Kronos Worldwide, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 9, 2022. Kronos is a global producer and marketer of titanium dioxide (TiO₂) pigments, with related mining and specialty-chemicals businesses. TiO₂ generated 92% of 2021 net sales. The company serves approximately 4,000 customers in 100 countries.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Net sales | $1,939.4 million | $1,638.8 million |
| Gross margin | $446.2 million; 23% of sales | $351.2 million; 21% of sales |
| Income from operations | $187.1 million; 10% of sales | $116.2 million; 7% of sales |
| Net income | $112.9 million; $0.98 per share | $63.9 million; $0.55 per share |
| Cash provided by operating activities | $206.5 million | $102.5 million |
| Capital expenditures | $58.6 million | $62.8 million |
- Sales increased 18% year over year, reflecting an 8% increase in average TiO₂ selling prices, 6% higher sales volume, and an estimated 3% favorable currency effect. Production volume rose 5% to 545,000 metric tons; plants operated at full practical capacity.
- Cost of sales rose 16% to $1,493.2 million, including higher raw-material and energy costs. Gross margin improved as pricing and production volumes more than offset cost pressures.
- Income tax expense was $40.5 million, up from $16.1 million, primarily due to higher earnings and the geographic mix of income. The effective rate was about 26%.
- At year-end, cash and cash equivalents were $406.0 million; restricted cash was $6.6 million. Current assets were $1,258.0 million and current liabilities were $288.8 million. The current ratio was approximately 4.4.
- Total debt was $451.2 million, mainly €400 million of 3.75% secured notes due September 2025. Cash exceeded debt by approximately $45 million, before considering restricted cash. The $225 million revolving facility, maturing in 2026, had no borrowings and approximately $213 million available. Kronos reported compliance with debt covenants.
- Dividends paid totaled $83.2 million, or $0.72 per share. In February 2022, the board declared a $0.19-per-share quarterly dividend.
Material changes versus comparable periods
- Compared with 2020, net income increased $49.0 million and operating income increased $70.9 million. The main drivers were recovery from pandemic-related demand weakness, higher selling prices and higher sales volume.
- Operating cash flow more than doubled, supported by stronger earnings and working-capital movements. Year-end inventory declined to $432.3 million from $519.0 million; days sales in inventory fell from 74 to 59.
- Compared with 2019, 2020 sales and earnings had fallen amid COVID-19 disruption and lower prices and volumes; 2021 results recovered above 2020 levels. The filing reports 2021 net income below 2019’s $87.1 million? No: 2021 net income of $112.9 million exceeded 2019’s $87.1 million.
- Currency movements increased 2021 sales by an estimated $43 million but reduced operating income by about $13 million. The company also recorded $2.0 million of gains on marketable equity securities in 2021; no insurance settlement gain was recognized that year.
- The non-U.S. defined-benefit pension underfunding decreased to $278.0 million from $364.9 million, principally due to higher discount rates and currency effects. Total accrued pension costs on the balance sheet were $287.4 million.
Outlook, commentary and risks
- Management expects 2022 sales and operating income to exceed 2021, with strong demand and continued price increases. It expects to operate plants at near-full practical capacity, but forecast sales volumes to be lower than 2021 as production is aligned with sales and current inventory levels.
- Management expects TiO₂ feedstock costs to rise further in 2022 versus the 2021 average, alongside higher energy, utility, shipping and other production costs. Price increases are expected to mitigate, but may not fully offset, cost inflation; margins remain challenged. Management expects the 2022 effective tax rate to exceed the 21% U.S. federal statutory rate.
- Planned 2022 capital expenditures are approximately $95 million, including about $32 million for environmental compliance, protection and improvement. Management expects to fund spending from cash or the revolving facility and says it expects sufficient liquidity for short- and long-term obligations.
- Key exposures include the cyclical TiO₂ market, pricing and customer inventories; feedstock availability and approximately $800 million of minimum feedstock purchase commitments beginning in 2022; supply-chain and transportation disruption; energy inflation; foreign-exchange movements; and the ability to refinance or maintain liquidity.
- Environmental regulation is a material operating risk. The EU TiO₂ classification and labeling rules took effect October 1, 2021; Kronos states its dry TiO₂ products do not meet the criteria requiring classification labels. Norwegian authorities raised the classification level of a mine dam, requiring increased oversight and expected additional capital spending.
- The company disclosed ongoing litigation and environmental, contractual, intellectual-property and other claims, but had not accrued material litigation losses because it considered a material loss not reasonably possible. The filing also highlights COVID-19 uncertainty, climate and extreme-weather exposure, cybersecurity risks, pension assumptions and tax matters.
- Kronos is controlled through a chain of related companies and reported related-party service, insurance and joint-venture transactions. It is jointly and severally liable for certain U.S. federal tax-group liabilities, with Valhi agreeing to indemnify it for amounts exceeding Kronos’s allocated liability.
Important facts for investors to verify
- Whether 2022 selling-price increases offset feedstock, energy, freight and other production-cost inflation, and whether management’s sales, income and volume expectations are achieved.
- Feedstock contract renewals, supplier concentration, minimum purchase obligations and the effect of any supply or logistics disruption.
- Cash conversion and working-capital trends, capital expenditure execution, dividend sustainability, and available borrowing capacity under the revolving credit facility.
- Euro-denominated debt exposure, currency effects on operating income, and progress toward the September 2025 notes maturity and refinancing needs.
- Environmental compliance and mine-dam spending, tax-asset realization and tax examinations, pension funding assumptions, and any material developments in litigation or related-party arrangements.
PricewaterhouseCoopers LLP issued an unmodified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2021. Income taxes were identified as a critical audit matter.