Kronos Worldwide, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; financial statements are unaudited. Kronos produces and markets titanium dioxide (TiO₂) pigments. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $360.2 | $443.5 | $725.3 | $863.6 |
| Gross margin | $46.5 (12.9%) | $93.8 (21.1%) | $123.9 (17.1%) | $174.3 (20.2%) |
| Operating income (loss) | $(10.4) (-2.9%) | $44.3 (10.0%) | $21.8 (3.0%) | $70.3 (8.1%) |
| Net income (loss) | $(159.8) | $33.1 | $(141.4) | $47.4 |
| Basic and diluted EPS | $(1.38) | $0.29 | $(1.22) | $0.41 |
- Sales and operating trends: Q2 sales fell 19%; average TiO₂ selling prices declined 13%, while sales volume rose 5%. For the first half, sales fell 16%, with prices down 12% and volume up 6%. Currency translation reduced sales by an estimated $44 in Q2 and $77 in the first half.
- Costs and margins: Lower feedstock and other production costs helped, but price declines and a $21.1 workforce-reduction charge weighed on results. The charge included $10.7 in cost of sales and $10.4 in SG&A. Currency movements increased operating income by an estimated $11 in Q2 and $25 in the first half.
- Cash flow: First-half operating cash flow was $8.3, versus $19.8 a year earlier; capital expenditures were $19.3. Dividends paid were $34.8. Cash and cash equivalents were $115.7 at June 30, down from $167.7 at year-end; including restricted cash, the balance was $117.5.
- Balance sheet and liquidity: Total assets were $1,367.9 and stockholders’ equity was $551.6 at June 30, versus $1,642.5 and $781.1 at December 31, 2014. Current assets were $820.4 and current liabilities $212.1. Debt totaled $347.8, including $344.3 carrying value of the term loan. Borrowing availability was approximately $87.2 under the North American revolver and $61.5 under the European facility. The company reported compliance with all debt covenants.
- Dividends: Quarterly dividends were $0.15 per share, unchanged year over year; first-half dividends were $0.30 per share.
Material changes and unusual items
- A $150.3 non-cash tax expense was recorded in Q2 for a valuation allowance against deferred tax assets associated with German and Belgian net operating losses. This followed twelve consecutive quarters of cumulative losses in both jurisdictions. Management said the NOLs have indefinite carryforward periods and it continues to expect eventual realization, but reversal of the allowance depends on sufficient positive evidence of sustained profitability.
- The $21.1 workforce-reduction charge covered reductions affecting approximately 110 employees. Accrued costs were $21.2 at June 30; most are expected to be paid by December 31, 2016. Management expected the implemented reductions, vacant positions and other savings to repay the charge in approximately one year, with savings beginning in Q3 2015.
- On May 21, 2015, the company amended its term loan due February 2020, reducing applicable interest-rate margins by 0.75 percentage points. Other principal, maturity and collateral terms remained unchanged; a 1% premium applies to certain early repayments before November 21, 2015.
- Accumulated other comprehensive loss increased to $389.2 from $335.8, including a $59.5 first-half currency-translation loss.
Outlook, commentary and risks
- Management expected practical-capacity production in the second half of 2015 and higher full-year sales volumes than in 2014, assuming global economic conditions did not deteriorate. It expected per-ton cost of sales for the remainder of 2015 to be comparable to, and slightly below the same periods of 2014 excluding currency effects.
- Management expected 2015 operating income to be significantly below 2014, principally because lower anticipated selling prices were expected to outweigh higher volumes and moderating raw-material costs. Near-term price increases were uncertain and dependent on market conditions. No specific earnings or revenue guidance was provided.
- Additional workforce reductions affecting 50–60 employees were expected in the second half of 2015 and first half of 2016; associated costs were not yet estimable. The company also estimated 2015 capital expenditures of approximately $54, including $19.3 spent through June 30, and pension/postretirement contributions of approximately $19.
- Management expected sufficient liquidity for near- and longer-term obligations, but noted that the cyclical TiO₂ market, pricing, demand, production, raw-material costs, exchange rates and access to credit could affect liquidity and results. Other risks include operational interruptions, environmental and regulatory matters, and tax uncertainties.
- Two TiO₂ price-fixing lawsuits remained pending. Kronos denied wrongdoing and intended to defend them; it considered a material loss not reasonably possible in one case and reasonably possible but not probable in the other, with no material loss expected. Tax authorities were also examining certain returns; management said it had adequate accruals and did not expect examinations to materially affect its financial position, results or liquidity.
- After quarter-end, Kronos entered into additional currency forwards and an interest-rate swap effective September 30, 2015. The filing reported no material changes in market risks or risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether TiO₂ prices stabilize or recover, and whether higher sales volumes persist across regions.
- Whether the German and Belgian businesses generate enough sustained profits to support reversal of the $150.3 tax valuation allowance.
- Actual restructuring costs, timing and realized savings versus management’s expected approximately one-year payback.
- Cash generation, revolver availability and covenant compliance as operating conditions and working-capital needs change.
- Developments in the pending antitrust litigation and tax examinations, including any change in the company’s loss assessments or accruals.