Tronox(TROX) - 2019 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements (Unaudited) Unaudited financial statements for Q3 2019 reflect the significant impact of the Cristal acquisition Condensed Consolidated Statements of Operations (in millions) | | Three Months Ended Sep 30, | Nine Months Ended Sep 30, | | :--- | :--- | :--- | | | 2019 | 2018 | 2019 | 2018 | | Net sales | $768 | $456 | $1,949 | $1,390 | | Gross profit | $133 | $121 | $316 | $380 | | Income from operations | $48 | $53 | $51 | $132 | | Net (loss) income from continuing operations | $(12) | $15 | $(97) | $24 | | Net (loss) income attributable to Tronox Holdings plc | $(13) | $6 | $(109) | $(2) | | Net (loss) income per share, diluted | $(0.09) | $0.05 | $(0.78) | $(0.01) | Condensed Consolidated Balance Sheet Highlights (in millions) | | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | ASSETS | | | | Cash and cash equivalents | $305 | $1,034 | | Inventories, net | $1,035 | $479 | | Total current assets | $2,053 | $2,544 | | Property, plant and equipment, net | $1,710 | $1,004 | | Total assets | $5,157 | $4,642 | | LIABILITIES AND EQUITY | | | | Total current liabilities | $629 | $300 | | Long-term debt, net | $3,067 | $3,139 | | Total liabilities | $4,333 | $3,780 | | Total equity | $824 | $862 | | Total liabilities and equity | $5,157 | $4,642 | Cash Flow Summary for Nine Months Ended Sep 30 (in millions) | | 2019 | 2018 | | :--- | :--- | :--- | | Cash provided by operating activities | $237 | $143 | | Cash used in investing activities | $(1,120) | $(121) | | Cash used in financing activities | $(517) | $(34) | | Net (decrease) increase in cash | $(1,380) | $(33) | - On April 10, 2019, the company completed the acquisition of Cristal's TiO2 business for $1.675 billion in cash and 37,580,000 ordinary shares, valued at approximately $2.2 billion in total[43] - To gain regulatory approval, Tronox divested Cristal's North American TiO2 business to INEOS for approximately $708 million and the 8120 paper laminate grade to Venator[28][44][47] - The company repurchased 14 million shares from Exxaro for approximately $200 million and redeemed Exxaro's 26% interest in Tronox Sands for approximately $148 million[31][33] - As of September 30, 2019, total long-term debt, net of discounts and issuance costs, was approximately $3.1 billion[106] Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A focuses on the financial impact of the Cristal acquisition, including pro forma results and synergy programs - The Cristal acquisition, completed on April 10, 2019, significantly expanded operations, making Tronox a fully vertically integrated producer of TiO2 pigment[160][161] - The company is targeting $220 million in operating synergies by 2022 from the Cristal acquisition and has raised its 2019 synergy target to $65 million[170][173] - Q3 2019 revenue was impacted by lower TiO2 and Zircon volumes sequentially, with softening demand in EMEA, Asia, and Latin America[174] - Reported Q3 gross margin was negatively impacted by 5 percentage points due to the step-up in value of acquired Cristal inventory and assets[187][195] - Pro forma Q3 TiO2 revenue declined due to lower selling prices, while Zircon revenue declined 35% due to a 32% drop in sales volumes[183] - Proceeds from the $708 million sale of Cristal's North American operations were used for a $200 million share repurchase and a $195 million debt prepayment[237] - Net cash provided by operating activities for the first nine months of 2019 was $237 million, an increase of $94 million from the prior year[252] Adjusted EBITDA Reconciliation (Non-GAAP) | | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net (loss) income (U.S. GAAP) | $(6)M | $(92)M | | EBITDA (non-U.S. GAAP) | $121M | $256M | | Adjustments (Inventory step-up, transaction costs, etc.) | $63M | $203M | | Adjusted EBITDA (non-U.S. GAAP) | $184M | $459M | Q3 2019 vs Q3 2018 Pro Forma Results (in millions) | | Q3 2019 (Pro Forma) | Q3 2018 (Pro Forma) | Variance | | :--- | :--- | :--- | :--- | | Net sales | $768 | $832 | $(64) | | Gross profit | $173 | $212 | $(39) | | Income from operations | $88 | $115 | $(27) | | Adjusted EBITDA | $184 | $215 | $(31) | Total Liquidity (in millions) | | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $305 | $1,034 | | Available under Revolvers | $356 | $249 | | Total | $661 | $1,283 | Quantitative and Qualitative Disclosures About Market Risk The company faces market, credit, interest rate, and currency risks from its global operations and debt structure - A hypothetical 1% increase in interest rates would result in a net increase to pre-tax loss of approximately $10 million on an annualized basis[306] - The company uses interest-rate swaps to convert a portion of its variable-rate Term Loan Facility to a fixed rate, mitigating interest rate exposure[307] - To manage currency risk, the company entered into foreign currency contracts to hedge non-functional currency sales and costs[309] Controls and Procedures Disclosure controls were deemed effective, excluding the recently acquired Cristal business pending integration - Management concluded that disclosure controls and procedures were effective as of September 30, 2019[312] - The assessment of internal controls over financial reporting excluded the newly acquired Cristal business, which constituted 54% of total assets[312] - The company is in the process of incorporating Cristal's internal controls, expected to be completed for the December 31, 2020 assessment[314] PART II – OTHER INFORMATION Legal Proceedings The company is in a legal dispute with Venator over a break fee, with a counterclaim for damages - Venator Materials plc sued Tronox for a $75 million "Break Fee" related to a preliminary agreement for the sale of Cristal's North American operations[127] - Tronox has counterclaimed against Venator for $400 million in damages, alleging Venator's breach of contract led to a lower sale price[127] Risk Factors A key risk involves integrating the acquired Cristal business into the public company's internal control framework - The company identifies a significant risk in integrating the acquired Cristal business into its internal control over financial reporting as required by the Sarbanes-Oxley Act[320] - Failure to properly integrate Cristal's controls could lead to increased compliance costs and potentially result in material weaknesses[320][321] Unregistered Sales of Equity Securities and Use of Proceeds The company executed a partial share repurchase program in Q3 2019, limited by NOL-related restrictions - The share repurchases were made under a $100 million program authorized on June 3, 2019, which was not fully completed due to NOL-related restrictions[325][326] Issuer Purchases of Equity Securities (Q3 2019) | Period | Total Shares Purchased | Average Price Paid Per Share | Approx. Dollar Value Remaining in Program | | :--- | :--- | :--- | :--- | | July 1 - July 31, 2019 | 2,496,293 | $12.24 | $13,647,254 |