Kronos Worldwide, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Kronos is a global producer and marketer of titanium dioxide (TiO2) pigments, with approximately half of quarterly sales volumes into Europe. Valhi owned approximately 50% of Kronos at quarter-end, and NL Industries held a further 30%.
Financial results and key metrics
| Metric | Q1 2012 | Q1 2013 |
|---|---|---|
| Net sales | $561.3 million | $463.6 million |
| Gross margin | $261.5 million; 47% of sales | $3.9 million; 1% of sales |
| Operating income (loss) | $209.4 million | $(46.9) million |
| Net income (loss) | $136.9 million | $(41.1) million |
| Diluted EPS | $1.18 | $(0.35) |
| Operating cash flow | $(104.7) million | $(39.3) million |
- Sales fell 17% year over year. Average TiO2 selling prices declined 21%; sales volumes rose 1%, product mix added 3%, and currency had an approximately $1 million positive sales impact.
- TiO2 sales volume was 132,000 metric tons versus 130,000; production volume was 122,000 versus 140,000 metric tons.
- Cost of sales increased 53% to $459.7 million, driven principally by approximately $110 million of higher raw-material costs and lower production volumes. Currency movements reduced operating income by an estimated $6 million year over year.
- Investing cash outflow was $18.3 million, including $19.0 million of capital expenditures. Financing cash outflow was $120.9 million. Cash and cash equivalents ended at $102.2 million, down from $282.7 million at year-end 2012.
- At March 31, total debt was $299.7 million, including $21.1 million of current maturities; it was $400.1 million at December 31, 2012. Current assets were $1,035.5 million and current liabilities $329.8 million.
Material changes and unusual items
- The company moved from substantial profit to a loss as lower TiO2 selling prices coincided with higher costs for products made using feedstock ore purchased in 2012.
- In February, Kronos prepaid $290 million of term-loan principal, funded with $100 million of cash and $190 million borrowed under a new note payable to Contran. The prepayment generated a $6.6 million non-cash pretax charge ($4.3 million after tax, or $0.04 per share).
- Quarter-end debt included $185.0 million payable to Contran, $100.0 million remaining term-loan principal, and $12.8 million under the European revolving facility. The Contran note is unsecured, has no financial maintenance covenant, and is due by June 2018.
- Other comprehensive loss was $21.1 million, principally reflecting a $27.3 million currency translation loss, partly offset by other items.
Liquidity, outlook and risks
- At March 31, cash, cash equivalents and restricted cash totaled $111.4 million. Available borrowing capacity was approximately $125 million under the North American revolver and $140.5 million under the European facility. Kronos reported compliance with debt covenants and expected sufficient liquidity for near- and longer-term obligations, subject to actual operating performance.
- Management expected 2013 operating income to be significantly below 2012. It anticipated higher sales volumes if economic conditions improved, continued matching of production to demand, and lower cost of sales per ton later in 2013 as higher-cost 2012 feedstock worked through inventory. Announced price increases were to begin implementation in Q2; realization depended on market conditions.
- Management described industry conditions as weak and uncertain, with producer and customer inventory correction, falling prices, and reduced operating rates. Kronos operated at approximately 92% of practical capacity in Q1 2013. It estimated 2013 capital expenditures of approximately $60 million, including $19.0 million spent through Q1, and expected pension and postretirement contributions of approximately $27 million.
- Key risks include TiO2 cyclicality, supply-demand and inventory shifts, pricing and competition, raw-material and energy costs and availability, foreign exchange, operational interruptions, liquidity and refinancing, environmental regulation, and tax and legal matters. Canadian tax re-assessments for 2002–2004 could result in approximately $15.7 million of cash tax if fully assessed; Kronos disputes them and has posted Cdn. $7.5 million of letters of credit. The company said pending claims were not expected to have a material adverse effect beyond existing accruals.
- Disclosure controls were assessed as effective at March 31, 2013; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether announced TiO2 price increases were achieved, and whether prices and demand stabilized after quarter-end.
- How quickly lower-cost feedstock and improved unit costs flowed through cost of sales, and the effect on gross margin and operating results.
- Subsequent cash generation, working-capital needs, and available revolver capacity given the quarter’s cash decline and operating cash outflow.
- Debt terms and related-party exposure under the Contran note, covenant headroom, and any further term-loan prepayments or borrowing.
- Developments in the Canadian tax dispute, other tax examinations, and any changes to related reserves or contingent exposures.