The following discussion should be read in conjunction withTronox Holdings plc's unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . This discussion and other sections in this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, and actual results could differ materially from those discussed in the forward-looking statements as a result of numerous factors. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements also can be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," and similar terms. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain financial measures, in particular the presentation of earnings before interest, taxes, depreciation and amortization ("EBITDA") and Adjusted EBITDA, which are not presented in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). We are presenting these non-U.S. GAAP financial measures because we believe they provide us and readers of this Form 10-Q with additional insight into our operational performance relative to earlier periods and relative to our competitors. We do not intend for these non-U.S. GAAP financial measures to be a substitute for anyU.S. GAAP financial information. Readers of these statements should use these non-U.S. GAAP financial measures only in conjunction with the comparableU.S. GAAP financial measures. A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA is also provided herein. OverviewTronox Holdings plc (referred to herein as "Tronox", "we", "us", or "our") operates titanium-bearing mineral sand mines and smelter operations inAustralia ,South Africa andBrazil to produce feedstock materials that can be processed into TiO2 for pigment, high purity titanium chemicals, including titanium tetrachloride, and Ultrafine© titanium dioxide used in certain specialty applications. It is our long-term strategic goal to be vertically integrated and consume all of our feedstock materials in our own nine TiO2 pigment facilities which we operate inthe United States ,Australia ,Brazil ,UK ,France ,the Netherlands ,China and theKingdom of Saudi Arabia ("KSA"). We believe that vertical integration is the best way to achieve our ultimate goal of delivering low cost, high-quality pigment to our coatings and other TiO2 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. We are a public limited company registered under the laws ofEngland andWales .Tronox was formerly listed on theNew York Stock Exchange asTronox Limited , a company registered under the laws ofWestern Australia . However, inMarch 2019 , we re-domiciled to theUnited Kingdom , and as a result of the re-domiciling,Tronox Limited became a wholly-owned subsidiary ofTronox Holdings plc . Another significant corporate milestone occurred onApril 10, 2019 when we completed the acquisition from National Industrialization Company ("Tasnee") of the TiO2 business ofThe National Titanium Dioxide Company Ltd. ("Cristal") (the "Cristal Transaction"). That transaction doubled our size and expanded the number of TiO2 pigment facilities we operate from three to nine and gave us control of several new mines, particularly inAustralia . In order to obtain regulatory approval for the Cristal Transaction, we were required to divest Cristal's North American TiO2 business, which was sold inMay 2019 . See Note 2 for further details on the Cristal Transaction. Tronox Synergy Savings Program The Cristal Transaction created significant opportunities for us to realize operating and cost-saving synergies. When the Cristal Transaction closed, we announced our goal of achieving approximately$220 million in synergies by 2022. These synergies are expected to be realized from the following areas: •operational enhancements through, among other things, technology exchange, optimization of feedstock cost at pigment plants and performance improvements at the Yanbu plant inSaudi Arabia ; 31 -------------------------------------------------------------------------------- Table of Contents •feedstock initiatives including, among other things, maximizing synthetic rutile and slag output and better utilizing our diverse types of feedstock in our TiO2 plants and other initiatives that more efficiently integrate our global feesdtock chain; •supply chain savings from, among other things, volume purchasing discounts for a range of raw materials and services, including shipping and freight, and rationalizing the production of our broad portfolio of TiO2 grades; and •reductions in selling, general and administrative expenses primarily from employee-related costs and indirect spend consolidation. In connection with realizing the synergies discussed above, during the year endedDecember 31, 2019 and including the six months endedJune 30, 2020 , we incurred restructuring costs of$24 million for employee related costs, including severance. See Note 3 of notes to unaudited condensed consolidated financial statements for further information on restructuring. During the six months endedJune 30, 2020 , we have delivered total synergies of$107 million , of which$84 million have been reflected in our EBITDA in the six months of 2020 and$23 million are cash and other synergies not reflected in EBITDA. Our synergy targets continue to be$190 million for 2020,$275 million for 2021 and$325 million for 2022. Business Environment The following discussion includes trends and factors that may affect future operating results: Throughout the current Covid-19 pandemic, our operations have been designated as essential to support the continued manufacturing of products such as food and medical packaging, medical equipment, pharmaceuticals, and personal protective gear. The Covid-19 pandemic has impacted, and will continue to impact, our industry and business. Our second quarter revenue decreased 20% sequentially driven primarily by lower TiO2 volumes which was in line with expectations as a result of the decline in global GDP. Average TiO2 selling prices remained flat on a sequential basis. The Covid-19 pandemic has impacted, and will continue to impact, our industry and business. Demand for TiO2 inNorth America has been the most resilient, as we have seen continued strength in the do-it-yourself coatings and packaging end markets, partially offset by slower demand in construction and professional paint end markets.South America andIndia were hardest hit by the virus in the quarter and experienced significantly slower demand relative to other regions, while regions such asEurope experienced slow demand in the beginning of the quarter, but saw demand pickup into late June. Zircon volumes and average selling prices both increased 2% sequentially owing to shipment timing and favorable product mix. Zircon demand has remained relatively consistent for the last three quarters. Feedstock and other products sales decreased 43% sequentially, primarily due to the lack of mandated shipments of CP slag in the quarter and lower sales volumes of pig iron. Gross margin declined sequentially from the first quarter to the second quarter 2020 due to the unfavorable impacts of volume and mix, and unfavorable cost structures in our South African operations due to the mandatory shut-down of our mining operations and slow-down of our smelters inSouth Africa during the 21 day country wide lockdown due to the Covid-19 pandemic. The unfavorable impacts were partially offset by favorable impacts of foreign currency on costs. As ofJune 30, 2020 , our total available liquidity was$1,123 million , including$722 million in cash and cash equivalents and$401 million available under revolving credit agreements including$288 million available under our Asset Backed Lending ("ABL") facility. Our total debt was$3.5 billion and net debt to trailing-twelve month Adjusted EBITDA pro forma for the Cristal transaction was 4.2x. There are no upcoming maturities on the Company's term loan or bonds until 2024. The Company also has no financial covenants on its term loan or bonds and only one springing financial covenant on its ABL facility, which we do not expect to be triggered based on our current scenario planning. 32 -------------------------------------------------------------------------------- Table of Contents Pro Forma Income Statement Information The acquisition of the TiO2 business of Cristal onApril 10, 2019 impacts the comparability of the reported results for 2020 compared to 2019. SinceTronox and Cristal have combined their respective businesses effective with the merger date ofApril 10, 2019 , the three and six months endedJune 30, 2020 reflect the results of the combined business, while the three and six months endedJune 30, 2019 reflect the results of the combined business fromApril 10, 2019 . To assist with a discussion of the 2020 and 2019 results on a comparable basis, certain supplemental unaudited pro forma income statement information is provided on a consolidated basis and is referred to as "pro forma information". The pro forma information has been prepared on a basis consistent with Article 11 of Regulation S-X, assuming the merger and merger-related divestitures of Cristal's North American TiO2 business and the 8120 paper laminate grade had been consummated onJanuary 1, 2018 . In preparing this pro forma information, the historical financial information has been adjusted to give effect to pro forma adjustments that are (i) directly attributable to the business combination and other transactions presented herein, such as the merger-related divestitures, (ii) factually supportable, and (iii) expected to have a continuing impact on the combined entity's consolidated results. The pro forma information is based on management's assumptions and is presented for illustrative purposes and does not purport to represent what the results of operations would actually have been if the business combination and merger-related divestitures had occurred as of the dates indicated or what the results would be for any future periods. Also, the pro forma information does not include the impact of any revenue, cost or other operating synergies in the periods prior to the acquisition that may result from the business combination or any related restructuring costs. 33 -------------------------------------------------------------------------------- Table of Contents Condensed Consolidated Results of Operations from Continuing Operations Three Months EndedJune 30, 2020 compared to the Three Months EndedJune 30, 2019 Reported Amounts Pro Forma Amounts (1) Three Months Ended June 30, Three Months Ended June 30, 2020 2019 Variance 2020 2019 Variance Net sales$ 578 $ 791 $ (213) $ 578 $ 827 $ (249) Cost of goods sold 449 672 (223) 449 648 (199) Contract loss - 19 (19) - - - Gross profit 129 100 29 129 179 (50) Gross Margin 22 % 13 % 9 pts 22 % 22 % 0 pts Selling, general and administrative expenses 80 103 (23) 80 85 (5) Restructuring - 10 (10) - 10 (10) Income (loss) from operations 49 (13) 62 49 84 (35) Interest expense (47) (54) (7) (47) (54) (7) Interest income 2 3 (1) 2 3 (1) Loss on extinguishment of debt - - - - - - Other (expense) income, net 2 5 (3) 2 5 (3) Income (loss) from continuing operations before income taxes 6 (59) 65 6 38 (32) Income tax (provision) benefit (10) 4 14 (10) (6) 4 Net (loss) income from continuing operations$ (4) $ (55) $ 51 $ (4) $ 32 $ (36) Effective tax rate 167 % (7) % 167 % 16 % EBITDA (2)$ 123 $ 76 $ 47 $ 123 $ 176 $ (53) Adjusted EBITDA (2)$ 142 $ 195 $ (53) $ 142 $ 200 $ (58) Adjusted EBITDA as% of Net Sales 25 % 25 % 0 pts 25 % 24 % 1 pts _______________ (1)The pro forma amounts have been prepared on a basis consistent with Article 11 of Regulation S-X. See "Supplemental Pro Forma Information" section of the MD&A for further detail. (2)EBITDA and Adjusted EBITDA are Non-U.S. GAAP financial measures. Please refer to the "Non-U.S. GAAP Financial Measures" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of these measures and a reconciliation of these measures to Net income (loss) from operations. On a reported basis and pro forma basis, net sales of$578 million for the three months endedJune 30, 2020 decreased by 27% and 30%, respectively, compared to$791 million and$827 million , respectively, for the same period in 2019. The decrease is primarily due to lower TiO2 and Zircon sales volumes as a result of the Covid-19 pandemic as well as lower Zircon average selling prices. Net sales by type of product for the three months endedJune 30, 2020 and 2019 were as follows: The table below presents reported revenue by product: 34
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Table of Contents Three Months Ended June 30, 2020 2019 Variance Percentage TiO2$ 466 $ 625 $ (159) (25) % Zircon 68 88 (20) (23) % Feedstock and other products 44 78 (34) (44) % Total net sales$ 578 $ 791 $ (213) (27) %
The table below presents pro forma revenue by product:
Three Months Ended June 30, (Millions of dollars) 2020 2019 Variance Percentage TiO2$ 466 $ 657 $ (191) (29) % Zircon 68 89 (21) (24) % Feedstock and other products 44 81 (37) (46) % Total net sales$ 578 $ 827 $ (249) (30) % On a reported basis, for the three months endedJune 30, 2020 , TiO2 revenue was lower by 25% or$159 million compared to the prior year quarter. Given the acquisition of Cristal onApril 10, 2019 , there is approximately$21 million of revenue in the nine days ofApril 2020 of which there was no comparable amounts in the same period of the prior year. Excluding this revenue generated from the Cristal operations, TiO2 revenue decreased 29% or$180 million primarily due to$169 million decrease in sales volumes as a result of the Covid-19 pandemic and a decrease of$7 million in average selling prices of TiO2. Foreign currency negatively impacted TiO2 revenue by$4 million due to the weakening of the Euro. Zircon revenues for the Cristal operation in the first nine days ofApril 2020 were approximately$2 million . Excluding this Cristal related revenue, Zircon revenue decreased decreased$22 million primarily due to a$12 million reduction in average selling prices and a$10 million reduction in sales volumes as a result of the Covid-19 pandemic. Feedstock and other products revenues for the Cristal operations in the first nine days ofApril 2020 were approximately$3 million . Excluding this Cristal related revenue, feedstock and other products revenues was$37 million lower from the year-ago quarter primarily driven by lower volumes of CP slag and pig iron. On a pro forma basis, for the three months endedJune 30, 2020 , TiO2 revenue declined 29% compared to the prior year quarter driven primarily by a$179 million decrease in sales volumes as a result of the Covid-19 pandemic and a$7 million decrease in average selling prices. Foreign currency negatively impacted TiO2 sales by$4 million or 2% due to the weakening of the Euro. Zircon revenues declined$21 million or 24% primarily due to a 13% decline in average sales prices and a 11% decline in sales volumes as a result of the Covid-19 pandemic. Feedstock and other products revenues declined primarily due to lower sales volumes of CP slag and pig iron. Second quarter revenue of 2020 decreased 20% when compared to the first quarter of 2020 driven by a 19% decrease in TiO2 volumes and lower sales volumes of CP slag and pig iron which is primarily as a result of the Covid-19 pandemic. On a reported basis, our gross margin of$129 million was 22% of net sales compared to 13% of net sales in the year-ago quarter. The increase in gross margin is primarily due to: •the favorable impact of 8 points due to the value of the inventory of Cristal being stepped up to fair value on the acquisition date in the prior year period, which resulted in the recognition of higher expense in the prior year period; •the favorable impact of 4 points due to the synergies realized from the Cristal transaction; •the favorable impact of 3 points due to the recognition of a$19 million charge for contract losses expected to be incurred on the 8120 supply agreement with Venator in the prior year quarter; •the net favorable impact of 5 points due to changes in foreign exchange rates, primarily the South African Rand and Australian Dollar; •the unfavorable impact of 5 points due to sales volume and product mix; •the unfavorable impact of 3 points due to increased cost structures and the absence of deferred margin build; •the unfavorable impact of 2 points primarily caused by a decrease in Zircon selling prices; and 35 -------------------------------------------------------------------------------- Table of Contents •the unfavorable impact of 1 point due to the mandatory shut-down of our mining operations and slow-down of our smelters inSouth Africa due to the Covid-19 pandemic. On a pro forma basis, our gross margin of$129 million was 22% of net sales compared to 22% of net sales in the year-ago quarter. Quarter over quarter, the main drivers of gross margin are as follows: •the favorable impact of 4 points due to the synergies realized from the Cristal transaction; •the net favorable impact of 4 points due to changes in foreign exchange rates, primarily the South African Rand and Australian Dollar; •the unfavorable impact of 2 points due to sales volumes and product mix; •the unfavorable impact of 3 points due to increased cost structures and the absence of deferred margin build; •the unfavorable impact of 2 points primarily caused by a decrease in Zircon selling prices; and •the unfavorable impact of 1 point due to the mandatory shut-down of our mining operations and slow-down of our smelters inSouth Africa due to the Covid-19 pandemic. On a reported basis, selling, general and administrative expenses decreased by$23 million or 22% during the three months endedJune 30, 2020 compared to the same period of the prior year. The decrease is mainly due to the following: i) lower professional services costs of$15 million , ii) lower travel and entertainment expenses of$6 million as a result of the Covid-19 pandemic, iii)$3 million lower employee costs primarily due to a$6 million true up to long term share based compensation incentive programs partially offset by a$3 million increase in the annual incentive program, iv) lower integration costs of$1 million , and v) a reduction of$1 million in research and development expenses offset by an increase of$1 million in taxes other than income and approximate$3 million of incremental expenses for Cristal for the first nine days ofApril 2020 of which there were no comparable amounts in the prior year period given the acquisition closed onApril 10, 2019 . On a pro forma basis, selling, general and administrative expenses decreased period over period primarily due to lower professional services costs. On both a reported and pro forma basis, we recorded restructuring expenses of$10 million for employee-related costs associated with headcount reductions during the three months endedJune 30, 2019 of which there were no comparable amounts in the comparable prior year period. See Note 3 of notes to unaudited condensed consolidated financial statements. On a reported basis, income from operations for the three months endedJune 30, 2020 was$49 million compared to loss from operations of$13 million in the prior year period. The increase of$62 million was primarily due to the higher gross margin coupled with lower SG&A expenses discussed above. On a pro forma basis, income from operations for the three months endedJune 30, 2020 decreased$35 million to$49 million from$84 million in the prior year period primarily due to lower gross margin as discussed above. On a reported basis, adjusted EBITDA as a percentage of net sales was 25% for the three months endedJune 30, 2020 unchanged from the prior year. On a pro forma basis, adjusted EBITDA as a percentage of net sales increased 1 percentage point over the prior year due to the synergies realized from the transaction. On both a reported and pro forma basis, interest expense for the three months endedJune 30, 2020 decreased by$7 million compared to the same period of 2019 primarily due to lower average debt outstanding balances and lower average interest rates mainly on the Term Loan Facility and Standard Bank Term Loan Facility. On both a reported and pro forma basis, interest income for the three months endedJune 30, 2020 decreased by$1 million compared to the same period in 2019 due to lower cash balances from the use of cash and previously restricted cash in the second quarter of 2019 for the acquisition of the Cristal Transaction. On both a reported and pro forma basis, other income (expense), net for the three months endedJune 30, 2020 primarily consisted of net realized and unrealized foreign currency gains. The foreign currency gains were primarily driven by the South African rand and the Australian dollars used in the remeasurement of ourU.S. dollar denominated working capital balances partially offset by the impact of our foreign currency derivatives. 36 -------------------------------------------------------------------------------- Table of Contents We continue to maintain full valuation allowances related to the total net deferred tax assets in theU.S. andAustralia . We have full valuation allowances related to the net deferred tax assets recently acquired inAustralia ,Belgium ,Brazil ,Saudia Arabia,Switzerland , and theU.S. The provisions for income taxes associated with these jurisdictions 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 other specific tax assets. On a reported basis, the effective tax rate was 167% and (7)% for the three months endedJune 30, 2020 and 2019, respectively. The effective tax rates for the three months endedJune 30, 2020 and 2019 are influenced by a variety of factors, primarily income and losses in jurisdictions with valuation allowances, disallowable expenditures, restructuring impacts, and our jurisdictional mix of income at tax rates different than theU.K. statutory rate. During the three months endedJune 30, 2020 , a full valuation allowance was recorded against the deferred tax assets inSaudi Arabia and the impact was$2 million to the income tax provision. On a pro forma basis, the effective tax rate was 167% and 16% for the three months endedJune 30, 2020 and 2019, respectively. 37
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Table of Contents Six Months EndedJune 30, 2020 compared to the Six Months EndedJune 30, 2019 Reported Amounts Pro Forma Amounts (1) Six Months Ended June 30, Six Months Ended June 30, 2020 2019 Variance 2020 2019 Variance Net sales$ 1,300 $ 1,181 $ 119 $ 1,300 $ 1,547 $ (247) Cost of goods sold 996 979 17 996 1,227 (231) Contract loss - 19 (19) - - - Gross profit 304 183 121 304 320 (16) Gross Margin 23 % 15 % 8 pts 23 % 21 % 2 pts Selling, general and administrative expenses 174 170 4 174 180 (6) Restructuring 2 10 (8) 2 10 (8) Income from operations 128 3 125 128 130 (2) Interest expense (92) (103) (11) (92) (109) (17) Interest income 5 12 (7) 5 6 (1) Loss on extinguishment of debt - (2) (2) - (2) (2) Other income, net 11 3 8 11 2 9 Income (loss) from continuing operations before income taxes 52 (87) 139 52 27 25 Income tax (provision) benefit (16) 2 18 (16) (13) 3 Net (loss) income from continuing operations$ 36 $ (85) $ 121 $ 36 $ 14 $ 22 Effective tax rate 31 % (2) % 31 % 48 % EBITDA (2)$ 282 $ 135 $ 147 $ 282 $ 304 $ (22) Adjusted EBITDA (2)$ 315 $ 275 $ 40 $ 315 $ 341 $ (26) Adjusted EBITDA as% of Net Sales 24 % 23 % 1 pts 24 % 22 % 2 pts _______________ (1)The pro forma amounts have been prepared on a basis consistent with Article 11 of Regulation S-X. See "Supplemental Pro Forma Information" section of the MD&A for further detail. (2)EBITDA and Adjusted EBITDA are Non-U.S. GAAP financial measures. Please refer to the "Non-U.S. GAAP Financial Measures" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of these measures and a reconciliation of these measures to Net income (loss) from operations. 38 -------------------------------------------------------------------------------- Table of Contents On a reported basis, net sales of$1,300 million for the six months endedJune 30, 2020 increased by 10% compared to$1,181 million for the same period in 2019. The six months endedJune 30, 2020 includes approximately$352 million of revenue from Cristal operations for the first quarter of 2020 and the first nine days ofApril 2020 of which there were no comparable amounts in the prior year period given the acquisition closed onApril 10, 2019 . Excluding this Cristal revenue, revenue decreased 20% primarily due to decreases in TiO2 and Zircon sales volumes as a result of the Covid-19 pandemic as well as lower Zircon average selling prices. On a pro forma basis, net sales for the six months endedJune 30, 2020 decreased$247 million in comparison to the same period in 2019 primarily due to the decreases in sales volumes of TiO2 and pig iron as well as lower average selling prices of Zircon. Net sales by type of product for the six months endedJune 30, 2020 and 2019 were as follows: The table below presents reported revenue by product: Six Months Ended June 30, 2020 2019 Variance Percentage TiO2$ 1,046 $ 902 $ 144 16 % Zircon 133 152 (19) (13) % Feedstock and other products 121 127 (6) (5) % Total net sales$ 1,300 $ 1,181 $ 119 10 %
The table below presents pro forma revenue by product:
Six Months Ended June 30, (Millions of dollars) 2020 2019 Variance Percentage TiO2$ 1,046 $ 1,227 $ (181) (15) % Zircon 133 171 (38) (22) % Feedstock and other products 121 149 (28) (19) % Total net sales$ 1,300 $ 1,547 $ (247) (16) % On a reported basis, for the six months endedJune 30, 2020 , TiO2 revenue was higher by 16% or$144 million compared to the prior year period. Given the acquisition of Cristal onApril 10, 2019 , there is approximately$306 million of revenue in the first quarter of 2020 and first nine days ofApril 2020 of which there was no comparable amounts in the same period of the prior year. Excluding this revenue generated from the Cristal operations, TiO2 revenue decreased by$162 million due to a$147 million decrease in sales volumes as a result of the Covid-19 pandemic and a decrease of$9 million in average selling prices of TiO2 and foreign currency negatively impacted TiO2 revenue by$6 million due to the weakening of the Euro. Zircon revenues for the Cristal operation in the first quarter of 2020 and first nine days ofApril 2020 were approximately$17 million . Excluding this Cristal related revenue, Zircon revenue decreased primarily due to$22 million reduction in average selling prices and$14 million reduction in sales volumes as a result of the Covid-19 pandemic. Feedstock and other products revenues for the Cristal operations in the first quarter of 2020 and first nine days ofApril 2020 were approximately$29 million . Excluding this Cristal related revenue, feedstock and other products decreased$35 million primarily due to lower sales volumes of pig iron. 39 -------------------------------------------------------------------------------- Table of Contents On a pro forma basis, for the six months endedJune 30, 2020 , TiO2 revenue declined 15% compared to the prior year driven primarily by a$131 million decrease in sales volumes as a result of the Covid-19 pandemic, a$18 million decrease in product mix, and a$14 million decrease in average selling prices. Foreign currency negatively impacted TiO2 sales by$12 million or 2% due to the weakening of the Euro. Zircon revenues declined$38 million or 22% primarily due to a 14% decline in average sales prices and a 9% decline in sales volumes. Feedstock and other products revenues declined primarily due to lower average selling prices of pig iron offset by higher sales volumes of CP slag. On a reported basis, our gross margin of$304 million was 23% of net sales compared to 15% of net sales in the year-ago quarter. The increase in gross margin is primarily due to: •the favorable impact of 4 points due to the synergies realized from the Cristal transaction; •the favorable impact of 4 points due to the value of the inventory of Cristal being stepped up to fair value on the acquisition date in the prior year period, which resulted in the recognition of higher expense in the prior year period; •the net favorable impact of 4 point due to changes in foreign exchange rates, primarily the South African Rand and Australian Dollar; •the favorable impact of 2 points due to the recognition of a$19 million charge for contract losses expected to be incurred on the 8120 supply agreement with Venator in the prior year period; •the unfavorable impact of 1 point due to the mandatory shut-down of our mining operations and slow-down of our smelters inSouth Africa due to the Covid-19 pandemic; •the unfavorable impact of 2 points due to sales volume and product mix; •the unfavorable impact of 1 point due to increased cost structures; and •the unfavorable impact of 2 points primarily caused by a decrease in Zircon selling prices. On a pro forma basis, our gross margin of$304 million was 23% of net sales compared to 21% of net sales in the prior year period. The increase in gross margin is primarily due to: •the favorable impact of 4 points due to the synergies realized from the Cristal transaction; •the favorable impact of 4 points due to changes in foreign exchange rates, primarily the South African Rand and Australian Dollar; •the unfavorable impact of 2 points due to increased cost structures; •the unfavorable impact of 1 point due to product mix; •the unfavorable impact of 2 points caused by a decrease in Zircon selling prices; and •the net unfavorable impact of 1 point due to the mandatory shut-down of our mining operations and slow-down of our smelters inSouth Africa due to the Covid-19 pandemic. On a reported basis, selling, general and administrative expenses increased by$4 million or 2% during the six months endedJune 30, 2020 compared to the same period of the prior year. Given the acquisition of Cristal onApril 10, 2019 , there are approximately$23 million of expenses in the first quarter of 2020 and first nine days ofApril 2020 of which there was no comparable amounts in the same period of the prior year. The increase was also driven by a$5 million increase in integration costs,$2 million higher amortization expense, and$3 million higher IT and communication expenses. Offsetting these increases were approximately$20 million of lower professional services costs, a reduction of$5 million in travel and entertainment expenses as a result of the Covid-19 pandemic and lower research and development expenses of$5 million . On a pro forma basis, selling, general and administrative expenses decreased period over period primarily due to lower professional services costs. On both a reported and pro forma basis, we recorded restructuring expenses of$2 million for employee-related costs associated with headcount reductions during the six months endedJune 30, 2020 . See Note 3 of notes to unaudited condensed consolidated financial statements. On a reported basis, income from operations for the six months endedJune 30, 2020 was$128 million compared to income from operations of$3 million in the prior year period. The increase of$125 million was primarily due to the higher gross margin partially and lower restructuring charges offset by higher SG&A expenses discussed above. On a pro forma basis, income from operations for the six months endedJune 30, 2020 decreased$2 million to$128 million from$130 million in the prior year period primarily due to lower gross margin offset by lower SG&A expenses and lower restructuring charges as discussed above. 40 -------------------------------------------------------------------------------- Table of Contents On a reported basis, adjusted EBITDA as a percentage of net sales was 24% for the six months endedJune 30, 2020 , an increase of 1 point from 23% in the prior year. The higher gross margin partially offset by the higher SG&A expenses as discussed above were the primary drivers of the year-over-year increase in Adjusted EBITDA percentage. On a pro forma basis, adjusted EBITDA as a percentage of net sales was 24% for the six months endedJune 30, 2020 , an increase of 2 points from 22% in the prior year. The lower SG&A expenses partially offset by the lower gross margin as discussed above were the primary drivers of the year-over-year increase in Adjusted EBITDA percentage. On a reported and pro forma basis, interest expense for the six months endedJune 30, 2020 decreased by$11 million and$17 million , respectively, compared to the same period of 2019 primarily due to lower average debt outstanding balances and lower average interest rates mainly on the Term Loan Facility and Standard Bank Term Loan Facility. On a reported and pro forma basis, interest income for the six months endedJune 30, 2020 decreased by$7 million and$1 million , respectively, compared to the same period in 2019 due to lower cash balances from the use of cash and previously restricted cash in the second quarter of 2019 for the acquisition of the Cristal Transaction. On both a reported and pro forma basis, other income, net for the six months endedJune 30, 2020 primarily consisted of net realized and unrealized foreign currency gains. The foreign currency gains were primarily driven by the South African rand and the Australian dollars used in the remeasurement of ourU.S. dollar denominated working capital balances partially offset by the impact of our foreign currency derivatives. We continue to maintain full valuation allowances related to the total net deferred tax assets in theU.S. andAustralia . We have full valuation allowances related to the net deferred tax assets recently acquired inAustralia ,Belgium ,Brazil ,Saudi Arabia ,Switzerland , and theU.S. The provisions for income taxes associated with these jurisdictions 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 other specific tax assets. On a reported basis, the effective tax rate was 31% and (2)% for the six months endedJune 30, 2020 and 2019, respectively. The effective tax rates for the six months endedJune 30, 2020 and 2019 are influenced by a variety of factors, primarily income and losses in jurisdictions with valuation allowances, disallowable expenditures, restructuring impacts, and our jurisdictional mix of income at tax rates different than theU.K. statutory rate. During the six months endedJune 30, 2020 , a full valuation allowance was recorded against the deferred tax assets inSaudi Arabia and the impact was$2 million to the income tax provision. On a pro forma basis, the effective tax rate was 31% and 48% for the six months endedJune 30, 2020 and 2019, respectively. Other Comprehensive (Loss) Income Other comprehensive income was$61 million for the three months endedJune 30, 2020 as compared to none for the prior year period. The increase in income in 2020 compared to the prior year was primarily driven by gains on derivative instruments of$46 million as compared to losses of$23 million in the prior year quarter. This increase was offset by favorable foreign currency translation adjustments of$22 million in the prior year quarter as compared to favorable foreign currency translation adjustments of$16 million for the three months endedJune 30, 2020 . Other comprehensive loss was$209 million in the six months endedJune 30, 2020 as compared to none in the six months endedJune 30, 2019 . The increase in loss is primarily due to the unfavorable foreign currency translation adjustments of$172 million as compared to favorable foreign currency translation adjustments of$22 million in the prior year period. In addition, we recognized a net loss on derivative instruments of$37 million in the six months endedJune 30, 2020 as compared to a net loss on derivative instruments of$23 million in the prior year period. 41 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources The following table presents our liquidity as ofJune 30, 2020 andDecember 31, 2019 : June 30, 2020 December 31, 2019 (Millions of U.S. dollars) Cash and cash equivalents$ 722 $ 302 Available under the Wells Fargo Revolver 288
209
Available under the Standard Credit Facility 58
72
Available under the Emirates Revolver 50
46
Available under the SABB Facility 5 19 Total$ 1,123 $ 648 As discussed previously, onMay 1, 2020 , the Company increased liquidity by issuing its 6.5% senior secured notes due 2025 for an aggregate principal amount of$500 million . A portion of the proceeds of this debt offering was utilized to repay the$200 million of its outstanding borrowings as ofMarch 31, 2020 under the Company's Wells Fargo,Standard Bank , and Emirates revolvers. Historically, we have funded our operations and met our commitments through cash generated by operations, issuance of unsecured notes, bank financings and borrowings under lines of credit. In the next twelve months, we expect that our operations and available borrowings under our debt financings and revolving credit agreements (see Note 13 of notes to consolidated financial statements) will provide sufficient cash for our operating expenses, capital expenditures, interest payments and debt repayments. This is predicated on our achieving our forecast which could be negatively impacted by items outside of our control, in particular, macroeconomic conditions, including the economic impacts caused by the Covid-19 pandemic. If negatives events occur, we may need to reduce our capital expenditures and reduce operating costs and other items to maintain adequate liquidity. Working capital (calculated as current assets less current liabilities) was$1.8 billion atJune 30, 2020 compared to$1.4 billion atDecember 31, 2019 . As ofJune 30, 2020 , the non-guarantor subsidiaries of our Senior Notes due 2025 represented approximately 15% of our total consolidated liabilities and approximately 31% of our total consolidated assets. For the three and six months endedJune 30, 2020 , the non-guarantor subsidiaries of our Senior Notes due 2025 represented approximately approximately 36% and 39%, respectively, of our total consolidated net sales and approximately 32% and 40%, respectively, of our consolidated EBITDA (as such term is defined in the 2025 Indenture). In addition, as ofJune 30, 2020 , our non-guarantor subsidiaries had$697 million of total consolidated liabilities (including trade payables but excluding intercompany liabilities), all of which would have been structurally senior to the 2025 Notes. See Note 13 of notes to unaudited condensed consolidated financial statements. AtJune 30, 2020 , we had outstanding letters of credit and bank guarantees of$73 million . See Note 17 of notes to unaudited condensed consolidated financial statements. Principal factors that could affect our ability to obtain cash from external sources include (i) debt covenants that limit our total borrowing capacity; (ii) increasing interest rates applicable to our floating rate debt; (iii) increasing demands from third parties for financial assurance or credit enhancement; (iv) credit rating downgrades, which could limit our access to additional debt; (v) a decrease in the market price of our common stock and debt obligations; and (vi) volatility in public debt and equity markets. As ofJune 30, 2020 , our credit rating with Moody's andStandard & Poor's changed fromDecember 31, 2019 from B1 positive to B1 stable outlook and from B stable to B negative outlook, respectively. See Note 13 of notes to unaudited condensed consolidated financial statements. 42 -------------------------------------------------------------------------------- Table of Contents Cash and Cash Equivalents We consider all investments with original maturities of three months or less to be cash equivalents. As ofJune 30, 2020 , our cash and cash equivalents were primarily invested in money market funds. We maintain cash and cash equivalents in bank deposit and money market accounts that may exceed federally insured limits. The financial institutions where our cash and cash equivalents are held are highly rated and geographically dispersed, and we have a policy to limit the amount of credit exposure with any one institution. We have not experienced any losses in such accounts and believe we are not exposed to significant credit risk. The use of our cash includes payment of our operating expenses, capital expenditures, servicing our interest and debt repayment obligations, making pension contributions and making quarterly dividend payments. Repatriation of Cash AtJune 30, 2020 , we held$722 million in cash and cash equivalents in these respective jurisdictions:$442 million inthe United States ,$58 million inEurope ,$108 million inAustralia ,$48 million inSouth Africa ,$21 million inBrazil ,$26 million inSaudi Arabia and$19 million inChina . Our credit facilities limit transfers of funds from subsidiaries inthe United States to certain foreign subsidiaries. In addition, atJune 30, 2020 , we held$27 million of restricted cash of which$18 million is inEurope and is related to the termination fee associated with the TTI acquisition and$9 million is inAustralia related to performance bonds.Tronox Holdings plc has foreign subsidiaries with undistributed earnings atJune 30, 2020 . We have made no provision for deferred taxes related to these undistributed earnings because they are considered indefinitely reinvested in the foreign jurisdictions. Debt Obligations InMarch 2020 , the Company took precautionary measures and drew down$200 million of its outstanding borrowings under its Wells Fargo,Standard Bank , and Emirates revolvers in order to increase liquidity and preserve financial flexibility. As discussed below, the Company repaid the outstanding balances of these short-term credit facilities with a portion of the proceeds of the 6.5% senior secured notes due 2025. Additionally, during the six months endedJune 30, 2020 , our KSA subsidiary drew down$13 million on its SABB Credit Facility for local working capital purposes. As ofJune 30, 2020 , the short-term debt balance was$13 million based on theJune 30, 2020 exchange rate. There were no short term debt balances atDecember 31, 2019 . AtJune 30, 2020 andDecember 31, 2019 , our long-term debt, net of unamortized discount and debt issuance costs was$3.5 billion and$3.0 billion , respectively. AtJune 30, 2020 andDecember 31, 2019 , our net debt (the excess of our debt over cash and cash equivalents) was$2.7 billion and$2.7 billion , respectively. See Note 13 of notes to unaudited condensed consolidated financial statements. OnMay 1, 2020 ,Tronox Incorporated , a wholly-owned indirect subsidiary of the Company, issued its 6.5% senior secured notes due 2025 for an aggregate principal amount of$500 million . A portion of the proceeds of this debt offering was utilized to repay the$200 million of the Company's outstanding borrowings under its Wells Fargo,Standard Bank , and Emirates revolvers. TTI Acquisition InMay 2020 , the Company announced that it had signed a definitive agreement to acquire the Tizir Titanium and Iron ("TTI") business from Eramet S.A. for approximately$300 million in cash, plus 3% per annum which accrues for the period fromJanuary 1, 2020 until the transaction closes. The close of the transaction, which we anticipate to occur beforeMay 13, 2021 , is subject to certain consents and customary closing conditions, including regulatory approvals. 43 -------------------------------------------------------------------------------- Table of Contents Cash Flows The following table presents cash flow from continuing operations for the periods indicated: Six Months Ended June 30, 2020 2019
(Millions of
$ 133 Cash used in investing activities - continuing operations (92) (991)
Cash provided by (used in) financing activities - continuing operations
466 (417) Net cash provided by discontinued operations - (16)
Effects of exchange rate changes on cash and cash equivalents and restricted cash
(8) 1
Net increase (decrease) in cash, cash equivalents and restricted cash
$ 438 $ (1,290) Cash Flows provided by Operating Activities - Cash provided by operating activities is driven by net income from continuing operations adjusted for non-cash items and changes in working capital items. The following table provides our net cash provided by operating activities for the six months endedJune 30, 2020 and 2019: Six Months Ended June 30, 2020 2019 (Millions of U.S. dollars) Net income (loss) $ 36$ (85) Adjustments for non-cash items 196 230 Income related cash generation 232 145
Net change in assets and liabilities ("working capital changes")
(160) (12)
Cash provided by operating activities - continuing operations $ 72
$ 133 Net cash provided by operating activities was$72 million as compared to net cash provided by operating activities of$133 million in the prior year. The change period over period is due to a higher use of cash from working capital in the current year period. Higher use of cash from working capital was caused primarily by a higher use of cash of$117 million for inventories coupled with a$18 million higher use of cash for prepaid assets and other assets and a$16 million higher use of cash for accounts payable and accrued liabilities due to timing of payments. Cash Flows used in Investing Activities - Net cash used in investing activities for the six months endedJune 30, 2020 was$92 million as compared to$991 million for the same period in 2019. The current year represents$82 million of capital expenditures as compared to$81 million in the prior year. Additionally, the decrease in cash used in investing activities is attributable to the acquisition of Cristal in the prior year period offset by the proceeds from the sale of Ashtabula. The prior year is also comprised of a loan of$25 million to AMIC related to the Jazan Slagger, a titanium slag smelter facility (see Note 21 of notes to unaudited condensed consolidated financial statements for a discussion of the Jazan Slagger) as compared to$12 million in the current year. Cash Flows provided by (used in) Financing Activities -Net cash provided by financing activities during the six months endedJune 30, 2020 was$466 million as compared to cash used in financing activities of$417 million for the six months endedJune 30, 2019 . The current year is primarily comprised of$500 million from the proceeds from the issuance of the 6.5% Senior Secured Notes due 2025 (see Note 13 of notes to unaudited condensed consolidated financial statements). Additionally, during the six months endedJune 30, 2020 , our KSA subsidiary drew down$13 million on its SABB Credit Facility for local working capital purposes. Partially offsetting these proceeds was a use of cash of$20 million for the payment of dividends during the first and second quarter of 2020 and repayments of long-term debt of$15 million for our debt inSouth Africa . For the six months endedJune 30, 2019 , cash flows used in financing activities included repurchases of common stock of$252 million , repayments against our Term Loan Facility of$215 million , and a payment of$148 million for the acquisition of Exxaro's ownership interest in Tronox Sands partially offset by proceeds of$222 million from the Standard Bank Term Loan. 44 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table sets forth information relating to our contractual obligations as ofJune 30, 2020 : Contractual Obligation Payments Due by Year (3)(4) Less than 1-3 3-5 More than Total 1 year years years 5 years (Millions of U.S. dollars) Long-term debt, net and lease financing (including interest) (1)$ 4,389 243 409 2,619 1,118 Purchase obligations (2) 545 158 135 94 158 Operating leases 97 41 39 10 7 Asset retirement obligations(5) 410 20 68 37 285 Total$ 5,441 462 651 2,760 1,568 __________________ (1)We calculated the Term Loan interest at a LIBOR plus a margin of 2.75%. See Note 13 of notes to our unaudited condensed consolidated financial statements. (2)Includes obligations for purchase requirements of process chemicals, supplies, utilities and services. We have various purchase commitments for materials, supplies, and services entered into in the ordinary course of business. Included in the purchase commitments table above are contracts, which require minimum volume purchases that extend beyond one year or are renewable annually and have been renewed for 2019. Certain contracts allow for changes in minimum required purchase volumes in the event of a temporary or permanent shutdown of a facility. We believe that all of our purchase obligations will be utilized in our normal operations. (3)The table excludes contingent obligations, as well as any possible payments for uncertain tax positions given the inability to estimate the possible amounts and timing of any such payments. (4)The table excludes commitments pertaining to our pension and other postretirement obligations. (5)Asset retirement obligations are shown at the undiscounted and uninflated values. Non-U.S. GAAP Financial Measures EBITDA and Adjusted EBITDA, which are used by management to measure performance, are not presented in accordance withU.S. GAAP. We define EBITDA as net income (loss) excluding the impact of income taxes, interest expense, interest income and depreciation, depletion and amortization. We define Adjusted EBITDA as EBITDA excluding the impact of nonrecurring items such as restructuring charges, gain or loss on debt extinguishments, impairment charges, gains or losses on sale of assets, acquisition-related transaction costs, integration costs, purchase accounting adjustments and pension settlements and curtailment gains or losses. Adjusted EBITDA also excludes non-cash items such as share-based compensation costs and pension and postretirement costs. Additionally, we exclude from Adjusted EBITDA, realized and unrealized foreign currency remeasurement gains and losses. 45 -------------------------------------------------------------------------------- Table of Contents Management believes that EBITDA is useful to investors, as it is commonly used in the industry as a means of evaluating operating performance. We do not intend for these non-U.S. GAAP financial measures to be a substitute for anyU.S. GAAP financial information. Readers of these statements should use these non-U.S. GAAP financial measures only in conjunction with the comparableU.S. GAAP financial measures. Since other companies may calculate EBITDA and Adjusted EBITDA differently than we do, EBITDA and Adjusted EBITDA, as presented herein, may not be comparable to similarly titled measures reported by other companies. Management believes these non-U.S. GAAP financial measures: •reflect our ongoing business in a manner that allows for meaningful period-to-period comparison and analysis of trends in our business, as they exclude income and expense that are not reflective of ongoing operating results; •provide useful information in understanding and evaluating our operating results and comparing financial results across periods; and •provide a normalized view of our operating performance by excluding items that are either noncash or infrequently occurring. Adjusted EBITDA is one of the primary measures management uses for planning and budgeting processes, and to monitor and evaluate financial and operating results. In addition, Adjusted EBITDA is a factor in evaluating management's performance when determining incentive compensation. 46 -------------------------------------------------------------------------------- Table of Contents The following table reconciles net loss to EBITDA and Adjusted EBITDA for the periods presented: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 (Millions of U.S. dollars) Net (loss) income (U.S. GAAP)$ (4) $ (56) $ 36 $ (86) Loss from discontinued operations, net of tax (see Note 2) (U.S. GAAP) - (1) - (1) Net (loss) income from continuing operations (U.S. GAAP) (4) (55) 36 (85) Interest expense 47 54 92 103 Interest income (2) (3) (5) (12) Income tax provision (benefit) 10 (4) 16 (2) Depreciation, depletion and amortization expense 72 84 143 131 EBITDA (non-U.S. GAAP) 123 76 282 135 Inventory step-up (a) - 55 - 55 Contract loss (b) - 19 - 19 Share-based compensation (c) 2 7 11 15 Transaction costs (d) 4 21 4 29 Restructuring (e) - 10 2 10 Integration costs (f) 3 4 10 4 Loss on extinguishment of debt (g) - - - 2 Foreign currency remeasurement (h) 2 (3) (8) (4) Charge for capital gains tax payment to Exxaro (i) - 1 - 2 Other items (j) 8 5 14 8 Adjusted EBITDA (non-U.S. GAAP)$ 142 $ 195
(a) 2019 amount represents a pre-tax charge related to the recognition of a step-up in value of inventories as a result of purchase accounting.
(b) 2019 amount represents a pre-tax charge for the estimated losses we expect to incur under the supply agreement with Venator. See Note 2 of notes to unaudited condensed consolidated financial statements. (c) Represents non-cash share-based compensation. See Note 19 of notes to unaudited condensed consolidated financial statements. (d) 2020 and 2019 amounts represent transaction costs associated with the TTI Transaction and Cristal Transaction, respectively, which were recorded in "Selling, general and administrative expenses" in the unaudited Condensed Consolidated Statements of Operations. (e) Represents amounts for employee-related costs, including severance. See Note 3 of notes to unaudited condensed consolidated financial statements. (f) Represents integration costs associated with the Cristal acquisition after the acquisition which were recorded in "Selling, general and administrative expenses" in the unaudited Condensed Consolidated Statements of Operations. (g) 2019 amount represents the loss in connection with the modification of the Wells Fargo Revolver and termination of the ABSA Revolver. (h) Represents realized and unrealized gains and losses associated with foreign currency remeasurement related to third-party and intercompany receivables and liabilities denominated in a currency other than the functional currency of the entity holding them, which are included in "Other income (expense), net" in the unaudited Condensed Consolidated Statements of Operations. (i) Represents the payment owed to Exxaro for capital gains tax on the disposal of its ordinary shares inTronox Holdings plc included in and "Other income (expense), net" in the unaudited Condensed Consolidated Statements of Operations. (j) Includes noncash pension and postretirement costs, asset write-offs, accretion expense and other items included in "Selling general and administrative expenses", "Cost of goods sold" and "Other income (expense), net" in the unaudited Condensed Consolidated Statements of Operations. 47
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The following table reconciles net loss to EBITDA and Adjusted EBITDA on a pro forma basis for the periods presented:
Pro Forma Pro Forma Six Months Ended Three Months Ended June 30, June 30, 2020 2019 2020 2019 (Millions of U.S. dollars) Net (loss) income from continuing operations (U.S. GAAP) $ (4)$ 32 $ 36 $ 14 Interest expense 47 54 92 109 Interest income (2) (3) (5) (6) Income tax provision 10 6 16 13 Depreciation, depletion and amortization expense 72 87 143 174 EBITDA (non-U.S. GAAP) 123 176 282 304 Share-based compensation 2 7 11 15 Transaction costs 4 - 4 - Restructuring - 10 2 10 Integration costs 3 4 10 4 Loss on extinguishment of debt - - - 2 Foreign currency remeasurement 2 (3) (8) (4) Charge for capital gains tax payment to Exxaro - 1 - 2 Other items 8 5 14 8 Adjusted EBITDA (non-U.S. GAAP)$ 142 $
200
Recent Accounting Pronouncements See Note 1 of notes to unaudited condensed consolidated financial statements for recently issued accounting pronouncements. Environmental Matters We are subject to a broad array of international, federal, state, and local laws and regulations relating to safety, pollution, protection of the environment, and the generation, storage, handling, transportation, treatment, disposal, and remediation of hazardous substances and waste materials. In the ordinary course of business, we are subject to frequent environmental inspections and monitoring, and occasional investigations by governmental enforcement authorities. Under these laws, we are or may be required to obtain or maintain permits or licenses in connection with our operations. In addition, under these laws, we are or may be required to remove or mitigate the effects on the environment of the disposal or release of chemical, petroleum, low-level radioactive and other substances at our facilities. We may incur future costs for capital improvements and general compliance under environmental, health, and safety laws, including costs to acquire, maintain, and repair pollution control equipment. Environmental laws and regulations are becoming increasingly stringent, and compliance costs are significant and will continue to be significant in the foreseeable future. There can be no assurance that such laws and regulations or any environmental law or regulation enacted in the future is not likely to have a material effect on our business. We believe we are in compliance with applicable environmental rules and regulations in all material respects. 48 -------------------------------------------------------------------------------- Table of Contents Supplemental Pro Forma Information To assist in the discussion of the 2020 and 2019 results on a comparable basis, certain supplemental unaudited pro forma income statement and adjusted EBITDA information is provided on a consolidated basis. The pro forma information has been prepared on a basis consistent with Article 11 of Regulation S-X, assuming the merger and merger-related divestitures of Cristal's North American TiO2 business and the 8120 paper laminate grade had been consummated onJanuary 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 byTronox ; (2)conversion toU.S. GAAP from IFRS for Cristal; (3)the elimination of transactions betweenTronox 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 impacts to EPS for the shares issued in conjunction with the transaction. In preparing this pro forma information, the historical financial information has been adjusted to give effect to pro forma adjustments that are (i) directly attributable to the business combination and other transactions presented herein, such as the merger-related divestitures, (ii) factually supportable, and (iii) expected to have a continuing impact on the combined entity's consolidated results. The pro forma information is based on management's assumptions and is presented for illustrative purposes and does not purport to represent what the results of operations would actually have been if the business combination and merger-related divestitures had occurred as of the dates indicated or what the results would be for any future periods. Also, the pro forma information does not include the impact of any revenue, cost or other operating synergies that may result from the business combination or any related restructuring costs. Events that are not expected to have a continuing impact on the combined results (nonrecurring income/charges) are excluded from the unaudited pro forma information. The unaudited pro forma statement of operations and adjusted EBITDA have been presented for informational purposes only and is not necessarily indicative of whatTronox's results actually would have been had the merger been completed onJanuary 1, 2018 . In addition, the unaudited pro forma information does not purport to project the future operating results of the company. The following unaudited pro forma information includes: •Pro forma statement of operations for the three and six months endedJune 30, 2020 and 2019 •Pro forma Adjusted EBITDA for the three and six months endedJune 30, 2020 and 2019 Pro forma Information for the three and six months endedJune 30, 2020 : For the three and six months endedJune 30, 2020 , the pro forma statement of operations and pro forma Adjusted EBITDA information were the same as the as reported statement of operations and as reported Adjusted EBITDA information.
Pro forma Information for the three and six months ended
For the three and six months endedJune 30, 2019 , the pro forma statement of operations and pro forma Adjusted EBITDA information were updated in subsequent periods to reflect final purchase price allocation adjustments. 49
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Table of Contents TRONOX HOLDINGS PLC Pro Forma Statement of Operations Information For The Three months ended June 30, 2019 (Unaudited) (Millions ofU.S. dollars, except share and per share data) Pro Forma Adjustments Tronox Holdings plc Cristal (a) Other Total Pro Forma Net sales$ 791 $ 36 $ -$ 36 $ 827 Cost of goods sold 672 31 (55) (b) (24) 648 Contract loss 19 - (19) (c) (19) - Gross profit 100 5 74 79 179 Selling, general and administrative expenses 103 3 (21) (d) (18) 85 Restructuring 10 - - - 10 Income from operations (13) 2 95 97 84 Interest expense (54) - - - (54) Interest income 3 - - - 3 Loss on extinguishment of debt - - - - - Other income (expense), net 5 - - - 5 Income (loss) from continuing operations before income taxes (59) 2 95 97 38 Income tax (provision) benefit 4 - (10) (10) (6) Net income (loss) from continuing operations (55) 2 85 87 32 Net income attributable to noncontrolling interest 6 - - - 6 Net income (loss) from continuing operations attributable to Tronox Holdings plc$ (61) $ 2 $ 85 $ 87 $ 26 Net income (loss) from continuing operations per share, basic$ (0.41) $ 0.17 Net income (loss) from continuing operations per share, diluted$ (0.41) $ 0.17 Weighted average shares outstanding, basic (in thousands) 150,686 154,402 Weighted average shares outstanding, diluted (in thousands) 150,686 155,254
Pro Forma Adjustments
(a) Includes results from continuing operations for Cristal for period of
(b) The adjustment to cost of goods sold is for the reversal of$55 million related to the amortizing of the step-up in value of inventory. For pro forma purposes this item is pushed back to the first quarter of 2018. (c) The adjustment is for the elimination of$19 million in non-recurring contract losses incurred on the 8120 supply agreement with Venator. (d) The adjustment to SG&A is for the elimination of$21 million in non-recurring acqusition-related transaction costs incurred. 50
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Table of Contents TRONOX HOLDINGS PLC Pro Forma Statement of Operations Information For The Six Months Ended June 30, 2019 (Unaudited) (Millions ofU.S. dollars, except share and per share data) Pro Forma Adjustments Tronox Holdings plc Cristal (a) Other Total Pro Forma Net sales$ 1,181 $ 379 $ (13) (b)$ 366 $ 1,547 Cost of goods sold 979 294 (46) (c) 248 1,227 Contract loss 19 - (19) (d) (19) - Gross profit 183 85 52 137 320 Selling, general and administrative expenses 170 59 (49) (e) 10 180 Restructuring 10 - - - 10 Income from operations 3 26 101 127 130 Interest expense (103) (5) (1) (f) (6) (109) Interest income 12 - (6) (g) (6) 6 Loss on extinguishment of debt (2) - - - (2) Other income (expense), net 3 (1) - (1) 2 Income (loss) from continuing operations before income taxes (87) 20 94 114 27 Income tax (provision) benefit 2 (4) (11) (15) (13) Net income (loss) from continuing operations (85) 16 83 99 14 Net income attributable to noncontrolling interest 10 1 - 1 11 Net income (loss) from continuing operations attributable to Tronox Holdings plc$ (95) $ 15
Net income (loss) from continuing operations per share, basic$ (0.69) $ 0.02 Net income (loss) from continuing operations per share, diluted$ (0.69) $ 0.02 Weighted average shares outstanding, basic (in thousands) 137,569 158,124 Weighted average shares outstanding, diluted (in thousands) 137,569 159,470 Pro Forma Adjustments (a) Includes results from continuing operations for Cristal for period ofJanuary 1, 2019 throughApril 9, 2019 . The Cristal Transaction closed onApril 10, 2019 . (b) The adjustment to net sales includes$11 million to eliminate sales betweenTronox and Cristal and$2 million to eliminate revenue associated with the divestiture of the 8120 paper laminate product grade. (c) The adjustment to cost of goods sold includes (i) a credit of$11 million for the elimination of sales betweenTronox and Cristal, (ii) a decrease of$1 million for the decrease in DD&A expense as a result of fair value adjustments to property, plant and equipment and mineral leases, (iii) a credit of$55 million related to the amortizing of the step-up in value of inventory. For pro forma purposes, this item was pushed back to the first quarter of 2018. Cost of goods sold also includes a reclassification of expenses of$21 million from SG&A to cost of goods sold for distribution costs as part of our accounting policy alignment. (d) The adjustment is for the elimination of$19 million in non-recurring contract losses incurred on the 8120 supply agreement with Venator. 51 -------------------------------------------------------------------------------- Table of Contents (e) The adjustment to SG&A includes (i) the elimination of$30 million in non-recurring acquisition-related transaction costs incurred, (2) the reclassification of$21 million in expenses from SG&A to cost of goods sold, and (3) a$2 million increase in amortization expense as a result of fair value adjustments to intangible assets. (f) The adjustment to interest expense of$1 million reflects interest incurred on incremental borrowings under the Wells Fargo Revolver used to close the Cristal acquisition. (g) The adjustment to interest income of$6 million reflects the elimination of interest earned on cash balances that were used to acquire Cristal. TRONOX HOLDINGS PLC Pro Forma Adjusted EBITDA Information For The Three months ended June 30, 2019 (Millions of U.S. dollars) Pro Forma Adjustments Tronox Holdings plc Cristal (1) Other Total Pro Forma Net income (loss) from continuing operations (U.S. GAAP)$ (55) $ 2 $ 85 $ 87 $ 32 Interest expense 54 - - - 54 Interest income (3) - - - (3) Income tax provision (benefit) (4) - 10 10 6 Depreciation, depletion and amortization expense 84 3 - 3 87 EBITDA (non-U.S. GAAP) 76 5 95 100 176 Inventory step-up 55 - (55) (55) - Contract loss 19 - (19) (19) - Share-based compensation 7 - - - 7 Transaction costs 21 - (21) (21) - Restructuring 10 - - - 10 Integration costs 4 - - - 4 Loss on extinguishment of debt - - - - - Foreign currency remeasurement (3) - - - (3) Charge for potential capital gains tax payment to Exxaro 1 - - - 1 Other items 5 - - - 5 Adjusted EBITDA (non-U.S. GAAP)$ 195 $ 5 $ -$ 5 $ 200
(1) Includes results from continuing operations for Cristal for the period of
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Table of Contents TRONOX HOLDINGS PLC Pro Forma Adjusted EBITDA Information For The Six Months Ended June 30, 2019 (Millions of U.S. dollars) Pro Forma Adjustments Tronox Holdings plc Cristal (1) Other Total Pro Forma Net income (loss) from continuing operations (U.S. GAAP)$ (85) $ 16 $ 83 $ 99 $ 14 Interest expense 103 5 1 6 109 Interest income (12) - 6 6 (6) Income tax provision (benefit) (2) 4 11 15 13 Depreciation, depletion and amortization expense 131 42 1 43 174 EBITDA (non-U.S. GAAP) 135 67 102 169 304 Inventory step-up 55 - (55) (55) - Contract loss 19 - (19) (19) - Share-based compensation 15 - - - 15 Transaction costs 29 1 (30) (29) - Restructuring 10 - - - 10 Integration costs 4 - - - 4 Loss on extinguishment of debt 2 - - - 2 Foreign currency remeasurement (4) - - - (4) Charge for potential capital gains tax payment to Exxaro 2 - - - 2 Other items 8 - - - 8 Adjusted EBITDA (non-U.S. GAAP)$ 275 $ 68 $ (2) $ 66 $ 341
(1) Includes results from continuing operations for Cristal for the period of
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