Kronos Worldwide Inc. 10-Q Summary: Quarter Ended June 30, 2010
Business Context and Reporting Period
Kronos Worldwide, Inc. (NYSE: KRO) is a leading global producer and marketer of titanium dioxide (TiO2) pigments used in plastics, paints, paper, and industrial products. The company is a majority-owned subsidiary of Valhi, Inc. This report covers the three and six months ended June 30, 2010. Approximately 50% of sales volumes are generated in European markets, with production facilities located in Europe and North America.
Key Financial Metrics
| Metric (in millions) | Q2 2010 | Q2 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Net Sales | $380.1 | $282.0 | $699.8 | $530.1 |
| Gross Margin | $85.2 (22%) | $14.1 (5%) | $145.7 (21%) | $18.3 (4%) |
| Operating Income | $38.8 | $(21.9) | $60.5 | $(48.2) |
| Net Income | $19.3 | $(21.8) | $62.1 | $(48.4) |
| Diluted EPS | $0.39 | $(0.45) | $1.27 | $(0.99) |
| Cash from Operations (YTD) | $(3.4) million (vs. $44.5 million in 2009) | |||
| Total Debt (June 30, 2010) | $550.8 million | |||
| Cash and Equivalents | $34.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 35% in Q2 and 32% YTD compared to 2009. This was driven primarily by a 30% increase in Q2 sales volumes and a 28% increase YTD, alongside modest price increases (6% in Q2, 3% YTD).
- Profitability Turnaround: The company shifted from significant operating losses in 2009 to profitability in 2010. Gross margin expanded from 5% to 22% in Q2 due to higher production volumes (54% increase in Q2) absorbing fixed costs, which were previously unabsorbed due to plant curtailments in 2009.
- Tax Benefit: Net income for the six months ended June 30, 2010, included a non-cash income tax benefit of $35.2 million resulting from a favorable European Court ruling regarding German net operating loss carryforwards.
- Cash Flow: Operating cash flow turned negative ($3.4 million used) YTD 2010 compared to positive cash flow in 2009, primarily due to a $154.2 million increase in cash used for working capital (specifically increases in receivables and inventory).
Outlook, Risks, and Management Commentary
- Guidance: Management expects average selling prices to continue increasing in the second half of 2010. Capacity utilization is expected to remain near full levels for the remainder of the year. The company anticipates reporting net income for the full year 2010.
- Cost Pressures: Management expects relative increases in raw material, energy, and freight costs in the second half of 2010, which price increases are intended to offset.
- Liquidity: The company has approximately $144.5 million in unused credit availability. It is in compliance with all debt covenants. Discussions are underway to extend the European revolving credit facility maturing in May 2011.
- Risks: Key risks include fluctuations in currency exchange rates (which negatively impacted operating income by $12 million in Q2), global economic conditions, raw material costs, and the outcome of pending litigation and tax examinations.
Investor Verification Checklist
- Working Capital Trends: Verify the sustainability of the increase in Days Sales Outstanding (DSO) and the impact of inventory build-up on future cash flows.
- Tax Benefit Sustainability: Confirm that the $35.2 million German tax benefit is a one-time non-cash item and does not reflect recurring operational earnings power.
- Debt Covenants: Monitor compliance with financial ratios, particularly regarding the European credit facility and the Restricted Payment Basket limitations on subsidiary dividends.
- Price Realization: Track the implementation of announced price increases in the second half of 2010 against rising raw material and energy costs.
- Capacity Utilization: Validate the ability to maintain near-full capacity utilization as global economic conditions evolve.