Kronos Worldwide, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. Amounts are in U.S. dollars, millions, except per-share data and where noted.
Business context
Kronos is a global producer and marketer of titanium dioxide (TiO₂) pigment, used in coatings, plastics, paper and other products. About half of nine-month sales were in Europe. Results are sensitive to TiO₂ prices and volumes, feedstock and energy costs, operating rates, and currency movements. The company is controlled through related entities: Valhi held about 50% of Kronos, and NL about 30% at September 30, 2014.
Financial performance
| Metric | Q3 2013 | Q3 2014 | Nine months 2013 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $419.1 | $414.8 | $1,363.8 | $1,278.4 |
| Gross margin | $47.2 | $95.7 | $60.7 | $270.0 |
| Gross margin as % of sales | 11% | 23% | 4% | 21% |
| Operating income (loss) | $(37.0) | $47.9 | $(131.6) | $118.2 |
| Net income (loss) | $(29.9) | $31.9 | $(104.9) | $79.3 |
| Diluted EPS | $(0.26) | $0.28 | $(0.91) | $0.68 |
- Q3 sales fell 1% year over year: average selling prices declined 6%, partly offset by 4% higher sales volume. For the nine months, sales declined 6%, reflecting 5% lower prices and 4% lower volumes.
- Operating improvement principally reflected lower feedstock and other production costs, higher production volumes, and the absence of the 2013 litigation settlement charge. Q3 production volume increased 18%; nine-month production volume increased 8% while sales volume decreased 4%.
- Currency movements added an estimated $8 to Q3 operating income and $28 to nine-month operating income versus 2013. Nine-month net income also included a $5.1 tax benefit from releases of uncertain-tax-position reserves; Q3 tax expense included a $2 cash benefit from U.S. tax credits.
- Cash from operations was $26.5 for the first nine months, down from $60.8. The filing attributes the decline primarily to working-capital movements, including receivables, inventories, payables and accruals, despite higher operating income.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $151.2, versus $53.8 at year-end; cash, cash equivalents and restricted cash totaled $153.5. Current assets were $897.6 and current liabilities $211.3.
- Total debt was $349.6, compared with $183.5 at December 31, 2013. This included a $350 term loan issued in February 2014, with a $346.7 carrying value, due February 2020, plus $2.9 of other debt. The new term loan refinanced the $170 Contran note and provided remaining proceeds for general corporate purposes.
- Available borrowing capacity was approximately $97 under the North American revolver and $81 under the European facility. The company said it could draw available amounts without breaching covenants and expected sufficient liquidity for short- and long-term obligations. It reported compliance with debt covenants at quarter-end; the European facility remains subject to financial-ratio conditions.
- Capital expenditures were $39.9 year to date; management estimated full-year 2014 spending of approximately $68. Dividends were $0.15 per share in Q3 and $0.45 per share year to date, totaling $52.1 paid.
Outlook, risks and notable items
- Management expected 2014 operating income to exceed 2013, citing lower third-party feedstock costs, higher production, and the 2013 settlement charge. It expected 2014 cost of sales per ton below 2013 and Q4 2014 cost per ton below the first nine months of 2014. No specific earnings or sales target was provided.
- Production facilities operated at 94% of practical capacity in the first nine months. Management expected higher full-year 2014 production than in 2013 but continued operation below full capacity, reflecting the Canadian facility restart after a labor lockout and maintenance and productivity projects.
- Management described demand as generally stable in major European and North American markets, with some improvement in primary markets, but noted that prices had declined during 2014. Potential near-term price increases depend on market conditions. The business remains cyclical and exposed to supply-demand shifts, customer inventories, competition, raw-material costs, currency rates, operating interruptions and credit access.
- Unusual prior-year charges included a $35 litigation settlement expense in Q3 2013 and $8.9 of debt-prepayment charges during the first nine months of 2013. In Q2 2014, favorable audit outcomes generated $5.7 of aggregate non-cash tax benefits. The Canadian tax reassessments were reversed in the company’s favor.
- The company considered the decline in its Valhi stock investment temporary at September 30, despite a $4.1 unrealized loss versus cost on that holding; an other-than-temporary decline could require an income-statement impairment charge. Total nine-month other comprehensive loss was $61.5, mainly from $53.6 of currency translation losses.
- Various legal and tax matters remain, including TiO₂-related antitrust litigation. Management said it believed existing accruals were adequate and did not expect the described claims to materially affect financial position, results or liquidity; outcomes remain uncertain. One previously disclosed case was dismissed with prejudice after final payment in July 2014.
Important facts for investors to verify
- Whether lower feedstock costs and stronger production can sustain margins if TiO₂ selling prices remain under pressure.
- Cash conversion and working-capital trends, especially receivables and the reversal of the prior-year inventory cash benefit.
- Debt-service capacity, covenant headroom and availability under the European revolver, given its EBITDA-based borrowing test.
- Progress on Canadian facility normalization, maintenance projects, and the stated capital-spending and pension-contribution expectations.
- Developments in pending antitrust litigation, tax examinations, and the valuation of the Valhi stock investment.