Kronos Worldwide, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Dollar amounts are in millions except per-share data. Kronos produces and sells titanium dioxide (TiO₂) pigments. The interim statements are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $441.4 | $356.1 | $811.2 | $674.5 |
| Gross margin | $129.8; 29% of sales | $55.5; 16% | $233.2; 29% | $95.9; 14% |
| Income from operations | $70.1 | $10.5 | $122.4 | $10.2 |
| Income before taxes | $65.4 | $5.6 | $113.2 | $0.4 |
| Income tax benefit (expense) | $131.1 benefit | $3.9 expense | $120.1 benefit | $2.5 expense |
| Net income (loss) | $196.5 | $1.7 | $233.3 | $(2.1) |
| Net income (loss) per share | $1.70 | $0.01 | $2.01 | $(0.02) |
Operating performance improved substantially: Q2 sales rose 24%, with average TiO₂ prices up 20% and sales volumes up 6%. For the first half, sales rose 20%, prices increased 19% and volumes increased 5%. Production volumes increased 8% in Q2 and 9% year to date. Cost of sales was $311.6 in Q2 (up 4%) and $578.0 year to date (down $0.6); lower raw-material and production costs and higher production volumes supported margins.
Reported net income includes a substantial non-cash tax benefit from reducing the German and Belgian deferred-tax-asset valuation allowance: $157.6 in Q2 and $162.6 year to date. The Q2 benefit includes $149.9 from the reassessment of future-year realizability and $7.7 related to utilization of tax losses. Thus, reported earnings growth materially exceeds the improvement in operating income.
Cash flow, balance sheet and liquidity
- Cash provided by operating activities was $101.6 for the first half, versus $16.6 a year earlier. Capital expenditures were $26.6, compared with $23.7; dividends paid were $34.8 in both periods.
- Cash, cash equivalents and restricted cash totaled $115.4 at June 30, 2017, versus $52.3 at December 31, 2016. $115.1 was held by non-U.S. subsidiaries.
- Total debt was $354.4, including a $334.9 carrying value for the term loan, $16.3 drawn on the North American revolver and $3.2 of other debt. Approximate debt less cash and restricted cash was $239.0.
- North American revolver availability was $91.4; the European facility’s full €120.0 (approximately $137.1) was available, subject to its terms. The company reported compliance with all debt covenants.
- Current assets were $800.0 and current liabilities $210.9 at June 30. Accounts receivable rose to $334.8 from $244.6 at year-end; inventory was $341.8 versus $343.5.
- Net property and equipment was $466.4, and stockholders’ equity was $620.8, up from $395.0 at December 31, 2016.
Changes, outlook and risks
- Management attributed stronger operating results to higher TiO₂ selling prices, increased sales and production volumes, and lower raw-material and other production costs. Capacity utilization averaged 100% in the first half versus approximately 96% a year earlier.
- Management expects 2017 operating income to exceed 2016, primarily due to higher average selling prices. It expects full-year sales volumes comparable to 2016 and production volumes slightly higher, potentially a record. Third-party feedstock costs were comparable to slightly higher in the first half; management expects full-year cost per ton slightly above 2016, with higher-cost feedstock expected to affect results beginning in Q3.
- Management expects the remaining approximately $20 million valuation allowance to be reversed in Q3 and Q4, subject to the expected profitability of German and Belgian operations. This is an accounting estimate, not operating cash flow.
- Estimated 2017 capital expenditures are approximately $65 million. Expected 2017 pension and postretirement plan contributions are approximately $15 million. Management expects sufficient liquidity for near- and longer-term obligations and expects 2017 interest expense comparable to 2016.
- The European revolving credit facility was due to mature in September 2017; management expected to extend it on or before maturity. The North American facility’s maturity was extended in January 2017 and was then scheduled for November 2019 under the existing term-loan maturity.
- Principal risks include TiO₂ demand, pricing, customer inventories, industry capacity, raw-material and energy costs, currency fluctuations, operating interruptions, liquidity and refinancing, tax matters, environmental regulation and litigation. Two U.S. cases allege TiO₂ price-fixing; Kronos denies wrongdoing and reported no material loss accrual, saying a material loss was not reasonably possible.
Important facts for investors to verify
- How much of reported earnings and equity improvement reflects the non-cash tax valuation-allowance reversal, and whether German and Belgian profitability supports the remaining expected reversal.
- Whether higher selling prices persist and offset the expected increase in feedstock costs, and whether demand and volumes meet management’s outlook.
- Extension or refinancing of the European revolver, covenant compliance, and the effect of debt maturities and facility terms on liquidity.
- Developments in the TiO₂ antitrust litigation, tax examinations and the Canada-Germany advance pricing agreement process.
- Cash generation and working-capital trends, particularly receivables and cash held outside the United States.