Income taxes

12 Months Ended

Dec. 31, 2022

Income taxes

Income taxes

Note 13 - Income taxes:

The provision for income taxes and the difference between such provision for income taxes and the amount that would be expected using the U.S. federal statutory income tax rate are presented below.

	Years ended December 31,
	2020		2021		2022
	(In millions)
Expected tax expense, at U.S. federal statutory   income tax rate of 21%	$	2.9	$	12.8	$	8.2
Nontaxable dividends received from Kronos		(5.3)		(5.3)		(5.6)
U.S. state income taxes and other, net		(.1)		—		.2
Income tax expense (benefit)	$	(2.5)	$	7.5	$	2.8
Components of income tax expense (benefit):
Currently payable	$	—	$	—	$	.5
Deferred income tax expense (benefit)		(2.5)		7.5		2.3
Income tax expense (benefit)	$	(2.5)	$	7.5	$	2.8
Comprehensive provision (benefit) for income taxes allocable to:
Net income	$	(2.5)	$	7.5	$	2.8
Additional paid-in capital		(.1)		—		—
Other comprehensive income:
Currency translation		.9		(.4)		(1.8)
Pension plans		(.7)		3.2		6.5
OPEB plans		(.1)		—		.1
Total	$	(2.5)	$	10.3	$	7.6

In accordance with GAAP, we recognize deferred income taxes on our undistributed equity in earnings (losses) of Kronos. Because we and Kronos are part of the same U.S. federal income tax group, any dividends we receive from Kronos are nontaxable to us. Accordingly, we do not recognize and we are not required to pay income taxes on dividends from Kronos. We received aggregate dividends from Kronos of $25.4 million in each of 2020 and 2021 and $26.8 million in 2022. See Note 6.

The components of the net deferred tax liability at December 31, 2021 and 2022 are summarized in the following table.

	December 31,
	2021				2022
	Assets		Liabilities		Assets		Liabilities
	(In millions)
Tax effect of temporary differences related to:
Inventories	$	.5	$	—	$	.4	$	—
Marketable securities		—		(7.0)		—		(5.3)
Property and equipment		—		(2.7)		—		(2.0)
Accrued OPEB costs		.2		—		.2		—
Accrued pension costs		.5		—		.4		—
Accrued employee benefits		1.3		—		1.3		—
Accrued environmental liabilities		26.7		—		24.3		—
Goodwill		—		(1.7)		—		(1.7)
Other accrued liabilities and deductible differences		.2		—		.2		—
Other taxable differences		—		(2.3)		—		(2.4)
Investment in Kronos Worldwide, Inc.		—		(59.8)		—		(65.5)
Adjusted gross deferred tax assets (liabilities)		29.4		(73.5)		26.8		(76.9)
Netting of items by tax jurisdiction		(29.4)		29.4		(26.8)		26.8
Net noncurrent deferred tax liability	$	—	$	(44.1)	$	—	$	(50.1)

At December 31, 2022, we had NOL carryforwards for federal income tax purposes of approximately $21.9 million all of which have an indefinite carryforward period subject to an 80% annual usage limitation. Our deferred tax asset for such NOL carryforward is net of a portion of our uncertain tax positions as discussed below.

We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations. We believe the ultimate disposition of tax examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

At December 31, 2020, 2021, and 2022, the gross amount of our uncertain tax positions (exclusive of the effect of interest and penalties) was $7.3 million, and there was no change in such amount during the past three years. Previously, we made certain pro-rata distributions to our stockholders in the form of Kronos common stock and we recognized a taxable gain related to such distributions. Our uncertain tax positions are attributable to such prior period distribution of Kronos common stock. As discussed in Note 1, we are part of the Contran Tax Group and we have not paid this liability because Contran has not paid the liability to the applicable tax authority. This liability would be payable by Contran to the applicable tax authority only if the shares of Kronos common stock were to be sold or otherwise disposed outside of the Contran Tax Group. At December 31, 2022, $4.6 million of our uncertain tax position is classified as a component of our noncurrent deferred tax liability. If our uncertain tax position at December 31, 2022 was recognized, a benefit of $7.3 million would affect our effective income tax rate. We currently estimate that our unrecognized tax benefits will not change materially during the next twelve months.

We and Contran file income tax returns in U.S. federal and various state and local jurisdictions. Our U.S. income tax returns prior to 2019 are generally considered closed to examination by applicable tax authorities.

Income tax matters related to Kronos

Kronos has substantial net operating loss (NOL) carryforwards in Germany (the equivalent of $414 million for German corporate tax purposes at December 31, 2022) and in Belgium (the equivalent of $13 million for Belgian corporate tax purposes at December 31, 2022). At December 31, 2022, Kronos has concluded that no deferred income tax asset valuation allowance is required to be recognized with respect to such carryforwards, principally because (i) such

carryforwards have an indefinite carryforward period, (ii) Kronos has utilized a portion of such carryforwards during the most recent three-year period and (iii) Kronos currently expects to utilize the remainder of such carryforwards over the long term. However, prior to the complete utilization of such carryforwards, if Kronos were to generate additional losses in its German or Belgian operations for an extended period of time, or if applicable law were to change such that the carryforward period was no longer indefinite, it is possible that Kronos might conclude the benefit of such carryforwards would no longer meet the more-likely-than-not recognition criteria, at which point Kronos would be required to recognize a valuation allowance against some or all of the then-remaining tax benefit associated with the carryforwards.

Prior to the enactment of the 2017 Tax Act, the undistributed earnings of Kronos’ European subsidiaries were deemed to be permanently reinvested (Kronos had not made a similar determination with respect to the undistributed earnings of its Canadian subsidiary). Pursuant to the one-time repatriation tax (Transition Tax) provisions of the 2017 Tax Act which imposed a one-time repatriation tax on post-1986 undistributed earnings, Kronos recognized current income tax expense of $74.5 million and elected to pay such tax over an eight year period beginning in 2018. At December 31, 2022 the balance of its unpaid Transition Tax is $44.7 million, which will be paid in annual installments over the remainder of the eight-year period, which ends in 2025. Of such $44.7 million, $33.5 million is recorded as a noncurrent payable to affiliate (income taxes payable to Valhi) classified as a noncurrent liability in its Consolidated Balance Sheet at December 31, 2022, and $11.2 million is included with its current payable to affiliate (income taxes payable to Valhi) classified as a current liability (a portion of its noncurrent income tax payable to affiliate was reclassified to its current payable to affiliate for the portion of its 2022 Transition Tax installment due within the next twelve months).

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law in response to the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, modifications to the limitation of business interest for tax years beginning in 2019 and 2020 and technical corrections to tax depreciation methods for qualified improvement property. The 2017 Tax Act limited Kronos’ business interest expense to the sum of its business interest income and 30% of its adjusted taxable income as defined in the Tax Act. Any business interest expense disallowed as a deduction as a result of the limitation may be carried forward indefinitely. Kronos determined its interest expense was limited under these provisions and recorded deferred tax assets for the carryforwards associated with the nondeductible portion of its interest expense. Kronos also concluded that it is required to recognize a valuation allowance for such deferred tax asset under the more-likely-than-not recognition criteria. The CARES Act modification to the business interest provisions increased the business interest limitation from 30% of adjusted taxable income to 50% of adjusted taxable income which increased Kronos’ allowable interest expense deduction for 2019 and 2020. Consequently, in the first quarter of 2020 Kronos recognized a cash tax benefit of $.5 million related to the reversal of the valuation allowance recognized in 2019 for the portion of the disallowed interest expense Kronos did not expect to fully utilize at December 31, 2019 and Kronos has considered such modifications in its 2020 provision for income taxes. The CARES Act provisions expired at the end of 2020, and in 2021 Kronos recognized additional disallowed interest expense and increased the valuation allowance by $2.8 million for the portion of the carryforward Kronos believed did not meet the more-likely-than-not measurement criteria. During 2022, Kronos determined it was able to utilize a portion of the business interest expense carryforward and accordingly it recognized an aggregate non-cash income tax benefit of $3.5 million as a reduction of the valuation allowance.

On August 16, 2022, the Inflation Reduction Act was signed into law. Among other things, this legislation provides for a 15% corporate alternative minimum tax on certain large corporations, imposes a 1% excise tax on qualifying stock buybacks occurring after December 31, 2022, and provides for certain energy-related tax credits. Kronos has evaluated the relevant provisions of the Act and does not expect them to have a material impact on its tax provision.

Tax authorities may in the future examine certain of Kronos’ U.S. and non-U.S. tax returns and may propose tax deficiencies, including penalties and interest. Because of the inherent uncertainties involved in settlement initiatives and court and tax proceedings, Kronos cannot guarantee that these tax matters, if any, will be resolved in Kronos’ favor, and therefore its potential exposure, if any, is also uncertain. Kronos believes it has adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations. Kronos believes the ultimate disposition of

tax examinations should not have a material adverse effect on its consolidated financial position, results of operations or liquidity.