Kronos Worldwide, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing. Kronos is a global producer of titanium dioxide (TiO₂) pigments; TiO₂ represented about 90% of 2014 net sales.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $1,651.9 million | $1,732.4 million |
| Gross margin | $349.7 million; 21% of sales | $112.2 million; 6% of sales |
| Operating income (loss) | $149.7 million; 9% of sales | $(132.6) million; (8)% of sales |
| Net income (loss) | $99.2 million; $0.86 per share | $(102.0) million; $(0.88) per share |
| Operating cash flow | $87.7 million | $130.4 million |
| Capital expenditures | $61.2 million | $67.6 million |
Fourth-quarter 2014 net sales were $373.5 million and net income was $19.9 million, compared with $368.6 million and $2.9 million, respectively, in fourth-quarter 2013.
TiO₂ sales volume was nearly unchanged at 496,000 metric tons versus 498,000; production rose 8% to 511,000 metric tons. Average selling prices fell 6% for the year, while prices at year-end were 9% below year-end 2013. Cost of sales fell 20%, primarily reflecting lower feedstock and other production costs, higher production, and the absence of 2013 Canadian lockout costs. Currency movements increased 2014 operating income by an estimated $42 million versus 2013.
Balance sheet, debt and liquidity
- At year-end, cash and cash equivalents were $167.7 million; restricted cash was $2.2 million and marketable securities were $11.1 million.
- Total debt was $348.6 million, up from $183.5 million in 2013. The principal borrowing was a $347.4 million term loan, due February 2020, with a 4.75% year-end rate; most debt was variable-rate. Stockholders’ equity was $781.1 million, down from $935.1 million.
- Available borrowing capacity was approximately $94.2 million under the North American revolver and $79 million under the European facility. The company reported compliance with debt covenants at year-end.
- Contractual commitments totaled $1,198.7 million, including $531.8 million of TiO₂ feedstock purchases and $164.4 million of other supply and service contracts. These commitments are not all debt. Management estimated 2015 pension and postretirement contributions of approximately $19 million.
- Operating cash flow declined despite the return to profitability, principally because working-capital changes used $106.1 million in 2014, compared with providing $219.8 million in 2013.
Material changes and unusual items
- The business returned to profitability after a 2013 loss. Lower raw-material costs and higher production were the principal drivers; lower selling prices partly offset the improvement.
- 2013 results included a $35 million litigation settlement charge and approximately $28 million of Canadian plant lockout, pension-curtailment, severance and restart-related costs. The settlement was paid in 2014; it related to a U.S. TiO₂ antitrust case that was dismissed with prejudice as to Kronos.
- In February 2014, Kronos issued a new $350 million term loan and used $170 million of proceeds to repay its note payable to Contran. The loan’s remaining principal is largely due in 2020.
- Comprehensive loss was $84.6 million in 2014 despite net income, reflecting $183.8 million of other comprehensive loss, including currency translation and pension effects. Defined-benefit plans recorded a $103.9 million actuarial loss, primarily due to lower discount rates and updated mortality tables.
- A $5.1 million noncash tax benefit resulted from reductions in reserves for uncertain tax positions. A Canadian tax appeal was resolved in the company’s favor, releasing related letters of credit and contributing to tax benefits.
Outlook, risks and contingencies
Management expected 2015 sales and production volumes to exceed 2014, assuming economic conditions did not deteriorate. It expected below-full-capacity operations during improvement projects and maintenance shutdowns, slightly lower cost of sales per metric ton, and 2015 operating income comparable to 2014. Management cautioned that anticipated lower selling prices could offset much of the benefit from higher volume. It described long-term TiO₂ demand growth expectations of 2%–3% annually.
- Results remain exposed to cyclical TiO₂ demand and pricing, competition, producer and customer inventories, capacity changes, and the ability to pass through feedstock, energy and other cost increases.
- Raw-material supply is concentrated, and supply contracts include minimum-purchase commitments. Foreign exchange movements can materially affect reported results and cash flows.
- Two pending U.S. cases allege TiO₂ price-fixing: an indirect-purchaser class action and a separate Valspar action. Kronos denied the allegations and stated it intended to defend itself. The filing does not provide a clear estimate of potential loss.
- Environmental regulation, operating interruptions, labor disruption, debt refinancing and liquidity, pension assumptions, tax audits and recognized tax attributes are additional risks. Kronos stated that it believed its facilities were in substantial environmental compliance and that existing litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether TiO₂ prices and margins stabilized or improved after year-end, and whether volume gains offset pricing pressure.
- Whether cost reductions from lower feedstock prices continued to flow through cost of sales, given procurement-to-sale timing.
- Cash conversion and working-capital needs, available revolver capacity, variable-rate debt exposure and covenant headroom.
- Developments and potential exposure in the pending antitrust cases, as well as environmental and tax contingencies.
- The effect of lower pension discount rates, future required contributions, and the large 2014 pension and currency-related comprehensive losses.