KRO

Kronos Worldwide Inc. 10-Q Summary (Period Ended Sept 30, 2009)

Business Context and Reporting Period

Kronos Worldwide, Inc. is a leading global producer of titanium dioxide (TiO2) pigments used in plastics, paints, and paper. The company is a majority-owned subsidiary of Valhi, Inc. This report covers the quarter and nine months ended September 30, 2009. Kronos operates primarily in Europe and North America, holding an estimated 19% share of the European TiO2 market and 16% of the North American market.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Performance: Q3 2009 showed a significant turnaround with net income of $8.6 million compared to a loss of $3.6 million in Q3 2008. Operating income rose to $21.1 million (7% margin) from $7.9 million (3% margin). This improvement was driven by lower maintenance costs, higher sales volumes (+3%), and favorable currency impacts, which offset a 5% decline in average selling prices.
• Year-to-Date Performance: For the nine months ended Sept 30, 2009, the company reported a net loss of $39.9 million versus net income of $1.8 million in 2008. Sales volumes dropped 14% and production volumes dropped 28% due to economic downturns and intentional production curtailments to reduce inventory. These curtailments resulted in approximately $80 million of unabsorbed fixed production costs charged to expense in the first half of 2009.
• Liquidity and Working Capital: Cash provided by operating activities increased significantly to $63.5 million (9M 2009) from $13.6 million (9M 2008), primarily due to a reduction in inventory levels (DSI dropped from 113 days to 48 days). Cash and cash equivalents rose from $13.6 million to $40.4 million.
• Dividends: The company suspended cash dividends in 2009. No dividends were paid in the first nine months of 2009, compared to $36.7 million paid in the same period of 2008.

Guidance, Outlook, and Risks

• Outlook: Management expects 2009 full-year income from operations to be lower than 2008 due to the impact of first-half production curtailments. However, capacity utilization improved to ~96% in Q3 2009 and is expected to remain between 90-95% in Q4. Average selling prices are expected to rise in Q4 2009 and into 2010 following announced price increases.
• Debt Covenants: The company secured waivers and entered a Fourth Amendment to its European revolving credit facility in September 2009 due to non-compliance with financial ratios in the first half of the year. Borrowing availability under this facility is currently limited to €51 million ($74.5 million) until compliance is achieved or March 31, 2010. The company believes it will comply with new covenants but notes that future operating results could impact this.
• Risks: Key risks include global economic conditions affecting demand, fluctuations in currency exchange rates (particularly the Euro), raw material costs, and the ability to maintain compliance with debt covenants. The company also faces potential tax examination outcomes and environmental liabilities.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the company's ability to meet the new financial covenants added to the European credit facility to avoid further restrictions on borrowing availability.
• Production Utilization: Monitor Q4 2009 capacity utilization rates to ensure they remain near the projected 90-95% to avoid further unabsorbed fixed costs.
• Price Realization: Confirm the implementation and market acceptance of announced price increases in Q4 2009 and Q1 2010 to offset volume declines.
• Inventory Levels: Track Days Sales in Inventory (DSI) to ensure the reduction trend continues without indicating a loss of market share.
• Dividend Policy: Assess the likelihood of dividend resumption given the current "Restricted Payment Basket" limitations and the expectation of a full-year net loss.