Tronox(TROX) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, significantly impacted by the Cristal Transaction, for Q1 2020 and 2019 Condensed Consolidated Statements of Operations Net sales reached $722 million with a net income of $40 million in Q1 2020, a significant improvement driven by the Cristal acquisition Condensed Consolidated Statements of Operations (Unaudited) | | Three Months Ended March 31, | | :--- | :--- | :--- | | | 2020 | 2019 | | Net sales | $722M | $390M | | Gross profit | $175M | $83M | | Income from operations | $79M | $16M | | Net income (loss) | $40M | $(30)M | | Net income (loss) attributable to Tronox Holdings plc | $32M | $(34)M | | Diluted Earnings (loss) per share | $0.22 | $(0.27) | Condensed Consolidated Balance Sheets Total assets decreased slightly to $5.13 billion, while total liabilities increased to $4.45 billion, leading to a decrease in total equity Condensed Consolidated Balance Sheets (Unaudited) | | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $2,158M | $2,073M | | Total assets | $5,130M | $5,268M | | Total current liabilities | $911M | $702M | | Total liabilities | $4,451M | $4,352M | | Total equity | $679M | $916M | Condensed Consolidated Statements of Cash Flows Operating activities resulted in a $28 million cash outflow, while financing activities provided $193 million, leading to a $118 million net cash increase Condensed Consolidated Statements of Cash Flows (Unaudited) | | Three Months Ended March 31, | | :--- | :--- | :--- | | | 2020 | 2019 | | Cash (used in) provided by operating activities | $(28)M | $39M | | Cash used in investing activities | $(38)M | $(50)M | | Cash provided by financing activities | $193M | $50M | | Net increase in cash, cash equivalents and restricted cash | $118M | $38M | Notes to Unaudited Condensed Consolidated Financial Statements Detailed notes explain financial statements, emphasizing the Cristal acquisition's impact, revenue disaggregation, debt structure, and ongoing litigation - The company is a vertically integrated producer of titanium-bearing mineral sands and TiO2 pigment, with operations across multiple continents, and completed the acquisition of Cristal's TiO2 business on April 10, 2019[29][30] - The Cristal acquisition was valued at approximately $2.2 billion, consisting of $1.675 billion in cash and 37,580,000 ordinary shares, with Tronox divesting Cristal's North American TiO2 business to INEOS for $701 million as a condition[39][40] Net Sales by Geographic Area (Q1 2020 vs Q1 2019) | Geographic Area | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | North America | $178M | $138M | | South and Central America | $40M | $13M | | Europe, Middle-East and Africa | $292M | $130M | | Asia Pacific | $212M | $109M | | Total net sales | $722M | $390M | Net Sales by Product (Q1 2020 vs Q1 2019) | Product | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | TiO2 | $580M | $277M | | Zircon | $65M | $64M | | Feedstock and other products | $77M | $49M | | Total net sales | $722M | $390M | - In March 2020, the company drew down $200 million from its revolvers to increase liquidity, resulting in total short-term debt of $212 million at March 31, 2020, compared to zero at year-end 2019[85] - The company is involved in a lawsuit with Venator Materials plc, which alleges Tronox owes a $75 million 'Break Fee', while Tronox has counterclaimed for $400 million in damages, alleging Venator breached an Exclusivity Agreement[103] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting the Cristal acquisition and COVID-19 impact, with improved pro forma gross margin and Adjusted EBITDA due to synergies Business Environment and Synergy Program Operations remained essential during COVID-19, with Q1 revenue up 4% sequentially, and the company delivered $45 million in synergies, on track for $190 million annually - During the COVID-19 pandemic, operations were designated as essential, with all sites running at planned levels except for a temporary shutdown of ilmenite mining in South Africa, which has since resumed full capacity[129] - The company delivered $45 million in total synergies in Q1 2020, with $38 million reflected in EBITDA, and maintains synergy targets of $190 million for 2020, $275 million for 2021, and $325 million for 2022[128] Results of Operations Reported net sales grew 85% to $722 million due to Cristal, while pro forma results showed flat sales but improved gross margin and Adjusted EBITDA Pro Forma Results of Operations (Q1 2020 vs Q1 2019) | | Q1 2020 | Q1 2019 (Pro Forma) | Variance | | :--- | :--- | :--- | :--- | | Net sales | $722M | $720M | $2M | | Gross profit | $175M | $141M | $34M | | Gross Margin | 24% | 20% | 4 pts | | Income from operations | $79M | $46M | $33M | | Adjusted EBITDA | $174M | $141M | $33M | - On a pro forma basis, Q1 2020 TiO2 revenue increased 2% due to higher volumes, while Zircon revenue declined 21% due to lower prices and volumes[141] - The increase in pro forma gross margin was primarily driven by a 4-point favorable impact from production cost reductions and a 3-point favorable impact from foreign currency on cost of goods sold[149] Liquidity and Capital Resources Total liquidity stood at $570 million with $3.2 billion in debt, and a $28 million cash outflow from operations in Q1 2020 Liquidity Position | | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $420M | $302M | | Available under Revolvers | $150M | $346M | | Total Liquidity | $570M | $648M | - On May 1, 2020, a subsidiary issued $500 million of 6.5% senior secured notes due 2025, with a portion of the proceeds used to repay $200 million of borrowings under its revolvers[133][170] - Net cash used in operating activities was $28 million in Q1 2020, a decrease from $39 million provided in Q1 2019, primarily due to a higher use of cash for accounts receivable and accounts payable[171][172] Non-U.S. GAAP Financial Measures This section reconciles Net Income (Loss) to non-GAAP EBITDA and Adjusted EBITDA, with Q1 2020 Adjusted EBITDA at $174 million Reconciliation of Net Income (Loss) to Adjusted EBITDA (Reported) | | Three Months Ended March 31, | | :--- | :--- | :--- | | | 2020 | 2019 | | Net income (loss) (U.S. GAAP) | $40M | $(30)M | | Interest expense | $45M | $49M | | Income tax provision | $7M | $2M | | Depreciation, depletion and amortization | $71M | $47M | | EBITDA (non-U.S. GAAP) | $160M | $59M | | Adjustments (Share-based comp, transaction costs, restructuring, etc.) | $14M | $21M | | Adjusted EBITDA (non-U.S. GAAP) | $174M | $80M | Reconciliation of Net Income (Loss) to Adjusted EBITDA (Pro Forma) | | Three Months Ended March 31, | | :--- | :--- | :--- | | | 2020 | 2019 | | Net income (loss) (U.S. GAAP) | $40M | $(18)M | | Interest expense | $45M | $55M | | Income tax provision | $7M | $7M | | Depreciation, depletion and amortization | $71M | $87M | | EBITDA (non-U.S. GAAP) | $160M | $128M | | Adjustments (Share-based comp, restructuring, etc.) | $14M | $13M | | Adjusted EBITDA (non-U.S. GAAP) | $174M | $141M | Quantitative and Qualitative Disclosures About Market Risk The company manages market, credit, interest rate, and currency risks, with significant exposure to its top ten customers and foreign exchange fluctuations - The company faces credit risk from its customers, with the ten largest third-party customers representing 29% of consolidated net sales for the three months ended March 31, 2020[208] - A hypothetical 1% increase in interest rates would result in a net decrease to pre-tax income of approximately $10 million on an annualized basis as of March 31, 2020[209] - The company is exposed to currency fluctuations, particularly the South African rand and Australian dollar, and uses foreign currency contracts to hedge these exposures, with notional amounts of 2.9 billion ZAR and 691 million AUD outstanding as of March 31, 2020[212][214] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting - Based on an evaluation as of March 31, 2020, management concluded that the company's disclosure controls and procedures were effective[216] - There were no changes in internal control over financial reporting during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, internal controls[218] PART II – OTHER INFORMATION Legal Proceedings Information on legal proceedings, including ongoing litigation with Venator Materials plc, is incorporated by reference from Note 16 of the financial statements - Information regarding legal proceedings is incorporated by reference from Note 16, "Commitments and Contingencies," in the financial statements section of this Form 10-Q[221] Risk Factors No material changes to risk factors were reported, except for a COVID-19 related factor filed separately on Form 8-K - There have been no material changes from the risk factors disclosed in the company's Annual Report on Form 10-K, other than a COVID-related risk factor filed on Form 8-K on April 23, 2020[222] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported during the period - None reported[224] Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None reported[225] Mine Safety Disclosures This item is not applicable to the company for the current reporting period - Not applicable[226] Other Information Mr. Robert Loughran, VP and Corporate Controller, will depart, with CFO Timothy Carlson assuming the Principal Accounting Officer role - Mr. Robert Loughran, Vice President and Corporate Controller, will be leaving the company effective June 5, 2020, and the CFO, Timothy Carlson, will assume the role of Principal Accounting Officer[227] Exhibits This section lists exhibits filed with Form 10-Q, including CEO/CFO certifications, the May 2020 notes indenture, and iXBRL data files - The exhibits filed include CEO/CFO certifications (31.1, 31.2, 32.1, 32.2), the indenture for the new senior secured notes (4.1), and financial statements formatted in iXBRL (101 series)[228]