Kronos Worldwide, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2012, compared with Q1 2011. Kronos is a global producer and marketer of titanium dioxide (TiO₂) pigments; about half of Q1 sales volumes were in Europe. Valhi owned approximately 50% of Kronos and NL Industries approximately 30% at quarter-end. Financial amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q1 2011 | Q1 2012 | Change / context |
|---|---|---|---|
| Net sales | $420.4 | $561.3 | Up 34%; chiefly reflecting 34% higher average TiO₂ prices. Sales volumes rose 5%; currency reduced sales by an estimated $9. |
| Gross margin | $146.4 (35% of sales) | $261.5 (47% of sales) | Higher prices, sales volumes, and production volumes more than offset higher costs. |
| Income from operations | $102.4 (24% of sales) | $209.4 (37% of sales) | Up $107.0; currency movements reduced Q1 2012 operating income by an estimated $3. |
| Net income | $60.3 | $136.9 | Up from stronger operating results; income tax expense was $68.5 versus $30.9. |
| Diluted earnings per share | $0.52 | $1.18 | Weighted-average shares were 115.9 million in both periods. |
| Operating cash flow | $21.2 provided | $104.7 used | Negative in 2012, principally from increased receivables and inventory, joint-venture funding, and taxes. |
| Capital expenditures | $13.3 | $23.3 | Primarily maintenance and improvements at existing facilities. |
Financial position and material changes
- Cash and cash equivalents fell to $47.9 at March 31 from $82.5 at year-end; cash, cash equivalents, and restricted cash totaled $57.0. Working capital increased, with receivables rising to $432.3 from $299.9 and inventory to $585.0 from $444.2.
- Total debt increased to $481.5 from $365.1, including $371.0 of 6.5% Senior Secured Notes and $106.4 drawn on the European revolving facility. The company borrowed €80 million during the quarter; the facility’s average interest rate was 1.94% at quarter-end. Interest expense declined to $6.3 from $9.6.
- Current liabilities were $316.2 and current assets $1,083.5 at quarter-end. Stockholders’ equity rose to $1,054.9 from $924.3, mainly reflecting quarterly net income and other comprehensive income, partly offset by $17.4 of dividends paid.
- Quarterly dividends were $0.15 per share, versus $0.625 in Q1 2011; the prior-year amount included a $0.50 special dividend.
- TiO₂ production and sales volumes were each up 5% year over year, reaching first-quarter records. Production facilities operated at full practical capacity.
Outlook, risks, and contingencies
- Management expected stronger TiO₂ demand to continue through 2012, sales volumes to increase year over year, and selling prices to rise further. It projected 2012 operating income to exceed 2011, assuming favorable pricing and volumes outweigh higher production costs; these are expectations, not guaranteed results.
- Management anticipated 2012 production levels consistent with or slightly below 2011, with only nominal capacity gains from debottlenecking. It estimated TiO₂ production cost per metric ton could rise approximately 50%–60% versus 2011, chiefly from feedstock ore, with additional pressure from petroleum coke and energy costs. Q1 sold product was substantially made using lower-cost feedstock.
- The €279.2 million principal amount of Senior Secured Notes is due in April 2013. Kronos had begun refinancing efforts and engaged a financial advisor, but terms were not determined and completion was not assured. Management believed it could refinance before maturity and expected sufficient liquidity for stated short- and long-term needs, subject to actual results. The company had drawn the full €80 million European facility and reported compliance with debt covenants.
- Canadian tax reassessments for 2002–2004 were being appealed; the estimated cash tax exposure if the full proposed adjustment were assessed was approximately $12.2 million. Kronos had posted Cdn. $7.3 million of letters of credit and said it had adequate tax accruals. Other tax examinations and ordinary-course legal, environmental, product-liability, and other claims were disclosed; management did not expect them to have a material adverse effect beyond recorded accruals.
- Risks include TiO₂ supply, demand and pricing cycles; customer inventory; raw-material and energy costs and availability; global economic conditions; currency movements; production interruptions; refinancing and liquidity; tax matters; environmental regulation; and litigation. Management said no material changes to previously disclosed risk factors occurred during the quarter.
Most important facts for investors to verify
- Progress, terms, and availability of refinancing for the notes due April 2013, and Kronos’s ongoing covenant compliance.
- Whether expected price increases and sales-volume growth can offset the forecast sharp rise in feedstock and other production costs.
- Working-capital conversion and liquidity, given the $104.7 million operating cash outflow and substantial increases in receivables and inventory.
- Resolution and potential cash impact of Canadian tax reassessments and other tax examinations.
- Valuation of related-party marketable securities: Kronos reported its TIMET investment’s market value below cost and considered the decline temporary; an impairment could require an income-statement charge.
- Execution of the approximately $74 million 2012 capital expenditure plan and expected pension and postretirement contributions of approximately $27 million.