Business context and reporting period
Tronox Holdings plc’s unaudited Form 10-Q covers the three months ended March 31, 2020. Tronox produces TiO2 pigment, titanium-bearing feedstocks and zircon, with operations across multiple regions. The period includes Cristal, acquired on April 10, 2019; the first-quarter 2019 reported results do not. Accordingly, reported year-over-year comparisons are not like-for-like. Management also provides unaudited pro forma comparisons assuming the acquisition and related divestitures occurred earlier.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $722 million | $390 million |
| Gross profit / margin | $175 million / 24% | $83 million / 21% |
| Operating income | $79 million | $16 million |
| Net income (loss) | $40 million | $(30) million |
| Net income (loss) attributable to Tronox | $32 million; $0.23 basic EPS | $(34) million; $(0.27) basic EPS |
| Adjusted EBITDA (non-GAAP) | $174 million; 24% of sales | $80 million; 21% of sales |
| Operating cash flow | $(28) million | $39 million |
| Capital expenditures | $38 million | $25 million |
At March 31, cash and cash equivalents were $420 million, total available liquidity was $570 million, and working capital was $1.2 billion. Total debt was approximately $3.2 billion and net debt was $2.6 billion; net debt to trailing-12-month Adjusted EBITDA, pro forma for Cristal, was 3.9x. Long-term debt, net, was $2.954 billion, with $212 million of short-term debt outstanding.
Material changes versus the prior comparable period
- Reported sales rose 85%, with approximately $326 million of the increase attributable to Cristal. On a pro forma basis, sales were $722 million versus $720 million; pro forma Adjusted EBITDA increased from $141 million to $174 million.
- Pro forma TiO2 sales increased 2%, while zircon sales declined 21%, reflecting lower average prices and volumes. Management cited higher TiO2 volumes, lower production costs and cost synergies as contributors to improved margins.
- Operating cash flow shifted to an outflow, principally because receivables used $92 million of cash and accounts payable and accrued liabilities used $54 million, partly due to sales and payment timing.
- Other comprehensive loss was $270 million, driven primarily by $188 million of foreign-currency translation losses and derivative-related losses. This reduced Tronox shareholders’ equity to $553 million from $748 million at year-end.
Outlook, commentary, risks and unusual items
- COVID-19: Tronox said its operations were designated essential. South African mines and concentrators paused during the national lockdown, then returned to full capacity on April 13. Management expected second-quarter TiO2 volumes to decline from Q1, while zircon volumes were expected to remain broadly in line; demand effects varied by geography and end market.
- Synergies: Management reported $45 million of cumulative synergies delivered in Q1, including $38 million reflected in EBITDA. Targets remained $190 million for 2020, $275 million for 2021 and $325 million for 2022.
- Liquidity: Management expected operations and borrowing availability to cover the next 12 months’ operating costs, capital expenditures, interest and debt repayments, subject to achieving its forecast. It noted that adverse macroeconomic conditions could require lower capital spending and operating costs. The company was in compliance with debt covenants at quarter-end.
- Subsequent financing: On May 1, 2020, Tronox issued $500 million of 6.5% senior secured notes due 2025; part of the proceeds repaid $200 million drawn on revolving facilities.
- Contingencies: Tronox recorded a $61 million provision for remediation at the Hawkins Point site. In litigation with Venator, Venator claims a $75 million break fee and Tronox counterclaims for $400 million; Tronox stated there is no assurance it will prevail. The filing says it cannot estimate reasonably possible environmental losses beyond recorded liabilities.
- Other notable items include $2 million of restructuring charges and a $16 million loss on non-hedge foreign-currency contracts. A $500 million note issuance and the revolver repayment occurred after the reporting date.
Important facts for investors to verify
- Assess Q2 demand and the pandemic’s effects on customer orders, receivables, collections and production, particularly in weaker regions.
- Track cash conversion and working capital: Q1 operating cash flow was negative despite positive earnings.
- Review debt, refinancing costs and covenant headroom after the May notes issuance and revolver repayment; the filing reports 3.9x net leverage on a pro forma trailing-12-month basis.
- Test delivery and measurement of the $325 million 2022 synergy target against restructuring and integration costs.
- Monitor the Venator litigation, Hawkins Point remediation and other environmental obligations, whose ultimate costs or outcomes remain uncertain.
- Interpret year-over-year growth using the pro forma comparisons, not reported sales alone, because Cristal was absent from Q1 2019 reported results.