Kronos Worldwide, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited. Kronos produces and markets titanium dioxide (TiO₂) pigments for coatings, plastics, paper and other applications. Approximately half of first-half sales volumes were in Europe. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2012 | Q2 2013 | Six months 2012 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $545.3 million | $481.1 million | $1,106.6 million | $944.7 million |
| Gross margin | $163.3 million (30%) | $9.6 million (2%) | $424.8 million (38%) | $13.5 million (1%) |
| Operating income (loss) | $110.6 million | $(47.7) million | $320.0 million | $(94.6) million |
| Net income (loss) | $64.5 million | $(33.9) million | $201.4 million | $(75.0) million |
| Basic and diluted EPS | $0.56 | $(0.29) | $1.74 | $(0.65) |
- Q2 sales declined 12%; average TiO₂ selling prices fell 24%, partly offset by 17% higher sales volumes. First-half sales declined 15%; pricing fell 22%, while volumes rose 9% to a record first-half level.
- Cost of sales rose 23% in Q2 and 37% in the first half. Management cited higher raw-material costs, especially feedstock ore, along with sales-volume and currency effects. First-half production volumes fell 5%.
- Interest expense was $5.7 million in Q2 and $12.1 million in the first half. Income-tax benefit was $19.2 million and $37.7 million, respectively, reflecting lower earnings.
Cash flow, balance sheet and liquidity
- For the first six months, operating cash use was $15.1 million, versus $67.0 million used in 2012. Investing cash use was $33.5 million, including $33.8 million of capital expenditures. Financing cash use was $130.9 million. Cash declined $180.7 million, including currency effects, from $282.7 million at year-end to $102.0 million at June 30.
- At June 30, cash, cash equivalents and restricted cash totaled $111.3 million. Total assets were $1,742.3 million; stockholders’ equity was $936.9 million.
- Total debt was $307.8 million: $180.0 million payable to Contran, $100.0 million principal remaining on the term loan, $26.1 million under the European facility, and approximately $3.1 million other debt. The filing reports $286.9 million long-term debt, excluding current maturities.
- Available borrowing capacity at June 30 was approximately $119.5 million on the North American revolver and $130.5 million on the European facility. The company reported compliance with debt covenants and expected sufficient liquidity for short- and long-term obligations, subject to actual operating results.
- In July 2013, Kronos repaid the remaining $100 million term-loan principal using $50 million cash and $50 million borrowed under its North American revolver. It expected a non-cash pre-tax charge of about $2.3 million in Q3 from this repayment.
Changes, outlook and material matters
- Profitability deteriorated sharply: Lower selling prices and higher raw-material costs drove the company from operating profit to operating loss year over year. Management said feedstock cost moderation would affect cost of sales more fully in the second half of 2013.
- Pricing and demand: Prices had generally stabilized by the end of Q2 after about a year of declines; announced increases began taking effect in June. Management expected further increases in the second half, conditional on market conditions. It anticipated higher 2013 sales volumes than 2012 if economic conditions improved, but expected full-year operating income to be significantly below 2012 and second-half operating results to improve from the first half.
- Labor disruption: After a Canadian union contract expired June 15, 2013, employees rejected the company’s revised offer and Kronos declared a lockout. The plant, representing about 19% of worldwide capacity, was operating at approximately 15% capacity with management employees. The company expected minimal customer disruption using inventory and other facilities, but no settlement was assured.
- Financing and unusual charges: A February 2013 voluntary $290 million term-loan prepayment generated a $6.6 million non-cash pre-tax charge in Q1. Debt reduction was partly funded by a new $190 million Contran loan; $180 million remained outstanding at June 30. Contran is a related party, and the filing describes its controlling ownership chain.
- Other risks and obligations: Expected 2013 capital expenditures were approximately $65 million; expected pension and other postretirement contributions were approximately $28 million. Canadian tax reassessments for 2002–2004 could result in about $15.6 million cash tax exposure if fully assessed; Kronos is appealing and reported adequate tax accruals. It also disclosed routine environmental, contractual, product-liability, intellectual-property, employment and other claims, which management did not expect to have a material adverse effect beyond existing accruals.
- The company identified TiO₂ supply and demand, cyclicality, pricing, feedstock and energy costs, currency movements, plant interruptions, labor relations, liquidity and refinancing, tax matters, environmental regulation and litigation among key risks. It gave no quantified earnings or revenue guidance.
Most important facts for investors to verify
- Whether announced price increases are achieved and whether improved demand and sales volumes continue.
- How quickly lower feedstock costs flow through cost of sales, and whether margins recover as management anticipated.
- Duration and operating impact of the Canadian labor lockout, including any effect on customer deliveries.
- Post-July repayment debt mix, revolver usage, cash levels, covenant headroom and the company’s liquidity assumptions.
- Outcome of tax examinations and the Canadian reassessments, and continued support for deferred tax assets tied to German tax-loss carryforwards.
- Related-party financing terms and the company’s ability to sustain dividends amid operating losses and cash use.