Kronos Worldwide, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited; amounts are in millions of dollars except per-share data and where noted.
Business context
Kronos is a global producer and marketer of titanium dioxide (TiO₂) pigments, used in products including paints, plastics and paper. Results are sensitive to TiO₂ prices and volumes, production costs—particularly feedstock ore—foreign exchange rates, and cyclical industry conditions. About half of nine-month sales volumes were in Europe.
Financial performance
| Metric | Three months ended Sept. 30, 2014 | Three months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2015 |
|---|---|---|---|---|
| Net sales | $414.8 | $336.5 | $1,278.4 | $1,061.8 |
| Gross margin | $95.7 (23%) | $43.2 (13%) | $270.0 (21%) | $167.1 (16%) |
| Operating income (loss) | $47.9 | $(3.2) | $118.2 | $18.6 |
| Net income (loss) | $31.9 | $(11.8) | $79.3 | $(153.2) |
| Net income (loss) per share | $0.28 | $(0.10) | $0.68 | $(1.32) |
- Q3 sales declined 19% year over year. A 15% drop in average TiO₂ selling prices and adverse currency translation more than offset an 8% increase in sales volumes. The nine-month comparison showed sales down 17%, with average prices down 13% and volumes up 7%.
- Q3 cost of sales fell 8% to $293.3, but rose to 87% of sales from 77%; nine-month cost of sales fell 11% to $894.7 but rose to 84% of sales from 79%. Lower raw-material and other production costs partly offset lower selling prices.
- Q3 operating results swung to a loss, while nine-month operating income fell 84%. Currency movements reduced sales by an estimated $36 in Q3 and $113 for the nine months, but increased operating income by an estimated $5 and $30, respectively.
- Nine-month results include a $152.6 non-cash tax valuation allowance, a $21.5 workforce-reduction charge, and a $12.0 pre-tax impairment of Valhi shares. The company reported a $7.8 after-tax securities loss for the impairment.
Cash flow, balance sheet and liquidity
- Operating cash flow was $50.1 for the first nine months, versus $26.5 in 2014. Investing activities used $31.0, including $31.7 of capital expenditures; financing activities used $53.7, including $52.1 of dividends.
- Cash and cash equivalents were $126.8 at September 30, down from $167.7 at year-end 2014; cash, cash equivalents and restricted cash totaled $128.2. Total assets were $1,312.7, compared with $1,642.5 at year-end, and stockholders’ equity was $507.7, compared with $781.1.
- Total debt was approximately $346.7, including $343.5 carrying value of the term loan, due February 2020. The term loan’s average interest rate was 4.38% for the nine-month period. Debt was reduced modestly from $348.6 at year-end.
- Available borrowing capacity at quarter-end was approximately $79.2 under the North American revolver and $42.2 under the European facility. Kronos reported compliance with all debt covenants and expected sufficient liquidity for its stated short- and long-term needs.
- The company paid dividends of $0.45 per share during the nine months and reported a quarterly dividend of $0.15 per share.
Outlook, commentary and risks
- Management expected 2015 sales volumes to exceed 2014, assuming economic conditions did not deteriorate. It expected TiO₂ cost per metric ton for the remainder of 2015 to be comparable to the first nine months, and slightly lower than the comparable 2014 period excluding currency effects.
- Management said selling prices had declined 13% during the first nine months of 2015 and were 13% below year-end 2014 at the end of Q3. It saw signs of stronger demand in some markets but said near-term price increases depended on market conditions.
- Management expected 2015 operating income to be significantly below 2014 and said a Q4 operating loss was likely, citing low selling prices and restructuring charges. Workforce reductions affected about 160 people; accrued costs were $18.2 at quarter-end. Management expected the workforce-reduction charge to pay back within about one year through savings and other cost actions.
- The $152.6 tax valuation allowance related to German and Belgian deferred tax assets followed cumulative losses in those jurisdictions. Management expected a further increase if those operations incurred additional Q4 losses; realization or reversal depends on sufficient evidence of future profitability.
- Key risks include TiO₂ price and demand cycles, competition and capacity changes, raw-material and energy costs, currency and interest-rate movements, liquidity and refinancing, tax matters, environmental requirements, operating interruptions, and litigation.
- Two TiO₂ price-fixing lawsuits remained pending. Kronos denied the allegations; it said a material loss was not reasonably possible in one case and, for the other, a loss was reasonably possible but not probable and was not expected to be material. No accrual was recorded for either matter.
Most important facts for investors to verify
- Whether TiO₂ pricing and margins stabilized or continued to weaken after quarter-end, given the expected Q4 operating loss.
- Whether the German and Belgian tax valuation allowance increased and what evidence could support eventual realization of those tax assets.
- Whether restructuring savings materialized on schedule and offset the $21.5 charge and continuing costs.
- Operating cash generation, working-capital needs, revolving-credit availability, covenant compliance and the capacity to sustain dividends.
- Developments in the pending antitrust litigation and any changes to the company’s assessment of potential exposure.