Tronox Holdings plc — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Tronox operates mineral-sands mines and beneficiation operations and produces titanium dioxide (TiO₂) pigment, zircon and other products. The filing presents unaudited interim results.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $870 million | $675 million | $2,688 million | $1,975 million |
| Gross profit / margin | $244 million / 28% | $139 million / 21% | $677 million / 25% | $443 million / 22% |
| Operating income | $168 million | $49 million | $443 million | $177 million |
| Net income attributable to Tronox | $111 million | $896 million | $203 million | $924 million |
| Diluted EPS | $0.70 | $6.18 | $1.29 | $6.42 |
| Adjusted EBITDA (non-GAAP) | $252 million | $148 million | $714 million | $464 million |
Q3 sales rose 29% year over year; nine-month sales rose 36%. Q3 revenue increases reflected higher TiO₂ and zircon volumes and higher average selling prices across products. TiO₂ revenue rose 26% in Q3 and 33% for the nine months; zircon revenue rose 107% and 90%, respectively. Q3 gross margin increased seven percentage points year over year, while nine-month margin rose three points. Pricing and volume gains were partly offset by foreign-exchange effects, higher production costs and freight rates.
Reported net income comparisons are heavily affected by the 2020 release of part of the U.S. deferred-tax valuation allowance: 2020 income-tax benefits were $893 million for Q3 and $876 million for the nine-month period, versus tax provisions of $28 million and $54 million in 2021. The 2021 nine-month results also included a $60 million debt-extinguishment loss.
Cash flow, debt and liquidity
- Cash flow: Nine-month operating cash flow was $601 million, versus $156 million in 2020. Investing cash use was $181 million, including $183 million in capital expenditures. Financing cash use was $752 million, primarily reflecting debt repayments and dividends. Cash, cash equivalents and restricted cash ended at $313 million, down $335 million during the period. The filing does not provide a separate Q3-only cash-flow total in the supplied text.
- Debt: Long-term debt, net, was $2.675 billion at September 30, compared with $3.263 billion at December 31, 2020; total debt was approximately $2.7 billion and net debt approximately $2.4 billion. Net debt to trailing-twelve-month Adjusted EBITDA was 2.6x.
- Liquidity: Available liquidity was $764 million: $309 million cash and $455 million available under revolving facilities. Working capital was $1.3 billion, down from $1.7 billion at year-end 2020. Management said it expected operating cash flow to cover operating costs, capital expenditures, interest and debt repayments over the next 12 months, subject to achieving its forecast.
- Financing actions: The company refinanced its term loan and revolver, issued $1.075 billion of 4.625% notes due 2029, and redeemed $615 million of notes due 2026 and $450 million due 2025. It also made voluntary term-loan prepayments. Management reported compliance with debt covenants at September 30; the cash-flow revolver has a springing leverage covenant if specified borrowing thresholds are exceeded.
Outlook, commentary and risks
- Management described demand as strong, continuing trends seen since Q3 2020. Sequentially, Q3 revenue declined 6%: price increases were offset by lower volumes. TiO₂ volumes fell 10% sequentially amid global logistics challenges, supply-chain constraints and limited raw-material availability. Zircon volumes declined 14% sequentially while prices rose 10%.
- The filing provides no quantified forward revenue or earnings guidance. Management said it would prioritize capital expenditures, continued annual dividend increases and share repurchases, while noting that adverse events could prompt reductions in capital spending and operating costs.
- Risks include COVID-19 and macroeconomic impacts, commodity and TiO₂ price cycles, freight and input-cost inflation, foreign-exchange and floating-rate debt exposure, customer credit risk, and international trade or sovereign risks. A hypothetical 1% interest-rate increase was estimated to reduce annualized pretax income by approximately $4 million.
- Environmental liabilities included a $60 million provision for the Hawkins Point Plant remediation. Tronox said it could not estimate reasonably possible environmental losses beyond recorded liabilities.
- Tronox disputes Venator’s claim for a $75 million break fee and seeks $400 million in damages; the company cautioned there is no assurance it will prevail. A Western Australia stamp-duty exemption dispute could result in a material charge if resolved unfavorably; the company was assessing its options.
- Full valuation allowances remained against net deferred tax assets in Australia, Saudi Arabia, Switzerland and the U.K.; the company said some could potentially be reversed within the next year if profitability improves. No uncertain tax positions were recorded, though this could change over the next 12 months.
Key facts for investors to verify
- Underlying earnings and cash generation, distinguishing operating improvement from the unusually large 2020 tax benefit and the 2021 refinancing costs.
- Whether logistics, supply-chain and raw-material constraints ease, and whether sequential volume declines affect pricing and margins.
- Debt reduction, interest-rate exposure, covenant headroom and the availability of revolving credit facilities.
- Potential outcomes and financial exposure from the Hawkins Point remediation, Venator litigation and Western Australia stamp-duty matter.
- Whether forecast operating cash flow supports planned investment, dividends and buybacks under less favorable market conditions.