Tronox Holdings plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts are U.S. dollars in millions, except per-share data. Before March 27, 2019, the public parent was Tronox Limited; the company re-domiciled from Australia to the United Kingdom and became Tronox Holdings plc. Results cover the pre-Cristal business: the Cristal acquisition closed April 10, 2019.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $390 | $442 |
| Gross profit / margin | $83 / 21% | $115 / 26% |
| Operating income | $16 | $14 |
| Net loss | $(30); $(34) attributable to Tronox | $(41); $(44) attributable to Tronox |
| Basic and diluted loss per share | $(0.27) | $(0.36) |
| EBITDA / Adjusted EBITDA | $59 / $80 | $53 / $117 |
| Operating cash flow | $39 | $(4) |
Adjusted EBITDA is a non-U.S. GAAP measure. Interest expense was $49 in both periods; income tax provision was $2 versus $5. Capital expenditures were $25. Investing cash use was $50, including a $25 loan to AMIC for the Jazan Slagger; financing provided $50, including debt proceeds and the $148 Exxaro-related payment. Cash, cash equivalents and restricted cash increased $38 to $1,734, of which $666 was restricted.
Liquidity and debt
At March 31, cash and cash equivalents were $1,068; reported available borrowing capacity was $158 under the Wells Fargo Revolver and $55 under the Standard Bank Revolver. Total liquidity, as presented by the company, was $1,281. Working capital was $2.1 billion, including $650 of restricted Blocked Term Loan proceeds and related interest not available until the Cristal closing. Long-term debt, net, was $3,223; short-term debt was $94 and long-term debt due within one year was $58. Net debt was $2.3 billion, excluding the $650 of restricted cash. The company reported a 5.6% average effective rate on its Term Loan Facility.
Changes and management commentary
- Sales fell 12% year over year, mainly due to lower pigment volumes and the absence of Electrolytic business revenue following its 2018 sale. Pigment sales declined $47 (14%); zircon sales rose $3, with higher prices offsetting lower shipment volumes.
- Pigment revenue was affected by a 10% volume reduction, a 5% decrease in average selling prices, and $6 of unfavorable currency translation. Management said first-quarter pigment prices were slightly below Q4 2018 in local currency, while pigment volume rose 10% sequentially.
- Gross margin declined five percentage points. Management attributed pressure primarily to higher direct-material costs and product mix, partly offset by favorable currency effects and higher zircon pricing. Adjusted EBITDA fell $37 year over year, despite higher reported EBITDA; the prior-year comparison included a $25 impairment charge and different transaction-cost adjustments.
- Operating cash flow improved from an outflow of $4 to an inflow of $39, largely because working-capital movements were more favorable; cash generated by income was lower.
Outlook, transactions and risks
- No quantified earnings or sales guidance is provided in the supplied filing text. Management expected operations and available borrowings to fund the Cristal transaction, operating costs, capital spending, interest and debt repayments over the following 12 months.
- Cristal was acquired after quarter-end for $1.673 billion cash, subject to adjustments, plus 37.58 million shares; the stated total value was approximately $2.2 billion. Tronox subsequently sold Cristal’s North American TiO₂ business to INEOS for approximately $700 million, subject to a working-capital adjustment, and sold the 8120 paper-laminate grade to Venator. The company expected an approximately $19 million loss on the latter sale.
- After quarter-end, proceeds from the North American divestiture were used in part to repurchase about 14 million shares from Exxaro for approximately $200 million, prepay $100 million of term debt, and repay the Wells Fargo Revolver. Management reported that the divestiture did not trigger a required term-loan prepayment. Exxaro retained approximately 9.9% of Tronox and a 26% interest in South African operating subsidiaries.
- Risks include exposure to cyclical TiO₂ and commodity pricing, raw-material costs, foreign exchange and floating interest rates; customer concentration (the ten largest customers represented 42% of Q1 sales, versus 33% a year earlier); debt and refinancing constraints; and environmental compliance and remediation obligations. A hypothetical 1% rate increase was estimated to raise annualized pretax loss by approximately $6.
- Tronox disputed Venator’s potential $75 million break-fee claim related to negotiations over Cristal’s North American assets. The company believed the fee was not payable but acknowledged possible litigation and no assurance of prevailing. It also disclosed ongoing legal and environmental proceedings without a clear quantified exposure in the supplied text.
- Full valuation allowances remained against U.S. and Australian net deferred tax assets. The company said an ownership change under IRC Section 382 during 2019 could limit up to $5.2 billion of U.S. net operating losses and interest limitation carryforwards.
Investor verification priorities
- Verify post-quarter Cristal purchase accounting, acquisition financing, divestiture proceeds and adjustments, and the resulting pro forma leverage and liquidity.
- Track pigment pricing and volumes, direct-material costs, production levels, product mix, and whether sequential revenue movements reflect shipment timing or sustained demand changes.
- Reconcile reported cash and liquidity with restricted Blocked Term Loan funds, debt repayments, and the subsequent Exxaro share repurchase.
- Monitor the Venator break-fee dispute, environmental and other contingencies, and the potential tax attributes affected by ownership-change rules.
- Assess Adjusted EBITDA alongside GAAP results; the company changed its foreign-currency adjustment treatment in 2019 and revised prior-period amounts for comparability.