Tronox(TROX) - 2019 Q4 - Annual Report

PART I Item 1. Business Tronox is a leading global vertically integrated TiO2 pigment manufacturer, significantly expanding its operations and product portfolio through the 2019 Cristal acquisition - Tronox is the world's leading vertically integrated manufacturer of TiO2 pigment, with operations spanning Australia, South Africa, and Brazil, pursuing a long-term strategy of full vertical integration[22] Revenue by Geographic Region (2019) | Region | Percentage of Revenue | | :--- | :--- | | Europe, Middle East & Africa | 36% | | Asia Pacific | 31% | | North America | 27% | | South & Central America | 6% | Revenue by Product (2019) | Product | Percentage of Revenue | | :--- | :--- | | TiO2 | 78% | | Feedstock and Other | 11% | | Zircon | 11% | - On April 10, 2019, Tronox completed the acquisition of Cristal's TiO2 business, divesting Cristal's North American TiO2 business to INEOS for approximately $701 million to secure regulatory approval[28][29] - On March 27, 2019, the company re-domiciled from Australia to the United Kingdom, becoming Tronox Holdings plc[31] - As of December 31, 2019, the company employed approximately 6,660 people globally[73] Item 1A. Risk Factors The company faces significant market, operational, integration, financial, and regulatory risks, including volatile prices, intense competition, South African operational challenges, and the EU's TiO2 carcinogen classification - Market conditions and economic downturns significantly impact demand for TiO2 and zircon, with a prolonged downturn in China, accounting for approximately 50% of global zircon demand, posing a material business risk[88][89] - The company faces intense competition from global producers, including expanding Chinese manufacturers improving quality and adopting chloride technology, potentially increasing substitution risk[93] - Concentrated ownership by Cristal (26%) and Exxaro (10%) may influence corporate decisions and create potential conflicts of interest[98] - South African mining operations are subject to onerous regulations, including Mining Charter III, requiring a 30% Black Economic Empowerment (BEE) shareholding for new or renewed mining rights[101][102] - The company may not fully realize anticipated benefits and synergies from the Cristal Transaction due to potential difficulties in integrating operations, systems, and cultures[105][107] - Operational risks in South Africa include reliance on the sole, unreliable state-owned power supplier Eskom, potential water restrictions, and dependence on state-owned rail and port services[112][115][116] - The ability to use approximately $4.1 billion of Net Operating Losses (NOLs) and $1.1 billion of interest expense carryforwards could be limited by an "ownership change" under Section 382 of the U.S. tax code[126] - In February 2020, the European Commission classified powder TiO2 as a Category 2 Carcinogen by inhalation, potentially leading to more stringent regulations, inhibited marketing, and increased costs[149] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[184] Item 2. Properties Tronox operates five mining-mineral processing chains and nine TiO2 pigment production facilities globally with a total capacity of 1,078,000 metric tons per year, holding significant mineral reserves of 78.1 million metric tons of in-place THM as of December 31, 2019 TiO2 Production Facilities and Capacity | Facility Location | Capacity (metric tons/year) | Process | | :--- | :--- | :--- | | Hamilton, Mississippi, USA | 225,000 | Chloride | | Kwinana, Western Australia | 150,000 | Chloride | | Kemerton, Western Australia | 110,000 | Chloride | | Botlek, the Netherlands | 90,000 | Chloride | | Stallingborough, England, UK | 165,000 | Chloride | | Yanbu, Saudi Arabia | 200,000 | Chloride | | Salvador, Bahia, Brazil | 60,000 | Sulphate | | Fuzhou, Jiangxi Province, China | 46,000 | Sulphate | | Thann, Alsace, France | 32,000 | Sulphate | Mineral Processing Capacities (metric tons per year) | Product | Namakwa Sands RSA (metric tons) | KZN Sands RSA (metric tons) | Northern Ops W.A. (metric tons) | Southern Ops W.A. (metric tons) | Eastern Ops NSW (metric tons) | Total (metric tons) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Rutile | 30,000 | 25,000 | 35,000 | 10,000 | 70,000 | 170,000 | | Synthetic rutile | — | — | 220,000 | — | — | 220,000 | | Titanium slag | 190,000 | 220,000 | — | — | — | 410,000 | | Pig Iron | 100,000 | 120,000 | — | — | — | 220,000 | | Zircon | 125,000 | 55,000 | 40,000 | 9,000 | 65,000 | 294,000 | Global Heavy Mineral Reserves Summary (as of Dec 31, 2019) | Reserve Category | Ore (million metric tons) | Avg. Grade (% THM) | In Place THM (million metric tons) | | :--- | :--- | :--- | :--- | | Total Global Reserves | 1,648 | 4.7% | 78.1 | - The company's total heavy mineral reserves increased from 66.1 million metric tons in 2018 to 78.1 million metric tons in 2019, primarily due to the inclusion of reserves from the Cristal acquisition[261] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 20 of the Notes to Consolidated Financial Statements - Information required by this item is incorporated by reference to Note 20 - Commitments and Contingencies[262] Item 4. Mine Safety Disclosures The company reports no mine safety disclosures - None[263] PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Tronox's ordinary shares are traded on the New York Stock Exchange under the ticker symbol "TROX." As of January 31, 2020, there were approximately 56 holders of record - The company's ordinary shares trade on the New York Stock Exchange under the symbol TROX[266] - As of January 31, 2020, there were approximately 56 holders of record of ordinary shares, excluding those held in "street-name" accounts[266] Item 6. Selected Financial Data Selected financial data for 2019 shows significant revenue growth to $2.64 billion due to the Cristal acquisition, but also a net loss of $109 million, with comparability impacted by acquisition-related adjustments Selected Financial Data (2015-2019) | (In millions USD) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $2,642 | $1,819 | $1,698 | $1,309 | $1,510 | | Income (loss) from operations | $95 | $200 | $141 | $(53) | $(199) | | Net (loss) income attributable to Tronox | $(109) | $(7) | $(285) | $(61) | $(329) | | Total assets | $5,268 | $4,642 | $4,864 | $3,293 | $3,337 | | Total debt, net | $3,026 | $3,161 | $3,147 | $3,054 | $3,076 | - Comparability of financial results is impacted by significant items, including a $98 million inventory step-up charge in 2019, Cristal acquisition transaction costs, and a $31 million impairment loss in 2018[268][269] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Tronox's 2019 financial performance was significantly shaped by the Cristal acquisition, boosting reported revenues to $2.6 billion but resulting in a $102 million net loss from continuing operations due to purchase accounting adjustments, while pro forma revenues declined 10% to $3.0 billion - The acquisition of Cristal's TiO2 business was completed on April 10, 2019, for approximately $2.2 billion, enhancing Tronox's position as a vertically integrated global producer[275] - The company targets approximately $325 million in operating synergies by 2022 from the Cristal acquisition, with $89 million delivered by year-end 2019[285][287] - On a reported basis, 2019 net sales increased 45% to $2.64 billion due to Cristal's inclusion, though gross margin decreased from 27% to 18% primarily due to a $98 million inventory step-up charge[295][298] - On a pro forma basis, 2019 net sales decreased 10% to $3.01 billion from $3.34 billion in 2018, driven by lower TiO2 and zircon sales volumes and prices[293][297] - Total liquidity decreased by $635 million during 2019 to $648 million, comprising $302 million in cash and $346 million in available revolver capacity[320] - Net cash provided by operating activities increased to $412 million in 2019 from $170 million in 2018, driven by Cristal's inclusion and working capital initiatives[335] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Tronox faces market risks including commodity price volatility, credit risk, interest rate risk on floating-rate debt, and significant currency risk, which it mitigates through hedging strategies, with a 1% interest rate increase potentially raising pre-tax loss by $9 million annually - The company is exposed to credit risk, with its ten largest TiO2 customers representing 31% of consolidated net sales in 2019, and no single customer accounting for 10% of sales[403] - Tronox is exposed to interest rate risk on its floating-rate debt, where a hypothetical 1% increase in interest rates would result in an approximate $9 million increase to pre-tax loss annually[404] - The company faces significant currency risk, particularly in South Africa and Australia where revenues are largely in U.S. dollars but expenses are in local currencies, mitigated through economic hedges like forward contracts[405] - As of December 31, 2019, the company held foreign currency contracts with notional amounts of 3.7 billion South African rands and 486 million Australian dollars to hedge sales and cost of sales[407] Item 8. Financial Statements and Supplementary Data The 2019 consolidated financial statements reflect the significant impact of the Cristal acquisition, with total assets increasing to $5.3 billion but a net loss of $97 million primarily due to acquisition-related costs and purchase accounting adjustments Consolidated Statement of Operations Highlights (2019 vs 2018) | (In millions USD) | 2019 | 2018 | | :--- | :--- | | Net sales | $2,642 | $1,819 | | Gross profit | $464 | $498 | | Income from operations | $95 | $200 | | Net (loss) income from continuing operations | $(102) | $30 | | Net loss attributable to Tronox Holdings plc | $(109) | $(7) | Consolidated Balance Sheet Highlights (as of Dec 31) | (In millions USD) | 2019 | 2018 | | :--- | :--- | | Total current assets | $2,073 | $2,544 | | Total assets | $5,268 | $4,642 | | Total current liabilities | $702 | $300 | | Long-term debt, net | $2,988 | $3,139 | | Total liabilities | $4,352 | $3,780 | | Total equity | $916 | $862 | Consolidated Statement of Cash Flows Highlights (2019 vs 2018) | (In millions USD) | 2019 | 2018 | | :--- | :--- | | Net cash provided by operating activities | $412 | $170 | | Net cash used in investing activities | $(1,185) | $(174) | | Net cash used in financing activities | $(638) | $(46) | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure - None[706] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, though the assessment excluded the Cristal business, which represented 38% of total assets and 39% of net sales - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[707] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[709] - The assessment of internal control over financial reporting excluded the Cristal business, acquired on April 10, 2019, which represented 38% of consolidated assets and 39% of net sales[712] Item 9B. Other Information The company reports no other information - None[716] PART III Item 10. Directors, Executive Officers and Corporate Governance Information required by this item will be included in the company's definitive proxy statement for its 2020 annual general meeting of shareholders and is incorporated herein by reference - Information regarding directors, executive officers, corporate governance, and Section 16(a) compliance is incorporated by reference from the company's 2020 proxy statement[719][720] Item 11. Executive Compensation Information regarding executive officer and director compensation will be included in the company's definitive proxy statement for its 2020 annual general meeting of shareholders and is incorporated herein by reference - Information regarding executive compensation is incorporated by reference from the company's 2020 proxy statement[721] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership and related matters will be included in the company's definitive proxy statement for its 2020 annual general meeting of shareholders and is incorporated herein by reference - Information regarding security ownership is incorporated by reference from the company's 2020 proxy statement[722] Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price (USD) | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 6,818,561 | $16.36 | 4,770,192 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence will be included in the company's definitive proxy statement for its 2020 annual general meeting of shareholders and is incorporated herein by reference - Information regarding related transactions and director independence is incorporated by reference from the company's 2020 proxy statement[725] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services will be included in the company's definitive proxy statement for its 2020 annual general meeting of shareholders and is incorporated herein by reference - Information regarding principal accounting fees and services is incorporated by reference from the company's 2020 proxy statement[726] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists documents filed as part of the Annual Report on Form 10-K, including consolidated financial statements and various exhibits, with all financial statement schedules omitted as inapplicable or redundant - This item lists the consolidated financial statements and exhibits filed with the Form 10-K[728] - All financial statement schedules have been omitted because they are either not applicable or the necessary information is already included in the financial statements or notes[728] Item 16. Form 10-K Summary The company provides no Form 10-K summary - None[732]