Kronos Worldwide, Inc. — Q1 2016 Form 10-Q
Business and reporting period. This unaudited report covers the three months ended March 31, 2016, with balance-sheet comparisons to December 31, 2015. Kronos is a global producer and marketer of titanium dioxide (TiO₂) pigments, used primarily in paints, plastics, paper and other products. About half of Q1 sales volumes went to Europe.
Financial performance
| Metric | Q1 2015 | Q1 2016 |
|---|---|---|
| Net sales | $365.1 million | $318.4 million |
| Gross margin | $77.4 million (21% of sales) | $40.4 million (13% of sales) |
| Operating income (loss) | $32.2 million | $(0.3) million |
| Net income (loss) | $18.4 million | $(3.8) million |
| Diluted earnings (loss) per share | $0.16 | $(0.03) |
| Net cash used in operating activities | $10.0 million | $15.3 million |
| Capital expenditures | $11.7 million | $14.3 million |
Revenue and margins. Sales fell 13% year over year. A 14% decline in average selling prices reduced sales by about $51 million; 5% higher sales volumes added about $18 million. Foreign-exchange translation reduced sales by an estimated $11 million. Sales volumes reached a first-quarter record. Cost of sales declined 3%, but its share of sales rose to 87% from 79% as lower prices outweighed lower input costs and improved volumes. Currency changes increased operating income by an estimated $7 million year over year.
Cash, debt and liquidity. Cash and cash equivalents were $55.5 million at March 31, down from $92.5 million at year-end; restricted cash was another $1.3 million. Total debt was $349.8 million, including $337.5 million carrying value for the term loan, $9.2 million drawn on the North American revolver and $3.1 million of other debt. The term loan’s average rate was 4.0%; North American revolver borrowings averaged 4.25%. The company reported $79.1 million available on the North American facility and approximately $7.5 million on its European facility, and said it was in compliance with debt covenants. It expected sufficient liquidity for near- and long-term obligations.
Current assets were $695.2 million and current liabilities $188.9 million at quarter-end. Operating cash use reflected the seasonal working-capital pattern and lower operating results. The company paid $17.4 million in dividends, or $0.15 per share, during the quarter.
Changes, outlook and risks
- Results shifted from profit to loss, principally because of sharply lower selling prices. Higher volumes, lower feedstock and other production costs, workforce savings and currency effects provided partial offsets.
- Production capacity utilization was 97%, versus 93% in Q1 2015. Management expected 2016 production and sales volumes to exceed 2015 levels, assuming economic conditions did not deteriorate.
- Management expected per-ton costs for the rest of 2016 to be below comparable 2015 periods, citing lower-cost ore and cost-reduction initiatives. It forecast 2016 operating income above 2015, but gave no specific earnings target. Price increases announced by Kronos and competitors were expected to be implemented in the first half of 2016 or as contracts allowed; realization remained dependent on market conditions.
- Workforce reductions affecting about 160 employees were expected to generate approximately $19 million in annual savings. Planned 2016 capital expenditures were approximately $63 million, including spending on a new accounting and manufacturing system. Management expected full-year 2016 interest expense to be comparable to 2015.
- Q1 included a $2.0 million pretax gain from settlement of a 2014 business-interruption insurance claim; a further $1.4 million received in April was expected to be recognized in Q2. No additional material recovery was expected.
- A $168.9 million valuation allowance against German and Belgian deferred tax assets was reported at year-end and did not change materially in Q1. Management believed some reversal might be possible in 2016 but did not expect a full reversal; future realization depends on sustained profitability and other positive evidence.
- Key risks include TiO₂ pricing and demand cyclicality, competition and capacity changes, raw-material and energy costs, foreign-exchange and interest-rate movements, liquidity and refinancing, environmental requirements, tax matters and litigation. The company reported an indirect-purchaser TiO₂ antitrust case and said it had not accrued a loss; it also reported dismissal with prejudice of a separate Valspar case in April 2016, without material financial effect.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Management’s forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- Whether selling prices stabilize or recover, and whether announced industry price increases are realized.
- Whether higher volumes, lower ore costs and workforce savings offset pricing pressure sufficiently to improve operating results and cash generation.
- Cash needs, revolver availability and covenant headroom, particularly under the European facility’s EBITDA-based borrowing test.
- The status and potential effect of the German and Belgian deferred-tax valuation allowance, tax examinations and litigation.
- Execution and cost of the planned capital program and new systems; the filing does not provide a specific 2016 earnings forecast.