Tronox(TROX) - 2020 Q2 - Quarterly Report

Form 10-Q Filing Information Filing Details The document is a Form 10-Q quarterly report for Tronox Holdings PLC for the period ending June 30, 2020 - The report is a Quarterly Report on Form 10-Q for the period ended June 30, 2020[2] - Tronox Holdings PLC is registered in England and Wales[4] - Ordinary Shares are registered on the New York Stock Exchange under the trading symbol TROX[4] Registrant Status Tronox Holdings PLC has filed all required reports, is a large accelerated filer, and is not a shell company - The Registrant has filed all required reports and Interactive Data Files during the preceding 12 months[5] Filer Type | Filer Type | Status | | :---------------------- | :----- | | Large accelerated filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ | - The Registrant is not a shell company[5] - As of July 20, 2020, there were 143,519,623 ordinary shares outstanding[6] Table of Contents PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes for Tronox Holdings PLC Unaudited Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (Unaudited) - Three Months Ended June 30 | Metric (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Net sales | $578 | $791 | | Gross profit | $129 | $100 | | Income (loss) from operations | $49 | $(13) | | Net (loss) income | $(4) | $(56) | | Net (loss) income attributable to Tronox Holdings plc | $(4) | $(62) | | Net (loss) income per share, basic | $(0.03) | $(0.41) | Condensed Consolidated Statements of Operations (Unaudited) - Six Months Ended June 30 | Metric (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Net sales | $1,300 | $1,181 | | Gross profit | $304 | $183 | | Income (loss) from operations | $128 | $3 | | Net (loss) income | $36 | $(86) | | Net (loss) income attributable to Tronox Holdings plc | $28 | $(96) | | Net (loss) income per share, basic | $0.19 | $(0.69) | Unaudited Condensed Consolidated Statements of Comprehensive Loss Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) - Three Months Ended June 30 | Metric (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Net income (loss) | $(4) | $(56) | | Other comprehensive (loss) income | $61 | $— | | Total comprehensive income (loss) | $57 | $(56) | | Comprehensive income (loss) attributable to Tronox Holdings plc | $57 | $(66) | Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) - Six Months Ended June 30 | Metric (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Net income (loss) | $36 | $(86) | | Other comprehensive (loss) income | $(209) | $— | | Total comprehensive income (loss) | $(173) | $(86) | | Comprehensive income (loss) attributable to Tronox Holdings plc | $(134) | $(111) | Unaudited Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (Unaudited) | Metric (Millions of U.S. dollars) | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | ASSETS | | | | Cash and cash equivalents | $722 | $302 | | Total current assets | $2,507 | $2,073 | | Property, plant and equipment, net | $1,642 | $1,762 | | Total assets | $5,482 | $5,268 | | LIABILITIES AND EQUITY | | | | Total current liabilities | $727 | $702 | | Long-term debt, net | $3,427 | $2,988 | | Total liabilities | $4,754 | $4,352 | | Total equity | $728 | $916 | | Total liabilities and equity | $5,482 | $5,268 | Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30 | Metric (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Cash provided by operating activities - continuing operations | $72 | $133 | | Cash used in investing activities - continuing operations | $(92) | $(991) | | Cash provided by (used in) financing activities - continuing operations | $466 | $(417) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $438 | $(1,290) | | Cash, cash equivalents and restricted cash at end of period | $749 | $406 | Unaudited Condensed Consolidated Statement of Shareholders' Equity Changes in Tronox Holdings plc Shareholders' Equity (Unaudited) - Six Months Ended June 30, 2020 | Metric (Millions of U.S. dollars) | Balance, Dec 31, 2019 | Net Income | Other Comprehensive (Loss) Income | Share-based Compensation | Shares Cancelled | Dividends Paid | Balance, Jun 30, 2020 | | :-------------------------------- | :-------------------- | :--------- | :-------------------------------- | :----------------------- | :--------------- | :------------- | :-------------------- | | Total Tronox Holdings plc Shareholders' Equity | $748 | $28 | $(162) | $11 | $(3) | $(20) | $602 | Changes in Tronox Holdings plc Shareholders' Equity (Unaudited) - Six Months Ended June 30, 2019 | Metric (Millions of U.S. dollars) | Balance, Dec 31, 2018 | Net (Loss) Income | Other Comprehensive (Loss) Income | Share-based Compensation | Shares Cancelled | Acquisition of Noncontrolling Interest | Shares Issued for Acquisition | Shares Repurchased and Cancelled | Dividends Paid | Balance, Jun 30, 2019 | | :-------------------------------- | :-------------------- | :---------------- | :-------------------------------- | :----------------------- | :--------------- | :------------------------------------- | :---------------------------- | :------------------------------- | :------------- | :-------------------- | | Total Tronox Holdings plc Shareholders' Equity | $683 | $(96) | $(15) | $15 | $(6) | $(148) | $526 | $(257) | $(13) | $779 | Notes to Unaudited Condensed Consolidated Financial Statements Note 1. The Company - Tronox operates titanium-bearing mineral sand mines and smelter operations in Australia, South Africa, and Brazil, producing feedstock for TiO2 pigment, high purity titanium chemicals, and Ultrafine© titanium dioxide[24] - The company's strategic goal is vertical integration, aiming to consume all feedstock in its nine TiO2 pigment facilities globally[24] - Tronox re-domiciled to the United Kingdom in March 2019, with Tronox Limited becoming a wholly-owned subsidiary[25] - The acquisition of Cristal's TiO2 business on April 10, 2019, doubled the company's size and expanded its TiO2 pigment facilities from three to nine[25] - The financial statements are unaudited and prepared under U.S. GAAP, reflecting all normal recurring adjustments[26][28] - The Cristal acquisition impacts the comparability of financial statements between 2019 and 2020[27] - The company adopted ASU 2018-13 (Fair Value Measurement) and ASU 2016-13 (Credit Losses) on January 1, 2020, with immaterial impact[30][31] - The company is evaluating the impact of ASU 2020-04 (Reference Rate Reform) issued in Q1 2020[32] Note 2. Acquisitions and Related Divestitures - In May 2020, Tronox signed an agreement to acquire Tizir Titanium and Iron (TTI) for approximately $300 million in cash, plus 3% per annum accrual from January 1, 2020[33] - A $18 million termination fee was placed in escrow for the TTI acquisition, reflected in 'Restricted cash' at June 30, 2020[34] - The Cristal acquisition was completed on April 10, 2019, for $1.675 billion cash and 37,580,000 ordinary shares (totaling approximately $2.2 billion)[36] - Cristal's North American TiO2 business was divested to INEOS in May 2019 for $701 million (net of transaction costs) to obtain regulatory approval[37] - The 8120 paper laminate grade from the Botlek facility was divested to Venator Materials PLC for 8 million Euros, with a $19 million contract loss recorded in Q2 2019[39] - The purchase price allocation for Cristal was finalized in Q1 2020, resulting in minor adjustments to environmental liabilities, PPE, noncontrolling interest, deferred taxes, and inventory[43] Cristal Acquisition Purchase Price Consideration (April 10, 2019) | Item | Amount (Millions of U.S. dollars) | | :----------------------------------- | :------------------------------ | | Total fair value of Tronox Holdings plc shares issued | $526 | | Cash consideration paid | $1,675 | | Total purchase price | $2,201 | Cristal Acquisition Fair Value of Net Assets Acquired (April 10, 2019) | Item | Fair Value (Millions of U.S. dollars) | | :----------------------------------- | :------------------------------ | | Total assets acquired | $2,923 | | Total liabilities assumed | $674 | | Less noncontrolling interest | $48 | | Purchase price | $2,201 | - For the three and six months ended June 30, 2019, the acquired Cristal business contributed $353 million in revenue and $(48) million in operating income[48] Supplemental Pro Forma Financial Information (Six Months Ended June 30, 2019) | Metric (Millions of U.S. dollars) | 2019 | | :-------------------------------- | :--- | | Net sales | $1,547 | | Net income from continuing operations attributable to Tronox Holdings plc | $3 | Note 3. Restructuring Initiatives - Restructuring costs of $2 million were recorded for the six months ended June 30, 2020, primarily for employee-related costs[52] - Restructuring costs of $10 million were recorded for both the three and six months ended June 30, 2019, following the Cristal acquisition[52] Restructuring Liability Balance (Millions of U.S. dollars) | Metric | December 31, 2019 | March 31, 2020 | June 30, 2020 | | :-------------------- | :---------------- | :------------- | :------------ | | Balance | $10 | $9 | $4 | Note 4. Revenue - Revenue is recognized when the customer obtains control of the promised products, typically at shipment or a specified destination[54] - The company operates under one operating and reportable segment: TiO2[57] Net Sales by Geographic Area (Millions of U.S. dollars) | Geographic Area | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $154 | $180 | $332 | $318 | | South and Central America | $21 | $48 | $61 | $61 | | Europe, Middle-East and Africa | $201 | $316 | $493 | $446 | | Asia Pacific | $202 | $247 | $414 | $356 | | Total net sales | $578 | $791 | $1,300 | $1,181 | Net Sales by Product Type (Millions of U.S. dollars) | Product Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | TiO2 | $466 | $625 | $1,046 | $902 | | Zircon | $68 | $88 | $133 | $152 | | Feedstock and other products | $44 | $78 | $121 | $127 | | Total net sales | $578 | $791 | $1,300 | $1,181 | - The ten largest third-party TiO2 customers represented 33% and 31% of consolidated net sales for the six months ended June 30, 2020 and 2019, respectively[59] Note 5. Discontinued Operations - Cristal's North American TiO2 business was divested on May 1, 2019, for $701 million cash, with operating results included in 'Net income (loss) from discontinued operations, net of tax'[60] Summary of Discontinued Operations (Three and Six Months Ended June 30, 2019) | Metric (Millions of U.S. dollars) | 2019 | | :-------------------------------- | :--- | | Net sales | $41 | | Gross profit | $12 | | Income before income taxes | $9 | | Net loss from discontinued operations, net of tax | $(1) | Note 6. Income Taxes Income Tax (Provision) Benefit and Effective Tax Rate | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax (provision) benefit | $(10) | $4 | $(16) | $2 | | Income (loss) from continuing operations before income taxes | $6 | $(59) | $52 | $(87) | | Effective tax rate | 167% | (7)% | 31% | (2)% | - The statutory tax rate in the U.K. was 19% at June 30, 2020 and 2019[64] - Effective tax rates are influenced by income/losses in jurisdictions with full valuation allowances, disallowable expenditures, restructuring impacts, and jurisdictional mix of income at varying tax rates[64] - Full valuation allowances are maintained against net deferred tax assets in Australia, Belgium, Brazil, Switzerland, and the U.S., and against specific tax assets in the Netherlands, South Africa, and the U.K[66] - A full valuation allowance of $2 million was recorded against deferred tax assets in Saudi Arabia during Q2 2020[67] - The company's ability to use U.S. loss and expense carryforwards could be limited by an ownership change under IRC Section 382, potentially impacting up to $5.5 billion[68] - The Australian Taxation Office commenced a tax audit for pre-Cristal Transaction periods, with Cristal obligated to indemnify Tronox for related tax liabilities[70] Note 7. Income (Loss) Per Share Net Income (Loss) Per Share (Unaudited) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) available to ordinary shares | $(4) | $(62) | $28 | $(96) | | Weighted-average ordinary shares, basic (in thousands) | 143,465 | 150,686 | 143,080 | 137,569 | | Basic net income (loss) operations per ordinary share | $(0.03) | $(0.41) | $0.19 | $(0.69) | | Diluted net income (loss) operations per ordinary share | $(0.03) | $(0.41) | $0.19 | $(0.69) | Anti-Dilutive Shares Not Recognized (in thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Options | 1,208,055 | 1,269,443 | 1,208,055 | 1,269,443 | | Restricted share units | 6,831,965 | 5,206,611 | 6,831,965 | 5,206,611 | Note 8. Inventories, Net Inventories, Net (Millions of U.S. dollars) | Category | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Raw materials | $172 | $205 | | Work-in-process | $109 | $129 | | Finished goods, net | $677 | $573 | | Materials and supplies, net | $216 | $224 | | Inventories, net – current | $1,174 | $1,131 | - Inventory obsolescence reserves were $43 million at June 30, 2020, up from $39 million at December 31, 2019[76] - Reserves for lower of cost or market and net realizable value were $21 million at June 30, 2020, down from $25 million at December 31, 2019[76] Note 9. Property, Plant and Equipment, Net Property, Plant and Equipment, Net (Millions of U.S. dollars) | Category | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Land and land improvements | $177 | $191 | | Buildings | $327 | $340 | | Machinery and equipment | $1,934 | $2,028 | | Construction-in-progress | $174 | $156 | | Other | $57 | $54 | | Subtotal | $2,669 | $2,769 | | Less: accumulated depreciation | $(1,027) | $(1,007) | | Property, plant and equipment, net | $1,642 | $1,762 | - The decline in PPE, net from December 31, 2019, to June 30, 2020, is primarily due to foreign currency translation impacts from the devaluation of the South African rand and Brazilian real[77] - Substantially all PPE, net is pledged as collateral for debt[78] Depreciation Expense (Millions of U.S. dollars) | Line Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of goods sold | $52 | $58 | $109 | $90 | | Selling, general and administrative expenses | $1 | $1 | $3 | $2 | | Total | $53 | $59 | $112 | $92 | Note 10. Mineral Leaseholds, Net Mineral Leaseholds, Net (Millions of U.S. dollars) | Category | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Mineral leaseholds | $1,301 | $1,352 | | Less: accumulated depletion | $(523) | $(500) | | Mineral leaseholds, net | $778 | $852 | - The decline in mineral leaseholds, net is primarily due to foreign currency translation from the devaluation of the South African rand[79] - Depletion expense was $12 million (Q2 2020) and $14 million (YTD Q2 2020), recorded in 'Cost of goods sold'[79] Note 11. Intangible Assets, Net Intangible Assets, Net (Millions of U.S. dollars) | Category | June 30, 2020 Net Carrying Amount | December 31, 2019 Net Carrying Amount | | :-------------------- | :-------------------------------- | :------------------------------------ | | Customer relationships | $108 | $118 | | TiO2 technology | $73 | $75 | | Internal-use software | $14 | $15 | | Intangible assets, net | $195 | $208 | Amortization Expense (Millions of U.S. dollars) | Line Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of goods sold | $— | $1 | $1 | $1 | | Selling, general and administrative expenses | $7 | $7 | $16 | $13 | | Total | $7 | $8 | $17 | $14 | - Estimated future amortization expense for intangible assets is $16 million for the remainder of 2020, $31 million for 2021, $29 million for 2022, $27 million for 2023, $26 million for 2024, and $66 million thereafter[80] Note 12. Balance Sheet and Cash Flow Supplemental Information Accrued Liabilities (Millions of U.S. dollars) | Category | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Employee-related costs and benefits | $98 | $103 | | Interest | $21 | $16 | | Sales rebates | $28 | $39 | | Restructuring | $4 | $10 | | Interest rate swaps | $62 | $22 | | Currency contracts | $10 | $— | | Professional fees and other | $52 | $60 | | Accrued liabilities | $305 | $283 | Supplemental Non-Cash Information (Six Months Ended June 30) | Item | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Investing activities- shares issued in the Cristal acquisition | $— | $526 | | Financing activities- debt assumed in the Cristal acquisition | $— | $22 | Note 13. Debt Long-Term Debt, Net (Millions of U.S. dollars) | Debt Instrument | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Term Loan Facility, net | $1,806 | $1,805 | | Senior Notes due 2025 | $450 | $450 | | Senior Notes due 2026 | $615 | $615 | | 6.5% Senior Secured Notes due 2025 | $500 | $— | | Standard Bank Term Loan Facility | $112 | $158 | | Tikon Loan | $16 | $16 | | Finance leases | $12 | $15 | | Long-term debt, net | $3,427 | $2,988 | - On May 1, 2020, Tronox Incorporated issued $500 million of 6.5% senior secured notes due 2025, with proceeds used to repay $200 million of outstanding revolver borrowings[84] Short-Term Debt (Millions of U.S. dollars) | Debt Instrument | June 30, 2020 | December 31, 2019 | | :---------------- | :------------ | :---------------- | | SABB Credit Facility | $13 | $— | | Short-term debt | $13 | $— | - The company was in compliance with all financial covenants in its debt facilities at June 30, 2020[86] - In March 2020, the company drew down $200 million from its Wells Fargo, Standard Bank, and Emirates revolvers for liquidity, which was repaid in May 2020[87] Note 14. Derivative Financial Instruments Fair Value of Derivatives Outstanding (Millions of U.S. dollars) | Category | June 30, 2020 Assets | June 30, 2020 Liabilities | December 31, 2019 Assets | December 31, 2019 Liabilities | | :-------------------------------- | :------------------- | :---------------------- | :----------------------- | :-------------------------- | | Currency Contracts (Cash Flow Hedges) | $33 | $6 | $30 | $— | | Interest Rate Swaps (Cash Flow Hedges) | $— | $62 | $— | $22 | | Currency Contracts (Not Designated) | $1 | $4 | $7 | $— | | Total Derivatives | $34 | $72 | $37 | $22 | Derivatives' Impact on Condensed Consolidated Statement of Operations (Pre-Tax Gain (Loss)) | Category | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :----------------------------- | | Currency Contracts (Not Designated) | $8 (Other Income, net) | $(8) (Other Income, net) | | Currency Contracts (Cash Flow Hedges) | $(5) (Cost of Goods Sold), $(1) (Other Income, net) | $(6) (Cost of Goods Sold), $(5) (Other Income, net) | - Interest rate swap agreements with a notional value of $750 million convert variable rates to fixed rates for a portion of the Term Loan Facility, expiring in September 2024[91] - Foreign currency contracts hedge forecasted non-functional currency sales for South African subsidiaries and cost of goods sold for Australian subsidiaries, designated as cash flow hedges[93] - As of June 30, 2020, notional amounts for foreign currency cash flow hedges included 1.4 billion South African rand ($81 million) and $507 million Australian dollars ($349 million)[94] Note 15. Fair Value - Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction, categorized into Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[96] Fair Value of Debt and Derivative Contracts (Millions of U.S. dollars) | Item | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Term Loan Facility | $1,740 | $1,820 | | Senior Notes due 2025 | $418 | $459 | | Senior Notes due 2026 | $576 | $636 | | 6.5% Senior Secured Notes due 2025 | $507 | $— | | Interest rate swaps | $62 | $22 | | Foreign currency contracts, net | $24 | $37 | - Fair values for Term Loan Facility, Senior Notes, and 6.5% Senior Secured Notes are determined using Level 1 inputs (quoted market prices)[96] - Fair values for Standard Bank Term Loan, Tikon Loan, Australian Government Loan, foreign currency contracts, and interest rate swaps are determined using Level 2 inputs (observable inputs other than quoted prices)[96][97] Note 16. Asset Retirement Obligations - Asset retirement obligations (AROs) primarily cover rehabilitation, restoration, landfill capping, and decommissioning costs[99] Asset Retirement Obligations (Millions of U.S. dollars) | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Current portion included in "Accrued liabilities" | $10 | $16 | | Noncurrent portion included in "Asset retirement obligations" | $145 | $142 | | Asset retirement obligations | $155 | $158 | Changes in Asset Retirement Obligations (Six Months Ended June 30) | Metric | 2020 | 2019 | | :-------------------- | :--- | :--- | | Beginning balance | $158 | $74 | | Accretion expense | $5 | $4 | | Remeasurement/translation | $(9) | $— | | Settlements/payments | $(3) | $(1) | | Transferred in with the acquisition of Cristal | $— | $94 | | Balance, June 30 | $155 | $174 | Note 17. Commitments and Contingencies Purchase Commitments (Millions of U.S. dollars) | Year | Amount | | :----- | :----- | | 2020 | $117 | | 2021 | $83 | | 2022 | $67 | | 2023 | $54 | | 2024 | $48 | | Thereafter | $177 | - Outstanding letters of credit and bank guarantees totaled $73 million at June 30, 2020 ($34 million letters of credit, $39 million bank guarantees)[102] - A provision of $61 million has been made for remediation of the Hawkins Point Plant, assumed with the Cristal acquisition[103] - The company is involved in a lawsuit with Venator Materials plc regarding a $75 million 'Break Fee' and Tronox's counterclaim for $400 million in damages related to the Cristal divestiture[104] Note 18. Accumulated Other Comprehensive Loss Attributable to Tronox Holdings plc Changes in Accumulated Other Comprehensive Loss (Millions of U.S. dollars) - Three Months Ended June 30, 2020 | Component | Balance, March 31, 2020 | Other Comprehensive Income (Loss) | Reclassified Amounts | Balance, June 30, 2020 | | :-------------------- | :---------------------- | :-------------------------------- | :------------------- | :--------------------- | | Cumulative Translation Adjustment | $(644) | $16 | $— | $(628) | | Pension Liability Adjustment | $(103) | $(2) | $1 | $(104) | | Unrealized Gains (Losses) on Hedges | $(82) | $40 | $6 | $(36) | | Total | $(829) | $54 | $7 | $(768) | Changes in Accumulated Other Comprehensive Loss (Millions of U.S. dollars) - Six Months Ended June 30, 2020 | Component | Balance, January 1, 2020 | Other Comprehensive Loss | Reclassified Amounts | Balance, June 30, 2020 | | :-------------------- | :----------------------- | :----------------------- | :------------------- | :--------------------- | | Cumulative Translation Adjustment | $(503) | $(125) | $— | $(628) | | Pension Liability Adjustment | $(104) | $(2) | $2 | $(104) | | Unrealized Gains (Losses) on Hedges | $1 | $(48) | $11 | $(36) | | Total | $(606) | $(175) | $13 | $(768) | Note 19. Share-Based Compensation - The maximum number of shares for awards under the MEIP was increased by 8,000,000 to 20,781,225 ordinary shares on June 24, 2020[110] - In Q1 and Q2 2020, 1,591,511 time-based RSUs were granted to management (vesting over three years) and 183,374 to Board members[111] - 1,501,092 performance-based RSUs were granted in 2020, half vesting based on relative Total Shareholder Return (TSR) and half on company performance metrics (ORONA)[111] - Unrecognized compensation cost for unvested awards was $47 million at June 30, 2020, expected to be recognized over approximately 1.8 years[112] - Stock compensation expense was $2 million (Q2 2020) and $11 million (YTD Q2 2020), including a $6 million credit for 2018 performance grants reversal[113] Note 20. Pension and Other Postretirement Healthcare Benefits Net Periodic Pension Cost (Millions of U.S. dollars) | Component | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Service cost | $2 | $1 | $3 | $1 | | Interest cost | $4 | $6 | $9 | $9 | | Expected return on plan assets | $(5) | $(7) | $(11) | $(10) | | Net amortization of actuarial loss and prior service credit | $1 | $1 | $2 | $1 | | Total net periodic cost | $2 | $1 | $3 | $1 | - Estimated 2020 required contributions to pension plans are $16 million, with $8 million made through June 30, 2020[116] Note 21. Related Parties - Exxaro sold 14 million shares to Tronox for approximately $200 million in May 2019, which were subsequently cancelled[118] - Tronox completed the redemption of Exxaro's 26% ownership interest in Tronox Sands LLP for approximately $148 million in cash in February 2019[119] - At June 30, 2020, Exxaro still owns approximately 14.7 million shares (10.3% ownership) of Tronox and a 26% interest in South African operating subsidiaries[120] - Cristal International Holdings B.V. (a Tasnee subsidiary) owns 37,580,000 shares (26% ownership) of Tronox at June 30, 2020[121] - Tronox loaned AMIC $101 million for capital expenditures and operational expenses to facilitate the startup of the Jazan Slagger, recorded in 'Other long-term assets'[122] - An amendment to the Option Agreement in May 2020 gives Tronox the right to acquire 90% of the SPV (Slagger) in exchange for forgiving the Tronox Loan[123] - Tronox provides technical advice and project management services for the Slagger, receiving a monthly management fee of approximately $1 million[125] - Tronox recorded a net reduction of approximately $1 million in 'Selling, general and administrative expenses' for both the three and six months ended June 30, 2020, related to the transition services agreement with Tasnee/Cristal[127] - Tronox entered an agreement to acquire certain assets co-located at its Yanbu facility (MGT) from Cristal, assuming a $36 million note payable[128] - MGT sales to AMIC were $7 million (Q2 2020) and $13 million (YTD Q2 2020), recorded in 'Net sales'[129] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Tronox's financial condition and operating results for the three and six months ended June 30, 2020 Overview - Tronox operates titanium-bearing mineral sand mines and smelter operations globally, aiming for vertical integration to produce low-cost, high-quality TiO2 pigment[133] - The company re-domiciled to the UK in March 2019 and completed the acquisition of Cristal's TiO2 business on April 10, 2019, significantly expanding its operations[134] Tronox Synergy Savings Program - The Cristal Transaction aimed to achieve approximately $220 million in synergies by 2022 through operational enhancements, feedstock initiatives, supply chain savings, and SG&A reductions[135][143] - Restructuring costs of $24 million were incurred for employee-related costs from the Cristal Transaction through June 30, 2020[137] - Total synergies of $107 million were delivered during the six months ended June 30, 2020, with $84 million reflected in EBITDA[138] - Synergy targets are $190 million for 2020, $275 million for 2021, and $325 million for 2022[138] Business Environment - Operations were designated as essential during the COVID-19 pandemic[139] - Q2 2020 revenue decreased 20% sequentially due to lower TiO2 volumes, in line with expectations from global GDP decline[140] - TiO2 selling prices remained flat sequentially, with resilient demand in North American DIY coatings and packaging, but slower demand in South America and India[140] - Gross margin declined sequentially in Q2 2020 due to unfavorable volume, mix, and cost structures in South Africa (COVID-19 lockdown impacts), partially offset by favorable foreign currency[141] - Total available liquidity was $1,123 million at June 30, 2020, including $722 million in cash and $401 million available under revolving credit agreements[142] - Total debt was $3.5 billion, with net debt to trailing-twelve month Adjusted EBITDA (pro forma for Cristal) at 4.2x[142] Pro Forma Income Statement Information - Pro forma information is provided to assist with comparability of 2020 and 2019 results, assuming the Cristal merger and related divestitures occurred on January 1, 2018[144] - Pro forma adjustments include conforming accounting policies, IFRS to U.S. GAAP conversion, elimination of intercompany transactions, incremental expenses from purchase accounting, contract loss recognition, transaction costs, interest expense effects, and related tax/EPS impacts[49] - The pro forma information does not include the impact of revenue, cost, or other operating synergies prior to the acquisition or related restructuring costs[145] Condensed Consolidated Results of Operations from Continuing Operations (Three Months Ended June 30, 2020 compared to the Three Months Ended June 30, 2019) Reported Financial Performance (Three Months Ended June 30) | Metric (Millions of U.S. dollars) | 2020 | 2019 | Variance | | :-------------------------------- | :--- | :--- | :------- | | Net sales | $578 | $791 | $(213) | | Gross profit | $129 | $100 | $29 | | Gross Margin | 22% | 13% | 9 pts | | Income (loss) from operations | $49 | $(13) | $62 | | Net (loss) income from continuing operations | $(4) | $(55) | $51 | | Effective tax rate | 167% | (7)% | | | EBITDA | $123 | $76 | $47 | | Adjusted EBITDA | $142 | $195 | $(53) | | Adjusted EBITDA as % of Net Sales | 25% | 25% | 0 pts | Pro Forma Financial Performance (Three Months Ended June 30) | Metric (Millions of U.S. dollars) | 2020 | 2019 | Variance | | :-------------------------------- | :--- | :--- | :------- | | Net sales | $578 | $827 | $(249) | | Gross profit | $129 | $179 | $(50) | | Gross Margin | 22% | 22% | 0 pts | | Income (loss) from operations | $49 | $84 | $(35) | | Net (loss) income from continuing operations | $(4) | $32 | $(36) | | Effective tax rate | 167% | 16% | | | EBITDA | $123 | $176 | $(53) | | Adjusted EBITDA | $142 | $200 | $(58) | | Adjusted EBITDA as % of Net Sales | 25% | 24% | 1 pts | - Reported net sales decreased by 27% ($213 million) due to lower TiO2 and Zircon sales volumes (COVID-19 impact) and lower Zircon average selling prices[149] - Reported TiO2 revenue decreased 25% ($159 million), primarily due to a $169 million decrease in sales volumes and a $7 million decrease in average selling prices[151] - Reported gross margin increased from 13% to 22% of net sales, driven by the favorable impact of inventory step-up amortization (8 pts), Cristal synergies (4 pts), and contract loss recognition (3 pts)[153] - Selling, general and administrative expenses decreased by $23 million (22%) due to lower professional services, travel, and employee costs[154] - Reported income from operations increased by $62 million to $49 million, driven by higher gross margin and lower SG&A[156] - Interest expense decreased by $7 million due to lower average debt and interest rates[159] - The effective tax rate was 167% in Q2 2020, influenced by valuation allowances and jurisdictional income mix[163] Condensed Consolidated Results of Operations from Continuing Operations (Six Months Ended June 30, 2020 compared to the Six Months Ended June 30, 2019) Reported Financial Performance (Six Months Ended June 30) | Metric (Millions of U.S. dollars) | 2020 | 2019 | Variance | | :-------------------------------- | :--- | :--- | :------- | | Net sales | $1,300 | $1,181 | $119 | | Gross profit | $304 | $183 | $121 | | Gross Margin | 23% | 15% | 8 pts | | Income from operations | $128 | $3 | $125 | | Net (loss) income from continuing operations | $36 | $(85) | $121 | | Effective tax rate | 31% | (2)% | | | EBITDA | $282 | $135 | $147 | | Adjusted EBITDA | $315 | $275 | $40 | | Adjusted EBITDA as % of Net Sales | 24% | 23% | 1 pts | Pro Forma Financial Performance (Six Months Ended June 30) | Metric (Millions of U.S. dollars) | 2020 | 2019 | Variance | | :-------------------------------- | :--- | :--- | :------- | | Net sales | $1,300 | $1,547 | $(247) | | Gross profit | $304 | $320 | $(16) | | Gross Margin | 23% | 21% | 2 pts | | Income from operations | $128 | $130 | $(2) | | Net (loss) income from continuing operations | $36 | $14 | $22 | | Effective tax rate | 31% | 48% | | | EBITDA | $282 | $304 | $(22) | | Adjusted EBITDA | $315 | $341 | $(26) | | Adjusted EBITDA as % of Net Sales | 24% | 22% | 2 pts | - Reported net sales increased by 10% ($119 million), including $352 million from Cristal operations in Q1 2020 and early April 2020[167] - Excluding Cristal revenue, reported revenue decreased 20% due to lower TiO2 and Zircon sales volumes (COVID-19 impact) and lower Zircon average selling prices[167] - Reported gross margin increased from 15% to 23% of net sales, driven by Cristal synergies (4 pts), inventory step-up amortization (4 pts), and contract loss recognition (2 pts)[170] - Reported income from operations increased by $125 million to $128 million, primarily due to higher gross margin and lower restructuring charges[172] - Interest expense decreased by $11 million (reported) and $17 million (pro forma) due to lower average debt and interest rates[176] - The effective tax rate was 31% in YTD Q2 2020, influenced by valuation allowances and jurisdictional income mix[180] Other Comprehensive (Loss) Income - Other comprehensive income was $61 million for Q2 2020, compared to none in Q2 2019, primarily due to $46 million in gains on derivative instruments[181] - Other comprehensive loss was $209 million for YTD Q2 2020, compared to none in YTD Q2 2019, primarily due to unfavorable foreign currency translation adjustments of $172 million[182] Liquidity and Capital Resources Liquidity (Millions of U.S. dollars) | Item | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $722 | $302 | | Available under Wells Fargo Revolver | $288 | $209 | | Available under Standard Credit Facility | $58 | $72 | | Available under Emirates Revolver | $50 | $46 | | Available under SABB Facility | $5 | $19 | | Total | $1,123 | $648 | - The company expects operations and available borrowings to provide sufficient cash for operating expenses, capital expenditures, interest, and debt repayments over the next twelve months[184] - Working capital increased to $1.8 billion at June 30, 2020, from $1.4 billion at December 31, 2019[185] - Non-guarantor subsidiaries represented approximately 15% of total consolidated liabilities and 31% of total consolidated assets at June 30, 2020[186] - Outstanding letters of credit and bank guarantees totaled $73 million at June 30, 2020[187] - Credit ratings changed from B1 positive to B1 stable (Moody's) and B stable to B negative (S&P) from December 31, 2019, to June 30, 2020[189] - At June 30, 2020, $722 million in cash and cash equivalents were held across various jurisdictions, with $442 million in the United States[192] - The company has made no provision for deferred taxes on undistributed foreign earnings, considering them indefinitely reinvested[193] - Net debt was $2.7 billion at both June 30, 2020, and December 31, 2019[195] - The acquisition of Tizir Titanium and Iron (TTI) for approximately $300 million in cash is anticipated to close before May 13, 2021[197] Cash Flows Cash Flow from Continuing Operations (Six Months Ended June 30) | Activity (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Cash provided by operating activities | $72 | $133 | | Cash used in investing activities | $(92) | $(991) | | Cash provided by (used in) financing activities | $466 | $(417) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $438 | $(1,290) | - Net cash provided by operating activities decreased to $72 million from $133 million, primarily due to higher use of cash from working capital, particularly for inventories[198] - Net cash used in investing activities decreased significantly to $92 million from $991 million, mainly due to the Cristal acquisition in the prior year and proceeds from the Ashtabula sale[199] - Net cash provided by financing activities was $466 million, compared to $417 million used in the prior year, driven by $500 million from new senior secured notes issuance[200] Contractual Obligations Contractual Obligations as of June 30, 2020 (Millions of U.S. dollars) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :-------------------------------- | :---- | :--------------- | :-------- | :-------- | :---------------- | | Long-term debt, net and lease financing (including interest) | $4,389 | $243 | $409 | $2,619 | $1,118 | | Purchase obligations | $545 | $158 | $135 | $94 | $158 | | Operating leases | $97 | $41 | $39 | $10 | $7 | | Asset retirement obligations | $410 | $20 | $68 | $37 | $285 | | Total | $5,441 | $462 | $651 | $2,760 | $1,568 | Non-U.S. GAAP Financial Measures - EBITDA is defined as net income (loss) excluding income taxes, interest expense, interest income, and depreciation, depletion, and amortization[202] - Adjusted EBITDA further excludes nonrecurring items (restructuring, debt extinguishments, impairments, acquisition costs, purchase accounting adjustments, pension settlements) and non-cash items (share-based compensation, pension/postretirement costs, foreign currency remeasurement gains/losses)[202] - Management uses EBITDA and Adjusted EBITDA for planning, budgeting, evaluating performance, and determining incentive compensation[204] Reconciliation of Net (Loss) Income to EBITDA and Adjusted EBITDA (Three Months Ended June 30) | Metric (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Net (loss) income (U.S. GAAP) | $(4) | $(56) | | Net (loss) income from continuing operations (U.S. GAAP) | $(4) | $(55) | | EBITDA (non-U.S. GAAP) | $123 | $76 | | Adjusted EBITDA (non-U.S. GAAP) | $142 | $195 | Reconciliation of Net (Loss) Income to EBITDA and Adjusted EBITDA (Six Months Ended June 30) | Metric (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Net (loss) income (U.S. GAAP) | $36 | $(86) | | Net (loss) income from continuing operations (U.S. GAAP) | $36 | $(85) | | EBITDA (non-U.S. GAAP) | $282 | $135 | | Adjusted EBITDA (non-U.S. GAAP) | $315 | $275 | Pro Forma Reconciliation of Net (Loss) Income to EBITDA and Adjusted EBITDA (Three Months Ended June 30) | Metric (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Net (loss) income from continuing operations (U.S. GAAP) | $(4) | $32 | | EBITDA (non-U.S. GAAP) | $123 | $176 | | Adjusted EBITDA (non-U.S. GAAP) | $142 | $200 | Pro Forma Reconciliation of Net (Loss) Income to EBITDA and Adjusted EBITDA (Six Months Ended June 30) | Metric (Millions of U.S. dollars) | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Net (loss) income from continuing operations (U.S. GAAP) | $36 | $14 | | EBITDA (non-U.S. GAAP) | $282 | $304 | | Adjusted EBITDA (non-U.S. GAAP) | $315 | $341 | Recent Accounting Pronouncements - Refer to Note 1 for details on recently issued accounting pronouncements[215] Environmental Matters - The company is subject to various environmental laws and regulations, incurring significant compliance costs[216] - The company believes it is in compliance with applicable environmental rules and regulations in all material respects[216] Supplemental Pro Forma Information - Supplemental unaudited pro forma information is provided for comparability, assuming the Cristal merger and related divestitures occurred on January 1, 2018[217] - Pro forma adjustments include accounting policy conformity, IFRS to U.S. GAAP conversion, elimination of intercompany transactions, purchase accounting adjustments, contract loss, interest expense, and tax/EPS effects[222] - Pro forma information for the three and six months ended June 30, 2020, was the same as the as-reported information[221] - Pro forma information for the three and six months ended June 30, 2019, was updated to reflect final purchase price allocation adjustments[222] Pro Forma Statement of Operations Information (Three Months Ended June 30, 2019) | Metric (Millions of U.S. dollars) | Tronox Holdings plc | Cristal (a) | Other Pro Forma Adjustments | Pro Forma | | :-------------------------------- | :------------------ | :---------- | :-------------------------- | :-------- | | Net sales | $791 | $36 | $— | $827 | | Gross profit | $100 | $5 | $74 | $179 | | Income from operations | $(13) | $2 | $95 | $84 | | Net income (loss) from continuing operations attributable to Tronox Holdings plc | $(61) | $2 | $85 | $26 | Pro Forma Statement of Operations Information (Six Months Ended June 30, 2019) | Metric (Millions of U.S. dollars) | Tronox Holdings plc | Cristal (a) | Other Pro Forma Adjustments | Pro Forma | | :-------------------------------- | :------------------ | :---------- | :-------------------------- | :-------- | | Net sales | $1,181 | $379 | $(13) | $1,547 | | Gross profit | $183 | $85 | $52 | $320 | | Income from operations | $3 | $26 | $101 | $130 | | Net income (loss) from continuing operations attributable to Tronox Holdings plc | $(95) | $15 | $83 | $3 | Pro Forma Adjusted EBITDA Information (Three Months Ended June 30, 2019) | Metric (Millions of U.S. dollars) | Tronox Holdings plc | Cristal (1) | Other Pro Forma Adjustments | Pro Forma | | :-------------------------------- | :------------------ | :---------- | :-------------------------- | :-------- | | EBITDA (non-U.S. GAAP) | $76 | $5 | $95 | $176 | | Adjusted EBITDA (non-U.S. GAAP) | $195 | $5 | $— | $200 | Pro Forma Adjusted EBITDA Information (Six Months Ended June 30, 2019) | Metric (Millions of U.S. dollars) | Tronox Holdings plc | Cristal (1) | Other Pro Forma Adjustments | Pro Forma | | :-------------------------------- | :------------------ | :---------- | :-------------------------- | :-------- | | EBITDA (non-U.S. GAAP) | $135 | $67 | $102 | $304 | | Adjusted EBITDA (non-U.S. GAAP) | $275 | $68 | $(2) | $341 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details Tronox's exposure to various market risks and outlines the strategies employed to manage these exposures Market Risk - The company is exposed to commodity price risk as products and raw materials reprice with market supply and demand changes[241] - Strategies to mitigate market risk include sales contract provisions for passing on raw material costs, formula price contracts, varying contract term lengths, and diverse customer mix[241] Credit Risk - A significant portion of liquidity is concentrated in trade accounts receivable, with potential impact from industry concentration and economic conditions (e.g., COVID-19)[242] - The company performs ongoing credit evaluations and maintains allowances for potential credit losses[242] - The ten largest third-party TiO2 customers represented 33% of consolidated net sales for the six months ended June 30, 2020[242] Interest Rate Risk - The company is exposed to interest rate risk on its floating rate debt, including the Term Loan Facility and Standard Bank Term Loan Facility[243] - A hypothetical 1% increase in interest rates would result in a net decrease to pre-tax income of approximately $5 million on an annualized basis[243] - Interest-rate swap agreements were entered into in 2019 to convert a portion of the Term Loan Facility's variable rate to a fixed rate, expiring in September 2024[244] Currency Risk - Currency risk arises from fluctuations in foreign exchange rates impacting balance sheets and earnings, particularly in Australia, Brazil, China, South Africa, the Netherlands, and the United Kingdom[246] - The exposure is more prevalent in South Africa and Australia, where revenues are primarily in U.S. dollars and expenses in local currencies[246] - Foreign currency contracts are used as cash flow hedges for forecasted non-functional currency sales (South African subsidiaries) and cost of goods sold (Australian subsidiaries)[247] - As of June 30, 2020, notional amounts for foreign currency cash flow hedges included 1.4 billion South African rand ($81 million) and $507 million Australian dollars ($349 million)[248] Item 4. Controls and Procedures This section confirms the effectiveness of Tronox's disclosure controls and reports no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - Management concluded that the company's disclosure controls and procedures were