Kronos Worldwide, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Kronos produces and markets titanium dioxide (TiO₂) pigments, with roughly half of Q1 sales volumes in Europe. Amounts below are in millions of dollars except per-share data and operating statistics.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2015 | Change / note |
|---|---|---|---|
| Net sales | $420.1 | $365.1 | Down 13% |
| Gross margin | $80.5 | $77.4 | Margin rose from 19% to 21% |
| Income from operations | $26.0 | $32.2 | Operating margin rose from 6% to 9% |
| Net income | $14.3 | $18.4 | EPS increased from $0.12 to $0.16 |
| Net cash used in operating activities | $(2.5) | $(10.0) | Greater working-capital use and tax payments |
| Capital expenditures | $16.3 | $11.7 | Primarily maintenance and facility improvements |
- Cash and liquidity: At March 31, cash and cash equivalents were $121.4; restricted cash was $1.5. The company reported $94.8 available under its North American revolver and approximately $77 available under its European revolver. Management expected liquidity to cover short- and long-term obligations.
- Debt: Total debt was $348.6, including a $345.1 carrying amount for the term loan and $3.9 of current maturities. The term loan is due in February 2020; its average interest rate was 4.75%. The company reported compliance with all debt covenants.
- Dividends: $17.4 was paid during the quarter, equal to $0.15 per share.
- Balance sheet changes: From December 31, 2014 to March 31, 2015, cash declined from $167.7 to $121.4, inventories from $423.6 to $394.0, total assets from $1,642.5 to $1,504.5, and stockholders’ equity from $781.1 to $718.5. Currency translation was the primary driver of the quarter’s $63.6 other comprehensive loss, including a $65.6 translation loss.
Material changes and management’s explanation
- Sales fell primarily because average TiO₂ selling prices declined 11% and currency translation reduced reported sales by an estimated $33. Higher sales volumes, up 7%, partially offset those effects. Production volume rose 4%.
- Cost of sales decreased 15%, reflecting lower feedstock and other production costs, higher volume, and currency effects. Cost of sales as a percentage of sales improved to 79% from 81%.
- Operating income improved despite lower sales and gross-margin dollars. Management attributed the increase to lower manufacturing costs, higher production and sales volumes, and favorable currency effects; currency changes increased operating income by an estimated $14 compared with Q1 2014.
- Interest expense increased to $4.6 from $4.0, principally due to higher average debt levels. Income tax expense rose to $9.4 from $7.9 as earnings increased.
- Production facilities operated at 93% of practical capacity, compared with approximately 90% in Q1 2014. The prior-year rate was affected by the restart after a Canadian labor lockout; 2015 production was affected by improvement projects and longer-than-normal maintenance shutdowns.
Outlook, risks and contingencies
- Management expected 2015 sales and production volumes to exceed 2014 levels, while production would remain below full capacity because of improvement projects and maintenance. This outlook assumes global economic conditions do not deteriorate.
- Management expected 2015 operating income to be comparable to 2014: higher volumes and moderating raw-material costs were expected to be mostly offset by lower anticipated selling prices. Costs per metric ton were expected to remain broadly comparable to Q1 2015 and slightly below comparable 2014 periods, excluding currency effects.
- Prices remained under competitive pressure: selling prices at Q1 2015-end were 7% below year-end 2014, after prices had begun 2015 9% below the start of 2014. The company said near-term price increases would depend on market conditions. Long-term TiO₂ demand was expected to grow 2%–3% annually.
- Estimated 2015 capital expenditures were approximately $68, including $11.7 spent through March 31. Expected pension and postretirement plan contributions were approximately $19 for 2015.
- Principal risks include cyclical TiO₂ demand and pricing, customer and producer inventories, competition and capacity changes, raw-material and energy costs and availability, currency movements, operating interruptions, liquidity and refinancing, tax matters, environmental requirements, and litigation.
- Tax authorities are examining certain returns; the company said it had adequate accruals and did not expect resolution to materially affect financial position, results, or liquidity. Other claims and disputes include environmental, contractual, product liability, intellectual property, and employment matters; management did not expect them to have a material adverse effect beyond recorded accruals.
- The company considered the decline in its Valhi share investment temporary at March 31, 2015; its market value was $4.6 below cost. A future conclusion that the decline is other than temporary could require an income-statement impairment charge.
Important facts for investors to verify
- Whether TiO₂ pricing stabilizes or improves, and whether volume gains continue to offset price and currency pressure.
- Whether lower feedstock costs and production efficiencies persist, and whether maintenance projects affect planned production.
- Whether operating cash flow and liquidity remain adequate after working-capital needs, dividends, capital spending, and pension contributions.
- Debt covenant headroom and continued availability under both revolving credit facilities.
- Developments in tax examinations, legal and environmental matters, and the valuation of the Valhi investment.