TRONOX HOLDINGS PLC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
The following discussion should be read in conjunction with
Tronox Holdings plc'sconsolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other sections in this Annual Report on Form 10-K 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. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks and uncertainties outlined in Item 1A. "Risk Factors." 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 in the 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-K 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 any U.S.GAAP financial information. Readers of these statements should use these non- U.S.GAAP financial measures only in conjunction with the comparable U.S.GAAP financial measures. A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA is also provided herein.
Tronox Holdings plc(referred to herein as "Tronox", "we", "us", or "our") operates titanium-bearing mineral sand mines and beneficiation operations in Australia, South Africaand Brazilto 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 in the United States, Australia, Brazil, UK, France, the Netherlands, Chinaand the Kingdom 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 and pig iron, which we also supply to customers around the world.
We are a public limited company listed on the
The following analysis includes trends and factors that could affect future results of operations:
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 fourth quarter of 2021 results were driven by robust demand across our end markets, with the supply to demand balance remaining tight due to below seasonally normal levels of TiO2, production challenges caused by supplier force majeures and delivery times extended by shipping delays. Fourth quarter revenue increased 13% compared to the prior year, driven by higher TiO2, Zircon and pig iron prices. On a year over year basis, TiO2 average selling prices increased 17% on a local currency basis and 15% on a US dollar basis and Zircon average selling prices increased 26%. Both TiO2 and Zircon sales volumes remained relatively flat in line with prior year levels. Revenue from feedstock and other products decreased 11% on a year over year basis due to the internal consumption of all feedstocks in the quarter compared to the prior year, partially offset by increased pig iron revenue from higher average selling prices. Sequentially, revenue increased 2% in the fourth quarter of 2021 compared to the third quarter of 2021, as price increases of TiO2, Zircon and pig iron were partially offset by volume declines of TiO2 and Zircon. TiO2 average selling prices grew 3% sequentially on a US dollar basis and 4% on a local currency basis. TiO2 volumes were 38 -------------------------------------------------------------------------------- TABLE OF CONTENTS constrained by global logistics challenges and supply chain and certain raw material availability that resulted in a 4% sequential decline. Revenue from Zircon sales increased 3% sequentially, as a 9% increase in average selling prices due to improved pricing, was partially offset by 6% lower sales volumes. Feedstock and other product revenues increased 26% sequentially mainly due to both higher pig iron volumes and selling prices. Gross profit decreased sequentially from the third quarter to the fourth quarter of 2021 due to lower sales volumes of TiO2 and Zircon, higher production costs due to transitory inflation and increased freight rates, partially offset by favorable impacts of average selling prices. Gross profit increased year over year due to the increase in average selling prices of TiO2, Zircon and pig iron and the favorable impact of sales volumes and product mix partially offset by unfavorable impacts of foreign currency as well as higher production costs and increased freight rates partially offset by favorable overhead absorption and cost savings.
During the year ended
December 31, 2021, we made several discretionary prepayments on our debt facilities primarily on the New Term Loan Facility and Standard Bank Term Loan Facility. During the fourth quarter of 2021, we made an additional $202 millionof voluntary prepayments on our New Term Loan Facility. As of December 31, 2021, our total debt was $2.6 billionand net debt to trailing-twelve month Adjusted EBITDA was 2.5x. The Company also has no financial covenants on its term loan or bonds and only one springing financial covenant on its Cash Flow revolver facility, which we do not expect to be triggered based on our current scenario planning.
Consolidated operating results from continuing operations
Reported Amounts Year Ended December 31, 2021 2020 Variance (Millions of U.S. Dollars) Net sales
$ 3,572 $ 2,758 $ 814Cost of goods sold 2,677 2,137 540 Gross profit $ 895 $ 621 $ 274Gross Margin 25.1 % 22.5 % 2.6 pts Selling, general and administrative expenses 318 347 (29) Restructuring - 3 (3) Income from operations 577 271 306 Interest expense (157) (189) 32 Interest income 7 8 (1) Loss on extinguishment of debt (65) (2) (63) Other income, net 12 26 (14) Income from continuing operations before income taxes 374 114 260 Income tax (provision) benefit (71) 881 (952) Net income from continuing operations $ 303
Effective tax rate 19 % (773) % 792 pts EBITDA(1)
$ 821 $ 599 $ 222Adjusted EBITDA(1) $ 947 $ 668 $ 279Adjusted EBITDA as % of Net Sales 26.5 % 24.2 % 2.3 pts _____________________ (1) EBITDA and Adjusted EBITDA are Non- U.S.GAAP financials 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 continuing operations. 39
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Net sales of
$3,572 millionfor the year ended December 31, 2021increased by 30% compared to $2,758 millionfor the same period in 2020. Revenue increased primarily due to both higher TiO2 and Zircon sales volumes and average selling prices. Net sales by type of product for the years ended December 31, 2021and 2020 were as follows:
The table below shows reported revenues by product:
Year Ended December 31, (Millions of dollars, except percentages) 2021 2020 Variance Percentage TiO2
$ 2,793 $ 2,176 $ 61728 % Zircon 478 283 195 69 % Feedstock and other products 301 299 2 1 % Total net sales $ 3,572 $ 2,758 $ 81430 % For the year ended December 31, 2021, TiO2 revenue increased $617 million, or 28%, compared to the prior year due to a $369 millionincrease in sales volumes and an increase of $217 millionin average selling prices. Foreign currency positively impacted TiO2 revenue by $31 milliondue primarily to the strengthening of the Euro. Zircon revenues increased $195 millionprimarily due to a 55% increase in sales volumes and a 9% increase in average selling prices. Feedstock and other products revenue increased $2 millionprimarily due to an increase in average selling prices and sales volumes of pig iron partially offset by a decrease in sales volumes of CP slag and other feedstocks.
Gross profit of
•the favorable impact of approximately 8 points due to the increase in the selling prices of TiO2, Zircon and cast iron;
•the favorable impact of around 1 point on the volume of sales and the product mix;
•the net unfavorable impact of approximately 4 points due to changes in foreign exchange rates, primarily due to the South African Rand and Australian dollar; and •the net unfavorable impact of approximately 2 points due to higher production costs and increased freight rates offset by favorable overhead absorption and cost savings. Selling, general and administrative ("SG&A") expenses decreased
$29 millionwhen comparing the year ended December 31, 2021to the prior year. The SG&A expenses decrease was primarily driven by $29 millionof lower professional fees and lower integration costs of $9 million, partially offset by $16 millionof increased employee costs primarily driven by higher incentive compensation. The remaining net decrease was driven by individually immaterial amounts. Income from operations for the year ended December 31, 2021of $577 million, increased by $306 millionor 113% compared to the same period in 2020 which is primarily attributable to the higher gross margin and lower selling, general and administrative expenses. Adjusted EBITDA as a percentage of net sales was 26.5% for the year ended December 31, 2021, an increase of 2.3 points from 24.2% in the prior year. On a reported basis, the higher gross profit and lower SG&A expenses as discussed above were the primary drivers of the year-over-year increase in Adjusted EBITDA percentage. Interest expense for the year ended December 31, 2021decreased $32 millioncompared to the same period in 2020. The decrease is primarily due to the following: 1) lower average debt outstanding balances and lower average interest rates on the New Term Loan Facility as compared to the Prior Term Loan Facility, 2) lower average debt outstanding balance on the New Standard Bank Term Loan Facility as compared to the Prior Standard Bank Term Loan Facility, and 3) lower average interest rates on the Senior Notes due 2029 as compared to the Senior Notes due 2025 and the Senior Notes due 2026. These decreases in interest expense are partially offset by the four months of additional interest expense in the current year associated with the 6.5% Senior Secured Notes due 2025, which were issued on May 1, 2020. Interest income for the year ended December 31, 2021decreased by $1 millioncompared to the prior year primarily due to lower cash balances from the use of cash to paydown the New Term Loan Facility, the Standard Bank Term Loan Facility and the Tikon Loan. Loss on extinguishment of debt of $65 millionfor the year ended December 31, 2021is primarily comprised of the following: 1) call premiums paid of $21 millionand $19 millionin relation to the refinancing of our $615 millionSenior Notes due 2026 and our $450 millionSenior Notes due 2025, respectively, 2) the write-off of certain existing debt issuance costs and original issue discount as well as certain new lender and other third party fees associated with the refinancing of our new revolver 40
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and term loan and issuance of our new senior notes due 2029 and 3) approximately
$9 millionwrite-off of existing debt issuance costs and original issue discount as a result of the $398 millionvoluntary prepayments made on the New Term Loan Facility. Other income, net for the year ended December 31, 2021primarily consisted of $16 millionnet realized and unrealized foreign currency gains, $8 millionassociated with the monthly technical service fee relating to the Jazan slagger we receive from AMIC, and $5 millionof pension income primarily due to the expected return on plan assets offset by pension related interest costs and amortization of actuarial gain/losses partially offset by $18 millionrelated to the breakage fee associated with the termination of the TTI acquisition. The foreign currency gains were primarily related to the South African Rand and the Australian dollar due to the remeasurement of our U.S.dollar denominated working capital and other long-term obligations partially offset by the impact of our foreign currency derivatives. We maintain full valuation allowances related to the total net deferred tax assets in Australia, Switzerlandand the United Kingdom. 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. The effective tax rate was 19% and (773)% for the years ended December 31, 2021and 2020, respectively. The large negative effective tax rate for the year ended December 31, 2020is caused by the release of valuation allowances for deferred tax assets in the U.S.and Brazil, partially offset by the recording of valuation allowances in Saudi Arabiaand the U.K.The net impact was $905 millionbenefit to the income tax provision. Refer to Note 8 of notes to consolidated financial statements for further information. Additionally, the effective tax rates for the years ended December 31, 2021and 2020 are influenced by a variety of factors, primarily income and losses in jurisdictions with valuation allowances, disallowable expenditures, prior year accruals, and our jurisdictional mix of income at tax rates different than the U.K.statutory rate.
A discussion of our results of operations for the year ended
December 31, 2020versus December 31, 2019is included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operation", included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Other comprehensive income (loss)
There was an other comprehensive loss of
$104 millionfor the year ended December 31, 2021compared to other comprehensive loss of $20 millionfor the year ended December 31, 2020. This increase in comprehensive loss was primarily driven by unfavorable movements of foreign currency translation adjustments of $113 millionfor the year ended December 31, 2021as compared to unfavorable foreign currency translation adjustments of $4 millionin the prior year. In addition, we recognized net losses on derivative instruments of $11 millionin the year ended December 31, 2021as compared to none in the prior year. These losses were partially offset by $20 millionof pension and postretirement gains for the year ended December 31, 2021as compared to $16 millionof pension and postretirement losses for the prior year. A discussion of our comprehensive (loss) income for the year ended December 31, 2020versus December 31, 2019is included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Comprehensive (Loss) Income", included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Cash and capital resources
In 2021, our liquidity decreased by
The table below shows our liquidity, including amounts available under our credit facilities, as of the following dates:
December 31, December 31, 2021 2020 Cash and cash equivalents $ 228 $ 619 Available under the Wells Fargo Revolver -
Available under the new Cash Flow Revolver 329
Available under the Standard Credit Facility 63
Available under the Emirates Revolver 38
Available under the SABB Facility 19 19 Total $ 677
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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 will provide sufficient cash for our operating expenses, capital expenditures, interest payments and debt repayments, however, if necessary, we have the ability to borrow under our debt and revolving credit agreements (see Note 15 of notes to consolidated financial statements). 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 continued impact of the COVID-19 pandemic. Consistent with our actions in 2020 in response to the COVID-19 pandemic, if negative events occur in the future, we may need to reduce our capital spend, cut back on operating costs, and other items within our control to maintain appropriate liquidity. Working capital (calculated as current assets less current liabilities) was
$1.2 billionat December 31, 2021, compared to $1.7 billionat December 31, 2020. The decrease year over year is primarily due to the decrease in cash as we made several voluntary prepayments on our debt obligations as is discussed below and in Note 15 of notes to consolidated financial statements and reductions in inventories as the supply / demand balance remains tight due to continued strong demand. As of and for the year ended December 31, 2021, the non-guarantor subsidiaries of our 6.5% Senior Secured Notes and our Senior Notes due 2029 represented approximately 20% of our total consolidated liabilities, approximately 25% of our total consolidated assets, approximately 44% of our total consolidated net sales and approximately 49% of our Consolidated EBITDA (as such term is defined in 6.5% Senior Secured Notes Indenture and the 2029 Indenture). In addition, as of December 31, 2021, our non-guarantor subsidiaries had $777 millionof total consolidated liabilities (including trade payables but excluding intercompany liabilities), all of which would have been structurally senior to the 6.5% Senior Secured Notes and the 2029 Notes. See Note 15 of notes to consolidated financial statements for additional information.
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 of
December 31, 2021, our credit rating with Moody's was B1 stable outlook unchanged from December 31, 2020. Starting in the first quarter of 2021 and through December 31, 2021, our credit rating with Standard & Poor'schanged positively to B stable and further changed positively to Ba3 during the first quarter of 2022. See Note 15 of notes to consolidated financial statements.
Cash and cash equivalents
We consider all investments with original maturities of three months or less to be cash equivalents. As of
December 31, 2021, our cash and cash equivalents were invested in money market funds and we also receive earnings credits for some balances left in our bank operating accounts. 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. On November 9, 2021, we updated our capital allocation policy and announced that our Board of Directors had authorized the repurchase of up to $300 millionof the Company's ordinary shares through February 2024. Under the updated policy, the Board intends to increase the annual dividend to $0.50per share beginning with the first quarterly dividend in 2022. We also expect to continue to invest in our businesses through cost reduction, as well as growth and vertical integration-related capital expenditures including projects such as newTRON and various mine development projects as well as continued reductions in our debt.
December 31, 2021, we held $228 millionin cash and cash equivalents in these respective jurisdictions: $5 millionin the United States, $54 millionin South Africa, $59 millionin Australia, $30 millionin Brazil, $40 millionin Saudi Arabia, $19 millionin China, and $21 millionin Europe. Our credit facilities limit transfers of funds from subsidiaries in the United Statesto certain foreign subsidiaries. In addition, at December 31, 2021, we held $4 millionof restricted cash of which $3 millionis in Australiarelated to performance bonds and $1 millionis in Saudi Arabiarelated to vendor supply agreement guarantees. 42
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Tronox Holdings plchas foreign subsidiaries with undistributed earnings at December 31, 2021. 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 In March 2021, the Company closed the refinancing of its existing first lien term loan credit agreement with a new seven-year first lien term loan credit facility (the "New Term Loan Facility") and existing revolving syndicated facility agreement with a new five-year cash flow revolving facility (the "New Revolving Facility"). Pursuant to the New Term Loan Facility, the Company's wholly owned subsidiary, Tronox Finance LLCborrowed $1,300 millionof first lien term loans. Pursuant to the New Revolving Facility, the lenders thereunder have agreed to provide revolving commitments of $350 million. The Company also paid down approximately $313 million, with cash on hand, of debt in conjunction with the refinancing transaction. Refer to Note 15 of notes to consolidated financial statements for further details. On March 15, 2021, Tronox Incorporated, a wholly-owned indirect subsidiary of the Company, issued its 4.625% senior notes due 2029 for an aggregate principal amount of $1,075 million. The net proceeds was used to fund the redemption in full on March 31, 2021of the Company's outstanding $615 millionaggregate principal amount of 6.50% senior notes due 2026 and the redemption in full on April 1, 2021of Company's outstanding $450 millionaggregate principal amount of 5.75% senior notes due 2025. Refer to Note 15 of notes to consolidated financial statements for further details. On October 1, 2021, Tronox Minerals Sands Proprietary Limited, a wholly-owned indirect subsidiary of the Company, entered into an amendment and restatement of a new credit facility with Standard Bank. The new credit facility provides the Company with (a) a new five-year term loan facility in an aggregate principal amount of R1.5 billion (approximately $98 million) (the "New Standard Bank Term Loan Facility") and (b) a new three-year revolving credit facility (the "New Standard Bank Revolving Credit Facility") providing initial revolving commitments of R1.0 billion (approximately $63 millionat December 31, 2021exchange rate). As a result of the amended facility, the Company repaid the remaining outstanding principal balance of R390 million (approximately $26 million) of the Standard Bank Term Loan Facility on September 30, 2021and we drewdown the R1.5 billion (approximately $98 million) on the new term loan facility in November 2021. During the year ended December 31, 2021, the Company made several voluntary prepayments totaling $398 millionon the New Term Loan Facility. As a result of these voluntary prepayments, the Company recorded $9 millionin "Loss on extinguishment of debt" within the Consolidated Statement of Operations for the year ended December 31, 2021. During the year ended December 31, 2021, the Company made several voluntary prepayments totaling R1,040 million (approximately $69 million) on the Prior Standard Bank Term Loan Facility. Additionally, on September 30, 2021, in conjunction with the Company's refinancing of the Prior Standard Bank Term Loan Facility, the Company repaid the remaining outstanding principal balance of R390 million (approximately $26 million). During the year ended December 31, 2021, the Company repaid the remaining outstanding principal balance of CNY 111 million(approximately $17 million) on the Tikon loan. No prepayment penalties were required as a result of these principal prepayments.
On a consolidated basis, no additional debt has been incurred as a result of the above debt refinancing transactions.
December 31, 2021and 2020, our net debt (the excess of our debt over cash and cash equivalents) was $2.3 billionand $2.7 billion, respectively. See Note 15 of notes to consolidated financial statements.
The following table presents the cash flows for the periods indicated:
Year Ended December 31, 2021 2020 (Millions of U.S. dollars) Net cash provided by operating activities $ 740
$ 355Net cash used in investing activities (269) (229) Net cash (used in) provided by financing activities (877) 214 Effect of exchange rate changes on cash (10) (3) Net (decrease) increase in cash and cash equivalents $
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Cash Flows provided by Operating Activities - Cash provided by our operating activities is driven by net income adjusted for non-cash items and changes in working capital items. The following table summarizes our net cash provided by operating activities for 2021 and 2020: Year Ended
December 31, 20212020 (Millions of U.S.dollars) Net income $
Net adjustments to reconcile net income (loss) to net cash provided by operating activities
455 (488) Income related cash generation 758 507 Net change in assets and liabilities (18) (152) Net cash provided by our operating activities $
Net cash provided by operating activities was
$740 millionin 2021 as compared to $355 millionin 2020. The increase of $385 millionperiod over period is primarily due to a $251 millionimprovement in net income net of non-cash adjustments and a decrease of $134 millionuse of cash for net assets and liabilities. The lower use of cash for working capital was primarily driven by decreases in inventories and prepaid and other current assets of $74 millionand $82 million, respectively, and an increase in account payable and accrued liabilities of $36 millionpartially offset by an increase in accounts receivable of $59 millionand an increased use of cash in long-term other assets and liabilities of $10 million. Cash Flows used in Investing Activities - Net cash used in investing activities for the year ended December 31, 2021was $269 millionas compared to $229 millionfor the year ended December 31, 2020. The $40 millionincrease in use of cash year over year is primarily driven by higher capital expenditures of $272 million. The prior year also included $36 millionfor a loan to AMIC related to a titanium slag smelter facility (see Note 24 of notes to consolidated financial statements) of which there was no comparable amount in the current year. Cash Flows (used in) provided by Financing Activities - Net cash used in financing activities during the year ended December 31, 2021was $877 millionas compared to cash provided by financing activities of $214 millionfor the year ended December 31, 2020. The current year is primarily comprised of repayments of long-term debt of $3 billionpartially offset by proceeds from long-term debt of $2 billiondue to the various debt refinancing transactions that occurred during the current year (refer to Note 15 of notes to consolidated financial statements) as well as the Company's continued focus on making discretionary debt repayments in order to achieve its previously stated gross debt target. As a result of the debt refinancing transactions, there was a $77 millionuse of cash for debt issuance costs and call premiums paid in 2021 as compared to $10 millionin 2020. Additionally, dividends paid were $65 millionduring the year ended December 31, 2021as compared to $40 millionin the same period of 2020.
A discussion of our cash flows for the year ended
December 31, 2020versus 2019 is included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cash Flows", included in our Annual Report on Form 10-K for the year ended December 31, 2020.
The following table presents information relating to our contractual obligations as of
Payments of contractual obligations due by period(3)
Less than 1-3 3-5 More than Total 1 year years years 5 years (Millions of U.S. dollars) Long-term debt and lease financing (including interest)(1)
$ 3,370 $ 151 $ 303 $ 757 $ 2,159Purchase obligations(2) 655 231 209 157 58 Operating leases 226 34 42 29 121 Pension and other post-retirement benefit obligations(4) 312 37 65 64 146 Asset retirement obligations(5) 446 17 26 25 378 Total $ 5,009 $ 470 $ 645 $ 1,032 $ 2,86244
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(1)We have calculated interest on the new term loan facility at LIBOR plus a margin of 2.25%. See Note 15 of the Notes to our Consolidated Financial Statements.
(2)Includes obligations to 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 2022. 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)Pension and other post-retirement benefit ("OPEB") obligations of
$312 millioninclude estimates of pension plan contributions and expected future benefit payments for unfunded pension and OPEB plans. Pension plan contributions are forecasted for 2022 only. Expected future unfunded pension and OPEB benefit payments are forecasted only through 2031. Contribution and unfunded benefit payment estimates are based upon current valuation assumptions. Estimates of pension contributions after 2022 and unfunded benefit payments after 2031 are not included in the table because the timing of their resolution cannot be estimated. Refer to Note 23 in notes to consolidated financial statements for further discussion on our pension and OPEB plans.
(5) Asset retirement obligations are presented at undiscounted and uninflated values.
EBITDA and Adjusted EBITDA, which are used by management to measure performance, are not presented in accordance with
U.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 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. Management believes that EBITDA and Adjusted 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 any U.S.GAAP financial information. Readers of these statements should use these non- U.S.GAAP financial measures only in conjunction with the comparable U.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 operations in a manner that permits meaningful period-to-period comparison and analysis of trends in our operations, as they exclude revenues and expenses that do not reflect current operating results. Classes ;
•provide useful information to understand and evaluate our results of operations and compare financial results from period to period; and
•provide a normalized view of our operating performance by excluding non-monetary or infrequent items.
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. 45
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The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for the periods presented: Year Ended December 31, 2021 2020 2019 Net income (loss), (U.S. GAAP)
Income from discontinued operations, net of tax (see Note 6), (
- - 5
Net income (loss) from continuing operations, (
995 (102) Interest expense 157 189 201 Interest income (7) (8) (18) Income tax provision 71 (881) 14 Depreciation, depletion and amortization expense 297 304 280 EBITDA (non-U.S. GAAP) 821 599 375 Inventory step-up(a) - - 98 Contract loss(b) - - 19 Share-based compensation(c) 31 30 32 Transaction costs(d) 18 14 32 Restructuring(e) - 3 22 Integration costs(f) - 10 16 Loss on extinguishment of debt(g) 65 2 3 Foreign currency remeasurement(h) (16) (4) (6) Pension settlement and curtailment gains(i) - (2) (1) Costs associated with Exxaro deal(j) 6 - 4 Costs associated with former CEO retirement(k) 1 - - Gain on asset sale(l) (2) - - Office closure costs(m) 3 - - Insurance proceeds(n) - (11) - Other items(o) 20 27 21 Adjusted EBITDA (non-U.S. GAAP)
$ 947 $ 668 $ 615________________
(a) The amount for 2019 represents a pre-tax charge related to the recognition of an increase in the value of inventories following the recognition of purchases.
(b) The 2019 amount represents a pre-tax charge for estimated losses we expect to incur under the supply agreement with Venator. See Note 3 of the notes to the consolidated financial statements.
(c) Represents non-cash stock-based compensation. See note 22 of the notes to the consolidated financial statements.
(d)2021 amount represents the breakage fee and other costs associated with the termination of the TTI transaction which were primarily recorded in "Other income (expense)" in the Consolidated Statements of Operations. 2020 amount represents transaction costs associated with the TTI acquisition which were recorded in "Selling, general and administrative expenses" in the Consolidated Statement of Operations. 2019 amounts represent transaction costs associated with the Cristal Transaction which were recorded in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. (e)2020 and 2019 amounts represent amounts for employee-related costs, including severance, which was recorded in "Restructuring" in the Consolidated Statements of Operations. See Note 4 of notes to consolidated financial statements. (f)2020 and 2019 amounts represent integration costs associated with the Cristal transaction after the acquisition which were recorded in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. (g)2021 amount represents the loss in connection with the following: 1) termination of its Wells Fargo Revolver, 2) amendment and restatement of its term loan facility including the new revolving credit facility, 3) termination of its Senior Notes due 2026 and its Senior Notes due 2025, 4) issuance of its Senior Notes due 2029 and 5) several voluntary prepayments made on the New Term Loan Facility. See Note 15 of notes to consolidated financial statements. 2020 amount represents the loss in connection with a voluntary prepayment on the Prior Term Loan Facility. 2019 amount represents the loss in connection with the modification of the Wells Fargo Revolver and termination of the ABSA Revolver and a voluntary prepayment made on the Prior Term Loan Facility. (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 Consolidated Statements of Operations.
(i) The 2020 amount represents a curtailment gain due to the plan benefit freeze partially offset by pension settlements. The 2019 amount represents the settlement gain related to the
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(j)2021 amount represents costs associated with the Exxaro flip-in transaction which are included in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. 2019 amount represents the payment to Exxaro for capital gains tax on the disposal of its ordinary shares in
Tronox Holdings plcincluded in "Other income (expense), net" in the Consolidated Statements of Operations. (k)2021 amount represents costs, excluding share-based compensation, associated with the retirement agreement of the former CEO which were recorded in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. The $2 millionof share based compensation expense associated with the former CEO is included in the total share-based compensation amounts of $31 millionin the table above.
(l) The amount for 2021 represents the gain on
(m)Represents impairments of our right-of-use assets associated with the early termination of our leases and other costs related to the closure of our
Baltimoreand New York Cityoffices which are included in "Selling, general and administrative expenses" in the Consolidated Statements of Operations.
(n) The 2020 amount represents the reimbursement of claims related to the failure of the Ginkgo concentrator that we inherited as part of the Cristal transaction.
(o) Includes non-cash retirement and post-retirement expenses, accretion expense, severance and other items included in “Selling general and administrative expenses” and “Cost of goods sold” in the statements consolidated results.
Significant Accounting Policies and Estimates
The preparation of financial statements in conformity with
U.S.GAAP requires management to make certain estimates and assumptions regarding matters that are inherently uncertain and that ultimately affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The estimates and assumptions are based on management's experience and understanding of current facts and circumstances. These estimates may differ from actual results. Certain of our accounting policies are considered critical, as they are both important to reflect our financial position and results of operations and require significant or complex judgment on the part of management. The following is a summary of certain accounting policies considered critical by management.
Asset retirement obligations
To the extent a legal obligation exists, an asset retirement obligation ("ARO") is recorded at its estimated fair value and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. Because AROs represent financial obligations to be settled in the future, uncertainties exist in estimating the timing and amount of the associated costs to be incurred. Fair value is measured using expected future cash outflows, adjusted for expected inflation and discounted at our credit-adjusted risk-free interest rate. No market-risk premium has been included in our calculation of ARO balances since we can make no reliable estimate. Management believes these estimates and assumptions are reasonable; however, they are inherently uncertain. Refer to Notes 19 to the consolidated financial statements for a summary of the estimates and assumptions utilized. At
December 31, 2021, AROs were $149 millionof which the long-term portion of $139 millionis recorded in "Asset retirement obligations" and the short-term portion of $10 millionis recorded in "Accrued liabilities" in the Consolidated Balance Sheet.
Liabilities for environmental matters are recognized 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 or reasonably possible environmental loss in excess of our recorded liabilities. At
December 31, 2021, environmental liabilities (both short term and long term) were $72 million, primarily related to the Cristal transaction. For further discussion, see Environmental Matters included elsewhere in this section entitled, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 2 and 20 to the consolidated financial statements.
We have operations in several countries around the world and are subject to income and similar taxes in these countries. The estimation of the amounts of income tax involves the interpretation of complex tax laws and regulations and how foreign taxes affect domestic taxes, as well as the analysis of the realizability of deferred tax assets, tax audit findings and uncertain tax positions. Although we believe our tax accruals are adequate, differences may occur in the future, depending on the resolution of pending and new tax matters. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided against a deferred tax asset when it is more 47 -------------------------------------------------------------------------------- TABLE OF CONTENTS likely than not that all or some portion of the deferred tax asset will not be realized. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes in our estimates in the valuation allowance with a corresponding adjustment to earnings or other comprehensive income (loss) as appropriate. ASC 740, Income Taxes, requires that all available positive and negative evidence be weighted to determine whether a valuation allowance should be recorded. The amount of income taxes we pay are subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We assess our income tax positions, and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the amount that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties are accrued as part of tax expense, where applicable. If we do not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized.
See Notes 2 and 8 to the consolidated financial statements for additional information.
From time to time, we may be subject to 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, 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 or 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. Such contingencies are significant and the accounting requires considerable management judgments in analyzing each matter to assess the likely outcome and the need for establishing appropriate liabilities and providing adequate disclosures.
Refer to notes 2 and 20 of the consolidated financial statements for more information.
Long-Lived Assets Key estimates related to long-lived assets (property, plant and equipment, mineral leaseholds, and intangible assets) include useful lives, recoverability of carrying values, and the existence of any asset retirement obligations. As a result of future decisions, such estimates could be significantly modified. The estimated useful lives of property, plant and equipment range from three to forty years, and depreciation is recognized on a straight-line basis. Useful lives are estimated based upon our historical experience, engineering estimates, and industry information. These estimates include an assumption regarding periodic maintenance. Mineral leaseholds are depreciated over their useful lives as determined under the units of production method. Intangible assets with finite useful lives are amortized on the straight-line basis over their estimated useful lives. The amortization methods and remaining useful lives are reviewed quarterly. We evaluate the recoverability of the carrying value of long-lived assets that are held and used whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under such circumstances, we assess whether the projected undiscounted cash flows of our long-lived assets are sufficient to recover the carrying amount of the asset group being assessed. If the undiscounted projected cash flows are not sufficient, we calculate the impairment amount by discounting the projected cash flows using our weighted-average cost of capital. For assets that satisfy the criteria to be classified as held for sale, an impairment loss, if any, is recognized to the extent the carrying amount exceeds fair value, less cost to sell. The amount of the impairment of long-lived assets is written off against earnings in the period in which the impairment is determined.
Retirement and post-retirement benefits
We provide pension benefits for qualifying employees in
the United Statesand internationally, with the largest in the United Kingdom. Because pension benefits represent financial obligations that will ultimately be settled in the future with employees who meet eligibility requirements, uncertainties exist in estimating the timing and amount of future payments, and significant estimates are required to calculate pension expense and liabilities relating to these plans. The company utilizes the services of independent actuaries, whose models are used to help facilitate these calculations. Several key assumptions are used in actuarial models to calculate pension expense and liability amounts recorded in the financial statements; the most significant variables in the models are the expected rate of return on plan assets, the discount rate, and the expected rate of compensation increase. Management believes the assumptions used in the actuarial calculations are reasonable, reflect the company's experience and expectations for the future and are within accepted practices in each of the respective geographic locations in which it operates. However, actual results in any given year often differ from actuarial assumptions due to economic events and different rates of 48 -------------------------------------------------------------------------------- TABLE OF CONTENTS retirement, mortality, and turnover. Refer to Notes 2 and 23 to the consolidated financial statements for a summary of the plan assumptions and additional information on our pension arrangements. Expected Return on Plan Assets - In forming the assumption of the long-term rate of return on plan assets, we consider the expected earnings on funds already invested, earnings on contributions expected to be made in the current year, and earnings on reinvested returns. The long-term rate of return estimation methodology for the plans is based on a capital asset pricing model using historical data and a forecasted earnings model. An expected return on plan assets analysis is performed which incorporates the current portfolio allocation, historical asset-class returns, and an assessment of expected future performance using asset-class risk factors. A 100 basis point change in these expected long-term rates of return, with all other variables held constant, would change our pension expense by approximately $4 million. Discount Rate - The discount rates selected for estimation of the actuarial present value of the benefit obligations are determined based on the prevailing market rate for high-quality, fixed-income debt instruments with maturities corresponding to the expected timing of benefit payments as of the annual measurement date for each of the various plans. These rates change from year to year based on market conditions that affect corporate bond yields. A 100 basis points change in discount rates, with all other variables held constant, would decrease/increase our pension expense by approximately $1 million. A 100 basis points reduction in discount rates would increase the PBO by approximately $72 millionwhereas a 100 basis point increase in discount rates would have a favorable impact to the PBO of approximately $61 million. Rates of Compensation Increase - We determine these rates based on review of the underlying long-term salary increase trend characteristic of the local labor markets and historical experience, as well as comparison to peer companies. A 100 basis points change in the expected rate of compensation increase, with all other variables held constant, would change our pension expense by approximately $1 millionand would impact the PBO by approximately $6 million.
Recent accounting pronouncements
See Note 2 of the Notes to the 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.
See Section 3. Legal Proceedings for more information.
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