Kronos Worldwide, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 12, 2013. The filing is an annual report, not a standalone fourth-quarter filing. Dollar amounts are in millions unless stated otherwise.
Business context
Kronos is a global producer and marketer of titanium dioxide pigment (TiO2), which accounted for about 90% of 2012 net sales. It serves more than 4,000 customers in approximately 100 countries, principally in Europe and North America. The company reported weaker industry demand and customer inventory correction during 2012, after several years of rising TiO2 prices.
Financial and operating results
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Net sales | $1,976.3 | $1,943.3 | Up 2%; higher average TiO2 prices were partly offset by lower volume and unfavorable currency effects. |
| Gross margin | $560.4; 28% | $748.4; 39% | Down $188.0; margin fell 11 percentage points. |
| Income from operations | $359.6; 18% of sales | $546.5; 28% of sales | Down $186.9, or 34%. |
| Net income | $218.5 | $321.0 | Down 32%; diluted EPS was $1.89 versus $2.77. |
| Operating cash flow | $76.9 | $295.6 | Down $218.7, primarily reflecting lower operating income and working-capital and joint-venture cash needs. |
| Capital expenditures | $74.8 | $68.6 | Includes $25.2 for environmental compliance, protection and improvement in 2012. |
| TiO2 sales volume | 470,000 metric tons | 503,000 metric tons | Down 6%. |
| TiO2 production volume | 469,000 metric tons | 550,000 metric tons | Down 15%; production was about 85% of capacity. |
Average TiO2 selling prices for the year were 10% higher than in 2011, but prices fell during the second half; year-end average prices were 17% below year-end 2011. Raw-material costs rose sharply: the company estimates cost per metric ton produced increased about 50%, primarily because of feedstock ore and petroleum coke costs and unabsorbed fixed costs. Reduced production generated approximately $25 million of unabsorbed fixed production costs. Currency movements reduced 2012 sales by an estimated $82 million and operating income by about $10 million compared with 2011.
Fourth-quarter 2012 net sales were $396.8, gross margin was $49.6, and the company recorded a net loss of $18.1, or $0.16 per share. This compared with fourth-quarter 2011 sales of $437.4, gross margin of $194.1 and net income of $85.8.
Balance sheet, debt and liquidity
- At December 31, 2012, cash and cash equivalents were $282.7; restricted cash was $10.2 in total, including $2.7 current and $7.5 noncurrent.
- Total assets were $2,027.0; current assets were $1,223.4 and current liabilities were $328.4.
- Total debt was $400.1, including $21.2 current maturities. Most debt was variable-rate: a term loan with a $384.5 carrying value and $13.2 under the European revolver. The term loan carried a 5.75% rate at year-end and was due in 2018.
- Unused borrowing availability at year-end was approximately $144.9 under the European facility and $125 under the North American revolver. Kronos reported compliance with debt covenants.
- Contractual commitments totaled $2,581.7, including $1,827.7 for TiO2 feedstock supply contracts and $121.6 for other long-term supply and service contracts. The filing estimates 2013 contractual payments of $716.1; this excludes, among other items, expected 2013 pension and OPEB contributions of about $27.4.
- In February 2013, after year-end, Kronos prepaid $290 of term-loan principal using $100 of cash and a $190 loan from Contran, a related party. It expected a roughly $7 noncash charge in first-quarter 2013; $100 of term-loan principal remained outstanding after the prepayment.
Outlook, risks and unusual items
Management expected 2013 sales volumes to exceed 2012 levels if global economic conditions improved, while planning to adjust production and inventories to demand. Despite some moderation in ore costs, management expected 2013 operating income to be significantly lower than 2012, citing the loss of the benefit from lower-cost feedstock used in early 2012 and the decline in selling prices. The company planned price increases in 2013 to address production costs. It expected to spend about $60 on capital expenditures in 2013, including approximately $25 for environmental programs.
- Industry and cost exposure: TiO2 demand and prices are cyclical and sensitive to global economic conditions, customer inventories, competition, capacity additions, feedstock availability and energy costs. The company’s feedstock contracts include minimum purchase commitments.
- Leverage and liquidity: Variable-rate debt, significant contractual obligations and dependence on cash generation expose Kronos to refinancing, covenant-compliance and liquidity risks if results underperform. A portion of debt was subsequently replaced with related-party borrowing.
- Concentration and governance: Behr Process Corporation accounted for approximately 10% of 2012 sales; the top ten customers accounted for about 34%. Valhi and NL together held approximately 80% of Kronos common stock, and Harold C. Simmons may be deemed to control the related companies.
- Legal and regulatory: A U.S. antitrust class action concerning alleged TiO2 price-fixing had been certified for trial, then scheduled for September 2013. Kronos denied the allegations and intended to defend itself. Environmental requirements, tax examinations and other litigation are additional contingencies.
- Unusual 2012 items: Earnings included a $7.2 charge for early debt extinguishment and a $3.9 loss on the sale of TIMET shares. The tax provision also reflected changes in plans for foreign dividends and related tax-credit treatment. Kronos recognized a $3.1 net incremental tax benefit during the year, including offsetting quarterly tax effects.
- Retirement plans: Pension obligations increased amid lower discount rates; the company reported a $66.9 combined actuarial loss for its defined benefit plans in 2012 and a $189.2 accrued pension cost at year-end.
Most important facts for investors to verify
- Whether 2013 price increases, volume recovery and feedstock-cost moderation were sufficient to meet management’s expectation for significantly lower operating income.
- Whether operating cash flow and working-capital needs supported debt service, planned capital spending, dividends and the remaining debt obligations.
- The terms, repayment expectations and related-party implications of the $190 Contran loan, and the effect of the February 2013 term-loan prepayment.
- The status and potential financial exposure of the antitrust class action, Canadian tax reassessments and other tax or environmental matters.
- Whether customer concentration, minimum feedstock commitments and pension funding needs changed materially after year-end.