Tronox Holdings plc — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Tronox operates mineral-sands mines and beneficiation facilities and nine TiO₂ pigment plants, with products including TiO₂ pigment, zircon, feedstock, pig iron, and titanium chemicals.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $895 million | $870 million | $2,805 million | $2,688 million |
| Gross profit / margin | $232 million / 25.9% | $244 million / 28.0% | $727 million / 25.9% | $677 million / 25.2% |
| Operating income | $163 million | $168 million | $422 million | $443 million |
| Net income | $123 million | $113 million | $514 million | $216 million |
| Adjusted EBITDA (non-GAAP) | $247 million | $252 million | $762 million | $714 million |
| Diluted EPS | $0.77 | $0.70 | $3.23 | $1.29 |
Q3 net income attributable to Tronox was $121 million, compared with $111 million a year earlier. Nine-month net income included a $187 million income tax benefit, principally reflecting a $278 million noncash benefit from releasing part of the Australian deferred-tax valuation allowance. Accordingly, reported nine-month profit was materially affected by tax accounting.
For the nine months, cash from operations was $358 million, versus $601 million; capital expenditures were $314 million, versus $183 million. Cash used in investing was $311 million and cash used in financing was $184 million. Cash and cash equivalents were $91 million at quarter-end, down from $228 million at December 31, 2021.
Total available liquidity was $486 million: $91 million cash and $395 million available under revolving facilities. Total debt was approximately $2.6 billion and net debt approximately $2.5 billion; net debt to trailing-twelve-month Adjusted EBITDA was 2.5x. Working capital was $1.1 billion, compared with $1.2 billion at year-end. The company reported compliance with debt covenants.
Material changes and drivers
- Q3 sales rose 3% year over year, mainly from higher TiO₂, zircon, and pig iron prices. TiO₂ sales volumes fell 12% and zircon volumes fell 23%; TiO₂ average selling prices increased 11% in U.S. dollars and zircon prices increased 33%.
- Q3 gross margin fell 2.1 percentage points. Higher production and commodity costs, freight, lower TiO₂ volumes, and product mix outweighed pricing benefits. Adjusted EBITDA declined 2% year over year.
- Nine-month sales rose 4%, while Adjusted EBITDA increased 7%. Higher selling prices and lower SG&A supported results, partly offset by cost inflation, freight, weaker volumes, and adverse currency translation.
- Operating cash flow fell primarily because working capital used cash, including inventory replenishment; capital spending increased with Project newTRON and development of the Atlas-Campaspe mine.
Outlook, risks, and unusual items
- Management said it expects operations to generate sufficient cash over the next 12 months for operating costs, capital spending, interest, and debt repayments, with revolving facilities available if needed. It cautioned that forecasts may be affected by macroeconomic conditions, inflation, political instability, the Russia-Ukraine conflict, and supply-chain disruption; adverse developments could require lower capital spending or operating-cost reductions. No specific revenue or earnings guidance is provided in the filing text.
- In April, Tronox paid $85 million, including interest, to settle the Venator litigation after a directed verdict for Venator; the company chose not to appeal. The settlement was recorded as an expense and was not tax-deductible in the relevant jurisdiction.
- In April, Tronox borrowed $400 million under a new term facility and redeemed its $500 million 6.5% secured notes due 2025, recording a $21 million debt-extinguishment loss, including an $18 million call premium.
- Management expected an approximately $20 million pension settlement charge in Q4 2022 following an October arrangement; the final charge would be calculated at settlement.
- Tronox had a $56 million provision for remediation at the Hawkins Point site. A sale and remediation arrangement with Maryland’s port authority was approved in October, with closing anticipated in Q4; the company did not expect a material income-statement effect if completed.
- An adverse outcome in the Western Australia stamp-duty appeal could result in a material charge; the filing does not provide a clear estimate of the potential amount. Environmental liabilities, regulatory obligations, commodity-price exposure, foreign exchange, and floating-rate debt are additional risks.
- The company had $121 million of purchase commitments for the remainder of 2022 and $54 million of outstanding letters of credit and bank guarantees. It also had a $75 million receivables securitization facility, with a one-year term ending March 14, 2023.
Key facts for investors to verify
- How much of reported nine-month earnings reflects the Australian deferred-tax valuation-allowance release, and what is the sustainability of earnings excluding that noncash benefit?
- Whether TiO₂ and zircon volumes, pricing, and margins stabilize amid cost inflation, freight expense, and weaker demand in several regions.
- Cash conversion, inventory levels, and the returns and timing of increased capital expenditures.
- Debt and liquidity trends, including floating-rate exposure and the availability of revolving credit; management estimated a 1% rate increase would reduce annualized pretax income by approximately $7 million.
- Resolution and financial impact of the Hawkins Point transaction, the Western Australia stamp-duty appeal, and the expected Q4 pension settlement charge.