Kronos Worldwide, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are noted separately below. Kronos is a global producer and marketer of titanium dioxide (TiO₂), used mainly in coatings, plastics and paper. TiO₂ represented about 90% of 2015 net sales. The company reported sales in approximately 100 countries and operated chiefly in Europe and North America.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $1,348.8 million | $1,651.9 million |
| Gross margin | $192.3 million; 14% of sales | $349.7 million; 21% of sales |
| Operating income (loss) | $(1.1) million | $149.7 million |
| Net income (loss) | $(173.6) million | $99.2 million |
| Diluted loss (income) per share | $(1.50) | $0.86 |
| Cash provided by operating activities | $52.1 million | $87.7 million |
| Capital expenditures | $47.1 million | $61.2 million |
| Cash and cash equivalents at year-end | $92.5 million | $167.7 million |
| Total debt at year-end | $341.0 million | $343.6 million |
TiO₂ sales volume increased 6% to 525,000 metric tons, while production rose 3% to 528,000 metric tons. Capacity utilization was 95%, compared with 92% in 2014. Cost of sales fell 11%, but rose to 86% of net sales from 79%, as lower selling prices and restructuring costs outweighed lower input costs and higher volumes.
At December 31, 2015, current assets were $710.8 million and current liabilities were $201.7 million. Kronos had $68.3 million available under its North American revolving facility and approximately $25.3 million available under its European facility. The principal term loan matures in February 2020; the company reported compliance with debt covenants. Dividends paid in 2015 totaled $0.60 per share, or $69.5 million.
Fourth quarter: Net sales were $287.0 million, gross margin was $25.2 million, and net loss was $20.4 million, or $0.18 per share. In fourth-quarter 2014, sales were $373.5 million, gross margin $79.7 million, and net income $19.9 million, or $0.17 per share.
Material changes versus prior year
- Net sales declined 18%. A 14% decrease in average TiO₂ selling prices and an 8% adverse currency effect outweighed the 6% increase in sales volume; product mix reduced sales by a further 2%.
- Average selling prices at year-end were 17% below year-end 2014. Prices fell across major markets, particularly North America and some export markets.
- Lower third-party feedstock ore and other production costs, higher production volumes, and currency effects reduced cost of sales. The company estimated currency changes increased operating income by about $40 million year over year.
- Operating income fell by $150.8 million, from $149.7 million to a $1.1 million loss. Operating cash flow decreased by $35.6 million.
- Net loss included a $159.0 million non-cash deferred tax valuation allowance for German and Belgian tax assets, a $12.0 million pre-tax impairment of Valhi shares, and $21.7 million of workforce-reduction charges. The valuation allowance was the largest contributor to the reported net loss.
Outlook, commentary and risks
- Management expected 2016 production and sales volumes to exceed 2015 levels, assuming economic conditions did not deteriorate, and expected operating income to improve through higher volumes, lower feedstock costs and restructuring savings. It nevertheless said a first-quarter 2016 operating loss was possible.
- Management expected 2016 cost of sales per metric ton to decline from 2015. A price increase announced by Kronos and major competitors in late 2015 was expected to be implemented during the first quarter of 2016, subject to market conditions and contracts.
- The 2015 restructuring affected approximately 160 employees. Management expected the accrued workforce-reduction charge to pay back within approximately one year through workforce savings and other cost initiatives.
- Kronos cited cyclical TiO₂ demand and pricing, competition and capacity changes, customer inventories, raw-material availability and costs, energy costs, foreign exchange, operating interruptions, labor relations, environmental regulation, and access to liquidity or refinancing as material risks. It had minimum purchase commitments of approximately $865 million for TiO₂ feedstock and $146.7 million for other long-term supply and service contracts.
- Two antitrust matters remained pending. Kronos said the Los Gatos action was not reasonably likely to have incurred a loss; in the Valspar matter, it considered a loss reasonably possible but not probable and did not expect a material loss. Trial in the Valspar case was scheduled for September 2016. No material environmental liabilities were anticipated, though future requirements could increase costs.
- The company expected approximately $63 million of 2016 capital expenditures, including about $9 million for environmental compliance and improvement, and approximately $16 million of pension and other postretirement plan contributions.
Most important facts for investors to verify
- Whether TiO₂ selling prices stabilized or recovered, and whether the announced price increases were realized without sacrificing sales volumes.
- Whether volume growth, feedstock savings and restructuring initiatives improved operating results and cash flow as management expected.
- Whether German and Belgian operations generated sufficient positive evidence to support any reversal of the $159.0 million tax valuation allowance; its reversal is not assured.
- Liquidity against debt service, dividends, capital spending and the substantial feedstock and other contractual commitments; also monitor covenant compliance and refinancing needs.
- Developments in the Valspar and Los Gatos antitrust cases, environmental matters, and the terms and effects of related-party arrangements.