Edgar Filing: KRONOS WORLDWIDE INC

kro-10q_20160930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2016

Commission file number 1-31763

KRONOS WORLDWIDE, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE

76-0294959

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

5430 LBJ Freeway, Suite 1700

Dallas, Texas 75240-2697

(Address of principal executive offices)

Registrant’s telephone number, including area code: (972) 233-1700

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Number of shares of the Registrant’s common stock outstanding on October 31, 2016: 115,894,098.

KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

INDEX

		Page number
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets - December 31, 2015; September 30, 2016 (unaudited)	3
	Condensed Consolidated Statements of Operations (unaudited) - Three and nine months ended September 30, 2015 and 2016	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) - Three and nine months ended September 30, 2015 and 2016	6
	Condensed Consolidated Statement of Stockholders’ Equity (unaudited) - Nine months ended September 30, 2016	7
	Condensed Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 30, 2015 and 2016	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		30
Item 4.	Controls and Procedures		30
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings		32
Item 1A.	Risk Factors		32
Item 6.	Exhibits	32
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

	December 31,		September 30,
	2015		2016
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	92.5	$	92.1
Restricted cash		1.8		1.2
Accounts and other receivables		220.8		267.8
Inventories, net		387.2		317.1
Prepaid expenses and other		8.5		12.3

Total current assets		710.8		690.5

Other assets:
Investment in TiO₂ manufacturing joint venture		82.9		79.8
Marketable securities		2.4		4.0
Deferred income taxes		14.0		17.9
Other		3.1		2.7

Total other assets		102.4		104.4

Property and equipment:
Land		37.8		39.1
Buildings		197.4		204.5
Equipment		941.6		978.9
Mining properties		102.6		116.2
Construction in progress		29.2		47.8
		1,308.6		1,386.5
Less accumulated depreciation and amortization		879.1		939.9

Net property and equipment		429.5		446.6

Total assets	$	1,242.7	$	1,241.5

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In millions)

	December 31,			September 30,
	2015			2016
				(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt	$	3.8		$	22.0
Accounts payable and accrued liabilities		192.2			179.1
Income taxes		5.7			5.4

Total current liabilities		201.7			206.5

Noncurrent liabilities:
Long-term debt		337.2			336.0
Deferred income taxes		8.1			9.3
Accrued pension cost		202.7			203.3
Accrued postretirement benefits cost		6.7			7.0
Other		24.4			24.5

Total noncurrent liabilities		579.1			580.1

Stockholders' equity:
Common stock		1.2			1.2
Additional paid-in capital		1,398.7			1,398.8
Retained deficit		(526.0	)		(558.1	)
Accumulated other comprehensive loss		(412.0	)		(387.0	)

Total stockholders' equity		461.9			454.9

Total liabilities and stockholders' equity	$	1,242.7		$	1,241.5

Commitments and contingencies (Notes 8 and 12)

See accompanying notes to Condensed Consolidated Financial Statements.

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

	Three months ended						Nine months ended
	September 30,						September 30,
	2015			2016			2015			2016
	(unaudited)
Net sales	$	336.5		$	356.1		$	1,061.8		$	1,030.6
Cost of sales		293.3			280.6			894.7			859.2

Gross margin		43.2			75.5			167.1			171.4

Selling, general and administrative expense		42.3			43.6			137.3			129.7
Other operating income (expense):
Currency transaction gains (losses), net		(.7	)		(1.0	)		.6			3.2
Other operating expense, net		(3.4	)		(2.9	)		(11.8	)		(6.7	)

Income (loss) from operations		(3.2	)		28.0			18.6			38.2

Other income (expense):
Interest and dividend income		.3			.1			.6			.5
Securities transactions, net		(12.0	)		-			(12.0	)		-
Interest expense		(4.3	)		(5.2	)		(13.3	)		(15.4	)

Income (loss) before income taxes		(19.2	)		22.9			(6.1	)		23.3

Income tax expense (benefit)		(7.4	)		.7			147.1			3.2

Net income (loss)	$	(11.8	)	$	22.2		$	(153.2	)	$	20.1

Net income (loss) per basic and diluted share	$	(.10	)	$	.19		$	(1.32	)	$	.17

Cash dividends per share	$	.15		$	.15		$	.45		$	.45

Weighted average shares used in the calculation of net income (loss) per share		115.9			115.9			115.9			115.9

See accompanying notes to Condensed Consolidated Financial Statements.

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

	Three months ended						Nine months ended
	September 30,						September 30,
	2015			2016			2015			2016
	(unaudited)
Net income (loss)	$	(11.8	)	$	22.2		$	(153.2	)	$	20.1

Other comprehensive income (loss), net of tax:
Currency translation		(18.0	)		9.0			(77.5	)		18.4
Marketable securities		3.6			.9			2.9			1.1
Defined benefit pension plans		3.4			2.9			10.4			8.7
Other postretirement benefit plans		(.1	)		(.1	)		(.3	)		(.3	)
Interest rate swap		(3.7	)		.8			(3.7	)		(2.9	)

Total other comprehensive income (loss), net		(14.8	)		13.5			(68.2	)		25.0

Comprehensive income (loss)	$	(26.6	)	$	35.7		$	(221.4	)	$	45.1

See accompanying notes to Condensed Consolidated Financial Statements.

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine months ended September 30, 2016

(In millions)

								Accumulated
			Additional		Retained			other
	Common		paid-in		earnings			comprehensive
	stock		capital		(deficit)			loss			Total
	(unaudited)
Balance at December 31, 2015	$	1.2	$	1,398.7	$	(526.0	)	$	(412.0	)	$	461.9

Net income		-		-		20.1			-			20.1
Other comprehensive income, net of tax		-		-		-			25.0			25.0
Issuance of common stock		-		.1		-			-			.1
Dividends paid		-		-		(52.2	)		-			(52.2	)

Balance at September 30, 2016	$	1.2	$	1,398.8	$	(558.1	)	$	(387.0	)	$	454.9

See accompanying notes to Condensed Consolidated Financial Statements.

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

	Nine months ended
	September 30,
	2015			2016
	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	(153.2	)	$	20.1
Depreciation and amortization		32.1			30.7
Deferred income taxes		138.6			(2.5	)
Security transactions, net		12.0			-
Benefit plan expense greater than cash funding		4.3			4.2
Distributions from TiO₂ manufacturing joint venture, net		7.6			3.1
Other, net		5.9			(.3	)
Change in assets and liabilities:
Accounts and other receivables		(2.1	)		(36.9	)
Inventories		1.6			81.1
Prepaid expenses		(3.0	)		(3.3	)
Accounts payable and accrued liabilities		(7.4	)		(9.0	)
Income taxes		.8			1.6
Accounts with affiliates		10.3			(18.2	)
Other, net		2.6			(1.9	)

Net cash provided by operating activities		50.1			68.7

Cash flows from investing activities:
Capital expenditures		(31.7	)		(34.3	)
Change in restricted cash, net		.7			.7

Net cash used in investing activities		(31.0	)		(33.6	)

Cash flows from financing activities:
Indebtedness:
Borrowings		1.3			209.9
Principal payments		(2.9	)		(194.2	)
Dividends paid		(52.1	)		(52.2	)

Net cash used in financing activities		(53.7	)		(36.5	)

Cash and cash equivalents - net change from:
Operating, investing and financing activities		(34.6	)		(1.4	)
Currency translation		(6.3	)		1.0
Balance at beginning of period		167.7			92.5

Balance at end of period	$	126.8		$	92.1

Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized	$	11.9		$	13.9
Income taxes		6.8			4.4
Accrual for capital expenditures		3.2			4.8

See accompanying notes to Condensed Consolidated Financial Statements.

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KRONOS WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

Note 1 - Organization and basis of presentation:

Organization - At September 30, 2016, Valhi, Inc. (NYSE: VHI) held approximately 50% of our outstanding common stock and NL Industries, Inc. (NYSE: NL) held approximately 30% of our common stock, Valhi owned approximately 83% of NL’s outstanding common stock and a wholly-owned subsidiary of Contran Corporation held approximately 93% of Valhi’s outstanding common stock. All of Contran’s outstanding voting stock is held by a family trust established for the benefit of Lisa K. Simmons and Serena Simmons Connelly and their children, for which Ms. Simmons and Ms. Connelly are co-trustees, or is held directly by Ms. Simmons and Ms. Connelly or entities related to them. Consequently, Ms. Simmons and Ms. Connelly may be deemed to control Contran, Valhi, NL and us.

Basis of presentation - The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2015 that we filed with the Securities and Exchange Commission (SEC) on March 10, 2016 (2015 Annual Report). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. We have condensed the Consolidated Balance Sheet at December 31, 2015 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date, and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2015) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Our results of operations for the interim periods ended September 30, 2016 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2015 Consolidated Financial Statements contained in our 2015 Annual Report.

Unless otherwise indicated, references in this report to “we,” “us” or “our” refer to Kronos Worldwide, Inc. and its subsidiaries (NYSE: KRO) taken as a whole.

Note 2 - Accounts and other receivables:

	December 31,			September 30,
	2015			2016
	(In millions)
Trade receivables	$	194.8		$	238.8
Recoverable VAT and other receivables		17.8			15.0
Receivable from affiliates:
Louisiana Pigment Company, L.P.		-			8.8
Income taxes, net - Valhi		-			.7
Other		2.5			2.8
Refundable income taxes		6.8			2.7
Allowance for doubtful accounts		(1.1	)		(1.0	)
Total	$	220.8		$	267.8

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Note 3 - Inventories, net:

	December 31,		September 30,
	2015		2016
	(In millions)
Raw materials	$	75.9	$	60.1
Work in process		21.1		25.4
Finished products		232.4		170.5
Supplies		57.8		61.1
Total	$	387.2	$	317.1

Note 4 - Marketable securities:

Our marketable securities consist of investments in the publicly-traded shares of related parties: Valhi, NL and CompX International Inc. NL owns the majority of CompX’s outstanding common stock. All of our marketable securities are accounted for as available-for-sale securities, which are carried at fair value using quoted market prices in active markets for each marketable security, and represent a Level 1 input within the fair value hierarchy. See Note 13. Because we have classified all of our marketable securities as available-for-sale, any unrealized gains or losses on the securities are recognized through other comprehensive income, net of deferred income taxes.

	Fair value
	measurement	Market		Cost		Unrealized
Marketable security	level	value		basis		gain (loss)
		(In millions)
December 31, 2015
Valhi common stock	1	$	2.3	$	3.2	$	(.9	)
NL and CompX common stocks	1		.1		.1		-
Total		$	2.4	$	3.3	$	(.9	)

September 30, 2016
Valhi common stock	1	$	3.9	$	3.2	$	.7
NL and CompX common stocks	1		.1		.1		-
Total		$	4.0	$	3.3	$	.7

At December 31, 2015 and September 30, 2016, we held approximately 1.7 million shares of Valhi’s common stock. We also held a nominal number of shares of CompX and NL common stocks. At December 31, 2015 and September 30, 2016, the quoted per share market price of Valhi’s common stock was $1.34 and $2.30, respectively.

The Valhi, CompX and NL common stocks we own are subject to the restrictions on resale pursuant to certain provisions of SEC Rule 144. In addition, as a majority-owned subsidiary of Valhi we cannot vote our shares of Valhi common stock under Delaware General Corporation law, but we do receive dividends from Valhi on these shares, when declared and paid.

Note 5 - Other noncurrent assets:

	December 31,		September 30,
	2015		2016
	(In millions)
Deferred financing costs, net	$	1.0	$	.6
Pension asset		.4		.5
Other		1.7		1.6
Total	$	3.1	$	2.7

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Note 6 - Accounts payable and accrued liabilities:

	December 31,		September 30,
	2015		2016
	(In millions)
Accounts payable	$	96.1	$	81.2
Employee benefits		14.2		20.9
Accrued sales discounts and rebates		18.9		19.6
Reserve for uncertain tax positions		-		3.3
Interest rate swap contract		3.3		3.3
Accrued workforce reduction costs		5.3		3.0
Accrued interest		.2		.1
Payable to affiliates:
Louisiana Pigment Company, L.P.		19.4		12.7
Income taxes, net - Valhi		.1		-
Other		34.7		35.0
Total	$	192.2	$	179.1

During the first nine months of 2016, we made an aggregate of $2.4 million in payments with respect to workforce reduction costs accrued as of December 31, 2015. See Note 13 for a discussion of the interest rate swap contract.

Note 7 - Long-term debt:

	December 31,		September 30,
	2015		2016
	(In millions)
Term loan	$	338.0	$	336.4
Revolving North American credit facility		-		18.5
Other		3.0		3.1
Total debt		341.0		358.0
Less current maturities		3.8		22.0
Total long-term debt	$	337.2	$	336.0

Term loan - During the first nine months of 2016, we made our required quarterly term loan principal payments aggregating $2.6 million. The average interest rate on the term loan borrowings as of and for the nine months ended September 30, 2016 was 4.0%. The carrying value of the term loan at September 30, 2016 is stated net of unamortized original issue discount of $1.0 million and debt issuance costs of $3.8 million.

See Note 13 for a discussion of the interest rate swap we entered into in 2015 pursuant to our interest rate risk management strategy.

Revolving North American credit facility - During the first nine months of 2016, we borrowed a net $18.5 million under our North American revolving credit facility. The average interest rate on outstanding borrowings as of and for the nine months ended September 30, 2016 was 4.25% and 4.13%, respectively. At September 30, 2016 we had approximately $57.4 million available for additional borrowing under this revolving facility.

Revolving European credit facility - Our European revolving credit facility requires the maintenance of certain financial ratios, and one of such requirements is based on the ratio of net debt to last twelve months earnings before income tax, interest, depreciation and amortization expense (EBITDA) of the borrowers. Based upon the borrowers’ last twelve months EBITDA as of September 30, 2016 and the net debt to EBITDA financial test, our borrowing availability at September 30, 2016 is approximately 22% of the credit facility, or €26.4 million ($29.6 million).

Other - We are in compliance with all of our debt covenants at September 30, 2016.

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Note 8 - Income taxes:

	Three months ended						Nine months ended
	September 30,						September 30,
	2015			2016			2015			2016
	(In millions)
Expected tax expense (benefit), at U.S. federal statutory income tax rate of 35%	$	(6.8	)	$	8.1		$	(2.2	)	$	8.2
Non-U.S. tax rates		(.1	)		(1.0	)		(.7	)		(1.4	)
Incremental net tax expense (benefit) on earnings and losses of non-U.S. companies		(4.2	)		(.8	)		(3.1	)		(1.6	)
Valuation allowance		2.3			(.8	)		152.6			2.1
U.S.-Canada APA		-			(5.6	)		-			(5.6	)
Adjustment to the reserve for uncertain tax positions, net		.3			.4			.1			.6
Nondeductible expenses		.9			.3			.4