Tronox Holdings plc — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2020. Tronox operates mineral-sands mines and smelters and nine TiO₂ pigment facilities; it also sells zircon and other feedstock products. The COVID-19 pandemic affected demand and operations. Comparability with 2019 is affected by the April 2019 Cristal acquisition; reported nine-month 2020 results include Cristal for periods not included in reported 2019 results.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $675 million | $768 million | $1,975 million | $1,949 million |
| Gross profit / margin | $139 million / 21% | $133 million / 17% | $443 million / 22% | $316 million / 16% |
| Operating income | $49 million | $48 million | $177 million | $51 million |
| Net income (loss) attributable to Tronox | $896 million | $(13) million | $924 million | $(109) million |
| Adjusted EBITDA (non-GAAP) | $148 million | $184 million | $464 million | $459 million |
| Adjusted EBITDA margin | 22% | 24% | 23% | 24% |
Q3 sales fell 12% year over year, principally from lower TiO₂ volumes and selling prices, reduced zircon volumes and prices, and weaker feedstock sales. Nine-month reported sales rose 1%, but pro forma sales, assuming Cristal was included throughout both periods, declined 15% to $1,975 million from $2,315 million. On that pro forma basis, nine-month Adjusted EBITDA was $464 million versus $525 million in 2019. Management’s non-GAAP measures are not substitutes for GAAP results and may not be comparable with similarly titled measures at other companies.
Q3 attributable net income was dominated by a noncash $895 million U.S. deferred-tax valuation-allowance reversal; pretax income was $9 million. The nine-month tax benefit was $876 million, also primarily reflecting that reversal. The reported profit therefore does not represent a comparable improvement in underlying operating earnings.
Cash flow and liquidity: Nine-month operating cash flow was $156 million, down from $237 million, largely due to increased working-capital use, including a $100 million inventory cash outflow. Capital expenditures were $129 million. Cash and cash equivalents were $722 million at September 30, versus $302 million at year-end 2019; cash plus available revolver capacity totaled $1.098 billion. Working capital was $1.8 billion.
Debt: Total debt was approximately $3.5 billion and net debt was $2.7 billion, broadly unchanged from year-end net debt. Net debt to trailing-twelve-month pro forma Adjusted EBITDA was 4.5x. In May, Tronox issued $500 million of 6.5% secured notes due 2025, using part of the proceeds to repay $200 million drawn on revolvers. The filing reports compliance with financial covenants and no term-loan or bond maturities before 2024. The ABL facility has a springing covenant; management did not expect it to be triggered under its current scenario planning.
Material changes and management commentary
- Q3 revenue increased 17% sequentially, primarily on higher TiO₂ volumes, with selling prices flat sequentially. Volumes improved sequentially across regions, led by South and Central America; Asia Pacific remained weaker, largely due to India.
- Management attributed sequential gross-profit improvement to higher TiO₂ volumes, the reopening of South African mining after the COVID-19 lockdown, favorable Australian cost structures, and currency effects. Lower production, idle-facility costs, and lower-of-cost-or-market charges were offsets.
- Gross margin comparisons benefit from the prior-year Cristal inventory fair-value step-up and other acquisition-related comparability effects. On a pro forma basis, Q3 gross margin was 21% versus 23% in 2019; nine-month margin was 22% versus 21%.
- Tronox reported $183 million in Cristal-related synergies delivered through September, including $134 million reflected in EBITDA. It raised its 2020 synergy target to $235 million, of which $185 million is expected to be reflected in EBITDA; its stated longer-term goal had been approximately $220 million by 2022.
Outlook, risks, contingencies and unusual items
- Management expected operating cash flows and available borrowing capacity to fund operations, capital expenditures, interest, and debt repayments over the next 12 months, conditional on achieving its forecast. It warned that adverse macroeconomic conditions, particularly COVID-19 impacts, could require reductions in capital spending and operating costs.
- The company agreed to acquire Tizir Titanium and Iron for approximately $300 million in cash plus 3% annual accrual from January 1, 2020 to closing. Closing was subject to regulatory approvals and other conditions. An $18 million termination payment may apply in specified circumstances, potentially increasing to no more than $20 million if extensions are exercised; $18 million was held in restricted cash.
- Environmental liabilities were $70 million on the balance sheet. A $60 million provision relates to remediation at the former Hawkins Point plant; the company said it could not estimate a reasonably possible loss range above recorded environmental liabilities.
- Venator sued for a claimed $75 million break fee related to the Cristal divestiture; Tronox counterclaimed for $400 million in damages. Tronox stated it believed its contract interpretation was correct but could not assure it would prevail.
- Moody’s outlook changed from B1 positive to B1 stable, and S&P’s from B stable to B negative. The filing also identifies commodity-price, customer-credit, currency, floating-rate debt, environmental, regulatory, and pandemic-related risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and equity growth reflects the $895 million noncash tax valuation-allowance reversal, rather than operating performance.
- Whether TiO₂ demand, volumes, prices, and margins recover, and how COVID-19 conditions affect regional sales and production costs.
- Whether operating cash flow improves after the substantial working-capital outflow, and whether liquidity and leverage remain manageable.
- Progress toward the raised synergy target and the expected cost, timing, and financing of the TTI acquisition.
- Developments in the Hawkins Point remediation, Venator litigation, and other environmental or legal matters, including any change in estimated liabilities.