See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of U.S. dollars, except share, per share and metric tons data or unless otherwise noted)
Prior to March 27, 2019, Tronox Limited,a public limited company registered under the laws of the State of Western Australia, was the ultimate parent company of the Tronox group of companies. Effective March 27, 2019, Tronox Limited effected a redomiciliation transaction (the “Re-domicile Transaction”), effectively changing its jurisdiction of incorporation from Western Australia to England and Wales, by “top-hatting” the Tronox group of companies with Tronox Holdings plc (referred to herein as “Tronox,” “we,” “us,” or “our”), a public limited company registered under the laws of England and Wales. As a result of the Re-domicile Transaction, Tronox Limited became a wholly-owned subsidiary of Tronox Holdings plc. The Re-domicile Transaction was implemented by
two
schemes of arrangement, pursuant to which Tronox Limited’s Class A and Class B ordinary shares were exchanged on a one-for-
one
basis for ordinary shares in Tronox Holdings plc, par value US $
0.01
per share. As a result, the Class A ordinary shares of Tronox Limited were delisted from the New York Stock Exchange (“NYSE”) and the ordinary shares of Tronox Holdings plc were listed on the NYSE in its place. The Re-domicile Transaction had an impact on capital gains tax for our ordinary shares held by Exxaro Resources Limited (“Exxaro”). See “Exxaro Mineral Sands Transaction Completion Agreement” below for a discussion of our agreement with Exxaro associated with South African capital gains tax.
On April 10, 2019, we completed the acquisition of the TiO
2
business of The National Titanium Dioxide Company Ltd., a limited company organized under the laws of the Kingdom of Saudi Arabia (“Cristal”)
( the “Cristal Transaction”)
. Including the Cristal operations, we now operate titanium-bearing mineral sand mines and beneficiation and smelting operations in Australia, South Africa and Brazil to produce feedstock materials that can be processed into TiO
2
for pigment, high purity titanium chemicals, including titanium tetrachloride, and Ultrafine© titanium dioxide used in certain specialty applications where nano-particulate TiO
2
is required.
We intend to consume all
of our feedstock materials in our own TiO
2
pigment facilities in the United States, Australia, Brazil, UK, France, Netherlands, China and the Kingdom of Saudi Arabia (“KSA”) with a goal of delivering low cost, high-quality pigment to our coatings and other TiO
2
customers throughout the world. The mining, beneficiation and smelting of titanium bearing mineral sands creates meaningful quantities of zircon, which we also supply to customers around the world. See Note 2 below for further details on the Cristal
Transaction
.
In order to obtain regulatory approval for the Cristal Transaction, the Federal Trade Commission (“FTC”) required us to divest Cristal's North American TiO
2
business, which we sold to INEOS Enterprises ("INEOS") on May 1, 2019, for proceeds of approximately $
700
million,
plus an additional amount for working capital, which is subject to an adjustment.
The operating results of Cristal’s North American TiO
2
business, from the acquisition date to the date of divestiture, are included in a single caption entitled “Loss from discontinued operations, net of tax” in our unaudited Condensed Consolidated Statements of Operatio
ns.
Jazan Slagger and Option Agreement
On May 9, 2018, we entered into an Option Agreement (the “Option Agreement”) with Advanced Metal Industries Cluster Company Limited (“AMIC”), which is owned
equally by the National Industrialization Company (Tasnee)
and Cristal. Under the terms of the Option Agreement, 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 KSA will be contributed together with $
322
million of AMIC indebtedness (the “AMIC Debt”). As of June 30, 2019, we have loaned $
89
million for capital expenditures and operational expenses to facilitate the start-up of the Slagger and we have recorded this loan within “Other long-term assets” on the unaudited Condensed Consolidated Balance Sheet at June 30, 2019. The Option Agreement did not have a significant impact on the financial statements as of or for the period ended June 30, 2019.
Exxaro Mineral Sands Transaction Completion Agreement
On November 26, 2018, we, certain of our subsidiaries and Exxaro entered into the Exxaro Mineral Sands Transaction Completion Agreement (the “Completion Agreement”). The Completion Agreement (i) provides for the orderly sale of Exxaro’s remaining ownership interest in us, subject to market conditions, (ii) helped to facilitate the Re-domicile Transaction, and (iii) addressed several legacy issues related to our 2012 acquisition of Exxaro’s mineral sands business. Pursuant to the terms of the Completion Agreement, Tronox has covenanted to pay Exxaro an amount equal to any South African capital gains tax assessed on Exxaro in respect of any profit arising to it on a disposal of any of its ordinary shares subsequent to the Re-domicile Transaction where such tax would not have been assessed but for the Re-domicile Transaction. Similarly, Exxaro has covenanted to pay Tronox an amount equal to any South African tax savings Exxaro may realize in certain situations from any tax relief that would not have arisen but for the Re-domicile Transaction.
Pursuant to the terms of the Completion Agreement, on May 9, 2019, we repurchased
14
million shares from Exxaro for an aggregate purchase price of approximately $
200
million or $
14.3185
per share.
The share price was based upon a
5%
discount to the
10
day volume weighted average price as of the day that Exxaro exercised their sale notice to us. Upon repurchase of the shares by the Company, the shares were cancelled. As a result of the sale of the
14
million shares on May 9, 2019, and the
imputed gain or loss if Exxaro was to sell its
remaining
14.7
million shares, we have recorded a liability of approximately $
2
million related to the estimated net payment to Exxaro, which is included in “Accrued liabilities” in our unaudited Condensed Consolidated Balance Sheets as of June 30, 2019.
See Note 23 for additional information.
Furthermore, pursuant to the Completion Agreement, the parties agreed to accelerate our purchase of Exxaro’s 26% membership interest in Tronox Sands LLP, a U.K. limited liability partnership (“Tronox Sands”). On February 15, 2019, we completed the redemption of Exxaro’s ownership interest in Tronox Sands for consideration of approximately ZAR 2.06 billion (or approximately $148 million) in cash, which represented Exxaro’s indirect share of the loan accounts in our South African subsidiaries.
At June 30, 2019, Exxaro continues to own approximately
14.7
million shares of Tronox, or a
10.2%
ownership interest, as well as their
26%
ownership interest in our South African operating subsidiaries.
Under the terms of the Completion Agreement, Exxaro has the right to sell its ownership in Tronox at anytime on or after August 11, 2019.
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/A for the year ended December 31, 2018. The unaudited Condensed Consolidated Balance Sheet as of December 31, 2018 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
The acquisition of Cristal has impacted the comparability of our financial statements. As the Cristal Transaction was completed on April 10, 2019, in accordance with ASC 805, the three and six month periods ended June 30, 2019, only include the results of the Cristal business since the date of the acquisition, while the three and six month periods ended June 30, 2018 do not include any results of Cristal. Likewise, the balance sheet at June 30, 2019 includes the impacts of the acquisition of Cristal while the balance sheet at December 31, 2018 does not.
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.
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.
Recently Adopted 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 new standard requires a lessee to recognize on the balance sheet, for all leases of more than 12 months, a lease liability, which corresponds to the discounted obligation of future lease payments arising from a lease, and a right-of-use (“ROU”) asset, which represents the lessee’s right to use, or control the use of, the underlying asset over the lease term.
On January 1, 2019, we adopted the new standard using the cumulative-effect adjustment approach and recorded a lease liability and related right-of-use asset of $
66
million and $
64
million, respectively.We elected the package of practical expedients under the transition guidance, which does not require the reassessment of whether existing contracts contain a lease or whether the classification or unamortized initial direct costs of existing leases would be different under the new guidance. As an accounting policy election, we excluded short-term leases (leases that have a term of 12 months or less and do not include a purchase option that we are reasonably certain to exercise) from the balance sheet presentation. Additionally, we elected to account for non-lease components in a contract as part of a single lease component for all asset classes. We implemented a new lease accounting system and updated our business processes and internal controls to address relevant risks associated with the implementation of the new standard including the preparation of the required financial information and disclosures. See Note 16 for details.
Recently Issued Accounting Pronouncements
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 will assess the impact, if any, that the standard may have on our disclosure requirements.
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 Other Comprehensive Income 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 will assess the impact, if any, that the standard may have on our disclosure requirements.
2. Cristal Acquisition and Related Divestitures
On April 10, 2019, we completed the acquisition of the TiO
2
business of Cristal for $1.675 billion of cash, subject to a working capital and noncurrent liability adjustment, plus 37,580,000 ordinary shares. The total acquisition price, including the value of the ordinary shares at $14 per share on the closing date of the Cristal Transaction, was approximately $2.2 billion, subject to a working capital and noncurrent liability adjustment. With the acquisition of our shares, an affiliate of Cristal became our largest shareholder. At June 30, 2019, Cristal Inorganic Chemical Netherlands Cooperatief W.A., a wholly-owned subsidiary of Tasnee, continues to own 37,580,000 shares of Tronox, or a 26% ownership interest.
In order to obtain regulatory approval for the Cristal Transaction, the FTC required us to divest Cristal's North American TiO
2
business, which we sold to INEOS on May 1, 2019, for cash proceeds of approximately $700 million plus an additional amount for working capital, which is subject to adjustment. The operating results of Cristal’s North American TiO
2
business from the acquisition date to the date of divestiture are included in a single caption entitled “Loss from discontinued operations, net of tax” in our unaudited Condensed Consolidated Statements of Operations.
In conjunction with the Cristal Transaction, we entered into a transition services agreement with Tasnee and certain of its affiliates under which we and the Tasnee entities will provide certain transition services to one another. See Note 23 for further details of the transition services agreement. In conjunction with the divestiture of Cristal's North American TiO
2
business to INEOS, we entered into a transition services agreement with INEOS. Under the terms of the transition services agreement, INEOS will provide services to Tronox for manufacturing, technology and innovation, information technology, finance, warehousing and human resources. Similarly, Tronox will provide services to INEOS for information technology, finance, product stewardship, warehousing and human resources.
In addition, the previously announced divestiture of the 8120 paper laminate grade to Venator Materials PLC (“Venator”), which we were required to undertake by the European Commission in order to consummate the Cristal Transaction, was completed on April 26, 2019. Under the terms of the agreement, we will supply the 8120 grade product to Venator under a supply agreement for an initial term of 2 years, and extendable up to 3 years, to allow for the transfer of the manufacturing of the 8120 grade to Venator. Total cash consideration is 8 million Euros, of which 1 million Euros was paid at the closing and the remaining 7 million Euros will be paid in equal installments during the second quarters of 2020 and 2021. We recorded a charge of approximately $19 million during the second quarter of 2019, in “Contract loss” in the unaudited Condensed Consolidated Statements of Operations, reflecting both the proceeds on sale and the estimated losses we expect to incur under the supply agreement with Venator.
We funded the cash portion of the Cristal Transaction through existing cash, borrowings from our Wells Fargo Revolver, and restricted cash which had been borrowed under the Blocked Term Loan and which became available to us for the purpose of consummating the Cristal Transaction. See Note 13 for further details of the Cristal Transaction financing.
We have applied the acquisition method of accounting in accordance with the FASB’s ASC 805, "Business Combinations", with respect to the identifiable assets and liabilities of Cristal, which have been measured at estimated fair value as of the date of the business combination.
The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date using primarily Level 2 and Level 3 inputs (see Note 15 for an explanation of Level 2 and Level 3 inputs). These Level 2 and Level 3 valuation inputs include an estimate of future cash flows and discount rates. The estimated fair values are based, in part, upon outside preliminary appraisals by a third-party valuation firm for certain assets, including specifically-identified intangible assets.
The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based upon preliminary information and subject to change. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair value of inventories, property, plant and equipment, intangible assets, leases, legal reserves, contingent liabilities, including uncertain tax positions, deferred tax assets and liabilities other assets and liabilities and noncontrolling interest. Further adjustments may result before the end of the measurement period, which ends one year from the date of the acquisition. During the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date, we will revise the preliminary purchase price allocation. The effect of measurement period adjustments to the estimated fair values will be calculated as if the adjustments had been completed on the acquisition date. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings.
The purchase price consideration and preliminary estimated fair value of Cristal’s net assets acquired as of the acquisition date on April 10, 2019 are shown below. The assets and liabilities of Cristal's North American TiO
2
business, that was subsequently divested on May 1, 2019, are shown as held for sale in the fair value of assets acquired and liabilities assumed.
|
|
|
Fair Value
|
|
|
Purchase Price Consideration:
|
|
|
|
|
Tronox Holdings plc shares issued
|
|
|
37,580,000
|
|
|
Tronox Holdings plc closing price per share on April 10, 2019
|
|
$
|
14.00
|
|
|
Total fair value of Tronox Holdings plc shares issued at acquisition date
|
|
$
|
526
|
|
|
Cash consideration paid
|
|
$
|
1,603
|
|
|
Liability for additional cash consideration
|
|
$
|
72
|
|
|
Total purchase price
|
|
$
|
2,201
|
|
|
|
|
Fair Value
|
|
|
Fair Value of Assets Acquired:
|
|
|
|
|
Accounts receivable
|
|
$
|
231
|
|
|
Inventory
|
|
|
706
|
|
|
Deferred taxes
|
|
|
70
|
|
|
Prepaid and other assets
|
|
|
104
|
|
|
Property, plant and equipment
|
|
|
624
|
|
|
Mineral leaseholds
|
|
|
57
|
|
|
Intangible assets
|
|
|
69
|
|
|
Lease right of use assets
|
|
|
39
|
|
|
Other long-term assets
|
|
|
59
|
|
|
Assets held for sale
|
|
|
807
|
|
|
Goodwill
|
|
|
68
|
|
|
Total assets acquired
|
|
$
|
2,834
|
|
|
Less: Liabilities Assumed
|
|
|
|
|
|
Accounts payable
|
|
$
|
92
|
|
|
Accrued liabilities
|
|
|
127
|
|
|
Short-term lease liabilities
|
|
|
12
|
|
|
Pension and postretirement healthcare benefits
|
|
|
67
|
|
|
Deferred tax liabilities
|
|
|
5
|
|
|
Environmental liabilities
|
|
|
36
|
|
|
Asset retirement obligations
|
|
|
80
|
|
|
Long-term debt
|
|
|
21
|
|
|
Long-term lease liabilities
|
|
|
24
|
|
|
Other long-term liabilities
|
|
|
20
|
|
|
Liabilities held for sale
|
|
|
113
|
|
|
Total liabilities assumed
|
|
$
|
597
|
|
|
Less noncontrolling interest
|
|
|
36
|
|
|
Purchase price
|
|
$
|
2,201
|
|
The fair value of net assets acquired includes accounts receivables where the book value approximates fair value.
As a result of the Cristal acquisition, we have goodwill on the unaudited Condensed Consolidated Balance Sheet as of June 30, 2019. The primary item that generated goodwill is the additional benefits we expect which will further enhance our vertically integrated business.
Goodwill is not amortized but rather assessed for impairment on an annual basis. We will perform a goodwill impairment assessment annually, or sooner, if events or changes in circumstances indicate the carrying value of goodwill may not be fully recoverable.
The goodwill associated with our acquisitions will not be deductible for tax purposes.
For the three and six months ended June 30, 2019, the acquired Cristal business contributed $353 million in revenue and $(48) million in operating losses.
Supplemental Pro forma financial information
The following unaudited pro forma information gives effect to the Cristal Transaction as if it had occurred on January 1, 2018. The unaudited pro forma financial information reflects certain adjustments related to the acquisition, such as:
|
(1)
|
conforming the accounting policies of Cristal to those applied by Tronox;
|
|
(2)
|
conversion to U.S. GAAP from IFRS for Cristal;
|
|
(3)
|
the elimination of transactions between Tronox and Cristal;
|
|
(4)
|
recording certain incremental expenses resulting from purchase accounting adjustments, such as inventory step-up amortization, depreciation, depletion and amortization expense in connection with fair value adjustments to property, plant and equipment, mineral leases and intangible assets;
|
|
(5)
|
recording the contract loss on the sale of the 8120 product line as a charge in the first quarter of 2018;
|
|
(6)
|
recording the effect on interest expense related to borrowings in connection with the Cristal Transaction; and
|
|
(7)
|
recording the related tax effects and the impacts to EPS for the shares issued in conjunction with the transaction.
|
The unaudited pro forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if the Cristal Transaction had actually occurred on that date, nor the results of operations in the future.
In accordance with ASC 805, the supplemental pro forma results of operations for the three and six months ended June 30, 2019 and 2018, as if the Cristal Transaction had occurred on January 1, 2018, are as follows:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net sales
|
|
$
|
827
|
|
|
$
|
903
|
|
|
$
|
1,547
|
|
|
$
|
1,779
|
|
|
Net income (loss) from continuing operations
|
|
$
|
21
|
|
|
$
|
72
|
|
|
$
|
(25
|
)
|
|
$
|
12
|
|
|
Diluted net income (loss) per share from continuing operations attributable to Tronox plc
|
|
$
|
0.10
|
|
|
$
|
0.44
|
|
|
$
|
(0.23
|
)
|
|
$
|
0.07
|
|
For both the three and six months ended June 30, 2019, we incurred pre-tax charges of $55 million related to the recognition of the step up to fair value of inventories acquired and $19 million in contract losses incurred on the 8120 supply agreement with Venator. The 2019 pro forma results were adjusted to exclude these charges as these costs were reflected within the results of operations in the pro forma results as if they were incurred on January 1, 2018. Also, the three and six months ended June 30, 2018, includes an additional pre-tax charge of $6 million for the recognition of the step up to fair value of inventories.
|
3.
|
Restructuring Initiatives
|
On April 10, 2019, we announced the completion of the Cristal Transaction. During the second quarter, as a result of the acquisition, we outlined a broad based synergy savings program that is expected to reduce costs, simplify processes and focus the organization’s structure and resources on key growth initiatives. During the second quarter we recorded restructuring charges associated with this program. For both the three and six months ended June 30, 2019, we recorded costs of $10 million in our unaudited Condensed Consolidated Statement of Operations. The costs consisted of charges for employee related costs, including severance.
The liability balance for restructuring as of June 30, 2019, is as follows:
|
|
|
Employee-
Related Costs
|
|
|
Second Quarter 2019 charges
|
|
$
|
10
|
|
|
Cash payments
|
|
|
(6
|
)
|
|
Foreign exchange
|
|
|
-
|
|
|
Balance, June 30, 2019
|
|
$
|
4
|
|
4. Revenue
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 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 June 30, 2019, and December 31, 2018, 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 June 30, 2019 and December 31, 2018 were approximately $8 million and less than $1 million, respectively. Contract liability balances were reported as “Accounts payable” in the unaudited Condensed Consolidated Balance Sheets. All contract liabilities as of December 31, 2018 were recognized as revenue in “Net sales” in the unaudited Condensed Consolidated Statements of Operations during the first quarter of 2019.
Disaggregation of Revenue
We operate under one operating and reportable segment, TiO
2
. See Note 24 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
North America
|
|
$
|
180
|
|
|
$
|
185
|
|
|
$
|
318
|
|
|
$
|
330
|
|
|
South and Central America
|
|
|
48
|
|
|
|
21
|
|
|
|
61
|
|
|
|
37
|
|
|
Europe, Middle-East and Africa
|
|
|
316
|
|
|
|
149
|
|
|
|
446
|
|
|
|
295
|
|
|
Asia Pacific
|
|
|
247
|
|
|
|
137
|
|
|
|
356
|
|
|
|
272
|
|
|
Total net sales
|
|
$
|
791
|
|
|
$
|
492
|
|
|
$
|
1,181
|
|
|
$
|
934
|
|
Net sales from external customers for each similar type of product were as follows:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
TiO
2
|
|
$
|
625
|
|
|
$
|
346
|
|
|
$
|
902
|
|
|
$
|
671
|
|
|
Zircon
|
|
|
88
|
|
|
|
78
|
|
|
|
152
|
|
|
|
139
|
|
|
Feedstock and other products
|
|
|
78
|
|
|
|
53
|
|
|
|
127
|
|
|
|
97
|
|
|
Electrolytic
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
27
|
|
|
Total net sales
|
|
$
|
791
|
|
|
$
|
492
|
|
|
$
|
1,181
|
|
|
$
|
934
|
|
TiO
2
includes pigment and ultrafine. Feedstock and other products mainly include pig iron rutile prime, ilmenite, Chloride (“CP”) slag, 8120 grade product and other mining products. Electrolytic products mainly include electrolytic manganese dioxide and boron. We sold our Electrolytic operations on September 1, 2018. The nature, amount, timing and uncertainty of revenue and cash flows typically do not differ significantly among different products.
5. Asset Sale
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. On December 27, 2018, we received the full settlement of the Promissory Note of $4.7 million from EMD Acquisition LLC. For the year ended December 31, 2018, a total pre-tax loss on the sale of $31 million was recorded in “Impairment loss” in the unaudited Condensed Consolidated Statements of Operations, of which $25 million had been recognized during the three months ended March 31, 2018. The remaining loss of $6 million was recognized during the third quarter of 2018, primarily due to an amendment to the original purchase agreement which reduced the initially agreed consideration from $13 million to $6 million.
Our operations are conducted through 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.
Income (loss) before income taxes is comprised of the following:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Income tax benefit
|
|
$
|
4
|
|
|
$
|
27
|
|
|
$
|
2
|
|
|
$
|
22
|
|
|
(Loss) income before income taxes
|
|
$
|
(59
|
)
|
|
$
|
23
|
|
|
$
|
(87
|
)
|
|
$
|
(13
|
)
|
|
Effective tax rate
|
|
|
7
|
%
|
|
|
(117
|
)%
|
|
|
2
|
%
|
|
|
169
|
%
|
Tronox Holdings plc, a U.K. public limited company, became the public parent during the three months ended March 31, 2019. During the three and six months ended June 30, 2018, Tronox Limited was the public parent, registered under the laws of the State of Western Australia but managed and controlled in the U.K. The statutory tax rate in the U.K. at both June 30, 2019 and 2018 was 19%. The effective tax rate for the three and six months ended June 30, 2019 and 2018 differs from the U.K. statutory rate of 19% primarily due to income and losses in jurisdictions with full valuation allowances, disallowable expenditures, and our jurisdictional mix of income at tax rates different than the U.K. statutory rate.
Upon completion of the Cristal Transaction, we now have additional jurisdictions with operational income. The statutory tax rates on income earned in Australia (30%), the United States (21%), South Africa (28%), France (32%), China (25%), Brazil (34%), the Kingdom of Saudi Arabia (KSA) (20%), and the Netherlands (25%) are higher than the U.K. statutory rate of 19%. Tax rates will be reduced in the Netherlands and the United Kingdom to 20.5% and 17%, respectively, in future years.
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. 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. For entities acquired in the Cristal Transaction, we have full valuation allowances in Australia, Brazil, Switzerland and the U.S. 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 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, including certain groups of persons treated as “5-percent shareholders,” 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 2019, the resulting impact could be a limitation of up to $5.2 billion composed of both U.S. net operating losses and interest limitation carryforwards. We believe there would be minimal impact on the $2.5 billion future Grantor Trust deductions from an IRC Sections 382 change.
We currently have no uncertain tax positions recorded; however, we continue to evaluate the companies acquired in the Cristal Transaction, and it is reasonably possible that this could change in the next 12 months.
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, adjustments to our provisions may be necessary and/or reclassifications of noncurrent tax liabilities to current may occur in the future.
|
7.
|
Income (Loss) Per Share
|
The computation of basic and diluted loss per share for the periods indicated is as follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Numerator - Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
$
|
(55
|
)
|
|
$
|
50
|
|
|
$
|
(85
|
)
|
|
$
|
9
|
|
|
Less: Net income from continuing operations attributable to noncontrolling interest
|
|
|
6
|
|
|
|
14
|
|
|
|
10
|
|
|
|
17
|
|
|
Undistributed net (loss) income from continuing operations attributable to Tronox Holdings plc
|
|
|
(61
|
)
|
|
|
36
|
|
|
|
(95
|
)
|
|
|
(8
|
)
|
|
Net loss from discontinued operations
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
Net income (loss) available to ordinary shares
|
|
$
|
(62
|
)
|
|
$
|
36
|
|
|
$
|
(96
|
)
|
|
$
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator - Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares, basic (in thousands)
|
|
|
150,686
|
|
|
|
123,063
|
|
|
|
137,569
|
|
|
|
122,699
|
|
|
Weighted-average ordinary shares, diluted (in thousands)
|
|
|
150,686
|
|
|
|
126,716
|
|
|
|
137,569
|
|
|
|
122,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) from continuing operations per ordinary share
|
|
$
|
(0.41
|
)
|
|
$
|
0.30
|
|
|
$
|
(0.69
|
)
|
|
$
|
(0.07
|
)
|
|
Basic net income (loss) from discontinued operations per ordinary share
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Basic net income (loss) operations per ordinary share
|
|
$
|
(0.41
|
)
|
|
$
|
0.30
|
|
|
$
|
(0.69
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) from continuing operations per ordinary share
|
|
$
|
(0.41
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.69
|
)
|
|
$
|
(0.07
|
)
|
|
Diluted net income (loss) from discontinued operations per ordinary share
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Diluted net income (loss) operations per ordinary share
|
|
$
|
(0.41
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.69
|
)
|
|
$
|
(0.07
|
)
|
Net loss per ordinary share amounts were calculated from exact, not rounded net loss and share information. Prior to January 2019, we had issued shares of restricted stock which were participating securities that did not have a contractual obligation to share in losses; therefore, when we had a net loss, none of the loss was allocated to participating securities. The restricted stock vested on January 29, 2019. For both the three and six months ended June 30, 2019 and for the six months ended June 30, 2018, the two-class method did not have an effect on our net loss per ordinary share calculation.
In computing diluted net loss per share under the two-class method, we considered potentially dilutive shares. Anti-dilutive shares not recognized in the diluted net loss per share calculation for the three and six months ended June 30, 2019 and 2018 were as follows:
|
|
|
Three Months Ended June 30,
Shares
|
|
|
Six Months Ended June 30,
Shares
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Options
|
|
|
1,269,443
|
|
|
|
1,328,129
|
|
|
|
1,269,443
|
|
|
|
1,328,129
|
|
|
Restricted share units
|
|
|
5,206,611
|
|
|
|
1,605,156
|
|
|
|
5,206,611
|
|
|
|
5,258,259
|
|
Inventories, net consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Raw materials
|
|
$
|
267
|
|
|
$
|
102
|
|
|
Work-in-process
|
|
|
108
|
|
|
|
43
|
|
|
Finished goods, net
|
|
|
528
|
|
|
|
225
|
|
|
Materials and supplies, net
|
|
|
194
|
|
|
|
109
|
|
|
Inventories, net – current
|
|
$
|
1,097
|
|
|
$
|
479
|
|
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 June 30, 2019 and December 31, 2018, inventory obsolescence reserves primarily for materials and supplies were $15 million and $13 million, respectively. Reserves for lower of cost or market and net realizable value was $26 million and $17 million at June 30, 2019 and December 31, 2018, respectively.
|
9.
|
Property, Plant and Equipment, Net
|
Property, plant and equipment, net of accumulated depreciation, consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Land and land improvements
|
|
$
|
158
|
|
|
$
|
96
|
|
|
Buildings
|
|
|
309
|
|
|
|
242
|
|
|
Machinery and equipment
|
|
|
1,857
|
|
|
|
1,395
|
|
|
Construction-in-progress
|
|
|
184
|
|
|
|
63
|
|
|
Other
|
|
|
59
|
|
|
|
39
|
|
|
Subtotal
|
|
|
2,567
|
|
|
|
1,835
|
|
|
Less: accumulated depreciation
|
|
|
(932
|
)
|
|
|
(831
|
)
|
|
Property, plant and equipment, net
(1)
|
|
$
|
1,635
|
|
|
$
|
1,004
|
|
Substantially all of the property, plant and equipment, net is pledged as collateral for our debt. See Note 13.
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Cost of goods sold
|
|
$
|
58
|
|
|
$
|
31
|
|
|
$
|
90
|
|
|
$
|
64
|
|
|
Selling, general and administrative expenses
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
Total
|
|
$
|
59
|
|
|
$
|
32
|
|
|
$
|
92
|
|
|
$
|
66
|
|
|
10.
|
Mineral Leaseholds, Net
|
Mineral leaseholds, net of accumulated depletion, consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Mineral leaseholds
|
|
$
|
1,303
|
|
|
$
|
1,238
|
|
|
Less: accumulated depletion
|
|
|
(469
|
)
|
|
|
(442
|
)
|
|
Mineral leaseholds, net
|
|
$
|
834
|
|
|
$
|
796
|
|
Depletion expense relating to mineral leaseholds recorded in “Cost of goods sold” in the unaudited Condensed Consolidated Statements of Operations was $
17
million and $
10
million during the three months ended June 30, 2019 and 2018, respectively. Depletion expense relating to mineral leaseholds recorded in “Cost of goods sold” in the unaudited Condensed Consolidated Statements of Operations was $
25
million and $
18
million during the six months ended June 30, 2019 and 2018, respectively.
|
11.
|
Intangible Assets, Net
|
Intangible assets, net of accumulated amortization, consisted of the following:
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
Gross Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Gross Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Customer relationships
|
|
$
|
291
|
|
|
$
|
(163
|
)
|
|
$
|
128
|
|
|
$
|
291
|
|
|
$
|
(154
|
)
|
|
$
|
137
|
|
|
TiO
2
technology
|
|
|
101
|
|
|
|
(14
|
)
|
|
|
87
|
|
|
|
32
|
|
|
|
(13
|
)
|
|
|
19
|
|
|
Internal-use software
|
|
|
47
|
|
|
|
(31
|
)
|
|
|
16
|
|
|
|
47
|
|
|
|
(27
|
)
|
|
|
20
|
|
|
Intangible assets, net
|
|
$
|
439
|
|
|
$
|
(208
|
)
|
|
$
|
231
|
|
|
$
|
370
|
|
|
$
|
(194
|
)
|
|
$
|
176
|
|
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Cost of goods sold
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
Selling, general and administrative expenses
|
|
|
7
|
|
|
|
6
|
|
|
|
13
|
|
|
|
12
|
|
|
Total
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
14
|
|
|
$
|
13
|
|
Estimated future amortization expense related to intangible assets is $14 million for the remainder of 2019, $27 million for 2020, $26 million for 2021, $24 million for 2022, $22 million for 2023 and $113 million thereafter.
12. Balance Sheet and Cash Flow Supplemental Information
Accrued liabilities consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Employee-related costs and benefits
|
|
$
|
92
|
|
|
$
|
69
|
|
|
Payable to Tasnee for Cristal acquisition
|
|
|
72
|
|
|
|
—
|
|
|
Related party payables
|
|
|
5
|
|
|
|
—
|
|
|
Interest
|
|
|
16
|
|
|
|
16
|
|
|
Sales rebates
|
|
|
31
|
|
|
|
18
|
|
|
Restructuring
|
|
|
4
|
|
|
|
—
|
|
|
Taxes other than income taxes
|
|
|
26
|
|
|
|
5
|
|
|
Asset retirement obligations
|
|
|
11
|
|
|
|
6
|
|
|
Interest rate swaps
|
|
|
22
|
|
|
|
—
|
|
|
Foreign currency
derivatives
|
|
|
—
|
|
|
|
6
|
|
|
Professional fees and other
|
|
|
51
|
|
|
|
20
|
|
|
Accrued liabilities
|
|
$
|
330
|
|
|
$
|
140
|
|
Additional supplemental cash flow information for the six months ended June 30, 2019 is as follows:
|
Supplemental non cash information:
|
|
Six Months Ended
June 30, 2019
|
|
|
Investing activities- shares issued in the Cristal acquisition
|
|
$
|
526
|
|
|
Financing activities- debt assumed in the Cristal acquisition
|
|
$
|
20
|
|
Wells Fargo Revolver
On September 22, 2017, we entered into a global senior secured asset-based syndicated revolving credit facility with Wells Fargo Bank, N.A. (the “Wells Fargo Revolver”) which provided us with up to $
550
million of revolving credit lines, with an $
85
million sublimit for letters of credit, and has a maturity date of
September 22, 2022
. Our availability of revolving credit loans and letters of credit is subject to a borrowing base.
On March 22, 2019, we entered into a consent and amendment to the Wells Fargo Revolver and an amendment to our Term Loan Facility. The purpose of each amendment was to, among other things, (i) permit the refinancing of certain existing indebtedness incurred by our South African subsidiaries, Tronox KZN Sands Proprietary Limited and Tronox Mineral Sands Proprietary Limited, and the proposed uses of proceeds thereof, and (ii) implement required provisions in both the Wells Fargo Revolver and Term Loan Facility necessary in connection with establishment of Tronox Holdings plc.
The Wells Fargo Revolver amendment also modified certain components of the borrowing base in order to increase the potential availability of credit. We also voluntarily reduced the revolving credit lines under the Wells Fargo Revolver from $
550
million to $
350
million. As a result of this modification, we accelerated the recognition of a portion of the deferred financing costs related to the Wells Fargo Revolver and during the three months ended March 31, 2019, recorded a charge of $
2
million in “Loss on extinguishment of debt” within the unaudited Condensed Consolidated Statement of Operations. There were
no
balances outstanding at June 30, 2019.
ABSA Revolving Credit Facility
On December 13, 2017, our South African subsidiaries entered into an agreement for a revolving credit facility with ABSA Bank Limited (“ABSA”) acting through its ABSA Capital Division for an amount up to R
750
million maturing on
December 13, 2020
(the “ABSA Revolver”). In connection with the Standard Bank Revolver entered into on March 25, 2019, discussed below, the ABSA Revolver was terminated on March 26, 2019. As a result of the termination, we accelerated the recognition of the remaining deferred financing costs related to the ABSA Revolver during the three months ended March 31, 2019 and recorded less than $
1
million in “Loss on extinguishment of debt” within the unaudited Condensed Consolidated Statement of Operations.
Standard Bank Credit Facility
On March 25, 2019, our South African subsidiaries,
Tronox KZN Sands Proprietary Limited and Tronox Mineral Sands Proprietary Limited,
entered into the Standard Bank Revolver for an amount up to R
1
billion (approximately $
71
million at June 30, 2019 exchange rate) maturing on
March 25, 2022
. The Standard Bank Revolver bears interest at the Johannesburg Interbank Average Rate (“JIBAR”) plus
260
basis points when net leverage for our South African subsidiaries (total combined debt outstanding under the Standard Bank Revolver and Standard Bank Term Loan less cash and cash equivalents divided by the consolidated EBITDA) is less than 1.5 and JIBAR plus
285
basis points when net leverage is greater than 1.5. There were
no
balances outstanding at June 30, 2019.
Standard Bank Term Loan Facility
On March 25, 2019, our South African subsidiaries, Tronox KZN Sands Proprietary Limited and Tronox Mineral Sands Proprietary Limited, entered into the Standard Bank Term Loan with a maturity date of
March 25, 2024
. The Term Loan Facility consists of (i) an aggregate principal amount of R
2.6
billion (“Amortizing Loan”) the principal of which will be paid back at
5
percent per
quarter
over the
five year
term of the loan, and (ii) an aggregate principal amount of R
600
million (“Bullet Loan”) the principal of which will be paid back at the maturity date of the Standard Bank Term Loan.
The Amortizing and Bullet Loans bear interest at JIBAR plus
260
basis points and
295
basis points when net leverage South African subsidiaries is less than 1.5 and JIBAR plus
285
basis points and
315
basis points when net leverage is greater than 1.5, respectively. At June 30, 2019, the principal amounts for the Amortizing Loan and the Bullet Loan were R
2.6
billion (approximately $
175
million) and R
600
million (approximately $
43
million), respectively.
Cristal Debt Acquired
As part of the Cristal Transaction, we became party to certain debt arrangements as described below:
|
|
•
|
A revolving credit facility with Emirates NBD PJSC under which we will have the ability to borrow up to approximately $50 million. The revolver is secured by the inventory and trade receivables of Cristal Pigment UK Ltd. Under the terms of the revolver, for U.S dollar borrowings the interest rate is LIBOR plus 2.25% while the interest rate for Euro borrowings is Euribor plus 2.25%. There were no borrowings outstanding under this revolver at June 30, 2019.
|
|
|
•
|
A working capital debt agreement in China (“Tikon Loan”) that matures in April and May of 2021. The Tikon Loan bears interest based on an official lending basis rate per annum as announced and published by the People’s Bank of China plus a 7% premium. At June 30, 2019 the outstanding balance on the Tikon Loan was approximately CNY140 million (approximately $20 million at June 30, 2019 exchange rate).
|
Long-term Debt
Long-term debt, net of an unamortized discount and debt issuance costs, consisted of the following:
|
|
Original
Principal
|
|
|
Annual
Interest Rate
|
|
Maturity
Date
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Term Loan Facility, net of unamortized discount
(1) (2)
|
$
|
2,150
|
|
|
Variable
|
|
9/22/2024
|
|
$
|
1,914
|
|
$
|
2,119
|
|
Senior Notes due 2025
|
|
450
|
|
|
|
5.75%
|
|
10/01/2025
|
|
|
450
|
|
|
450
|
|
Senior Notes due 2026
|
|
615
|
|
|
|
6.50%
|
|
4/15/2026
|
|
|
615
|
|
|
615
|
|
Standard Bank Term Loan Facility
|
|
222
|
|
|
Variable
|
|
03/25/2024
|
|
|
218
|
|
|
—
|
|
Tikon Loan
|
|
N/A
|
|
|
|
Variable
|
|
05/23/2021
|
|
|
20
|
|
|
—
|
|
Finance leases
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
16
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
3,233
|
|
|
3,200
|
|
Less: Long-term debt due within one year
|
|
|
|
|
|
|
|
|
|
|
(58)
|
|
|
(22)
|
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(39)
|
|
|
(39)
|
|
Long-term debt, net
|
|
|
|
|
|
|
|
|
|
$
|
3,136
|
|
$
|
3,139
|
|
|
(1)
|
Average effective interest rate of 5.8% and 5.5% during the six months ended June 30, 2019 and 2018, respectively.
|
|
|
(2)
|
The Term Loan Facility consists of (i) a U.S. dollar term facility in an aggregate principal amount of $1.5 billion (the “Term Loans”) with our subsidiary, Tronox Finance LLC (“Tronox Finance”) as the borrower and (ii) a U.S. dollar term facility in an aggregate principal amount of $650 million (the “Blocked Term Loan”) with our unrestricted subsidiary, Tronox Blocked Borrower LLC (the “Blocked Borrower”) as the borrower, which Blocked Term Loan was funded into a blocked account. Upon consummation of the Cristal Transaction on April 10, 2019, the Blocked Borrower merged with and into Tronox Finance, and the Blocked Term Loan became available to Tronox Finance. Pursuant to the terms of the Term Loan Facility, in the event of an asset sale, some or all of the net proceeds from the sale may be required to be used to prepay borrowings under the Term Loan Facility based on the ratio of the total combined debt outstanding under the Term Loan Facility and the Wells Fargo Revolver to the consolidated EBITDA, as defined in the Term Loan Facility, for the previous four quarters. If this ratio is greater than 3, then all of the net proceeds from an asset sale would be required to be used to prepay borrowings under the Term Loan Facility, while if the ratio were less than 3 but greater than 2.75, 50% of the net proceeds would be required for prepayment and if the ratio were less than 2.75, no prepayment would be required. On May 1, 2019, we divested Cristal’s North American operations for approximately $700 million and subsequent to the sale,our senior net leverage ratio was below 2.75, and, as a result, the sale of the North American operations did not trigger a prepayment event.
|
|
14.
|
Derivative Financial Instruments
|
Interest Rate Risk
During the second quarter of 2019, we entered into interest-rate swap agreements with an aggregate notional value of $750 million, representing a portion of our Term Loan Facility, which effectively converts the variable rate to a fixed rate for a portion of the loan. The agreements expire in September 2024. The Company’s objectives in using the interest-rate swap agreements are to add stability to interest expense and to manage its exposure to interest rate movements. These interest rate swaps have been designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
Fair value gains or losses on these cash flow hedges are recorded in other comprehensive income and are subsequently reclassified into interest expense in the same periods during which the hedged transactions affect earnings. For both the three and six months ended June 30, 2019, the amount recorded in interest expense related to the interest-rate swap agreements was not material. The fair value of the outstanding interest-rate swap contracts was $22 million and was included in “Accrued liabilities” on the unaudited Condensed Consolidated Balance Sheet:
Foreign Currency Risk
We enter into foreign currency contracts for the South African rand to reduce exposure of our subsidiaries’ balance sheet accounts not denominated in our South African subsidiaries’ functional currency to fluctuations in foreign currency exchange rates. We use a combination of zero-cost collars or forward contracts to reduce the exposure. For accounting purposes, these foreign currency contracts are not considered hedges. The change in fair value associated with these contracts is recorded in “Other 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 June 30, 2019, there was $18 million, in the aggregate, of notional amount outstanding foreign currency contracts with a fair value of a loss of less than $1 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 six months ended June 30, 2019, we have recorded gains of $1 million and $6 million, respectively, related to foreign currency contracts in our unaudited Condensed Consolidated Statement of Operations
15. Fair Value
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The accounting standards also have established a fair value hierarchy, which prioritizes the inputs to valuation techniques used in measuring fair value into three broad levels as follows:
Level 1 -Quoted prices in active markets for identical assets or liabilities
Level 2 -Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly
Level 3 -Unobservable inputs based on the Company’s own assumptions
Our debt is recorded at historical amounts.
The following table presents the fair value of our debt at both June 30, 2019 and December 31, 2018:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Term Loan Facility
|
|
$
|
1,906
|
|
|
$
|
2,074
|
|
|
Standard Bank Term Loan Facility
|
|
|
218
|
|
|
|
—
|
|
|
Senior Notes due 2025
|
|
|
439
|
|
|
|
368
|
|
|
Senior Notes due 2026
|
|
|
610
|
|
|
|
518
|
|
|
Tikon Loan
|
|
|
20
|
|
|
|
—
|
|
We determined the fair value of the Term Loan Facility, the Senior Notes due 2025 and the Senior Notes due 2026 using quoted market prices, which under the fair value hierarchy is a Level 1 input. We determined the fair value of the Standard Bank Term Loan Facility and Tikon Loan utilizing transactions in the listed markets for identical or similar liabilities, which under the fair value hierarchy is a Level 2 input.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to the short-term nature of these items.
See Note 2, “Cristal Acquisition and Related Divestitures”, for the assets and liabilities measured on a non-recurring basis at fair value associated with our acquisition. See Note 14, “Derivative Financial Instruments” for our derivative financial instruments recorded at fair value.
We determine if a contract is or contains a lease at inception of the contract. Our leases are primarily operating leases. Leased assets primarily include office buildings, rail cars and motor vehicles, forklifts, and other machinery and equipment. Our leases primarily have fixed lease payments, with real estate leases typically requiring additional payments for real estate taxes and occupancy-related costs. Our leases typically have initial lease terms ranging from 1 to 25 years. Some of our lease agreements include options to renew, extend or early terminate the leases. Lease term is the non-cancellable period of a lease, adjusted by the period covered by an option to extend or terminate the lease if we are reasonably certain to exercise that option. Our operating leases typically do not contain purchase options we expect to exercise, residual value guarantees or other material covenants.
Operating leases are recorded under “Lease right of use assets”, “Short-term lease liabilities”, and “Long-term lease liabilities”on the unaudited Condensed Consolidated Balance Sheets. Finance leases are recorded under “Property, plant and equipment net”, “Long-term debt due within one year”, and “Long-term debt” on the unaudited Condensed Consolidated Balance Sheets. Operating lease ROU assets and lease liabilities are initially recorded at the present value of the future minimum lease payments over the lease term at commencement date or acquisition date for Cristal leases. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. Lease payments for the initial measurement of lease ROU assets and lease liabilities include fixed payments and variable payments that depend on an index or a rate. Variable lease payments that are not index or rate based are recorded as expenses when incurred. Operating lease ROU assets are amortized on a straight-line basis over the period of the lease. Finance lease ROU assets are amortized on a straight-line basis over the shorter of their estimated useful lives of leased asset and the lease terms.
Financial information for the three months and six months ended June 30, 2019 are presented under the new standard, while comparative periods are not required since we adopted the new standard using the cumulative-effect adjustment approach.
Lease expense for the three and six months ended June 30, 2019 were comprised of the following:
|
|
|
Three months
ended
June 30, 2019
|
|
|
Six months
ended
June 30, 2019
|
|
|
Operating lease expense
|
|
$
|
10
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease expense:
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
|
—
|
|
|
|
—
|
|
|
Interest on lease liabilities
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term lease expense
|
|
|
7
|
|
|
|
11
|
|
|
Variable lease expense
|
|
|
8
|
|
|
|
12
|
|
|
Total lease expense
|
|
$
|
25
|
|
|
$
|
41
|
|
The table below summarizes lease expense for the three and six months ended June 30, 2019, recorded in the specific line items in our unaudited Condensed Consolidated Statements of Operations:
|
|
|
Three months
ended
June 30, 2019
|
|
|
Six months
ended
June 30, 2019
|
|
|
Cost of goods sold
|
|
$
|
24
|
|
|
$
|
39
|
|
|
Selling, general and administrative expenses
|
|
|
1
|
|
|
|
2
|
|
|
Total
|
|
$
|
25
|
|
|
$
|
41
|
|
The weighted-average remaining lease term in years and weighted-average discount rates at June 30, 2019 were as follows:
|
|
|
June 30,
2019
|
|
|
Weighted-average remaining lease term:
|
|
|
|
|
Operating leases
|
|
|
3.9
|
|
|
Finance leases
|
|
|
11.0
|
|
|
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
|
|
|
Operating leases
|
|
|
8.8
|
%
|
|
Finance leases
|
|
|
14.2
|
%
|
The maturity analysis for operating leases and finance leases at June 30, 2019 were as follows:
|
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
|
2019
|
|
$
|
19
|
|
|
$
|
2
|
|
|
2020
|
|
|
33
|
|
|
|
3
|
|
|
2021
|
|
|
26
|
|
|
|
3
|
|
|
2022
|
|
|
12
|
|
|
|
3
|
|
|
2023
|
|
|
5
|
|
|
|
3
|
|
|
Thereafter
|
|
|
11
|
|
|
|
18
|
|
|
Total lease payments
|
|
|
106
|
|
|
|
32
|
|
|
Less: imputed interest
|
|
|
(17
|
)
|
|
|
(16
|
)
|
|
Present value of lease payments
|
|
$
|
89
|
|
|
$
|
16
|
|
The minimum commitments for operating leases and finance leases at December 31, 2018 were as follows:
|
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
|
2019
|
|
$
|
15
|
|
|
$
|
3
|
|
|
2020
|
|
|
6
|
|
|
|
3
|
|
|
2021
|
|
|
5
|
|
|
|
3
|
|
|
2022
|
|
|
4
|
|
|
|
3
|
|
|
2023
|
|
|
3
|
|
|
|
3
|
|
|
Thereafter
|
|
|
4
|
|
|
|
18
|
|
|
Total lease payments
|
|
$
|
37
|
|
|
$
|
33
|
|
Additional information relating to cash flows and ROU assets for the six months ended June 30, 2019 is as follows:
|
|
|
June 30,
2019
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows used for operating leases
|
|
$
|
17
|
|
|
Operating cash flows used for finance leases
|
|
|
1
|
|
|
Financing cash flows used for finance leases
|
|
|
—
|
|
Additional information relating to ROU assets for the three and six months ended June 30, 2019 is as follows:
|
|
|
Three months
ended
June 30, 2019
|
|
|
Six months
ended
June 30, 2019
|
|
|
ROU assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
Operating leases obtained in the normal course of business
|
|
$
|
4
|
|
|
$
|
7
|
|
|
Operating leases acquired in connection with Cristal acquisition
|
|
|
37
|
|
|
|
37
|
|
|
Finance leases (recorded in “Property, plant, and equipment, net”)
|
|
|
—
|
|
|
|
—
|
|
As of June 30, 2019, we have additional operating leases, primarily for equipment and machinery, that have not yet commenced. The related ROU asset is approximately $12 million. These leases will commence later in 2019 with lease terms that range from 3 years to 5 years.
17. 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 follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Beginning balance
|
|
$
|
75
|
|
|
$
|
83
|
|
|
$
|
74
|
|
|
$
|
82
|
|
|
Additions
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
|
|
4
|
|
|
Accretion expense
|
|
|
3
|
|
|
|
2
|
|
|
|
4
|
|
|
|
3
|
|
|
Remeasurement/translation
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
|
Settlements/payments
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
Transferred with the divestiture of Ashtabula
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
Transferred in with the acquisition of Cristal
|
|
|
94
|
|
|
|
—
|
|
|
|
94
|
|
|
|
—
|
|
|
Transferred with the sale of Henderson Electrolytic
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
Balance, June 30,
|
|
$
|
174
|
|
|
$
|
78
|
|
|
$
|
174
|
|
|
$
|
78
|
|
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Current portion included in “Accrued liabilities”
|
|
$
|
11
|
|
|
$
|
6
|
|
|
Noncurrent portion included in “Asset retirement obligations”
|
|
|
163
|
|
|
|
68
|
|
|
Asset retirement obligations
|
|
$
|
174
|
|
|
$
|
74
|
|
|
18.
|
Commitments and Contingencies
|
Purchase and Capital Commitments
— Includes obligations for purchase requirements of process chemicals, supplies, utilities and services entered into in the ordinary course of business. At June 30, 2019, purchase commitments were $185 million for 2019, $132 million for 2020, $82 million for 2021, $63 million for 2022, $41 million for 2023, and $114 million thereafter.
Letters of Credit
—At June 30, 2019, we had outstanding letters of credit and bank guarantees of $66 million, of which $21 million were letters of credit, $44 million were bank guarantees and less than $1 million were performance bonds.
Environmental Matters
— It is our policy to record appropriate liabilities for environmental matters when remedial efforts are probable and the costs can be reasonably estimated. Such liabilities are based on our best estimate of the undiscounted future costs required to complete the remedial work. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical, regulatory or legal information becomes available. Given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of other potentially responsible parties, technology and information related to individual sites, we do not believe it is possible to develop an estimate of the range of reasonably possible environmental loss in excess of our recorded liabilities. We expect to fund expenditures for these matters from operating cash flows. The timing of cash expenditures depends principally on the timing of remedial investigations and feasibility studies, regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties. Included in these environmental matters are the following:
Hawkins Point Plant.
Residual waste mud, known as Batch Attack Mud, and a spent sulfuric waste stream were deposited in an onsite repository (the “Batch Attack Lagoon”) at a former TiO
2
manufacturing site, Hawkins Point Plant in Baltimore, Maryland, operated by Cristal USA, Inc. from 1954 until 2011. We assumed responsibility for remediation of the Hawkins Point Plant when we acquired the TiO
2
business of Cristal in April 2019. In 1984, a predecessor of Cristal and the Maryland Department of the Environment (“MDE”) entered into a consent decree (the “Consent Decree”) to address the Batch Attack Lagoon. The Consent Decree required that Cristal close the Batch Attack Lagoon when the Hawkins Point Plant ceased operations. In addition, we are investigating whether hazardous substances are migrating from the Batch Attack Lagoon. A provision of $32 million has been made in our financial statements for the Hawkins Point Plant consistent with the accounting policy described above. We are in discussions with the MDE regarding a new consent decree to address both the Batch Attack Lagoon as well as other environmental contamination issues associated with the Hawkins Point Plant.
Other Matters
— We are subject to a number of other lawsuits, investigations and disputes (some of which involve substantial amounts claimed) arising out of the conduct of our business, including matters relating to commercial transactions, prior acquisitions and divestitures, including our acquisition of Cristal, the materiality of which is still being assessed, employee benefit plans, intellectual property, and environmental, health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Included in these other matters is the following:
Venator Materials plc v. Tronox Limited.
In May 2019, Venator Materials plc (“Venator”) filed an action in the Superior Court of the State of Delaware alleging among other things that we owed Venator a $75 million “Break Fee” pursuant to the terms of a preliminary agreement dated July 14, 2018 (the “Exclusivity Agreement”). The Exclusivity Agreement required, among other things, Tronox and Venator to use their respective best efforts to negotiate a definitive agreement to sell the entirety of the National Titanium Dioxide Company Limited’s (“Cristal’s”) North American operations to Venator if a divestiture of all or a substantial part of these operations were required to secure the approval of the Federal Trade Commission for us to complete our acquisition of Cristal’s TiO
2
business. In June 2019, we counterclaimed against Venator seeking to recover $400 million in damages from Venator that we suffered as a result of Venator’s breaches of the Exclusivity Agreement. Specifically, we allege that Venator’s failure to use best efforts constituted a material breach of the Exclusivity Agreement and directly resulted in and caused us to sell Cristal’s North American operations to an alternative buyer for $700 million, $400 million less than the price Venator had agreed to in the Exclusivity Agreement. Though we believe that our interpretation of the Exclusivity Agreement is correct, there can be no assurance that we will prevail in litigation.
|
19.
|
Accumulated Other Comprehensive Loss Attributable to Tronox Holdings plc
|
The tables below present changes in accumulated other comprehensive loss by component for the three months ended June 30, 2019 and 2018.
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Pension
Liability
Adjustment
|
|
|
Unrealized
Gains
(Losses) on
Derivatives
|
|
|
Total
|
|
|
Balance, March 31, 2019
|
|
$
|
(517
|
)
|
|
$
|
(95
|
)
|
|
$
|
—
|
|
|
$
|
(612
|
)
|
|
Other comprehensive loss
|
|
|
18
|
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
(5
|
)
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
Balance, June 30, 2019
|
|
$
|
(499
|
)
|
|
$
|
(94
|
)
|
|
$
|
(23
|
)
|
|
$
|
(616
|
)
|
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Pension
Liability
Adjustment
|
|
|
Unrealized
Gains
(Losses) on
Derivatives
|
|
|
Total
|
|
|
Balance, March 31, 2018
|
|
$
|
(268
|
)
|
|
$
|
(89
|
)
|
|
$
|
(1
|
)
|
|
$
|
(358
|
)
|
|
Other comprehensive loss
|
|
|
(139
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(139
|
)
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
Balance, June 30, 2018
|
|
$
|
(407
|
)
|
|
$
|
(88
|
)
|
|
$
|
(1
|
)
|
|
$
|
(496
|
)
|
The tables below present changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2019 and 2018.
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Pension
Liability
Adjustment
|
|
|
Unrealized
Gains
(Losses) on
Derivatives
|
|
|
Total
|
|
|
Balance, January 1, 2019
|
|
$
|
(445
|
)
|
|
$
|
(95
|
)
|
|
$
|
—
|
|
|
$
|
(540
|
)
|
|
Other comprehensive loss
|
|
|
7
|
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
(16
|
)
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
Acquisition of noncontrolling interest
|
|
|
(61
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(61
|
)
|
|
Balance, June 30, 2019
|
|
$
|
(499
|
)
|
|
$
|
(94
|
)
|
|
$
|
(23
|
)
|
|
$
|
(616
|
)
|
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Pension
Liability
Adjustment
|
|
|
Unrealized
Gains
(Losses) on
Derivatives
|
|
|
Total
|
|
|
Balance, January 1, 2018
|
|
$
|
(312
|
)
|
|
$
|
(90
|
)
|
|
$
|
(1
|
)
|
|
$
|
(403
|
)
|
|
Other comprehensive loss
|
|
|
(95
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(95
|
)
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
Balance, June 30, 2018
|
|
$
|
(407
|
)
|
|
$
|
(88
|
)
|
|
$
|
(1
|
)
|
|
$
|
(496
|
)
|
|
20.
|
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 cancelled 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 closed and based upon the achievement of established performance conditions. During the third and fourth quarter of 2018, an additional 90,161 and 40,161 RSUs, respectively, were granted under the modified terms of the Integration Incentive Award. All the integration awards discussed above will vest on April 10, 2021 if performance conditions are met.
During the six months ended June 30, 2019, 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 that are valued at the weighted average grant date fair value, 195,178 RSUs were granted to Board members and vest a year from the date of grant 1,143,018 RSUs were granted to management and vest ratably over a three-year period and 3,528 RSUs were granted to certain Board members in lieu of cash fees earned and vested immediately. For the performance-based awards, 1,143,018 RSUs were granted to management and cliff vest at the end of the three years. Vesting of the performance-based awards is determined based on a relative Total Stockholder Return (“TSR”) calculation compared to a peer group performance over the applicable three-year measurement period. The Company’s three-year TSR versus the peer group performance levels determines the payout percentage. 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 June 30, 2019 was $67 million, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of approximately 2.3 years.
Options
There were no options exercised during the six months ended June 30, 2019.
|
21.
|
Repurchase of Common Stock
|
In addition to the repurchase of 14 million shares from Exxaro discussed in Note 23, Related Parties, on
June 3, 2019, the Company’s Board of Directors authorized the repurchase of up to $
100
million of the Company's stock. During the three months ended June 30, 2019, we purchased
4,957,098
shares of common stock under the stock repurchase program at an average price of $
11.26
per share and at a cost of approximately $
56
million, including sales commissions, leaving approximately $
44
million available for additional repurchases under the program. Upon repurchase of the shares by the Company, the shares were cancelled.
As of August 8, 2019, we had purchased a total of 7,453,391 shares under the authorization at an average price of $11.59 per share and at a cost of approximately $86 million.
|
22.
|
Pension and Other Postretirement Healthcare Benefits
|
We sponsor a noncontributory qualified defined benefit retirement plan in the United States (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”).
As a result of the Cristal acquisition we assumed liability for defined benefit (“DB”) and post retirement plans in the United States (“U.S. DB Plans”), United Kingdom (“U.K. DB Scheme”), Australia (“Australia DB Plan”), France (“France Retirement Indemnity Plan”) and Saudi Arabia (“KSA End of Service Indemnity”). The U.S. DB Plans are comprised of a pension plan (“U.S. Pension Plan”), a
Supplemental Executive Retirement Plan (“SERP”) and Permanent Transfer Plan (“TERP”) and retirement medical plan. These plans benefits are generally calculated based on years of credited service and average compensation as defined under the respective plan provisions. The U.S. Pension Plan is funded through contributions to a pension trust fund, generally subject to minimum funding requirements. The SERP, TERP and the retirement medical plans are unfunded. As a result of the INEOS transaction, all active participants moving to INEOS were terminated from the U.S. Pension Plan and became
100%
vested with no further benefits accruing to those participants.
The U.K. DB Scheme and the Australia DB Plan are funded plans that are frozen and therefore no further benefits accrue to the participants. The Australia DB Plan is in the process of winding down and is expected to cease by the end of the year. The France Indemnity Plan is an active unfunded plan and benefits are generally based on years of credited service and average compensation. The KSA End of Service Indemnity provides end of service benefits to qualifying participants. End of service benefits are based on years of service and the reasons for which a participant’s services to the company are terminated.
At June 30, 2019, the U.K. DB Scheme, the Australian DB Plan and U.S. Pension Plan were overfunded by $17 million, $4 million and $4 million, respectively, and are recorded in “Other long-term assets” in the unaudited Condensed Consolidated Balance Sheet. The KSA End of Service Indemnity, the France Indemnity plan and the U.S. SERP and TERP were underfunded by $46 million, $7 million and $3 million, respectively, and are included in “Pension and postretirement healthcare benefits” in the unaudited Condensed Consolidated Balance Sheet.
The components of net periodic cost associated with our U.S defined benefit plans and the acquired foreign plans recognized in the unaudited Condensed Consolidated Statements of Operations were as follows
:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net periodic cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
Interest cost
|
|
|
6
|
|
|
|
4
|
|
|
|
9
|
|
|
|
7
|
|
|
Expected return on plan assets
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
Net amortization of actuarial loss and prior service credit
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
Total net periodic cost
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
The aggregate impact of interest costs, expected return on plan assets and net amortization of actuarial losses component of net periodic costs of $1 million for each of the three and six months ended June 30, 2019 and 2018, respectively, is presented in “Other income (expense), net” in the unaudited Condensed Consolidated Statements of Operations.
The components of net periodic cost associated with the South Africa postretirement healthcare plan was less than $1 million for each of the three months ended June 30, 2019 and 2018.
For the three and six months ended June 30, 2019 and 2018, we contributed $1 million and $2 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
At June 30, 2019, Exxaro continues to own approximately 14.7 million shares of Tronox, or a 10.2% ownership interest, as well as their 26% ownership interest in our South African operating subsidiaries.
On November 26, 2018, we, certain of our subsidiaries and Exxaro entered into the Completion Agreement. The Completion Agreement provides for the orderly sale of Exxaro’s remaining ownership interest in us, subject to market conditions, helped to facilitate the Re-domicile Transaction, as well as addressed several legacy issues related to our 2012 acquisition of Exxaro’s mineral sands business. Pursuant to the terms of the Completion Agreement, Tronox has covenanted to pay Exxaro an amount equal to any South African capital gains tax assessed on Exxaro in respect of any profit arising to it on a disposal of any of its ordinary shares subsequent to the Re-domicile Transaction where such tax would not have been assessed but for the Re-domicile Transaction. Similarly, Exxaro has covenanted to pay Tronox an amount equal to any South African tax savings Exxaro may realize in certain situations from any tax relief that would not have arisen but for the Re-domicile Transaction.
Pursuant to the terms of the Completion Agreement, on May 9, 2019, we repurchased
14
million shares from Exxaro for an aggregate purchase price of approximately $
200
million or $
14.3185
per share.
The share price was based upon a
5%
discount to the
10 day
volume weighted average price as of the day that Exxaro exercised their sale notice to us. As a result of the sale of the
14
million shares on May 9, 2019, and the imputed gain or loss if Exxaro was to sell its remaining
14.7
million shares, we have recorded a liability of approximately $
2
million related to the estimated net payment to Exxaro, which is included in “Accrued liabilities” in our unaudited Condensed Consolidated Balance Sheets as of June 30, 2019.
Tasnee/Cristal
On April 10, 2019, we announced the completion of the acquisition of the TiO
2
business of Cristal for $
1.675
billion of cash, subject to a working capital and noncurrent liability adjustment, plus
37,580,000
ordinary shares. At June 30, 2019, Cristal Inorganic Chemical Netherlands Cooperatief W.A., a wholly-owned subsidiary of Tasnee, continues to own
37,580,000
shares of Tronox, or
26%
ownership interest.
On May 9, 2018, we entered into an Option Agreement with AMIC which is owned equally by Tasnee and Cristal. Under the terms of the Option Agreement, 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 KSA will be contributed together with $
322
million of AMIC indebtedness (the “AMIC Debt”). As of June 30, 2019, we have loaned $
89
million for capital expenditures and operational expenses to facilitate the start-up of the Slagger and we have recorded this loan payment and related interest within “Other long-term assets” on the Unaudited Condensed Consolidated Balance Sheet at June 30, 2019. The Option Agreement did not have a significant impact on the financial statements as of or for the periods ended June 30, 2019.
The Company acquired feedstock from AMIC for consumption in production. As of June 30, 2019, we had a payable of approximately $
11
million recorded in "Accrued liabilities" on the unaudited Condensed Consolidated Balance Sheet for purchases of feedstock from AMIC, including $
5
million purchased during the three months ended June 30, 2019. The balances are expected to be settled in the near term.
In conjunction with the acquisition on April 10, 2019 we entered into a transition services agreement with Tasnee, Cristal and AMIC. Under the terms of the transition services agreement, Tasnee and its affiliates will provide services to Tronox related to information technology support and infrastructure, logistics, safety, health and environmental, treasury and tax. Similarly, Tronox will provide services to Tasnee and its affiliates for information technology support and infrastructure, finance and accounting, tax, treasury, human resources, logistics, research and development and business development.
During the three and six months ended June 30, 2019, Tronox recorded a net reduction of approximately $
1
million in “Selling, general and administrative” in the unaudited Condensed Consolidated Statement of Operations associated with the transition services agreement. The net reduction of selling, general and administrative expenses associated with the transition services agreement generally represents a recovery of the related costs. At June 30, 2019, Tronox had a receivable due from Tasnee of $
12
million and a payable due to Tasnee of $
77
million that are recorded within “Prepaid and other assets” and “Accrued liabilities”, respectively, on the unaudited Condensed Consolidated Balance Sheet. Accrued liabilities include $
72
million related to the cash,
working capital and noncurrent liabilities
received with the acquired entities in connection with the Cristal Transaction. The balance in prepaid and other assets and remaining balances in accrued liabilities primarily relate to pre-acquisition activity and those balances are expected to be settled in the near term.
Prior to and after the Cristal Transaction, we operate our business under one operating segment, TiO
2,
which is also our reportable segment.
The Company’s chief operating decision maker, who is its CEO, reviews financial information presented at the TiO
2
level for purposes of allocating resources and evaluating financial performance. Since we operate our business under one segment, there is no difference between our consolidated results and segment results.
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. See Note 4 for further information on revenues.