Kronos(KRO) - 2022 Q4 - Annual Report

Part I Business Overview Kronos Worldwide, Inc. is a leading global producer and marketer of titanium dioxide (TiO2), a key pigment used in coatings, plastics, and paper, operating primarily in Europe and North America General Overview - Kronos Worldwide, Inc. (NYSE: KRO) is a major global producer and marketer of value-added titanium dioxide (TiO2) pigments, serving approximately 4,000 customers in 100 countries[12] - TiO2 is a critical white pigment used for its durability, whiteness, brightness, and opacity in applications like coatings, plastics, and paper, considered superior to alternatives for comparable performance cost-effectively[13][14] - Demand for TiO2 is linked to global GDP and rising standards of living, with consumption growing at a compound annual rate of approximately 2% since 2000[15] - As of December 31, 2022, Valhi, Inc. owned approximately 50% of Kronos's common stock, and a subsidiary of NL Industries, Inc. owned about 31%[16] Products and End-Use Markets Market Share in Key Regions (2020-2022) | Region | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Europe | 17% | 15% | 14% | | North America | 18% | 17% | 17% | 2022 Sales Volume Breakdown | By Geographic Region | Percentage | By End-Use | Percentage | | :--- | :--- | :--- | :--- | | Europe | 45% | Coatings | 50% | | North America | 39% | Plastics | 29% | | Asia Pacific | 9% | Paper | 8% | | Rest of World | 7% | Other | 13% | - The company's core TiO2 pigments represented approximately 92% of net sales in 2022, with complementary businesses accounting for the remaining 8%[19][23][24] Manufacturing, Operations, and Properties - Kronos produces TiO2 using both the chloride process (preferred for coatings and plastics) and the sulfate process (preferred for specialty applications), with chloride process facilities representing about 45% of industry capacity in 2022[23][25] TiO2 Production Volumes and Capacity Utilization | Year | Production (Metric Tons) | Capacity Utilization | | :--- | :--- | :--- | | 2020 | 517,000 | 92% | | 2021 | 545,000 | Full Practical Capacity | | 2022 | 492,000 | 89% | - Production was curtailed in Q4 2022 due to reduced demand and high energy costs in Europe, with expectations to operate at 80-90% capacity in the first half of 2023, returning to near full capacity in the second half[26][28] Expected 2023 Manufacturing Capacity by Process | Process | % of Total Capacity | | :--- | :--- | | Chloride | 79% | | Sulfate | 21% | Raw Materials - The company is vertically integrated for its European sulfate process, sourcing ilmenite from its own mine in Norway, which has reserves expected to last at least 50 years[24][38] - For the chloride process, Kronos relies on a limited number of suppliers for titanium-containing feedstock, with supply contracts extending through 2026 in some cases[37] - Many raw material contracts have fixed purchase quantity commitments, with pricing generally negotiated quarterly or semi-annually[39] Sales and Marketing - The marketing strategy focuses on building strong, multi-level relationships with customers through a direct sales force and technical service group, particularly in Europe and North America[41][43] - The company has a diverse customer base, with the largest ten customers accounting for approximately 33% of net sales in 2022, and Behr Process Corporation being the only customer representing 10% or more of net sales[44] - TiO2 sales are generally higher in the second and third quarters due to seasonal painting demand, with the company historically operating at near full capacity year-round, building inventory in Q1 and Q4 to meet peak demand[45][46] Competition - The TiO2 industry is highly competitive, with key factors being price, product quality, technical service, and availability, and Kronos's principal competitors include The Chemours Company, Tronox Incorporated, LB Group Co. Ltd., and Venator Materials PLC[47][48] Estimated Worldwide Production Capacity - 2022 | Company | Capacity Share | | :--- | :--- | | Chemours | 15% | | Tronox | 12% | | LB Group Co. Ltd. | 11% | | Venator | 7% | | Kronos | 7% | | Other | 48% | - The industry has high barriers to entry, including high capital costs and proprietary technology, with no significant new capacity additions by major competitors expected in Europe or North America, other than debottlenecking and a planned LB Group expansion[50] Human Capital Resources Employee Count as of December 31, 2022 | Region | Number of People | | :--- | :--- | | Europe | 1,841 | | Canada | 369 | | United States | 56 | | Total | 2,266 | - Approximately 88% of the company's worldwide workforce is organized under collective bargaining agreements, with no work stoppages occurring in 2022[71] Risk Factors The company faces significant risks related to its operations, finances, and the legal/regulatory environment, including market cyclicality, intense competition, supplier dependency, substantial debt, currency fluctuations, and evolving environmental regulations - Operational Risk: The company's profitability is highly dependent on the cyclical TiO2 industry, with demand linked to global GDP and pricing subject to alternating periods of increasing and decreasing demand in a concentrated and highly competitive market[78][79][81] - Raw Material Risk: The company depends on a limited number of suppliers for key raw materials like titanium-containing feedstocks, with supply contracts requiring minimum purchase commitments of approximately $1.0 billion from 2023 through 2026, which could be adverse if production is significantly reduced[82][83] - Financial Risk: As of December 31, 2022, the company had approximately $425 million in consolidated debt, which could impair its ability to satisfy obligations, fund operations, and compete effectively, while a significant portion of sales and costs in foreign currencies creates exposure to exchange rate fluctuations[84][88] - Regulatory & Legal Risk: The company is exposed to potential litigation and evolving environmental, health, and safety regulations that could increase costs, limit TiO2 marketability, or restrict operations, despite the annulment of the EU's classification of TiO2 as a suspected carcinogen in November 2022[63][89][91] Properties Information regarding the company's properties, including its production facilities and corporate headquarters, is detailed in Item 1 under 'Manufacturing, Operations and Properties' - Details on the company's properties are incorporated by reference from the 'Manufacturing, Operations and Properties' section in Item 1 of this report[100] Legal Proceedings The company is involved in various legal claims incidental to its business, with further details incorporated by reference from Note 15 to the Consolidated Financial Statements - Information on legal proceedings is incorporated by reference from Note 15 to the Consolidated Financial Statements[101] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Kronos Worldwide's common stock trades on the NYSE under the symbol KRO, with the company repurchasing 217,778 shares in 2022 and 1,331,332 shares remaining available for repurchase as of year-end, while its cumulative total return underperformed both the S&P 500 and a peer group index over the five-year period ending December 31, 2022 Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased Under Plan | Max Shares Remaining Under Plan | | :--- | :--- | :--- | :--- | :--- | | November 2022 | 46,931 | $9.71 | 46,931 | 1,428,298 | | December 2022 | 96,966 | $9.46 | 96,966 | 1,331,332 | - In 2022, the company repurchased a total of 217,778 shares, with 1,331,332 shares still available for repurchase under the authorized program at December 31, 2022[105] Cumulative Total Stockholder Return (2017-2022, $100 Investment) | Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Kronos common stock | $100 | $46 | $56 | $67 | $70 | $47 | | S&P 500 Composite | $100 | $96 | $126 | $149 | $192 | $157 | | Peer Group | $100 | $48 | $39 | $53 | $77 | $61 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net income decreased to $104.5 million from $112.9 million in 2021, driven by lower sales volumes and significantly higher production costs, partially offset by higher average TiO2 selling prices, with the company anticipating lower operating results for 2023 but maintaining sufficient liquidity Results of Operations Financial Performance Summary (2021 vs. 2022) | Metric | 2021 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,939.4 million | $1,930.2 million | 0% | | Gross Margin | 23% | 20% | (3 pts) | | Income from Operations | $187.1 million | $159.6 million | (15)% | | Net Income | $112.9 million | $104.5 million | (7)% | | TiO2 Sales Volumes (kMT) | 563 thousand metric tons | 481 thousand metric tons | (15)% | | TiO2 Production Volumes (kMT) | 545 thousand metric tons | 492 thousand metric tons | (10)% | - The slight decrease in 2022 net sales was due to a 21% increase in average TiO2 selling prices being offset by a 15% decrease in sales volumes and a 5% negative impact from currency exchange rates[121] - Gross margin decreased from 23% to 20% in 2022, as higher production costs (raw materials, energy) and $26 million in unabsorbed costs from production curtailments outweighed the benefit of higher selling prices[122] Financial Performance Summary (2020 vs. 2021) | Metric | 2020 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,638.8 million | $1,939.4 million | 18% | | Gross Margin | 21% | 23% | +2 pts | | Income from Operations | $116.2 million | $187.1 million | 61% | | Net Income | $63.9 million | $112.9 million | 77% | | TiO2 Sales Volumes (kMT) | 531 thousand metric tons | 563 thousand metric tons | 6% | | TiO2 Production Volumes (kMT) | 517 thousand metric tons | 545 thousand metric tons | 5% | - The 18% increase in net sales in 2021 was driven by an 8% increase in average TiO2 selling prices and a 6% increase in sales volumes, reflecting recovery from the COVID-19 impact in 2020[131] Outlook - The company expects lower operating results for the full year of 2023 compared to 2022[148] - Demand weakness from late 2022 continued into early 2023, particularly in North America, though pockets of improving demand were seen in Europe and export markets due to customer inventory replenishment[147][148] - The company began a measured ramp-up of production at the start of 2023, expecting to operate at full practical capacity by the end of Q2 2023, with selling prices anticipated to rise during the last three quarters of 2023 to counter higher production costs[148] Liquidity and Capital Resources Cash Flow Summary | Cash Flow (in millions) | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $102.5 million | $206.5 million | $81.7 million | | Net cash used in investing activities | ($61.3 million) | ($58.6 million) | ($63.1 million) | | Net cash used in financing activities | ($85.3 million) | ($86.7 million) | ($91.5 million) | - Cash from operations decreased by $124.8 million in 2022 compared to 2021, primarily due to lower income from operations and a significant increase in cash used for inventory[170] - At December 31, 2022, total debt was $425.2 million, primarily consisting of €400 million in 3.75% Senior Secured Notes due 2025, with no outstanding borrowings on its $225 million global revolving credit facility and $211 million available[177][314] - Capital expenditures were $63.2 million in 2022 and are planned to be approximately $46 million in 2023, with $20 million targeted for environmental compliance and efficiency programs[173][186] - The company paid dividends of $0.76 per share in 2022, totaling $87.8 million, and declared a regular quarterly dividend of $0.19 per share for Q1 2023[175][176] Critical Accounting Policies and Estimates - The most critical accounting policies involve significant judgment and relate to long-lived assets, defined benefit pension plans, and income taxes[154] - Defined Benefit Pension Plans: Accounting for these plans requires significant assumptions for discount rates, long-term rate of return on assets, and future compensation levels, with a 25 basis point decrease in the discount rate at year-end 2022 increasing projected benefit obligations by approximately $18 million[155][166] - Income Taxes: The company has substantial net operating loss (NOL) carryforwards in Germany ($414 million) and Belgium ($13 million) with indefinite carryforward periods, for which no valuation allowance was deemed necessary at year-end 2022[168][350] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in interest rates, currency exchange rates, and raw material prices, though interest rate risk is minimized by fixed-rate debt, while significant currency risk exists due to global operations and euro-denominated debt, and raw material price risk is managed through long-term supply agreements with periodic price renegotiations - The majority of the company's debt is comprised of fixed-rate, euro-denominated Senior Secured Notes, which minimizes earnings volatility from interest rate changes[190] - The company is exposed to currency exchange risk from its global operations, where a hypothetical 10% adverse change in exchange rates at December 31, 2022, would increase the U.S. dollar equivalent of its euro-denominated debt by approximately $43 million[192][196] - Exposure to raw material price changes is managed via long-term supply agreements, but pricing is generally renegotiated quarterly or semi-annually, leaving the company subject to price volatility[197] Financial Statements and Supplementary Data This section indicates that the company's audited financial statements and supplementary data are included in a separate section of the Annual Report, starting on page F-1 - The required financial statements and supplementary data are located in the 'Index of Financial Statements' on page F-1 of the report[200] Controls and Procedures As of December 31, 2022, the company's management, including the CEO and CFO, concluded that its disclosure controls and internal control over financial reporting were effective, an assessment confirmed by PricewaterhouseCoopers LLP, with no material changes to internal controls reported during Q4 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[201] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the 2013 COSO framework[203] - PricewaterhouseCoopers LLP, the independent auditor, also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[204] Part III Items 10-14 Information required for Items 10 through 14, covering Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships and Related Transactions, and Principal Accounting Fees and Services, is incorporated by reference from the company's definitive proxy statement to be filed with the SEC - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's definitive proxy statement for its 2023 annual meeting[212][213][214] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report, including the consolidated financial statements with an index on page F-1, and an Exhibit Index detailing all accompanying documents - The consolidated financial statements for the Registrant are filed with this Annual Report, with an index provided on page F-1[219] - An index of all exhibits filed with the report is provided, including key agreements such as the Indenture for the Senior Notes, the Global Revolver Credit Agreement, and various intercompany and joint venture agreements[221][222] Financial Statements and Supplementary Data Consolidated Financial Statements The consolidated financial statements present Kronos Worldwide, Inc.'s financial position and results for 2020-2022, showing total assets decreasing from $2,012.8 million in 2021 to $1,934.4 million in 2022, total liabilities decreasing from $1,142.6 million to $977.2 million, and total stockholders' equity increasing from $870.2 million to $957.2 million, with net income for 2022 at $104.5 million Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2021 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,258.0 | $1,242.2 | | Net Property and Equipment | $503.4 | $484.5 | | Total Assets | $2,012.8 | $1,934.4 | | Total Current Liabilities | $288.8 | $326.7 | | Total Noncurrent Liabilities | $853.8 | $650.5 | | Total Liabilities | $1,142.6 | $977.2 | | Total Stockholders' Equity | $870.2 | $957.2 | Consolidated Statement of Income Highlights (in millions) | Account | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net Sales | $1,638.8 | $1,939.4 | $1,930.2 | | Gross Margin | $351.2 | $446.2 | $391.1 | | Income from Operations | $116.2 | $187.1 | $159.6 | | Net Income | $63.9 | $112.9 | $104.5 | Notes to Consolidated Financial Statements The notes provide detailed disclosure on the company's accounting policies, segment information, debt structure, employee benefit plans, income taxes, and related party transactions, including its 50% ownership in the LPC joint venture, the terms of the €400 million Senior Notes due 2025, significant underfunded non-U.S. pension plans, and substantial NOL carryforwards in Germany Note 5 – Investment in TiO2 manufacturing joint venture - Kronos owns a 50% interest in Louisiana Pigment Company, L.P. (LPC), a manufacturing joint venture with Venator Investments LLC, requiring Kronos to purchase one-half of the TiO2 produced by LPC[302][303] - The joint venture operates on a break-even basis, resulting in no equity in earnings reported by Kronos, which made net contributions of $10.5 million to LPC in 2022, a shift from net distributions of $3.8 million in 2021[303][304] Note 8 – Long-term debt Long-Term Debt Summary (in millions) | Debt Instrument | Dec 31, 2021 | Dec 31, 2022 | | :--- | :--- | :--- | | 3.75% Senior Notes (KII) | $448.8 | $424.1 | | Other | $2.4 | $1.1 | | Total Debt | $451.2 | $425.2 | - The primary debt is €400 million in 3.75% Senior Secured Notes due September 2025, issued by subsidiary Kronos International, Inc. (KII)[314] - The company has a $225 million global revolving credit facility maturing in April 2026, with no borrowings outstanding at year-end 2022 and approximately $211 million available[316][317] Note 10 – Defined contribution and defined benefit retirement plans - The company sponsors various defined benefit pension plans, primarily for non-U.S. employees, with the total net underfunded status decreasing significantly from $287.4 million in 2021 to $128.6 million in 2022[247][322] - The decrease in the underfunded status was mainly due to a large decrease in the Projected Benefit Obligation (PBO) from $748.1 million to $502.8 million for non-U.S. plans, driven by higher discount rates (actuarial gains) and favorable currency fluctuations[325][326] - The company expects to contribute approximately $17 million to all defined benefit pension plans in 2023[324] Note 12 – Income taxes - The company's effective tax rate was 22.0% in 2022, down from 26.4% in 2021, primarily due to lower earnings, the jurisdictional mix of earnings, and the release of a valuation allowance related to business interest expense carryforwards[126][347] - At December 31, 2022, the company had substantial net operating loss (NOL) carryforwards in Germany (equivalent of $414 million) and Belgium (equivalent of $13 million), both with indefinite carryforward periods[350] - The balance of the unpaid one-time repatriation tax (Transition Tax) from the 2017 Tax Act was $44.7 million at December 31, 2022, payable in installments through 2025[352] Note 15 – Commitments and contingencies - The company has long-term supply contracts for TiO2 feedstock with minimum purchase commitments of approximately $1.0 billion for years subsequent to 2022, including about $600 million committed for 2023[379] - One customer, Behr Process Corporation, accounted for approximately 10% of net sales in 2022, while the top ten customers accounted for 33% of net sales[44][377] - As a member of the Contran Tax Group, Kronos is jointly and severally liable for the federal income tax liability of the entire group, but is indemnified by Valhi for any liability in excess of its own calculated share[380]