Tronox Holdings plc — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
Tronox operates a single reportable segment, TiO2, spanning mineral-sands mining, feedstock and smelting, and titanium dioxide pigment and related products. The April 10, 2019 acquisition of Cristal materially changed the scale and composition of the business. Accordingly, 2019 reported results include Cristal only from the acquisition date, while 2018 reported results exclude it; management also presents illustrative pro forma comparisons.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $768 million | $456 million | $1,949 million | $1,390 million |
| Gross profit / margin | $133 million / 17% | $121 million / 27% | $316 million / 16% | $380 million / 27% |
| Income from operations | $48 million | $53 million | $51 million | $132 million |
| Net income (loss) attributable to Tronox | $(13) million | $6 million | $(109) million | $(2) million |
| Basic net income (loss) per share | $(0.09) | $0.05 | $(0.78) | $(0.01) |
| Adjusted EBITDA, non-GAAP | $184 million | $128 million | $459 million | $393 million |
| Operating cash flow | Not separately stated here | Not separately stated here | $237 million | $143 million |
On a pro forma basis, net sales were $768 million in Q3 versus $832 million in Q3 2018, and $2,315 million for the first nine months versus $2,611 million in 2018. Pro forma Adjusted EBITDA was $184 million versus $215 million for Q3 and $525 million versus $706 million year to date. These non-GAAP, illustrative figures are not forecasts and exclude certain nonrecurring items.
Q3 sales increased 68% on a reported basis, primarily because of Cristal, but declined 8% pro forma. Nine-month reported sales rose 40%, while pro forma sales fell 11%. For Q3, Cristal contributed $346 million of revenue and $13 million of operating losses; for the nine-month period it contributed $699 million of revenue and $61 million of operating losses.
Cash, debt and liquidity
- Cash and cash equivalents were $305 million at September 30, 2019, with an additional $11 million of restricted cash. Total reported liquidity, including available revolving credit, was $661 million.
- Long-term debt, net, was approximately $3.1 billion; reported net debt was $2.8 billion. Debt due within one year was $55 million. Working capital was $1.4 billion, down from $2.2 billion at December 31, 2018.
- For the first nine months, operating cash flow was $237 million; investing cash use was $1.12 billion and financing cash use was $517 million. Capital expenditures were $140 million. Cash, cash equivalents and restricted cash declined by $1.38 billion to $316 million.
- Liquidity included $240 million available under the Wells Fargo Revolver, $66 million under the Standard Bank Revolver and $50 million under the Emirates Revolver; there were no borrowings under these revolvers at quarter-end.
Material changes and unusual items
- Cristal was acquired for approximately $2.2 billion of total consideration, comprising $1.675 billion cash and 37.58 million Tronox shares. The FTC-required sale of Cristal’s North American TiO2 business to INEOS generated approximately $708 million in net proceeds; Tronox reimbursed INEOS about $7 million for a finalized working-capital adjustment in October 2019.
- Purchase accounting increased costs by $40 million in Q3 and $95 million year to date for acquired inventory step-up. The 8120 product-line supply agreement with Venator generated a $19 million contract-loss charge; restructuring costs were $3 million in Q3 and $13 million year to date.
- Q3 reported gross margin was pressured by purchase-accounting charges, Cristal’s lower gross-margin profile, and weaker volume, mix and pricing; currency effects partly offset these factors. On a pro forma basis, Q3 TiO2 revenue declined 4% and zircon revenue declined 35% year over year.
- Cash uses included $288 million of share repurchases and $148 million to acquire Exxaro’s remaining interest in Tronox Sands. Tronox also repurchased 14 million shares from Exxaro for approximately $200 million. A separate $100 million buyback program was not completed because of tax-related Section 382 restrictions.
Outlook, management commentary and risks
- Management cited short-term TiO2 customer ordering, softer demand in parts of Asia, Latin America and EMEA, and weaker zircon buying amid slower Chinese ceramics activity and geopolitical uncertainty. Q3 revenue was down 3% sequentially, chiefly due to lower TiO2 and zircon volumes.
- Management targeted approximately $220 million in operating synergies by 2022 and raised the 2019 synergy target to $65 million. It reported $45 million delivered since the acquisition: $21 million reflected in EBITDA, $13 million expected to be reflected in future quarters, and $11 million in cash synergies not reflected in EBITDA. No broader revenue or earnings guidance is provided in the filing.
- Management expected operating cash and available borrowings to cover the next 12 months’ operating expenses, capital expenditures, interest and debt repayments. After quarter-end, a Saudi working-capital facility of up to approximately $19 million was established, with $50 million Saudi riyals borrowed during October.
- Material risks include commodity-price and demand cyclicality, foreign-exchange exposure, floating-rate debt, customer credit concentration, and integration of Cristal’s systems and internal controls. A hypothetical 1 percentage-point rate increase was estimated to raise annualized pretax loss by approximately $10 million.
- Environmental liabilities were $62 million at quarter-end, including a $56 million provision for remediation at the acquired Hawkins Point site. Asset-retirement obligations were $162 million. Tronox disclosed Venator litigation seeking a $75 million break fee; Tronox counterclaimed for $400 million in damages. The company stated it could not assure a favorable outcome.
Important facts for investors to verify
- Whether pro forma operating trends, particularly lower sales and Adjusted EBITDA, stabilize after accounting for Cristal’s acquisition and required divestitures.
- Actual realization, timing and costs of the announced synergies, and whether purchase-accounting and integration charges persist.
- Cash generation, working-capital requirements, debt service and available borrowing capacity as the enlarged company integrates.
- Developments in TiO2 and zircon pricing, volumes and end-market demand, as well as foreign-exchange and interest-rate exposures.
- Outcomes of the Venator dispute, Hawkins Point remediation and other environmental matters, and the completion of Cristal purchase-price allocation and internal-control integration.