NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of U.S. dollars, except share, per share and metric tons data or unless otherwise noted)
Tronox Limited (referred to as “Tronox,” “we,” “us,” or “our”) is a public limited company registered under the laws of the State of
Western Australia. We are a global leader in the production and marketing of titanium bearing mineral sands and titanium dioxide (“TiO
2
”) pigment. Through the exploration, mining and beneficiation of mineral sands deposits, we produce
titanium feedstock (including chloride slag, slag fines, rutile, synthetic rutile and leucoxene) and its coproducts, pig iron and zircon. Titanium feedstock is primarily used to manufacture TiO
2
, a pigment used in the manufacture of
paint and plastics. Zircon, a hard, glossy mineral, is used for the manufacture of ceramics, refractories, TV screen glass, and a range of other industrial and chemical products. Pig iron is a metal material used in the steel and metal casting
industries to create wrought iron, cast iron, and steel.
We have global operations in North America, Europe, South Africa, and the Asia-Pacific region. We classify our business into one
reportable segment, TiO
2
, in which we operate three pigment production facilities at the following locations: Hamilton, Mississippi; Botlek, the Netherlands; and Kwinana, Western Australia. We also operate three separate mining
operations: KwaZulu-Natal (“KZN”) Sands and Namakwa Sands both located in South Africa and Cooljarloo located in Western Australia.
On February 21, 2017, we entered into a definitive agreement with The National Titanium Dioxide Company Ltd., a limited company organized
under the laws of the Kingdom of Saudi Arabia (“Cristal”), and Cristal Inorganic Chemicals Netherlands Coöperatief W.A., a cooperative organized under the laws of the Netherlands and a wholly owned subsidiary of Cristal (“Seller”), to acquire the
TiO
2
business of Cristal for $1.673 billion of cash, subject to a working capital adjustment at closing, plus 37,580,000 Class A Shares (the “Cristal Transaction”). On October 2, 2017, at a special meeting of shareholders, the
Company’s shareholders approved a resolution to issue 37,580,000 Class A Shares to the Seller in connection with the acquisition of Cristal’s TiO
2
business
.
Based on the status of outstanding regulatory approvals in the
United States and European Union described below, on March 1, 2018, we entered into an amendment to the definitive agreement that extended the termination date under such definitive agreement to June 30, 2018, with automatic 3-month extensions to
March 31, 2019, if necessary.
We have received final approval from eight of the nine regulatory jurisdictions whose approvals are required to close the Cristal
Transaction and are still seeking approval from the U.S. Federal Trade Commission (“FTC”).
With respect to the FTC, on December 5, 2017 the FTC filed an administrative complaint against us, Cristal and certain of Cristal’s
subsidiaries and shareholders alleging that the Cristal Transaction would violate Section 7 of the Clayton Antitrust Act and Section 5 of the FTC Act. The administrative complaint seeks, among other things, a permanent injunction to prevent the
transaction from being completed. On June 27, 2018, the evidentiary phase of the FTC’s administrative action before the FTC’s administrative law judge concluded. The FTC’s administrative law judge is expected to rule on the FTC’s complaint
during the fourth quarter of 2018.
On July 10, 2018, we received notice that the FTC had filed a complaint against us in the U.S. District Court in the District of Columbia
(the “U.S. District Court”). The complaint alleged that Tronox’s pending acquisition of the TiO
2
business of Cristal would violate antitrust laws by significantly reducing competition in the North American market for chloride-process
TiO
2
. The trial in U.S. District Court commenced on August 7, 2018 and
on September 5, 2018, the U.S. District Court granted the FTC a preliminary injunction blocking
Tronox’s pending acquisition of Cristal’s
TiO
2
business
.
With respect to the European Commission (“EC”), on July 4, 2018 we received approval from the EC, conditional upon divestiture of our
8120 paper-laminate product grade (the “8120 Grade”) on or prior to November 19, 2018. The 8120 Grade is supplied to European customers from our Botlek facility in the Netherlands. On July 16, 2018, we announced the submittal to the European
Commission of an executed definitive agreement with Venator Materials PLC (“Venator”) to divest the 8120 Grade and on August 20, 2018, the EC approved the Cristal transaction based on the conclusion that Venator is a suitable buyer of the 8120
Grade.
In addition to seeking the divestiture of the 8120 Grade to Venator, we also announced on July 16, 2018 that we had entered into a
binding Memorandum of Understanding (“MOU”) providing for the negotiation in good faith of a definitive agreement to sell the entirety of Cristal’s Ashtabula, Ohio two-plant TiO2 production complex (“Ashtabula”) to Venator if a divestiture of all
or a substantial part of Ashtabula is required to secure final regulatory approval in the United States of the proposed Cristal acquisition. The MOU granted Venator exclusivity for a period of 75 days to negotiate a definitive agreement for the
sale of the entirety of the Ashtabula complex while Tronox continued to vigorously defend the merits of the transaction in a preliminary injunction hearing in the U.S. District Court brought against us by the FTC and described above. On October
1, 2018, we announced that the 75-day exclusivity period under the MOU with Venator had expired without the two companies agreeing on the terms of the divestiture by Tronox to Venator of the Ashtabula production complex. Upon expiration of the
exclusivity period with Venator the Company commenced discussions with a global chemical company not currently in the TiO2 industry concerning a potential purchase of Cristal’s Ashtabula complex. The Company, Cristal, and the prospective buyer
are engaged in on-going discussions with the FTC regarding the terms and conditions of a potential remedial transaction that would allow the Company’s acquisition of Cristal to proceed with a divestiture of the Ashtabula complex.
In addition, the MOU provides for a $75 million break fee if, among other things, the parties, despite negotiating in good-faith and in
conformity with the terms in the MOU, do not reach a definitive agreement for the sale of Ashtabula, and Tronox is able to consummate both the Cristal transaction and the paper-laminate grade divestiture to Venator is completed to obtain final
European Commission approval.
On May 9, 2018, we entered into an Option Agreement (the “Option Agreement”) with Advanced Metal Industries Cluster Company Limited
(“AMIC”) pursuant to which AMIC granted us an option (the “Option”) to acquire 90% of a special purpose vehicle (the “SPV”), to which AMIC’s ownership in a titanium slag smelter facility (the “Slagger”) in The Jazan City for Primary and
Downstream Industries in the Kingdom of Saudi Arabia (“KSA”) will be contributed together with $322 million of indebtedness currently held by AMIC (the “AMIC Debt”). The execution of the Option Agreement occurred shortly after we entered into a
Technical Services Agreement (the “Technical Services Agreement”) with AMIC pursuant to which we agreed to immediately commence providing technical assistance to AMIC to facilitate the start-up of the Slagger. National Industrialization Company
and Cristal each own 50% of AMIC. The strategic intent of the Option Agreement and Technical Services Agreement is to enable us to further optimize the vertical integration between our TiO
2
pigment production and TiO
2
feedstock production after the closing of the Cristal Transaction. Pursuant to the Option Agreement and during its term, we agreed to lend AMIC and, upon the creation of the SPV, the SPV up to $125 million for capital expenditures and operational
expenses intended to facilitate the start-up of the Slagger. Such funds may be drawn down by AMIC and the SPV, as the case may be, on a quarterly basis as needed based on a budget reflecting the anticipated needs of the Slagger start-up. The
obligation to fund up to $125 million is contingent on our continued reasonable belief that such amounts will be sufficient (in addition to any amounts supplied by AMIC) to bring the Slagger up to certain sustained production levels. If we do not
acquire the Slagger, the loans mature with both interest and principal due on the date that is eighteen months from the termination of the Option Agreement. Pursuant to the Option Agreement, subject to certain conditions, we may exercise the
Option at any time on or prior to May 9, 2023. If the Slagger achieves certain production criteria related to sustained quality and tonnage of slag produced (and the other conditions referenced above are satisfied), AMIC may require us to acquire
the Slagger (the “Put”). If the Option or Put is exercised, we will acquire a 90% ownership interest in the SPV. During the nine months ended September 30, 2018, we loaned $39 million for capital expenditures and operational expenses to
facilitate the start-up of the Slagger and we have recorded this loan payment within Other long-term assets on the unaudited Condensed Consolidated Balance Sheet at September 30, 2018. An additional $25 million was loaned on October 1, 2018. The
Option and the Put did not have a significant impact on the financial statements as of or for the periods ended September 30, 2018.
On March 8, 2017, Exxaro Resources Limited (“Exxaro”) announced its intention to begin pursuing a path to monetize its ownership stake in
Tronox over time. On October 10, 2017, Exxaro sold 22,425,000 Class A ordinary shares (“Class A Shares”) in an underwritten registered offering. At September 30, 2018 and December 31, 2017, Exxaro held approximately 23% and 24%, respectively, of
the voting securities of Tronox Limited. Presently, Exxaro intends to sell the remainder of its Tronox shares in a staged process over time pursuant to the existing registration statement, subject to market conditions. An ownership change as
defined under IRC Section 382 could substantially limit our ability to use certain loss and expense carryforwards. See Note 5 for additional information on ownership change under IRC Section 382 and see Note 19 for additional information
regarding Exxaro transactions. Exxaro also has a 26% ownership interest in certain of our other non-operating subsidiaries.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations
of the U.S. Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017. The unaudited
Condensed Consolidated Balance Sheet as of December 31, 2017 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a
normal recurring nature, considered necessary for a fair statement. Our unaudited condensed consolidated financial statements include the accounts of all majority-owned subsidiary companies. All intercompany balances and transactions have been
eliminated in consolidation. As a result of the sale of our wholly owned subsidiary Tronox Alkali Corporation (“Alkali”) in the third quarter of 2017, the results of Alkali have been presented as discontinued operations for the three and nine
months ended September 30, 2017. See Note 3 for additional information.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. It is at least reasonably
possible that the effect on the financial statements of a change in estimate due to one or more future confirming events could have a material effect on the financial statements.
Revisions
In our Form 10-Q filed for the period ended March 31, 2018, we disclosed that we revised our long-term debt due within one year and
long-term debt, net at December 31, 2017, in our unaudited Condensed Consolidated Balance Sheet. Our long-term debt due within one year had been understated by $5 million with a corresponding overstatement in our long-term debt, net.
In our Form 10-Q filed for the period ended June 30, 2018, we identified certain current assets of $7 million which we had included in
“Accounts receivable, net of allowance for doubtful accounts” that should have been included in “Prepaid and other assets” in the Consolidated Balance Sheet at December 31, 2017. We have revised this amount in the unaudited Condensed Consolidated
Balance Sheets presented herein.
During the third quarter of 2017, we completed the sale of our wholly owned subsidiary, Tronox Alkali Corporation (“Alkali”), to Genesis
Energy, L.P. As part of the calculation of the loss on the sale, during the third quarter of 2017, we reclassified $5 million of Alkali transactional expenses that we had incurred in the six months ended June 30, 2017 from continuing operations
and included such amounts in the loss on sale calculation within the results of discontinued operations. Although the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2017 is not impacted, when the results
were restated in the third quarter of 2017 to present Alkali as discontinued operations for the previous periods, income from the operations was overstated by the $5 million of transactional expenses for the third quarter ended September 30,
2018. As a result, we have revised the results of the third quarter of 2017 as follows:
|
·
|
Income from operations decreased from a $52 million to $47 million;
|
|
·
|
Net loss from continuing operations increased from $25 million to $28 million;
|
|
·
|
Loss from discontinued operations, net of tax decreased from $216 million to $213 million;
|
|
·
|
Basic and diluted net loss per share from continuing operations increased from $0.26 to $0.28; and
|
|
·
|
Basic and diluted net loss per share from discontinued operations decreased from $1.81 to $1.79.
|
The Company has concluded that the impact of these revisions are not material to the consolidated financial statements for any prior
quarterly period impacted.
Out of Period Adjustment
During the three months ended September 30, 2018, we recognized a $3 million settlement gain in Other income (expense), net in the
unaudited Condensed Statement of Operations related to our U.S. postretirement medical plan which was eliminated effective January 1, 2015. This amount had been deferred in Accumulated other comprehensive loss in the unaudited Condensed
Consolidated Balance Sheet pending satisfaction of certain settlement obligations by us. Based on additional information provided, we concluded this gain should have been recognized during the first quarter of 2015 as all the obligations required
for settlement accounting had been satisfied by that date. The Company has concluded that the impact of this out of period adjustment is not material to the consolidated financial statements for any prior quarterly or annual period impacted or
to the current quarter or the full year 2018 financial statements. See Note 18 for additional information.
Recently Adopted Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation
(Topic 718): Scope of Modification Accounting
(“ASU 2017-09”), which clarifies when to account
for a change to the terms or conditions of a share-based payment award as a modification. Under ASU 2017-09, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or
liability) changes as a result of the change in terms or conditions. On January 1, 2018, we adopted the new standard, and during the second quarter of 2018, we applied the guidance under the new standard for a modification to a share-based
payment award. See Note 17 for additional information.
In March 2017, the FASB issued ASU 2017-07,
Compensation-Retirement
Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(“ASU 2017-07”), which requires employers to present the service cost component of the net periodic benefit cost in the same
income statement line item(s) as other employee compensation costs arising from service rendered during the period. In addition, under the new guidance, only the service cost component of net periodic pension costs and net periodic postretirement
costs are eligible for capitalization in assets. Other components must be presented separately from the line item(s) that include the service cost and outside of operating income. As a result of our adopting ASU 2017-07 during the first quarter
of 2018, we reclassified pension and postretirement healthcare benefit costs of less than $1 million and $2 million, respectively, for the three and nine months ended September 30, 2017 from “Income (loss) from operations” to “Other income
(expense), net” in our unaudited Condensed Consolidated Statements of Operations.
In November 2016, the FASB issued ASU 2016-18,
Statement
of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”), which requires that the reconciliation of the beginning-of-period and end-of period amounts shown in the statement of cash flows include restricted cash and restricted cash
equivalents. ASU 2016-18 does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions. We adopted ASU 2016-18 during the first quarter of 2018. Restricted cash includes $659
million and $651 million as of September 30, 2018 and December 31, 2017, respectively, related to the Blocked Term Loan. See Note 12. Restricted cash also includes $2 million at December 31, 2017 required by our performance bonds issued for our
energy supply contracts in Australia.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
which states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. Topic 606 supersedes the revenue recognition requirements under Revenue Recognition (Topic 605). On January 1, 2018, we adopted the new standard using the modified
retrospective approach applied to contracts that were not completed as of January 1, 2018. The adoption of this new standard did not have a material impact to our unaudited condensed consolidated financial statements. No adjustment to the opening
balance of retained earnings at January 1, 2018 was required. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with
our historic accounting under Topic 605. See Note 2 for additional information.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases
(“ASU 2016-02”) which includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease
terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or an operating lease. The standard is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard, as originally issued would have required adoption using a modified retrospective transition to apply the new
guidance at the beginning of the earliest comparative period presented. In July 2018, the FASB issued an alternative method that permits application of the new guidance at the beginning of the year of adoption, recognizing a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. We plan to elect the cumulative-effect adjustment approach to apply the new standard. Based on our lease portfolio, we currently anticipate recognizing a lease
liability and related right-of-use asset on our balance sheet of approximately $23 million and $20 million, respectively, with an immaterial impact on our income statement compared to the current lease accounting model, and therefore, no material
cumulative effect adjustment is expected at the adoption date. However, the ultimate impact of the standard will depend on our lease portfolio as of the adoption date. Additionally, we are implementing an enterprise-wide lease management system
to assist in the accounting, and are evaluating additional changes to our processes and internal controls to ensure we meet the standard’s reporting and disclosure requirements. These changes will be effective January 1, 2019.
In August 2018, the FASB issued ASU 2018-13,
Fair
Value Measurement (“Topic 820”): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.
The standard modifies the disclosure requirements in Topic 820, Fair Value Measurement, by: removing certain
disclosure requirements related to the fair value hierarchy; modifying existing disclosure requirements related to measurement uncertainty; and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for
the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair
value measurements. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted.
We are currently evaluating the effect, if any, that the standard will have on our disclosures.
In August 2018, the FASB also issued ASU 2018-14,
Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for
Defined Benefit Plans.
The standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by
removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated OCI expected to be recognized in net periodic benefit costs over the next fiscal year, (b) the amount and timing of plan
assets expected to be returned to the employer, and (c) the effects of a one-percentage-point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for postretirement health care benefits.
The new disclosures include the interest crediting rates for cash balance plans and an explanation of significant gains and losses related to changes in benefit obligations. This standard is effective for fiscal years and interim periods within
those fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the effect, if any, that the standard will have
on our disclosures
.
Nature of Contracts and Performance Obligations
We primarily generate revenue from selling TiO
2
pigment products, products derived from titanium bearing mineral sands and
related co-products, primarily zircon and pig iron, to our customers. These products are used for the manufacture of paints, coatings, plastics, paper, and a wide range of other applications. We account for a contract with our customer when it
has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.
Our promise in a contract typically relates to the transferring of a product or multiple distinct products that are substantially the
same and that have the same pattern of transfer, representing a single performance obligation within a contract. We have elected to account for shipping and handling activities that occur after control of the products has transferred to the
customer as contract fulfillment activities, rather than a separate performance obligation. Amounts billed to a customer in a sales transaction related to shipping and handling activities continue to be reported as “Net sales” and related costs
as “Cost of goods sold” in the unaudited Condensed Consolidated Statements of Operations.
The duration of our contract period is one year or less. As such, we have elected to recognize incremental costs incurred to obtain
contracts, which primarily consist of commissions paid to third-party sales agents, as “Selling, general and administrative expenses” in the unaudited Condensed Consolidated Statements of Operations. Furthermore, we have elected not to disclose
the value of unsatisfied performance obligations at each period end, given the original expected duration of our contracts are one year or less.
Transaction Price
Revenue is measured as the amount of consideration that we expect to be entitled in exchange for transferring products to the customer.
The transaction price typically consists of fixed cash consideration. We also offer various incentive programs to our customers, such as rebates, discounts, and other price adjustments that represent variable consideration. We estimate variable
consideration and include such consideration amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration
is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and
forecasted) that is reasonably available to us. We adjust our estimate of revenue at the earlier of when the amount of consideration we expect to receive changes or when the consideration becomes fixed. Sales returns rarely happen in our
business, therefore it is unlikely that a significant reversal of revenue will occur.
Sales and similar taxes we collect on behalf of governmental authorities are excluded from the transaction price for the determination of
revenue. The expected costs associated with product warranties continue to be recognized as expense when the products are sold. Customer payment terms and conditions vary by contract and customer, although the timing of revenue recognition
typically does not differ from the timing of invoicing. Additionally, as we generally do not grant extended payment terms, we have determined that our contracts generally do not include a significant financing component.
Revenue Recognition
We recognize revenue at a point in time when the customer obtains control of the promised products. For most transactions this occurs
when products are shipped from our manufacturing facilities or at a later point when control of the products transfers to the customer at a specified destination or time.
Contract Balances
Contract assets represent our rights to consideration in exchange for products that have transferred to a customer when the right is
conditional on situations other than the passage of time. For products that we have transferred to our customers, our rights to the consideration are typically unconditional and only the passage of time is required before payments become due.
These unconditional rights are recorded as accounts receivable. As of September 30, 2018, and December 31, 2017, we did not have material contract asset balances.
Contract liabilities represent our obligations to transfer products to a customer for which we have received consideration from the
customer. Infrequently we may receive advance payment from our customers that is accounted for as deferred revenue. Deferred revenue is earned when control of the product transfers to the customer, which is typically within a short period of time
from when we received the advanced payment. Contract liability balances as of September 30, 2018 and December 31, 2017 were less than $1 million and $3 million, respectively. Contract liability balances were reported as “Accounts payable” in the
unaudited Condensed Consolidated Balance Sheets. All contract liabilities as of December 31, 2017 were recognized as revenue in “Net sales” in the unaudited Condensed Consolidated Statements of Operations during the first quarter of 2018.
Disaggregation of Revenue
We operate under one operating and reportable segment, TiO
2
. See Note 20 for details. We disaggregate our revenue from
contracts with customers by product type and geographic area. We believe this level of disaggregation appropriately depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors and reflects
how our business is managed.
Net sales to external customers by geographic areas where our customers are located were as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
North America
|
|
$
|
175
|
|
|
$
|
149
|
|
|
$
|
505
|
|
|
$
|
426
|
|
South and Central America
|
|
|
21
|
|
|
|
15
|
|
|
|
58
|
|
|
|
42
|
|
Europe, Middle-East and Africa
|
|
|
118
|
|
|
|
132
|
|
|
|
413
|
|
|
|
367
|
|
Asia Pacific
|
|
|
142
|
|
|
|
139
|
|
|
|
414
|
|
|
|
399
|
|
Total net sales
|
|
$
|
456
|
|
|
$
|
435
|
|
|
$
|
1,390
|
|
|
$
|
1,234
|
|
Net sales from external customers for each similar type of product were as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Pigment
|
|
$
|
315
|
|
|
$
|
316
|
|
|
$
|
1,002
|
|
|
$
|
894
|
|
Zircon
|
|
|
72
|
|
|
|
53
|
|
|
|
211
|
|
|
|
141
|
|
Pig iron
|
|
|
23
|
|
|
|
18
|
|
|
|
62
|
|
|
|
42
|
|
Feedstock and other products
|
|
|
36
|
|
|
|
37
|
|
|
|
78
|
|
|
|
117
|
|
Electrolytic
|
|
|
10
|
|
|
|
11
|
|
|
|
37
|
|
|
|
40
|
|
Total net sales
|
|
$
|
456
|
|
|
$
|
435
|
|
|
$
|
1,390
|
|
|
$
|
1,234
|
|
Feedstock and other products mainly include rutile prime, ilmenite, Chloride (“CP”) slag and other mining products. Electrolytic
products mainly include electrolytic manganese dioxide and boron. On March 21, 2018, we announced that we entered into an agreement to sell our Electrolytic operations and on September 1, 2018 the sale was completed. See Note 4. The nature,
amount, timing and uncertainty of revenue and cash flows typically do not differ significantly among different products.
3.
|
Discontinued Operations
|
In the third quarter of 2017, we completed the previously announced sale of our wholly owned subsidiary, Alkali, to Genesis Energy, L.P..
Sales, costs and expenses and income taxes attributable to Alkali for the three and nine months ended September 30, 2017 have been aggregated in a single caption entitled “Income (loss) from discontinued operations, net of tax” in our unaudited
Condensed Consolidated Statement of Operations.
Alkali, which was previously one of our two operating and reportable segments, included certain allocated corporate costs which have been
reallocated to Corporate. The amount of allocated corporate costs was $1 million and $3 million, respectively for the three months and nine months ended September 30, 2017.
The following table presents the major classes of line items constituting the “Income from discontinued operations, net of tax” in our
unaudited Condensed Consolidated Statements of Operations:
|
|
Three Months
ended
September 30,
2017
|
|
|
Nine Months
ended
September 30,
2017
|
|
Net sales
|
|
$
|
129
|
|
|
$
|
521
|
|
Cost of goods sold
|
|
|
113
|
|
|
|
448
|
|
Selling, general and administrative expense
|
|
|
(1
|
)
|
|
|
(18
|
)
|
Restructuring expense
|
|
|
—
|
|
|
|
(1
|
)
|
Interest and debt expenses, net
|
|
|
—
|
|
|
|
1
|
|
Income before income taxes
|
|
|
15
|
|
|
|
55
|
|
Income tax benefit (provision)
|
|
|
5
|
|
|
|
(1
|
)
|
Loss on sale of discontinued operations, no tax impact
|
|
|
(233
|
)
|
|
|
(233
|
)
|
Loss from discontinued operations, net of tax
|
|
$
|
(213
|
)
|
|
$
|
(179
|
)
|
On September 1, 2018, Tronox LLC, our indirect wholly owned subsidiary sold to EMD Acquisition LLC certain of the assets and liabilities
of our Henderson Electrolytic Operations based in Henderson, Nevada (the “Henderson Electrolytic Operations”), a component of our TiO
2
segment, for $1.3 million in cash and a Secured Promissory Note of $4.7 million which is recorded in
Prepaid and other assets on the unaudited Condensed Consolidated Balance Sheet. The Secured Promissory Note is collateralized by the working capital of the Henderson Electrolytic Operations. The principal and any accrued interest outstanding
under this Secured Promissory Note is payable in full no later than August 31, 2019. The total pre-tax loss on the sale of $31 million has been recorded in “Impairment losses” in the unaudited Condensed Consolidated Statements of Operations.
The Purchase Agreement with EMD Acquisition LLC contemplated cash consideration of $13 million, subject to certain working capital
adjustments. When we entered into the Purchase Agreement during the first quarter of 2018, we recorded a total pre-tax charge of $25 million for the expected loss on sale of the assets comprising the Henderson Electrolytic Operations. The
expected loss on sale included an impairment charge of $15 million for the long-lived assets of the Henderson Electrolytic Operations and an additional loss of $10 million for the difference between the estimated value of Henderson Electrolytic
Operations net assets to be delivered at closing and the expected net proceeds.
On August 31, 2018, we agreed to amend the Purchase Agreement with EMD Acquisition LLC reducing the sale proceeds to $1.3 million in cash
and the issuance of a Secured Promissory Note of $4.7 million. As a result of the amendment to the Purchase Agreement, we recorded an additional pre-tax charge of $6 million during the third quarter of 2018.
Our operations are conducted through our various subsidiaries in a number of countries throughout the world. We have provided for income
taxes based upon the tax laws and rates in the countries in which operations are conducted and income is earned.
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Income tax (provision) benefit
|
|
$
|
(6
|
)
|
|
$
|
(11
|
)
|
|
$
|
16
|
|
|
$
|
(10
|
)
|
Income (loss) before income taxes
|
|
$
|
21
|
|
|
$
|
(17
|
)
|
|
$
|
8
|
|
|
$
|
(85
|
)
|
Effective tax rate
|
|
|
29
|
%
|
|
|
(65
|
)%
|
|
|
(200
|
)%
|
|
|
(12
|
)%
|
During the three months ended March 31, 2017, Tronox Limited, the public parent which is registered under the laws of the State of
Western Australia, became managed and controlled in the United Kingdom (“U.K.”). The effective tax rate for the three and nine months ended September 30, 2018 differs from the U.K. statutory rate of 19% primarily due to changes to valuation
allowances, disallowable expenditures, changes in estimate of accruals for prior year taxes and our jurisdictional mix of income at tax rates different than the U.K. statutory rate.
Both the three months ended September 30, 2017 and the nine months ended September 30, 2018 reflect large negative effective tax rates.
During the three months ended September 30, 2017 we sold the Alkali segment of our operations and reversed a tax benefit which was allocated to continuing operations for prior quarters as required under ASC 740-20-45-7. During the nine months
ended September 30, 2018 we recorded the reversal of a valuation allowance in the Netherlands which generated an income tax benefit during a period of pre-tax book income.
Tax rates in the United States (“U.S.”) (21% and 35% for corporations in 2018 and 2017, respectively), Australia (30% for corporations),
South Africa (28% for limited liability companies), the Netherlands (25% for corporations), Switzerland (8.5% for corporations) and Jersey, U.K. (0% for corporations) all impact our effective tax rate.
At each reporting date,
we perform an analysis to determine the
likelihood of realizing our deferred tax assets and whether a valuation allowance is required or sufficient evidence exists to support the reversal of all or a portion of a valuation allowance
.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which those deferred tax assets will become
deductible.
Our analysis takes into consideration all available positive and negative evidence, including prior operating results, the nature and reason for any losses, our
forecast of future taxable income, utilization of tax planning strategies, and the dates on which any deferred tax assets are expected to expire. These assumptions and estimates require a significant amount of judgment and are made based on
current and projected circumstances and conditions.
As of June 30, 2018, we determined that sufficient positive evidence existed to reverse the valuation allowance attributable to our
operating subsidiary in the Netherlands. This reversal resulted in a one-time, non-cash tax benefit of $48 million recorded in the second quarter of 2018. Our analysis considered all positive and negative evidence, including (i) three years of
cumulative income for our Netherlands subsidiary, (ii) our continued and improved profitability over the last twelve months in this jurisdiction, (iii) estimates of continued profitability based on updates to our latest current year forecast and
our long-term strategic forecast which became available during the second quarter, and (iv) changes in the factors that drove losses in the past, primarily pigment prices in Europe. Based on our analysis, we concluded that it was more likely
than not that our Dutch operating subsidiary will be able to utilize all of its deferred tax assets.
We continue to maintain full valuation allowances related to the total net deferred tax assets in Australia and the U.S., as we cannot
objectively assert that these deferred tax assets are more likely than not to be realized. It is reasonably possible that a portion of these valuation allowances could be reversed within the next year due to increased book profitability levels
and our pending acquisition of the Cristal TiO
2
business. Until these valuation allowances are eliminated, future provisions for income taxes for these jurisdictions will include no tax benefits with respect to losses incurred and tax
expense only to the extent of current state tax payments. Additionally, we have valuation allowances against specific tax assets in the Netherlands, South Africa, and the U.K.
The Company’s ability to use certain loss and expense carryforwards could be substantially limited if the Company were to experience an
ownership change as defined under IRC Section 382. In general, an ownership change would occur if the Company’s “5-percent shareholders,” as defined under IRC Section 382, collectively increased their ownership in the Company by more than 50
percentage points over a rolling three-year period. If an ownership change does occur during 2018, the resulting impact could be a limitation of up to $5.2 billion. There would be minimal impact on the $2.5 billion future Grantor Trust deductions
from an IRC Section 382 change.
The Company is currently under audit in Australia. We believe that we have made adequate provision for income taxes that may be payable
with respect to years open for examination; however, the ultimate outcome is not presently known and, accordingly, additional provisions may be necessary and/or reclassifications of noncurrent tax liabilities to current may occur in the future.
Following the continued guidance of Staff Accounting Bulletin 118, our accounting for Tax Cuts and Jobs Act (H.R. 1) is considered to
remain incomplete. There are no financial statement differences for the three months and nine months ended September 30, 2018 from the reasonable estimates made in the information reported for the year ended December 31, 2017. A limited amount of
additional guidance has been issued by the Internal Revenue Service and state taxing authorities, and we continue to wait for guidance pertinent to completing our analysis on the full impact of H.R.1.
6.
|
Income (Loss) Per Share
|
The computation of basic and diluted income (loss) per share for the periods indicated is as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator – Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
15
|
|
|
$
|
(28
|
)
|
|
$
|
24
|
|
|
$
|
(95
|
)
|
Less: Net income from continuing operations attributable to noncontrolling interest
|
|
|
9
|
|
|
|
6
|
|
|
|
26
|
|
|
|
11
|
|
Undistributed net income (loss) from continuing operations attributable to ordinary shares
|
|
|
6
|
|
|
|
(34
|
)
|
|
|
(2
|
)
|
|
|
(106
|
)
|
Net loss from discontinued operations available to ordinary shares
|
|
|
—
|
|
|
|
(213
|
)
|
|
|
—
|
|
|
|
(179
|
)
|
Net income (loss) available to ordinary shares
|
|
$
|
6
|
|
|
$
|
(247
|
)
|
|
$
|
(2
|
)
|
|
$
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator – Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares, basic (in thousands)
|
|
|
123,121
|
|
|
|
119,405
|
|
|
|
122,850
|
|
|
|
118,908
|
|
Weighted-average ordinary shares, diluted (in thousands)
|
|
|
126,302
|
|
|
|
119,405
|
|
|
|
122,850
|
|
|
|
118.908
|
|
Basic net income (loss) per Ordinary Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) from continuing operations per ordinary share
|
|
|
0.05
|
|
|
|
(0.28
|
)
|
|
|
(0.01
|
)
|
|
|
(0.89
|
)
|
Basic net loss from discontinued operations per ordinary share
|
|
|
—
|
|
|
|
(1.79
|
)
|
|
|
—
|
|
|
|
(1.51
|
)
|
Basic net income (loss) per ordinary share
|
|
$
|
0.05
|
|
|
$
|
(2.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(2.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per Ordinary Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) from continuing operations per ordinary share
|
|
|
0.05
|
|
|
|
(0.28
|
)
|
|
|
(0.01
|
)
|
|
|
(0.89
|
)
|
Diluted net loss from discontinued operations per ordinary share
|
|
|
—
|
|
|
|
(1.79
|
)
|
|
|
—
|
|
|
|
(1.51
|
)
|
Diluted net income (loss) per ordinary share
|
|
$
|
0.05
|
|
|
$
|
(2.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(2.40
|
)
|
Net income (loss) per ordinary share amounts were calculated from exact, not rounded net income (loss) and share information. We have
issued shares of restricted stock which are participating securities that do not have a contractual obligation to share in losses; therefore, when we have a net loss, none of the loss is allocated to participating securities. Consequently, for
the nine months ended September 30, 2018 and for the three and nine months ended 2017, the two-class method did not have an effect on our net income (loss) per ordinary share calculation, and as such, dividends paid during these periods did not
impact this calculation. During the three months ended September 30, 2018, the percentage of undistributed net income from continuing operations attributable to the participating securities was insignificant.
In computing diluted net income (loss) per share under the two-class method, we considered potentially dilutive shares. Anti-dilutive
shares not recognized in the diluted net income (loss) per share calculation for the three and nine months ended September 30, 2018 and 2017 were as follows:
|
|
Three Months Ended
September 30,
Shares
|
|
|
Nine Months Ended
September 30,
Shares
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Options
|
|
|
1,324,991
|
|
|
|
1,827,354
|
|
|
|
1,324,991
|
|
|
|
1,827,354
|
|
Series A Warrants
|
|
|
—
|
|
|
|
960,371
|
|
|
|
—
|
|
|
|
960,371
|
|
Series B Warrants
|
|
|
—
|
|
|
|
1,009,283
|
|
|
|
—
|
|
|
|
1,009,283
|
|
Restricted share units
|
|
|
2,107,664
|
|
|
|
5,548,071
|
|
|
|
5,289,161
|
|
|
|
5,548,071
|
|
Series A Warrants were converted into Class A ordinary shares at September 30, 2017 using a rate of 6.02. Series B Warrants were
converted into Class A ordinary shares at September 30, 2017 using a rate of 6.03. The Series A Warrants and Series B Warrants expired on February 14, 2018.
Inventories, net consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
116
|
|
|
$
|
137
|
|
Work-in-process
|
|
|
45
|
|
|
|
35
|
|
Finished goods, net
|
|
|
198
|
|
|
|
194
|
|
Materials and supplies, net
|
|
|
116
|
|
|
|
110
|
|
Total
|
|
|
475
|
|
|
|
476
|
|
Less: Inventories, net – non-current
|
|
|
—
|
|
|
|
(3
|
)
|
Inventories, net – current
|
|
$
|
475
|
|
|
$
|
473
|
|
Materials and supplies, net consists of processing chemicals, maintenance supplies, and spare parts, which will be consumed directly
and indirectly in the production of our products.
At September 30, 2018 and December 31, 2017, inventory obsolescence reserves primarily for materials and supplies were $14 million and
$17 million, respectively. At September 30, 2018 and December 31, 2017, reserves for lower of cost and net realizable value were $22 million and $27 million, respectively.
8.
|
Property, Plant and Equipment, Net
|
Property, plant and equipment, net of accumulated depreciation, consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Land and land improvements
|
|
$
|
96
|
|
|
$
|
95
|
|
Buildings
|
|
|
241
|
|
|
|
267
|
|
Machinery and equipment
|
|
|
1,357
|
|
|
|
1,387
|
|
Construction-in-progress
|
|
|
90
|
|
|
|
103
|
|
Other
|
|
|
40
|
|
|
|
41
|
|
Subtotal
|
|
|
1,824
|
|
|
|
1,893
|
|
Less: accumulated depreciation
|
|
|
(810
|
)
|
|
|
(778
|
)
|
Property, plant and equipment, net
|
|
$
|
1,014
|
|
|
$
|
1,115
|
|
Substantially all of the Property, plant and equipment, net is pledged as collateral for our debt. See Note 12.
The table below summarizes depreciation expense related to property, plant and equipment for the periods presented, recorded in the
specific line items in our unaudited Condensed Consolidated Statements of Operations:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of goods sold
|
|
$
|
33
|
|
|
$
|
30
|
|
|
$
|
97
|
|
|
$
|
91
|
|
Selling, general and administrative expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
$
|
33
|
|
|
$
|
30
|
|
|
$
|
99
|
|
|
$
|
93
|
|
9.
|
Mineral Leaseholds, Net
|
Mineral leaseholds, net of accumulated depletion, consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Mineral leaseholds
|
|
$
|
1,244
|
|
|
$
|
1,303
|
|
Less: accumulated depletion
|
|
|
(435
|
)
|
|
|
(418
|
)
|
Mineral leaseholds, net
|
|
$
|
809
|
|
|
$
|
885
|
|
Depletion expense relating to mineral leaseholds recorded in “Cost of goods sold” in the unaudited Condensed Consolidated Statements of
Operations was $8 million and $9 million during the three months ended September 30, 2018 and 2017. Depletion expense relating to mineral leaseholds recorded in “Cost of goods sold” in the unaudited Condensed Consolidated Statements of Operations
was $26 million and $24 million during the nine months ended September 30, 2018 and 2017.
10.
|
Intangible Assets, Net
|
Intangible assets, net of accumulated amortization, consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Gross Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Customer relationships
|
|
$
|
291
|
|
|
$
|
(149
|
)
|
|
$
|
142
|
|
|
$
|
291
|
|
|
$
|
(134
|
)
|
|
$
|
157
|
|
TiO
2
technology
|
|
|
32
|
|
|
|
(12
|
)
|
|
|
20
|
|
|
|
32
|
|
|
|
(11
|
)
|
|
|
21
|
|
Internal-use software
|
|
|
48
|
|
|
|
(28
|
)
|
|
|
20
|
|
|
|
45
|
|
|
|
(25
|
)
|
|
|
20
|
|
Intangible assets, net
|
|
$
|
371
|
|
|
$
|
(189
|
)
|
|
$
|
182
|
|
|
$
|
368
|
|
|
$
|
(170
|
)
|
|
$
|
198
|
|
The table below summarizes amortization expense related to intangible assets for the periods presented, recorded in the specific line
items in our unaudited Condensed Consolidated Statements of Operations:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of goods sold
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Selling, general and administrative expenses
|
|
|
7
|
|
|
|
6
|
|
|
|
19
|
|
|
|
18
|
|
Total
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
20
|
|
|
$
|
19
|
|
Estimated future amortization expense related to intangible assets is $7 million for the remainder of 2018, $26 million each for 2019
through 2020, $25 million for 2021, $24 million for 2022 and $74 million thereafter.
Accrued liabilities consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Employee-related costs and benefits
|
|
$
|
61
|
|
|
$
|
72
|
|
Interest
|
|
|
34
|
|
|
|
21
|
|
Sales rebates
|
|
|
15
|
|
|
|
19
|
|
Taxes other than income taxes
|
|
|
7
|
|
|
|
7
|
|
Professional fees and other
|
|
|
37
|
|
|
|
44
|
|
Accrued liabilities
|
|
$
|
154
|
|
|
$
|
163
|
|
Long-term Debt
On April 6, 2018, Tronox Incorporated issued 6.5% Senior Notes due 2026 for an aggregate principal amount of $615 million (“Senior Notes
due 2026”). The 2026 Indenture and the Senior Notes due 2026 provide, among other things, that the Senior Notes due 2026 are senior unsecured obligations of Tronox Incorporated and are guaranteed on a senior and unsecured basis by us and certain
of our other subsidiaries. The Senior Notes due 2026 have not been registered under the Securities Act and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements. Interest is payable
on April 15 and October 15 of each year beginning on October 15, 2018 until their maturity date of April 15, 2026. The terms of the 2026 Indenture, among other things, limit, in certain circumstances, our and certain of our subsidiaries ability
to: incur secured indebtedness; engage in certain sale-leaseback transactions; and merge, consolidate or sell substantially all of our assets. The terms of the 2026 Indenture also include certain limitations on our non-guarantor subsidiaries
incurring indebtedness. The proceeds of the offering were used to fund the redemption of our Senior Notes due 2022. Debt issuance costs of $10 million related to the Senior Notes due 2026 were recorded as a direct reduction of the carrying value
of the long-term debt. Additionally, in connection with the redemption of our Senior Notes due 2022, we recorded $30 million in debt extinguishment costs including a call premium of $22 million during the second quarter of 2018.
Long-term debt, net of an unamortized discount and debt issuance costs, consisted of the following:
|
|
Original
Principal
|
|
|
Annual
Interest Rate
|
|
Maturity
Date
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
New Term Loan Facility, net of unamortized discount
|
|
$
|
2,150
|
|
|
Variable
|
|
9/22/2024
|
|
$
|
2,124
|
|
|
$
|
2,138
|
|
Senior Notes due 2022
|
|
|
600
|
|
|
|
7.50
|
%
|
3/15/2022
|
|
|
—
|
|
|
|
584
|
|
Senior Notes due 2025
|
|
|
450
|
|
|
|
5.75
|
%
|
9/22/2025
|
|
|
450
|
|
|
|
450
|
|
Senior Notes due 2026
|
|
|
615
|
|
|
|
6.50
|
%
|
4/15/2026
|
|
|
615
|
|
|
|
—
|
|
Lease financing
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
19
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
3,205
|
|
|
|
3,191
|
|
Less: Long-term debt due within one year
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
(22
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
(44
|
)
|
Long-term debt, net
|
|
|
|
|
|
|
|
|
|
|
$
|
3,143
|
|
|
$
|
3,125
|
|
The average effective interest rate for the New Term Loan Facility was 5.3% and 5.4% for the three and nine months
ended September 30, 2018, respectively. The New Term Loan Facility consists of (i) a U.S. dollar term facility in an aggregate principal amount of $1.5 billion (the “New Term Loans”) and (ii) a U.S. dollar term facility in an aggregate principal
amount of $650 million (the “Blocked Term Loan”) to be used for the Cristal Transaction. If the Cristal Transaction is terminated, the Blocked Term Loan will be repaid to the lenders of such Blocked Term Loan, and as the termination would
represent a Prepayment Event as defined in our Term Loan Facility, we will be required to prepay $800 million of outstanding borrowing under the New Term Loan Facility.
Our debt is recorded at historical amounts. The following table presents the fair value of our debt at both September 30, 2018 and
December 31, 2017:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
New Term Loan Facility
|
|
$
|
2,143
|
|
|
$
|
2,170
|
|
Senior Notes due 2022
|
|
NA
|
|
|
|
609
|
|
Senior Notes due 2025
|
|
|
420
|
|
|
|
463
|
|
Senior Notes due 2026
|
|
|
592
|
|
|
NA
|
|
We determined the fair value of the New Term Loan Facility, the Senior Notes due 2022, the Senior Notes due 2025 and the Senior Notes due
2026 using quoted market prices. The fair value hierarchy for the New Term Loan Facility, the Senior Notes due 2022 the Senior Notes due 2025 and the Senior Notes due 2026 is a Level 1 input.
Commencing in the second quarter of 2018, we entered into foreign currency contracts for the South African rand to reduce exposure of a
foreign subsidiary’s balance sheet to fluctuations in foreign currency rates. For accounting purposes, these foreign currency contracts are not considered hedges. The change in fair value associated with these contracts is recorded in Other
income (expense), net within the unaudited Condensed Consolidated Statement of Operations and partially offsets the change in value of third party and intercompany-related receivables not denominated in the functional currency of the subsidiary.
At September 30, 2018, the aggregate notional amount of outstanding foreign currency contracts was $166 million and the fair value of the foreign currency contracts was a loss of $6 million. We determined the fair value of the foreign currency
contracts using inputs other than quoted prices in active markets that are observable either directly or indirectly. The fair value hierarchy for the foreign currency contracts is a Level 2 input. For the three and nine months ended September 30,
2018, we have recorded realized and unrealized losses of less than $1 million and $6 million, respectively, related to these foreign currency contracts, in our unaudited Condensed Consolidated Statement of Operations.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, our secured promissory note with EMD Acquisition
LLC and accounts payable approximate fair value due to the short-term nature of these items.
14.
|
Asset Retirement Obligations
|
Asset retirement obligations consist primarily of rehabilitation and restoration costs, landfill capping costs, decommissioning costs,
and closure and post-closure costs. Activities related to asset retirement obligations were as follow:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
78
|
|
|
$
|
80
|
|
|
$
|
82
|
|
|
$
|
76
|
|
Additions
|
|
|
1
|
|
|
|
1
|
|
|
|
5
|
|
|
|
1
|
|
Accretion expense
|
|
|
1
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
Remeasurement/translation
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
4
|
|
Settlements/payments
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Transferred with the sale of Henderson Electrolytic
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
Balance, September 30,
|
|
$
|
79
|
|
|
$
|
82
|
|
|
$
|
79
|
|
|
$
|
82
|
|
Asset retirement obligations in our unaudited Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017 consist
of a current portion of $4 million and $3 million, respectively, included in “Accrued liabilities” and a noncurrent portion of $75 million and $79 million, respectively, included in “Asset retirement obligations”.
15.
|
Commitments and Contingencies
|
Financial Commitments
— At September 30, 2018, financial commitments were $68 million for the remainder of 2018, $78 million for 2019, $46 million for 2020, $38 million for 2021,
$26 million for 2022, and $89 million thereafter.
Letters of Credit
—
At September 30, 2018, we had outstanding letters of credit of $16 million and bank guarantees of $22 million.
Other Matters
—From time to
time, we may be party to a number of legal and administrative proceedings involving legal, environmental, and/or other matters in various courts or agencies. These proceedings, individually and in the aggregate, may have a material adverse effect
on us. These proceedings may be associated with facilities currently or previously owned, operated or used by us and/or our predecessors, some of which may include claims for personal injuries, property damages, cleanup costs, and other
environmental matters. Current and former operations may also involve management of regulated materials that are subject to various environmental laws and regulations including the Comprehensive Environmental Response Compensation and Liability
Act, the Resource Conservation and Recovery Act or state equivalents. Similar environmental laws and regulations and other requirements exist in foreign countries in which we operate.
16.
|
Accumulated Other Comprehensive Loss Attributable to Tronox Limited
|
The tables below present changes in accumulated other comprehensive loss by component for the three months ended September 30, 2018 and
2017.
|
|
Cumulative
Translation
Adjustment
|
|
|
Pension
Liability
Adjustment
|
|
|
Unrealized
Gains
(Losses) on
Derivatives
|
|
|
Total
|
|
Balance, June 30, 2018
|
|
$
|
(407
|
)
|
|
$
|
(88
|
)
|
|
$
|
(1
|
)
|
|
$
|
(496
|
)
|
Other comprehensive loss
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
(23
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
Balance, September 30, 2018
|
|
$
|
(431
|
)
|
|
$
|
(91
|
)
|
|
$
|
—
|
|
|
$
|
(522
|
)
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Pension
Liability
Adjustment
|
|
|
Unrealized
Gains
(Losses) on
Derivatives
|
|
|
Total
|
|
Balance, June 30, 2017
|
|
$
|
(363
|
)
|
|
$
|
(91
|
)
|
|
$
|
—
|
|
|
$
|
(454
|
)
|
Other comprehensive income (loss)
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(26
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
Balance, September 30, 2017
|
|
$
|
(389
|
)
|
|
$
|
(85
|
)
|
|
$
|
|
|
|
$
|
(474
|
)
|
The tables below present changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2018 and
2017.
|
|
Cumulative
Translation
Adjustment
|
|
|
Pension
Liability
Adjustment
|
|
|
Unrealized
Gains
(Losses) on
Derivatives
|
|
|
Total
|
|
Balance, January 1, 2018
|
|
$
|
(312
|
)
|
|
$
|
(90
|
)
|
|
$
|
(1
|
)
|
|
$
|
(403
|
)
|
Other comprehensive loss
|
|
|
(119
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
(118
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Balance, September 30, 2018
|
|
$
|
(431
|
)
|
|
|
(91
|
)
|
|
|
—
|
|
|
|
(522
|
)
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Pension
Liability
Adjustment
|
|
|
Unrealized
Gains
(Losses) on
Derivatives
|
|
|
Total
|
|
Balance, January 1, 2017
|
|
$
|
(408
|
)
|
|
$
|
(92
|
)
|
|
$
|
3
|
|
|
$
|
(497
|
)
|
Other comprehensive income (loss)
|
|
|
19
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
16
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
—
|
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
Balance, September 30, 2017
|
|
$
|
(389
|
)
|
|
$
|
(85
|
)
|
|
$
|
—
|
|
|
$
|
(474
|
)
|
17.
|
Share-Based Compensation
|
Restricted Share Units (“RSUs”)
During 2017, a total of 1,397,471 RSUs were granted, pursuant to an Integration Incentive Award program (“Integration Incentive Award”)
established in connection with the Cristal Transaction, to certain executive officers and managers with significant integration accountability. In addition, during the second quarter of 2018, an additional 139,225 RSUs were granted under the
Integration Incentive Award. These RSUs would have vested two years from the date of the close of the Cristal Transaction and the number of shares that would have been issued to grantees would have been based upon the achievement of established
performance conditions. Under the original terms of the Integration Incentive Award, if the Cristal Transaction did not close by July 1, 2018, all unvested awards pursuant to the Integration Incentive Award would immediately be canceled and
forfeited.
During the second quarter of 2018, terms of the Integration Incentive Award were modified to eliminate the requirement that the Cristal
Transaction must close by July 1, 2018. We accounted for this modification as a Type III modification since, at the modification date, the expectation of the award vesting changed from improbable to probable. As a result, we reversed
approximately $6 million of previously recorded expense related to the Integration Incentive Award. The issued and unvested RSUs under the Integration Incentive Award were revalued based on the closing price of the Company’s stock on the
modification date and will vest two years from the date the Cristal Transaction closes and based upon the achievement of established performance conditions. As a result, the estimated expense associated with the revalued award is being expensed
over the period from the modification date through two years from the estimated date that the Cristal Transaction will close.
During the third quarter of 2018, an additional 90,161 RSUs were granted under the modified terms of the Integration Incentive Award.
The estimated expense associated with these awards is being expensed over the period from the grant dates through two years from the estimated date that the Cristal Transaction will close.
In addition to the Integration Incentive Award, during the nine months ended September 30, 2018, we granted RSUs which have time and/or
performance conditions. Both the time-based awards and the performance-based awards are classified as equity awards. For the time-based awards valued at the weighted average grant date fair value, 65,222 vest ratably over an approximate
one-year period and 580,554 RSUs vest ratably over a thirty to thirty-six month period ending February 8, 2021. For the performance-based awards, 564,706 RSUs cliff vest at the end of a thirty to thirty-six month period ending February 8, 2021.
Vesting of the performance-based awards is determined, for 50% of the award, based on Earnings per Share (“EPS”) growth, and the other 50%, based on Operating Return on Net Assets (“ORONA”) over the applicable three-year measurement period. The
combined results are then subject to a Total Shareholder Return (“TSR”) modifier calculation over the same three-year measurement period. The TSR metric is considered a market condition for which we use a Monte Carlo simulation to determine the
grant date fair value.
The unrecognized compensation cost associated with all unvested awards at September 30, 2018 was $46 million, adjusted for estimated
forfeitures, which is expected to be recognized over a weighted-average period of 2.0 years.
Options
During the nine months ended September 30, 2018, 214,763 options were exercised at a weighted average exercise price of $19.09. In
connection with these exercises, we received $4 million in cash.
18.
|
Pension and Other Postretirement Healthcare Benefits
|
We sponsor a noncontributory qualified defined
benefit retirement plan in the U. S. (the “U.S. Qualified Plan”). We also have a collective defined contribution plan (a multiemployer plan) in the Netherlands (the “Netherlands Multiemployer Plan”) and a postretirement healthcare plan in South
Africa (the “SA Postretirement Plan”) .
On January 1, 2015, we eliminated the retiree
medical plan offered to employees in the United States. For active participants in the plan who had not reached retirement eligibility as of that date, the plan benefits were eliminated and we recognized a curtailment gain of $6 million in
2014. For participants who had retired as of that date, we provided them with a one-time subsidy aggregating less than $1 million to be used towards medical costs. This action resulted in a settlement gain of $3 million which was deferred in
Accumulated other comprehensive loss on the unaudited Condensed Consolidated Balance Sheet as settlement accounting requirements were deemed not fully satisfied. During the three months ended September 30, 2018, review of additional information
indicated that full settlement had occurred,
and we concluded this gain should not have been deferred beyond January 1, 2015 as all the obligations required for settlement accounting had been satisfied by that date. Accordingly during
the three months ended September 30, 2018, we released the $3 million gain from
Accumulated other comprehensive loss and recorded such amount in Other
income (expense), net in the unaudited Condensed Consolidated Statements of Operations.
The components of net periodic cost associated
with our U.S. Qualified Plan recognized in the unaudited Condensed Consolidated Statements of Operations were as follows
:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net periodic cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
|
3
|
|
|
|
3
|
|
|
|
10
|
|
|
|
11
|
|
Expected return on plan assets
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Net amortization of actuarial loss and prior service credit
|
|
|
—
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Total net periodic cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
2
|
|
As a result of the adoption of ASU 2017-07, the aggregate impact of interest costs, expected return on plan assets and net amortization
of actuarial losses component of net periodic costs for the U.S. Qualified Plan of less than $1 million each for the three months ended September 30, 2018 and 2017, $1 million and $2 million for the nine months ended September 30, 2018 and 2017,
respectively, is presented in “Other income (expense), net” in the unaudited Condensed Consolidated Statements of Operations.
The aggregate impact of all components of net periodic cost associated with the
SA Postretirement Plan
of less than $1 million each for the three and $1 million each for the nine months ended September 30, 2018 and 2017, respectively, is presented in “Other income (expense), net” in
the unaudited Condensed Consolidated Statements of Operations as a result of adopting ASU 2017-07.
For the three and nine-month periods ended September 30, 2018 and 2017, we contributed $1 million and $3 million, respectively to the
Netherlands Multiemployer Plan, which was primarily recognized in “Cost of goods sold” in the unaudited Condensed Consolidated Statement of Operations.
Exxaro
We had service level agreements with Exxaro for research and development that expired during the third quarter of 2017. These service
level agreements amounted to expenses of less than $1 million during the three and nine months ended September 30, 2017 which was included in “Selling general and administrative expense” in the unaudited Condensed Consolidated Statements of
Operations.
We operate our business under one operating segment, TiO
2,
which is also our reportable segment.
Segment
performance is evaluated based on segment operating income (loss), which represents the results of segment operations before unallocated costs, such as general corporate expenses not specifically identified to the TiO
2
segment,
interest expense, other income (expense), net and income tax expense or benefit. We incur overhead expenses related to support services provided by senior management, finance, legal and other functions that are centralized at our corporate
headquarters, as well as similar services performed at other global offices. Components of these overhead expenses are generally allocated to our TiO
2
segment based on either time or headcount depending on the nature of the expense.
Management believes that this method of allocation is representative of the value and related services provided to our TiO
2
segment.
The following table provides net sales and income (loss) from operations of our
TiO
2
segment, as well as a reconciliation of our segment income to our income (loss) from continuing operations
:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
$
|
456
|
|
|
$
|
435
|
|
|
$
|
1,390
|
|
|
$
|
1,234
|
|
TiO
2
segment operating income
|
|
$
|
80
|
|
|
$
|
75
|
|
|
$
|
240
|
|
|
$
|
168
|
|
Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TiO
2
operating income
|
|
$
|
80
|
|
|
$
|
75
|
|
|
$
|
240
|
|
|
$
|
168
|
|
Unallocated corporate expenses
|
|
|
(27
|
)
|
|
|
(28
|
)
|
|
|
(108
|
)
|
|
|
(87
|
)
|
Interest expense
|
|
|
(47
|
)
|
|
|
(47
|
)
|
|
|
(144
|
)
|
|
|
(140
|
)
|
Interest income
|
|
|
8
|
|
|
|
3
|
|
|
|
23
|
|
|
|
5
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(28
|
)
|
|
|
(30
|
)
|
|
|
(28
|
)
|
Other income (expense), net
|
|
|
7
|
|
|
|
8
|
|
|
|
27
|
|
|
|
(3
|
)
|
Income (loss) from continuing operations before income taxes
|
|
$
|
21
|
|
|
|
(17
|
)
|
|
|
8
|
|
|
|
(85
|
)
|