Kronos Worldwide, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone quarterly filing; the filing also reports fourth-quarter results. Unless noted otherwise, financial amounts are U.S. dollars in millions.
Business context
Kronos is a global producer and marketer of titanium dioxide pigment (TiO2), used primarily in coatings, plastics and paper. TiO2 generated about 92% of 2011 net sales. The company sold in approximately 100 countries; Europe represented 53% of sales volume and North America 32%. Kronos produced a record 550,000 metric tons in 2011 and operated at full capacity. Valhi owned about 50% of Kronos and NL Industries about 30%; the filing says Harold C. Simmons may be deemed to control the affiliated companies.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $1,943.3 | $1,449.7 |
| Gross margin | $748.4; 39% of sales | $345.3; 24% of sales |
| Operating income | $546.5; 28% of sales | $178.4; 12% of sales |
| Net income | $321.0 | $130.6 |
| Diluted EPS | $2.77 | $1.29 |
| Operating cash flow | $295.6 | $126.0 |
| Capital expenditures | $68.6 | $37.7 |
Sales rose 34%, mainly due to a 40% increase in average TiO2 selling prices. Sales volume fell 5% to 503,000 metric tons, while production rose 5%. Favorable currency movements added an estimated $70 million to sales; product mix reduced sales by about $87 million. Higher prices more than offset higher raw-material and maintenance costs; cost of sales increased 8%, and production cost per metric ton rose about 10%.
Income tax provision was $196.1 million, versus $9.7 million in 2010. The 2011 result included $17.2 million of U.S. incremental tax on repatriated German earnings; 2010 included a $35.2 million non-cash German tax benefit. Interest expense declined to $32.7 million from $38.8 million.
Cash and cash equivalents were $82.5 million at year-end, down from $304.7 million; current mutual-fund securities were $20.9 million, and additional marketable equity securities were $98.4 million. The European credit facility had $103.5 million available and no borrowings. Total debt was $365.1 million, primarily euro-denominated 6.5% senior secured notes; $279.2 million principal remained outstanding and the notes mature in April 2013. Shareholders’ equity was $924.3 million.
Working capital absorbed cash: inventory increased to $444.2 million from $275.8 million, and days in inventory rose to 104 from 52. Operating cash flow nevertheless increased year over year. Investing cash outflow was $218.1 million, including capital spending, marketable-security purchases and net lending to Valhi; financing cash outflow was $299.6 million, including debt repayment and $124.6 million of dividends. Kronos had a $136.1 million note receivable from Valhi.
Fourth-quarter results and changes
Fourth-quarter 2011 net sales were $437.4 million, gross margin was $194.1 million, net income was $85.8 million and EPS was $0.74. In fourth-quarter 2010, the comparable figures were $373.3 million, $103.4 million, $36.4 million and $0.33, respectively. Management attributed lower full-year sales volume versus 2010 largely to customer destocking and softer demand late in 2011.
During 2011, Kronos redeemed and repurchased portions of its senior notes, reducing reported total debt from $539.6 million to $365.1 million. It paid regular dividends of $0.575 per share plus a $0.50 special dividend; the annual total was $1.075 per share. The company completed a 2-for-1 stock split in May 2011.
Outlook, risks and unusual items
Management expected 2012 production at levels consistent with or slightly below 2011, with sales volumes increasing as demand recovered and year-end inventory was sold. It anticipated further TiO2 price increases and higher 2012 operating income. However, management projected production cost per metric ton to rise approximately 50%–60% in 2012, primarily because of feedstock ore costs, as well as increases in petroleum coke, energy and freight. These expectations are forward-looking and depend on market conditions.
- Industry and cost exposure: TiO2 prices and demand are cyclical; customer destocking, competition, capacity additions and higher or unavailable feedstock could pressure results. Feedstock supply contracts carry estimated minimum commitments of $2.6 billion; other service and supply commitments total $87.2 million.
- Debt and liquidity: The 2013 notes create a material refinancing requirement. Management expected adequate liquidity, but noted that weaker-than-expected results could affect covenant compliance and liquidity. Contractual commitments total $3.139 billion, including $819.9 million due in 2012, largely estimated feedstock purchases.
- Legal and tax matters: Kronos is defending a U.S. antitrust class action alleging TiO2 price-fixing; it denies the allegations and says it intends to defend vigorously. Canadian tax reassessments could result in approximately $11.6 million of cash taxes if fully upheld; the company is appealing and considers its accruals adequate.
- Other exposures: Environmental regulation, pension funding, foreign-exchange movements and marketable-security values may affect results. A 10% adverse currency move would increase the U.S.-dollar equivalent of the euro notes by an estimated $36.1 million. Related-party dealings include the Valhi loan, shared services and insurance arrangements.
The independent auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting; management also reported disclosure controls and internal control as effective at year-end.
Important facts for investors to verify
- Progress on refinancing or repaying the €279.2 million principal of notes due in April 2013, and access to the stated European credit availability.
- Whether 2012 price increases and volume recovery offset the forecast 50%–60% rise in production cost per metric ton.
- Inventory normalization, customer demand and resulting working-capital and operating-cash-flow trends.
- Developments in the antitrust litigation and Canadian tax reassessments, including any changes to recorded contingencies.
- Credit terms, collectability and use of the $136.1 million Valhi receivable, alongside other related-party transactions.