Kronos(KRO) - 2020 Q4 - Annual Report

Part I Business Overview Kronos Worldwide is a leading global producer and marketer of titanium dioxide (TiO2) pigments for various industries - Kronos is a leading global producer and marketer of value-added titanium dioxide pigments (TiO2), selling to approximately 4,000 customers in 100 countries[11] - At December 31, 2020, approximately 50% of the company's common stock was owned by Valhi, Inc., and 30% by a subsidiary of NL Industries, Inc., indicating a concentrated ownership structure[15] 2020 Sales Volume Breakdown | By Geographic Region | Percentage | By End-Use | Percentage | | :--- | :--- | :--- | :--- | | Europe | 46% | Coatings | 58% | | North America | 36% | Plastics | 30% | | Asia Pacific | 11% | Paper | 6% | | Rest of World | 7% | Other | 6% | Market Share in Key Regions | Region | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Europe | 13% | 18% | 17% | | North America | 17% | 19% | 18% | - The company's business is enhanced by three complementary businesses which comprised approximately 7% of net sales in 2020: operating ilmenite mines, manufacturing iron-based chemicals, and producing titanium specialty chemicals[27] TiO2 Production Volumes and Capacity Utilization | Year | Production (Metric Tons) | Capacity Utilization | | :--- | :--- | :--- | | 2018 | 536,000 | 95% | | 2019 | 546,000 | 98% | | 2020 | 517,000 | 92% | - As of December 31, 2020, the company employed 2,242 people, with approximately 86% of the worldwide workforce organized under collective bargaining agreements[60][62] - On February 18, 2020, the European Union published a regulation classifying TiO2 powder as a suspected carcinogen via inhalation, requiring new hazard labels on certain products[73] Risk Factors The company faces operational, financial, legal, and general risks, including industry cyclicality, competition, leverage, and regulatory changes - Operational Risks: Profitability is highly dependent on the cyclical TiO2 industry, where the top five producers account for about 52% of global capacity, and faces risks from raw material costs and availability[79][81][82] - Financial Risks: As of December 31, 2020, total consolidated debt was approximately $487 million, and the company is exposed to currency exchange rate risks with 46% of 2020 sales volumes in European markets[87][91] - Legal and Regulatory Risks: The company is exposed to potential litigation and increased compliance costs from new regulations, such as the EU's classification of TiO2 powder as a suspected carcinogen[92][93][97] - COVID-19 Impact: The pandemic significantly impacted 2020 operations, primarily through reduced demand, with the future extent of the impact remaining uncertain[85] Part II Market for Common Equity and Related Stockholder Matters The company's common stock (NYSE: KRO) has an active repurchase program, and its five-year total return has underperformed its peer group - The company's common stock is listed on the NYSE under the symbol KRO[106] - In 2020, the company repurchased 122,489 shares of its common stock, with 1,563,519 shares remaining available for repurchase under the authorized program[107] Cumulative Total Stockholder Return (2015-2020) | Year | Kronos Common Stock | S&P 500 Composite Stock Index | Peer Group | | :--- | :--- | :--- | :--- | | 2015 | $100 | $100 | $100 | | 2016 | $230 | $112 | $374 | | 2017 | $512 | $136 | $828 | | 2018 | $238 | $130 | $395 | | 2019 | $292 | $171 | $323 | | 2020 | $346 | $203 | $441 | Selected Financial Data The five-year financial summary from 2016 to 2020 shows significant fluctuations in performance, with peak net income in 2017 followed by a decline Selected Financial Data (2016-2020) | Metric | 2016 | 2017 | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales ($M) | 1,364.3 | 1,729.0 | 1,661.9 | 1,731.1 | 1,638.8 | | Income from operations ($M) | 92.9 | 347.8 | 330.1 | 145.8 | 116.2 | | Net income ($M) | 43.3 | 354.5 | 205.0 | 87.1 | 63.9 | | Net income per share ($) | 0.37 | 3.06 | 1.77 | 0.75 | 0.55 | | Total assets ($M) | 1,179.6 | 1,824.4 | 1,898.1 | 1,965.8 | 2,036.7 | | Long-term debt ($M) | 339.0 | 474.5 | 456.6 | 445.5 | 487.4 | | Operating cash flow ($M) | 89.6 | 276.1 | 188.5 | 160.3 | 102.5 | | Sales volumes (k metric tons) | 559 | 586 | 491 | 566 | 531 | | Production volumes (k metric tons) | 546 | 576 | 536 | 546 | 517 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management analyzes financial performance, attributing the 2020 income decline to pandemic impacts while confirming sufficient liquidity and outlining critical accounting policies Results of Operations The company's 2020 net income declined due to lower sales volumes and prices from the COVID-19 pandemic, though a recovery is expected in 2021 Comparison of Results of Operations (2020 vs. 2019) | Metric | 2019 ($M) | 2020 ($M) | % Change | | :--- | :--- | :--- | :--- | | Net sales | 1,731.1 | 1,638.8 | (5)% | | Gross margin | 386.2 | 351.2 | (9)% | | Income from operations | 145.8 | 116.2 | (20)% | | TiO2 Sales volumes (k tons) | 566 | 531 | (6)% | - The 5% decrease in 2020 net sales was primarily due to a 6% decrease in sales volumes and a 2% decrease in average TiO2 selling prices[124] Comparison of Results of Operations (2019 vs. 2018) | Metric | 2018 ($M) | 2019 ($M) | % Change | | :--- | :--- | :--- | :--- | | Net sales | 1,661.9 | 1,731.1 | 4% | | Gross margin | 562.2 | 386.2 | (31)% | | Income from operations | 330.1 | 145.8 | (56)% | | TiO2 Sales volumes (k tons) | 491 | 566 | 15% | - The 4% increase in 2019 net sales was driven by a 15% increase in sales volumes, which was partially offset by a 6% decrease in average TiO2 selling prices[137] - Outlook for 2021: Management expects sales and income from operations to be higher than in 2020, driven by anticipated higher average TiO2 selling prices and sales volumes[157] Critical Accounting Policies and Estimates Key accounting judgments involve impairment of long-lived assets, pension plan assumptions, and the realizability of deferred tax assets - The most critical accounting policies involve significant judgment regarding long-lived assets, defined benefit pension plans, and income taxes[164] Pension Plan Discount Rate Assumptions (for Obligations) | Region | at Dec 31, 2018 | at Dec 31, 2019 | at Dec 31, 2020 | | :--- | :--- | :--- | :--- | | Germany | 1.8% | 1.0% | 0.7% | | Canada | 3.5% | 3.0% | 2.4% | | Norway | 2.5% | 2.3% | 1.7% | | U.S. | 4.1% | 3.1% | 2.2% | - The company has substantial net operating loss carryforwards in Germany ($531 million) and Belgium ($20 million) as of December 31, 2020[179] Liquidity and Capital Resources The company maintains sufficient liquidity through cash from operations and credit facilities despite a decrease in operating cash flow in 2020 Consolidated Cash Flow Summary | Cash Flow Activity ($M) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Operating activities | 188.5 | 160.3 | 102.5 | | Investing activities | (42.7) | (52.5) | (61.3) | | Financing activities | (80.4) | (87.9) | (85.3) | - At December 31, 2020, the company had consolidated debt of $487.4 million, primarily comprising €400 million of 3.75% Senior Secured Notes due 2025[188][190] - At December 31, 2020, the company had $107.6 million available under its North American revolving credit facility and the full €90 million ($110.3 million) available under its European facility[192] - The company intends to spend approximately $85 million on capital expenditures in 2021, including $23 million for environmental programs[201] Contractual Commitments as of December 31, 2020 | Contractual Commitment ($M) | 2021 | 2022/2023 | 2024/2025 | 2026 and after | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Indebtedness (Principal & Interest) | 19.1 | 37.8 | 521.9 | - | 578.8 | | Operating leases | 7.4 | 6.8 | 3.1 | 20.1 | 37.4 | | Long-term supply contracts (TiO2 feedstock) | 483.5 | 690.1 | - | - | 1,173.6 | | Other supply contracts & obligations | 79.8 | 53.8 | 46.0 | 3.3 | 182.9 | | Total | $590.8 | $788.5 | $571.0 | $23.4 | $1,973.7 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks stem from currency exchange rates, interest rates, and raw material prices, with significant exposure from non-U.S. operations - The company's primary market risks are from changes in currency exchange rates, interest rates, and raw material prices[210] - The majority of the company's debt is fixed-rate, which minimizes earnings volatility from interest rate changes, but the euro-denominated Senior Secured Notes expose the company to currency exchange rate risk[211][216] - A hypothetical 10% adverse change in the euro exchange rate at December 31, 2020, would increase the U.S. dollar equivalent of the Senior Secured Notes by approximately $49 million[216] Financial Statements and Supplementary Data Consolidated Financial Statements The consolidated financial statements show a decrease in 2020 net income and operating cash flow, alongside an increase in total assets and long-term debt Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2019 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $390.8 | $355.3 | | Total current assets | $1,219.7 | $1,218.3 | | Net property and equipment | $490.6 | $524.6 | | Total assets | $1,965.8 | $2,036.7 | | Total current liabilities | $270.6 | $260.2 | | Long-term debt | $444.0 | $486.7 | | Total liabilities | $1,149.7 | $1,240.2 | | Total stockholders' equity | $816.1 | $796.5 | Consolidated Statement of Income Highlights (in millions) | Account | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $1,661.9 | $1,731.1 | $1,638.8 | | Gross margin | $562.2 | $386.2 | $351.2 | | Income from operations | $330.1 | $145.8 | $116.2 | | Net income | $205.0 | $87.1 | $63.9 | | Net income per share | $1.77 | $0.75 | $0.55 | Notes to Consolidated Financial Statements The notes detail key accounting policies, debt instruments, pension plans, income taxes, and significant related party transactions - The company accounts for its 50% interest in the Louisiana Pigment Company, L.P. (LPC) joint venture using the equity method[328][329] - Long-term debt primarily consists of €400 million in 3.75% Senior Secured Notes issued by subsidiary KII, due in 2025[340] - At year-end 2020, the non-U.S. pension plans had a total underfunded status of $364.9 million, while the U.S. plan had an underfunded status of $3.3 million[353][361] - The company has significant net operating loss (NOL) carryforwards in Germany ($531 million) and Belgium ($20 million) with indefinite carryforward periods[381] - Significant related party transactions exist with parent and affiliated companies, including intercorporate service agreements, shared insurance programs, and tax sharing agreements[397][400][405] - The company has long-term supply contracts with minimum purchase commitments for TiO2 feedstock aggregating approximately $1.2 billion subsequent to December 31, 2020[414]