The following discussion should be read in conjunction with Tronox 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/A for the year ended December 31, 2018. 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 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-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 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.
Overview
On April 10, 2019, we announced the completion of the acquisition of the TiO2 business of The National Titanium Dioxide Company Ltd. (“Cristal”), a limited company organized under the laws of the Kingdom of Saudi Arabia the (“Cristal Transaction”). The total acquisition price, including the value of the ordinary shares at $14 per share on the date of the acquisition, is approximately $2.2 billion, subject to a working capital and non-current liability adjustment.
As a result of closing the Cristal Transaction, we now operate titanium-bearing mineral sand mines and beneficiation and smelting operations in Australia, South Africa and Brazil to produce feedstock materials that can be processed into TiO2 for pigment, high purity titanium chemicals, including titanium tetrachloride, and Ultrafine© titanium dioxide used in certain specialty applications where nano-particulate TiO2 is required. The mining, beneficiation and smelting of titanium bearing mineral sands creates meaningful quantities of zircon, which we also supply to customers around the world. It is our long-term strategic goal to be fully vertically integrated and consume all of our feedstock materials in our own TiO2 pigment facilities in the United States, Australia, Brazil, UK, France, Netherlands, China and the Kingdom of Saudi Arabia (“KSA”). We believe that full 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.
In order to obtain regulatory approval for the Cristal Transaction, the Federal Trade Commission (“FTC”) required us to divest Cristal's North American TiO2 business, which we sold to INEOS on May 1, 2019, for cash proceeds, net of transaction costs, of approximately $708 million, inclusive of an amount for an estimated working capital adjustment. The working capital adjustment was finalized subsequent to September 30, 2019, resulting in a reimbursement to INEOS of approximately $7 million in October 2019. The operating results of Cristal’s North American TiO2 business, from the acquisition date to the date of divestiture, are included in a single caption entitled “Loss from discontinued operations, net of tax” in our unaudited Condensed Consolidated Statements of Operations.
In addition, the previously announced divestiture of the 8120 paper laminate grade to Venator Materials PLC (“Venator”), which we were required to undertake by the European Commission in order to consummate the Cristal Transaction was completed on April 26, 2019. Under the terms of the agreement, we will supply the 8120 grade product to Venator under a supply agreement for an initial term of 2 years, and extendable up to 3 years, to allow for the transfer of the manufacturing of the 8120 grade to Venator. Total cash consideration is 8 million Euros, of which 1 million Euros was paid at the closing and the remaining 7 million Euros will be paid in equal installments during the second quarters of 2020 and 2021. As a result of consummating the sale, we recorded a loss of approximately $19 million during the second quarter of 2019.
Exxaro Mineral Sands Transaction Completion Agreement
On November 26, 2018, we, certain of our subsidiaries and Exxaro entered into the Exxaro Mineral Sands Transaction Completion Agreement (the “Completion Agreement”). The Completion Agreement provides for the orderly sale of Exxaro’s remaining ownership interest in us, subject to market conditions, helped to facilitate the Re-domicile Transaction, as well as addressed several legacy issues related to our 2012 acquisition of Exxaro’s mineral sands business. Pursuant to the terms of the Completion Agreement, Tronox has covenanted to pay Exxaro an amount equal to any South African capital gains tax assessed on Exxaro in respect of any profit arising to it on a disposal of any of its ordinary shares in the newly formed Tronox U.K. entity subsequent to the completion date of the Re-domicile Transaction where such tax would not have been assessed but for the Re-domicile Transaction. Similarly, Exxaro has covenanted to pay Tronox an amount equal to any South African tax savings Exxaro may realize in certain situations from any tax relief that would not have arisen but for the Re-domicile Transaction.
Pursuant to the terms of the Completion Agreement, on May 9, 2019, Exxaro exercised their right under the agreement to sell 14 million shares to us for an aggregate purchase price of approximately $200 million or $14.3185 per share, plus fees of approximately $1 million. The share price was based upon a 5% discount to the 10 day volume weighted average price as of the day that Exxaro exercised their sale notice to us. Upon repurchase of the shares by the Company, the shares were cancelled. As a result of the sale of the 14 million shares on May 9, 2019, we have recorded a liability of approximately $6 million which is included in “Accrued liabilities” in our unaudited Condensed Consolidated Balance Sheets as of September 30, 2019.
At September 30, 2019, Exxaro continues to own approximately 14.7 million shares of Tronox, or a 10.4% ownership interest, as well as their 26% ownership interest in our South African operating subsidiaries. At the present time we are unable to reasonably determine when and if Exxaro will sell its remaining shares in the foreseeable future, and as a result, we are not able to estimate what the capital gains tax impacts would be should Exxaro sell its remaining shares. See Note 23 for additional information.
Furthermore, pursuant to the Completion Agreement, the parties agreed to accelerate our purchase of Exxaro’s 26% membership interest in Tronox Sands LLP, a U.K. limited liability partnership (“Tronox Sands”). On February 15, 2019, we completed the redemption of Exxaro’s ownership interest in Tronox Sands for consideration of approximately ZAR 2.06 billion (or approximately $148 million) in cash, which represented Exxaro’s indirect share of the loan accounts in our South African subsidiaries.
Share Repurchases
On June 3, 2019, the Company’s Board of Directors authorized the repurchase of up to $100 million of the Company's stock. As of September 30, 2019, we had repurchased a total of 7,453,391 shares under the authorization at an average price of $11.59 per share and at a cost of approximately $87 million, including sales commissions and fees. We did not complete the full program given certain Section 382 restrictions related to our NOLs. Upon repurchase of the shares by the Company, the shares were cancelled.
Tronox Synergy Savings Program
On April 10, 2019, we completed the Cristal Transaction. During the second quarter of 2019 as part of our strategy for realizing value from the acquisition, we announced our goal of achieving approximately $220 million in operating synergies by 2022. These synergies are expected to be realized from the following areas:
In connection with the actions and associated savings discussed above, during the second and third quarters of 2019, we incurred restructuring costs of $13 million for employee related costs, including severance primarily related to the closing of the Cristal Transaction. See Note 3 of notes to unaudited condensed consolidated financial statements for further information on restructuring.
As of September 30, 2019, we have delivered total synergies of $45 million since closing the Cristal acquisition; of which $21 million have been reflected in our EBITDA, $13 million will be reflected in EBITDA in future quarters and $11 million are cash synergies not reflected in EBITDA. We are raising our target synergies in 2019 to $65 million.
Business Environment
The following discussion includes trends and factors that may affect future operating results:
Our third quarter revenue, including the impact related to Cristal, decreased 3% sequentially driven primarily by lower TiO2 and Zircon volumes. Average TiO2 selling prices were slightly lower while Zircon average selling prices were 4% lower. TiO2 Customers’ order patterns remain relatively short term. Within TiO2, the North America market continues to show stable demand influenced by normal seasonal demand patterns, while the weakening of currencies in Asia and Latin America are causing demand to be lower. Industrial activity in EMEA is also lower which is impacting demand for TiO2. We continued to see softening in Zircon demand due to a general slowdown in customer buying patterns, partially tied to an uncertain outlook related to geopolitical tensions. Production in the China ceramic sector has declined due to slower growth in the Chinese domestic market and the impact of recently enacted tariffs.
Gross margin improved sequentially from the second quarter 2019 to the third quarter 2019 due to lower impacts of purchase accounting in the third quarter related to the step up of acquired inventory and property, plant and equipment from the Cristal acquisition. Operationally, sequential gross margin was negatively impacted by lower volume and mix, partially offset by favorable impact of foreign currency on costs.
Pro Forma Income Statement Information
On April 10, 2019, we announced the completion of the acquisition of the TiO2 business of Cristal which impacts the comparability of the reported results for 2019 compared to 2018 and the second quarter of 2019 compared to the first quarter of 2019. Since Tronox and Cristal have combined their respective businesses effective with the merger date of April 10, 2019, the three and nine months ended September 30, 2019 reflect the results of the combined business, while the three and nine months ended September 30, 2018 include only the results of the legacy Tronox business. To assist with a discussion of the 2019 and 2018 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 on January 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.
Condensed Consolidated Results of Operations from Continuing Operations
Three Months Ended September 30, 2019 compared to the Three Months Ended September 30, 2018
On a reported basis, net sales of $768 million for the three months ended September 30, 2019 increased by 68% compared to $456 million for the same period in 2018. The three months ended September 30, 2019 includes $346 million, or 76% revenue growth related to the acquired operations of Cristal. Partially offsetting the increase from the Cristal acquisition were lower TiO2 sales prices and lower Zircon sales volumes in Tronox legacy operations. On a pro forma basis, net sales of $768 million for the three months ended September 30, 2019 decreased by 8% compared to $832 million for the same period in 2018 primarily due to lower TiO2 sales prices and lower Zircon sales volumes. On both a reported and pro forma basis, revenues were negatively impacted by the absence of revenues from the Electrolytic business sold in September 2018.
Net sales by type of product for the three months ended September 30, 2019 and 2018 were as follows:
The table below presents reported revenue by product:
The table below presents pro forma revenue by product:
On a reported basis, for the three months ended September 30, 2019, TiO2 revenue was higher by 96% or $296 million compared to the prior year quarter. The acquisition of Cristal benefitted growth by $298 million, or 97%. The increase in TiO2 revenue from the Cristal acquisition was slightly offset by a 3% or $6 million reduction in sales prices in legacy Tronox operations. Foreign currency also contributed $3 million to the TiO2 revenue declines, due to the weakening Euro. TiO2 volumes increased 2% or $7 million in legacy Tronox operations. Zircon revenues were $4 million lower compared to the prior year quarter driven by a 30% reduction in sales volumes in legacy Tronox operations. This decline was partially offset by $20 million of revenues related to Cristal. Feedstock and other products revenues was $30 million higher from the year-ago quarter and includes $28 million related to Cristal. The increase in Feedstock and other products revenues for Tronox legacy operations was primarily driven by higher CP slag volumes.
On a pro forma basis, for the three months ended September 30, 2019, TiO2 revenue declined compared to the prior year driven primarily by $23 million for lower selling prices and $5 million for product mix, which were partially offset by a 3% or $12 million increase in sales volumes. Foreign currency also contributed $10 million to the TiO2 revenue decline, primarily due to the weakening of the Euro. The Zircon revenues decline was due to a 32% decline in sales volumes and a 4% decline in average selling prices. Feedstock and other products revenues was slightly higher due to higher CP slag sales volumes.
On a reported basis, third quarter revenue of 2019 declined 3% when compared to the second quarter of 2019 driven primarily by a 2% decline in TiO2 volumes and a 19% decline in Zircon volumes. Average TiO2 selling prices declined 1% while Zircon average selling prices were 4% lower. Feedstock and other products revenue was higher driven by higher CP slag sales volumes.
Comparing our third quarter of 2019 revenue to second quarter 2019 on a pro forma basis, our third quarter TiO2 revenue of $603 million represents an 8% decrease as compared to $657 million in the second quarter of 2019. TiO2 revenue was lower driven by 7% lower sales volumes and 1% lower selling prices. Zircon revenues decreased 24% primarily due to a 20% decline in sales volumes. Feedstock and other products revenue was higher driven by higher CP slag sales volumes.
On a reported basis, our gross margin of $133 million was 17% of net sales compared to 27% of net sales in the year-ago quarter. The decrease in gross margin is primarily due to:
These decreases in gross margin were offset by a 2 point favorable impact of foreign currency driven by the weakening South African Rand and the Australian Dollar.
On a pro forma basis, our gross margin of $173 million was 23% of net sales compared to 25% of net sales in the year-ago quarter. The decrease in gross margin is primarily due to:
These decreases in gross margin were partially offset by 2 points of favorable impacts from foreign currency primarily driven by the weakening South African Rand and the Australian Dollar.
On a reported basis, selling, general and administrative expenses increased by $20 million or 32% during the three months ended September 30, 2019 compared to the same period of the prior year. The acquisition of Cristal accounted for $23 million of the increase. Offsetting the Cristal expenses were $12 million of lower professional fees related to the Cristal transaction, partially offset by integration costs of $4 million and higher other general expenses including commissions and leases. Employee-related costs were generally flat as higher salaries and wages and stock compensation costs were offset by lower incentive compensation expenses.
On a pro forma basis, selling, general and administrative expenses decreased by $9 million or 10% during the three months ended September 30, 2019 compared to the same period of the prior year. The decrease in SG&A expenses compared to the prior year period was due to lower employee-related costs resulting from lower incentive compensation and integration savings.
On both a reported and pro forma basis, we recorded restructuring expenses of $3 million for employee-related costs associated with headcount reductions during the three months ended September 30, 2019. See Note 3 of notes to unaudited condensed consolidated financial statements.
Impairment losses of $6 million for the three months ended September 30, 2018 related to a charge for the impairment and expected loss on sale of the assets of our Tronox Electrolytic Operations. The Tronox Electrolytic Operations were ultimately sold on September 1, 2018. See Note 5 of notes to unaudited condensed consolidated financial statements.
On a reported basis, income from operations for the three months ended September 30, 2019 was $48 million compared to income from operations of $53 million in the prior year period. The decrease of $5 million was primarily due to the lower gross margin and higher SG&A expenses discussed above. The gross margin included $40 million of charges related to the recognition of a step-up in value of inventories as a result of purchase accounting.
On a pro forma basis, income from operations for the three months ended September 30, 2019 decreased $27 million to $88 million from $115 million in the prior year period primarily due to the lower sales and gross margin discussed above.
On a reported basis, adjusted EBITDA as a percentage of net sales was 24% for the three months ended September 30, 2019, a decrease of 4 points from 28% in the prior year. The lower gross margin and higher SG&A expenses as discussed above were the primary drivers of the year-over-year decrease in Adjusted EBITDA percentage.
On a pro forma basis, adjusted EBITDA as a percentage of net sales was 24% for the three months ended September 30, 2019, a decrease of 2 points from 26% in the prior year. The lower sales and gross margin as discussed above were the primary driver of the year-over-year decrease in Adjusted EBITDA percentage.
On a reported basis, interest expense for the three months ended September 30, 2019 increased by $4 million compared to the same period of 2018 primarily due to higher average interest rates driven by our borrowings in South Africa under the Standard Bank Term Loan Facility, partially offset by lower average debt outstanding balances.
On a pro forma basis, interest expense for the three months ended September 30, 2019 was slightly lower compared to the same period of 2018 due to lower average debt levels in the current period versus the prior year period.
On a reported basis, interest income for the three months ended September 30, 2019 decreased by $4 million compared to the same period in 2018 due to lower cash balances from the use of cash and previously restricted cash to close the Cristal Transaction.
On a pro forma basis, interest income for the three months ended September 30, 2019 increased by $1 million compared to the same period in 2018 due to higher cash balances.
On a reported basis, other income (expense), net for the three months ended September 30, 2019 was lower than the prior year period primarily due to $4 million of net realized and unrealized foreign currency gains recognized in the prior year as compared to $1 million in the current year. The foreign currency gains were primarily driven by the South African rand used in the remeasurement of our U.S. dollar denominated working capital balances. Additionally, the current year period includes a $4 million expense for the potential payment to Exxaro equal to any South African capital gains tax assessed on Exxaro in respect of any profit arising to it from the May 9, 2019 disposal of its ordinary shares in Tronox Holdings plc (see Note 23 of notes to unaudited condensed consolidated financial statements for additional information), while the prior year period included a $3 million adjustment associated with a settlement gain related to our former U.S. postretirement medical plan.
On a pro forma basis, other expense, net for the three months ended September 30, 2019 was slightly lower than the prior year period primarily due to the pro forma results include foreign currency losses for legacy Cristal operations in the prior year, mostly offset by the reasons previously discussed.
We continue to maintain full valuation allowances related to the total net deferred tax assets in the U.S. and Australia. For entities acquired in the Cristal Transaction, we have full valuation allowances in Australia, Brazil, Switzerland, and the U.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 not relevant for the three months ended September 30, 2019 and was 29% for the three months ended September 30, 2019 and 2018. The effective tax rates differ from the U.K. statutory rate of 19% primarily due to income and losses in jurisdictions with valuation allowances, disallowable expenditures, net reversal of deferred charges, and our jurisdictional mix of income at tax rates different than the U.K. statutory rate.
On a pro forma basis, the effective tax rate was 35% and 35% for both the three months ended September 30, 2019 and 2018, respectively.
Nine months Ended September 30, 2019 compared to the Nine months Ended September 30, 2018
On a reported basis, net sales of $1,949 million for the nine months ended September 30, 2019 increased by 40% compared to $1,390 million for the same period in 2018. The nine months ended September 30, 2019 includes $699 million of revenue, or 50% of growth from the acquired operations of Cristal. Partially offsetting the increase due to the Cristal acquisition was lower TiO2 sales volumes and average selling prices and lower Zircon sales volumes in Tronox legacy operations. On a pro forma basis, net sales of $2,315 million for the nine months ended September 30, 2019 decreased by 11% compared to $2,611 million for the same period in 2018 primarily due to lower TiO2 sales volumes and prices and lower Zircon sales volumes. On both a reported and pro forma basis, revenues were negatively impacted by the absence of revenues from the Electrolytic business sold in September 2018.
Net sales by type of product for the nine months ended September 30, 2019 and 2018 were as follows:
The table below presents reported revenue by product:
The table below presents pro forma revenue by product:
On a reported basis, for the nine months ended September 30, 2019, TiO2 revenue was higher by 54% or $527 million compared to the prior year period. The acquisition of Cristal benefitted the growth by $606 million, or 62%. The increase in TiO2 revenue from the Cristal acquisition was more than offset by a 4% or $44 million reduction in sales volumes, a 4% or $18 million decrease in average selling prices in legacy Tronox operations and a $4 million decline due to product mix. Foreign currency also contributed $13 million to the TiO2 revenue declines, due to the weakening Euro. Zircon revenues were $9 million higher compared to the prior year quarter and include $36 million from Cristal. The increase in Zircon revenue from the Cristal acquisition was more than offset by a 20% reduction in sales volumes in legacy Tronox operations although average selling prices were 9% higher compared to the prior year period. Feedstock and other products revenues were $60 million higher from the year-ago quarter and include $57 million related to Cristal. Feedstock and other product revenue for legacy Tronox operations were slightly higher as revenue increases for CP slag and synthetic rutile were offset by lower revenues for rutile prime and ilmenite as we are not actively selling ilmenite in the market due to our expanded internal requirements following the closing of the Cristal acquisition.
On a pro forma basis, for the nine months ended September 30, 2019, TiO2 revenue was lower compared to the prior year driven by a 8% or $94 million decrease in average selling prices and a 3% or $70 million reduction in sales volumes. Foreign currency also contributed $43 million to the TiO2 revenue declines due to the weakening of the Euro. The Zircon revenue decline was driven by a 26% decline in volumes, partially offset by a 8% increase in average selling prices. Feedstock and other product revenue was slightly higher due to higher CP slag sales volumes, partially offset by declines in ilmenite sales as we are not actively selling ilmenite in the market due to our expanded internal requirements following the closing of the Cristal acquisition.
On reported basis, our gross margin of $316 million was 16% of net sales compared to 27% of net sales in the year-ago period. The decrease in gross margin is primarily due to:
• the recognition of a $19 million (1 points negative impact on gross margin) charge for contract losses for the estimated losses we expect to incur on the 8120 supply agreement with Venator;
The decreases in gross margin were partially offset by a 4 point favorable impact of foreign currency on costs of goods sold primarily driven the weakening South African Rand and the Australian Dollar.
On a pro forma basis, our gross margin of $490 million was 21% of net sales compared to 22% of net sales in the year-ago quarter. The decrease in gross margin is primarily due to:
These decreases in gross margin were partially offset by 5 points of favorable impact of foreign currency primarily driven by the weakening South African Rand and the Australian Dollar.
On a reported basis, selling, general and administrative expenses increased by $35 million or 16% during the nine
months ended September 30, 2019 compared to the same period of the prior year. The acquisition of Cristal accounted for $44 million of the increase. Offsetting the Cristal expenses, were $32 million of lower professional fees primarily related to the Cristal transaction, partially offset by higher employee-related costs of $6 million, integration costs of $8 million, higher R&D expenses of $5 million and $4 million of higher other general expenses including lease costs. The increase in employee-related costs reflects the impact of a modification to a performance-based restricted stock award in the prior year and higher salaries and wages in the current year, partially offset by lower incentive compensation expenses.
On a pro forma basis, selling, general and administrative expenses increased by $35 million or 16% during the nine months ended September 30, 2019 compared to the same period of the prior year due to higher employee-related costs, higher R&D expenses, professional fees and integration costs.
On both a reported and pro forma basis, we recorded restructuring expenses of $13 million for employee-related costs associated with headcount reductions during the nine months ended September 30, 2019. See Note 3 of notes to unaudited condensed consolidated financial statements.
Impairment losses of $31 million for the nine months ended September 30, 2018 related to a charge for the impairment and expected loss on sale of the assets of our Tronox Electrolytic Operations. The Tronox Electrolytic Operations were ultimately sold on September 1, 2018. See Note 5 of notes to unaudited condensed consolidated financial statements.
On a reported basis, income from operations for the nine months ended September 30, 2019 was $51 million, a decrease of $81 million compared to $132 million in the prior year period, primarily due to the lower gross margin, higher SG&A expenses and restructuring costs discussed above, partially offset by the recognition of the $31 million impairment of our Electrolytic Operations in the prior year.
On a pro forma basis, income from operations for the nine months ended September 30, 2019 decreased $89 million to $217 million as compared to $306 million for the prior year period due to the lower sales, higher SG&A expenses and restructuring costs recorded in the current year period, partially offset by the $31 million impairment of our Electrolytic Operations in the prior year.
On a reported basis, adjusted EBITDA as a percentage of net sales was 24% for the nine months ended September 30, 2019, a decrease of 4 points from 28% in the prior year. The lower sales and higher SG&A expenses as discussed above were the primary driver of the year-over-year decrease in Adjusted EBITDA percentage.
On a pro forma basis, adjusted EBITDA as a percentage of net sales was 23% for the nine months ended September 30, 2019, a decrease of 4 points from the 27% in the prior year. The lower gross margin and higher SG&A expenses as discussed above were the primary drivers of the year-over year decrease in Adjusted EBITDA percentage.
On a reported basis, interest expense for the nine months ended September 30, 2019 increased by $10 million compared to the same period of 2018 primarily due to higher average interest rates driven by our borrowings in South Africa under the Standard Bank Term Loan Facility and interest expense related to outstanding balances earlier in the year under our revolver agreements.
On a pro forma basis, interest expense for the nine months ended September 30, 2019 was higher compared to the same period of 2018 due to the impact of higher average interest rates driven by our borrowings in South Africa under the Standard Bank Term Loan Facility and interest expense related to outstanding balances earlier in the current year under our revolver agreements.
On a reported basis, interest income for the nine months ended September 30, 2019 decreased by $7 million compared to the same period in 2018 due to the proceeds from the Blocked Term Loan that were included in restricted cash, to close the Cristal Transaction.
On a pro forma basis, interest income for the nine months ended September 30, 2019 was slightly higher compared to the same period in 2018 primarily due to the higher average cash balance primarily in the third quarter of the current year.
Loss on extinguishment of debt of $2 million for the nine months ended September 30, 2019 results from a modification to our Wells Fargo Revolver and the termination of the ABSA Revolver. Loss on extinguishment of debt of $30 million for the nine months ended September 30, 2018 relates to the redemption of our Senior Notes due 2022.
On a reported basis, other income (expense), net for the nine months ended September 30, 2019 was lower than the prior year period primarily due to $23 million of net realized and unrealized foreign currency gains recognized in the prior year as compared to $5 million in the current year. The foreign currency gains and losses in the prior year were primarily driven by the South African Rand used in the remeasurement of our U.S. dollar denominated working capital balances. The current year amounts were also impacted by the recognition of a $6 million expense for the potential payment to Exxaro equal to any South African capital gains tax assessed on Exxaro in respect of any profit arising to it from the May 9, 2019 disposal of its ordinary shares in Tronox Holdings plc (see Note 23 of notes to unaudited condensed consolidated financial statements for additional information), while the prior year period included a $3 million adjustment associated with a settlement gain related to our former U.S. postretirement medical plan.
On a pro forma basis,other income (expense), net for the nine months ended September 30, 2019 was lower than the prior year period primarily due to the reasons previously discussed above.
We continue to maintain full valuation allowances related to the total net deferred tax assets in the U.S. and Australia. For entities acquired in the Cristal Transaction, we have full valuation allowances in Australia, Brazil, Switzerland, and the U.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 of (11)% and (200)% for the nine months ended September 30, 2019 and 2018, respectively, differs from the U.K. statutory rate of 19% primarily due to income and losses in jurisdictions with valuation allowances, disallowable expenditures, net reversal of deferred charges, and our jurisdictional mix of income at tax rates different than the U.K. statutory rate. The prior year was significantly impacted by a benefit of $48 million due to the release of a valuation allowance for deferred tax assets associated with our operating subsidiary in the Netherlands.
On a pro forma basis, the effective tax rate was 47% and nil for the nine months ended September 30, 2019 and 2018, respectively. The prior year was significantly impacted by a benefit of $48 million due to the release of a valuation allowance for deferred tax assets associated with our operating subsidiary in the Netherlands.
Other Comprehensive (Loss) Income
Other comprehensive loss was $84 and $35 million for the three months ended September 30, 2019 and 2018, respectively. The increase in loss in 2019 compared to the prior year was driven by unfavorable foreign currency translation adjustments of $79 million in the current year period compared to $33 million in the prior year primarily due to the movement in the South Africa rand, and net income in the prior year compared to a net loss in the current year period. Other comprehensive loss was $84 and $159 million for the nine months ended September 30, 2019 and 2018, respectively. The decrease in loss in 2019 compared to the prior year was primarily driven by unfavorable foreign currency translation adjustments of $159 million in the prior year period compared to $57 million in the current year primarily due to the movement in the South Africa Rand.
Liquidity and Capital Resources
The following table presents our liquidity as of September 30, 2019 and December 31, 2018:
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. Subsequent to September 30, 2019, our KSA subsidiary on October 16, 2019, entered into a short-term working capital facility with the Saudi British Bank (“SABB Facility”) for an amount up to SAR 70 million (approximately $19 million) maturing in July 2020. The SABB Facility bears interest at the Saudi Inter Bank Offered Rate plus 180 basis points on outstanding balances. During October 2019, the Company utilized SAR 50 million under the SABB Facility.
Working capital (calculated as current assets less current liabilities) was $1.4 billion at September 30, 2019, compared to $2.2 billion at December 31, 2018. Working capital at December 31, 2018 included $650 million funded by the Block Term Loan and related interest which upon the closing of the Cristal Transaction on April 10, 2019, became available to us for the purpose of the acquisition. In the event of an asset sale, some or all of the net proceeds from the sale may be required to be used to prepay borrowings under the Term Loan Facility based on the ratio of the total combined debt outstanding under the Term Loan Facility and the Wells Fargo Revolver to the consolidated EBITDA, as defined in the Term Loan Facility, for the previous four quarters.
We completed the acquisition of Cristal on April 10, 2019 and on May 1, 2019, divested Cristal’s North American operations for approximately $708 million, inclusive of an amount for an estimated working capital adjustment. Upon closing of the Cristal acquisition and subsequent sale of the Cristal North American operations, our senior net leverage ratio was below 2.75, and, as a result, the sale of the North American operations did not trigger a prepayment event. The proceeds received from the sale of the North American operations were used in part for the repurchase of the approximately 14 million shares from Exxaro on May 9, 2019 for an aggregate purchase price of approximately $200 million, prepayment of $195 million on our Term Loan Facility and repurchase of approximately 7.5 million shares for approximately $87 million under our Board authorized plan.
The balance of the remaining proceeds is expected to be used for general corporate purposes.
The liquidity table for December 31, 2018 does not include restricted cash of $662 million related to the Blocked Term Loan and related interest. The Blocked Term Loan under the Term Loan Facility is included in Long-term debt, net.
As of and for the three and nine months ended September 30, 2019, the non-guarantor subsidiaries of our Senior Notes due 2025 represented approximately 15% of our total consolidated liabilities, approximately 30% of our total consolidated assets, approximately 31% of our total consolidated net sales and approximately 45% of our consolidated EBITDA (as such term is defined in the 2025 Indenture). In addition, as of September 30, 2019, our non-guarantor subsidiaries had $630 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.
At September 30, 2019, we had outstanding letters of credit and bank guarantees of $81 million. See Note 18 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 of September 30, 2019, our credit rating with Moody’s and Standard & Poor’s was B1 positive outlook and B stable outlook, respectively, representing no change from December 31, 2018. See Note 13, of notes to unaudited condensed consolidated financial statements.
Cash and Cash Equivalents
We consider all investments with original maturities of nine months or less to be cash equivalents. As of September 30, 2019, 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
At September 30, 2019, we held $305 million in cash and cash equivalents in these respective jurisdictions: $111 million in the United States, $51 million in Europe, $66 million in Australia, $11 million in South Africa, $41 million in Brazil, $8 million in Saudi Arabia and $17 million in China. Our credit facilities limit transfers of funds from subsidiaries in the United States to certain foreign subsidiaries. In addition, at September 30, 2019, we held $11 million of restricted cash primarily in Australia related to performance bonds.
Tronox Holdings plc has foreign subsidiaries with undistributed earnings at September 30, 2019. We have made no provision for deferred taxes related to these undistributed earnings because they are considered indefinitely reinvested in the foreign jurisdictions.
Cash Dividends on Ordinary Shares
On November 7, 2019, the Board declared a quarterly dividend of $0.045 per share to holders of our ordinary shares at the close of business on November 19, 2019, which will be paid on December 2, 2019.
Debt Obligations
At September 30, 2019, we had no outstanding borrowings under our Wells Fargo, Standard Bank and Emirates revolvers. There were no short term debt balances at December 31, 2018.
At both September 30, 2019 and December 31, 2018, our long-term debt, net of unamortized discount was $3.1 billion.
At September 30, 2019 our net debt (the excess of our debt over cash and cash equivalents) was $2.8 billion and at December 31, 2018, our net debt was $2.1 billion, excluding the $650 million of restricted cash related to the Blocked Term Loan. See Note 13, of notes to unaudited condensed consolidated financial statements.
Cash Flows
The following table presents cash flow from continuing operations for the periods indicated:
Cash Flows provided by Operating Activities — Cash provided by our operating activities is driven by net loss 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 nine months ended September 30, 2019 and 2018:
Net cash provided by operating activities increased by $94 million as compared to the prior year due to higher cash generated by income and a lower use of cash from working capital in the current year period. Although we incurred a higher net loss for the three months ended September 30, 2019, that loss was driven by the purchase accounting step-up of inventory and an increase in depreciation, depletion and amortization expense which are non-cash items. Lower use of cash from working capital was caused primarily by a (i) $52 million benefit from reduced inventory levels due to the use of TiO2 inventory to meet seasonal demand, including the inventory of Cristal as well as a lower average cost per ton for TiO2 inventory, and (ii) a $17 million lower use of cash for accounts payable and accrued liabilities due to lower Cristal Transaction costs, and timing of payments. These benefits from working capital changes were partially offset by a higher use of cash of $13 million for accounts receivable due to the higher sales in the current year due to the Cristal Transaction.
Cash Flows used in Investing Activities — Net cash used in investing activities for the nine months ended September 30, 2019 was $1,120 million as compared to $121 million for the same period in 2018. The current year includes $1,675 million of cash used to fund the Cristal Transaction, offset by proceeds of $708 million received for the divestiture of Cristal’s North American TiO2 business and $10 million in insurance proceeds received related to Cristal mining (see Notes 1 and 2 of notes to unaudited condensed consolidated financial statements for a discussion of the Cristal Transaction). Both the current year and prior year includes (ii) $25 million and $39 million, respectively, for a loan to AMIC related to the Jazan Slagger, a titanium slag smelter facility (see Notes 1 and 23 of notes to unaudited condensed consolidated financial statements for a discussion of the Jazan Slagger), and (ii) $140 million and $83 million, respectively, for capital expenditures.
Cash Flows used in Financing Activities —Net cash used by financing activities during the nine months ended September 30, 2019 was $517 million as compared to $34 million for the nine months ended September 30, 2018. The current year includes repurchases of common stock of $288 million, a payment of $148 million for the acquisition of Exxaro’s ownership interest in Tronox Sands (see Note 1 of notes to unaudited condensed consolidated financial statements for a discussion of Tronox Sands), repayments of $220 million against our Term Loan Facility and $48 million against our Standard Bank Term Loan Facility, including the repayment of the outstanding balance on the Bullet Loan portion of the facility. Partially offsetting these uses of cash in the current year were proceeds of $222 million from the Standard Bank Term Loan. For the nine months ended September 30, 2018, the net proceeds from the issuance of our Senior Notes due 2026 (including repayments for call premium and debt issuance costs) was slightly less than the repayments of debt as the net proceeds were used to redeem the Senior Notes due 2022.
Contractual Obligations
The following table sets forth information relating to our contractual obligations as of September 30, 2019:
Non-U.S. GAAP Financial Measures
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, 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.
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 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:
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.
The following table reconciles net loss to EBITDA and Adjusted EBITDA for the periods presented:
The following table reconciles net loss to EBITDA and Adjusted EBITDA on a pro forma basis for the periods presented:
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.
Supplemental Pro Forma Information
To assist in the discussion of the 2019 and 2018 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 on January 1, 2018. The unaudited pro forma financial information reflects certain adjustments related to the acquisition, such as:
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 what Tronox’s results actually would have been had the merger been completed on January 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:
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