Kronos Worldwide
2018
ANNUAL REPORT
KRONOS WORLDWIDE, INC. CORPORATE AND OTHER INFORMATION
Board of Directors
Continuing in Office
Loretta J. Feehan
Chair of the Board (non-executive)
Financial Consultant
Robert D. Graham
Vice Chairman, President and
Chief Executive Officer
John E. Harper (a)
Private Investor
Meredith W. Mendes (a)
Executive Director and Chief Operating
Officer
Jenner & Block LLP
C. H. Moore, Jr. (a)
Retired Partner
KPMG LLP
Gen. Thomas P. Stafford (ret.) (a)(b)
United States Air Force (retired)
Dr. R. Gerald Turner (a)(b)
President
Southern Methodist University
Consultant
Board Committees
(a) Audit Committee
(b) Management Development
and Compensation Committee
Annual Meeting
The 2019 Annual Meeting of Stockholders
will be held at the office of the Company,
Three Lincoln Centre, 5430 LBJ Freeway,
Suite 1700, Dallas, Texas 75240-2697, on
the date and time as set forth in the notice
of the meeting, proxy statement and form
of proxy that will be mailed to
stockholders in advance of the meeting.
Stock Exchange
Kronos’ common shares are listed on the
New York Stock Exchange under the
symbol “KRO.”
Corporate and
Operating Management
Robert D. Graham
Vice Chairman, President and
Chief Executive Officer
James M. Buch
Chief Operating Officer
Benjamin R. Corona
President, Global Sales Management
Gregory M. Swalwell
Executive Vice President
and Chief Financial Officer
Kelly D. Luttmer
Executive Vice President
and Chief Tax Officer
Brian W. Christian
Executive Vice President
Andrew B. Nace
Executive Vice President
Tim C. Hafer
Senior Vice President and Controller
Clarence B. Brown, III
Vice President, General Counsel
and Secretary
Steve S. Eaton
Vice President and Director of Internal
Control Over Financial Reporting
Bryan A. Hanley
Vice President and Treasurer
Janet G. Keckeisen
Vice President, Corporate Strategy
and Investor Relations
Patricia A. Kropp
Vice President, Director
of Global Human Resources
Courtney J. Riley
Vice President,
Environmental Affairs
Michael S. Simmons
Vice President, Finance
John A. Sunny
Vice President and
Chief Technology Officer
Product Information
Information about our products and
services is available online or by
contacting:
Kronos Worldwide, Inc.
5 Cedar Brook, Drive
Cranbury, NJ. 08512
Phone: (609) 860-6200
Customer Service: 1-800-866-5600.
Email: kronos.marketing@kronosww.com
Transfer Agent
Computershare acts as transfer agent,
registrar and dividend paying agent for the
Company’s common stock.
Communications regarding stockholder
accounts, dividends and change of
address should be directed to:
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, Texas 77842-3170
Telephone: (877) 373-6374
http://www.computershare.com/investor
Visit us on the Web
http://www.kronostio2.com
Form 10-K Report
The Company’s Annual Report on Form
10-K for the year ended December 31,
2018, as filed with the Securities and
Exchange Commission is printed as part
of this Annual Report. Additional copies
are available without charge upon written
request to:
Janet G. Keckeisen
Vice President, Corporate Strategy and
Investor Relations
Kronos Worldwide, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧ Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934:
For the fiscal year ended December 31, 2018
Commission file number 1-31763
KRONOS WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction
of incorporation or organization)
76-0294959
(IRS Employer
Identification No.)
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2620
(Address of principal executive offices)
Registrants telephone number, including area code: (972) 233-1700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock ($.01 par value)
Name of each exchange on which registered
New York Stock Exchange
No securities are registered pursuant to Section 12(g) of the Act.
Indicate by check mark:
If the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:4) No ⌧
If the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No ⌧
Whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No (cid:4)
Whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was
required to submit such files). Yes ⌧ No (cid:4)
If disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. Yes ⌧ No (cid:4)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller
reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
(cid:4)
(cid:4)
(cid:4)
Accelerated filer ⌧
Smaller reporting company (cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4)
Whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:4) No ⌧
The aggregate market value of the 22.6 million shares of voting stock held by nonaffiliates of Kronos Worldwide, Inc. as of
June 30, 2018 (the last business day of the Registrants most recently-completed second fiscal quarter) approximated
$508.3 million.
As of February 28, 2019, 115,907,698 shares of the Registrants common stock were outstanding.
The information required by Part III is incorporated by reference from the Registrants definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
Documents incorporated by reference
p
y
Forward-Looking Information
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended. Statements in this Annual Report that are not historical facts
are forward-looking in nature and represent managements beliefs and assumptions based on currently available
information.
In some cases, you can identify forward-looking statements by the use of words such as believes,
intends, may, should, could, anticipates, expects or comparable terminology, or by discussions of
strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are
t. Such statements by their nature involve substantial
reasonable, we do not know if these expectations will be correcrr
risks and uncertainties that could significantly impact expected results. Actual future results could differ materially
from those predicted. The factors that could cause actual future results to differ materially from those described
herein are the risks and uncertainties discussed in this Annual Report and those described from time to time in our
other filings with the SEC and include, but are not limited to, the following:
•
•
•
•
Future supply and demand for our products
The extent of the dependence of certain of our businesses on certain market sectors
The cyclicality of our business
Customer and producer inventory levels
• Unexpected or earlier-than-expected industry capacity expansion
•
Changes in raw material and other operating costs (such as energy and ore costs)
•
Changes in the availability of raw materials (such as ore)
• General global economic and political conditions (such as changes in the level of gross domestic
product in various regions of the world and the impact of such changes on demand for TiO2)
•
•
•
•
•
•
•
•
•
•
Competitive products and substitute products
Customer and competitor strategies
Potential consolidation of our competitors
Potential consolidation of our customers
The impact of pricing and production decisions
Competitive technology positions
Potential difficulties in upgrading or implementing new accounting and manufacturing software
systems (such as our new enterprise resource planning system)
The introduction of trade barriers
Possible disruption of our business, or increases in our cost of doing business, resulting from terrorist
activities or global conflicts
Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar
and each of the euro, the Norwegian krone and the Canadian dollar), or possible disruptions to our
business resulting from potential instability resulting from uncertainties associated with the euro or
other currencies
• Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires,
explosions, unscheduled or unplanned downtime, transportation interruptions and cyber attacks)
• Our ability to renew or refinance credit facilities
• Our ability to maintain sufficient liquidity
•
The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including
future tax reform
2
• Our ability to utilize income tax attributes, the benefits of which may or may not have been recognized
under the more-likely-than-not recognition criteria
•
Environmental matters (such as those requiring compliance with emission and discharge standards for
existing and new facilities)
• Government laws and regulations and possible changes therein including new environmental health
and safety regulations
•
•
The ultimate resolution of pending litigation
Possible future litigation.
Should one or more of these risks materialize (or the consequences of such a development worsen), or
should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or
expected. We disclaim any intention or obligation to update or revise any forward-looking statements whether as a
result of changes in information, future events or otherwise.
3
ITEM 1.
BUSINESS
General
PART I
Kronos Worldwide, Inc. (NYSE: KRO) (Kronos), incorporated in Delaware in 1989, is a leading global
producer and marketer of value-added titanium dioxide pigments, or TiO2, a base industrial product used in a wide
range of applications. We, along with our distributors and agents, sell and provide technical services for our
products to approximately 4,000 customers in 100 countries with the majority of sales in Europe, North America and
Asia Pacific. We believe we have developed considerable expertise and efficiency in the manufacture, sale,
shipment and service of our products in domestic and international markets.
TiO2 is a white inorganic pigment used in a wide range of products for its exceptional durability and its
ability to impart whiteness, brightness and opacity. TiO2 is a critical component of everyday applications, such as
coatings, plastics and paper, as well as many specialty products such as inks, food and cosmetics. TiO2 is widely
considered to be superior to alternative white pigments in large part due to its hiding power (or opacity), which is the
ability to cover or mask other materials effectively and efficiently. TiO2 is designed, marketed and sold based on
specific end-use applications.
TiO2 is the largest commercially used whitening pigment because it has a high refractive rating, giving it
more hiding power than any other commercially produced white pigment. In addition, TiO2 has excellent resistance
to interaction with other chemicals, good thermal stability and resistance to ultraviolet degradation. Although there
are other white pigments on the market, we believe there are no effective substitutes for TiO2 because no other white
pigment has the physical properties for achieving comparable opacity and brightness or can be incorporated in as
cost-effective a manner. Pigment extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are
used together with TiO2 in a number of end-use markets. However, these products are not able to duplicate the
opacity performance characteristics of TiO2 and we believe these products are unlikely to have a significant impact
on the use of TiO2.
TiO2 is considered a quality-of-life product. Demand for TiO2 has generally been driven by worldwide
gross domestic product and has generally increased with rising standards of living in various regions of the world.
According to industry estimates, TiO2 consumption has grown at a compound annual growth rate of approximately
3% since 1990. Per capita consumption of TiO2 in Western Europe and North America far exceeds that in other
areas of the world, and these regions are expected to continue to be the largest consumers of TiO2 on a per capita
basis for the foreseeable future. We believe that Western Europe and North America currently account for
approximately 20% and 17% of global TiO2 consumption, respectively. Markets for TiO2 are generally increasing in
South America, Eastern Europe, the Asia Pacific region and China and we believe these are significant markets
where we expect continued growth as economies in these regions continue to develop and quality-of-life products,
including TiO2, experience greater demand.
At December 31, 2018, approximately 50% of our common stock was owned by Valhi, Inc. (NYSE: VHI)
and approximately 30% was owned by a wholly-owned subsidiary of NL Industries, Inc. (NYSE: NL). Valhi also
owns approximately 83% of NL Industries outstanding common stock. A wholly-owned subsidiary of Contran
Corporation held approximately 92% of Valhis outstanding common stock. As discussed in Note 1 to our
Consolidated Financial Statements, Lisa K. Simmons and Serena Simmons Connelly may be deemed to control
Contran, Valhi, NL and us.
4
Products and end-use markets
Including our predecessors, we have produced and marketed TiO2 in North America and Europe, our
primary markets, for over 100 years. We believe we are the largest producer of TiO2 in Europe with 44% of our
2018 sales volumes attributable to markets in Europe. The table below shows our market share for our significant
markets, Europe and North America, for the last three years.
Europe
North America
2016
2017
2018
17%
16%
17%
18%
13%
17%
We believe we are the leading seller of TiO2 in several countries, including Germany, with an estimated 8%
share of worldwide TiO2 sales volume in 2018. Overall, we are one of the top six producers of TiO2 in the world.
We offer our customers a broad portfolio of products that include over 40 different TiO2 pigment grades
under the KRONOS®SS trademark, which provide a variety of performance properties to meet customers specififf c
requirements. Our major customers include domestic and international paint, plastics, decorative laminate and paper
manufacturers. We ship TiO2 to our customers in either a powder or slurry form via rail, truck and/or ocean carrier.
Sales of our core TiO2 pigments represented approximately 94% of our net sales in 2018. We and our agents and
distributors primarily sell our products in three major end-use markets: coatings, plastics and paper.
The following tables show our approximate TiO2 sales volume by geographic region and end use for the
year ended December 31, 2018:
Sales volume percentages
by geographic region
Sales volume percentages
by end-use
Europe
North America
Asia Pacific
Rest of World
44%
37%
10%
9%
Coatings
Plastics
Paper
Other
56%
27%
7%
10%
Some of the principal applications for our products include the following:
TiO2 for coatings Our TiO2 is used to provide opacity, durability, tinting strength and brightness in
industrial coatings, as well as coatings for commercial and residential interiors and exteriors, automobiles, aircraft,
machines, appliances, traffic paint and other special purpose coatings. The amount of TiO2 used in coatings varies
widely depending on the opacity, color and quality desired.
In general, the higher the opacity requirement of the
coating, the greater the TiO2 content.
TiO2 for plastics We produce TiO2 pigments that improve the optical and physical properties of plastics,
including whiteness and opacity. TiO2 is used to provide opacity to items such as containers and packaging
materials, and vinyl products such as windows, door profiles and siding. TiO2 also generally provides hiding power,
neutral undertone, brightness and surface durability for housewares, appliances, toys, computer cases and food
packages. TiO2s high brightness along with its opacity, is used in some engineering plastics to help mask their
undesirable natural color. TiO2 is also used in masterbatch, which is a concentrate of TiO2 and other additives and is
one of the largest uses for TiO2 in the plastics end-use market.
In masterbatch, the TiO2 is dispersed at high
concentrations into a plastic resin and is then used by manufacturers of plastic containers, bottles, packaging and
agricultural films.
TiO2 for paper Our TiO2 is used in the production of several types of paper, including laminate
(decorative) paper, filled paper and coated paper to provide whiteness, brightness, opacity and color stability.
Although we sell our TiO2 to all segments of the paper end-use market, our primary focus is on the TiO2 grades used
layers of paper are laminated together using melamine resin under high
in paper laminates, where several
temperature and pressure. The top layer of paper contains TiO2 and plastic resin and is the layer that is printed with
decorative patterns. Paper laminates are used to replace materials such as wood and tile for such applications as
counter tops, furniture and wallboard. TiO2 is beneficial in these applications because it assists in preventing the
material from fading or changing color after prolonged exposure to sunlight and other weathering agents.
5
TiO2 for other applications We produced
TiO2 to improve the opacity and hiding power of printing inks.
TiO2 allows inks to achieve very high print quality while not interfering with the technical requirements of printing
machinery, including low abrasion, high printing speed and high temperatures. Our TiO2 is also used in textile
applications where TiO2 functions as an opacifying and delustering agent.
In man-made fibers such as rayon and
polyester, TiO2 corrects an otherwise undesirable glossy and translucent appearance. Without the presence of TiO2,
these materials would be unsuitable for use in many textile applications.
We produce high purity sulfate process anatase TiO2 used to provide opacity, whiteness and brightness in a
variety of cosmetic and personal care products, such as skin cream, lipstick, eye shadow and toothpaste. Our TiO2 is
also found in food products, such as candy and confectionaries, and in pet foods where it is used to obtain
uniformity of color and appearance.
In pharmaceuticals, our TiO2 is used commonly as a colorant in tablet and
capsule coatings as well as in liquid medicines to provide uniformity of color and appearance. KRONOS® purified
anatase grades meet the applicable requirements of the CTFA (Cosmetics, Toiletries and Fragrances Association),
USP and BP (United States Pharmacopoeia and British Pharmacopoeia) and the FDA (United States Food and Drug
Administration).
Our TiO2 business is enhanced by the following three complementary businesses, which comprised
approximately 6% of our net sales in 2018:
• We own and operate two ilmenite mines in Norway pursuant to a governmental concession with an
unlimited term. Ilmenite is a raw material used directly as a feedstock by some sulfate-process TiO2
plants. We supply ilmenite to our sulfate plants in Europe. We also sell ilmenite ore to third parties,
some of whom are our competitors, and we sell an ilmenite-based specialty product to the oil and gas
industry. The mines have estimated ilmenite reserves that are expected to last at least 50 years.
• We manufacture and sell iron-based chemicals, which are co-products and processed co-products of
sulfate and chloride process TiO2 pigment production. These co-product chemicals are marketed
through our Ecochem division and are primarily used as treatment and conditioning agents for
industrial effluents and municipal wastewater as well as in the manufacture of iron pigments, cement
and agricultural products.
• We manufacture and sell titanium oxychloride and titanyl sulfate, which are side-stream specialty
products from the production of TiO2. Titanium oxychloride is used in specialty applications in the
formulation of pearlescent pigments, production of electroceramic capacitors for cell phones and other
electronic devices. Titanyl sulfate productions are used in pearlescent pigments, natural gas pipe and
other specialty applications.
Manufacturing, operations and properties
We produce TiO2 in two crystalline forms: rutile and anatase. Rutile TiO2 is manufactured using both a
chloride production process and a sulfate production process, whereas anatase TiO2 is only produced using a sulfate
production process. Manufacturers of many end-use applications can use either form, especially during periods of
tight supply for TiO2. The chloride process is the preferred form for use in coatings and plastics, the two largest
end-use markets. Due to environmental factors and customer considerations, the proportion of TiO2 industry sales
represented by chloride process pigments has increased relative to sulfate process pigments, and in 2018, chloride
process production facilities represented approximately 50% of industry capacity. The sulfate process is preferred
for use in selected paper products, ceramics, rubber tires, man-made fibers, food products, pharmaceuticals and
cosmetics. Once an intermediate TiO2 pigment has been produced by either the chloride or sulfate process, it is
finished into products with specific performance characteristics for particular end-use applications through
proprietary processes involving various chemical surface treatments and intensive micronizing (milling).
•
Chloride process The chloride process is a continuous process in which chlorine is used to extract
rutile TiO2. The chloride process produces less waste than the sulfate process because much of the
chlorine is recycled and feedstock bearing higher titanium content is used. The chloride process also
has lower energy requirements and is less labor-intensive than the sulfate process, although the
chloride process requires a higher-skilled labor force. The chloride process produces an intermediate
base pigment with a wide range of properties.
6
•
Sulfate process The sulfate process is a batch process in which sulfuric acid is used to extract the
TiO2 from ilmenite or titanium slag. After separation from the impurities in the ore (mainly iron), the
TiO2 is precipitated and calcined to form an intermediate base pigment ready for sale or can be
upgraded through finishing treatments.
We produced 536,000 metric tons of TiO2 in 2018, down from the record 576,000 metric tons we produced
in 2017. Our production volumes include our share of the output produced by our TiO2 manufacturing joint venture
discussed below in TiO2 manufacturing joint venture. Our average production capacity utilization rates were
approximately 98% in 2016, at full practical capacity in 2017 and approximately 95% in 2018. Our production rates
in 2018 were impacted by maintenance activities at certain facilities and by the first quarter implementation of a
productivity-enhancing improvement project at our Belgian facility.
We operate facilities throughout North America and Europe, including the only sulfate process plant in
North America and four TiO2 plants in Europe (one in each of Leverkusen, Germany; Nordenham, Germany;
Langerbrugge, Belgium; and Fredrikstad, Norway). In North America, we have a TiO2 plant in Varennes, Quebec,
Canada and, through the manufacturing joint venture described below in TiO2 manufacturing joint venture, a 50%
interest in a TiO2 plant in Lake Charles, Louisiana.
Our production capacity has increased by approximately 6% over the past ten years due to debottlenecking
programs, incurring only moderate capital expenditures. We expect to operate our TiO2 plants at near full practical
capacity levels in 2019.
The following table presents the division of our expected 2019 manufacturing capacity by plant location
and type of manufacturing process:
Facility
Leverkusen, Germany (1)
Nordenham, Germany
Langerbrugge, Belgium
Fredrikstad, Norway (2)
Varennes, Canada
Lake Charles, LA, US (3)
Total
Description
TiO2 production, chloride and sulfate
process, co-products
TiO2 production, sulfate process, co-
products
TiO2 production, chloride process, co-
products, titanium chemicals products
TiO2 production, sulfate process, co-
products
TiO2 production, chloride and sulfate
process, slurry facility, titanium
chemicals products
TiO2 production, chloride process
% of capacity by TiO2
manufacturing process
Chloride
Sulfate
30%
6%
-
16
-
15
13
74%
10
-
7
3
-
26%
(1)
(2)
(3)
The Leverkusen facility is located within an extensive manufacturing complex owned by Bayer AG. We
own the Leverkusen facility, which represents about one-third of our current TiO2 production capacity, but
we lease the land under the facility from Bayer under a long-term agreement which expires in 2050. Lease
payments are periodically negotiated with Bayer for periods of at least two years at a time. A majority-
owned subsidiary of Bayer provides some raw materials including chlorine, auxiliary and operating
materials, utilities and services necessary to operate the Leverkusen facility under separate supplies and
services agreements.
The Fredrikstad facility is located on public land and is leased until 2063.
We operate the Lake Charles facility in a joint venture with Venator Investments LLC (Venator
Investments) (formerly Huntsman P&A Investments LLC), a wholly-owned subsidiary of Venator Group,
of which Venator Materials PLC (Venator) owns 100% and the amount indicated in the table above
represents the share of TiO2 produced by the joint venture to which we are entitled. See Note 5 to our
7
Consolidated Financial Statements and TiO2 manufacturing joint venture. The joint venture owns the
land and facility.
We own the land underlying all of our principal production facilities unless otherwise indicated in the table
above.
We also operate two ilmenite mines in Norway pursuant to a governmental concession with an unlimited
term.
In addition, we operate a rutile slurry manufacturing plant in Lake Charles, Louisiana, which converts dry
pigment primarily manufactured for us at the Lake Charles TiO2 facility into a slurry form that is then shipped to
customers.
We have various corporate and administrative offices located in the U.S., Germany, Norway, Canada,
Belgium, France and the United Kingdom and various sales offices located in North America.
TiO2 manufacturing joint venture
Kronos Louisiana, Inc., one of our subsidiaries, and Venator Investments each own a 50% interest in a
manufacturing joint venture, Louisiana Pigment Company, L.P., or LPC. LPC owns and operates a chloride-process
TiO2 plant located in Lake Charles, Louisiana. We and Venator share production from the plant equally pursuant to
separate offtake agreements, unless we and Venator otherwise agree.
A supervisory committee directs the business and affairs of the joint venture, including production and
output decisions. This committee is composed of four members, two of whom we appoint and two of whom
Venator appoints. Two general managers manage the operations of the joint venture acting under the direction of
the supervisory committee. We appoint one general manager and Venator appoints the other.
The joint venture is not consolidated in our financial statements, because we do not control it. We account
for our interest in the joint venture by the equity method. The joint venture operates on a break-even basis and
therefore we do not have any equity in earnings of the joint venture. We are required to purchase one half of the
TiO2 produced by the joint venture. All costs and capital expenditures are shared equally with Venator with the
exception of feedstock (purchased natural rutile ore or slag) and packaging costs for the pigment grades produced.
Our share of net costs is reported as cost of sales as the TiO2 is sold. See Notes 5 and 15 to our Consolidated
Financial Statements.
Raw materials
The primary raw materials used in chloride process TiO2 are titanium-containing feedstock (purchased
natural rutile ore or slag), chlorine and coke. Chlorine is available from a number of suppliers, while petroleum
coke is available from a limited number of suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited but increasing number of suppliers principally in Australia, South Africa, Canada,
India and the United States. We purchase chloride process grade slag from Rio Tinto Iron and Titanium Limited
under a long-term supply contract which automatically renewed at the end of 2018 and extends through December
31, 2020. The contract automatically renews bi-annually, but can be terminated if written notice is given at least
twelve months prior to the current contract end date. We also purchase upgraded slag from Rio Tinto Iron and
Titanium Limited under a long-term supply contract that expires at the end of 2019. We purchase natural rutile ore
primarily from Iluka Resources, Limited under a contract that expires in 2019.
In the past we have been, and we
expect that we will continue to be, successful in obtaining short-term and long-term extensions to these and other
existing supply contracts prior to their expiration. We expect the raw materials purchased under these contracts, and
contracts that we may enter into, will meet our chloride process feedstock requirements over the next several years.
The primary raw materials used in sulfate process TiO2 are titanium-containing feedstock, primarily
ilmenite or purchased sulfate grade slag and sulfuric acid. Sulfuric acid is available from a number of suppliers.
Titanium-containing feedstock suitable for use in the sulfate process is available from a limited number of suppliers
principally in Norway, Canada, Australia, India and South Africa. As one of the few vertically-integrated producers
of sulfate process TiO2, we operate two rock ilmenite mines in Norway, which provided all of the feedstock for our
European sulfate process TiO2 plants in 2018. We expect ilmenite production from our mines to meet our European
8
sulfate process feedstock requirements for the foreseeable future. For our Canadian sulfate process plant, we
purchase sulfate grade slag primarily from Rio Tinto Fer et Titane Inc. under a supply contract that renews annually,
subject to termination upon twelve months written notice. We expect the raw materials purchased under these
contracts, and contracts that we may enter into, to meet our sulfate process feedstock requirements over the next
several years.
Many of our raw material contracts contain fixed quantities we are required to purchase, or specify a range
of quantities within which we are required to purchase. The pricing under these agreements is generally negotiated
quarterly or semi-annually.
The following table summarizes our raw materials purchased or mined in 2018.
Production process/raw material
Chloride process plants -
Purchased slag or rutile ore
Sulfate process plants:
Ilmenite ore mined and used internally
Purchased slag
Raw materials
procured or mined
(In thousands
of metric tons)
430
328
24
Sales and marketing
Our marketing strategy is aimed at developing and maintaining strong relationships with new and existing
customers. Because TiO2 represents a significant raw material cost for our customers, the purchasing decisions are
often made by our customers senior management. We work to maintain close relationships with the key decision
makers through in-depth and frequent in-person meetings. We endeavor to extend these commercial and technical
relationships to multiple levels within our customers organization using our direct sales force and technical service
group to accomplish this objective. We believe this has helped build customer loyalty to Kronos and strengthened
our competitive position. Close cooperation and strong customer relationships enable us to stay closely attuned to
trends in our customers businesses. Where appropriate, we work in conjunction with our customers to solve
formulation or application problems by modifying specific product properties or developing new pigment grades.
We also focus our sales and marketing efforts on those geographic and end-use market segments where we believe
we can realize higher selling prices. This focus includes continuously reviewing and optimizing our customer and
product portfolios.
Our marketing strategy is also aimed at working directly with customers to monitor the success of our
products in their end-use applications, evaluate the need for improvements in product and process technology and
identify opportunities to develop new product solutions for our customers. Our marketing staff closely coordinates
with our sales force and technical specialists to ensure that the needs of our customers are met, and to help develop
and commercialize new grades where appropriate.
We sell a majority of our products through our direct sales force operating in Europe and North America.
We also utilize sales agents and distributors who are authorized to sell our products in specific geographic areas. In
Europe, our sales efforts are conducted primarily through our direct sales force and our sales agents. Our agents do
not sell any TiO2 products other than KRONOS® brand products. In North America, our sales are made primarily
through our direct sales force and supported by a network of distributors.
In export markets, where we have
increased our marketing efforts over the last several years, our sales are made through our direct sales force, sales
agents and distributors. In addition to our direct sales force and sales agents, many of our sales agents also act as
distributors to service our customers in all regions. We offer customer and technical service to customers who
purchase our products through distributors as well as to our larger customers serviced by our direct sales force.
We sell to a diverse customer base and no single customer comprised 10% or more of our sales in 2018.
Our largest ten customers accounted for approximately 33% of sales in 2018.
Neither our business as a whole nor any of our principal product groups is seasonal to any significant
extent. However, TiO2 sales are generally higher in the second and third quarters of the year, due in part to the
9
increase in coatings production in the spring to meet demand during the spring and summer painting seasons. With
certain exceptions, we have historically operated our production facilities at near full capacity rates throughout the
entire year, which among other things helps to minimize our per-unit production costs. As a result, we normally will
build inventories during the first and fourth quarters of each year in order to maximize our product availability
during the higher demand periods normally experienced in the second and third quarters.
Competition
The TiO2 industry is highly competitive. We compete primarily on the basis of price, product quality,
technical service and the availability of high performance pigment grades. Since TiO2 is not a traded commodity, its
pricing is largely a product of negotiation between suppliers and their respective customers. Price and availability
are the most significant competitive factors along with quality and customer service for the majority of our product
Increasingly, we are focused on providing pigments that are differentiated to meet specific customer
grades.
requests and specialty grades that are differentiated from our competitors products. During 2018, we had an
estimated 8% share of worldwide TiO2 sales volume, and based on sales volume, we believe we are the leading
seller of TiO2 in several countries, including Germany.
Our principal competitors are The Chemours Company, Cristal Global, Venator Materials PLC, Tronox
Incorporated and Lomon Billions. The top six TiO2 producers (i.e. we and our five principal competitors) account
for approximately 58% of the worlds production capacity.
In 2017, one of Venators European sulfate plants,
which has a capacity of 130,000 metric tons, operated at significantly reduced rates due to a fire at the facility. In
2018, Venator announced that the facility would be permanently closed and production of approximately 45,000
tons of specialty and differentiated operating capacity would be restored at other sites.
The following chart shows our estimate of worldwide production capacity in 2018:
Worldwide production capacity - 2018
Chemours
Cristal
Venator
Lomon Billions
Kronos
Tronox
Other
16%
11%
9%
9%
7%
6%
42%
Chemours has over one-half of total North American TiO2 production capacity and is our principal North
American competitor.
In February 2017, Tronox announced a definitive agreement to acquire the TiO2 assets of
Cristal Global, but this acquisition has been challenged by U.S. antitrust authorities and has not been completed, and
it is uncertain whether it will be completed. In 2018, Lomon Billions announced construction plans for an additional
200,000 tons of chloride capacity which is scheduled to come on line in 2019 and 2020.
Over the past ten years, we and our competitors increased industry capacity through debottlenecking
projects, which in part compensated for the shut-down of various TiO2 plants throughout the world. Although
overall industry demand is expected to increase in 2019, we do not expect any significant efforts, other than the
Lomon Billions expansion mentioned above, will be undertaken by us or our principal competitors to further
increase capacity for the foreseeable future, other than through debottlenecking projects.
If actual developments
differ from our expectations, the TiO2 industrys and our performance could be unfavorably affected.
The TiO2 industry is characterized by high barriers to entry consisting of high capital costs, proprietary
technology and significant lead times required to construct new facilities or to expand existing capacity. We believe
it is unlikely any new TiO2 plants will be constructed in Europe or North America in the foreseeable future.
10
Research and development
We employ scientists, chemists, process engineers and technicians who are engaged in research and
development, process technology and quality assurance activities in Leverkusen, Germany. These individuals have
the responsibility for improving our chloride and sulfate production processes, improving product quality and
strengthening our competitive position by developing new products and applications. Our expenditures for these
activities were approximately $13 million in 2016, $18 million in 2017 and $16 million in 2018. We expect to
spend approximately $17 million on research and development in 2019.
We continually seek to improve the quality of our grades and have been successful at developing new
grades for existing and new applications to meet the needs of our customers and increase product life cycles. Since
the beginning of 2014, we have added nine new grades for pigments and other applications.
Patents, trademarks, trade secrets and other intellectual property rights
We have a comprehensive intellectual property protection strategy that includes obtaining, maintaining and
enforcing our patents, primarily in the United States, Canada and Europe. We also protect our trademark and trade
secret rights and have entered into license agreements with third parties concerning various intellectual property
matters. We have also from time to time been involved in disputes over intellectual property.
Patents We have obtained patents and have numerous patent applications pending that cover our products
and the technology used in the manufacture of our products. Our patent strategy is important to us and our
In addition to maintaining our patent portfolio, we seek patent protection for our
continuing business activities.
technical developments, principally in the United States, Canada and Europe. U.S. patents are generally in effect for
20 years from the date of filing. Our U.S. patent portfolio includes patents having remaining terms ranging from
five years to 18 years.
Trademarks and trade secrets Our trademarks, including KRONOS®, are covered by issued and/or
pending registrations, including in Canada and the United States. We protect the trademarks that we use in
connection with the products we manufacture and sell and have developed goodwill in connection with our long-
term use of our trademarks. We conduct research activities in secret and we protect the confidentiality of our trade
secrets through reasonable measures, including confidentiality agreements and security procedures, including data
security. We rely upon unpatented proprietary knowledge and continuing technological innovation and other trade
secrets to develop and maintain our competitive position. Our proprietary chloride production process is an
important part of our technology and our business could be harmed if we fail to maintain confidentiality of our trade
secrets used in this technology.
Employees
As of December 31, 2018, we employed the following
ff
number of people:
Europe
Canada
United States (1)
Total
1,805
340
50
2,195
(1)
Excludes employees of our LPC joint venture.
Certain employees at each of our production facilities are organized by labor unions. In Europe, our union
employees are covered by master collective bargaining agreements for the chemical industry that are generally
renewed annually. In Canada, our union employees are covered by a collective bargaining agreement that expires in
June 2021. At December 31, 2018, approximately 86% of our worldwide workforce is organized under collective
bargaining agreements. It is possible that there could be future work stoppages or other labor disruptions that could
materially and adversely affect our business, results of operations, financial position or liquidity.
11
Regulatory and environmental matters
Our operations and properties are governed by various environmental laws and regulations which are
complex, change frequently and have tended to become stricter over time. These environmental laws govern,
among other things, the generation, storage, handling, use and transportation of hazardous materials; the emission
and discharge of hazardous materials into the ground, air or water; and the health and safety of our employees.
Certain of our operations are, or have been, engaged in the generation, storage, handling, manufacture or use of
substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar businesses, certain of our past and current
operations and products have the potential to cause environmental or other damage. We have implemented and
continue to implement various policies and programs in an effort to minimize these risks. Our policy is to comply
with applicable environmental laws and regulations at all our facilities and to strive to improve our environmental
It is possible that future developments, such as stricter requirements in environmental laws and
performance.
enforcement policies, could adversely affect our operations,
including production, handling, use, storage,
transportation, sale or disposal of hazardous or toxic substances or require us to make capital and other expenditures
to comply, and could adversely affect our consolidated financial position and results of operations or liquidity.
Our U.S. manufacturing operations are governed by federal, state and local environmental and worker
health and safety laws and regulations. These include the Resource Conservation and Recovery Act, or RCRA, the
Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the
Toxic Substances Control Act and the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act, or CERCLA, as well as the state counterparts of
these statutes. Some of these laws hold current or previous owners or operators of real property liable for the costs
of cleaning up contamination, even if these owners or operators did not know of, and were not responsible for, such
contamination. These laws also assess liability on any person who arranges for the disposal or treatment of
hazardous substances, regardless of whether the affected site is owned or operated by such person. Although we
have not incurred and do not currently anticipate any material liabilities in connection with such environmental laws,
we may be required to make expenditures for environmental remediation in the future.
While the laws regulating operations of industrial facilities in Europe vary from country to country, a
common regulatory framework is provided by the European Union, or the EU. Germany and Belgium are members
of the EU and follow its initiatives. Norway is not a member but generally patterns its environmental regulatory
actions after those of the EU.
At our sulfate plant facilities in Germany, we recycle spent sulfuric acid either through contracts with third
parties or at our own facilities. In addition, at our German locations we have a contract with a third-party to treat
certain sulfate-process effluents. At our Norwegian plant, we ship spent acid to a third-party location where it is
used as a neutralization agent. These contracts may be terminated by either party after giving three or four years
advance notice, depending on the contract.
From time to time, our facilities may be subject to environmental regulatory enforcement under U.S. and
non-U.S. statutes. Typically we establish compliance programs to resolve these matters. Occasionally, we may pay
penalties. To date, such penalties have not involved amounts having a material adverse effect on our consolidated
financial position, results of operations or liquidity. We believe that all of our facilities are in substantial
compliance with applicable environmental laws.
From time to time, new environmental, health and safety regulations are passed or proposed in the
countries in which we operate or sell our products, seeking to regulate our operations or to restrict, limit or classify
TiO2. We believe that we are in substantial compliance with laws applicable to the regulation of TiO2. However,
increased regulatory scrutiny could affect consumer perception of TiO2 or limit the marketability and demand for
TiO2 or products containing TiO2 and increase our regulatory and compliance costs.
a
Our capital
expenditures related to ongoing environmental compliance, protection and improvement
programs, including capital expenditures which are primarily focused on increasing operating efficiency but also
result in improved environmental protection such as lower emissions from our manufacturing facilities, were $17.1
million in 2018 and are currently expected to be approximately $25 million in 2019.
12
Website and other available information
Our fiscal year ends December 31. Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports are available on our website at kronostio2.com.
These reports are available on the website, without charge, as soon as is reasonably practicable after we file or
furnish them electronically with the Securities and Exchange Commission, or SEC. Additional information
regarding us, including our Audit Committee charter, Code of Business Conduct and Ethics and our Corporate
Governance Guidelines, can also be found at this website. Information contained on our website is not part of this
report. We will also provide free copies of such documents upon written request. Such requests should be directed
to the Corporate Secretary at our address on the cover page of this Form 10-K.
information statements and other information
We are an electronic filer and the SEC maintains an internet website that contains reports, proxy and
regarding issuers that file electronically with the SEC at www.sec.gov.
ff
ITEM 1A.
RISK FACTORS
Below are certain risk factors associated with our business. See also certain risk factors discussed in Item
7- Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting
Policies and Estimates. In addition to the potential effect of these risk factors, any risk factor which could result in
reduced earnings or operating losses, or reduced liquidity, could in turn adversely affect our ability to service our
liabilities or pay dividends on our common stock or adversely affect the quoted market prices for our securities.
Demand for, and prices of, certain of our products are influenced by changing market conditions for our
products, which may result in reduced earnings or in operating losses.
Our sales and profitability is largely dependent on the TiO2 industry.
In 2018, 94% of our sales were
attributable to sales of TiO2. TiO2 is used in many quality of life products for which demand historically has been
linked to global, regional and local gross domestic product and discretionary spending, which can be negatively
impacted by regional and world events or economic conditions. Such events are likely to cause a decrease in
demand for our products and, as a result, may have an adverse effect on our results of operations and financial
condition.
Pricing within the global TiO2 industry over the long term is cyclical and changes in economic conditions
worldwide can significaff
ntly impact our earnings and operating cash flows. Historically, the markets for many of our
products have experienced alternating periods of increasing and decreasing demand. Relative changes in the selling
prices for our products are one of the main factors that affect the level of our profitability. In periods of increasing
demand, our selling prices and profit margins generally will tend to increase, while in periods of decreasing demand
our selling prices and profit margins generally tend to decrease. In addition, pricing may affect customer inventory
levels as customers may from time to time accelerate purchases of TiO2 in advance of anticipated price increases or
defer purchases of TiO2 in advance of anticipated price decreases. Our ability to further increase capacity without
additional investment in greenfield or brownfield capacity increases may be limited and as a result, our profitability
may become even more dependent upon the selling prices of our products.
The TiO2 industry is concentrated and highly competitive and we face price pressures in the markets in which
we operate, which may result in reduced earnings or operating losses.
The global market in which we operate our business is concentrated with the top six TiO2 producers
accounting for approximately 58% of the worlds production capacity and is highly competitive. Competition is
based on a number of factors, such as price, product quality and service. Some of our competitors may be able to
drive down prices for our products if their costs are lower than our costs.
In addition, some of our competitors
financial, technological and other resources may be greater than our resources and such competitors may be better
able to withstand changes in market conditions. Our competitors may be able to respond more quickly than we can
to new or emerging technologies and changes in customer requirements. Further, consolidation of our competitors
or customers may result in reduced demand for our products or make it more difficult for us to compete with our
competitors. The occurrence of any of these events could result in reduced earnings or operating losses.
13
Higher costs or limited availability of our raw materials may reduce our earnings and decrease our liquidity.
In addition, many of our raw material contracts contain fixed quantities we are required to purchase.
The number of sources for and availability of certain raw materials is specific to the particular geographical
region in which a facility is located. For example, titanium-containing feedstocks suitable for use in our TiO2
facilities are available from a limited number of suppliers around the world. Political and economic instability in the
countries from which we purchase our raw material supplies could adversely affect their availability.
If our
worldwide vendors were unable to meet their contractual obligations and we were unable to obtain necessary raw
materials, we could incur higher costs for raw materials or may be required to reduce production levels. We
experienced significantly higher ore costs in 2012 which carried over into 2013. We saw moderation in the purchase
cost of third-party feedstock ore since 2013 through the first half of 2017; however, the cost of third-party feedstock
ore we procured in the last half of 2017 and full year of 2018 is higher as compared to the first half of 2017. We
may also experience higher operating costs such as energy costs, which could affect our profitability. We may not
always be able to increase our selling prices to offset the impact of any higher costs or reduced production levels,
which could reduce our earnr ings and decrease our liquidity.
We have long-term supply contracts that provide for our TiO2 feedstock requirements that currently expire
through 2020. While we believe we will be able to renew these contracts, there can be no assurance we will be
successful
in renewing them or in obtaining long-term extensions to them prior to expiration. Our current
agreements (including those entered into through January 2019) require us to purchase certain minimum quantities
of feedstock with minimum purchase commitments aggregating approximately $594 million in years subsequent to
December 31, 2018. In addition, we have other long-term supply and service contracts that provide for various raw
materials and services. These agreements require us to purchase certain minimum quantities or services with
minimum purchase commitments aggregating approximately $156 million at December 31, 2018.
Our
commitments under these contracts could adversely affect our financial results if we significantly reduce our
production and were unable to modify the contractual
commitments.
t
Our leverage may impair our financial condition or limit our ability to operate our businesses.
As of December 31, 2018, our total consolidated debt was approximately $456.6 million, substantially all
of which relates to our Senior Secured Notes issued in September 2017. Our level of debt could have important
consequences to our stockholders and creditors, including:
• making it more difficult for us to satisfy our obligations with respect to our liabilities;
•
increasing our vulnerability to adverse general economic and industry conditions;
•
•
•
•
•
requiring that a portion of our cash flows from operations be used for the payment of interest on our
debt, which reduces our ability to use our cash flow to fund working capital, capital expenditures,
dividends on our common stock, acquisitions or general corporate requirements;
limiting the ability of our subsidiaries to pay dividends to us;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures,
acquisitions or general corporate requirements;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which
we operate; and
placing us at a competitive disadvantage relative to other less leveraged competitors.
Indebtedness outstanding under our revolving North American credit facility and revolving European credit
facility accrues interest at variable rates. To the extent market interest rates rise, the cost of our debt would increase,
adversely affecting our financial condition, results of operations and cash flows.
In addition to our indebtedness, at December 31, 2018 we are party to various lease and other agreements
(including feedstock ore purchase contracts and other long-term supply and service contracts, as discussed above)
pursuant to which, along with our indebtedness, we are committed to pay approximately $495 million in 2019. Our
ability to make payments on and refinance our debt and to fund planned capital expenditures depends on our future
14
ability to generate cash flow. To some extent, this is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. In addition, our ability to borrow funds under our revolving
credit facilities in the future will, in some instances, depend in part on our ability to maintain specified financial
ratios and satisfy certain financial covenants contained in the applicable credit agreement.
Our business may not generate cash flows from operating activities sufficient to enable us to pay our debts
when they become due and to fund our other liquidity needs. As a result, we may need to refinance all or a portion
of our debt before maturity. We may not be able to refinance any of our debt in a timely manner on favorable terms,
if at all, in the current credit markets. Any inability to generate sufficient cash flows or to refinance our debt on
favorable terms could have a material adverse effeff ct on our financial condition.
As a global business, we are subject to risks associated with doing business outside the United States.
We have global operations and derive a large portion of our sales from customers outside the United States.
Accordingly, our international operations or those of our international customers could be substantially affected by a
number of risks arising with operating an international business, including trade barriers, tariffs, exchange controls,
economic and political conditions, compliance with a variety of non-United States laws and regulations (including
environmental, health and safety and income tax laws and regulations) or compliance with United States law and
regulations in respect to doing business internationally, limitations on restrictions on the repatriation of non-United
States earnings to the United States, and difficulty in enforcing agreements or other legal rights. Our operations are
also subject to the effects of global competition.
These risks, individually or in the aggregate, could have an
adverse effect on our results of operations and financial condition.
Changes in exchange rates and interest rates can adversely affect our net sales, profits and cash flows.
We operate our businesses in several different countries and sell our products worldwide. For example,
during 2018, 44% of our sales volumes were sold into European markets. The majority (but not all) of our sales
from our operations outside the United States are denominated in currencies other than the United States dollar,
primarily the euro, other major European currencies and the Canadian dollar. Therefore,
we are exposed to risks
related to the need to convert currencies we receive from the sale of our products into the currencies required to pay
for certain of our operating costs and expenses and other liabilities (including indebtedness), all of which could
result in future losses depending on fluctuations in currency exchange rates and affect the comparability of our
results of operations between periods.
ff
If our intellectual property were to be declared invalid, or copied by or become known to by competitors, or if
our competitors were to develop similar or superior intellectual property or technology, our ability to
compete could be adversely impacted.
Protection of our intellectual property rights, including patents, trade secrets, confidential information,
trademarks and tradenames, is important to our business and our competitive position. We endeavor to protect our
intellectual property rights in key jurisdictions in which our products are produced or used and in jurisdictions into
which our products are imported. However, we may be unable to obtain protection for our intellectual property in
key jurisdictions. Although we own and have applied for numerous patents and trademarks throughout the world,
we may have to rely on judicial enforcement of our patents and other proprietary rights. Our patents and other
intellectual property rights may be challenged, invalidated, circumvented, and rendered unenforceable or otherwise
compromised. A failure to protect, defend or enforce our intellectual property could have an adverse effect on our
financial condition and results of operations. Similarly, third parties may assert claims against us and our customers
and distributors alleging our products infringe upon third-party intellectual property rights.
Although it is our practice to enter into confidentiality agreements with our employees and third parties to
protect our proprietary expertise and other trade secrets, these agreements may not provide sufficient protection for
our trade secrets or proprietary know-how, or adequate remedies for breaches of such agreements may not be
available in the event of an unauthorized use or disclosure of such trade secrets and know-how. We also may not be
able to readily detect breaches of such agreements. The failure of our patents or confidentiality agreements to
protect our proprietary technology, know-how or trade secrets could result in a material loss of our competitive
position, which could lead to significantly lower revenues, reduced profit margins or loss of market share.
15
If we must take legal action to protect, defend or enforce our intellectual property rights, any suits or
proceedings could result in significant costs and diversion of resources and managements attention, and we may not
prevail in any such suits or proceedings. A failure to protect, defend or enforce our intellectual property rights could
have an adverse effect on our financial condition and results of operations.
We may be subject to litigation, the disposition of which could have a material adverse effect on our results of
operations.
The nature of our operations exposes us to possible litigation claims, including disputes with customers and
suppliers and matters relating to, among other things, antitrust, product liability, intellectual property, employment
and environmental claims. It is possible that judgments could be rendered against us in these or other types of cases
for which we could be uninsured or not covered by indemnity, or which may be beyond the amounts that we
currently have reserved or anticipate incurring for such matters. Some of the lawsuits may seek fines or penalties
and damages in large amounts, or seek to restrict our business activities. Because of the uncertain nature of
litigation and coverage decisions, we cannot predict the outcome of these matters or whether insurance claims may
mitigate any damages ultimately determined to be owed by us. Any liability we might incur in the future could be
material. In addition, litigation is very costly, and the costs associated with defending litigation matters could have a
material adverse effect on our results of operations.
Environmental, health and safety laws and regulations may result in significant compliance costs or
obligations or unanticipated losses which could negatively impact our financial results or limit our ability to
operate our business.
From time to time, new environmental, health and safety regulations are passed or proposed in the
countries in which we operate or sell our products, seeking to regulate our operations or to restrict, limit or classify
TiO2, or its use. Increased regulatory scrutiny could affect consumer perception of TiO2 or limit the marketability
and demand for TiO2 or products containing TiO2, and increase our regulatory compliance obligations and
costs.
Increased compliance obligations and costs or restrictions on certain TiO2 applications could negatively
impact our future financial results through increased costs of production, or reduced sales which may decrease our
liquidity, operating income and results of operations.
Global climate change legislation could negatively impact our financial results or limit our ability to operate
our businesses.
We operate production facilities in several countries.
In many of the countries in which we operate,
legislation has been passed, or proposed legislation is being considered, to limit greenhouse gases through various
means, including emissions permits and/or energy taxes. In several of our production facilities, we consume large
amounts of energy, primarily electricity and natural gas. To date, the permit system in effect in the various countries
in which we operate has not had a material adverse effect on our financial results. However, if further greenhouse
gas legislation were to be enacted in one or more countries, it could negatively impact our future results from
operations through increased costs of production, particularly as it relates to our energy requirements or our need to
obtain emissions permits. If such increased costs of production were to materialize, we may be unable to pass price
increases onto our customers to compensate for increased production costs, which may decrease our liquidity,
operating income and results of operations.
Technology failures or cyber security breaches could have a material adverse effect on our operations.
We rely on information technology systems to manage, process and analyze data, as well as to facilitate the
manufacture and distribution of our products to and from our plants. We receive, process and ship orders, manage
the billing of and collections from our customers, and manage the accounting for and payment to our vendors. In
this regard, in January 2017 we implemented a new enterprise resource planning system covering certain finance
ledger, accounts receivable and accounts payable), and in January 2018 we
processes (principally general
implemented the remaining portion of such enterprise resource planning system covering sales, procurement,
manufacturing and plant maintenance. Although we have systems and procedures in place to protect our
information technology systems, there can be no assurance that such systems and procedures would be sufficiently
16
effective. Therefore, any of our information technology systems may be susceptible to outages, disruptions or
destruction as well as cyber security breaches or attacks, resulting in a disruption of our business operations, injury
to people, harm to the environment or our assets, and/or the inability to access our information technology
systems. If any of these events were to occur, our results of operations and financial condition could be adversely
affected.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
ITEM 2.
PROPERTIES
Information on our properties is incorporated by reference to Item 1: Manufacturing, Operations and
Properties above. Our corporate headquarters is located in Dallas, Texas. See Note 16 to our Consolidated
Financial Statements for information on our leases.
ITEM 3.
LEGAL PROCEEDINGS
We are involved in various environmental, contractual, intellectual property, product liability and other
claims and disputes incidental to our business. Information called for by this Item is incorporated by reference to
Note 16 to our Consolidated Financial Statements.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable
17
PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed and traded on the New York Stock Exchange (symbol: KRO). As of
February 28, 2019, there were approximately 1,900 holders of record of our common stock.
In December 2010, our board of directors authorized the repurchase of up to 2.0 million shares of our
common stock in open market transactions, including block purchases, or in privately-negotiated transactions at
unspecified prices and over an unspecified period of time. We have 1,951,000 shares available for repurchase under
the plan at December 31, 2018. See Note 14 to our Consolidated Financial Statements.
Performance graph
Set forth below is a table and line graph comparing the yearly change in our cumulative total stockholder
return on our common stock against the cumulative total return of the S&P 500 Composite Stock Index and an index
of a self-selected peer group of companies. In 2018, as more of our peers have become publicly traded, we began
using a peer group metric which we believe provides a more meaningful comparison to our performance. The peer
group index is comprised of The Chemours Company, Venator Materials PLC and Tronox Ltd. The Chemours
Company and Venator Materials PLC are included from the date each company began trading on the New York
Stock Exchange in June 2015 and August 2017, respectively. The graph shows the value at December 31 of each
year, assuming an original investment of $100 at December 31, 2013 and reinvestment of cash dividends and other
distributions to stockholders.
Kronos common stock
S&P 500 Composite Stock Index
Peer Group
2013
2014
2015
2016
2017
2018
$
$
100
100
100
$
71
114
108
$
33
115
19
$
77
129
76
$
170
157
141
79
150
68
$200
$150
$100
$50
$0
2013
2014
2015
2016
2017
2018
Kronos Worldwide Inc
S&P 500 Index
Peer Group
The information contained in the performance graph shall not be deemed soliciting material or filed
with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act, except to the extent we
specifically request that the material be treated as soliciting material or specifically incorporate this performance
graph by reference into a document filed under the Securities Act or the Securities Exchange Act.
18
Equity compensation plan information
We have an equity compensation plan, which was approved by our stockholders, pursuant to which an
aggregate of 200,000 shares of our common stock can be awarded to members of our board of directors. At
December 31, 2018, 149,900 shares are available for award under this plan. See Note 14 to our Consolidated
Financial Statements.
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our Consolidated Financial
s Discussion and Analysis of Financial Condition and Results of
Statements and Item 7 - Management
Operations.
Years ended December 31,
2017
2016
(In millions, except per share data and TiO2 operating statistics)
2015
2018
2014
STATEMENTS OF OPERATIONS DATA:
Net sales
Gross margin (1)
Income from operations (1)
Net income (loss)
Net income (loss) per share
Cash dividends per share
BALANCE SHEET DATA (at year end):
Total assets
Notes payable and long-term debt
including current maturities
Common stockholders' equity
STATEMENTS OF CASH FLOW DATA:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
$ 1,651.9
357.1
161.4
99.2
.86
.60
$ 1,348.8
200.0
11.0
(173.6)
(1.50)
.60
$ 1,364.3
264.7
92.9
43.3
.37
.60
$ 1,729.0
569.7
347.8
354.5
3.06
.60
$ 1,661.9
562.2
330.1
205.0
1.77
.68
$ 1,633.1
$ 1,242.7
$ 1,179.6
$ 1,824.4
$ 1,898.1
343.6
781.1
341.0
461.9
339.0
395.0
474.5
754.3
456.6
839.8
$
$
87.7
(61.2)
89.6
$
52.1
(47.1)
(72.1)
$
89.6
(53.0)
(73.3)
$
276.1
(77.9)
58.8
188.5
(42.7)
(80.4)
TiO2 OPERATING STATISTICS:
Sales volumes (2)
Production volumes (2)
Production capacity at beginning of year (2)
Production rate as a percentage of capacity
496
511
555
525
528
555
559
546
555
92%
95%
98%
586
576
555
100%
491
536
565
95%
(1)
Prior period amounts have been reclassified to reflect the adoption on January 1, 2018 of ASU 2017-07,
Compensation Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost. As a result, gross margin increased by $7.4 million, $7.7
million, $7.7 million and $10.8 million in 2014, 2015, 2016 and 2017, respectively. Income from operations
increased by $11.7 million, $12.1 million, $11.8 million and $17.4 million in 2014, 2015, 2016 and 2017,
respectively. There was no impact to net income (loss) in any period as a result of this reclassification. See
Note 18 to our Consolidated Financial Statements.
(2) Metric tons in thousands
19
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Business overview
We are a leading global producer and marketer of value-added TiO2. TiO2 is used for a variety of
manufacturing applications, including plastics, paints, paper and other industrial and specialty products. During
2018, 44% of our sales volumes were sold into European markets. We believe we are the largest producer of TiO2
in Europe with an estimated 13% share of European TiO2 sales volumes in 2018. In addition, we estimate we have a
17% share of North American TiO2 sales volumes in 2018. Our production facilities are located in Europe and
North America.
We consider TiO2 to be a quality of life product, with demand affected by gross domestic product, or
GDP, and overall economic conditions in our markets located in various regions of the world. Over the long-term,
we expect demand for TiO2 will grow by 2% to 3% per year, consistent with our expectations for the long-term
growth in GDP. However, even if we and our competitors maintain consistent shares of the worldwide market,
demand for TiO2 in any interim or annual period may not change in the same proportion as the change in GDP, in
part due to relative changes in the TiO2 inventory levels of our customers. We believe that our customers inventory
levels are influenced in part by their expectation for future changes in market TiO2 selling prices as well as their
expectation for future availability of product. Although certain of our TiO2 grades are considered specialty
pigments, the majority of our grades and substantially all of our production are considered commodity pigment
products with price and availability being the most significant competitive factors along with quality and customer
service.
The factors having the most impact on our reported operating results are:
•
TiO2 selling prices,
• Our TiO2 sales and production volumes,
• Manufacturing costs, particularly raw materials such as third-party feedstock ore, maintenance and
energy-related expenses, and
•
Currency exchange rates (particularly the exchange rate for the U.S. dollar relative to the euro, the
Norwegian krone and the Canadian dollar).
Our key performance indicators are our TiO2 average selling prices, our level of TiO2 sales and production
volumes and the cost of our third-party feedstock ore. TiO2 selling prices generally follow industry trends and the
selling prices will increase or decrease generally as a result of competitive market pressures.
In addition, our effective income tax rate in 2016, 2017 and 2018 was impacted by certain favorable and
unfavorable developments discussed below.
Executive summary
We reported income from operations of $330.1 million in 2018 as compared to $347.8 million in 2017.
Our income from operations was lower in 2018 compared to the same period in 2017 primarily as the favorable
impact of higher average selling prices was more than offset by the unfavorable impact of lower sales and
production volumes and higher raw materials and other production costs as discussed below. We reported net
income of $205.0 million, or $1.77 per share for 2018 compared to net income of $354.5 million, or $3.06 per share
for 2017. Our net income was lower in 2018 compared to 2017 primarily due to the 2017 recognition of an
aggregate net income tax benefit of $136.5 million as a result of the net effect of reversing our deferred income tax
asset valuation allowances associated with our German and Belgian operations ($186.7 million income tax benefit)
and our deferred income tax asset valuation allowance related to certain U.S. deferred income tax assets of one of
our non-U.S. subsidiaries ($18.7 million income tax benefit), the one-time repatriation tax imposed on the post-1986
undistributed earnings of our non-U.S. subsidiaries imposed as a result of the Tax Cuts and Jobs Act (2017 Tax Act)
enacted on December 22, 2017 ($76.2 million income tax expense), an income tax benefit related to the execution
20
and finalization of an Advance Pricing Agreement between Canada and Germany ($11.8 million income tax
benefit), and an income tax expense related to a change in our conclusions regarding our permanent reinvestment
assertion with respect to the post-1986 undistributed earnings of our European subsidiaries ($4.5 million income tax
expense).
We reported net income of $354.5 million, or $3.06 per share for 2017 compared to net income of $43.3
million, or $.37 per share for 2016. We reported higher net income in 2017 compared to 2016 in part due to higher
income from operations in 2017. Our income from operations improved in 2017 primarily due to the net impact of
higher average selling prices, higher sales and production volumes, higher raw materials and other production costs,
the recognition of an insurance settlement gain totaling $4.3 million in 2016 from two separate business interruption
claims and the net effect of changes in currency exchange rates. In addition, we recognized an aggregate net income
tax benefit of $136.5 million in 2017, as discussed above.
Our net income in 2018 includes:
•
•
the fourth quarter recognition of a $3.7 million ($.03 per share) current cash income tax expense
related to tax on global intangible low-tax income (GILTI), and
the recognition of an aggregate $2.1 million ($.02 per share) non-cash income tax expense related to an
increase in our reserve for uncertain tax positions, recognized in the first and fourth quarters.
Our net income in 2017 includes:
•
•
•
•
•
•
the recognition of an aggregate $186.7 million ($1.61 per share) non-cash deferred income tax benefit
as a result of the reversal of our deferred income tax asset valuation allowances associated with our
German and Belgian operations, mostly recognized in the second quarter,
the fourth quarter recognition of an $18.7 million ($.16 per share) non-cash deferred income tax
benefit as a result of the reversal of our deferred income tax asset valuation allowance related to certain
U.S. deferred income tax assets of one of our non-U.S. subsidiaries (which subsidiary is treated as a
dual resident for U.S. income tax purposes),
the fourth quarter recognition of a $76.2 million ($.66 per share) provisional current income tax
expense as a result of the 2017 Tax Act for the one-time repatriation tax imposed on the post-1986
undistributed earnings of our non-U.S. subsidiaries,
the recognition of an $11.8 million ($.10 per share) aggregate income tax benefit related to the
execution and finalization of an Advance Pricing Agreement between Canada and Germany, mostly
recognized in the third quarter (which includes an $8.6 million non-cash income tax benefit as a result
of a net decrease in our reserve for uncertain tax positions),
the fourth quarter recognition of a $4.5 million ($.04 per share) provisional non-cash deferred income
tax expense related to a change in our conclusions regarding our permanent reinvestment assertion
with respect to the post-1986 undistributed earnings of our European subsidiaries, and
a pre-tax aggregate charge of $7.1 million ($4.6 million, or $.04 per share, net of income tax benefit)
recognized in the third quarter related to the loss on prepayment of debt.
Our net income in 2016 includes:
•
•
•
a pre-tax insurance settlement gain of $4.3 million ($3.2 million, or $.03 per share, net of income tax
expense) recognized in the first, second and fourth quarters,
the recognition of a net $3.4 million ($.03 per share) current income tax benefit related to the execution
and finalization of an Advance Pricing Agreement between the U.S. and Canada,
the recognition of an aggregate $2.2 million ($.02 per share) non-cash deferred income tax benefit as a
result of a net decrease in our deferred income tax asset valuation allowance related to our German and
Belgian operations, recognized in the second, third and fourth quarters, and
21
•
the recognition of a $2.4 million ($.02 per share) non-cash income tax expense related to an increase in
our reserve for uncertain tax positions, mostly recognized in the fourth quarter.
Critical accounting policies and estimates
The accompanying Managements Discussion and Analysis of Financial Condition and Results of
Operations is based upon our Consolidated Financial Statements, which we have prepared in accordance with
accounting principles generally accepted in the United States of America, or GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reported period. On an ongoing basis we evaluate our estimates,
including those related to the recoverability of long-lived assets, pension benefit obligations and the underlying
actuarial assumptions related thereto, the realization of deferred income tax assets and accruals for litigation, income
tax and other contingencies. We base our estimates on historical experience and on various other assumptions
which we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ
significantly from previously-estimated amounts under different assumptions or conditions.
The following critical accounting policies affect our more significant judgments and estimates used in the
preparation of our Consolidated Financial Statements:
•
Long-lived assets We recognize an impairment charge associated with our long-lived assets,
including property and equipment, whenever we determine that recovery of such long-lived asset is not
probable. Such determination is made in accordance with the applicable GAAP requirements of
Accounting Standard Codification, or ASC, Topic 360-10-35 Property, Plant and Equipment and is
based upon, among other things, estimates of the amount of future net cash flows to be generated by
the long-lived asset and estimates of the current fair value of the asset. Significant judgment is
required in estimating such cash flows. Adverse changes in such estimates of future net cash flows or
estimates of fair value could result in an inability to recover the carrying value of the long-lived asset,
thereby possibly requiring an impairment charge to be recognized in the future. We do not assess our
property and equipment for impairment unless certain impairment indicators specified in ASC Topic
360-10-35 are present. We did not evaluate any long-lived assets for impairment during 2018 because
no such impairment indicators were present.
• Defined benefit pension plans We maintain various defined benefit pension plans. The amounts
recognized as defined benefit pension expenses and the reported amounts of pension asset and accrued
pension costs are actuarially determined based on several assumptions, including discount rates,
expected rates of return on plan assets and expected mortality. Variances from these actuarially
assumed rates will result in increases or decreases, as applicable, in the recognized pension obligations,
pension expenses and funding requirements. These assumptions are more fully described below under
Assumptions on Defined Benefit Pension Plans.
•
Income taxes We recognize deferred taxes for future tax effects of temporary differences between
financial and income tax reporting. Deferred income tax assets and liabilities for each tax-paying
jurisdiction in which we operate are netted and presented as either a noncurrent deferred income tax
asset or liability, as applicable. We record a valuation allowance to reduce our deferred income tax
assets to the amount that is believed to be realized under the more-likely-than-not recognition criteria.
While we have considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance, it is possible that we may change our
estimate of the amount of the deferred income tax assets that would more-likely-than-not be realized in
the future, resulting in an adjustment to the deferred income tax asset valuation allowance that would
either increase or decrease, as applicable, reported net income in the period such change in estimate
was made.
For example, at December 31, 2018 we have substantial net operating loss (NOL) carryforwards in
Germany (the equivalent of $541 million for German corporate tax purposes) and in Belgium (the
equivalent of $16 million for Belgian corporate tax purposes), all of which have an indefinite
22
carryforward period. As a result, we have net deferred income tax assets with respect to these two
jurisdictions, primarily related to these NOL carryforwards. As more fully described below under
Comparison of 2018 to 2017 Results of Operations Income tax expense (benefit) and Comparison
of 2017 to 2016 Results of Operations Income tax expense (benefit), we had a deferred income tax
asset valuation allowance recognized with respect to such net deferred income tax assets of our
Belgian and German operations beginning June 30, 2015. At June 30, 2017 we concluded we had
sufficient positive evidence under the more-likely-than-not recognition criteria to support reversal of
the entire valuation allowance related to our German and Belgian operations.
In addition, at the end of each reporting period we evaluate whether or not some or all of the
undistributed earnings of our non-U.S. subsidiaries are permanently reinvested (as that term is defined
in GAAP). While we may have concluded in the past that some of such undistributed earnings are
permanently reinvested, facts and circumstances can change in the future and it is possible that a
change in facts and circumstances, such as a change in the expectation regarding the capital needs of
our non-U.S. subsidiaries or a change in tax law, could result in a conclusion that some or all of such
undistributed earnings are no longer permanently reinvested. Prior to enactment of the new tax
legislation in December 2017 referred to below,
the undistributed earnings of our European
subsidiaries were deemed to be permanently reinvested (we had not made a similar determination with
respect to the undistributed earnings of our Canadian subsidiary). On December 22, 2017, H.R.1
formally known as the Tax Cuts and Jobs Act (2017 Tax Act) was enacted into law. Among other
things, this new tax legislation, as discussed more fully below under Comparison of 2018 to 2017
Results of Operations Income tax expense (benefit), implemented a territorial tax system and
imposed a one-time repatriation tax on the deemed repatriation of the post-1986 undistributed earnings
of non-U.S. subsidiaries accumulated up through December 31, 2017, regardless of whether such
earnings had been repatriated, and eliminated any U.S. federal income tax on future non-U.S. earnings
after such date (subject to certain exceptions). Our provision for income taxes in the fourth quarter of
2017 included a provisional current income tax expense for the one-time repatriation tax imposed
under the new tax law.
In addition, and as a result of this significant change in tax law, effective
December 31, 2017 we determined that all of the post-1986 undistributed earnings of our European
subsidiaries are not permanently reinvested (we had previously concluded that all of the undistributed
earnings of our Canadian subsidiary are not permanently reinvested), and accordingly our provision for
income taxes in the fourth quarter of 2017 also includes a provisional deferred income tax expense for
the estimated incremental U.S. state income tax, non-U.S. income tax and withholding tax liability
attributable to all of such previously-considered permanently reinvested undistributed earnings. We
continue to assert indefinite reinvestment as it relates to our outside basis difference attributable to our
investments in our non-U.S. subsidiaries, other than post-1986 undistributed earnings of our European
subsidiaries and all undistributed earnings of our Canadian subsidiary.
We recognize GILTI as a period expense in the period the tax is incurred. The GILTI regime was
imposed under the 2017 Tax Act, as discussed more fully below under Comparison of 2018 to 2017
Results of Operations Income tax expense (benefit). While our future global operations depend on
a number of different factors, we do expect to have future U.S. inclusions in taxable income related to
GILTI. It is possible that the tax imposed on such U.S. taxable income inclusions under GILTI may be
material to our tax provision.
We record a reserve for uncertain tax positions where we believe it is more-likely-than-not our tax
positions will not prevail with the applicable tax authorities.
It is possible that in the future we may
change our assessment regarding the probability that our tax positions will prevail that would require
an adjustment to the amount of our reserve for uncertain tax positions that could either increase or
decrease, as applicable, reported net income in the period the change in assessment was made.
•
Contingencies We record accruals for legal and other contingencies when future expenditures
associated with such contingencies and commitments become probable and the amounts can be
reasonably estimated. However, new information may become available or circumstances (such as
applicable laws and regulations) may change, thereby resulting in an increase or decrease in the
amount required to be accrued for such matters (and therefore a decrease or increase in reported net
income in the period of such change).
23
Results from operations are impacted by certain of these and other significant judgments and estimates,
such as allowance for doubtful accounts, reserves for obsolete or unmarketable inventories, impairment of equity
method investments and long-lived assets, defined benefit pension plans and loss accruals. In addition, net income
is impacted by the significant judgments and estimates for deferred income tax asset valuation allowances.
Comparison of 2018 to 2017 Results of Operations
Net sales
Cost of sales
Gross margin
Selling, general and administrative expense
Other operating income (expense):
Currency transactions, net
Other operating expense, net
Income from operations
TiO2 operating statistics:
Sales volumes*
Production volumes*
Percentage change in net sales:
TiO2 product pricing
TiO2 sales volumes
TiO2 product mix/other
Changes in currency exchange rates
Total
* Thousands of metric tons
Year ended December 31,
2017
2018
(Dollars in millions)
100% $
67
33
12
-
(1)
20% $
$
$
1,729.0
1,159.3
569.7
200.6
(7.5)
(13.8)
347.8
586
576
1,661.9
1,099.7
562.2
228.3
10.1
(13.9)
330.1
491
536
100 %
66
34
14
1
(1)
20 %
% Change
(16)%
(7)%
13 %
(16)
(4)
3
(4)%
Industry conditions and 2018 overview Due to the successful implementation of previously-announced
price increases, average selling prices rose throughout 2017 and the first six months of 2018. We started 2018 with
average selling prices 27% higher than at the beginning of 2017, and our average selling prices at the end of the
second quarter of 2018 were 3% higher than at the end of 2017, with most of the increase occurring during the first
quarter. Our average selling prices declined during the third and fourth quarters of 2018. Our average selling prices
at the end of the fourth quarter of 2018 were 4% lower than at the end of the third quarter of 2018 and 3% lower
than at the end of 2017. Lower prices in the European, Latin American and export markets were partially offset by
higher prices in North America at the end of 2018 as compared to the end of 2017. We experienced lower sales
volumes in all major markets in 2018 as compared to the record sales volumes achieved in 2017, with the European
and export markets having the most significant decreases.
The following table shows our capacity utilization rates during 2017 and 2018.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Overall
2017
2018
100%
100%
100%
100%
100%
95%
97%
92%
95%
95%
24
Due to a moderate rise in the cost of third-party feedstock ore we procured in 2017 and 2018, our cost of
sales per metric ton of TiO2 sold in 2018 was higher as compared to 2017 (excluding the effect of changes in
currency exchange rates).
Net sales Our net sales decreased 4% or $67.1 million in 2018 compared to 2017, primarily due to the net
effect of a 13% increase in average TiO2 selling prices (which increased net sales by approximately $225 million)
and a 16% decrease in sales volumes (which decreased net sales by approximately $277 million). TiO2 selling
prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of
supply and demand as well as changes in raw material and other manufacturing costs.
Our sales volumes decreased 16% in 2018 as compared to the record sales volumes of 2017 primarily due
to a combination of factors including (i) lower sales in all major markets resulting from a controlled ramp-up in
January 2018 as we brought the second phase of our new global enterprise resource planning system online; (ii)
inventory management to assure adequate supply to our customers during the spring and summer necessitated by the
lower production volumes in the first three months of the year (as discussed below); (iii) product availability in the
second quarter; and (iv) customer inventory level changes in the second, third and fourth quarters as customer
inventory levels returned to more normal levels. In addition to the impact of changes in average TiO2 selling prices
and sales volumes, we estimate that changes in currency exchange rates increased our net sales by approximately
$49 million, or 3%, as compared to 2017.
Cost of sales and gross margin Cost of sales decreased $59.6 million or 5% in 2018 compared to 2017
due to the net impact of a 16% decrease in sales volumes, a 7% decrease in TiO2 production volumes, higher raw
materials and other production costs of approximately $103 million (primarily caused by higher third-party
feedstock ore costs) and currency fluctuations (primarily the euro). The decrease in TiO2 production volumes in
2018 compared to the production volumes in 2017 was primarily due to increased maintenance activities at certain
facilities in 2018, and the implementation of a productivity-enhancing improvement project at our Belgian facility in
the first quarter of 2018. Our cost of sales as a percentage of net sales decreased to 66% in 2018 compared to 67%
in 2017 as the favorable effects of higher average selling prices more than offset the unfavorable effects related to
lower production volumes and higher raw materials and other production costs, as discussed above.
Gross margin as a percentage of net sales increased to 34% in 2018 compared to 33% in 2017. As
discussed and quantified above, our gross margin increased primarily due to the net effect of higher average selling
prices, lower sales and production volumes and higher raw materials and other production costs.
Selling, general and administrative expense Selling, general and administrative expense in 2018 was
$228.3 million, an increase of $27.7 million compared to 2017 in part due to higher general and administrative costs
related to the implementation of a new accounting and manufacturing software system of $11 million, higher
shipping and handling costs of $4 million and higher sales support costs of $3 million to better serve our customers.
Selling, general and administrative expenses were approximately 14% of net sales in 2018 and 12% of net sales in
2017.
Income from operations Income from operations decreased by $17.7 million, from $347.8 million in 2017
to $330.1 million in 2018. This decrease was due in part to the decrease in gross margin and the increase in selling,
Income from operations as a
general and administrative expense noted above for the comparable periods.
percentage of net sales was 20% in each of 2018 and 2017. We estimate that changes in currency exchange rates
increased income from operations by approximately $33 million in 2018 as compared to 2017.
Other non-operating income (expense) Beginning on January 1, 2018 with the adoption of ASU 2016-01,
all of our marketable equity securities continue to be carried at fair value, but any unrealized gains or losses on the
securities are now recognized in Marketable equity securities on our Consolidated Statements of Income. See Notes
6 and 17 to our Consolidated Financial Statements. Other components of net periodic pension and postretirement
benefits other than pensions, or OPEB, cost decreased $2.4 million in 2018 compared to 2017 primarily due to a
higher expected return on plan assets for certain non-U.S. defined benefit plans in 2018. See Notes 10 and 18 to our
Consolidated Financial Statements. Interest expense in 2018 was comparable to 2017, as higher average debt levels
in 2018 resulting from the September 2017 issuance of our Senior Secured Notes were offset by lower average
25
interest rates on outstanding indebtedness. We also recognized a loss on prepayment of debt in the third quarter of
2017 aggregating $7.1 million, associated with the prepayment and termination of our term loan indebtedness. See
Note 8 to our Consolidated Financial Statements.
Income tax expense (benefit) We recognized income tax expense of $88.8 million in 2018 compared to an
income tax benefit of $48.8 million in 2017. As discussed below, our income tax benefit in 2017 includes a net
income tax benefit of $136.5 million, consisting of the following:
•
•
•
•
•
a $186.7 million non-cash deferred income tax benefit as a result of the reversal of our deferred income
tax asset valuation allowances associated with our German and Belgian operations, mostly recognized
in the second quarter,
an $18.7 million non-cash deferred income tax benefit as a result of the reversal of our deferred income
tax asset valuation allowance related to certain U.S. deferred income tax assets of one of our non-U.S.
subsidiaries (which subsidiary is treated as a dual resident for U.S. income tax purposes),
a $76.2 million provisional current income tax expense as a result of the 2017 Tax Act for the one-time
repatriation tax imposed on the post-1986 undistributed earnings of our non-U.S. subsidiaries,
a $4.5 million provisional non-cash deferred income tax expense related to a change in our conclusions
regarding our permanent reinvestment assertion with respect to the post-1986 undistributed earnings of
our European subsidiaries, and
an $11.8 million aggregate income tax benefit related to the execution and finalization of an Advance
Pricing Agreement between Canada and Germany, mostly recognized in the third quarter (which
includes an $8.6 million non-cash income tax benefit as a result of a net decrease in our reserve for
uncertain tax positions).
Our earnings are subject to income tax in various U.S. and non-U.S. jurisdictions. Beginning in 2018
(following enactment of the 2017 Tax Act discussed below), the income tax rates applicable to our pre-tax earnings
(losses) of our non-U.S. operations are generally higher than the income tax rates applicable to our U.S. operations.
Excluding the effect of any increase or decrease in our deferred income tax asset valuation allowance or changes in
our reserve for uncertain tax positions, we would generally expect our overall effective tax rate to be higher than the
U.S. federal statutory tax rate of 21% primarily because of our non-U.S. operations. Prior to 2018, the income tax
rates applicable to our pre-tax earnings (losses) of our non-U.S. operations were generally lower than the U.S.
federal statutory tax rate of 35%. See Note 13 to our Consolidated Financial Statements for a tabular reconciliation
of our statutory income tax provision to our actual tax provision.
We have substantial net operating loss (NOL) carryforwards in Germany (the equivalent of $541 million
for German corporate tax purposes at December 31, 2018) and in Belgium (the equivalent of $16 million for Belgian
corporate tax purposes at December 31, 2018), all of which have an indefinite carryforward period. As a result, we
have net deferred income tax assets with respect to these two jurisdictions, primarily related to these NOL
carryforwards. The German corporate tax is similar to the U.S. federal income tax, and the German trade tax is
similar to the U.S. state income tax (our German trade tax NOLs were fully utilized as of December 31, 2018). Prior
to 2017, we concluded that we were required to recognize a non-cash deferred income tax asset valuation allowance
under the more-likely-than-not recognition criteria with respect to our German and Belgian net deferred income tax
assets. At December 31, 2016 such valuation allowance aggregated $173 million ($153 million with respect to
Germany and $20 million with respect to Belgium). During the first six months of 2017, we recognized an
aggregate non-cash deferred income tax benefit of $12.7 million as a result of a net decrease in such deferred
income tax asset valuation allowance, due to utilizing a portion of both the German and Belgian NOL during the
period. At June 30, 2017, we concluded we had sufficient positive evidence under the more-likely-than-not
recognition criteria to support reversal of the entire valuation allowance related to our German and Belgian
operations. In accordance with the ASC 740-270 guidance regarding accounting for income taxes at interim dates,
the amount of the valuation allowance reversed at June 30, 2017 ($149.9 million, of which $141.9 million related to
Germany and $8.0 million related to Belgium) associated with our change in judgment at that date regarding the
realizability of the related deferred income tax asset as it relates to future years (i.e. 2018 and after). A change in
judgment regarding the realizability of deferred tax assets as it relates to the current year is considered in
determining the estimated annual effective tax rate for the year and is recognized throughout the year, including
interim periods subsequent to the date of the change in judgment. Accordingly, our income tax benefit in calendar
26
year 2017 includes an aggregate non-cash deferred income tax benefit of $186.7 million associated with the reversal
of the German and Belgian valuation allowance, comprised of $12.7 million recognized in the first half of 2017
(noted above) associated with the utilization of a portion of both the German and Belgian NOLs during such period,
$149.9 million related to the portion of the valuation allowance reversed as of June 30, 2017 and $24.1 million
recognized in the second half of 2017 associated with the utilization of a portion of both the German and Belgian
NOLs during such period. Our deferred income tax asset valuation allowance increased $13.7 million in 2017 as a
result of changes in currency exchange rates, which increase was recognized as part of other comprehensive income
(loss).
On December 22, 2017, the 2017 Tax Act was enacted into law. This new tax legislation, among other
changes, (i) reduced the U.S. Federal corporate income tax rate from 35% to 21% effective January 1, 2018; (ii)
implemented a territorial tax system and imposed a one-time repatriation tax (Transition Tax) on the deemed
repatriation of the post-1986 undistributed earnings of non-U.S. subsidiaries accumulated up through December 31,
2017, regardless of whether such earnings are repatriated; (iii) eliminated U.S. tax on future non-U.S. earnings
(subject to certain exceptions); (iv) eliminated the domestic production activities deduction beginning in 2018; (v)
eliminated the net operating loss carryback and provides for an indefinite carryforward period subject to an 80%
annual usage limitation; (vi) allows for the expensing of certain capital expenditures; (vii) imposed GILTI beginning
in 2018; (viii) imposed a base erosion anti-abuse tax (BEAT) beginning in 2018; and (ix) amended the rules limiting
the deduction for business interest expense beginning in 2018. Following the enactment of the 2017 Tax Act, the
Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 118 to provide guidance on the
accounting and reporting impacts of the 2017 Tax Act. SAB 118 states that companies should account for changes
related to the 2017 Tax Act in the period of enactment if all information is available and the accounting can be
completed. In situations where companies do not have enough information to complete the accounting in the period
of enactment, a company must either 1) record an estimated provisional amount if the impact of the change can be
reasonably estimated; or 2) continue to apply the accounting guidance that was in effect immediately prior to the
2017 Tax Act if the impact of the change cannot be reasonably estimated.
If estimated provisional amounts are
recorded, SAB 118 provides a measurement period of no longer than one year during which companies should
adjust those amounts as additional information becomes available in the reporting period within the measurement
period in which such adjustment is determined.
Under GAAP, we were required to revalue our net deferred tax asset associated with our U.S. net
deductible temporary differences in the period in which the new tax legislation is enacted based on deferred tax
balances as of the enactment date, to reflect the effect of such reduction in the corporate income tax rate. Our
temporary differences as of December 31, 2017 were not materially different from our temporary differences as of
the enactment date, accordingly revaluation of our net deductible temporary differences was based on our net
deferred tax asset as of December 31, 2017. Such revaluation was recognized in continuing operations and was not
material to us.
Prior to the enactment of the 2017 Tax Act, the undistributed earnings of our European subsidiaries were
deemed to be permanently reinvested (we had not made a similar determination with respect to the undistributed
earnings of our Canadian subsidiary). Pursuant to the Transition Tax provisions imposing a one-time repatriation
tax on post-1986 undistributed earnings, we recognized a provisional current income tax expense of $76.2 million in
the fourth quarter of 2017. The amounts recorded as of December 31, 2017 as a result of the 2017 Tax Act
represented estimates based on information available at that date. We elected to pay such tax over an eight year
period beginning in 2018, including approximately $6.1 million which was paid in April 2018 (for the 2017 tax
year) and $5.8 million which was paid in 2018 (for the 2018 tax year). During the third quarter of 2018, in
conjunction with finalizing our federal income tax return and based on additional information that became availablea
(including proposed regulations issued by the IRS in August 2018 with respect to the Transition Tax), we
recognized a provisional income tax benefit of $1.7 million which amount is recorded as a measurement-period
adjustment, reducing the provisional income tax expense of $76.2 million recognized in the fourth quarter of 2017.
As a result, at December 31, 2018, taking into account the prior Transition Tax installments payments of $11.9
million (noted above), the balance of our unpaid Transition Tax aggregates $62.6 million, which will be paid in
quarterly installments over the remainder of the eight year period. Of such $62.6 million, $56.6 million is recorded
as a noncurrent payable to affiliate (income taxes payable to Valhi) classified as a noncurrent liability in our
Consolidated Balance Sheet at December 31, 2018, and $6.0 million is included with our current payable to affiliate
(income taxes payable to Valhi) classified as a current liability (a portion of our noncurrent income tax payable to
affiliate was reclassified to our current payable to affiliate for the portion of our 2019 Transition Tax installment due
27
within the next twelve months). We have completed our analysis of the Transition Tax provisions within the
prescribed measurement period ending December 22, 2018 pursuant to the guidance under SAB 118.
Prior to the enactment of the 2017 Tax Act the undistributed earnings of our European subsidiaries were
deemed to be permanently reinvested (we had not made a similar determination with respect to the undistributed
earnings of our Canadian subsidiary). As a result of the implementation of a territorial tax system under the 2017
Tax Act, effective January 1, 2018, and the Transition Tax which in effect taxes the post-1986 undistributed
earnings of our non-U.S. subsidiaries accumulated up through December 31, 2017, we determined effective
December 31, 2017 that all of the post-1986 undistributed earnings of our European subsidiaries are not permanently
reinvested. Accordingly, in the fourth quarter of 2017 we recognized an aggregate provisional non-cash deferred
income tax expense of $4.5 million based on our reasonable estimates of the U.S. state and non-U.S. income tax and
withholding tax liability attributable to all of such previously-considered permanently reinvested undistributed
earnings through December 31, 2017. The amounts recorded as of December 31, 2017 as a result of the 2017 Tax
Act represented estimates based on information currently available. We have not made any measurement-period
adjustments to the provisional amounts recorded at December 31, 2017 for this item during 2018 because no new
information became available during the period that required an adjustment. However, we recorded a non-cash
deferred income tax expense of $2.4 million for the U.S. state and non-U.S. income tax and withholding tax liability
attributable to the 2018 undistributed earnings of our non-U.S. subsidiaries in 2018, including withholding taxes
related to the undistributed earnings of our Canadian subsidiary. We have completed our analysis as it relates to the
implementation of a territorial tax system under the 2017 Tax Act within the prescribed measurement period ending
December 22, 2018 pursuant to the guidance under SAB 118.
Under U.S. GAAP, as it relates to the new GILTI tax rules, we are allowed to make an accounting policy
choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-
period expense when incurred (the period cost method) or (2) factoring such amounts into the measurement of our
deferred taxes (the deferred method). While our future global operations depend on a number of different factors,
we do expect to have future U.S. inclusions in taxable income related to GILTI. We did not record any adjustment
related to GILTI during the first nine months of 2018 based on our determination that the impact was not material,
and based on the guidance available to us at the time. During the fourth quarter of 2018, and taking into
consideration proposed regulations issued by the IRS in November 2018 with respect to various related non-U.S. tax
credit provisions, we recognized a current cash income tax expense of $3.7 million for GILTI. In conjunction with
the issuance of the proposed regulations, taking into consideration the complexities related to an election to
recognize deferred taxes for basis differences that are expected to have a GILTI impact in future years, we have
concluded that the appropriate accounting policy election for Kronos is to record GILTI tax as a current-period
expense when incurred under the period cost method. As such, we have completed our policy election within the
prescribed measurement period ended December 22, 2018 pursuant to the guidance under SAB 118. Similarly, we
have evaluated the tax impact of BEAT, taking into consideration proposed regulations issued by the IRS in
December 2018 with respect to BEAT, and determined that the tax imposed under BEAT has no material impact to
us as we have historically not entered into international payments between related parties that are unrelated to cost
of goods sold. Our determinations under the GILTI, BEAT and related U.S. tax credit provisions are based on the
relevant statutes and guidance provided under the proposed regulations. Given the complexity of the international
provisions, it is possible that final regulations could differ from the proposed regulations and materially impact our
determinations with respect to such items. Any material change will be recognized in the period in which the final
regulations are published.
Certain U.S. deferred tax attributes of one of our non-U.S. subsidiaries, which subsidiary is treated as a
dual resident for U.S. income tax purposes, were subject to various limitations. As a result, we had previously
concluded that a deferred income tax asset valuation allowance was required to be recognized with respect to such
subsidiarys U.S. net deferred income tax asset because such assets did not meet
the more-likely-than-not
recognition criteria primarily due to (i) the various limitations regarding use of such attributes due to the dual
residency; (ii) the dual resident subsidiary had a history of losses and absent distributions from our non-U.S.
subsidiaries, which were previously not determinable, such subsidiary was expected to continue to generate losses;
and (iii) a limited NOL carryforward period for U.S. tax purposes. Because we had concluded the likelihood of
realization of such subsidiarys net deferred income tax asset was remote, we had not previously disclosed such
valuation allowance or the associated amount of the subsidiarys net deferred income tax assets (exclusive of such
valuation allowance). Primarily due to changes enacted under the 2017 Tax Act, we have concluded we now have
28
sufficient positive evidence under the more-likely-than-not recognition criteria to support reversal of the entire
valuation allowance related to such subsidiarys net deferred income tax asset, which evidence included, among
other things, (i) the inclusion under Transition Tax provisions of significant earnings for U.S. income tax purposes
which significantly and positively impacts the ability of such deferred tax attributes to be utilized by us; (ii) the
indefinite carryforward period for U.S. net operating losses incurred after December 31, 2017; (iii) an expectation of
continued future profitability for our U.S. operations; and (iv) a positive taxable income basket for U.S. tax purposes
in excess of the U.S. deferred tax asset related to the U.S. attributes of such subsidiary. Accordingly, in the fourth
quarter of 2017 we recognized an $18.7 million non-cash deferred income tax benefit as a result of the reversal of
such valuation allowance.
Our consolidated effective income tax rate in 2019 is expected to be higher than the U.S. federal statutory
rate of 21% because the income tax rates applicable to our earnings (losses) of our non-U.S. operations will be
higher than the income tax rates applicable to our U.S. operations. In addition, our consolidated effective income
tax rate in 2019 is expected to be lower than our effective tax rate in 2018 primarily due to the mix of earnings and a
decrease in the statutory income tax rate in certain non-U.S. jurisdictions in which we operate.
Comparison of 2017 to 2016 Results of Operations
Net sales
Cost of sales
Gross margin
Selling, general and administrative expense
Other operating income (expense):
Currency transactions, net
Other operating expense, net
Income from operations
TiO2 operating statistics:
Sales volumes*
Production volumes*
Percentage change in net sales:
TiO2 product pricing
TiO2 sales volumes
TiO2 product mix/other
Changes in currency exchange rates
Total
* Thousands of metric tons
Year ended December 31,
2016
2017
(Dollars in millions)
100 % $
80
20
12
-
(1)
7 % $
$
$
1,364.3
1,099.6
264.7
168.5
5.5
(8.8)
92.9
559
546
1,729.0
1,159.3
569.7
200.6
(7.5)
(13.8)
347.8
586
576
100 %
67
33
12
-
(1)
20 %
% Change
5 %
5 %
22 %
5
(1)
1
27 %
Net sales Our net sales increased 27% or $364.7 million in 2017 compared to 2016, primarily due to the
favorable effects of a 22% increase in average TiO2 selling prices (which increased net sales by approximately $300
million) and a 5% increase in sales volumes (which increased net sales by approximately $68 million). TiO2 selling
prices will increase or decrease generally as a result of competitive market pressures, changes in the relative level of
supply and demand as well as changes in raw material and other manufacturing costs.
Our sales volumes increased in 2017 primarily due to strength in the North American and European
markets as compared to 2016. Our sales volumes in 2017 set a new overall record for a full-year period. We
estimate that changes in currency exchange rates increased our net sales by approximately $16 million, or 1%, as
compared to 2016.
29
Cost of sales and gross margin Cost of sales increased $59.7 million or 5% in 2017 compared to 2016
due to the net impact of a 5% increase in sales volumes, efficiencies related to a 5% increase in TiO2 production
volumes, higher raw materials and other production costs of approximately $13 million and currency fluctuations
(primarily the euro). Our production volumes in 2017 set a new overall record for a full-year period. Our cost of
sales as a percentage of net sales decreased to 67% in 2017 compared to 80% in 2016 as the favorable effects of
higher average selling prices and efficiencies related to higher production volumes more than offset the higher raw
materials and other production costs, as discussed above.
Gross margin as a percentage of net sales increased to 33% in 2017 compared to 20% in 2016. As
discussed and quantified above, our gross margin increased primarily due to the net effect of higher average selling
prices, higher sales and production volumes and higher raw materials and other production costs.
Selling, general and administrative expense Selling, general and administrative expense in 2017 was
$200.6 million, an increase of $32.1 million compared to 2016. Selling, general and administrative expense
increased in 2017 in part due to higher shipping and handling costs of $11 million, higher general and administrative
costs related to the implementation of a new accounting and manufacturing software system of $8 million and higher
research, development and certain sales technical support costs of $7 million. Selling, general and administrative
expenses were approximately 12% of net sales in each of 2017 and 2016.
Other operating income and expense, net Other operating income and expense, net in 2016 includes
income aggregating $4.3 million related to insurance settlement gains from two separate business interruption claims.
Income from operations Income from operations increased by $254.9 million, from $92.9 million in 2016
to $347.8 million in 2017. Income from operations as a percentage of net sales increased to 20% in 2017 from 7%
in 2016. This increase was driven by the increase in gross margin, discussed above, partially offset by income
aggregating $4.3 million related to insurance settlement gains from two separate business interruption claims in
2016. We estimate that changes in currency exchange rates decreased income from operations by approximately
$18 million in 2017 as compared to 2016.
Other non-operating income (expense) We recognized a loss on prepayment of debt in the third quarter of
2017 aggregating $7.1 million, associated with the prepayment and termination of our term loan indebtedness. See
Note 8 to our Consolidated Financial Statements.
Interest expense decreased $1.5 million from $20.5 million in
2016 to $19.0 million in 2017 primarily due to higher capitalized interest in 2017. See Notes 1 and 8 to our
Consolidated Financial Statements.
Income tax expense (benefit) We recognized an income tax benefit of $48.8 million in 2017 compared to
income tax expense of $17.9 million in 2016. Our income tax expense in 2016 includes a $3.4 million current
income tax benefit related to the execution and finalization of an Advance Pricing Agreement between the U.S. and
Canada, an aggregate $2.2 million non-cash tax benefit as the result of a net decrease in our deferred income tax
valuation allowance and a $2.4 increase to our reserve for uncertain tax positions. Our income tax benefit in 2017
includes a net income tax benefit of $136.5 million, as discussed above.
Our effective income tax rate in 2016, excluding the impact of the reduction in our deferred income tax
asset valuation allowances we recognized and the change to our reserve for uncertain tax positions, was lower than
the U.S. federal statutory rate of 35% primarily due to the change to prior year tax discussed above. Our effective
income tax rate in 2017, excluding the impact of the reversal of the deferred income tax asset valuation allowances,
the one-time repatriation tax, the impact of the change in our permanent reinvestment assertion with respect to the
undistributed earnings of our European subsidiaries and the change to our reserve for uncertain tax positions, was
lower than the U.S. federal statutory rate of 35% primarily due to the impact of the earnings of our non-U.S.
subsidiaries. See Note 13 to our Consolidated Financial Statements for a tabular reconciliation of our statutory
income tax provision to our actual tax provision.
30
Effects of currency exchange rates
We have substantial operations and assets located outside the United States (primarily in Germany,
Belgium, Norway and Canada). The majority of our sales from non-U.S. operations are denominated in currencies
other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar. A portion
of our sales generated from our non-U.S. operations is denominated in the U.S. dollar (and consequently our non-
U.S. operations will generally hold U.S. dollars from time to time). Certain raw materials used worldwide, primarily
titanium-containing feedstocks, are purchased primarily in U.S. dollars, while labor and other production costs are
purchased primarily in local currencies. Consequently, the translated U.S. dollar value of our non-U.S. sales and
operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact
reported earnings and may affect the comparability of period-to-period operating results. In addition to the impact
of the translation of sales and expenses over time, our non-U.S. operations also generate currency transaction gains
and losses which primarily relate to (i) the difference between the currency exchange rates in effect when non-local
currency sales or operating costs (primarily U.S. dollar denominated) are initially accrued and when such amounts
are settled with the non-local currency, (ii) changes in currency exchange rates during time periods when our non-
U.S. operations are holding non-local currency (primarily U.S. dollars), and (iii) relative changes in the aggregate
fair value of currency forward contracts held from time to time. As discussed in Note 17 to our Consolidated
Financial Statements, we periodically use currency forward contracts to manage a portion of our currency exchange
risk, and relative changes in the aggregate fair value of any currency forward contracts we hold from time to time
serves in part to mitigate the currency transaction gains or losses we would otherwise recognize from the first two
items described above.
Overall, we estimate that fluctuations in currency exchange rates had the following effects on our sales and
income from operations for the periods indicated.
Impact of changes in currency exchange rates - 2018 vs. 2017
Transaction gains/(losses) recognized
2017
2018
Change
(In millions)
Translation
gains
impact of
rate changes
Total currency
impact
2018 vs. 2017
Impact on:
Net sales
Income from operations
$
$
-
(8)
$
-
10
$
-
18
$
49
15
49
33
The $49 million increase in net sales (translation gain) was caused primarily by a weakening of the U.S.
dollar relative to the euro, as our euro-denominated sales were translated into more U.S. dollars in 2018 as compared
to 2017. The weakening of the U.S. dollar relative to the Canadian dollar and the Norwegian krone in 2018 did not
have a significant effect on the reported amount of our net sales, as a substantial portion of the sales generated by
our Canadian and Norwegian operations are denominated in the U.S. dollar.
The $33 million increase in income from operations was comprised of the following:
• Approximately $18 million from net currency transaction gains primarily caused by relative changes in
currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro,
Canadian dollar and the Norwegian krone, which causes increases or decreases, as applicable, in U.S.
dollar-denominated receivables and payables and U.S. dollar currency held by our non-U.S.
operations, and
• Approximately $15 million from net currency translation gains primarily caused by a weakening of the
U.S. dollar relative to the euro as the positive effects of the weaker U.S. dollar on euro-denominated
sales more than offset the unfavorable effects of euro-denominated operating costs being translated
into more U.S. dollars in 2018 as compared to 2017, partially offset by the weakening of the U.S.
dollar relative to the Canadian dollar, as its local currency-denominated operating costs were translated
into more U.S. dollars in 2018 as compared to 2017.
31
Impact of changes in currency exchange rates - 2017 vs. 2016
Transaction gains/(losses) recognized
2016
2017
Change
(In millions)
Translation
gain/loss-
impact of
rate changes
Total currency
impact
2017 vs. 2016
Impact on:
Net sales
Income from operations
$
$
-
6
$
-
(8)
$
-
(14)
$
16
(4)
16
(18)
The $16 million increase in net sales (translation gain) was caused primarily by a weakening of the U.S.
dollar relative to the euro (mostly in the fourth quarter), as our euro-denominated sales were translated into more
U.S. dollars in 2017 as compared to 2016. The weakening of the U.S. dollar relative to the Canadian dollar and the
Norwegian krone in 2017 did not have a significant effecff
t on the reported amount of our net sales, as a substantial
portion of the sales generated by our Canadian and Norwegian operations are denominated in the U.S. dollar.
The $18 million decrease in income from operations was comprised of the following:
• Approximately $14 million from net currency transaction losses primarily caused by relative changes
in currency exchange rates at each applicable balance sheet date between the U.S. dollar and the euro,
Canadian dollar and the Norwegian krone, which causes increases or decreases, as applicable, in U.S.
dollar-denominated receivables and payables and U.S. dollar currency held by our non-U.S.
operations, and
• Approximately $4 million from net currency translation losses primarily caused by a weakening of the
U.S. dollar relative to the Canadian dollar, as its local currency-denominated operating costs were
translated into more U.S. dollars in 2017 as compared to 2016, and such translation, as it related to the
U.S. dollar relative to the euro, had a nominal effect on income from operations in 2017 as compared
to 2016.
Outlook
During 2018 we operated our production facilities at 95% of practical capacity compared to full practical
capacity in 2017. We expect our production volumes in 2019 to be slightly higher as compared to the 2018
production volumes. Assuming current global economic conditions continue and based on anticipated production
levels, we also expect our 2019 sales volumes to be higher as compared to 2018 sales volumes. We will continue to
monitor current and anticipated near-term customer demand levels and align our production and inventories
accordingly.
The cost of third-party feedstock ore we purchased in 2018 was higher as compared to 2017 and such
higher cost feedstock ore was reflected in our results of operations beginning in the second quarter of 2018.
Consequently, our cost of sales per metric ton of TiO2 sold in 2018 was moderately higher than our per-metric ton
cost in 2017 (excluding the effect of changes in currency exchange rates) primarily due to higher third-party
feedstock ore costs along with the unfavorable effects of lower production volumes. We expect our cost of sales per
metric ton of TiO2 sold in 2019 to be higher than our per-metric ton cost in 2018 primarily due to higher feedstock
costs.
We started 2018 with average selling prices 27% higher than the beginning of 2017. Average selling prices
increased by an additional 3% in the first six months of 2018 (most of which occurred in the first quarter) and
average selling prices decreased by 6% during the last six months of 2018. Industry data indicates that overall TiO2
inventory held by producers stood at adequate-to-low levels in the last half of 2018. We expect changes in customer
inventory levels to continue to decrease through the first quarter of 2019 which could lead to some selling price
decreases during the first quarter of 2019.
Overall, we expect our sales in 2019 will be higher as compared to 2018, principally as a result of the
favorable impact of higher expected sales volumes partially offset by the unfavorable impact of lower expected
32
average selling prices.
In addition, we expect our income from operations in 2019 will be lower as compared to
2018, as the favorable impact of higher expected sales volumes would be more than offset by the unfavorable impact
of lower expected average selling prices and higher raw material costs (principally feedstock ore) in 2019.
Due to the constraints of high capital costs and extended lead time associated with adding significant new
TiO2 production capacity, especially for premium grades of TiO2 products produced from the chloride process, we
believe increased and sustained profit margins will be necessary to financially justify major expansions of TiO2
production capacity required to meet expected future growth in demand. Any major expansion of TiO2 production
capacity, if announced, would take several years before such production would become available to meet future
growth in demand.
Our expectations for our future operating results are based upon a number of factors beyond our control,
including worldwide growth of gross domestic product, competition in the marketplace, continued operation of
competitors, unexpected or earlier-than-expected capacity additions or reductions and technological advances.
If
actual developments differ from our expectations, our results of operations could be unfavorably affected.
Assumptions on Defined Benefit Pension Plans
We maintain various defined benefit pension plans in the U.S., Europe and Canada. See Note 10 to our
Consolidated Financial Statements.
Under defined benefit pension plan accounting, defined benefit pension plan expense, pension assets and
accrued pension costs are each recognized based on certain actuarial assumptions. These assumptions are
principally the assumed discount rate, the assumed long-term rate of return on plan assets and the assumed increase
in future compensation levels. We recognize the full funded status of our defined benefit pension plans as either an
asset (for overfunded plans) or a liability (for underfunded plans) in our Consolidated Balance Sheet.
We recognized consolidated defined benefit pension plan expense of $22.0 million in 2016, $28.9 million
in 2017 and $26.6 million in 2018. Certain non-U.S. employees are covered by plans in their respective countries,
principally in Germany, Canada and Norway. Participation in the defined benefit pension plan in Germany was
closed to new participants effective in 2005. German employees hired beginning in 2005 participate in a new plan
in which the retirement benefit is based upon the amount of employee and employer contributions to the plan, but
for which in accordance with German law the employer guarantees a minimum rate of return on invested assets and
a guaranteed indexed lifetime benefit payment after retirement based on the participants account balance at the time
of retirement. In accordance with GAAP, the new pension plan is accounted for as a defined benefit plan, principally
because of such guaranteed minimum rate of return and guaranteed lifetime benefit payment. Participation in the
defined benefit plan in Canada with respect to hourly and salaried workers was closed to new participants in
December 2013 and 2014, respectively, and existing hourly and salaried plan participants no longer accrue
additional defined pension benefits after December 2013 and 2014, respectively. Our U.S. plan was closed to new
participants in 1996, and existing participants no longer accrue any additional benefits after that date. The amount
of funding requirements for these defined benefit pension plans is generally based upon applicable regulations (such
as ERISA in the U.S.) and will generally differ from pension expense for financial reporting purposes. We made
contributions to all of our plans which aggregated $15.5 million in 2016, $16.2 million in 2017 and $17.1 million in
2018.
The discount rates we use for determining defined benefit pension expense and the related pension
obligations are based on current interest rates earned on long-term bonds that receive one of the two highest ratings
given by recognized rating agencies in the applicable country where the defined benefit pension benefits are being
paid.
In addition, we receive third-party advice about appropriate discount rates and these advisors may in some
cases use their own market indices. We adjust these discount rates as of each December 31 valuation date to reflect
then-current interest rates on such long-term bonds. We use these discount rates to determine the actuarial present
value of the pension obligations as of December 31 of that year. We also use these discount rates to determine the
interest component of defined benefit pension expense for the following year.
At December 31, 2018, approximately 71%, 15%, 8% and 2% of the projected benefit obligations related to
our plans in Germany, Canada, Norway and the U.S., respectively. We use several different discount rate
33
assumptions in determining our consolidated defined benefit pension plan obligation and expense. This is because
we maintain defined benefit pension plans in several different countries in Europe and North America and the
interest rate environment differs from country to country.
We used the following discount rates for our defined benefit pension plans:
Obligations
at December 31, 2016
and expense in 2017
1.8%
3.7%
2.5%
3.9%
Discount rates used for:
Obligations
at December 31, 2017
and expense in 2018
1.8%
3.3%
2.5%
3.5%
Obligations
at December 31, 2018
and expense in 2019
1.8%
3.5%
2.5%
4.1%
Germany
Canada
Norway
U.S.
The assumed long-term rate of return on plan assets represents the estimated average rate of earnings
expected to be earned on the funds invested or to be invested in the plans assets provided to fund the benefit
payments inherent in the projected benefit obligations. Unlike the discount rate, which is adjusted each year based
on changes in current long-term interest rates, the assumed long-term rate of return on plan assets will not
necessarily change based upon the actual short-term performance of the plan assets in any given year. Defined
benefit pension expense each year is based upon the assumed long-term rate of return on plan assets for each plan,
the actual fair value of the plan assets as of the beginning of the year and an estimate of the amount of contributions
to and distributions from the plan during the year. Differences between the expected return on plan assets for a
given year and the actual return are deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for which benefits are still being earned by
active employees) or the average remaining life expectancy of the inactive participants (for plans for which benefits
are not still being earned by active employees).
At December 31, 2018, approximately 58%, 23%, 12% and 3% of the plan assets related to our plans in
Germany, Canada, Norway and the U.S., respectively. We use several different long-term rates of return on plan
asset assumptions in determining our consolidated defined benefit pension plan expense. This is because the plan
assets in different countries are invested in a different mix of investments and the long-term rates of return for
different investments differ from country to country.
In determining the expected long-term rate of return on plan asset assumptions, we consider the long-term
asset mix (e.g. equity vs. fixed income) for the assets for each of our plans and the expected long-term rates of return
for such asset components.
In addition, we receive third-party advice about appropriate long-term rates of return.
At December 31, 2017, all of the assets of our U.S. plan were invested in the Combined Master Retirement Trust
(CMRT), a collective investment trust sponsored by Contran to permit the collective investment by certain master
trusts which fund certain employee benefit plans sponsored by Contran and certain of its affiliates, including us.
During 2018, Contran and the other employer-sponsors (including us) implemented a restructuring of the CMRT, in
which a substantial part of each plans units in the CMRT were redeemed in exchange for a pro-rata portion of a
substantial part of the CMRTs investments. Following such restructuring, the plans held directly in the aggregate
the investments previously held directly by the CMRT which had been exchanged for CMRT units as part of the
restructuring. Certain investments held directly by the CMRT were not part of such restructuring and remain
investments of the CMRT. Such restructuring was implemented in part so each plan could more easily align the
composition of their plan asset portfolio with the plans benefit obligations. Such assumed asset mixes and the
CMRT restructuring are discussed in Note 10 to our Consolidated Financial Statements.
34
Our pension plan weighted average asset allocations by asset category were as follows:
Equity securities and limited partnerships
Fixed income securities
Real estate
Other
Total
Equity securities and limited partnerships
Fixed income securities
Real estate
Other
Total
Germany
22%
68
9
1
100%
December 31, 2018
Norway
Canada
21%
79
-
-
100%
12%
52
9
27
100%
U.S.
38%
46
-
16
100%
Germany
December 31, 2017
Norway
Canada
U.S.
20%
69
9
2
100%
23%
77
-
-
100%
12%
51
9
28
100%
62%
31
-
7
100%
We regularly review our actual asset allocation for each of our U.S. and non-U.S. plans and will
the targeted allocation when
periodically rebalance the investments in each plan to more accurately reflect
considered appropriate.
Our assumed long-term rates of return on plan assets for 2016, 2017 and 2018 were as follows:
Germany
Canada
Norway
U.S.
2016
2017
2018
3.5%
5.2%
3.3%
7.5%
1.3%
4.3%
3.5%
7.5%
2.0%
4.2%
4.0%
7.5%
Our long-term rate of return on plan asset assumptions in 2019 used for purposes of determining our 2019
defined benefit pension plan expense for Germany, Canada, Norway and the U.S. are 2.3%, 4.0%, 4.0% and 5.5%,
respectively.
To the extent that a plans particular pension benefit formula calculates the pension benefit in whole or in
part based upon future compensation levels, the projected benefit obligations and the pension expense will be based
in part upon expected increases in future compensation levels. For all of our plans for which the benefit formula is
so calculated, we generally base the assumed expected increase in future compensation levels upon average long-
term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, the amount of recognized defined benefit pension
expense and the amount of net pension asset and net pension liability will vary based upon relative changes in
currency exchange rates.
A reduction in the assumed discount rate generally results in an actuarial loss, as the actuarially-determined
present value of estimated future benefit payments will increase. Conversely, an increase in the assumed discount
rate generally results in an actuarial gain. In addition, an actual return on plan assets for a given year that is greater
than the assumed return on plan assets results in an actuarial gain, while an actual return on plan assets that is less
than the assumed return results in an actuarial loss. Other actual outcomes that differ from previous assumptions,
such as individuals living longer or shorter than assumed in mortality tables, which are also used to determine the
actuarially-determined present value of estimated future benefit payments, changes in such mortality tables
themselves or plan amendments, will also result in actuarial losses or gains. These amounts are recognized in other
In addition, any actuarial gains generated in future periods would reduce the negative
comprehensive income.
35
amortization effect of any cumulative unrecognized actuarial losses, while any actuarial losses generated in future
periods would reduce the favorable amortization effect of any cumulative unrecognized actuarial gains.
During 2018, all of our defined benefit pension plans generated a combined net actuarial
loss of
approximately $24.3 million. This actuarial loss resulted primarily from an actual return on plan assets during 2018
less than the expected return, partially offset by an increase in discount rates from December 31, 2017 to
December 31, 2018.
Based on the actuarial assumptions described above and our current expectation for what actual average
currency exchange rates will be during 2019, we expect our defined benefit pension expense will approximate
$28 million in 2019. In comparison, we expect to be required to contribute approximately $17 million to such plans
during 2019.
As noted above, defined benefit pension expense and the amounts recognized as accrued pension costs are
based upon the actuarial assumptions discussed above. We believe all of the actuarial assumptions used are
reasonable and appropriate. However, if we had lowered the assumed discount rate by 25 basis points for all plans
as of December 31, 2018, our aggregate projected benefit obligations would have increased by approximately $29.9
million at that date and our defined benefit pension expense would be expected to increase by approximately $2.5
million during 2019. Similarly, if we lowered the assumed long-term rate of return on plan assets by 25 basis points
for all of our plans, our defined benefit pension expense would be expected to increase by approximately $1.1
million during 2019.
Operations outside the United States
As discussed above, we have substantial operations located outside the United States for which the
functional currency is not the U.S. dollar. As a result, the reported amount of our assets and liabilities related to our
non-U.S. operations, and therefore our consolidated net assets, will fluctuate based upon changes in currency
exchange rates. At December 31, 2018, we had substantial net assets denominated in the euro, Canadian dollar and
Norwegian krone.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
Operating activities
Trends in cash flows as a result of our operating activities (excluding the impact of significant asset
dispositions and relative changes in assets and liabilities) are generally similar to trends in our earnings. In addition
to the impact of the operating, investing and financing cash flows discussed below, changes in the amount of cash,
cash equivalents and restricted cash we report from year to year can be impacted by changes in currency exchange
rates, since a portion of our cash, cash equivalents and restricted cash is held by our non-U.S. subsidiaries. For
example, during 2018, relative changes in currency exchange rates resulted in a $14.4 million decrease in the
reported amount of our cash, cash equivalents and restricted cash compared to a $14.4 million increase in 2017 and a
$5.3 million decrease in 2016.
Cash provided by operating activities was $188.5 million in 2018 compared to $276.1 million in 2017.
This $87.6 million decrease in the amount of cash provided was primarily due to the net effect of the following:
ff
•
•
•
•
lower income from operations in 2018 of $17.7 million,
higher amount of net cash used associated with relative changes in our inventories, receivables,
payables and accruals in 2018 of $58.2 million as compared to 2017,
higher cash paid for taxes in 2018 of $30.8 million due to the timing of tax payments as well as the
aggregate $11.9 million we paid in 2018 related to the Transition Tax provisions of 2017 Tax Act, and
higher distributions from our TiO2 manufacturing joint venture in 2018 of $10.0 million, primarily due
to the timing of the joint ventures working capital needs.
36
Cash provided by operating activities was $276.1 million in 2017 compared to $89.6 million in 2016. This
$186.5 million increase in the amount of cash provided was primarily due to the net effect of the following:
•
•
•
•
higher income from operations in 2017 of $254.9 million,
higher amount of net cash used associated with relative changes in our inventories, receivables,
payables and accruals in 2017 of $37.6 million as compared to 2016,
higher cash paid for taxes of $30.5 million due to our increased profitability, and
higher contributions to our TiO2 manufacturing joint venture in 2017 of $9.6 million, primarily due to
the timing of the joint ventures working capital needs.
Changes in working capital are affected by accounts receivable and inventory changes. As shown below:
• Our average days sales outstanding, or DSO, increased from December 31, 2017 to December 31,
2018, primarily due to the effects of lower sales volumes and relative changes in the timing of
collections, and
• Our average days sales in inventory, or DSI, increased from December 31, 2017 to December 31,
2018, primarily due to higher inventory volumes attributable in part to lower overall sales volumes and
production volumes exceeding sales volumes.
For comparative purposes, we have provided prior year numbers below.
Days sales outstanding
Days sales in inventory
Investing activities
December 31,
2016
65 days
71 days
December 31,
2017
63 days
62 days
December 31,
2018
76 days
113 days
Our capital expenditures were $53.0 million in 2016, $64.3 million in 2017 and $56.3 million in 2018.
Capital expenditures are primarily incurred to maintain and improve the cost effectiveness of our manufacturing
facilities.
In addition, approximately $39.2 million (including $1.7 million in 2018) of our capital expenditures
during the past three years relates to the implementation of a new accounting and manufacturing software system.
Our capital expenditures during the past three years include an aggregate of approximately $44.9 million (including
$17.1 million in 2018) for our ongoing environmental protection and compliance programs.
In addition, under the terms of our unsecured revolving demand promissory note with Valhi, we loaned
$18.2 million and subsequently collected $4.6 million during 2017 and we loaned $2.6 million and subsequently
collected $16.2 million during 2018.
Financing activities
During 2018, we paid quarterly dividends aggregating $.68 per share ($78.8 million).
During 2017, we:
•
•
•
•
issued 400 million ($477.6 million) aggregate principal amount of 3.75% Senior Secured Notes on
September 13, 2017,
repaid the remaining balance of $340.4 million on our term loan,
borrowed $253.9 million under our North American revolving credit facility and subsequently repaid
$253.9 million, and
paid quarterly dividends to stockholders aggregating $.60 per share ($69.5 million).
37
During 2016, we:
•
•
•
borrowed $266.2 million under our revolving North American credit facility and subsequently repaid
$266.2 million,
repaid $3.5 million on our term loan, and
paid quarterly dividends to stockholders aggregating $.60 per share ($69.5 million).
In February 2019, our board of directors declared a first quarter 2019 regular quarterly dividend of $.18 per
share, payable March 14, 2019 to stockholders of record as of March 5, 2019.
Outstanding debt obligations and borrowing availability
At December 31, 2018, our consolidated debt comprised:
•
•
400 million aggregate outstanding on our KII 3.75% Senior Secured Notes ($452.4 million carrying
amount, net of unamortized debt issuance costs) due in September 2025, and
approximately $4.2 million of other indebtedness.
Our North American and European revolvers and our Senior Secured Notes contain a number of covenants
and restrictions which, among other things, restrict our ability to incur or guarantee additional debt, incur liens, pay
dividends or make other restricted payments, or merge or consolidate with, or sell or transfer substantially all of our
assets to, another entity, and contain other provisions and restrictive covenants customary in lending transactions of
this type. Certain of our credit agreements contain provisions which could result in the acceleration of indebtedness
prior to their stated maturity for reasons other than defaults for failure to comply with typical financial or payment
covenants. For example, certain credit agreements allow the lender to accelerate the maturity of the indebtedness
upon a change of control (as defined in the agreement) of the borrower. In addition, certain credit agreements could
result in the acceleration of all or a portion of the indebtedness following a sale of assets outside the ordinary course
of business. Our European revolving credit facility also requires the maintenance of certain financial ratios, and one
of such requirements is based on the ratio of net debt to the last twelve months EBITDA of the borrowers. The
terms of all of our debt instruments (including revolving lines of credit for which we have no outstanding
borrowings at December 31, 2018) are discussed in Note 8 to our Consolidated Financial Statements. We are in
compliance with all of our debt covenants at December 31, 2018. We believe that we will be able to continue to
comply with the financial covenants contained in ouruu credit facilities through their maturity.
In addition to the outstanding indebtedness indicated above, at December 31, 2018 we had $101.3 million
available for borrowing under our North American revolving credit facility. At December 31, 2018, based upon the
last twelve months EBITDA and the net debt to EBITDA financial test for our European revolving credit facility, the
full 90 million amount of the credit facility ($103.2 million) was available for borrowing. We could borrow all
available amounts under each of our credit faff cilities without violating our existing debt covenants.
Our assets consist primarily of investments in operating subsidiaries, and our ability to service our
obligations,
including the Senior Secured Notes, depends in part upon the distribution of earnings of our
subsidiaries, whether in the form of dividends, advances or payments on account of intercompany obligations or
otherwise. Our Senior Secured Notes are collateralized by, among other things, a first priority lien on (i) 100% of
the common stock or other ownership interests of each existing and future direct domestic subsidiary of KII and the
guarantors, and (ii) 65% of the voting common stock or other ownership interests and 100% of the non-voting
common stock or other ownership interests of each non-U.S. subsidiary that is directly owned by KII or any
guarantor. Our North American revolving credit facility is collateralized by, among other things, a first priority lien
on the borrowers trade receivables and inventories. Our European revolving credit facility is collateralized by,
among other things, the accounts receivable and inventories of the borrowers plus a limited pledge of all the other
assets of the Belgian borrower. See Note 8 to our Consolidated Financial Statements.
38
Future cash requirements
Liquidity
Our primary source of liquidity on an ongoing basis is cash flows from operating activities which is
generally used to (i) fund capital expenditures, (ii) repay any short-term indebtedness incurred for working capital
purposes and (iii) provide for the payment of dividends. From time-to-time we will incur indebtedness, generally to
(i) fund short-term working capital needs, (ii) refinance existing indebtedness or (iii) fund major capital expenditures
or the acquisition of other assets outside the ordinary course of business. We will also from time-to-time sell assets
outside the ordinary course of business and use the proceeds to (i) repay existing indebtedness, (ii) make
investments in marketable and other securities, (iii) fund major capital expenditures or the acquisition of other assets
outside the ordinary course of business or (iv) pay dividends.
The TiO2 industry is cyclical, and changes in industry economic conditions significantly impact earnings
and operating cash flows. Changes in TiO2 pricing, production volumes and customer demand, among other things,
could significantly affect our liquidity.
We routinely evaluate our liquidity requirements, alternative uses of capital, capital needs and availability
of resources in view of, among other things, our dividend policy, our debt service, our capital expenditure
requirements and estimated future operating cash flows. As a result of this process, we have in the past and may in
the future seek to reduce, refinance, repurchase or restructure indebtedness, raise additional capital, repurchase
shares of our common stock, modify our dividend policy, restructure ownership interests, sell interests in our
subsidiaries or other assets, or take a combination of these steps or other steps to manage our liquidity and capital
resources. Such activities have in the past and may in the future involve related companies. In the normal course of
our business, we may investigate, evaluate, discuss and engage in acquisition, joint venture, strategic relationship
and other business combination opportunities in the TiO2 industry.
In the event of any future acquisition or joint
venture opportunity, we may consider using then-available liquidity, issuing our equity securities or incurring
additional indebtedness.
Based upon our expectation for the TiO2 industry and anticipated demands on cash resources, we expect to
have sufficient
term obligations (defined as the twelve-month period ending
December 31, 2019) and our long-term obligations (defined as the five-year period ending December 31, 2023, our
time period for long-term budgeting).
If actual developments differ from our expectations, our liquidity could be
adversely affected.
liquidity to meet our short
Cash, cash equivalents, restricted cash and marketable securities
At December 31, 2018 we had:
Cash and cash equivalents
Restricted cash
Noncurrent marketable securities
Held by
U.S.
entities
$
254.8
-
3.4
Non-U.S.
entities
(In millions)
118.5
$
1.4
-
$
Total
373.3
1.4
3.4
Following implementation of a territorial tax system under the 2017 Tax Act, repatriation of any cash and
cash equivalents held by our non-U.S. subsidiaries would not be expected to result in any material income tax
liability as a result of such repatriation.
Stock repurchase program
At December 31, 2018, we have 1,951,000 shares available for repurchase under a stock repurchase
program authorized by our board of directors. See Note 14 to our Consolidated Financial Statements.
39
Capital expenditures
We intend to spend approximately $85 million on capital expenditures during 2019, primarily to maintain
and improve our existing facilities, including approximately $25 million in the area of environmental compliance,
protection and improvement programs which are primarily focused on increasing operating efficiency but also result
in improved environmental protection, such as lower emissions from our manufacturing plants. Capital spending for
2019 is expected to be funded through cash on hand or borrowing under existing credit facilities.
Off-balance sheet financing
Other than operating lease commitments disclosed in Note 16 to our Consolidated Financial Statements, we
are not party to any material off-balance sheet financing arrangements.
Commitments and contingencies
See Notes 13 and 16 to our Consolidated Financial Statements for a description of certain income tax
contingencies, certain legal proceedings and other commitments.
As more fully described in the Notes to the Consolidated Financial Statements, we are a party to various
debt, lease and other agreements which contractually and unconditionally commit us to pay certain amounts in the
future. See Notes 8, 15 and 16 to our Consolidated Financial Statements. The timing and amount shown for our
commitments in the table below are based upon the contractual payment amount and the contractual payment date
for such commitments. The following table summarizes such contractual commitments of ours and our consolidated
subsidiaries as of December 31, 2018.
Contractual commitment
2019
2020/
2021
Payment due date
2022/
2023
(In millions)
2024
and after
Total
Indebtedness:
Principal (1)
Interest payments (2)
contracts for the purchase
Operating leases
Long-term supply
u
of TiO2 feedstock (3)
Long-term service and other supply contracts (4)
Fixed asset acquisitions
Estimated tax obligations (5)
$
$
1.5
17.2
6.2
379.4
56.0
15.5
19.4
495.2
$
$
2.1
34.4
9.2
214.1
82.8
-
12.0
354.6
$
$
.6
34.4
5.6
-
11.9
-
26.0
78.5
$
$
458.7
29.5
21.5
-
5.7
-
18.6
534.0
$
462.9
115.5
42.5
593.5
156.4
15.5
76.0
$ 1,462.3
(1)
(2)
(3)
At December 31, 2018, a significant portion of the amount shown for indebtedness relates to our 3.75%
Senior Secured Notes due 2025 ($458.7 million at December 31, 2018 exclusive of $6.3 million
unamortized debt issuance costs). Such indebtedness is denominated in the euro. See Item 7A -
Quantitative and Qualitative Disclosures About Market Risk and Note 8 to the Consolidated Financial
Statements.
The amounts shown for interest payments relate to outstanding fixed-rate indebtedness. Interest payments
assume that fixed-rate indebtedness remains outstanding until maturity.
Our contracts for the purchase of TiO2 feedstock contain fixed quantities of ore that we are required to
purchase, or specify a range of quantities within which we are required to purchase based on our feedstock
requirements. The pricing under these agreements is generally negotiated quarterly or semi-annually. The
timing and amount shown for our commitments related to the supply contracts for TiO2 feedstock are based
upon our current estimate of the quantity of material that will be purchased in each time period shown, the
payment that would be due based upon such estimated purchased quantity and an estimate of the prices for
the various suppliers which is primarily based on first half 2019 pricing. The actual amount of material
purchased and the actual amount that would be payable by us, may vary from such estimated amounts. Our
40
(4)
(5)
obligation for the purchase of TiO2 feedstock is more fully described in Note 16 to our Consolidated
Financial Statements and above in Business Raw materials. The amounts shown in the table above
include the feedstock requirements from contracts we entered into through January 2019.
The amounts shown for the long-term service and other supply contracts primarily pertain to agreements
we have entered into with various providers of products or services which help to run our plant facilities
(electricity, natural gas, etc.), utilizing December 31, 2018 exchange rates.
See Note 16 to our
Consolidated Financial Statements.
The amount shown for estimated tax obligations in 2019 is the consolidated amount of income taxes
payable at December 31, 2018, including an amount related to the Transition Tax which is assumed to be
paid during 2019. The amounts shown for estimated tax obligations in 2020 and thereafter relate to the
Transition Tax which will be paid in the years indicated above. See Note 13 to our Consolidated Financial
Statements.
The above table does not reflect:
• Any amounts we might pay to fund our defined benefit pension plans, as the timing and amount of any
such future fundings are unknown and dependent on, among other things, the future performance of
defined benefit pension plan assets, interest rate assumptions and actual future retiree medical costs.
We expect to be required to contribute an aggregate of approximately $17 million to our defined
benefit pension plans during 2019. Such defined benefit pension plans are discussed above in greater
detail and in Note 10 to our Consolidated Financial Statements.
• Any amounts we might pay to settle any of our uncertain tax positions classified as a noncurrent
liability, as the timing and amount of any such future settlements are unknown and dependent on,
among other things, the timing of tax audits. See Note 13 to our Consolidated Financial Statements.
• Any amounts we might pay to acquire TiO2 from our TiO2 manufacturing joint venture, as the timing
and amount of such purchases are unknown and dependent on, among other things, the amount of TiO2
produced by the joint venture in the future and the joint ventures future cost of producing such TiO2.
However, the table does include amounts related to our share of the joint ventures ore requirements
necessary to produce TiO2 for us. See Item 1, Business and Note 5 to our Consolidated Financial
Statements.
We occasionally enter into raw material supply arrangements to mitigate the short-term impact of future
increases in raw material costs. While these arrangements do not necessarily commit us to a minimum volume of
purchase, they generally provide for stated unit prices based upon achievement of specified volume purchase levels.
This allows us to stabilize raw material purchase prices to a certain extent, provided the specified minimum monthly
purchase quantities are met.
Recent accounting pronouncements
See Note 18 to our Consolidated Financial Statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We are exposed to market risk from changes in interest rates, currency exchange rates, equity security and
raw materials prices.
Interest rates
At December 31, 2017 and 2018, our fixed-rate, euro-denominated Senior Secured Notes comprised the
majority of our aggregate indebtedness. The fixed-rate debt instrument minimizes earnings volatility that would
result from changes in interest rates. The following table presents principal amounts and weighted average interest
rates for our aggregate outstanding indebtedness at December 31, 2017 and 2018.
Information shown below for our
euro-denominated Senior Secured Notes is presented in its U.S. dollar equivalent at December 31, 2017 and 2018
41
(net of unamortized debt issuance costs of $7.5 million and $6.3 million, respectively) using an exchange rate of
U.S. $1.197 per euro and $1.147 per euro, respectively. See Note 8 to our Consolidated Financial Statements.
Indebtedness Amount
Carrying
amount
Fair
value
(In millions)
Year-end
interest
rate
Maturity
date
$
$
452.4 $
412.9
3.75%
2025
471.1 $
495.1
3.75%
2025
December 31, 2018
Fixed-rate Senior Secured Notes
December 31, 2017
Fixed-rate Senior Secured Notes
Currency exchange rates
We are exposed to market risk arising from changes in currency exchange rates as a result of manufacturing
and selling our products worldwide. Earnings are primarily affected by fluctuations in the value of the U.S. dollar
relative to the euro, the Canadian dollar, the Norwegian krone and the United Kingdom pound sterling.
The majority of our sales from non-U.S. operations are denominated in currencies other than the U.S.
dollar, principally the euro, other major European currencies and the Canadian dollar. A portion of our sales
generated from our non-U.S. operations is denominated in the U.S. dollar (and consequently our non-U.S. operations
will generally hold U.S. dollars from time to time). Certain raw materials used worldwide, primarily titanium-
containing feedstocks, are purchased primarily in U.S. dollars, while labor and other production costs are purchased
primarily in local currencies. Consequently, the translated U.S. dollar value of our non-U.S. sales and operating
results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported
earnings. In addition to the impact of the translation of sales and expenses over time, our non-U.S. operations also
generate currency transaction gains and losses which primarily relate to (i) the difference between the currency
exchange rates in effect when non-local currency sales or operating costs (primarily U.S. dollar denominated) are
initially accrued and when such amounts are settled with the non-local currency, (ii) changes in currency exchange
rates during time periods when our non-U.S. operations are holding non-local currency (primarily U.S. dollars), and
(iii) relative changes in the aggregate fair value of currency forward contracts held from time to time.
We periodically use currency forward contracts to manage a very nominal portion of currency exchange
rate risk associated with trade receivables denominated in a currency other than the holders functional currency or
similar exchange rate risk associated with future sales. We have not entered into these contracts for trading or
speculative purposes in the past, nor do we currently anticipate entering into such contracts for trading or speculative
purposes in the future. We are not party to any currency forward contracts at December 31, 2018. See Note 17 to
our Consolidated Financial Statements.
Also, we are subject to currency exchange rate risk associated with our Senior Secured Notes, as such
indebtedness is denominated in the euro. At December 31, 2017 and 2018, we had the equivalent of $478.6 million
and $458.7 million, respectively, outstanding under our euro-denominated Senior Secured Notes (exclusive of
unamortized debt issuance costs.) The potential increase in the U.S. dollar equivalent of such indebtedness resulting
from a hypothetical 10% adverse change in exchange rates at such dates would be approximately $48 million and
$46 million, respectively.
Marketable security prices
We are exposed to market risk due to changes in prices of the marketable securities which we own. See
Note 6 to our Consolidated Financial Statements. The fair value of securities which includes investments in
publicly-traded shares of related parties was $10.7 million and $3.4 million at December 31, 2017 and December 31,
2018, respectively. The potential change in the aggregate fair value of these investments, assuming a 10% change in
prices, would be approximately $1.1 million and $.3 million at December 31, 2017 and December 31, 2018,
respectively.
42
Raw materials
We are exposed to market risk from changes in commodity prices relating to our raw materials. As
discussed in Item 1 we generally enter into long-term supply agreements for certain of our raw material
requirements. Many of our raw material contracts contain fixed quantities we are required to purchase, or specify a
range of quantities within which we are required to purchase. Raw material pricing under these agreements is
generally negotiated quarterly or semi-annually depending upon the suppliers.
For certain raw material
requirements we do not have long-term supply agreements either because we have assessed the risk of the
unavailability of those raw materials and/or the risk of a significant change in the cost of those raw materials to be
low, or because long-term supply agreements for those raw materials are generally not available.
a
Other
We believe there may be a certain amount of incompleteness in the sensitivity analyses presented above.
For example, the hypothetical effect of changes in exchange rates discussed above ignores the potential effect on
other variables which affect our results of operations and cash flows, such as demand for our products, sales
volumes and selling prices and operating expenses. Accordingly, the amounts presented above are not necessarily
an accurate reflection of the potential losses we would incur assuming the hypothetical changes in exchange rates
were actually to occur.
The above discussion and estimated sensitivity analysis amounts include forward-looking statements of
market risk which assume hypothetical changes in currency exchange rates. Actual future market conditions will
likely differ materially from such assumptions. Accordingly, such forward-looking statements should not be
considered to be projections by us of future events, gains or losses.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section of this Annual Report. See Index
of Financial Statements (page F-1).
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures which, as defined in Exchange Act Rule 13a-15(e), means
controls and other procedures that are designed to ensure that information required to be disclosed in the reports that
we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the Act), is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information we
are required to disclose in the reports we file or submit to the SEC under the Act is accumulated and communicated
to our management, including our principal executive officer and our principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure.
Each of Robert D. Graham, our Vice Chairman of the Board, President and Chief Executive Officer and Gregory M.
Swalwell, our Executive Vice President and Chief Financial Officer, have evaluated the design and effectiveness of
our disclosure controls and procedures as of December 31, 2018. Based upon their evaluation, these executive
officers have concluded that our disclosure controls and procedures are effecff
tive as of the date of such evaluation.
Managements report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting which, as defined by Exchange Act Rule 13a-15(f) means a process designed by, or under the supervision
43
of, our principal executive and principal financial officers, or persons performing similar functions, and effected by
the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles, and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets,
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that receipts and expenditures are being made only
in accordance with authorizations of management and directors and
Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition,
use or disposition of assets that could have a material effect on our Consolidated Financial Statements.
Our evaluation of the effectiveness of internal control over financial reporting is based upon the criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission in 2013 (commonly referred to as the 2013 COSO framework). Based on our
evaluation under that framework, we have concluded that our internal control over financial reporting was effective
as of December 31, 2018.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that has audited our
consolidated financial statements included in this Annual Report, has audited the effectiveness of our internal
control over financial reporting as of December 31, 2018, as stated in their report, which is included in this Annual
Report on Form 10-K.
Other
As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal
control over financial reporting of equity method investees and (ii) internal control over the preparation of any
financial statement schedules which would be required by Article 12 of Regulation S-X. However, our assessment
of internal control over financial reporting with respect to equity method investees did include controls over the
recording of amounts related to our investment that are recorded in the consolidated financial statements, including
controls over the selection of accounting methods for our investments, the recognition of equity method earnings
and losses and the determination, valuation and recording of our investment account balances.
Changes in internal control over financial reporting
There has been no change to our internal control over financial reporting during the quarter ended
December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Certifications
Our chief executive officer is required to annually file a certification with the New York Stock Exchange,
or NYSE, certifying our compliance with the corporate governance listing standards of the NYSE. During 2018, our
chief executive officer filed such annual certification with the NYSE. The 2018 certification was unqualified.
Our chief executive officer and chief financial officer are also required to, among other things, file
quarterly certifications with the SEC regarding the quality of our public disclosures, as required by Section 302 of
the Sarbanes-Oxley Act of 2002. The certifications for the quarter ended December 31, 2018 have been filed as
Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.
ITEM 9B.
OTHER INFORMATION
Not applicable
44
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to our 2019 definitive proxy statement
to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this
report.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our 2019 proxy statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to our 2019 proxy statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated by reference to our 2019 proxy statement. See also
Note 15 to our Consolidated Financial Statements.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by the Item is incorporated by reference to our 2019 proxy statement.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) and (c) Financial Statements
The Registrant
The consolidated financial statements of the Registrant listed on the accompanying Index of Financial
Statements (see page F-1) are filed as part of this Annual Report.
50%-or-less owned persons
We are not required to provide any consolidated financial statements pursuant to Rule 3-09 of
Regulation S-X.
(b)
Exhibits
Included as exhibits are the items listed in the Exhibit Index. We will furnish a copy of any of the
exhibits listed below upon payment of $4.00 per exhibit to cover our costs to furnish the exhibits.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, any instrument defining the rights of holders of long-
term debt issues and other agreements related to indebtedness which do not exceed 10% of consolidated
total assets as of December 31, 2018 will be furnished to the Commission upon request.
45
Item No.
3.1+
3.2
10.1
10.2
10.3*
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Exhibit Index
Restated First Amended and Restated Certificate of Incorporation of Kronos Worldwide, Inc., as
amended on May 12, 2011 incorporated by reference to Exhibit 3.1 of the Registrants Current Report
on Form 8-K (File No. 001-31763) filed on May 12, 2011.
Amended and Restated Bylaws of Kronos Worldwide, Inc. as of October 25, 2007 incorporated by
reference to Exhibit 3.1 of the Registrants Current Report on Form 8-K (File No. 001-31763) filed
with the U.S. Securities and Exchange Commission on October 31, 2007.
Amended and Restated Tax Agreement between Valhi, Inc. and Kronos Worldwide, Inc. dated as of
December 1, 2012 incorporated by reference to Exhibit 10.1 to the Registrants Annual Report on
Form 10-K (File No. 001-31763) for the year ended December 31, 2012.
Intercorporate Services Agreement by and between Contran Corporation and Kronos Worldwide, Inc.,
effective as of January 1, 2004 incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q of the Registrant (File No. 001-31763) for the quarter ended March 31, 2004.
Kronos Worldwide, Inc. 2012 Director Stock Plan incorporated by reference to Exhibit 4.4 of the
Registration statement on Form S-8 of the Registrant (File No. 333-113425).
Lease Contract, dated June 21, 1952, between Farbenfabriken Bayer Aktiengesellschaft and
Titangesellschaft mit beschrankter Haftung (German language version and English translation thereof)-
incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K (File No. 001-00640) of
NL Industries, Inc. for the year ended December 31, 1985. (P)
Master Technology Exchange Agreement, dated as of October 18, 1993, among Kronos Worldwide,
Inc. (f/k/a Kronos, Inc.), Kronos Louisiana, Inc., Kronos International, Inc., Tioxide Group Limited and
Tioxide Group Services Limited incorporated by reference to Exhibit 10.8 to the Quarterly Report on
Form 10-Q (File No. 001-00640) of NL Industries, Inc. for the quarter ended September 30, 1993. (P)
Form of Assignment and Assumption Agreement, dated as of January 1, 1999, between Kronos Inc.
(formerly known as Kronos (USA), Inc.) and Kronos International, Inc. incorporated by reference to
Exhibit 10.9 to Kronos International, Inc.s Registration Statement on Form S-4 (File No. 333-100047).
(P)
Form of Cross License Agreement, effective as of January 1, 1999, between Kronos Inc. (formerly
known as Kronos (USA), Inc.) and Kronos International, Inc. incorporated by reference to Exhibit to
Kronos International, Inc.s Registration Statement on Form S-4 (File No. 333-100047). (P)
Formation Agreement dated as of October 18, 1993 among Tioxide Americas Inc., Kronos Louisiana,
Inc. and Louisiana Pigment Company, L.P. incorporated by reference to Exhibit 10.2 to NL
Industries, Inc.s Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended
September 30, 1993. (P)
Joint Venture Agreement dated as of October 18, 1993 between Tioxide Americas Inc. and Kronos
Louisiana, Inc. incorporated by reference to Exhibit 10.3 to NL Industries, Inc.s Quarterly Report on
Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
Kronos Offtake Agreement dated as of October 18, 1993 between Kronos Louisiana, Inc. and Louisiana
Pigment Company, L.P. incorporated by reference to Exhibit 10.4 to NL Industries, Inc.s Quarterly
Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
Amendment No. 1 to Kronos Offtake Agreement dated as of December 20, 1995 between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. incorporated by reference to Exhibit 10.22 to
NL Industries, Inc.s Annual Report on Form 10-K (File No. 001-00640) for the year ended
December 31, 1995. (P)
46
Item No.
10.12
10.13
10.14
10.15
10.16**
10.17**
10.18
10.19
10.20
Exhibit Index
Tioxide Americas Offtake Agreement dated as of October 18, 1993 between Tioxide Americas Inc. and
Louisiana Pigment Company, L.P. incorporated by reference to Exhibit 10.5 to NL Industries, Inc.s
Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of December 20, 1995 between
Tioxide Americas Inc. and Louisiana Pigment Company, L.P. incorporated by reference to Exhibit
10.24 to NL Industries, Inc.s Annual Report on Form 10-K (File No. 001-00640) for the year ended
December 31, 1995. (P)
Parents Undertaking dated as of October 18, 1993 between ICI American Holdings Inc. and Kronos
Worldwide, Inc. (f/k/a Kronos, Inc.) incorporated by reference to Exhibit 10.9 to NL Industries, Inc.s
Quarterly Report on Form 10-Q (File No. 001-00640) for the quarter ended September 30, 1993. (P)
Allocation Agreement dated as of October 18, 1993 between Tioxide Americas Inc., ICI American
Holdings, Inc., Kronos Worldwide, Inc. (f/k/a Kronos, Inc.) and Kronos Louisiana, Inc. incorporated
by reference to Exhibit 10.10 to NL Industries, Inc.s Quarterly Report on Form 10-Q (File No. 001-
00640) for the quarter ended September 30, 1993. (P)
Second Amended and Restated Agreement Regarding Shared Insurance among CompX International
Inc., Contran Corporation, Kronos Worldwide, Inc., NL Industries, Inc., and Valhi, Inc. dated January
25, 2019.
Unsecured Revolving Demand Promissory Note dated December 31, 2018 in the principal amount of
$60.0 million executed by Valhi, Inc. and payable to the order of Kronos Worldwide, Inc.
Restated and Amended Agreement by and between Richards Bay Titanium (Proprietary) Limited
(acting through its sales agent Rio Tinto Iron & Titanium Limited) and Kronos (US), Inc. effective
January 1, 2016 incorporated by reference to Exhibit 10.26 to the Registrants Annual Report on
Form 10-K (File No. 001-31763) for the year ended December 31, 2015.
Indenture, dated as of September 13, 2017, among Kronos International, Inc., the guarantors named
therein, and Deutsche Bank Trust Company Americas, as trustee, collateral agent, paying agent,
transfer agent and registrar incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-
K (File No. 001-31763) dated September 13, 2017 and filed by the registrant on September 13, 2017.
Pledge Agreement, dated as of September 13, 2017, among Kronos International, Inc., the guarantors
named therein and Deutsche Bank Trust Company Americas, as collateral agent incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K (File No. 001-31763) dated September 13,
2017 and filed by the registrant on September 13, 2017.
21.1**
Subsidiaries.
23.1**
Consent of PricewaterhouseCoopers LLP.
31.1**
Certification.
31.2**
Certification.
32.1**
Certification.
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema
101.CAL** XBRL Taxonomy Extension Calculation Linkbase
101.DEF** XBRL Taxonomy Extension Definition Linkbase
101.LAB** XBRL Taxonomy Extension Label Linkbase
101.PRE** XBRL Taxonomy Extension Presentation Linkbase
47
+
*
**
(P)
Exhibit 3.1 is restated for the purposes of the disclosure requirements of Item 601 of Regulation S-K
promulgated by the U.S. Securities and Exchange Commission and does not represent a restated certificate of
incorporation that has been filed with the Delaware Secretary of State.
Management contract, compensatory plan or arrangement
Filed herewith
Paper exhibits
48
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Kronos Worldwide, Inc.
(Registrant)
,
By:
/s/ Robert D. Graham
Robert D. Graham, March 11, 2019
(Vice Chairman, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ Loretta J. Feehan
Loretta J. Feehan, March 11, 2019
(Chair of the Board (non-executive))
/s/ Robert D. Graham
Robert D. Graham, March 11, 2019
(Vice Chairman, President and Chief Executive Officer)
/s/ C. H. Moore, Jr.
C. H. Moore, Jr., March 11, 2019
(Director)
/s/ Thomas P. Stafford
Thomas P. Stafford, March 11, 2019
(Director)
/s/ Meredith W. Mendes
Meredith W. Mendes, March 11, 2019
(Director)
/s/ Keith R. Coogan
Keith R. Coogan, March 11, 2019
(Director)
/s/ John E. Harper
John E. Harper, March 11, 2019
(Director)
/s/ R. Gerald Turner
R. Gerald Turner, March 11, 2019
(Director)
/s/ Tim C. Hafer
Tim C. Hafer, March 11, 2019
(Vice President, Controller,
Principal Accounting Officer)
/s/ Gregory M. Swalwell
Gregory M. Swalwell, March 11, 2019
(Executive Vice President and
Chief Financial Officer, Principal Financial Officer)
49
SUBSIDIARIES OF THE REGISTRANT
NAME OF CORPORATION
Kronos Canada, Inc.
Kronos Internarr
tional, Inc.
Kronos Titan GmbHm
Société Industritt elle du Titane, S.A.
Kronos Limited
Kronos Denmark ApS
Kronos Europe S.A./N.V.
Kronos Norge A/S
Kronos Titan A/S
Titania A/S
Elkania DA
Kronos Louisiana, Inc.
Kronos (US), Inc.
Louisiana Pigment Compam ny, L.P.
(a) Held by the Registrant or the indicated subsiu
diary of the Registrant
EXHIBIT 21.1
Jurisdiction of
incorporation
or organization
Canada
Delaware
Germany
France
United Kingdom
Denmark
Belgium
Norway
Norway
Norway
Norway
Delaware
Delaware
Delaware
% of voting
securities held at
December 31, 2018(a)
100
100
100
99
100
100
100
100
100
100
50
100
100
50
KRONOS WORLDWIDE, INC.
Annual Report on Form 10-K
Items 8, 15(a) and 15(c)
Index of Financial Statements
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets December 31, 2017 and 2018
Consolidated Statements of Income
Years ended December 31, 2016, 2017 and 2018
Consolidated Statements of Comprehensive Income
Years ended December 31, 2016, 2017 and 2018
Consolidated Statements of Stockholders Equity
Years ended December 31, 2016, 2017 and 2018
Consolidated Statements of Cash Flows
Years ended December 31, 2016, 2017 and 2018
Notes to Consolidated Financial Statements
Page
F-2
F-4
F-6
F-7
F-8
F-9
F-11
All financial statement schedules have been omitted either because they are not applicable or required, or
the information that would be required to be included is disclosed in the Notes to the Consolidated Financial
Statements.
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Kronos Worldwide, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kronos Worldwide, Inc. and its
subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements
of income, comprehensive income, stockholders equity and cash flows for each of the three years in the
period ended December 31, 2018, including the related notes (collectively referred to as the consolidated
financial statements). We also have audited the Company's internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2018 in
conformity with accounting principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on the Companys
consolidated financial statements and on the Company's internal control over financial reporting based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) ("PCAOB") and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
(cid:41)(cid:16)(cid:21)
Definition and Limitations of Internal Control over Financial Reporting
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Dallas, Texas
March 11, 2019
We have served as the Companys auditor since 1997.
F-3
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts and other receivables
Receivables from affiliates
Inventories, net
Prepaid expenses and other
Total current assets
Other assets:
Investment in TiO2 manufacturing joint venture
Marketable securities
Note receivable from Valhi
Deferred income taxes
Other
Total other assets
Property and equipment:
Land
Buildings
Equipment
Mining properties
Construction in progress
Less accumulated depreciation and amortization
Net property and equipment
Total assets
December 31,
2017
2018
$
$
322.0
1.7
319.1
27.4
382.3
10.0
373.3
1.4
299.5
13.0
497.9
16.3
1,062.5
1,201.4
86.5
10.7
13.6
139.2
5.5
255.5
42.0
221.6
1,103.2
115.7
52.6
1,535.1
1,028.7
81.3
3.4
-
122.0
3.6
210.3
41.0
211.7
1,102.6
114.0
38.0
1,507.3
1,020.9
506.4
486.4
$
1,824.4
$
1,898.1
F-4
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In millions, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2017
2018
Current liabilities:
Current maturities of long-term debt
Accounts payable and accrued liabilities
Payables to affiliates
Income taxes
Total current liabilities
Noncurrent liabilities:
Long-term debt
Accrued pension costs
Payable to affiliate - income taxes
Deferred income taxes
Other
Total noncurrent liabilities
Stockholders' equity:
Common stock, $.01 par value; 240.0 shares authorized;
115.9 shares issued
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss
Total stockholders' equity
$
$
.7
189.6
16.2
25.0
231.5
473.8
254.2
70.1
11.3
29.2
838.6
1.5
195.8
27.1
9.0
233.4
455.1
262.9
56.6
21.5
28.8
824.9
1.2
1,399.0
(267.2)
(378.7)
1.2
1,399.1
(136.2)
(424.3)
754.3
839.8
Total liabilities and stockholders' equity
$
1,824.4
$
1,898.1
Commitments and contingencies (Notes 13 and 16)
See accompanying Notes to Consolidated Financial Statements.
F-5
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Net sales
Cost of sales
Gross margin
Selling, general and administrative expense
Other operating income (expense):
Currency transactions, net
Disposition of property and equipment
Other income, net
Corporate expense
Income from operations
Other income (expense):
Interest and dividend income
Marketable equity securities
Other components of net periodic pension and OPEB cost
Loss on prepayment of debt, net
Interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Net income per basic and diluted share
Cash dividends per share
$
$
$
$
Years ended December 31,
2017
1,729.0
1,159.3
2016
1,364.3
1,099.6
$
$
2018
1,661.9
1,099.7
264.7
168.5
5.5
(.3)
4.2
(12.7)
569.7
200.6
(7.5)
(.4)
.5
(13.9)
562.2
228.3
10.1
(.2)
.8
(14.5)
92.9
347.8
330.1
.6
-
(11.8)
-
(20.5)
61.2
17.9
43.3
.37
.60
1.4
-
(17.4)
(7.1)
(19.0)
5.5
(7.3)
(15.0)
-
(19.5)
305.7
293.8
(48.8)
88.8
$
$
$
354.5
3.06
.60
$
$
$
205.0
1.77
.68
Weighted average shares used in the calculation of net
income per share
115.9
115.9
115.9
See accompanying Notes to Consolidated Financial Statements.
F-6
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Years ended December 31,
2017
2018
2016
Net income
$
43.3
$
354.5
$
205.0
Other comprehensive income (loss), net of tax:
Currency translation
Defined benefit pension plans
Other postretirement benefit plans
Marketable securities
Interest rate swap
Total other comprehensive income (loss), net
(17.6)
(25.6)
(.3)
2.4
.3
(40.8)
57.7
12.0
(.6)
3.0
2.0
74.1
(33.1)
(7.2)
(.5)
-
-
(40.8)
Comprehensive income
$
2.5
$
428.6
$
164.2
See accompanying Notes to Consolidated Financial Statements.
F-7
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S
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years ended December 31,
2017
2018
2016
Cash flows from operating activities:
Net income
Depreciation and amortization
Deferred income taxes
Benefit plan expense greater than cash funding
Marketable equity securities
Distributions from (contributions to) TiO2 manufacturing
joint venture, net
Loss on prepayment of debt
Payment for termination of interest rate swap contract
Other, net
Change in assets and liabilities:
Accounts and other receivables
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Income taxes
Accounts with affiliates
Other noncurrent assets
Other noncurrent liabilities
$
43.3
40.5
7.7
5.8
-
3.6
-
-
3.0
(37.4)
38.8
(1.5)
(12.9)
3.8
(5.8)
.3
.4
$
$
354.5
41.2
(151.6)
12.0
-
(6.0)
7.1
(3.3)
2.4
(52.7)
(4.9)
.9
20.7
19.2
41.3
(1.6)
(3.1)
205.0
49.7
27.3
8.4
7.3
4.0
-
-
2.8
8.7
(135.5)
(5.3)
16.4
(16.4)
15.4
1.5
(.8)
Net cash provided by operating activities
89.6
276.1
188.5
Cash flows from investing activities:
Capital expenditures
Loan to Valhi:
Loans
Collections
(53.0)
(64.3)
(56.3)
-
-
(18.2)
4.6
(2.6)
16.2
Net cash used in investing activities
(53.0)
(77.9)
(42.7)
Cash flows from financing activities:
Indebtedness:
Borrowings
Principal payments
Deferred financing fees
Dividends paid
266.2
(270.0)
-
(69.5)
731.5
(594.3)
(8.9)
(69.5)
Net cash provided by (used in) financing activities
(73.3)
58.8
-
(1.5)
(.1)
(78.8)
(80.4)
F-9
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
Years ended December 31,
2017
2018
2016
Cash, cash equivalents and restricted cash - net change from:
Operating, investing and financing activities
Effect of exchange rate changes
Net change for the year
Balance at beginning of year
Balance at end of year
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized
Income taxes
Accrual for capital
expenditures
a
$
$
$
(36.7) $
(5.3)
$
257.0
14.4
65.4
(14.4)
(42.0)
271.4
51.0
94.3
52.3
323.7
52.3
$
323.7
$
374.7
$
18.4
6.6
8.0
$
15.2
37.1
8.7
18.5
67.9
6.3
See accompanying Notes to Consolidated Financial Statements.
F-10
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Note 1 Summary of significant accounting policies:
Organization and basis of presentation At December 31, 2018, Valhi, Inc. (NYSE: VHI) held
approximately 50% of our outstanding common stock and a wholly-owned subsidiary of NL Industries, Inc. (NYSE:
NL) held approximately 30% of our common stock. Valhi owned approximately 83% of NLs outstanding common
stock and a wholly-owned subsidiary of Contran Corporation held approximately 92% of Valhis outstanding
common stock. All of Contrans outstanding voting stock is held by a family trust established for the benefit of Lisa
K. Simmons and Serena Simmons Connelly and their children, for which Ms. Simmons and Ms. Connelly are co-
trustees, or is held directly by Ms. Simmons and Ms. Connelly or entities related to them. Consequently,
Ms. Simmons and Ms. Connelly may be deemed to control Contran, Valhi, NL and us.
Unless otherwise indicated, references in this report to we, us or our refer to Kronos Worldwide, Inc.
and its subsidiaries, taken as a whole.
Managements estimates In preparing our financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual
results may differ significantly from previously-estimated amounts under different assumptions or conditions.
Principles of consolidation The consolidated financial statements include our accounts and those of our
majority-owned subsidiaries. We have eliminated all material intercompany accounts and balances.
Translation of currencies We translate the assets and liabilities of our subsidiaries whose functional
currency is other than the U.S. dollar at year-end exchange rates, while we translate our revenues and expenses at
average exchange rates prevailing during the year. We accumulate the resulting translation adjustments in
stockholders equity as part of accumulated other comprehensive loss, net of related deferred income taxes. We
recognize currency transaction gains and losses in income currently.
Derivatives and hedging activities We recognize derivatives as either assets or liabilities measured at fair
income or other
value. We recognize the effect of changes in the fair value of derivatives either in net
comprehensive income (loss), depending on the intended use of the derivative. See Note 17.
Cash and cash equivalents We classify bank time deposits and U.S. Treasury securities purchased under
short-term agreements to resell with original maturities of three months or less as cash equivalents.
Restricted cash We classify cash that has been segregated or is otherwise limited in use as restricted.
Such restrictions or limitations relate to certain Norwegian payroll tax and employee benefit obligations. To the
extent the restricted amount relates to a recognized liability, we classify such restricted amount as either a current or
noncurrent asset to correspond with the classification of the liability. To the extent the restricted amount does not
relate to a recognized liability, we classify restricted cash as a current asset. All of our restricted cash is classified as
a current asset and is separately presented on the face of the statement of financial position.
Marketable securities and securities transactions We carry marketable securities at fair value.
Accounting Standard Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, establishes a
consistent framework for measuring fair value and (with certain exceptions) this framework is generally applied to
all financial statement items required to be measured at fair value. The standard requires fair value measurements to
be classified and disclosed in one of the following three categories:
F-11
(cid:3)
(cid:3)
(cid:3)
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or
indirectly, for substantially the full term of the assets or liability; and
Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable.
We classify all of our marketable securities as available-for-sale. Prior to 2018, any unrealized gains or
losses on the securities were recognized through other comprehensive income, net of deferred income taxes.
Beginning on January 1, 2018 with the adoption of ASU 2016-01, Financial Instruments Overall (Subtopic 825-
10): Recognition of Financial Assets and Financial Liabilities, all of our marketable equity securities continue to be
carried at fair value as noted above, but any unrealized gains or losses on the securities are now recognized in
Marketable equity securities on our Consolidated Statements of Income. See Note 18. We base realized gains and
losses upon the specific identification of the securities sold.
See Notes 6, 10 and 17.
Accounts receivable We provide an allowance for doubtful accounts for known and estimated potential
losses arising from sales to customers based on a periodic review of these accounts. See Note 3.
Inventories and cost of sales We state inventories at the lower of cost or net realizable value, net of
allowance for obsolete and slow-moving inventories. We generally base inventory costs for all inventory categories
on average cost that approximates the first-in, first-out method. Inventories include the costs for raw materials, the
cost to manufacture the raw materials into finished goods and overhead. Depending on the inventorys stage of
completion, our manufacturing costs can include the costs of packing and finishing, utilities, maintenance,
depreciation, and salaries and benefits associated with our manufacturing process. We allocate fixed manufacturing
overheads based on normal production capacity. Unallocated overhead costs resulting from periods with abnormally
low production levels are charged to expense as incurred. As inventoryrr
is sold to third parties, we recognize the cost
of sales in the same period that the sale occurs. We periodically review our inventory for estimated obsolescence or
instances when inventory is no longer marketable for its intended use, and we record any write-down equal to the
difference between the cost of inventory and its estimated net realizable value based on assumptions about
alternative uses, market conditions and other factors. See Note 4.
Investment in TiO2 manufacturing joint venture We account for our investment in a 50%-owned
manufacturing joint venture by the equity method. Distributions received from such investee are classified for
statement of cash flow purposes using the nature of distribution approach under ASC Topic 320. See Note 5.
Property and equipment and depreciation We state property and equipment at cost, including capitalized
interest on borrowings during the actual construction period of major capital projects. Capitalized interest costs
were $.9 million in 2016, $2.0 million in 2017 and $.8 million in 2018. We compute depreciation of property and
equipment for financial reporting purposes (including mining equipment) principally by the straight-line method
over the estimated useful lives of the assets as follows:
Asset
Buildings and improvements
Machinery and equipment
Mine development costs
Useful lives
10 to 40 years
3 to 20 years
units-of-production
We use accelerated depreciation methods for income tax purposes, as permitted. Upon the sale or
retirement of an asset, we remove the related cost and accumulated depreciation from the accounts and recognize
any gain or loss in income currently.
We expense costs incurred for maintenance, repairs and minor renewals (including planned major
maintenance) while we capitalize expenditures for major improvements.
F-12
We have a governmental concession with an unlimited term to operate our ilmenite mines in Norway.
Mining properties consist of buildings and equipment used in our Norwegian ilmenite mining operations. While we
own the land and ilmenite reserves associated with the mining operations, such land and reserves were acquired for
nominal value and we have no material asset recognized for the land and reserves related to our mining operations.
We perform impairment tests when events or changes in circumstances indicate the carrying value may not
be recoverable. We consider all relevant factors. We perform the impairment test by comparing the estimated
future undiscounted cash flows (exclusive of interest expense) associated with the asset to the assets net carrying
value to determine if a write-down to fair value or discounted cash flow value is required.
Long-term debt We state long-term debt net of any unamortized original issue premium, discount or
deferred financing costs (other than deferred financing costs associated with revolving credit facilities, which are
recognized as an asset). We classify amortization of all deferred financing costs and any premium or discount
associated with the issuance of indebtedness as interest expense and compute such amortization by either the interest
method or the straight-line method over the term of the applicable
issue. See Note 8.
a
Employee benefit plans Accounting and funding policies for our defined benefit pension and defined
contribution retirement plans are described in Note 10. We also provide certain postretirement benefits other than
pensions (OPEB), consisting of health care and life insurance benefits, to certain U.S. and Canadian retired
employees, which are not material. See Note 11.
Income taxes We, Valhi and our qualifying subsidiaries are members of Contrans consolidated U.S.
federal income tax group (the Contran Tax Group) and we and certain of our qualifying subsidiaries also file
consolidated income tax returns with Contran in various U.S. state jurisdictions. As a member of the Contran Tax
Group, we are jointly and severally liable for the federal income tax liability of Contran and the other companies
included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. See Note 16.
As a member of the Contran Tax Group, we are a party to a tax sharing agreement which provides that we compute
our provision for U.S. income taxes on a separate-company basis using the tax elections made by Contran. Pursuant
to the tax sharing agreement, we make payments to or receive payments from Valhi in amounts we would have paid
to or received from the U.S. Internal Revenue Service or the applicable state tax authority had we not been a
member of the Contran Tax Group. We made net payments of income taxes to Valhi of $.8 million in 2016 and
$16.8 million in 2017 and received net refunds of income taxes from Valhi of $1.9 million in 2018.
We recognize deferred income tax assets and liabilities for the expected future tax consequences of
temporary differences between the income tax and financial reporting carrying amounts of assets and liabilities,
including investments in our subsidiaries and affiliates who are not members of the Contran Tax Group and
undistributed earnings of non-U.S. subsidiaries which are not deemed to be permanently reinvested. At December
31, 2018, we continue to assert indefinite reinvestment as it relates to our outside basis difference attributable to our
investments in our non-U.S. subsidiaries, other than post-1986 undistributed earnings of our European subsidiaries
and all undistributed earnings of our Canadian subsidiary, which are not subject to permanent reinvestment plans. It
is currently not practical for us to determine the amount of the unrecognized deferred income tax liability related to
our investments in our non-U.S. subsidiaries which are permanently reinvested due to the complexities associated
with our organizational structure, changes in the Tax Cuts and Jobs Act (2017 Tax Act) enacted on December 22,
2017, and the U.S. taxation of such investments in the states in which we operate. Deferred income tax assets and
liabilities for each tax-paying jurisdiction in which we operate are netted and presented as either a noncurrent
deferred income tax asset or liability, as applicable. We periodically evaluate our deferred tax assets in the various
taxing jurisdictions in which we operate and adjust any related valuation allowance based on the estimate of the
amount of such deferred tax assets that we believe does not meet the more-likely-than-not recognition criteria.
We account for the tax effects of a change in tax law as a component of the income tax provision related to
continuing operations in the period of enactment, including the tax effects of any deferred income taxes originally
established through a financial statement component other than continuing operations (i.e. other comprehensive
income). Changes in applicable income tax rates over time as a result of changes in tax law, or times in which a
deferred income tax asset valuation allowance is initially recognized in one year and subsequently reversed in a later
year, can give rise to stranded tax effects in accumulated other comprehensive income in which the net
F-13
accumulated income tax (benefit) remaining in accumulated other comprehensive income does not correspond to the
then-applicable income tax rate applied to the pre-tax amount which resides in accumulated other comprehensive
income. As permitted by GAAP, our accounting policy is to remove any such stranded tax effect remaining in
accumulated other comprehensive income, by recognizing an offset to our provision for income taxes related to
continuing operations, only at
in accumulated other
comprehensive income. For accumulated other comprehensive income related to currency translation, this would
occur only upon the sale or complete liquidation of one of our non-U.S. subsidiaries. For defined pension benefit
plans and OPEB plans, this would occur whenever one of our subsidiaries which previously sponsored a defined
benefit pension or OPEB plan had terminated such a plan and had no future obligation or plan asset associated with
such a plan.
the time when there is no remaining pre-tax amount
We record a reserve for uncertain tax positions for tax positions where we believe that it is more-likely-
than-not our position will not prevail with the applicable tax authorities. The amount of the benefit associated with
our uncertain tax positions that we recognize is limited to the largest amount for which we believe the likelihood of
realization is greater than 50%. We accrue penalties and interest on the difference between tax positions taken on
our tax returns and the amount of benefit recognized for financial reporting purposes. We classify our reserves for
uncertain tax positions in a separate current or noncurrent liability, depending on the nature of the tax position. See
Note 13.
Net sales Our sales involve single performance obligations to ship our products pursuant to customer
purchase orders. In some cases, the purchase order is supported by an underlying master sales agreement, but our
purchase order acceptance generally evidences the contract with our customer by specifying the key terms of
product and quantity ordered, price and delivery and payment terms. Effective January 1, 2018 with the adoption of
ASU 2014-09, Revenue from Contracts with Customersrr
(Topic 606), see Note 18, we record revenue when we
satisfy our performance obligation to our customers by transferring control of our products to them, which generally
occurs at point of shipment or upon delivery. Such transfer of control is also evidenced by transfer of legal title and
other risks and rewards of ownership (giving the customer the ability to direct the use of, and obtain substantially all
of the benefits of, the product), and our customers becoming obligated to pay us and such payment is probable of
occurring.
In certain arrangements we provide shipping and handling activities after the transfer of control to our
customer (e.g. when control transfers prior to delivery) that are considered fulfillment activities, and accordingly,
such costs are accrued when the related revenue is recognized. Sales arrangements with consignment customers
occur when our product is shipped to a consignment customer location but we maintain control until the product is
used in the customers manufacturing process.
In these instances, we recognize sales when the consignment
customer uses our product, as control of our product has not passed to the customer until that time and all other
revenue recognition criteria have been satisfied. Prior to the adoption of ASU 2014-09, we recorded sales when our
products were shipped and title and other risks and rewards of ownership had passed to the customer, which was
generally at the time of shipment (although in some instances shipping terms were FOB destination point, for which
we did not recognize revenue until the product was received by our customer).
Revenue is recorded in an amount that reflects the net consideration we expect to receive in exchange for
our products. Prices for our products are based on terms specified in published list prices and purchase orders,
which generally do not include financing components, noncash consideration or consideration paid to our customers.
As our standard payment terms are less than one year, we have elected the practical expedient under ASU 2014-09
and have not assessed whether a contract has a significant financing component. We state sales net of price, early
payment, and distributor discounts and volume rebates (collectively, variable consideration). Variable consideration,
to the extent present, is recognized as the amount to which we are most-likely to be entitled, using all information
(historical, current and forecasted) that is reasonably available to us, and only to the extent that a significant reversal
in the amount of the cumulative revenue recognized is not probable of occurring in a future period. Differences, if
any, between estimates of the amount of variable consideration to which we will be entitled and the actual amount of
such variable consideration have not been material in the past. Amounts received or receivable from our customers
with respect to variable consideration we expect to refund to our customers is recognized as a current liability and
classified as accrued sales discounts and rebates. See Note 9. We report any tax assessed by a governmental
authority that we collect from our customers that is both imposed on and concurrent with our revenue-producing
activities (such as sales, use, value added and excise taxes) on a net basis (meaning we do not recognize these taxes
either in our revenues or in our costs and expenses).
F-14
Frequently, we receive orders for products to be delivered over dates that may extend across reporting
periods. We invoice for each delivery upon shipment and recognize revenue for each distinct shipment when all
sales recognition criteria for that shipment have been satisfied. As scheduled delivery dates for these orders are
within a one year period, under the optional exemption provided by ASU 2014-09, we do not disclose sales
allocated to future shipments of partially completed contracts.
ASU 2014-09 requires a disaggregation of our sales into categories that depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by economic factors. We have determined such
disaggregation of our sales is the same as the disclosure of our sales by place of manufacture (point of origin) and to
the location of the customer (point of destination). See Note 2.
Selling, general and administrative expense; shipping and handling costs Selling, general and
administrative expense includes costs related to marketing, sales, distribution, shipping and handling, research and
development, legal and administrative functions such as accounting, treasury and finance, and includes costs for
salaries and benefits not associated with our manufacturing process, travel and entertainment, promotional materials
and professional fees. We include shipping and handling costs in selling, general and administrative expense and
these costs were $90 million in 2016, $101 million in 2017 and $105 million in 2018. We expense research and
development costs as incurred, and these costs were $13 million in 2016, $18 million in 2017 and $16 million in
2018. We expense advertising costs as incurred and these costs were not material in any year presented.
Note 2 Geographic information:
Our operations are associated with the production and sale of titanium dioxide pigments (TiO2). TiO2 is
used to impart whiteness, brightness, opacity and durability to a wide variety of products, including paints, plastics,
paper, fibers and ceramics. Additionally, TiO2 is a critical component of everyday applications, such as coatings,
plastics and paper, as well as many specialty products such as inks, foods and cosmetics. At December 31, 2017 and
2018, the net assets of non-U.S. subsidiaries included in consolidated net assets approximated $381 million and
$384 million, respectively.
For geographic information, we attribute net sales to the place of manufacture (point of origin) and to the
location of the customer (point of destination); we attribute property and equipment to their physical location.
2016
Years ended December 31,
2017
(In millions)
2018
Net sales - point of origin:
Germany
United States
Canada
Belgium
Norway
Eliminations
Total
Net sales - point of destination:
Europe
North America
Other
Total
$
$
$
$
699.8
664.2
257.7
187.4
164.8
(609.6)
1,364.3
697.6
413.2
253.5
1,364.3
$
$
$
$
918.6
841.8
309.2
279.9
216.4
(836.9)
1,729.0
898.8
519.4
310.8
1,729.0
$
$
$
$
886.1
839.4
307.2
272.2
209.6
(852.6)
1,661.9
817.2
542.0
302.7
1,661.9
F-15
Identifiable assets - net property and equipment:
Germany
Belgium
y
Norwarr
Canada
Other
Total
Note 3 Accounts and other receivables:
Trade receivables
Recoverable VAT and other receivables
Refundable income taxes
Allowance for doubtful accounts
Total
Note 4 Inventories, net:
Raw materials
Work in process
Finished products
Supplies
Total
December 31,
2017
2018
(In millions)
243.2 $
96.5
79.6
67.9
19.2
506.4 $
232.1
94.8
79.3
65.2
15.0
486.4
December 31,
2017
2018
(In millions)
301.4 $
19.0
.1
(1.4)
319.1 $
273.3
23.8
3.6
(1.2)
299.5
December 31,
2017
2018
(In millions)
106.9 $
20.8
191.5
63.1
382.3 $
93.1
23.5
316.8
64.5
497.9
$
$
$
$
$
$
Note 5 Investment in TiO2 manufacturing joint venture:
We own a 50% interest in Louisiana Pigment Company, L.P. (LPC). LPC is a manufacturing joint venture
whose other 50%-owner is Venator Investments LLC (Venator Investments) (formerly Huntsman P&A Investments
LLC). Venator Investments is a wholly-owned subsidiary of Venator Group, of which Venator Materials PLC owns
100% and is the ultimate parent. LPC owns and operates a chloride-process TiO2 plant in Lake Charles, Louisiana.
We and Venator Investments are both required to purchase one-half of the TiO2 produced by LPC, unless
we and Venator Investments agree otherwise. LPC operates on a break-even basis and, accordingly, we report no
equity in earnings of LPC. Each owners acquisition transfer price for its share of the TiO2 produced is equal to its
share of the joint ventures production costs and interest expense, if any. Our share of net cost is reported as cost of
sales as the related TiO2 acquired from LPC is sold. We report distributions we receive from LPC, which generally
relate to excess cash generated by LPC from its non-cash production costs, and contributions we make to LPC,
which generally relate to cash required by LPC when it builds working capital, as part of our cash flows from
operating activities in our Consolidated Statements of Cash Flows. The components of our net cash distributions
from (contributions to) LPC are shown in the table below.
F-16
2016
Years ended December 31,
2017
(In millions)
2018
Distributions from LPC
Contributions to LPC
Net distributions (contributions)
$
$
35.0 $
(31.4)
3.6 $
44.0 $
(50.0)
(6.0) $
34.3
(30.3)
4.0
At December 31, 2017, we recorded $1.4 million as a payable to LPC related to contributions due to LPC,
and we paid such contribution on January 2, 2018. See Note 15.
Summary balance sheets of LPC are shown below:
ASSETS
Current assets
Property and equipment, net
Total assets
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current
Partners' equity
Total liabilities and partners' equity
Summary income statements of LPC are shown below:
December 31,
2017
2018
(In millions)
$
$
$
$
104.1 $
116.1
220.2 $
44.4 $
175.8
220.2 $
87.0
119.6
206.6
41.1
165.5
206.6
2016
Years ended December 31,
2017
(In millions)
2018
Revenues and other income:
Kronos
Venator Investments
Total revenues and other income
Cost and expenses:
Cost of sales
General and administrative
Total costs and expenses
Net income
$
157.5 $
157.9
315.4
157.5 $
158.3
315.8
314.9
.5
315.4
315.4
.4
315.8
$
- $
- $
165.9
167.0
332.9
332.5
.4
332.9
-
Note 6 Marketable securities:
Our marketable securities consist of investments in the publicly-traded shares of related parties: Valhi, NL
and CompX International Inc. NL owns the majority of CompXs outstanding common stock. All of our
marketable securities are accounted for as available-for-sale securities, which are carried at fair value using quoted
market prices in active markets for each marketable security and represent a Level 1 input within the fair value
hierarchy. See Note 17. Prior to 2018, any unrealized gains or losses on the securities were recognized through
other comprehensive income, net of deferred income taxes. Beginning on January 1, 2018 with the adoption of ASU
2016-01, all of our marketable equity securities continue to be carried at fair value as noted above, but we began
recognizing any unrealized gains or losses on the securities in Marketable equity securities on our Consolidated
Statements of Income.
F-17
Marketable security
December 31, 2017:
Valhi common stock
NL and CompX common stocks
Total
December 31, 2018:
Valhi common stock
NL and CompX common stocks
Total
Fair value
measurement
level
Market
value
Cost
basis
(In millions)
Unrealized
gain
1
1
1
1
$
$
$
$
10.6 $
.1
10.7 $
3.3 $
.1
3.4 $
3.2 $
.1
3.3 $
3.2 $
.1
3.3 $
7.4
-
7.4
.1
-
.1
At December 31, 2017 and 2018, we held approximately 1.7 million shares of Valhis common stock. We
also held a nominal number of shares of CompX and NL common stocks. At December 31, 2017 and 2018, the
quoted per share market price of Valhis common stock was $6.17 and $1.93, respectively.
The Valhi, CompX and NL common stocks we own are subject to the restrictions on resale pursuant to
certain provisions of the Securities and Exchange Commission (SEC) Rule 144. In addition, as a majority-owned
subsidiary of Valhi we cannot vote our shares of Valhi common stock under Delaware General Corporation Law,
but we do receive dividends from Valhi on these shares, when declared and paid.
Note 7 Other noncurrent assets:
Pension asset
Deferred financing costs, net
Other
Total
Note 8 Long-term debt:
Kronos International, Inc. 3.75% Senior Secured Notes
Other
Total debt
Less current maturities
Total long-term debt
F-18
December 31,
2017
2018
(In millions)
1.6 $
1.1
2.8
5.5 $
.8
.9
1.9
3.6
December 31,
2017
2018
(In millions)
471.1 $
3.4
474.5
.7
473.8 $
452.4
4.2
456.6
1.5
455.1
$
$
$
$
Senior Secured Notes On September 13, 2017, Kronos International, Inc. (KII), our wholly-owned
subsidiary, issued 400 million aggregate principal amount of its 3.75% Senior Secured Notes due September 15,
2025 (Senior Notes), at par value ($477.6 million when issued). We used $338.6 million of the net proceeds of the
Senior Notes to prepay in full the outstanding principal balance of our term loan (along with accrued and unpaid
interest through the prepayment date) and $21.0 million to repay the then-outstanding balance under our North
American revolving credit facility. The remaining net proceeds of the Senior Notes were available for our general
corporate purposes. The Senior Notes:
•
•
•
•
•
•
bear interest at 3.75% per annum, payable semi-annually on March 15 and September 15 of each year,
payments began on March 15, 2018;
r
have a maturity date of September 15, 2025. Prior to September 15, 2020, we may redeem some or all
of the Senior Notes at a price equal to 100% of the principal amount thereof, plus a make-whole
the Senior Notes). On or after September 15, 2020,
premium (as defined in the indenture governing
we may redeem the Senior Notes at redemption prices ranging from 102.813% of the principal amount,
declining to 100% on or after September 15, 2023. In addition, on or before September 15, 2020, we
may redeem up to 40% of the Senior Notes with the net proceeds of certain public or private equity
If we experience certain specified change of control
offerings at 103.75% of the principal amount.
events, we would be required to make an offer to purchase the Senior Notes at 101% of the principal
amount. We would also be required to make an offer to purchase a specified portion of the Senior
Notes at par value in the event that we generate a certain amount of net proceeds from the sale of assets
outside the ordinary course of business, and such net proceeds are not otherwise used for specified
purposes within a specified time period;
are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by Kronos
Worldwide, Inc. and each of our direct and indirect domestic, wholly-owned subsidiaries;
are collateralized by a first priority lien on (i) 100% of the common stock or other ownership interests
of each existing and future direct domestic subsidiary of KII and the guarantors, and (ii) 65% of the
voting common stock or other ownership interests and 100% of the non-voting common stock or other
ownership interests of each non-U.S. subsidiary that is directly owned by KII or any guarantor;
contain a number of covenants and restrictions which, among other things, restrict our ability to incur
or guarantee additional debt, incur liens, pay dividends or make other restricted payments, or merge or
consolidate with, or sell or transfer substantially all of our assets to, another entity, and contain other
provisions and restrictive covenants customary in lending transactions of this type (however, there are
no ongoing financial maintenance covenants); and
contain customary default provisions, including a default under any of our other indebtedness in excess
of $50.0 million.
The carrying value of the Senior Notes at December 31, 2018 is stated net of unamortized debt issuance
costs of $6.3 million (December 31, 2017 - $7.5 million).
Term loan During 2016 and the first six months of 2017, we made our required quarterly term loan
principal payments aggregating $3.5 million and $1.8 million, respectively, on our prior term loan indebtedness.
Concurrent with the issuance of our Senior Notes, in September 2017, we voluntarily prepaid in full the outstanding
$338.6 million principal balance of such term loan (and such term loan facility was terminated). As a result of such
prepayment, we recognized a loss on prepayment of debt aggregating $7.1 million in the third quarter of 2017
consisting principally of the write-off of unamortized debt issuance costs and original issue discount associated with
the term loan of $2.7 million and $.7 million, respectively, and $3.3 million in expense related to the early
termination of our interest rate swap contract discussed in Note 17. Funds for the aggregate prepayment were
provided by the net proceeds from the Senior Notes discussed above.
The average interest rate on the term loan borrowings for the year-to-date period ended September 13, 2017
(the pay-off date) was 4.1%.
F-19
Revolving credit facilities
Revolving North American credit facility We have a $125 million revolving bank credit facility that, as
amended, matures in January 2022. Borrowings under the revolving credit facility are available for our general
corporate purposes. Available borrowings on this facility are based on formula-determined amounts of eligible trade
receivables and inventories, as defined in the agreement, of certain of our North American subsidiaries less any
outstanding letters of credit up to $15 million issued under the facility (with revolving borrowings by our Canadian
subsidiary limited to $25 million). Any amounts outstanding under the revolving credit facility bear interest, at our
option, at LIBOR plus a margin ranging from 1.5% to 2.0% or at the applicable base rate, as defined in the
agreement, plus a margin ranging from .5% to 1.0%. The credit facility is collateralized by, among other things, a
first priority lien on the borrowers trade receivables and inventories. The facility contains a number of covenants
and restrictions which, among other things, restricts the borrowers ability to incur additional debt, incur liens, pay
dividends or merge or consolidate with, or sell or transfer all or substantially all of their assets to, another entity,
contains other provisions and restrictive covenants customary in lending transactions of this type and under certain
conditions requires the maintenance of a specified financial covenant (fixed charge coverage ratio, as defined) to be
at least 1.0 to 1.0.
During 2017, we had gross borrowings and repayments of $253.9 million. The average interest rate on
outstanding borrowings for the year-to-date period ended September 13, 2017 when the outstanding balance was
repaid was 4.8%. As discussed above, in September 2017 we used a portion of the net proceeds from the Senior
Notes to repay our then-outstanding principal balance of $21.0 million. We had no borrowings or repayments under
this facility in 2018. At December 31, 2018, there were no outstanding borrowings under this facility and we had
approximately $101.3 million available for borrowing under this revolving facility.
Revolving European credit facility Our operating subsidiaries in Germany, Belgium, Norway and
Denmark have a 90 million secured revolving bank credit facility that, as amended, matures in September 2022.
Outstanding borrowings bear interest at the Euro Interbank Offered Rate (EURIBOR) plus 1.60% per annum. The
facility is collateralized by the accounts receivable and inventories of the borrowers, plus a limited pledge of all of
the other assets of the Belgian borrower. The facility contains certain restrictive covenants that, among other things,
restricts the ability of the borrowers to incur debt, incur liens, pay dividends or merge or consolidate with, or sell or
transfer all or substantially all of the assets to, another entity, and requires the maintenance of certain financial
ratios.
In addition, the credit facility contains customary cross-default provisions with respect to other debt and
obligations of the borrowers, KII and its other subsidiaries.
We had no borrowings or repayments under this facility during 2017 and 2018 and at December 31, 2018,
there were no outstanding borrowings under this facility. Our European revolving credit facility requires the
maintenance of certain financial ratios, and one of such requirements is based on the ratio of net debt to last twelve
months earnings before income tax, interest, depreciation and amortization expense (EBITDA) of the borrowers.
Based upon the borrowers last twelve months EBITDA as of December 31, 2018 and the net debt to EBITDA
financial test, the full 90 million amount of this facility ($103.2 million) was available for borrowing at December
31, 2018.
F-20
Aggregate maturities and other Aggregate maturities of debt at December 31, 2018 are presented in the
table below.
Year ending December 31,
2019
2020
2021
2022
2023
2024 and thereafter
Gross maturities
Less debt issuance costs
Total
Amount
(In millions)
$
$
1.5
1.5
.6
.6
-
458.7
462.9
6.3
456.6
We are in compliance with all of our debt covenants at December 31, 2018.
Note 9 Accounts payable and accrued liabilities:
Accounts payable
Accrued sales discounts and rebates
Employee benefits
Other
Total
December 31,
2017
2018
(In millions)
107.9 $
11.7
27.0
43.0
189.6 $
103.2
29.7
27.9
35.0
195.8
$
$
Note 10 Defined contribution and defined benefit retirement plans:
Defined contribution plans We maintain various defined contribution pension plans with our
contributions based on matching or other formulas. Defined contribution plan expense approximated $2.8 million in
2016, $2.7 million in 2017 and $3.3 million in 2018.
Defined benefit pension plans We sponsor various defined benefit pension plans. Certain non-U.S.
employees are covered by plans in their respective countries. Our U.S. plan was closed to new participants in 1996,
and existing participants no longer accrued any additional benefits after that date. The benefits under our plans are
based upon years of service and employee compensation. Our funding policy is to contribute annually the minimum
amount required under ERISA (or equivalent non-U.S.) regulations plus additional amounts as we deem appropriate.
We recognize an asset or liability for the over or under funded status of each of our individual defined benefit
pension plans on our Consolidated Balance Sheets. Changes in the funded status of these plans are recognized either
in net income, to the extent they are reflected in periodic benefit cost, or through other comprehensive income (loss).
F-21
We expect to contribute the equivalent of approximately $17 million to all of our defined benefit pension
plans during 2019. Benefit payments to plan participants out of plan assets are expected to be the equivalent of:
Years ending December 31,
2019
2020
2021
2022
2023
Next 5 years
$
Amount
(In millions)
23.2
24.4
24.5
25.7
25.6
149.0
The funded status of our non-U.S. defined benefit pension plans is presented in the table below.
Change in projected benefit obligations (PBO):
Benefit obligations at beginning of the year
Service cost
Interest cost
Participant contributions
Actuarial losses
Change in currency exchange rates
Benefits paid
Benefit obligations at end of the year
Change in plan assets:
Fair value of plan assets at beginning of the year
Actual return on plan assets
Employer contributions
Participant contributions
Change in currency exchange rates
Benefits paid
Fair value of plan assets at end of year
Funded status
Amounts recognized in the balance sheet:
Noncurrent pension asset
Noncurrent accrued pension costs
Total
Amounts recognized in accumulated other comprehensive loss:
Actuarial losses
Prior service cost
Total
Accumulated benefit obligations (ABO)
December 31,
2017
2018
(In millions)
$
$
$
$
$
$
$
$
594.1
11.4
13.2
1.5
9.9
72.6
(20.8)
681.9
371.5
23.1
15.9
1.5
42.1
(20.8)
433.3
(248.6) $
$
1.6
(250.2)
(248.6) $
240.2
1.4
241.6
655.4
$
$
$
681.9
11.6
13.5
1.6
5.8
(33.7)
(22.0)
658.7
433.3
(5.6)
16.3
1.6
(23.3)
(22.0)
400.3
(258.4)
.8
(259.2)
(258.4)
250.3
1.2
251.5
633.5
F-22
The components of our net periodic defined benefit pension cost for our non-U.S. defined benefit pension
plans are presented in the table below. The amounts shown below for the amortization of prior service cost and
recognized actuarial losses for 2016, 2017 and 2018 were recognized as components of our accumulated other
comprehensive loss at December 31, 2015, 2016 and 2017, respectively, net of deferred income taxes.
2016
Years ended December 31,
2017
(In millions)
2018
Net periodic pension cost (income):
Service cost benefits
Interest cost on PBO
Expected return on plan assets
Recognized actuarial losses
Amortization of prior service cost
Total
$
$
9.9 $
14.7
(14.4)
11.3
.2
21.7 $
11.4 $
13.2
(9.2)
13.0
.2
28.6 $
11.6
13.5
(12.0)
13.1
.2
26.4
Information concerning certain of our non-U.S. defined benefit pension plans (for which the ABO exceeds
the fair value of plan assets as of the indicated date) is presented in the table below.
Plans for which the ABO exceeds plan assets:
PBO
ABO
Fair value of plan assets
December 31,
2017
2018
(In millions)
$
625.1 $
603.8
375.0
605.0
585.0
346.3
The weighted-average rate assumptions used in determining the actuarial present value of benefit
obligations for our non-U.S. defined benefit pension plans as of December 31, 2017 and 2018 are presented in the
table below.
Discount rate
Increase in future compensation levels
Rate
December 31,
2017
2018
2.1%
2.6%
2.1%
2.6%
The weighted-average rate assumptions used in determining the net periodic pension cost for our non-U.S.
defined benefit pension plans for 2016, 2017 and 2018 are presented in the table below.
Rate
Discount rate
Increase in future compensation levels
Long-term return on plan assets
Years ended December 31,
2017
2016
2018
2.6%
2.9%
3.9%
2.1%
2.6%
2.4%
2.1%
2.6%
2.9%
Variances from actuarially assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods.
F-23
The funded status of our U.S. defined benefit pension plan is presented in the table below.
Change in PBO:
Benefit obligations at beginning of the year
Interest cost
Actuarial losses (gains)
Benefits paid
Benefit obligations at end of the year
Change in plan assets:
Fair value of plan assets at beginning of the year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status
Amounts recognized in the balance sheet:
Accrued pension costs:
Current
Noncurrent
Total
Amounts recognized in accumulated other comprehensive
loss - actuarial losses
ABO
December 31,
2017
2018
(In millions)
$
$
$
$
$
$
$
17.8
.7
.7
(1.0)
18.2
13.6
1.2
.3
(1.0)
14.1
(4.1) $
(.1) $
(4.0)
(4.1) $
10.9
18.2
$
$
18.2
.6
(.9)
(1.0)
16.9
14.1
(.8)
.8
(1.0)
13.1
(3.8)
(.1)
(3.7)
(3.8)
11.2
16.9
The components of our net periodic defined benefit pension cost for our U.S. defined benefit pension plan
is presented in the table below. The amounts shown below for recognized actuarial losses for 2016, 2017 and 2018
were recognized as components of our accumulated other comprehensive loss at December 31, 2015, 2016 and 2017
respectively, net of deferred income taxes.
2016
Years ended December 31,
2017
(In millions)
2018
Net periodic pension cost (income):
Interest cost on PBO
Expected return on plan assets
Recognized actuarial losses
Total
$
$
.8 $
(1.0)
.5
.3 $
.7 $
(1.0)
.6
.3 $
.6
(1.0)
.6
.2
The discount rate assumptions used in determining the actuarial present value of the benefit obligation for
our U.S. defined benefit pension plan as of December 31, 2017 and 2018 are 3.5% and 4.1%, respectively. The
impact of assumed increases in future compensation levels does not have an effect on the benefit obligation as the
plan is frozen with regards to compensation.
F-24
The weighted-average rate assumptions used in determining the net periodic pension cost for our U.S.
defined benefit pension plan for 2016, 2017 and 2018 are presented in the table below. The impact of assumed
increases in future compensation levels also does not have an effect
on the periodic pension cost as the plan is frozen
with regards to compensation.
ff
Rate
Discount rate
Long-term return on plan assets
Years ended December 31,
2017
2018
2016
4.1%
7.5%
3.9%
7.5%
3.5%
7.5%
Variances from actuarially assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods.
The amounts shown in the tables above for actuarial losses and prior service cost at December 31, 2017 and
2018 have not yet been recognized as components of our periodic defined benefit pension cost as of those dates.
These amounts will be recognized as components of our periodic defined benefit cost in future years and are
recognized, net of deferred income taxes, in our accumulated other comprehensive loss at December 2017 and 2018.
We expect approximately $14.0 million and $.2 million of the unrecognized actuarial losses and prior service costs,
respectively, will be recognized as components of our consolidated net periodic defined benefit pension cost in
2019.
The table below details the changes in our consolidated other comprehensive income (loss) during 2016,
2017 and 2018.
2016
Years ended December 31,
2017
(In millions)
2018
Changes in plan assets and benefit obligations
recognized in other comprehensive income (loss):
Current year:
Net actuarial gain (loss)
Amortization of unrecognized:
Net actuarial losses
Prior service cost
Total
$
$
(38.0) $
3.5 $
(24.3)
11.8
.2
(26.0) $
13.6
.2
17.3 $
13.7
.2
(10.4)
At December 31, 2017, substantially all of the assets attributable to our U.S. plan were invested in the
Combined Master Retirement Trust (CMRT), a collective investment trust sponsored by Contran to permit the
collective investment by certain master trusts that fund certain employee benefit plans sponsored by Contran and
certain of its affiliates, including us. For 2016, 2017 and 2018, the long-term rate of return assumption for our U.S.
plan assets was 7.5%, based on the long-term asset mix of the assets of the CMRT and the expected long-term rates
of return for such asset components as well as advice from Contrans actuaries. During 2018, Contran and the other
employer-sponsors (including us) implemented a restructuring of the CMRT, in which a substantial part of each
plans units in the CMRT were redeemed in exchange for a pro-rata portion of a substantial part of the CMRTs
investments. Following such restructuring, the plans held directly in the aggregate the investments previously held
directly by the CMRT which had been exchanged for CMRT units as part of the restructuring. Certain investments
held directly by the CMRT were not part of such restructuring and remain investments of the CMRT. Such
restructuring was implemented in part so each plan could more easily align the composition of their plan asset
portfolio with the plans benefit obligations.
The CMRT unit value is determined semi-monthly, and prior to the 2018 restructuring, the plans had the
ability to redeem all or any portion of their investment in the CMRT at any time based on the most recent semi-
monthly valuation. However, the plans do not have the right to individual assets held by the CMRT and the CMRT
has the sole discretion in determining how to meet any redemption request. For purposes of our plan asset
F-25
disclosure, we consider the investment in the CMRT at December 31, 2017 as a Level 2 input because (i) the CMRT
value is established semi-monthly and the plans have the right to redeem their investment in the CMRT, in part or in
whole, at any time based on the most recent value and (ii) observable inputs from Level 1 or Level 2 (or assets not
subject to classification in the fair value hierarchy) were used to value approximately 93% of the assets of the
CMRT at December 31, 2017 as noted below. CMRT assets not subject to classification in the fair value hierarchy
consist principally of certain investments measured at net asset value (NAV) per share in accordance with ASC 820-
10. The aggregate fair value of all of the CMRT assets at December 31, 2017, including funds of Contran and its
other affiliates that also invest in the CMRT, and supplemental asset mix details of the CMRT are as follows:
CMRT asset value
CMRT assets comprised of:
Assets not subject to fair value hierarchy
Assets subject to fair value hierarchy:
Level 1
Level 2
Level 3
CMRT asset mix:
Domestic equities, principally publicly traded
International equities, principally publicly traded
Fixed income securities, principally publicly traded
Privately managed limited partnerships
Hedge funds
Other, primarily cash
December 31,
2017
(In millions)
672.4
$
31%
54
8
7
100%
33%
25
31
4
5
2
100%
The assets which remain in the CMRT are principally common stocks and limited partnerships which are
not publicly traded, most of which are categorized within Level 3 of the fair value hierarchy. As monetizing events
occur for these investments, we and the other plans which hold units in the CMRT will redeem a portion of our
CMRT units for the cash generated from such events. For purposes of our plan asset disclosure, we consider the
investment in the CMRT at December 31, 2018 as a Level 3 input because (i) most of the remaining assets in the
CMRT are categorized within Level 3 of the fair value hierarchy, and (ii) we do not expect to be able to redeem our
remaining CMRT units until monetizing events occur with respect to the remaining CMRT assets.
In determining the expected long-term rate of return on our U.S. and non-U.S. plan asset assumptions, we
consider the long-term asset mix (e.g. equity vs. fixed income) for the assets for each of our plans and the expected
long-term rates of return for such asset components.
In addition, we receive third-party advice about appropriate
long-term rates of return. Such assumed asset mixes are summarized below:
•
•
In Germany, the composition of our plan assets is established to satisfy the requirements of the
German insurance commissioner. Our German pension plan assets represent an investment in a large
collective investment fund established and maintained by Bayer AG in which several pension plans,
including our German pension plans and Bayers pension plans, have invested. Our plan assets
represent a very nominal portion of the total collective investment fund maintained by Bayer. These
plan assets are a Level 3 input because there is not an active market that approximates the value of our
investment in the Bayer investment fund. We estimate the fair value of the Bayer plan assets based on
periodic reports we receive from the managers of the Bayer plan. These periodic reports are subject to
audit by the German pension regulator.
In Canada, we currently have a plan asset target allocation of 20-30% to equity securities and 70-80%
to fixed income securities. We expect the long-term rate of return for such investments to average
approximately 125 basis points above the applicable equity or fixed income index. The Canadian
assets are Level 1 inputs because they are traded in active markets.
F-26
•
•
In Norway, we currently have a plan asset target allocation of 11% to equity securities, 79% to fixed
income securities, 7% to real estate and the remainder primarily to other investments and liquid
investments such as money markets. The expected long-term rate of return for such investments is
approximately 7%, 3%, 5% and 8%, respectively. The majority of Norwegian plan assets are Level 1
inputs because they are traded in active markets; however approximately 10% of our Norwegian plan
assets are invested in real estate and other investments not actively traded and are therefore a Level 3
input.
In the U.S. we currently have a plan asset target allocation of 40% to equity securities, 45% to fixed
income securities, and the remainder is allocated to multi-asset strategies and the CMRT. The expected
long-term rate of return for such investments is approximately 9%, 5% and 3%, respectively (before
plan administrative expenses). The majoa rity of U.S. plan assets are Level 1 inputs because they are
traded in active markets, approximately 29% of our U.S. plan assets are invested in funds that are
valued at NAV and not subject to classification in the fair value hierarchy, and approximately 6% are
invested in the CMRT which as noted above is a Level 3 input.
• We also have plan assets in Belgium and the United Kingdom. The Belgium plan assets are invested
in certain individualized fixed income insurance contracts for the benefit of each plan participant as
required by the local regulators and are therefore a Level 3 input. The United Kingdom plan assets
consist of marketable securities which are Level 1 inputs because they trade in active markets.
We regularly review our actual asset allocation for each plan, and will periodically rebalance the
investments in each plan to more accurately reflect the targeted allocation and/or maximize the overall long-term
return when considered appropriate.
The composition of our pension plan assets by asset category and fair value level at December 31, 2017 and
2018 is shown in the table below.
Germany
Canada:
Local currency equities
Non local currency equities
Local currency fixed income
Cash and other
Norway:
Local currency equities
Non local currency equities
Local currency fixed income
Non local currency fixed income
Real estate
Cash and other
U.S.
CMRT
Other
Total
Fair Value Measurements at December 31, 2017
Quoted
prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
(In millions)
- $
Significant
unobservable
inputs
(Level 3)
- $
257.9
Total
$
257.9 $
8.4
16.4
81.8
.3
1.8
4.6
21.0
6.8
4.7
15.4
8.4
16.4
81.8
.3
1.8
4.6
21.0
6.8
-
14.5
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4.7
.9
14.1
14.2
447.4 $
-
4.1
159.7 $
$
14.1
-
14.1 $
-
10.1
273.6
F-27
Fair Value Measurements at December 31, 2018
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Quoted
prices
in active
markets
(Level 1)
Assets
measured
at NAV
Total
Germany
Canada:
Local currency equities
Non local currency equities
Local currency fixed income
Cash and other
Norway:
Local currency equities
Non local currency equities
Local currency fixed income
Non local currency fixed income
Real estate
Cash and other
U.S.
Equities
Fixed income
Cash and other
CMRT
Other
Total
$
241.5 $
(In millions)
- $
- $
241.5 $
6.5
13.3
74.1
.5
1.7
4.3
20.4
6.1
4.5
13.5
6.5
13.3
74.1
.5
1.7
4.3
14.9
6.1
-
12.7
-
-
-
-
-
-
5.5
-
-
-
-
-
-
-
-
-
-
-
4.5
.8
4.9
6.0
1.5
.7
13.9
413.4 $
1.5
6.0
1.1
-
3.4
146.1 $
$
-
-
-
-
-
5.5 $
-
-
-
.7
10.5
258.0 $
A rollforward of the change in fair value of Level 3 assets follows.
-
-
-
-
-
-
-
-
-
-
-
3.4
-
.4
-
-
3.8
December 31,
2017
2018
$
(In millions)
230.5
11.0
.2
13.4
(13.8)
-
32.3
273.6
$
273.6
(4.6)
-
14.1
(14.5)
.7
(11.3)
258.0
Fair value at beginning of year
Gain (loss) on assets held at end of year
Gain on assets sold during the year
Assets purchased
Assets sold
Transfers in
Currency exchange rate fluctuations
Fair value at end of year
$
$
F-28
Note 11 Other noncurrent liabilities:
Employee benefits
Accrued postretirement benefits
Other
Total
December 31,
2017
2018
(In millions)
$
$
8.5
7.7
13.0
29.2
$
$
7.3
7.4
14.1
28.8
Note 12 Other operating income (expense), net:
Other operating income (expense), net in 2016 includes income of $3.4 million, recognized in the first and
second quarters, related to cash received from settlement of a business interruption insurance claim arising in 2014
and income of $.9 million recognized in the fourth quarter of 2016 related to cash received from settlement of
another business interruption insurance claim arising in 2015. No additional material amounts are expected to be
received with respect to such insurance claims.
F-29
Note 13 Income taxes:
Pre-tax income:
U.S.
Non-U.S.
Total
Expected tax expense, at U.S. federal statutory income
tax rate of 35% in 2016 and 2017 and 21% in 2018
Non-U.S. tax rates
Incremental net tax expense (benefit) on earnings and losses
of U.S. and non-U.S. companies
Valuation allowance
Transition Tax
Global intangible low-tax income, net
Tax rate changes
U.S. - Canada APA
Canada - Germany APA
Adjustment to the reserve for uncertain tax positions, net
Nondeductible expenses
U.S. state income taxes and other, net
Income tax expense (benefit)
Components of income tax expense (benefit):
Current payable:
a
U.S. federal and state
Non-U.S.
Noncurrent payable - U.S. federal
Deferred income taxes (benefit):
U.S. federal and state
Non-U.S.
Income tax expense (benefit)
Comprehensive provision for income taxes (benefit) allocable to:
Net income
Other comprehensive income (loss):
Currency translation
Pension plans
OPEB plans
Marketable securities
Interest rate swap
Total
F-30
2016
Years ended December 31,
2017
(In millions)
2018
11.5
49.7
61.2
21.4
(4.3)
2.2
(2.2)
-
-
(.1)
(3.4)
-
2.4
1.5
.4
17.9
-
9.5
9.5
-
4.3
4.1
8.4
17.9
$
$
$
$
$
$
38.6
267.1
305.7
107.0
(13.2)
(8.4)
(205.4)
76.2
-
(.2)
-
-
(8.6)
1.7
2.1
(48.8)
3.0
37.5
40.5
70.1
(13.7)
(145.7)
(159.4)
(48.8)
$
$
$
$
$
$
32.8
261.0
293.8
61.7
21.0
1.3
-
(1.7)
3.7
(.2)
-
(1.4)
2.1
1.6
.7
88.8
12.0
51.1
63.1
(1.6)
(1.8)
29.1
27.3
88.8
17.9
$
(48.8)
$
88.8
-
(.8)
(.2)
1.3
.2
18.4
$
19.8
5.6
(.2)
1.6
1.1
(20.9)
$
-
(3.6)
(.2)
-
-
85.0
$
$
$
$
$
$
$
$
The amount shown in the above table of our income tax rate reconciliation for non-U.S. tax rates represents
the result determined by multiplying the pre-tax earnings or losses of each of our non-U.S. subsidiaries by the
difference between the applicable statutory income tax rate for each non-U.S. jurisdiction and the U.S. federal
statutory tax rate of 35% in 2016 and 2017 and 21% in 2018. The amount shown on such table for incremental net
tax expense on earnings and losses of U.S. and non-U.S. companies includes, as applicable, (i) deferred income
taxes (or deferred income tax benefits) associated with the current-year change in the aggregate amount of
undistributed earnings of our Canadian subsidiary and, beginning in 2018, deferred income taxes (or deferred
income tax benefits) associated with the current-year earnings of all of our non-U.S. subsidiaries (the undistributed
earnings of our European subsidiaries were subject to a permanent reinvestment plan until December 31, 2017) and
(ii) current U.S. income taxes (or current income tax benefit), including U.S. personal holding company tax, as
applicable, attributable to current-year income (losses) of one of our non-U.S. subsidiaries, which subsidiary is
treated as a dual resident for U.S. income tax purposes, to the extent the current-year income (losses) of such
subsidiary is subject to U.S. income tax under the U.S. dual-resident provisions of the Internal Revenue Code.
The components of our net deferred income taxes at December 31, 2017 and 2018 are summarized in the
following table.
December 31,
2017
2018
Assets
Liabilities
Assets
Liabilities
(In millions)
$
Tax effect of temporary differences related to:
Inventories
Property and equipment
Accrued OPEB costs
Accrued pension costs
Other accrued liabilities and deductible differences
Other taxable differences
Tax on unremitted earnings of non-U.S. subsidiaries
Tax loss and tax credit carryforwards
Valuation allowance
Adjusted gross deferred tax assets (liabilities)
Netting by tax jurisdiction
Net noncurrent deferred tax asset (liability)
$
3.0
-
2.2
69.1
10.2
-
-
116.2
(2.9)
197.8
(58.6)
139.2
$
$
(.6) $
(57.2)
-
-
-
(2.6)
(9.5)
-
-
(69.9)
58.6
(11.3) $
4.3
-
2.1
73.7
10.4
-
-
86.6
(2.9)
174.2
(52.2)
122.0
$
$
(3.1)
(56.9)
-
-
-
(2.4)
(11.3)
-
-
(73.7)
52.2
(21.5)
We have substantial net operating loss (NOL) carryforwards in Germany (the equivalent of $541 million
for German corporate tax purposes at December 31, 2018) and in Belgium (the equivalent of $16 million for Belgian
corporate tax purposes at December 31, 2018), all of which have an indefinite carryforward period. As a result, we
have net deferred income tax assets with respect to these two jurisdictions, primarily related to these NOL
carryforwards. The German corporate tax is similar to the U.S. federal income tax, and the German trade tax is
similar to the U.S. state income tax (our German trade tax NOLs were fully utilized as of December 31, 2018). Prior
to 2017, we concluded that we were required to recognize a non-cash deferred income tax asset valuation allowance
under the more-likely-than-not recognition criteria with respect to our German and Belgian net deferred income tax
assets. At December 31, 2016 such valuation allowance aggregated $173 million ($153 million with respect to
Germany and $20 million with respect to Belgium). During the first six months of 2017, we recognized an
aggregate non-cash deferred income tax benefit of $12.7 million as a result of a net decrease in such deferred
income tax asset valuation allowance, due to utilizing a portion of both the German and Belgian NOL during the
period. At June 30, 2017, we concluded we had sufficient positive evidence under the more-likely-than-not
recognition criteria to support reversal of the entire valuation allowance related to our German and Belgian
operations. In accordance with the ASC 740-270 guidance regarding accounting for income taxes at interim dates,
the amount of the valuation allowance reversed at June 30, 2017 ($149.9 million, of which $141.9 million related to
Germany and $8.0 million related to Belgium) associated with our change in judgment at that date regarding the
realizability of the related deferred income tax asset as it relates to future years (i.e. 2018 and after). A change in
F-31
judgment regarding the realizability of deferred tax assets as it relates to the current year is considered in
determining the estimated annual effective tax rate for the year and is recognized throughout the year, including
interim periods subsequent to the date of the change in judgment. Accordingly, our income tax benefit in calendar
year 2017 includes an aggregate non-cash deferred income tax benefit of $186.7 million associated with the reversal
of the German and Belgian valuation allowance, comprised of $12.7 million recognized in the first half of 2017
(noted above) associated with the utilization of a portion of both the German and Belgian NOLs during such period,
$149.9 million related to the portion of the valuation allowance reversed as of June 30, 2017 and $24.1 million
recognized in the second half of 2017 associated with the utilization of a portion of both the German and Belgian
NOLs during such period. Our deferred income tax asset valuation allowance increased $13.7 million in 2017 as a
result of changes in currency exchange rates, which increase was recognized as part of other comprehensive income
(loss).
On December 22, 2017, the 2017 Tax Act was enacted into law. This new tax legislation, among other
changes, (i) reduced the U.S. Federal corporate income tax rate from 35% to 21% effective January 1, 2018; (ii)
implemented a territorial tax system and imposed a one-time repatriation tax (Transition Tax) on the deemed
repatriation of the post-1986 undistributed earnings of non-U.S. subsidiaries accumulated up through December 31,
2017, regardless of whether such earnings are repatriated; (iii) eliminated U.S. tax on future non-U.S. earnings
(subject to certain exceptions); (iv) eliminated the domestic production activities deduction beginning in 2018; (v)
eliminated the net operating loss carryback and provides for an indefinite carryforward period subject to an 80%
annual usage limitation; (vi) allows for the expensing of certain capital expenditures; (vii) imposed a tax on global
intangible low-tax income (GILTI) beginning in 2018; (viii) imposed a base erosion anti-abuse tax (BEAT)
beginning in 2018; and (ix) amended the rules limiting the deduction for business interest expense beginning in
2018. Following the enactment of the 2017 Tax Act, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 118 to provide guidance on the accounting and reporting impacts of the 2017 Tax Act.
SAB 118 states that companies should account for changes related to the 2017 Tax Act in the period of enactment if
all information is available and the accounting can be completed. In situations where companies do not have enough
information to complete the accounting in the period of enactment, a company must either 1) record an estimated
provisional amount if the impact of the change can be reasonably estimated; or 2) continue to apply the accounting
guidance that was in effect immediately prior to the 2017 Tax Act if the impact of the change cannot be reasonably
If estimated provisional amounts are recorded, SAB 118 provides a measurement period of no longer
estimated.
than one year during which companies should adjust those amounts as additional information becomes available in
the reporting period within the measurement period in which such adjustment is determined.
Under GAAP, we were required to revalue our net deferred tax asset associated with our U.S. net
deductible temporary differences in the period in which the new tax legislation is enacted based on deferred tax
balances as of the enactment date, to reflect the effect of such reduction in the corporate income tax rate. Our
temporary differences as of December 31, 2017 were not materially different from our temporary differences as of
the enactment date, accordingly revaluation of our net deductible temporary differences was based on our net
deferred tax asset as of December 31, 2017. Such revaluation was recognized in continuing operations and was not
material to us.
Prior to the enactment of the 2017 Tax Act, the undistributed earnings of our European subsidiaries were
deemed to be permanently reinvested (we had not made a similar determination with respect to the undistributed
earnings of our Canadian subsidiary). Pursuant to the Transition Tax provisions imposing a one-time repatriation
tax on post-1986 undistributed earnings, we recognized a provisional current income tax expense of $76.2 million in
the fourth quarter of 2017. The amounts recorded as of December 31, 2017 as a result of the 2017 Tax Act
represented estimates based on information available at that date. We elected to pay such tax over an eight year
period beginning in 2018, including approximately $6.1 million which was paid in April 2018 (for the 2017 tax
year) and $5.8 million which was paid in 2018 (for the 2018 tax year). During the third quarter of 2018, in
conjunction with finalizing our federal income tax return and based on additional information that became available
(including proposed regulations issued by the IRS in August 2018 with respect to the Transition Tax), we
recognized a provisional income tax benefit of $1.7 million which amount is recorded as a measurement-period
adjustment, reducing the provisional income tax expense of $76.2 million recognized in the fourth quarter of 2017.
As a result, at December 31, 2018, taking into account the prior Transition Tax installments payments of $11.9
million (noted above), the balance of our unpaid Transition Tax aggregates $62.6 million, which will be paid in
F-32
quarterly installments over the remainder of the eight year period. Of such $62.6 million, $56.6 million is recorded
as a noncurrent payable to affiliate (income taxes payable to Valhi) classified as a noncurrent liability in our
Consolidated Balance Sheet at December 31, 2018, and $6.0 million is included with our current payable to affiliate
(income taxes payable to Valhi) classified as a current liability (a portion of our noncurrent income tax payable to
affiliate was reclassified to our current payable to affiliate for the portion of our 2019 Transition Tax installment due
within the next twelve months). We have completed our analysis of the Transition Tax provisions within the
prescribed measurement period ending December 22, 2018 pursuant to the guidance under SAB 118.
Prior to the enactment of the 2017 Tax Act the undistributed earnings of our European subsidiaries were
deemed to be permanently reinvested (we had not made a similar determination with respect to the undistributed
earnings of our Canadian subsidiary). As a result of the implementation of a territorial tax system under the 2017
Tax Act, effective January 1, 2018, and the Transition Tax which in effect taxes the post-1986 undistributed
earnings of our non-U.S. subsidiaries accumulated up through December 31, 2017, we determined effective
December 31, 2017 that all of the post-1986 undistributed earnings of our European subsidiaries are not permanently
reinvested. Accordingly, in the fourth quarter of 2017 we recognized an aggregate provisional non-cash deferred
income tax expense of $4.5 million based on our reasonable estimates of the U.S. state and non-U.S. income tax and
withholding tax liability attributable to all of such previously-considered permanently reinvested undistributed
earnings through December 31, 2017. The amounts recorded as of December 31, 2017 as a result of the 2017 Tax
Act represented estimates based on information currently available. We have not made any measurement-period
adjustments to the provisional amounts recorded at December 31, 2017 for this item during 2018 because no new
information became available during the period that required an adjustment. However, we recorded a non-cash
deferred income tax expense of $2.4 million for the U.S. state and non-U.S. income tax and withholding tax liability
attributable to the 2018 undistributed earnings of our non-U.S. subsidiaries in 2018, including withholding taxes
related to the undistributed earnings of our Canadian subsidiary. We have completed our analysis as it relates to the
implementation of a territorial tax system under the 2017 Tax Act within the prescribed measurement period ending
December 22, 2018 pursuant to the guidance under SAB 118.
Under U.S. GAAP, as it relates to the new GILTI tax rules, we are allowed to make an accounting policy
choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-
period expense when incurred (the period cost method) or (2) factoring such amounts into the measurement of our
deferred taxes (the deferred method). While our future global operations depend on a number of different factors,
we do expect to have future U.S. inclusions in taxable income related to GILTI. We did not record any adjustment
related to GILTI during the first nine months of 2018 based on our determination that the impact was not material,
and based on the guidance available to us at the time. During the fourth quarter of 2018, and taking into
consideration proposed regulations issued by the IRS in November 2018 with respect to various related non-U.S. tax
credit provisions, we recognized a current cash income tax expense of $3.7 million for GILTI. In conjunction with
the issuance of the proposed regulations, taking into consideration the complexities related to an election to
recognize deferred taxes for basis differences that are expected to have a GILTI impact in future years, we have
concluded that the appropriate accounting policy election for Kronos is to record GILTI tax as a current-period
expense when incurred under the period cost method. As such, we have completed our policy election within the
prescribed measurement period ended December 22, 2018 pursuant to the guidance under SAB 118. Similarly, we
have evaluated the tax impact of BEAT, taking into consideration proposed regulations issued by the IRS in
December 2018 with respect to BEAT, and determined that the tax imposed under BEAT has no material impact to
us as we have historically not entered into international payments between related parties that are unrelated to cost
of goods sold. Our determinations under the GILTI, BEAT and related U.S. tax credit provisions are based on the
relevant statutes and guidance provided under the proposed regulations. Given the complexity of the international
provisions, it is possible that final regulations could differ from the proposed regulations and materially impact our
determinations with respect to such items. Any material change will be recognized in the period in which the final
regulations are published.
Certain U.S. deferred tax attributes of one of our non-U.S. subsidiaries, which subsidiary is treated as a
dual resident for U.S. income tax purposes, were subject to various limitations. As a result, we had previously
concluded that a deferred income tax asset valuation allowance was required to be recognized with respect to such
subsidiarys U.S. net deferred income tax asset because such assets did not meet
the more-likely-than-not
recognition criteria primarily due to (i) the various limitations regarding use of such attributes due to the dual
F-33
residency; (ii) the dual resident subsidiary had a history of losses and absent distributions from our non-U.S.
subsidiaries, which were previously not determinable, such subsidiary was expected to continue to generate losses;
and (iii) a limited NOL carryforward period for U.S. tax purposes. Because we had concluded the likelihood of
realization of such subsidiarys net deferred income tax asset was remote, we had not previously disclosed such
valuation allowance or the associated amount of the subsidiarys net deferred income tax assets (exclusive of such
valuation allowance). Primarily due to changes enacted under the 2017 Tax Act, we have concluded we now have
sufficient positive evidence under the more-likely-than-not recognition criteria to support reversal of the entire
valuation allowance related to such subsidiarys net deferred income tax asset, which evidence included, among
other things, (i) the inclusion under Transition Tax provisions of significant earnings for U.S. income tax purposes
which significantly and positively impacts the ability of such deferred tax attributes to be utilized by us; (ii) the
indefinite carryforward period for U.S. net operating losses incurred after December 31, 2017; (iii) an expectation of
continued future profitability for our U.S. operations; and (iv) a positive taxable income basket for U.S. tax purposes
in excess of the U.S. deferred tax asset related to the U.S. attributes of such subsidiary. Accordingly, in the fourth
quarter of 2017 we recognized an $18.7 million non-cash deferred income tax benefit as a result of the reversal of
such valuation allowance.
None of our U.S. and non-U.S. tax returns are currently under examination. As a result of prior audits in
certain jurisdictions, which are now settled, in 2008 we filed Advance Pricing Agreement Requests with the tax
authorities in the U.S., Canada and Germany. These requests have been under review with the respective tax
authorities since 2008 and prior to 2016, it was uncertain whether an agreement would be reached between the tax
authorities and whether we would agree to execute and finalize such agreements.
• During 2016, Contran, as the ultimate parent of our U.S. Consolidated income tax group, executed and
finalized an Advance Pricing Agreement with the U.S. Internal Revenue Service and our Canadian
subsidiary executed and finalized an Advance Pricing Agreement with the Competent Authority for
Canada (collectively, the U.S.-Canada APA) effective for tax years 2005 - 2015. Pursuant to the
terms of the U.S.-Canada APA, the U.S. and Canadian tax authorities agreed to certain prior year
changes to taxable income of our U.S. and Canadian subsidiaries. As a result of such agreed-upon
changes, we recognized a $3.4 million current U.S. income tax benefit in 2016.
In addition, our
Canadian subsidiary incurred a cash income tax payment of approximately CAD $3 million (USD $2.3
million) related to the U.S.-Canada APA, but such payment was fully offset by previously provided
accruals, and such income tax was paid in the third quarter of 2017.
• During the third quarter of 2017, our Canadian subsidiary executed and finalized an Advance Pricing
Agreement with the Competent Authority for Canada (the Canada-Germany APA) effective for tax
years 2005 - 2017. Pursuant to the terms of the Canada-Germany APA, the Canadian and German tax
authorities agreed to certain prior year changes to taxable income of our Canadian and German
subsidiaries. As a result of such agreed-upon changes, we reversed a significant portion of our reserve
for uncertain tax positions and recognized a non-cash income tax benefit of $8.6 million related to such
In addition, we recognized a $2.6
reversal ($8.1 million recognized in the third quarter of 2017).
million non-cash income tax benefit related to an increase in our German NOLs and a $.6 million
German cash tax refund related to the Canada-Germany APA in the third quarter of 2017.
• During the first quarter of 2018, our German subsidiary executed and finalized the related Advance
Pricing Agreement with the Competent Authority for Germany (the Germany-Canada APA)
effective for tax years 2005 - 2017. In the first quarter of 2018, we recognized a net $1.4 million non-
cash income tax benefit related to an APA tax settlement payment between our German and Canadian
subsidiaries.
Tax authorities may in the future examine certain of our U.S. and non-U.S. tax returns and may propose tax
deficiencies, including penalties and interest. Because of the inherent uncertainties involved in settlement initiatives
and court and tax proceedings, we cannot guarantee that these tax matters, if any, will be resolved in our favor, and
therefore our potential exposure, if any, is also uncertain. We believe we have adequate accruals for additional taxes
and related interest expense which could ultimately result from tax examinations. We believe the ultimate
disposition of tax examinations should not have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
F-34
We accrue interest and penalties on our uncertain tax positions as a component of our provision for income
taxes. The amount of interest and penalties we accrued during 2016, 2017 and 2018 was not material and at
December 31, 2017 and 2018, we had no accrual
for interest and penalties for our uncertain tax positions.
rr
The following table shows the changes in the amount of our uncertain tax positions (exclusive of the effect
of interest and penalties discussed above) during 2016, 2017 and 2018:
Changes in unrecognized tax benefits:
Unrecognized tax benefits at beginning of year
Net increase (decrease):
Tax positions taken in prior periods
Tax positions taken in current period
Lapse due to applicable statute of limitations
Settlements with taxing authorities
Change in currency exchange rates
Unrecognized tax benefits at end of year
$
2016
Years ended December 31,
2017
(In millions)
2018
$
9.7 $
9.9 $
(.1)
2.5
(.2)
(2.3)
.3
9.9 $
(6.3)
.2
(.1)
(2.3)
.7
2.1 $
2.1
1.4
.7
-
-
(.1)
4.1
Our uncertain tax position at December 31, 2018 is classified as a component of our noncurrent deferred
tax asset. If our uncertain tax position at December 31, 2018 was recognized, a benefit of $4.1 million would affect
our effective income tax rate. We currently estimate that our unrecognized tax benefits will not change materially
during the next twelve months.
We and Contran file income tax returns in U.S. federal and various state and local jurisdictions. We also
file income tax returns in various non-U.S. jurisdictions, principally in Germany, Canada, Belgium and Norway.
Our U.S. income tax returns prior to 2015 are generally considered closed to examination by applicable tax
authorities. Our non-U.S. income tax returns are generally considered closed to examination for years prior to 2014
for Germany, 2015 for Belgium, 2013 for Canada and 2009 for Norway.
Note 14 Stockholders equity:
Long-term incentive compensation plan Prior to 2016, our board of directors adopted a plan that
provides for the award of stock to our board of directors, and up to a maximum of 200,000 shares can be awarded
under this plan. We awarded 13,500 shares in 2016, 8,000 shares in 2017 and 5,600 shares in 2018 under this plan.
149,900 shares are available for future award at December 31, 2018.
Stock repurchase program Prior to 2016, our board of directors authorized the repurchase of up to
2.0 million shares of our common stock in open market transactions, including block purchases, or in privately-
negotiated transactions at unspecified prices and over an unspecified period of time. We may repurchase our
common stock from time to time as market conditions permit. The stock repurchase program does not include
specific price targets or timetables and may be suspended at any time. Depending on market conditions, we may
terminate the program prior to its completion. We would use cash on hand or other sources of liquidity to acquire
the shares. Repurchased shares will be added to our treasury and cancelled. At December 31, 2018, 1,951,000
shares are available for repurchase under this authorization.
F-35
Accumulated other comprehensive loss Changes in accumulated other comprehensive loss for 2016,
2017 and 2018 are presented in the tablea
below.
Accumulated other comprehensive loss, net of tax:
Currency translation:
Balance at beginning of year
Other comprehensive income (loss)
Balance at end of year
Defined benefit pension plans:
Balance at beginning of year
Other comprehensive income (loss):
Amortization of prior service cost and net
losses included in net periodic pension cost
Net actuarial gain (loss) arising during year
Balance at end of year
OPEB plans:
Balance at beginning of year
Other comprehensive (income) loss:
Amortization of prior service credit and net
losses included in net periodic OPEB cost
Net actuarial gain (loss) arising during year
Balance at end of year
Marketable securities:
Balance at beginning of year
Change in accounting principle
Balance at beginning of period, as adjusted
Other comprehensive income -
Unrealized gains arising during the year
Balance at end of year
Interest rate swap:
Balance at beginning of year
Other comprehensive income (loss):
Unrealized losses arising during the year
Less reclassification adjustment
for amounts included in earnings
Balance at end of year
Total accumulated other comprehensive loss:
Balance at beginning of year
Change in accounting principle
Balance at beginning of period, as adjusted
Other comprehensive income (loss)
Balance at end of year
2016
Years ended December 31,
2017
(In millions)
2018
(252.0)
(17.6)
(269.6)
$
$
(269.6)
57.7
(211.9)
$
$
(211.9)
(33.1)
(245.0)
(159.2)
$
(184.8)
$
(172.8)
8.5
(34.1)
(184.8)
2.1
(.4)
.1
1.8
(.6)
-
(.6)
2.4
1.8
$
$
$
$
$
9.8
2.2
(172.8)
1.8
(.3)
(.3)
1.2
1.8
-
1.8
3.0
4.8
$
$
$
$
$
(2.3)
$
(2.0)
$
(2.0)
2.3
(2.0)
(412.0)
-
(412.0)
(40.8)
(452.8)
$
$
$
(1.5)
3.5
-
(452.8)
-
(452.8)
74.1
(378.7)
$
$
$
10.4
(17.6)
(180.0)
1.2
(.3)
(.2)
.7
4.8
(4.8)
-
-
-
-
-
-
-
(378.7)
(4.8)
(383.5)
(40.8)
(424.3)
$
$
$
$
$
$
$
$
$
$
$
$
F-36
See Note 6 for further discussion on our marketable securities, Note 10 for amounts related to our defined
benefit pension plans, Note 11 for our OPEB plans and Note 17 for discussion on our interest rate swap contract.
Note 15 Related party transactions:
We may be deemed to be controlled by Ms. Simmons and Ms. Connelly. See Note 1. Corporations that
may be deemed to be controlled by or affiliated with such individuals sometimes engage in (a) intercorporate
transactions such as guarantees, management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and sales, leases and exchanges of assets,
including securities issued by both related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations, securities repurchases, and purchases and sales
(and other acquisitions and dispositions) of subsidiaries, divisions or other business units, which transactions have
involved both related and unrelated parties and have included transactions which resulted in the acquisition by one
related party of a publicly-held noncontrolling interest in another related party. While no transactions of the type
described above are planned or proposed with respect to us other than as set forth in these financial statements, we
continuously consider, review and evaluate, and understand that Contran and related entities consider, review and
evaluate such transactions. Depending upon the business, tax and other objectives then relevant, it is possible that
we might be a party to one or more such transactions in the future.
Receivables from and payables to affiliates are summarized in the table below.
Current receivables from affiliates:
LPC
Income taxes receivable from Valhi
Other
Noncurrent note receivable from Valhi
Current payables to affiliates:
LPC
Income taxes payable to Valhi
Noncurrent payable to affiliate - income taxes
Income taxes payable to Valhi (See Note 13)
December 31,
2017
2018
(In millions)
8.9
15.3
3.2
27.4
13.6
16.2
-
16.2
$
$
$
$
$
10.2
-
2.8
13.0
-
16.7
10.4
27.1
70.1
$
56.6
$
$
$
$
$
$
Amounts payable to LPC are generally for the purchase of TiO2, while amounts receivable from LPC are
generally from the sale of TiO2 feedstock. See Note 5. Purchases of TiO2 from LPC were $157.5 million in each of
2016 and 2017 and $165.9 million in 2018. Sales of feedstock to LPC were $68.8 million in 2016, $79.4 million in
2017 and $66.9 million in 2018.
From time to time, we may have loans and advances outstanding between us and various related parties
pursuant to term and demand notes. We generally enter into these loans and advances for cash management
purposes. When we loan funds to related parties, we are generally able to earn a higher rate of return on the loan
than we would earn if we invested the funds in other instruments, and when we borrow from related parties, we are
generally able to pay a lower rate of interest than we would pay if we had incurred third-party indebtedness. While
certain of these loans to affiliates may be of a lesser credit quality than cash equivalent instruments otherwise
available to us, we believe we have considered the credit risks in the terms of the applicable loans.
F-37
In this regard, prior to 2016 we entered into an unsecured revolving demand promissory note with Valhi
whereby, as amended, we agreed to loan Valhi up to $60 million. Our loan to Valhi bears interest at prime plus
1.00%, payable quarterly, with all principal due on demand, but in any event no earlier than December 31, 2020.
The amount of our outstanding loans to Valhi at any time is at our discretion. At December 31, 2017, we had $13.6
million of outstanding loans to Valhi and at December 31, 2018, we had no outstanding loans to Valhi under this
promissory note.
Interest income (including unused commitment fees) on our loan to Valhi was $.4 million in each of 2016
and 2017 and $.3 million in 2018.
Under the terms of various intercorporate services agreements (ISAs) entered into between us and various
related parties, including Contran, employees of one company will provide certain management, tax planning,
financial and administrative services to the other company on a fee basis. Such charges are based upon estimates of
the time devoted by the employees of the provider of the services to the affairs of the recipient, and the
compensation and associated expenses of such persons. Because of the number of companies affiliated with
Contran, we believe we benefit from cost savings and economies of scale gained by not having certain management,
financial and administrative staffs duplicated at each entity, thus allowing certain individuals to provide services to
multiple companies but only be compensated by one entity. The net ISA fee charged to us is included in selling,
general and administrative expense and corporate expense and was $15.2 million in 2016, $16.3 million in 2017 and
$21.1 million in 2018.
Contran and certain of its subsidiaries and affiliates, including us, purchase certain of their insurance
policies as a group, with the costs of the jointly-owned policies being apportioned among the participating
companies. Tall Pines Insurance Company and EWI RE, Inc., each subsidiaries of Valhi, provide for or broker
certain insurance policies for Contran and certain of its subsidiaries and affiliates, including ourselves. Tall Pines
purchases reinsurance from third-party insurance carriers with an A.M. Best Company rating of generally at least A-
(excellent) for substantially all of the risks it underwrites. Consistent with insurance industry practices, Tall Pines
and EWI receive commissions from insurance and reinsurance underwriters and/or assess fees for the policies that
they provide or broker. The aggregate premiums paid to Tall Pines and EWI by us and our joint venture were $9.2
million in 2016, $9.3 million in 2017 and $10.4 million in 2018. These amounts principally represent payments for
insurance premiums, which include premiums or fees paid to Tall Pines or fees paid to EWI. These amounts also
include payments to insurers or reinsurers through EWI for the reimbursement of claims within our applicable
deductible or retention ranges that such insurers or reinsurers paid to third parties on our behalf, as well as amounts
for claims and risk management services and various other third-party fees and expenses incurred by the program.
We expect these relationships with Tall Pines and EWI will continue in 2019.
With respect to certain of such jointly-owned policies, it is possible that unusually large losses incurred by
one or more insureds during a given policy period could leave the other participating companies without adequate
coverage under that policy for the balance of the policy period. As a result, and in the event that the available
coverage under a particular policy would become exhausted by one or more claims, Contran and certain of its
subsidiaries and affiliates, including us, have entered into a loss sharing agreement under which any uninsured loss
arising because the available coverage had been exhausted by one or more claims will be shared ratably amongst
those entities that had submitted claims under the relevant policy. We believe the benefits, in the form of reduced
premiums and broader coverage associated with the group coverage for such policies, justifies the risk associated
with the potential for any uninsured loss.
Contran and certain of its subsidiaries, including us, participate in a combined information technology data
recovery program that Contran provides from a data recovery center that it established. Pursuant to the program,
Contran and certain of its subsidiaries, including us, as a group share information technology data recovery services.
The program apportions its costs among the participating companies. We paid Contran $.1 million in each of 2016,
2017 and 2018 for such services. We expect that this relationship with Contran will continue in 2019.
F-38
Note 16 Commitments and contingencies:
tt
Environmental matters
Our operations are governed by various environmental laws and regulations.
Certain of our operations are and have been engaged in the handling, manufacture or use of substances or
compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws and
regulations. As with other companies engaged in similar businesses, certain of our past and current operations and
products have the potential to cause environmental or other damage. We have implemented and continue to
implement various policies and programs in an effort to minimize these risks. Our policy is to maintain compliance
with applicable environmental laws and regulations at all of our facilities and to strive to improve our environmental
performance. From time to time, we may be subject to environmental regulatory enforcement under U.S. and non-
U.S. statutes, the resolution of which typically involves the establishment of compliance programs.
It is possible
that future developments, such as stricter requirements of environmental laws and enforcement policies thereunder,
could adversely affect our production, handling, use, storage, transportation, sale or disposal of such substances. We
believe all of our manufacturing facilities are in substantial compliance with applicable environmental laws.
Litigation matters We are involved in various environmental, contractual, product liability, patent (or
intellectual property), employment and other claims and disputes incidental to our business. At least quarterly our
management discusses and evaluates the status of any pending litigation to which we are a party. The factors
considered in such evaluation include, among other things, the nature of such pending cases, the status of such
pending cases, the advice of legal counsel and our experience in similar cases (if any). Based on such evaluation,
we make a determination as to whether we believe (i) it is probable a loss has been incurred, and if so if the amount
of such loss (or a range of loss) is reasonably estimable, or (ii) it is reasonably possible but not probable a loss has
been incurred, and if so if the amount of such loss (or a range of loss) is reasonably estimable, or (iii) the probability
a loss has been incurred is remote. We have not accrued any amounts for litigation matters because it is not
reasonably possible we have incurred a loss that would be material to our consolidated financial condition, results of
operations or liquidity.
Concentrations of credit risk Sales of TiO2 accounted for 93% our net sales in 2016 and 94% in each of
2017 and 2018. The remaining sales result from the mining and sale of ilmenite ore (a raw material used in the
sulfate pigment production process), and the manufacture and sale of iron-based water treatment chemicals and
certain titanium chemical products (derived from co-products of the TiO2 production processes). TiO2 is generally
sold to the paint, plastics and paper industries. Such markets are generally considered quality-of-life markets
whose demand for TiO2 is influenced by the relative economic well-being of the various geographic regions. We
sell TiO2 to approximately 4,000 customers, with the top ten customers approximating 33% of net sales in 2016,
34% in 2017 and 33% in 2018. One customer, Behr Process Corporation, accounted for approximately 10% of our
net sales in 2016. We did not have sales to a single customer comprising 10% or more of our net sales in 2017 and
2018.
The table below shows the approximate percentage of our TiO2 sales by volume for our significant markets,
Europe and North America, for the last three years.
Europe
North America
2016
2017
2018
51%
29%
50%
31%
44%
37%
Long-term contracts We have long-term supply contracts that provide for certain of our TiO2 feedstock
requirements through 2020. The agreements require us to purchase certain minimum quantities of feedstock with
minimum purchase commitments aggregating approximately $594 million over the life of the contracts in years
subsequent to December 31, 2018. In addition, we have other long-term supply and service contracts that provide
for various raw materials and services. These agreements require us to purchase certain minimum quantities or
services with minimum purchase commitments aggregating approximately $156 million at December 31, 2018.
Operating leases Our principal German operating subsidiary leases the land under its Leverkusen TiO2
production facility pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen facility itself, which we
own and which represents approximately one-third of our current TiO2 production capacity, is located within
F-39
Bayers extensive manufacturing complex. We periodically establish the amount of rent for the land lease associated
with the Leverkusen facility by agreement with Bayer for periods of at least two years at a time. The lease
agreement provides for no formula, index or other mechanism to determine changes in the rent for such land lease;
rather, any change in the rent is subject solely to periodic negotiation between Bayer and us. We recognize any
change in the rent based on such negotiations as part of lease expense starting from the time such change is agreed
upon by both parties, as any such change in the rent is deemed contingent rentals under GAAP. Under the terms
of various supply and services agreements, majority-owned subsidiaries of Bayer provide raw materials, including
chlorine, auxiliary and operating materials, utilities and services necessary to operate the Leverkusen facility. These
agreements, as amended, expire in 2019 through 2022. We expect to renew these agreements prior to expiration at
similar terms and conditions.
We also lease various other manufacturing facilities and equipment. Some of the leases contain purchase
and/or various term renewal options at fair market and fair rental values, respectively. In most cases we expect that,
in the normal course of business, such leases will be renewed or replaced by other leases. Net rent expense
approximated $14 million in 2016, $16 million in 2017 and $15 million in 2018. At December 31, 2018, future
minimum payments under non-cancellable operating leases having an initial or remaining term of more than one
year were as follows:
Years ending December 31,
Amount
(In millions)
2019
2020
2021
2022
2023
2024 and thereafter
Total
$
$
6.2
5.0
4.2
3.2
2.4
21.5
42.5
Approximately $17 million of the $42.5 million aggregate future minimum rental commitments at
December 31, 2018 relates to our Leverkusen facility lease discussed above. The minimum commitment amounts
for such lease included in the table above for each year through the 2050 expiration of the lease are based upon the
current annual rental rate as of December 31, 2018. As discussed above, any change in the rent is based solely on
negotiations between Bayer and us, and any such change in the rent is deemed contingent rentals under GAAP
which is excluded from the future
minimum lease payments disclosed above.
ff
Income taxes We and Valhi are a party to a tax sharing agreement providing for the allocation of tax
liabilities and tax payments as described in Note 1. Under applicable law, we, along with every other member of the
Contran Tax Group, are each jointly and severally liable for the aggregate federal income tax liability of Contran
and the other companies included in the Contran Tax Group for all periods in which we are included in the Contran
Tax Group. Valhi has agreed, however, to indemnify us for any liability for income taxes of the Contran Tax Group
in excess of our tax liability computed in accordance with the tax sharing agreement.
F-40
Note 17 Financial instruments:
The following table summarizes the valuation of our financial instruments recorded on a fair value basis as
of December 31, 2017 and 2018:
Fair value measurements
Significant
other
observable
inputs
(Level 2)
Quoted prices
in active
markets
(Level 1)
(In millions)
Significant
unobservable
inputs
(Level 3)
Total
10.7
$
10.7
$
-
$
3.4
$
3.4
$
-
$
-
-
Asset:
December 31, 2017 -
Noncurrent marketable securities
(See Note 6)
December 31, 2018 -
Noncurrent marketable securities
(See Note 6)
$
$
Our earnings and cash flows are subject to fluctuations due to changes in currency exchange rates and
interest rates. Our risk management policy allows for the use of derivative financial instruments to prudently
manage exposure to currency exchange rates and interest rates. Derivatives that we use are primarily currency
forward contracts and interest rate swaps. We have not entered into these contracts for trading or speculative
purposes in the past, nor do we currently anticipate entering into such contracts for trading or speculative purposes
in the future.
Currency forward contracts Certain of our sales generated by our non-U.S. operations are denominated in
U.S. dollars. We periodically use currency forward contracts to manage a very nominal portion of currency
exchange rate risk associated with trade receivables denominated in a currency other than the holders functional
currency or similar exchange rate risk associated with future sales. Derivatives used to hedge forecasted
transactions and specific cash flows associated with financial assets and liabilities denominated in currencies other
than the U.S. dollar and which meet the criteria for hedge accounting are designated as cash flow hedges.
the effective portion of gains and losses is deferred as a component of accumulated other
Consequently,
comprehensive income and is recognized in earnings at the time the hedged item affects earnings. Contracts that do
not meet the criteria for hedge accounting are marked-to-market at each balance sheet date with any resulting gain or
loss recognized in income currently as part of net currency transaction gains and losses. The fair value of the
currency forward contracts is determined using Level 1 inputs based on the currency spot forward rates quoted by
banks or currency dealers.
At December 31, 2017 and 2018, we had no currency forward contracts outstanding. We did not use hedge
accounting for any of our contracts to the extent we held such contracts during 2016, 2017 and 2018.
Interest rate swap contract As part of our interest rate risk management strategy, in August 2015 we
entered into a pay-fixed/receive-variable interest rate swap contract with Wells Fargo Bank, N.A. to minimize our
exposure to volatility in LIBOR as it related to our forecasted outstanding variable-rate indebtedness. Under this
interest rate swap, we paid a fixed rate of 2.016% per annum, payable quarterly, and received a variable rate of
three-month LIBOR (subject to a 1.00% floor), also payable quarterly, in each case based on the notional amount of
the swap then outstanding. The effective date of the swap contract was September 30, 2015. The notional amount
of the swap started at $344.8 million and declined by $875,000 each quarter beginning December 31, 2015, with an
original final maturity of the swap contract in February 2020. This swap contract was designated as a cash flow
hedge and qualified as an effecff
tive hedge at inception under ASC Topic 815 in respect to our term loan indebtedness.
The effective portion of changes in fair value on this interest rate swap was recorded as a component of other
comprehensive income, net of deferred income taxes. Commencing in the fourth quarter of 2015, as interest
F-41
expense accrued on LIBOR-based variable rate debt, we classified the amount we paid under the pay-fixed leg of the
swap and the amount we received under the receive-variable leg of the swap as part of interest expense (as well as
part of the amount we report as cash paid for interest in our Consolidated Statements of Cash Flows), with the net
effect that the amount of interest expense we recognized on our LIBOR-based variable rate debt each quarter, as it
relates to the notional amount of the swap outstanding each quarter, was based on a fixed rate of 2.016% per annum
in lieu of the level of LIBOR prevailing during the quarter.
In September 2017, in connection with the voluntary prepayment and termination of our term loan
discussed in Note 8, we voluntarily terminated this swap contract, as we no longer had any exposure to volatility in
respect of LIBOR. The cost to us to early terminate the swap contract was $3.3 million, which we paid to Wells
Fargo concurrent with the termination. Such $3.3 million expense is classified as part of our loss on prepayment of
debt in our Consolidated Statement of Income for the year ended December 31, 2017 and discussed in Note 8. Such
$3.3 million amount is also classified as part of the cash paid for interest disclosed in our Consolidated Statement of
Cash Flows for the year ended December 31, 2017.
During 2016 and 2017 (prior to the termination of the interest rate swap contract), a pretax unrealized loss
arising during the periods of $3.1 million and $2.3 million, respectively, was recognized in other comprehensive loss
related to the interest rate swap. During such periods, $3.5 million and $2.1 million, respectively, were reclassified
from accumulated other comprehensive loss into earnings and are included in interest expense in our Consolidated
Statements of Income. From the inception of the swap until the swap contract termination, there had been no gains
or losses recognized in earnings representing hedge ineffff eff ctiveness with respect to the interest rate swap.
Other The following table presents the financial instruments that are not carried at fair value but which
require fair value disclosure as of December 31, 2017 and 2018.
December 31, 2017
Fair
value
Carrying
amount
December 31, 2018
Fair
value
Carrying
amount
Cash, cash equivalents and restricted cash
Long-term debt - Fixed rate Senior Notes
Common stockholders' equity
$
$
323.7
471.1
754.3
(In millions)
323.7
495.1
2,986.8
$
$
374.7
452.4
839.8
374.7
412.9
1,335.3
At December 31, 2018, the estimated market price of our Senior Notes was 900 per 1,000 principal
amount. The fair value of our Senior Notes was based on quoted market prices; however, these quoted market
prices represented Level 2 inputs because the markets in which the Senior Notes trade were not active. The fair
value of our common stockholders equity is based upon quoted market prices at each balance sheet date, which
represent Level 1 inputs. Due to their near-term maturities, the carrying amounts of accounts receivable and
accounts payable are considered equivalent to fair value. See Notes 3 and 9.
Note 18 Recent accounting pronouncements:
Adopted
On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) for all
contracts which were not completed as of January 1, 2018 using the modified retrospective method. Prior to
adoption of this standard, we recorded sales when our products were shipped and title and other risks and rewards of
ownership had passed to our customer, which was generally at the time of shipment (although in some instances
shipping terms were FOB destination point, for which we did not recognize revenue until the product was received
by our customer). Following adoption of this standard, we record sales when we satisfy our performance obligation
to our customers by transferring control of our products to them, which we have determined is at the same point in
time as when we would have recognized revenue prior to adoption of this new standard. Accordingly, the adoption
of ASU 2014-09 as of January 1, 2018 did not have a material impact on our consolidated financial statements, and
we believe adoption of this standard will have a minimal effect on our revenues on an ongoing basis. See Notes 1
and 2.
F-42
On January 1, 2018, we adopted ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects related
to the recognition, measurement, presentation and disclosure of financial instruments. The ASU requires equity
investments (except for those accounted for under the equity method of accounting or those that result in the
consolidation of the investee) to generally be measured at fair value with changes in fair value recognized in net
income (previously, changes in fair value of such securities were recognized in other comprehensive income). The
amendment also requires a number of other changes,
simplifying the impairment
assessment for equity instruments without readily determinable fair values; eliminating the requirement for public
business entities to disclose methods and assumptions used to determine fair value for financial instruments
measured at amortized cost; requiring an exit price notion when measuring the fair value of financial instruments for
disclosure purposes; and requiring separate presentation of financial assets and liabilities by measurement category
and form of asset. We adopted the new standard prospectively. The most significant aspect of adopting this ASU is
the requirement to recognize changes in fair value of our available-for-sale marketable equity securities in net
income. At December 31, 2017, our entire portfolio of marketable securities consisted of marketable equity
securities. Upon adoption of the ASU on January 1, 2018,
the entire balance of our accumulated other
comprehensive income related to marketable securities of $4.8 million was reclassified to our beginning retained
earnings pursuant to the transition requirements of the ASU.
including among others:
In March 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-07, Compensation -
Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost, which requires that the service cost component of net periodic defined benefit pension
and OPEB cost be reported in the same line item as other compensation costs for applicable employees incurred
during the period. Other components of such net benefit cost are required to be presented in the income statement
separately from the service cost component, and below income from operations (if such a subtotal is presented).
These other net benefit cost components must be disclosed either on the face of the financial statements or in the
notes to the financial statements. In addition only the service cost component is eligible for capitalization in assets
where applicable (inventory or internally constructed fixed assets for example). We adopted the amendments in
ASU 2017-07 beginning in the first quarter of 2018, with retrospective presentation in our Consolidated Statements
of Income. We began applying ASU 2017-07 prospectively beginning on January 1, 2018 as it relates to the
capitalization of the service cost component of net benefit cost into assets (primarily inventory). We are availing
ourselves of the practical expedient that permits us to use amounts we previously disclosed as components of our net
periodic defined benefit pension and OPEB cost for periods prior to the adoption of this ASU as the estimation basis
for applying the retrospective presentation requirements. As a result we have reclassified $7.7 million and $4.1
million, respectively, in 2016 and $10.8 million and $6.6 million, respectively, in 2017 previously classified as part
of cost of sales and selling, general and administrative expenses to Other components of net periodic pension and
OPEB cost in our Consolidated Statement of Income.
Pending Adoption
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is a comprehensive rewriting
of the lease accounting guidance which aims to increase comparability and transparency with regard to lease
transactions. The primary change will be the recognition of lease assets for the right-of-use of the underlying asset
and lease liabilities for the obligation to make payments by lessees on the balance sheet for leases currently
classified as operating leases. The ASU, as amended, also requires increased qualitative disclosure about leases in
addition to quantitative disclosures currently required. Upon adoption, companies are required to either apply a
modified retrospective transition approach, or recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption with no restatement of prior period financial statement. We expect to
elect the cumulative-effect adjustment method of transition. The ASU also provides a practical expedient which will
allow companies to continue to account for existing leases under the prior guidance unless a lease is modified, other
than the requirement to recognize the right-of-use asset and lease liability for all operating leases. The changes
indicated above will be effective for us beginning in the first quarter of 2019. This ASU permits companies to elect
certain practical expedients upon adoption, and at adoption we elected such practical expedients related to, among
other things, lease classification (in which existing leases classified as operating leases under current GAAP would
be classified as an operating lease under the new ASU, and existing leases classified as a capital lease under current
GAAP would be classified as a finance lease under the new ASU), nonlease components (in which nonlease
components associated with a lease and paid by us to the lessor, such as property taxes, insurance and maintenance,
would be treated as a lease component and considered part of minimum lease rent payments), and short-term leases
(in which leases with an original term of 12 months or less would be excluded from the recognition requirements of
F-43
the new ASU). We are in the process of completing our evaluation of the effect this ASU will have on our
Consolidated Financial Statements, but given the material amount of our future minimum payments under non-
cancellable operating leases at December 31, 2018 discussed in Note 16, we expect to recognize a material right-of-
use lease asset and lease liability upon adoption of the ASU.
Note 19 Quarterly results of operations (unaudited):
Year ended December 31, 2017
Net sales
Gross margin
Net income
Basic and diluted income per share
Year ended December 31, 2018
Net sales
Gross margin
Net income
Basic and diluted income per share
Quarter ended
March 31
June 30
September 30 December 31
(In millions, except per share data)
$
$
$
$
369.8
106.0
36.8
.32
430.4
174.8
70.7
.61
$
$
$
$
441.4
132.4
196.5
1.70
471.8
171.8
77.7
.67
$
$
$
$
464.5
155.0
73.8
.64
410.3
119.1
32.6
.28
$
$
$
$
453.3
176.3
47.4
.41
349.4
96.5
24.0
.21
We recognized the following amounts during 2017:
•
•
•
•
•
•
pre-tax charge of $7.1 million in the third quarter related to the loss on prepayment of debt (see Note 8),
non-cash deferred income tax benefit of $5.0 million, $157.6 million, $7.8 million and $16.3 million in
the first, second, third and fourth quarters, respectively, as a result of the reversal of our deferred
income tax asset valuation allowances associated with our German and Belgian operations (see Note
13),
provisional current income tax expense of $76.2 million in the fourth quarter as a result of the 2017
Tax Act for the one-time repatriation tax imposed on the post-1986 undistributed earnings of our non-
U.S. subsidiaries (see Note 13),
non-cash deferred income tax benefit of $18.7 million as a result of the reversal of our deferred income
tax asset valuation allowance related to certain U.S. deferred income tax assets of one of our non-U.S.
subsidiaries (which subsidiary is treated as a dual resident for U.S. income tax purposes) (see Note 13),
aggregate income tax benefit of $11.8 million related to the execution and finalization of an Advance
Pricing Agreement between Canada and Germany, mostly in the third quarter (see Note 13), and
aggregate provisional non-cash deferred income tax expense of $4.5 million in the fourth quarter
related to a change in our conclusions regarding our permanent reinvestment assertion with respect to
the post-1986 undistributed earnr ings of our European subsidiaries (see Note 13).
We recognized the following amounts during 2018:
•
•
current cash income tax expense of $3.7 million in the fourth quarter of 2018 related to GILTI (see
Note 13),
non-cash income tax expense of $1.4 million and $.7 million in the first and fourth quarters,
respectively, related to an increase in our reserve for uncertain tax positions (see Note 13).
The sum of the quarterly per share amounts may not equal the annual per share amounts due to relative
changes in the weighted average number of shares used in the per share computations.
F-44
Kronos Worldwide, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, TX 75240-2620
News Release
FOR IMMEDIATE RELEASE
Contact: Janet Keckeisen
Vice President, Corporate
Strategy and Investor Relations
(972) 233-1700
KRONOS WORLDWIDEWW
REPOEE RTS FOURTH QUARTER 2018 RESULTS
DALLAS, TEXAS
March 11, 2019
Kronos Worldwide, Inc. (NYSE:KRO) today reported net income
of $24.0 million, or $.21 per share, in the fourth quarter of 2018 compared to net income of $47.4 million,
or $.41 per share, in the fourth quarter of 2017. For the full year of 2018, Kronos Worldwide reported net
income of $205.0 million, or $1.77 per share, compared to net income of $354.5 million, or $3.06 per share
for the full year of 2017.
Income from operations was $44.6 million in the fourth quarter of 2018 as
compared to $121.0 million in the fourth quarter of 2017, and $330.1 million for the full year of 2018 as
compared to $347.8 million for the full year of 2017. Our income from operations was lower in the fourth
quarter of 2018 compared to the same period in 2017 due to the unfavorable effects of lower average selling
prices, lower sales and production volumes and higher raw materials and other production costs. Our
income from operations was lower in the full year of 2018 compared to the same period in 2017 as the
favorable impact of higher average selling prices was more than offset by the unfavorable impact of lower
sales and production volumes and higher raw materials and other production costs. We reported lower net
income in the fourth quarter of 2018 as compared to the fourth quarter of 2017 primarily due to lower income
from operations. We reported lower net income in the full year of 2018 compared to the full year of 2017
primarily due to the 2017 recognition of an aggregate net income tax benefit of $136.5 million as a result of
the various items described below.
Net sales of $349.4 million in the fourth quarter of 2018 were $103.9 million, or 23%, lower than in the fourth
quarter of 2017. Net sales of $1.7 billion in the full year of 2018 were $67.1 million, or 4%, lower than in
the full year of 2017. Net sales decreased in the fourth quarter of 2018 compared to the same period in
2017 due to the unfavorable effects of lower average TiO2 selling prices and lower sales volumes. Net
sales decreased in the full year of 2018 compared to the full year of 2017 due to the net effect of higher
average selling prices and lower sales volumes. The Companys average TiO2 selling prices were 2%
lower in the fourth quarter of 2018 as compared to the fourth quarter of 2017 and were 13% higher in the
full year of 2018 as compared to 2017. Our average selling prices at the end of the fourth quarter of 2018
were 4% lower than at the end of the third quarter of 2018 and were 3% lower than at the end of 2017.
Lower prices in the European, Latin American and export markets were partially offset by higher prices in
North America at the end of 2018 as compared to the end of 2017. TiO2 sales volumes in the fourth quarter
of 2018 were 22% lower as compared to the record fourth quarter sales volumes of 2017 primarily due to
lower sales in the European and export markets reflecting the effects of reduced shipments as customer
inventory levels continued to return to more normal levels partially offset by higher sales in the North
American market. The sales volumes in the full year of 2018 were 16% lower than the same period in 2017
primarily due to a combination of factors including (i) lower sales in all major markets resulting from a
controlled ramp-up in January 2018 as we brought the second phase of our new global enterprise resource
planning system online; (ii) inventory management to assure adequate supply to our customers during the
spring and summer necessitated by the lower production volumes in the first three months of the year (as
discussed below); (iii) product availability in the second quarter; and (iv) customer inventory level changes
in the second, third and fourth quarters as discussed above. Fluctuations in currency exchange rates
(primarily the euro) decreased net sales by approximately $4 million in the fourth quarter of 2018 and
increased net sales by approximately $49 million in the full year of 2018 as compared to the same periods
in 2017. The table at the end of this press release shows how each of these items impacted the overall
change in net sales.
Page 1 of 6
The Companys TiO2 segment profit (see description of non-GAAP inforff mation below) in the fourth quarter
of 2018 was $48.3 million as compared to $124.3 million in the fourth quarter of 2017. For the full year of
2018, the Companys segment profit was $346.0 million as compared to $362.3 million in 2017. Segment
profit decreased in the fourth quarter of 2018 compared to the 2017 period primarily due to the unfavorable
effects of lower average TiO2 selling prices, lower sales and production volumes and higher raw materials
and other production costs. Segment profit decreased in the full year of 2018 compared to the full year of
2017 primarily due to the net impact of higher average TiO2 selling prices, lower sales and production
volumes and higher raw materials and other production costs. Kronos TiO2 production volumes were 8%
lower in the fourth quarter and 7% lower in the full year of 2018 as compared to the same periods in 2017.
Our production facilities operated at 95% of average practical capacity utilization rates in 2018 (95%, 97%,
92% and 95% in the first, second, third and fourth quarters of 2018, respectively) compared to full practical
capacity utilization rates for the comparable periods in 2017. The decrease in TiO2 production volumes in
the 2018 periods compared to the production volumes in the comparable 2017 periods was primarily due
to increased maintenance activities at certain facilities in 2018, and the implementation of a productivity-
enhancing improvement project at our Belgian facility in the first quarter of 2018. Fluctuations in currency
exchange rates also affected segment profit comparisons, which increased segment profit by approximately
$7 million in the fourth quarter of 2018 and by approximately $33 million in the full year of 2018 as compared
to the same periods in 2017.
income taxes, interest expense and depreciation and amortization
The Companys net income beforef
expense (EBITDA) (see description of non-GAAPAA
information below) in the fourth quarter of 2018 was
$54.9 million compared to EBITDA of $127.6 million in the fourthrr quarter of 2017. For the full year of 2018,
the Companys EBITDA was $363.0 million compared to $373.0 million in the full year of 2017.
In September 2017, we voluntarily prepaid and terminated our term loan indebtedness using a portion of
Inc., our wholly-owned
the proceeds from the September 2017 issuance by Kronos International,
subsidiary, of 400 million principal amount of 3.75% Senior Secured Notes due September 2025. The
Companys results in the full year of 2017 include a pre-tax charge of $7.1 million ($4.6 million, or $.04 per
share, net of income tax benefit) related to such prepayment recognized in the third quarter.
The Companys income tax expense in 2018 includes a fourth quarter current cash income tax expense of
$3.7 million ($.03 per share) related to tax on global intangible low-tax income and an aggregate $2.1 million
($.02 per share) non-cash income tax expense related to an increase in our reserve for uncertain tax
positions, recognized in the first and fourth quarters.
The Companys income tax benefit in 2017 includes (i) a non-cash deferred income tax benefit of $186.7
million ($1.61 per share) as a result of the reversal of our deferred income tax asset valuation allowances
associated with our German and Belgian operations ($16.3 million or $.14 per share in the fourth quarter),
(ii) a fourth quarter non-cash deferred income tax benefit of $18.7 million ($.16 per share) as a result of the
reversal of our deferred income tax asset valuation allowance related to certain U.S. deferred income tax
assets of one of our non-U.S. subsidiaries (which subsidiary is treated as a dual resident for U.S. income
tax purposes), (iii) a fourth quarter provisional current income tax expense of $76.2 million ($.66 per share)
as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017 for the one-time repatriation tax
imposed on the post-1986 undistributed earnings of our non-U.S. subsidiaries, (iv) an aggregate income
tax benefit of $11.8 million ($.10 per share) related to the execution and finalization of an Advance Pricing
Agreement between Canada and Germany, mostly in the third quarter, and (v) a fourth quarter provisional
non-cash deferred income tax expense of $4.5 million ($.04 per share) related to a change in our
conclusions regarding our permanent reinvestment assertion with respect to the post-1986 undistributed
earnings of our European subsidiaries.
The statements in this release relating to matters that are not historical facts are forward-looking statements
that represent management's beliefs and assumptions based on currently available information. Although
the Company believes that the expectations reflected in such forward-looking statements are reasonable,
it cannot give any assurances that these expectations will prove to be correct. Such statements by their
nature involve substantial risks and uncertainties that could significantly impact expected results, and actual
future results could differ materially from those described in such forward-looking statements. While it is
Page 2 of 6
not possible to identify all factors, the Company continues to face many risks and uncertainties. The factors
that could cause actual future results to differ materially include, but are not limited to, the folff
lowing:
Future supply and demand for our products
The extent of the dependence of certain of our businesses on certain market sectors
The cyclicality of our business
(cid:120)
(cid:120)
(cid:120)
(cid:120) Customer and producer inventory levels
(cid:120) Unexpected or earlier-than-expected industry capacity expansion
(cid:120) Changes in raw material and other operating costs (such as energy and ore costs)
(cid:120) Changes in the availability of raw materials (such as ore)
(cid:120) General global economic and political conditions (such as changes in the level of gross domestic
product in various regions of the world and the impact of such changes on demand for TiO2)
(cid:120) Competitive products and substitute products
(cid:120) Customer and competitor strategies
(cid:120)
(cid:120)
(cid:120)
(cid:120) Competitive technology positions
(cid:120)
Potential consolidation of our competitors
Potential consolidation of our customers
The impact of pricing and production decisions
(cid:120)
(cid:120)
(cid:120)
Potential difficulties in upgrading or implementing new accounting and manufacturing software
systems (such as our new enterprise resource planning system)
The introduction of trade barriers
Possible disruption of our business, or increases in our cost of doing business, resulting from
terrorist activities or global conflicts
Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S.
dollar and each of the euro, the Norwegian krone and the Canadian dollar), or possible disruptions
to our business resulting from potential instability resulting from uncertainties associated with the
euro or other currencies
(cid:120) Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires,
explosions, unscheduled or unplanned downtime, transportation interruptions and cyber attacks)
(cid:120) Our ability to renew or refinance credit facilities
(cid:120) Our ability to maintain sufficient liquidity
(cid:120)
The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including
future tax reform
(cid:120) Our ability to utilize income tax attributes, the benefits of which may or may not have been
(cid:120)
recognized under the more-likely-than-not recognition criteria
Environmental matters (such as those requiring compliance with emission and discharge standards
for existing and new facilities)
(cid:120) Government laws and regulations and possible changes therein including new environmental
health and safety regulations
The ultimate resolution of pending litigation
Possible future litigation.
(cid:120)
(cid:120)
Should one or more of these risks materialize (or the consequences of such a development worsen), or
should the underlying assumptions prove incorrect, actual results could differ materially from those
forecasted or expected. The Company disclaims any intention or obligation to update or revise any forward-
looking statement whether as a result of changes in information, future events or otherwi
rr se.
In an effort to provide investors with additional information regarding the Company's results of operations
as determined by accounting principles generally accepted in the United States of America (GAAP), the
Company has disclosed certain non-GAAPAA
information, which the Company believes provides useful
informff
ation to investors:
(cid:120)
The Company discloses segment profit, which is used by the Companys management to assess
the performance of the Companys TiO2 operations. The Company believes disclosure of segment
profit provides useful
n to investors because it allows investors to analyze the
performance of the Companys TiO2 operations in the same way that the Companys management
informatio
ff
Page 3 of 6
(cid:120)
income taxes,
assesses performance. The Company defines segment profit as income beforeff
interest expense and certain general corporate items. Corporate items excluded from the
determination of segment profit include corporate expense and interest income not attributable to
the Companys TiO2 operations; and
The Company discloses EBITDA, which is also used by the Companys management to assess
the performance of the Companys TiO2 operations. The Company believes disclosure of EBITDA
provides useful information to investors because it allows investors to analyze the perfor
r mance of
the Companys TiO2 operations in the same way that the Companys management assesses
performance. The Company defines EBITDA as net income before income taxes, interest expense
and depreciation and amortization expense.
Kronos Worldwide, Inc. is a major international producer of titanium dioxide products.
Page 4 of 6
KRONOS WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share and metric ton data)
Net sales
Cost of sales
Gross margin
Selling, general and administrative expense
Other operating income (expense):
Currency transactions, net
Other income, net
Corporate expense
Three months ended
December 31,
2017
2018
(Unaudited)
Year ended
December 31,
2017
2018
$
453.3
277.0
$
349.4
252.9
$ 1,729.0
1,159.3
$ 1,661.9
1,099.7
176.3
53.0
.5
.2
((3.0))
96.5
54.6
5.9
.2
((3.4))
569.7
562.2
200.6
228.3
(7.5))
.1
((13.9))
10.1
.6
((14.5)
Income from operations
121.0
44.6
347.8
330.1
Other income (expense):
Trade interest income
Other interest and dividend income
Marketable equity securities
Other components of net periodic pension
and OPEB cost
Loss on prepayment of debt, net
Interest expense
Income before income taxes
Income tax expense ((benefit))
Net income
Net income per basic and diluted share
Weighted-average shares used in the
calculation of net income per share
TiO2 data - metric tons in thousands:
Sales volumes
Production volumes
.3
.4
-
(4.6)
-
((4.5))
112.6
65.2
47.4
.41
$
$
$
$
.3
1.5
(.6)
(3.7)
-
((4.8))
37.3
13.3
24.0
.21
.6
.8
-
(17.4)
(7.1)
((19.0))
1.4
4.1
(7.3)
(15.0)
-
((19.5)
305.7
293.8
((48.8))
88.8
$
$
354.5
3.06
$
$
205.0
1.77
115.9
115.9
115.9
115.9
136
149
106
136
586
576
491
536
Page 5 of 6
KRONOS WORLDWIDE, INC.
RECONCILIATION OF INCOME FROM
OPERATIONS TO SEGMENT PROFIT
(In millions)
(Unaudited)
Three months ended
December 31,
2017
2018
Year ended
December 31,
2017
2018
Income from operations
$
121.0
$
44.6
$
347.8
$
330.1
AAdjustments:
Trade interest income
Corporate expense
.3
3.0
.3
3.4
.6
13.9
1.4
14.5
Seggment profit
$
124.3
$
48.3
$
362.3
$
346.0
RECONCILIATION OF NET INCOME TO EBITDA
(In millions)
(Unaudited)
Three months ended
December 31,
2017
2018
Year ended
December 31,
2017
2018
$
47.4
$
24.0
$
354.5
$
205.0
Net income
AAdjustments:
Depreciation and amortization expense
Interest expense (includes loss on
prepayment of debt)
Income tax expense ((b
enefit)
)
10.5
4.5
65.2
12.8
4.8
13.3
41.2
26.1
((48.8))
49.7
19.5
88.8
EBITDA
$
127.6
$
54.9
$
373.0
$
363.0
IMPACT OF PERCENTAGE CHANGE IN NET SALES
(Unaudited)
Percentage change in net sales:
TiO2 product pricing
TiO2 sales volumes
TiO2 product mix/other
Changges in currencyy excha gnge rates
Total
Three months ended
December 31,
2018 vs. 2017
Year ended
December 31,
2018 vs. 2017
(2) %
(22)
2
((1))
((23)) %
13 %
(16)
(4))
3
((4)) %
Page 6 of 6
Kronos Worldwide, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, TX 75240-2697
(972) 233-1700