Kronos Worldwide, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Amounts are in U.S. dollars unless noted. Kronos produces and markets titanium dioxide (TiO₂) pigments, with roughly half of Q1 sales in Europe.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $420.1 million | $463.6 million |
| Gross margin | $80.5 million; 19% of sales | $3.9 million; 1% of sales |
| Operating income (loss) | $26.0 million; 6% of sales | $(46.9) million; (10)% of sales |
| Net income (loss) | $14.3 million; $0.12 per share | $(41.1) million; $(0.35) per share |
| Cash used in operating activities | $2.5 million | $39.3 million |
| Capital expenditures | $16.3 million | $19.0 million |
Net sales decreased 9%. TiO₂ sales volumes fell 7% and average selling prices fell 5%; currency movements added an estimated $7 million to sales. Cost of sales declined 26%, mainly due to lower feedstock and other production costs, and lower sales and production volumes. Management estimated the lower production costs contributed approximately $93 million to the year-over-year cost-of-sales decrease. Interest expense was $4.0 million, down from $6.4 million; income tax expense was $7.9 million versus a tax benefit of $18.5 million.
At March 31, 2014, cash and cash equivalents were $179.0 million and total cash, cash equivalents and restricted cash were $188.3 million. Total assets were $1.756 billion; stockholders’ equity was $920.6 million. Total debt was approximately $350.5 million, including a new $350 million term loan due February 2020 and $2.2 million of other debt. The company had approximately $107 million available on its North American revolver and $123.4 million available on its European facility, subject to facility terms. It reported compliance with debt covenants, including the European facility waiver then in effect through June 30, 2014.
The company paid a quarterly dividend of $0.15 per share, or $17.4 million in total. It estimated 2014 capital expenditures of approximately $68 million and pension and postretirement plan contributions of approximately $26 million.
Material changes versus Q1 2013
- Results shifted from an operating and net loss to operating and net income, principally because of lower raw-material costs, partly offset by weaker pricing and sales volumes.
- TiO₂ sales volumes were 7% lower and production volumes 2% lower. Management attributed lower export-market sales partly to competitive pressure and reported stronger demand in certain European markets.
- Cash used in operations improved by $36.8 million to $2.5 million, but remained an operating cash outflow. Financing activities provided $143.5 million, including borrowing under the new term loan; cash rose to $179.0 million from $53.8 million at year-end.
- Debt increased from $183.5 million at December 31, 2013 to $350.5 million at March 31, 2014, following the February term-loan issuance and repayment of the $170 million Contran note. The term loan carries variable-rate pricing and is secured by specified subsidiary shares, an intercompany note and a second-priority lien on certain U.S. assets.
- Q1 2013 included a $6.6 million pretax, noncash charge related to prepayment of an earlier term loan; Q1 2014 did not.
Outlook, commentary and risks
Management expected 2014 operating income to exceed 2013, citing lower feedstock costs, anticipated higher sales and production volumes, resumption of Canadian production, the 2013 litigation-settlement charge, and potential selling-price increases. This is management’s expectation, not a quantified earnings forecast. Management also expected 2014 cost of sales per ton to be below 2013 and the remainder of 2014 to be below Q1 levels.
Management expected production and sales volumes to be higher in 2014 than in 2013, while continuing to operate below capacity. Q1 facility utilization was 90%; the Canadian facility restarted in February after a labor lockout. Price increases depended on market conditions. The company cited cyclical TiO₂ demand, competition, customer inventories, raw-material and energy costs, capacity changes, currency movements, operating interruptions, and the ability to maintain liquidity as key uncertainties. It expected sufficient liquidity for near- and longer-term obligations, but cautioned that results differing from expectations could adversely affect liquidity.
Canadian tax authorities’ reassessments for 2002–2004 remain under appeal; the company estimated a cash tax exposure of approximately $15.2 million if the full proposed adjustment were assessed and stated it believed its accruals were adequate. Other tax examinations and environmental, contractual, product-liability, patent, employment and other claims are also disclosed; management did not expect their disposition to materially adversely affect the company beyond amounts accrued. No material changes to previously reported risk factors were identified. Disclosure controls were reported effective as of March 31, 2014.
Important facts for investors to verify
- Whether TiO₂ pricing and volumes improved as management anticipated, and whether expected price increases were achieved.
- Whether lower feedstock costs translated into sustained margin improvement, given the procurement-to-sales cost lag.
- Progress in restarting and ramping the Canadian facility, including any labor or operating disruptions.
- Debt terms, variable-rate exposure, covenant compliance and continued availability under the European facility after its June 30, 2014 waiver.
- Cash conversion and liquidity: Q1 operating cash flow was negative despite higher earnings, and cash growth was supported by financing.
- Developments in Canadian tax reassessments and other legal or tax matters, including the disclosed potential Canadian tax exposure.
- Whether the planned 2014 capital spending and benefit-plan contributions, alongside the dividend, are supported by operating cash flows.