Business context and reporting period
Tronox Holdings plc’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2019. The company produces TiO₂ pigment and related products, zircon and mineral-sands feedstocks. It completed its acquisition of Cristal’s TiO₂ business on April 10, 2019; reported 2019 results include Cristal only from that date, so year-over-year reported comparisons are not like-for-like. The filing also provides illustrative pro forma comparisons that assume the transaction and related divestitures occurred earlier.
Financial performance and position
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $791 | $492 | $1,181 | $934 |
| Gross profit / margin | $100 / 13% | $144 / 29% | $183 / 15% | $259 / 28% |
| Operating income (loss) | $(13) | $65 | $3 | $79 |
| Net income (loss) attributable to Tronox | $(62) | $36 | $(96) | $(8) |
| Adjusted EBITDA | $195 | $148 | $275 | $265 |
| Adjusted EBITDA margin | 25% | 30% | 23% | 28% |
Q2 reported revenue rose 61%, largely because Cristal contributed $353 million. On a pro forma basis, Q2 sales were $827 million versus $903 million and Adjusted EBITDA was $200 million versus $257 million; pro forma sales and EBITDA therefore declined despite the increase in reported Adjusted EBITDA. For the six months, pro forma sales were $1,547 million versus $1,779 million and pro forma Adjusted EBITDA was $341 million versus $491 million. Pro forma figures are illustrative, non-GAAP or supplemental measures and are not forecasts.
- Q2 net loss from continuing operations was $55 million; diluted loss per share was $0.41. The acquired Cristal business contributed $353 million of revenue and a $48 million operating loss from acquisition through June 30.
- Six-month operating cash flow from continuing operations was $133 million, versus $31 million a year earlier. Capital expenditures were $81 million.
- Investing cash outflow was $991 million, including $1,603 million paid for Cristal and $707 million received from the North American divestiture. Financing cash outflow was $417 million, including $252 million of share repurchases, $148 million to acquire Exxaro’s interest in Tronox Sands and $215 million of debt repayments.
- At June 30, cash and cash equivalents were $397 million; restricted cash was $9 million. Total stated liquidity, including available revolvers, was $798 million. Working capital was $1.5 billion.
- Long-term debt, net, was $3.136 billion, plus $58 million due within one year; management reported net debt of $2.8 billion. There were no outstanding borrowings under the Wells Fargo, Standard Bank or Emirates revolvers. A $750 million interest-rate swap hedges part of the floating-rate term loan.
- Total assets were $5.416 billion and total liabilities $4.487 billion. Current liabilities were $718 million against current assets of $2.262 billion.
Material changes, outlook and risks
- Reported Q2 gross margin fell to 13% from 29%. Management cited Cristal purchase-accounting charges, including a $55 million inventory step-up, the $19 million Venator supply-contract loss, Cristal’s lower-margin mix, and higher production costs. Q2 operating results also included $10 million of restructuring costs.
- Comparable pro forma Q2 sales fell 8%, mainly due to lower TiO₂ selling prices and zircon volumes. Management said TiO₂ market conditions showed improvement as transitory inventories declined in Asia and Europe, with North America stable; it also noted softer zircon demand amid weaker Chinese ceramic manufacturing and tariffs. The filing gives no formal earnings or revenue guidance.
- Management targets approximately $220 million of annual synergy savings by 2022, including operational, feedstock, supply-chain and SG&A initiatives. It reported $12 million of savings realized by June 30. The company expects operating cash and available borrowing capacity to fund expenses, capital spending, interest and debt repayments over the next 12 months.
- Cash and liquidity declined substantially following the acquisition, divestiture, debt repayment and share repurchases. Management identified borrowing limits and covenants, floating-rate exposure, credit-rating changes, market access, and third-party financial-assurance demands as factors that could affect external funding. A 1% interest-rate increase was estimated to increase annualized pretax loss by about $10 million, after the stated effect of floating-rate assets.
- Venator sued seeking a $75 million break fee; Tronox counterclaimed for $400 million, alleging breach of the exclusivity agreement. Tronox said it believes its interpretation is correct but cannot assure it will prevail. It recorded a $32 million provision for Hawkins Point environmental remediation; total environmental liabilities were $36 million. Other litigation and environmental outcomes remain uncertain.
- Purchase commitments were $617 million in total, and letters of credit and bank guarantees were $66 million. The preliminary Cristal purchase-price allocation remains subject to adjustment during the measurement period. The company excluded Cristal’s internal controls from its current disclosure-controls assessment while integrating them.
Most important facts for investors to verify
- Whether Cristal integration delivers the targeted $220 million synergies by 2022, and the costs and timing required.
- How much of the Q2 and first-half margin pressure is temporary purchase accounting or transaction-related versus ongoing pricing, input-cost and operating performance.
- Whether pro forma revenue and EBITDA trends stabilize, especially TiO₂ prices and volumes and zircon demand in China.
- Cash generation, working-capital requirements, debt service and liquidity after the acquisition and divestiture; confirm covenant headroom and variable-rate exposure.
- Final Cristal purchase accounting and working-capital adjustments, and outcomes of the Venator dispute and environmental remediation obligations.
- Effects of additional share repurchases and shareholder ownership changes on per-share results and potential tax-loss carryforwards.