Tronox Holdings Plc — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; filed November 6, 2018. Figures are in U.S. dollars unless noted. Tronox is a global producer of titanium dioxide (TiO₂) pigment and titanium-bearing mineral sands, with one reportable segment, TiO₂. The 2017 comparison includes Alkali as discontinued operations.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $456m | $435m | $1,390m | $1,234m |
| Gross profit / margin | $121m / 27% | $106m / 24% | $380m / 27% | $264m / 21% |
| Income from operations | $53m | $47m | $132m | $81m |
| Net income (loss) from continuing operations | $15m | $(28)m | $24m | $(95)m |
| Net income (loss) attributable to Tronox | $6m | $(247)m | $(2)m | $(285)m |
| Operating cash flow, continuing operations | Not stated for quarter | Not stated for quarter | $143m | $94m |
- Q3 sales rose 5%; growth came mainly from zircon and pig iron prices. Pigment sales were nearly flat year over year as higher prices were offset by lower volume.
- Nine-month sales rose 13%, with higher pigment and co-product prices. Adjusted EBITDA, a non-GAAP measure, was $128m for Q3 versus $118m and $388m for nine months versus $285m. Nine-month adjusted EBITDA margin increased to 28% from 23%.
- Nine-month operating cash flow improved by $49m year over year, but working-capital changes used $70m. Capital expenditures were $83m, versus $63m.
- At September 30, cash and cash equivalents were $1.077bn; restricted cash was $659m, primarily tied to the blocked loan for the Cristal acquisition. Total debt was about $3.2bn and net debt, excluding the blocked-loan restricted cash, was $2.1bn, versus $2.0bn at year-end 2017.
- Reported liquidity was $1.348bn, comprising cash and available revolver capacity; it excludes restricted cash. Working capital was $2.3bn, including $650m funded by the Blocked Term Loan.
Material changes and unusual items
- Gross margin improved on higher pigment and co-product prices and favorable currency effects, partly offset by higher direct-material costs and lower pigment volumes/product mix.
- Tronox issued $615m of 6.5% notes due 2026 and used the proceeds to redeem its 7.5% notes due 2022. The refinancing resulted in $30m of debt-extinguishment costs, including a $22m call premium.
- The Henderson Electrolytic Operations were sold on September 1 for $1.3m cash and a $4.7m secured note. The sale generated a $31m pretax loss recorded as impairment; the price was reduced by amendment to the sale agreement.
- A $48m noncash tax benefit in Q2 followed reversal of a Netherlands deferred-tax valuation allowance. Tronox continues full valuation allowances on U.S. and Australian net deferred tax assets.
- Q3 includes a $3m postretirement-plan settlement gain recognized as an out-of-period adjustment; the company said the adjustment was not material to prior or current periods.
- Currency translation reduced nine-month other comprehensive income by $159m, primarily reflecting foreign-currency movements.
Outlook, risks and contingencies
- Cristal acquisition: Tronox had received approval in eight of nine required jurisdictions, but the U.S. FTC challenged the deal. A U.S. District Court granted a preliminary injunction on September 5, 2018. The FTC administrative proceeding remained pending, with a judge’s ruling expected in Q4 2018. The deal’s termination date was extended, with automatic extensions possible through March 31, 2019.
- The EU approved the transaction subject to divestiture of the 8120 product grade, with Venator approved as buyer. Tronox’s exclusivity period with Venator to negotiate a sale of Cristal’s Ashtabula complex expired without agreement; Tronox then began discussions with another prospective buyer and the FTC. The filing states there was no certainty the FTC would approve a proposed remedy. If the acquisition is terminated, Tronox must repay the $650m Blocked Term Loan and prepay $800m of its New Term Loan Facility.
- Slagger investment: Tronox loaned AMIC $39m through September 30 and another $25m on October 1, under an arrangement that could require further funding up to $125m. An attempted Q3 start-up was unsuccessful; AMIC was investigating the cause, and no new start-up date was established.
- Management expected operations, cash on hand, and available borrowings to fund the acquisition, operating costs, capital spending, interest, debt repayments, and dividends for the next 12 months. This outlook depends in part on transaction and financing circumstances; no specific earnings guidance was provided.
- Market risks include commodity-price and demand cycles, higher input and energy costs, foreign exchange, floating-rate debt, customer concentration, environmental obligations, and possible limits on borrowing. Exxaro’s planned staged share sales could trigger an IRC Section 382 ownership change and restrict tax attributes.
Most important facts for investors to verify
- Status and final terms of the Cristal acquisition, FTC proceedings, required remedies, and consequences if the transaction fails.
- Availability and restrictions on cash, including the $659m of restricted cash and the required debt repayments if the acquisition is terminated.
- Operating trends in pigment volumes and prices, co-product pricing, input costs, and working-capital cash use.
- Progress and remaining funding needs for the Slagger after its unsuccessful start-up, plus recoverability of loans to AMIC.
- Impact of the Henderson sale loss, Netherlands tax benefit, and potential tax-attribute limitations on future reported earnings and cash taxes.