Kronos Worldwide, Inc. — Q2 2012 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012; filed August 8, 2012. Financial statements are unaudited. Kronos produces and markets titanium dioxide (TiO₂) pigments, with about half of first-half sales volumes in Europe.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $545.3m | $537.5m | $1,106.6m | $957.9m |
| Gross margin | $163.3m; 30% | $197.0m; 37% | $424.8m; 38% | $343.4m; 36% |
| Operating income | $110.6m | $144.2m | $320.0m | $246.6m |
| Net income | $64.5m | $89.0m | $201.4m | $149.3m |
| Diluted EPS | $0.56 | $0.77 | $1.74 | $1.29 |
- Q2 sales rose 1%: average TiO₂ selling prices increased 24%, offset by a 16% fall in sales volume and a 5% unfavorable currency effect. Operating income declined $33.6m as lower volumes and higher costs more than offset pricing.
- First-half sales increased 16%, principally on a 28% price increase, despite a 7% volume decline and a 4% unfavorable currency effect. Operating income rose $73.4m.
- Q2 cost of sales increased 12%; management attributed about $90m of higher costs to raw materials, chiefly feedstock ore and petroleum coke. First-half raw-material cost increases were about $117m.
- Q2 included a $7.2m pretax loss on early debt extinguishment ($4.7m after tax). First-half 2011 included a $3.3m pretax debt-prepayment charge.
Cash flow, liquidity and debt
- First-half operating cash flow was negative $67.0m, versus positive $80.2m in 2011. Management cited working-capital outflows, including a $218.0m inventory increase and $167.4m increase in receivables, as well as higher joint-venture contributions and tax payments.
- Capital expenditures were $31.9m for the first half; management estimated about $74m for full-year 2012. Cash and cash equivalents were $91.6m at June 30; cash, cash equivalents and restricted cash totaled $100.8m.
- At June 30, total debt was $497.0m: a $400m term loan (carrying value $394.0m), $99.5m under the European revolving facility and $3.5m other debt. The term loan matures in June 2018; the European facility matures in October 2013. The North American $125m revolver was undrawn and available.
- In June, the company issued the term loan and discharged its remaining 6.5% Senior Secured Notes, which were redeemed July 20, 2012. The term loan carries quarterly $5m repayments beginning September 2012 and a leverage covenant of no more than 3.5:1. The company reported covenant compliance at quarter-end.
- Current assets were $1,188.7m and current liabilities $392.0m. Receivables were $437.9m and inventories $641.3m at June 30. DSO rose to 69 days from 55 at year-end; DSI fell to 84 days from 104.
Outlook, risks and notable items
- Management expected 2012 production at 90%–95% of attainable practical capacity of 550,000 metric tons; annual sales volumes were expected below 2011, but above 2012 production.
- Management expected average selling prices for the remainder of 2012 to exceed comparable 2011 periods, while further price increases depended principally on demand. It expected second-half operating income to be lower than the prior-year period because lower volumes and higher costs were expected to outweigh pricing benefits.
- Management forecast 2012 TiO₂ production cost per metric ton to rise approximately 50%–60% versus 2011, primarily because of feedstock ore costs, with higher petroleum coke and energy costs also cited. Second-quarter facilities operated at about 86% of practical capacity due to softer demand.
- Risks include cyclical demand, customer inventory changes, raw-material availability and prices, currency movements, production interruptions, refinancing and liquidity, and environmental, tax and litigation matters. Management stated it expected sufficient liquidity for near- and long-term obligations, subject to actual developments.
- Canadian tax reassessments for 2002–2004 are being appealed; the potential cash tax liability if fully assessed was approximately $15.2m. The company said it believed accruals were adequate and expected no material adverse effect from tax examinations.
- The company held $69.6m of related-party marketable securities at fair value, including TIMET shares with a $25.9m unrealized loss relative to cost. Management considered the decline temporary at June 30; an other-than-temporary conclusion could result in an income-statement impairment charge.
- Kronos is majority-owned by Valhi and NL; the filing states Harold C. Simmons may be deemed to control the company. It also reported a $154.9m note receivable from Valhi.
Key facts for investors to verify
- Whether TiO₂ demand, sales volumes and pricing develop in line with management’s 2012 assumptions, and whether planned utilization is adjusted.
- Whether feedstock, petroleum coke and energy cost increases materialize as forecast and how they affect margins and second-half earnings.
- Working-capital conversion and operating cash flow, particularly receivables, inventories and the reported increase in DSO.
- Debt-service capacity, covenant compliance and refinancing needs, including the European facility’s October 2013 maturity.
- Resolution of the Canadian tax reassessments and subsequent valuation of the TIMET investment.