Kronos(KRO) - 2019 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Condensed Consolidated Balance Sheets Total assets and stockholders' equity slightly increased, while liabilities also rose, driven by higher receivables and new lease accounting standards | Metric | Dec 31, 2018 (Millions) | Jun 30, 2019 (Unaudited, Millions) | Change (Millions) | % Change | | :-------------------------- | :---------------------- | :--------------------------------- | :---------------- | :------- | | Total Assets | $1,898.1 | $1,958.6 | $60.5 | 3.19% | | Total Liabilities | $1,058.3 | $1,090.6 | $32.3 | 3.05% | | Total Stockholders' Equity | $839.8 | $868.0 | $28.2 | 3.36% | | Cash and cash equivalents | $373.3 | $328.6 | $(44.7) | -11.97% | | Accounts and other receivables | $312.5 | $400.6 | $88.1 | 28.19% | | Inventories, net | $497.9 | $488.6 | $(9.3) | -1.87% | | Operating lease right-of-use assets | $- | $32.0 | $32.0 | N/A | | Total current liabilities | $233.4 | $249.1 | $15.7 | 6.73% | | Long-term debt | $455.1 | $452.2 | $(2.9) | -0.64% | | Operating lease liabilities | $- | $24.6 | $24.6 | N/A | - The adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019, led to the recognition of operating lease right-of-use assets of $32.0 million and corresponding operating lease liabilities of $24.6 million (noncurrent) and $6.7 million (current) on the balance sheet[8][10][35] Condensed Consolidated Statements of Income Net income and income from operations significantly declined due to lower gross margins from decreased selling prices and higher raw material costs Three Months Ended June 30 (Unaudited) | Metric (Millions) | 2018 | 2019 | Change | % Change | | :---------------- | :------ | :------ | :------ | :------- | | Net sales | $471.8 | $484.5 | $12.7 | 2.69% | | Cost of sales | $300.0 | $375.0 | $75.0 | 25.00% | | Gross margin | $171.8 | $109.5 | $(62.3) | -36.26% | | Income from operations | $119.9 | $46.5 | $(73.4) | -61.22% | | Net income | $77.7 | $29.5 | $(48.2) | -62.03% | | Net income per basic and diluted share | $0.67 | $0.25 | $(0.42) | -62.69% | Six Months Ended June 30 (Unaudited) | Metric (Millions) | 2018 | 2019 | Change | % Change | | :---------------- | :------ | :------ | :------- | :------- | | Net sales | $902.2 | $921.0 | $18.8 | 2.08% | | Cost of sales | $555.6 | $702.2 | $146.6 | 26.39% | | Gross margin | $346.6 | $218.8 | $(127.8)| -36.88% | | Income from operations | $227.4 | $95.5 | $(131.9)| -58.00% | | Net income | $148.4 | $59.8 | $(88.6) | -59.70% | | Net income per basic and diluted share | $1.28 | $0.52 | $(0.76) | -59.38% | Condensed Consolidated Statements of Comprehensive Income Comprehensive income decreased due to lower net income, despite a positive shift in other comprehensive income from currency translation gains Comprehensive Income (Millions) | Metric | Three months ended June 30, 2018 | Three months ended June 30, 2019 | Six months ended June 30, 2018 | Six months ended June 30, 2019 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $77.7 | $29.5 | $148.4 | $59.8 | | Other comprehensive income (loss), net of tax | $(22.8) | $9.3 | $(9.8) | $11.4 | | Comprehensive income | $54.9 | $38.8 | $138.6 | $71.2 | - Currency translation shifted from a loss of $(25.2) million in Q2 2018 to a gain of $7.1 million in Q2 2019, and from a loss of $(14.5) million in H1 2018 to a gain of $7.0 million in H1 2019, positively impacting other comprehensive income[16] Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased due to net income and other comprehensive income, partially offset by dividends and treasury stock acquisitions Stockholders' Equity (Millions) | Metric | Dec 31, 2018 | Jun 30, 2019 | | :-------------------------- | :----------- | :----------- | | Total Stockholders' Equity | $839.8 | $868.0 | | Retained deficit | $(136.2) | $(118.1) | | Accumulated other comprehensive loss | $(424.3) | $(412.9) | | Treasury stock | $- | $(1.4) | - The company paid quarterly dividends of $0.18 per share in the first six months of 2019, totaling $41.7 million, compared to $0.17 per share ($39.4 million) in the same period of 2018[19][119] - During the second quarter of 2019, the company acquired 110,303 shares of its common stock for $1.4 million under its repurchase program[19][64][142] Condensed Consolidated Statements of Cash Flows Operating cash flow significantly decreased due to lower net income and working capital changes, while investing and financing cash outflows rose Cash Flows (Millions) | Metric | Six months ended June 30, 2018 | Six months ended June 30, 2019 | Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | | Net cash provided by operating activities | $169.7 | $26.0 | $(143.7) | | Net cash used in investing activities | $(11.2) | $(27.2) | $(16.0) | | Net cash used in financing activities | $(39.7) | $(43.4) | $(3.7) | | Balance at end of period (Cash, cash equivalents and restricted cash) | $433.2 | $329.5 | $(103.7) | - The $143.7 million decrease in cash from operating activities was primarily due to $131.9 million lower income from operations, $4.4 million contributions to (vs. $4.8 million distributions from) the TiO2 manufacturing joint venture, and $18.0 million higher cash paid for taxes[116] - Investing activities included capital expenditures of $25.5 million in H1 2019 (vs. $24.8 million in H1 2018) and net loans to Valhi of $1.7 million in H1 2019 (vs. net collections of $13.6 million in H1 2018)[21][118] Notes to Condensed Consolidated Financial Statements Notes detail organization, accounting policies, ownership, lease standard adoption, marketable securities, debt, revenue, and income tax reconciliation - Valhi, Inc. held approximately 50% of Kronos Worldwide's outstanding common stock at June 30, 2019, indicating significant control by related parties[25] - Effective January 1, 2019, the company adopted ASU 2016-02, Leases (Topic 842), recognizing right-of-use assets and lease liabilities for operating leases on the balance sheet. This resulted in the recognition of $35.1 million in right-of-use assets and $34.5 million in lease liabilities at adoption[35][70] Net Sales by Point of Origin and Destination (Millions) | Category | Three months ended June 30, 2019 | Six months ended June 30, 2019 | | :-------------------- | :------------------------------- | :----------------------------- | | Point of Origin: | | | | Germany | $248.5 | $467.7 | | United States | $289.3 | $534.6 | | Canada | $95.9 | $174.4 | | Belgium | $77.7 | $147.4 | | Norway | $47.7 | $99.2 | | Eliminations | $(274.6) | $(502.3) | | Total Net Sales | $484.5 | $921.0 | | Point of Destination: | | | | Europe | $229.4 | $444.6 | | North America | $161.5 | $308.3 | | Other | $93.6 | $168.1 | | Total Net Sales | $484.5 | $921.0 | Note 1 - Organization and basis of presentation Details the company's ownership structure and the basis for preparing the unaudited financial statements - At June 30, 2019, Valhi, Inc. held approximately 50% of Kronos Worldwide's outstanding common stock, and a wholly-owned subsidiary of NL Industries, Inc. held approximately 30%. This indicates a complex ownership structure with ultimate control by the Family Trust of Lisa K. Simmons and Serena Simmons Connelly[25][26] - The unaudited Condensed Consolidated Financial Statements are prepared on the same basis as the audited 2018 Annual Report on Form 10-K, with only normal recurring adjustments and certain information/footnote disclosures omitted[27] Note 2 - Accounts and other receivables Provides a breakdown of accounts and other receivables, highlighting changes in trade receivables Accounts and Other Receivables (Millions) | Category | Dec 31, 2018 | Jun 30, 2019 | | :-------------------------- | :----------- | :----------- | | Trade receivables | $273.3 | $372.5 | | Recoverable VAT and other receivables | $23.8 | $15.7 | | Receivables from affiliates | $13.0 | $12.2 | | Refundable income taxes | $3.6 | $2.2 | | Allowance for doubtful accounts | $(1.2) | $(2.0) | | Total | $312.5 | $400.6 | - Trade receivables increased significantly by $99.2 million from December 31, 2018, to June 30, 2019, reflecting higher sales volumes[29][94] Note 3 - Inventories, net Details the composition of inventories, showing changes in raw materials and finished products Inventories, Net (Millions) | Category | Dec 31, 2018 | Jun 30, 2019 | | :---------------- | :----------- | :----------- | | Raw materials | $93.1 | $137.0 | | Work in process | $23.5 | $27.3 | | Finished products | $316.8 | $256.6 | | Supplies | $64.5 | $67.7 | | Total | $497.9 | $488.6 | - Raw materials inventory increased by $43.9 million, while finished products inventory decreased by $60.2 million, contributing to a slight overall decrease in net inventories[30] Note 4 - Marketable securities Describes marketable securities, primarily related party investments, and their fair value changes - Marketable securities consist of investments in publicly-traded shares of related parties (Valhi, NL, and CompX International Inc.), accounted for as available-for-sale securities at fair value[31] Marketable Securities Fair Value (Millions) | Marketable security | Dec 31, 2018 (Fair Value) | Jun 30, 2019 (Fair Value) | Unrealized Gain (Jun 30, 2019) | | :------------------ | :------------------------ | :------------------------ | :----------------------------- | | Valhi common stock | $3.3 | $5.1 | $1.9 | | NL and CompX common stocks | $0.1 | $0.1 | $- | | Total | $3.4 | $5.2 | $1.9 | - The fair value of Valhi common stock increased from $3.3 million to $5.1 million, resulting in an unrealized gain of $1.9 million at June 30, 2019[32] Note 5 - Leases Explains the adoption of new lease accounting standards, lease terms, and maturity of lease liabilities - The company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, classifying all leases as operating leases under the new standard. This led to the recognition of right-of-use assets and lease liabilities on the balance sheet[35] - At June 30, 2019, the weighted average remaining lease term for operating leases was approximately 13 years, with a weighted average discount rate of approximately 4.5%[41] Maturities of Operating Lease Liabilities at June 30, 2019 (Millions) | Years ending December 31, | Amount | | :------------------------ | :----- | | 2019 (remainder of year) | $3.9 | | 2020 | $6.9 | | 2021 | $6.1 | | 2022 | $3.5 | | 2023 | $2.3 | | 2024 and thereafter | $21.5 | | Total remaining lease payments | $44.2 | | Less imputed interest | $12.9 | | Total lease obligations | $31.3 | | Less current obligations | $6.7 | | Long term lease obligations | $24.6 | Note 6 - Other noncurrent assets Presents a breakdown of other noncurrent assets, including pension assets and deferred financing costs Other Noncurrent Assets (Millions) | Category | Dec 31, 2018 | Jun 30, 2019 | | :-------------------------- | :----------- | :----------- | | Pension asset | $0.8 | $1.3 | | Deferred financing costs, net | $0.9 | $0.8 | | Other | $1.9 | $1.5 | | Total | $3.6 | $3.6 | Note 7 - Long-term debt Details the company's long-term debt obligations and compliance with debt covenants Long-Term Debt (Millions) | Category | Dec 31, 2018 | Jun 30, 2019 | | :---------------------------------- | :----------- | :----------- | | Kronos International, Inc. 3.75% Senior Secured Notes | $452.4 | $449.7 | | Other | $4.2 | $4.0 | | Total debt | $456.6 | $453.7 | | Less current maturities | $1.5 | $1.5 | | Total long-term debt | $455.1 | $452.2 | - The company had no borrowings or repayments under its North American and European revolving credit facilities during the first six months of 2019, with approximately $122.3 million and €90.0 million ($102.5 million) available for borrowing, respectively, at June 30, 2019[48] - The company was in compliance with all debt covenants at June 30, 2019[49] Note 8 - Accounts payable and accrued liabilities Provides a breakdown of current liabilities, including accounts payable and new lease liabilities Accounts Payable and Accrued Liabilities (Millions) | Category | Dec 31, 2018 | Jun 30, 2019 | | :-------------------------- | :----------- | :----------- | | Accounts payable | $103.2 | $139.4 | | Employee benefits | $27.9 | $21.1 | | Accrued sales discounts and rebates | $29.7 | $19.1 | | Operating lease liabilities | $- | $6.7 | | Payables to affiliates | $62.1 | $60.0 | | Total | $222.9 | $247.3 | - Accounts payable increased by $36.2 million, and operating lease liabilities of $6.7 million were recognized due to the adoption of ASU 2016-02[50] Note 9 - Other noncurrent liabilities Details the composition of other noncurrent liabilities, including postretirement and employee benefits Other Noncurrent Liabilities (Millions) | Category | Dec 31, 2018 | Jun 30, 2019 | | :-------------------------- | :----------- | :----------- | | Accrued postretirement benefits | $7.4 | $7.7 | | Employee benefits | $7.3 | $6.9 | | Other | $14.1 | $11.2 | | Total | $28.8 | $25.8 | Note 10 - Revenue recognition Disaggregates net sales by point of origin and destination for the reporting periods Net Sales by Point of Origin and Destination (Millions) | Category | Three months ended June 30, 2019 | Six months ended June 30, 2019 | | :-------------------- | :------------------------------- | :----------------------------- | | Point of Origin: | | | | Germany | $248.5 | $467.7 | | United States | $289.3 | $534.6 | | Canada | $95.9 | $174.4 | | Belgium | $77.7 | $147.4 | | Norway | $47.7 | $99.2 | | Eliminations | $(274.6) | $(502.3) | | Total Net Sales | $484.5 | $921.0 | | Point of Destination: | | | | Europe | $229.4 | $444.6 | | North America | $161.5 | $308.3 | | Other | $93.6 | $168.1 | | Total Net Sales | $484.5 | $921.0 | - For the six months ended June 30, 2019, the United States was the largest point of origin for net sales ($534.6 million), while Europe remained the largest point of destination ($444.6 million)[53] Note 11 - Employee benefit plans Details net periodic defined benefit pension costs and expected contributions for employee benefit plans Net Periodic Defined Benefit Pension Cost (Millions) | Component | Three months ended June 30, 2018 | Three months ended June 30, 2019 | Six months ended June 30, 2018 | Six months ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Service cost | $2.9 | $2.8 | $5.9 | $5.6 | | Interest cost | $3.6 | $3.5 | $7.2 | $7.0 | | Expected return on plan assets | $(3.2) | $(3.0) | $(6.6) | $(6.2) | | Recognized actuarial losses | $3.5 | $3.3 | $7.0 | $6.7 | | Total | $6.8 | $6.6 | $13.6 | $13.2 | - The company expects 2019 contributions for its pension plans to be approximately $17 million[55] Note 12 - Income taxes Presents income tax expense, effective tax rates, and the impact of non-U.S. operations and GILTI Income Tax Expense (Millions) | Metric | Three months ended June 30, 2018 | Three months ended June 30, 2019 | Six months ended June 30, 2018 | Six months ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense | $32.4 | $11.4 | $61.4 | $24.2 | | Expected tax expense (21% U.S. federal statutory rate) | $23.2 | $8.5 | $44.1 | $17.6 | | Non-U.S. tax rates | $7.9 | $2.3 | $15.0 | $4.7 | | Global intangible low-tax income, net | $- | $0.7 | $- | $1.5 | - The decrease in income tax expense for both periods is primarily due to lower earnings in 2019. The overall effective tax rate is generally higher than the U.S. federal statutory rate of 21% due to sizeable non-U.S. operations[56][91][101] - The company records global intangible low-tax income (GILTI) tax as a current-period expense and does not expect unrecognized tax benefits to materially change in the next twelve months[57][60] Note 13 – Stockholders' equity Details changes in stockholders' equity, including accumulated other comprehensive loss and stock repurchases Accumulated Other Comprehensive Loss, Net of Tax (Millions) | Category | Dec 31, 2018 | Jun 30, 2019 | | :-------------------------- | :----------- | :----------- | | Currency translation | $(245.1) | $(238.0) | | Defined benefit pension plans | $(177.7) | $(175.5) | | OPEB plans | $0.6 | $0.6 | | Marketable securities | $- | $- | | Total accumulated other comprehensive loss | $(424.3) | $(412.9) | - The company has an authorized stock repurchase program for up to 2.0 million shares. As of June 30, 2019, 1,840,697 shares remained available for repurchase, after acquiring 110,303 shares for $1.4 million in Q2 2019[63][64][142] Note 14 - Commitments and contingencies Outlines various environmental, legal, and contractual commitments and contingencies - The company is involved in various environmental, contractual, product liability, patent, employment, and other claims and disputes incidental to its business. No amounts have been accrued for litigation matters as it is not reasonably possible that a material loss has been incurred[65] Note 15 - Financial instruments Details fair value measurements of financial instruments and the use of derivatives for risk management Fair Value Measurements of Financial Instruments (Millions) | Asset | Dec 31, 2018 (Total Fair Value) | Jun 30, 2019 (Total Fair Value) | | :-------------------------- | :------------------------------ | :------------------------------ | | Noncurrent marketable securities | $3.4 | $5.2 | Financial Instruments Not Carried at Fair Value (Millions) | Instrument | Dec 31, 2018 (Carrying Amount) | Dec 31, 2018 (Fair Value) | Jun 30, 2019 (Carrying Amount) | Jun 30, 2019 (Fair Value) | | :---------------------------------- | :----------------------------- | :------------------------ | :----------------------------- | :------------------------ | | Cash, cash equivalents and restricted cash | $374.7 | $374.7 | $329.5 | $329.5 | | Long-term debt - Fixed rate Senior Secured Notes | $452.4 | $412.9 | $449.7 | $454.6 | | Common stockholders' equity | $839.8 | $1,335.3 | $868.0 | $1,774.2 | - The company uses derivative financial instruments, primarily currency forward contracts and interest rate swaps, to manage exposure to currency exchange rates and interest rates, not for trading or speculative purposes[67] Note 16 - Recent accounting pronouncement Discusses the adoption of ASU 2016-02, Leases, and its impact on the financial statements - On January 1, 2019, the company adopted ASU 2016-02, Leases (Topic 842), prospectively without restatement of prior periods. This resulted in the recognition of $35.1 million in right-of-use operating lease assets and $34.5 million in corresponding operating lease liabilities[70] - The company elected practical expedients upon adoption, including those related to lease classification, nonlease components, and short-term leases[70] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of the company's financial performance, liquidity, and capital resources Business overview Kronos Worldwide is a leading global TiO2 producer, with demand linked to GDP, and performance driven by selling prices, volumes, and raw material costs - Kronos Worldwide is a leading global producer and marketer of value-added titanium dioxide (TiO2) pigments, with production facilities in Europe and North America[72] - Approximately half of the company's sales volumes for the first six months of 2019 were in European markets[72] - Key performance indicators are TiO2 average selling prices, sales and production volumes, and the cost of third-party feedstock ore[74] Executive summary Net income significantly declined in Q2 and H1 2019 due to lower income from operations, driven by decreased selling prices and higher raw material costs Net Income Summary (Millions, except per share) | Period | Net Income (2018) | Net Income (2019) | Change | EPS (2018) | EPS (2019) | Change | | :-------------------- | :---------------- | :---------------- | :----- | :--------- | :--------- | :----- | | Second Quarter | $77.7 | $29.5 | $(48.2) | $0.67 | $0.25 | $(0.42) | | First Six Months | $148.4 | $59.8 | $(88.6) | $1.28 | $0.52 | $(0.76) | - The lower net income in 2019 periods was primarily due to lower income from operations, driven by lower average selling prices and higher raw materials and other production costs, partially offset by higher sales volumes[75] Forward-looking information Forward-looking statements involve substantial risks and uncertainties, with actual results potentially differing due to market, cost, economic, and competitive factors - Forward-looking statements are subject to substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from predictions[77] - Key factors that could cause actual results to differ include future supply and demand for products, cyclicality of the business, changes in raw material and operating costs, global economic and political conditions, competitive pressures, currency exchange rate fluctuations, and operating interruptions[78] Results of operations Operating results show significant declines in gross margin and income from operations, driven by lower TiO2 selling prices and higher raw material costs Current industry conditions Analyzes current TiO2 industry conditions, including selling price trends, sales volumes, and production capacity utilization - Average TiO2 selling prices declined in late 2018 and Q1 2019, but began to rise in Q2 2019, with prices 2% higher than Q1 2019, but still 2% lower than at the end of 2018[80] - Sales volumes increased in all major markets in the first six months of 2019 compared to the same period in 2018[80] Production Capacity Utilization Rates | Quarter | 2018 | 2019 | | :------------ | :--- | :--- | | First quarter | 95% | 97% | | Second quarter| 97% | 97% | - Cost of sales per metric ton of TiO2 sold in the first six months of 2019 was higher than in 2018, primarily due to a rise in the cost of third-party feedstock ore[83] Quarter ended June 30, 2019 compared to the quarter ended June 30, 2018 Compares financial performance for Q2 2019 versus Q2 2018, detailing changes in net sales, costs, and income Q2 2019 vs Q2 2018 Financial Highlights (Millions, except percentages) | Metric | 2018 | 2019 | % Change | | :-------------------------- | :------ | :------ | :------- | | Net sales | $471.8 | $484.5 | 3% | | Cost of sales | $300.0 | $375.0 | 25% | | Gross margin | $171.8 | $109.5 | -36% | | Income from operations | $119.9 | $46.5 | -61% | | Net sales change breakdown: | | | | | TiO2 product pricing | | | (8)% | | TiO2 sales volumes | | | 15% | | Changes in currency exchange rates | | | (4)% | - Net sales increased by $12.7 million (3%) due to a 15% increase in sales volumes (+$71 million), largely offset by an 8% decrease in average TiO2 selling prices (-$38 million) and negative currency exchange rate impacts (-$17 million)[84][85][86] - Cost of sales increased by $75.0 million (25%) due to higher sales volumes and approximately $31 million in higher raw materials and other production costs (primarily feedstock ore costs). Gross margin as a percentage of net sales decreased from 36% to 23%[87][88] - Income from operations decreased by $73.4 million (61%), primarily due to the lower gross margin. Currency exchange rate changes decreased income from operations by approximately $9 million[89] Six months ended June 30, 2019 compared to the six months ended June 30, 2018 Compares financial performance for H1 2019 versus H1 2018, detailing changes in net sales, costs, and income H1 2019 vs H1 2018 Financial Highlights (Millions, except percentages) | Metric | 2018 | 2019 | % Change | | :-------------------------- | :------ | :------ | :------- | | Net sales | $902.2 | $921.0 | 2% | | Cost of sales | $555.6 | $702.2 | 26% | | Gross margin | $346.6 | $218.8 | -37% | | Income from operations | $227.4 | $95.5 | -58% | | Net sales change breakdown: | | | | | TiO2 product pricing | | | (8)% | | TiO2 sales volumes | | | 15% | | Changes in currency exchange rates | | | (4)% | - Net sales increased by $18.8 million (2%) due to a 15% increase in sales volumes (+$135 million), largely offset by an 8% decrease in average TiO2 selling prices (-$72 million) and negative currency exchange rate impacts (-$32 million)[94][95] - Cost of sales increased by $146.6 million (26%) due to higher sales volumes and approximately $77 million in higher raw materials and other production costs (primarily feedstock ore costs). Gross margin as a percentage of net sales decreased from 38% to 24%[96][97] - Income from operations decreased by $131.9 million (58%), primarily due to the lower gross margin. Currency exchange rate changes decreased income from operations by approximately $1 million[99] Effects of Currency Exchange Rates Currency fluctuations, especially a stronger U.S. dollar, negatively impacted net sales and income from operations in Q2 and H1 2019 Impact of Currency Exchange Rates (Millions) | Impact on | Q2 2019 vs Q2 2018 | H1 2019 vs H1 2018 | | :-------------------- | :----------------- | :----------------- | | Net sales | $(17) | $(32) | | Income from operations | $(9) | $(1) | - The $17 million decrease in Q2 net sales and $32 million decrease in H1 net sales were primarily due to the strengthening of the U.S. dollar relative to the euro, translating euro-denominated sales into fewer U.S. dollars[104][106] - The $9 million decrease in Q2 income from operations was due to $11 million in net currency transaction losses, partially offset by $2 million in net currency translation gains. The $1 million decrease in H1 income from operations was due to $5 million in net currency transaction losses, partially offset by $4 million in net currency translation gains[109][110] Outlook Higher production and sales volumes are expected in 2019, but lower income from operations is projected due to reduced selling prices and increased raw material costs - The company expects 2019 production and sales volumes to be slightly higher than 2018, assuming stable global economic conditions[107] - Cost of sales per metric ton of TiO2 sold in 2019 is expected to be higher than in 2018, primarily due to increased feedstock ore costs[108] - Despite average selling prices being lower at the start of 2019, they began to rise in Q2 2019, and the company expects the market to support additional selling price increases for the remainder of 2019 due to rising raw material costs and global demand[109][111] - Overall, 2019 sales are expected to be higher than 2018, but income from operations is expected to be lower, as higher sales volumes will be more than offset by lower average selling prices and higher raw material costs[112] LIQUIDITY AND CAPITAL RESOURCES Liquidity, primarily from operating cash flows, decreased in H1 2019, but the company maintains sufficient resources and credit facilities for obligations Consolidated cash flows Analyzes changes in cash flows from operating, investing, and financing activities for the period - Cash provided by operating activities decreased significantly to $26.0 million in H1 2019 from $169.7 million in H1 2018, primarily due to lower income from operations and higher cash paid for taxes[116] - Working capital changes were influenced by a decrease in average days sales outstanding (DSO) from 76 days (Dec 31, 2018) to 72 days (Jun 30, 2019) and a decrease in average days sales in inventory (DSI) from 113 days to 62 days over the same period[117] Investing activities Details cash flows related to capital expenditures and loans to affiliates - Capital expenditures were $25.5 million in H1 2019, slightly up from $24.8 million in H1 2018, primarily for maintaining and improving manufacturing facilities[118] - The company loaned $7.1 million to Valhi and collected $5.4 million under a promissory note in H1 2019[118] Financing activities Outlines cash flows from dividend payments and treasury stock acquisitions - Dividends paid increased to $41.7 million ($.18 per share) in H1 2019 from $39.4 million ($.17 per share) in H1 2018[119] - Treasury stock acquisitions amounted to $1.4 million in H1 2019[21][119] Outstanding debt obligations Describes the company's long-term debt structure and compliance with covenants - At June 30, 2019, consolidated debt included €400 million (carrying amount $449.7 million) of KII 3.75% Senior Secured Notes due September 2025, and approximately $4.0 million of other indebtedness[120] - The company was in compliance with all debt covenants at June 30, 2019, and expects to continue to comply through maturity[120] Future cash requirements (Liquidity) Assesses future liquidity needs, sources of cash, and ability to meet short-term and long-term obligations - Primary liquidity source is cash flows from operating activities, used for capital expenditures, debt repayment, and dividends[122] - At June 30, 2019, the company had $329.5 million in cash, cash equivalents, and restricted cash, with $135.4 million held by non-U.S. subsidiaries, which can be repatriated without material income tax liability[125] - Available borrowing capacity included $122.3 million under the North American revolving credit facility and €90.0 million ($102.5 million) under the European revolving credit facility[125] - The company expects to have sufficient liquidity to meet short-term (through June 30, 2020) and long-term (through June 30, 2024) obligations[125] Capital expenditures Provides estimated capital expenditures for 2019 and details on spending priorities - Estimated capital expenditures for 2019 are approximately $78 million, with $25.5 million already spent through June 30, 2019, primarily for facility maintenance and improvements[126] Stock repurchase program Details the remaining shares available under the board-authorized stock repurchase program - At June 30, 2019, 1,840,697 shares were available for repurchase under the board-authorized stock repurchase program[127] Off-balance sheet financing Confirms the absence of off-balance sheet financing arrangements following new lease accounting adoption - Following the January 1, 2019 adoption of ASU 2016-02, Leases (Topic 842), the company no longer has any off-balance sheet financing arrangements[128] Commitments and contingencies Refers to notes for details on income tax contingencies and legal proceedings - Refer to Notes 12 and 14 of the Condensed Consolidated Financial Statements for details on income tax contingencies and legal proceedings[129] Recent accounting pronouncements Refers to notes for details on the adoption of ASU 2016-02, Leases - Refer to Note 16 of the Condensed Consolidated Financial Statements for details on recent accounting pronouncements, specifically the adoption of ASU 2016-02[130] Critical accounting policies States that there have been no changes in critical accounting policies during the period - There have been no changes in critical accounting policies during the first six months of 2019[131] Item 3. Quantitative and Qualitative Disclosure About Market Risk The company faces market risks from currency, interest rates, equity, and raw material prices, with no material changes since the 2018 Annual Report - The company is exposed to market risks related to currency exchange rates, interest rates, equity security, and raw material prices[132] - No material changes in these market risks have occurred since the filing of the 2018 Annual Report[132] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - The company's disclosure controls and procedures were evaluated by management and concluded to be effective as of June 30, 2019[133] - There has been no material change to internal control over financial reporting during the quarter ended June 30, 2019[136] Part II. OTHER INFORMATION Contains additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings Refers to Note 14 and the 2018 Annual Report for legal proceedings, with no new material information in this report - Information regarding legal proceedings is referenced to Note 14 of the Condensed Consolidated Financial Statements and the 2018 Annual Report[139] Item 1A. Risk Factors No material changes to risk factors discussed in the 2018 Annual Report for the six months ended June 30, 2019 - No material changes to the risk factors discussed in Part I, Item 1A of the 2018 Annual Report have occurred during the six months ended June 30, 2019[140] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 110,303 common shares for $1.4 million in Q2 2019 under its authorized program Common Stock Purchases (Q2 2019) | Period | Total number of shares purchased | Average price paid per share | Maximum number of shares that may yet be purchased | | :-------- | :------------------------------- | :--------------------------- | :----------------------------------------------- | | May 2019 | 106,137 | $12.83 | 1,844,863 | | June 2019 | 4,166 | $12.71 | 1,840,697 | - All purchases were made under the stock repurchase program authorized by the board of directors in December 2010 for up to 2.0 million shares[142] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including certifications and XBRL taxonomy documents - Exhibits include Certification documents (31.1, 31.2, 32.1) and various XBRL Taxonomy Extension documents (Instance, Schema, Calculation, Definition, Label, Presentation)[143] SIGNATURES The report was signed by the Senior Vice President and Chief Financial Officer and Senior Vice President and Controller on August 7, 2019 - The report was signed by James W. Brown, Senior Vice President and Chief Financial Officer, and Tim C. Hafer, Senior Vice President and Controller, on August 7, 2019[146]