Kronos Worldwide, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Kronos is a global producer of titanium dioxide (TiO₂), with sales concentrated in Europe and North America. TiO₂ represented about 90% of 2013 net sales.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $1,732.4 million | $1,976.3 million |
| Gross margin | $112.2 million; 6% of sales | $560.4 million; 28% of sales |
| Operating income (loss) | $(132.6) million; (8)% of sales | $359.6 million; 18% of sales |
| Net income (loss) | $(102.0) million; $(0.88) per share | $218.5 million; $1.89 per share |
| Cash from operating activities | $130.4 million | $76.9 million |
| Capital expenditures | $67.6 million | $74.8 million |
| Cash dividends per share | $0.60 | $0.60 |
TiO₂ sales volume rose 6% to 498,000 metric tons; production increased 1% to 474,000 metric tons, at 86% of capacity. Fourth-quarter 2013 net sales were $368.6 million, gross margin $51.5 million, and net income $2.9 million, compared with $396.8 million, $49.6 million, and a net loss of $18.1 million, respectively, in fourth-quarter 2012.
Liquidity, debt and balance sheet
- At December 31, 2013, cash and cash equivalents were $53.8 million, restricted cash $10.0 million, and marketable securities $30.4 million. Cash had declined from $282.7 million at year-end 2012.
- Total assets were $1.619 billion, total stockholders’ equity $935.1 million, and consolidated debt $183.5 million at year-end 2013, versus $400.1 million of debt at year-end 2012.
- In February 2014, Kronos entered a $350 million term loan, used $170 million of proceeds to repay its Contran note, and retained $172.8 million of net proceeds for general corporate purposes. Debt after this transaction was approximately $363.5 million.
- At year-end, $89.1 million was available under the North American revolver. European revolver availability was subject to a covenant waiver through June 30, 2014; borrowing capacity increased under the waiver from €60 million to €90 million effective January 1, 2014.
- Management said liquidity should be sufficient for near- and longer-term obligations, but the company’s European borrowing ability and covenant compliance depend on operating results. Adjusted contractual commitments for 2014 were approximately $471.7 million.
Material changes and unusual items
- Revenue fell 12% year over year, principally because average TiO₂ selling prices declined 19%; higher sales volume partly offset the price decline. Selling prices stabilized during the final three quarters, and fourth-quarter average prices were 1% above the third quarter.
- Cost of sales rose 14% to $1.620 billion. Higher raw-material and production costs, especially feedstock ore, combined with lower selling prices, drove gross margin down sharply. Management estimated 2013 cost of sales would have been about $218 million lower using then-current third-party ore costs, reflecting a procurement-to-sale cost lag.
- 2013 results included a $35 million antitrust class-action settlement charge; approximately $28 million of Canadian lockout, pension-curtailment, severance and back-to-work costs; and an $8.9 million charge for early term loan repayments.
- A labor lockout at the Canadian plant, which represents about 19% of company capacity, began in June 2013. A new agreement was reached in November, employees returned in December, and production resumed in February 2014. The agreement included workforce reductions and a freeze of the hourly defined-benefit pension plan.
- Operating cash flow improved by $53.5 million despite the operating loss, mainly reflecting inventory reductions, lower income-tax payments and higher net distributions from the manufacturing joint venture. Inventories declined to $416.6 million from $638.3 million.
Outlook, commentary and risks
Management expected 2014 sales and production volumes to exceed 2013 levels and operating income to improve, citing lower feedstock costs, Canadian plant recovery, higher anticipated volumes, the absence of the 2013 settlement charge, and potential selling-price increases. It expected to operate below full capacity because of the Canadian ramp-up and maintenance and improvement projects. These expectations are conditional on economic conditions, demand, pricing, competition, and other factors outside management’s control.
- Major risks include the cyclical and competitive TiO₂ market, price and demand changes, customer inventories, raw-material availability and cost, energy costs, currency fluctuations, unplanned outages, labor disruptions, environmental regulation, and access to liquidity or refinancing.
- Additional U.S. lawsuits alleging TiO₂ price-fixing remained pending; Kronos denied wrongdoing and said it intended to defend them. The $35 million settlement of the earlier direct-purchaser class action was payable in installments expected by mid-2014.
- Canadian tax reassessments for 2002–2004 could result in approximately $15.7 million of cash tax liability if fully upheld; Kronos disputed the assessments. The company also reported other tax examinations and uncertain tax positions.
- Environmental compliance and protection capital expenditures were $24.8 million in 2013 and were expected to be about $14 million in 2014. Total 2014 capital expenditures were projected at approximately $68 million.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded internal controls were effective at year-end.
Important facts for investors to verify
- Whether TiO₂ price increases took hold and whether lower feedstock costs flowed through to reported cost of sales and margins in 2014.
- The pace and cost of the Canadian plant’s production recovery, and whether the new labor agreement delivered expected savings.
- Current European revolver covenant compliance, waiver status, and actual borrowing availability.
- Payment timing and final resolution of the $35 million settlement, and developments in the remaining antitrust litigation.
- Actual cash generation, inventory and working-capital trends, debt service, and dividend capacity relative to contractual commitments.