UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

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(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to ___________

1-35573

(Commission file number)

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TRONOX LIMITED

(ACN 153 348 111)

(Exact Name of Registrant as Specified in its Charter) extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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Registrant’s telephone number, including area code: (203) 705-3800

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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of October 27, 2017, the Registrant had 91,052,581 Class A ordinary shares and 28,729,280 Class B ordinary shares outstanding.

 

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Table of Contents

 

Item 1.

Financial Statements (Unaudited)

 

TRONOX LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Millions of U.S. dollars, except share and per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

 

TRONOX LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Millions of U.S. dollars)

See accompanying notes to unaudited condensed consolidated financial statements.

 

TRONOX LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Millions of U.S. dollars, except share and per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

 

TRONOX LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Millions of U.S. dollars)

See accompanying notes to unaudited condensed consolidated financial statements.

 

TRONOX LIMITED

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(Millions of U.S. dollars)

See accompanying notes to unaudited condensed consolidated financial statements.

 

TRONOX LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Millions of U.S. dollars, except share, per share and metric tons data or unless otherwise noted)

1.	The Company

Tronox Limited and its subsidiaries (collectively referred to as “Tronox Limited,” “we,” “us,” or “our”) is a public limited company registered under the laws of the State of Western Australia. We are a global leader with operations in North America, Europe, South Africa and the Asia-Pacific region in the production and marketing of titanium bearing mineral sands and titanium dioxide (“TiO₂”) pigment. We classify our operations into one reporting segment: TiO₂: consisting of products that are critical components of everyday applications such as paint and other coatings, plastics, paper and other uses and our related mineral sands product streams include titanium feedstock, zircon and pig iron.

On February 21, 2017, Tronox Limited, The National Titanium Dioxide Company Ltd., a limited company organized under the laws of the Kingdom of Saudi Arabia (“Cristal”), and Cristal Inorganic Chemicals Netherlands Coöperatief W.A., a cooperative organized under the laws of the Netherlands and a wholly owned subsidiary of Cristal (“Seller”), entered into a Transaction Agreement (the “Transaction Agreement”), pursuant to which we agreed to acquire Cristal’s titanium dioxide business for $1.673 billion in cash, subject to a working capital adjustment at closing (the “Cash Consideration”), plus 37,580,000 Class A ordinary shares (“Class A Shares”), par value $0.01 per share, of Tronox Limited (the “Cristal Transaction”). Following the closing of the Cristal Transaction, the Seller will own approximately 24% of the outstanding ordinary shares (including both Class A and Class B) of Tronox Limited. The Cristal Transaction is conditioned on us obtaining financing sufficient to fund the Cash Consideration, and the Transaction Agreement provides that we must pay to Cristal a termination fee of $100 million if all conditions to closing, other than the financing condition, have been satisfied and the Transaction Agreement is terminated because closing of the Cristal Transaction has not occurred by May 21, 2018. As a result of the refinancing (See Note 11 - Debt), we expect to finance the Cristal Transaction with our cash on hand inclusive of restricted cash and liquidity from our asset-based syndicated revolving credit facility. The Cristal Transaction is also conditioned upon the receipt of various regulatory approvals, including antitrust clearance in numerous jurisdictions. On April 13, 2017, the United States Federal Trade Commission (“FTC”) issued a request for additional information (“Second Request”) to us and Cristal in connection with its filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and Tronox has substantially complied with the Second Request. The Cristal Transaction, which has been unanimously approved by our board of directors (the “Board”), is expected to close by the first quarter of 2018, subject to regulatory approvals and satisfaction of customary closing conditions. On October 2, 2017, at a special meeting of shareholders of the Company held pursuant to the Transaction Agreement, the Company’s shareholders approved a resolution to issue 37,580,000 Class A Shares to the Seller in connection with the acquisition of Cristal’s TiO₂ business, and the resulting acquisition of interests in such Class A Shares by the Seller and certain other persons and entities, at the closing of such acquisition.

On September 1, 2017, we completed the previously announced sale of our wholly owned subsidiary Tronox Alkali Corporation (“Alkali”) to Genesis Energy, L.P. for proceeds of $1.325 billion in cash, subject to a customary post-closing working capital adjustment (the “Sale”). We have agreed unconditionally to guarantee the indemnification and performance of the obligations of Tronox U.S. Holdings Inc. (“Tronox Holdings”), a subsidiary of Tronox Limited, under the stock purchase agreement (“Purchase Agreement”). Both Tronox Holdings and Genesis Energy, L.P. have agreed, following the closing, to indemnify the other party for losses arising from certain breaches of the Purchase Agreement and for certain other liabilities, subject to certain limitations.

During the three months ended September 30, 2017, we recognized a pre-tax loss of $233 million on the Alkali disposal.  For all periods presented, sales, costs and expenses and income taxes attributable to Alkali together with the loss on disposal have been aggregated in a single caption entitled “Income (loss) from discontinued operations, net of tax” in our Condensed Consolidated Statement of Operations. Included in the calculation of the loss noted above, were approximately $21 million of transaction fees related to the sale of Alkali. For cash flow presentation purposes, these transaction costs are included in “Cash provided by operating activities, continuing operations” on the Condensed Consolidated Statements of Cash Flows. See Note 2 – Discontinued Operations for additional information.

In 2012, our Class B ordinary shares (“Class B Shares”) were issued to Exxaro Resources Limited (“Exxaro”) and one of its subsidiaries in consideration for 74% of Exxaro’s South African mineral sands business. Exxaro has agreed not to acquire any voting shares of Tronox Limited if, following such acquisition, Exxaro will have a voting interest in Tronox Limited of 50% or more unless Exxaro brings any proposal to make such an acquisition to the Board on a confidential basis. In the event an agreement regarding the proposal is not reached, Exxaro is permitted to make a takeover offer for all the shares of Tronox Limited not held by affiliates of Exxaro, subject to certain non-waivable conditions. At September 30, 2017 and December 31, 2016, Exxaro held approximately 43% and 44%, respectively, of the voting securities of Tronox Limited. See Note 18 for additional information regarding Exxaro transactions. On March 8, 2017, Exxaro announced its intention to begin pursuing a path to monetize its ownership stake in Tronox over time. On October 10, 2017, Exxaro sold 22,425,000 Class A ordinary shares in an underwritten registered offering (the “Exxaro Share Transaction”). Subsequent to the Exxaro Shares Transaction, Exxaro held approximately 24% of the Company’s voting securities. Presently, Exxaro intends to sell the remainder of its Tronox shares in a staged process over time pursuant to the existing registration statement, subject to market conditions. Exxaro’s sale of Class A ordinary shares does not impact their 26% ownership interest in each of our Tronox KZN Sands (Pty) Ltd. and Tronox Mineral Sands (Pty) Ltd subsidiaries.

 

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited, and have been prepared pursuant to the rules and regulations of the U. S. Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. The Condensed Consolidated Balance Sheet as of December 31, 2016 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, considered necessary for a fair statement. Our unaudited condensed consolidated financial statements include the accounts of all majority-owned subsidiary companies. All intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the manner and presentation in the current period. As a result of the Alkali disposition, the results of Alkali have been reclassified as discontinued operations for all periods presented. See Note 2 – Discontinued Operations for additional information.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. It is at least reasonably possible that the effect on the financial statements of a change in estimate due to one or more future confirming events could have a material effect on the financial statements.

Revision of Previously Issued Consolidated Financial Statements

During the three months ended March 31, 2017, we identified a misstatement in our selling, general, and administrative expense for certain prior periods related to a liability resulting from a non-timely filing with a statutory authority. The aggregate misstatement is $11 million, which impacts our previously issued consolidated statements of operations, comprehensive loss, balance sheets and cash flows as of and for the years ended December 31, 2015 and 2016, and the unaudited condensed consolidated financial statements for the third and fourth quarters and corresponding year-to-date periods of 2015, and each quarter and corresponding year-to-date periods of 2016.

In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management evaluated the materiality of the misstatement from qualitative and quantitative perspectives, and concluded that the misstatement was not material to our previously issued annual and interim financial statements. The cumulative amount of the prior period adjustments would have been material to our current statement of operations and comprehensive loss had we made the correction in the three months ended March 31, 2017 and accordingly we will revise our previously issued financial statements to correct this misstatement. We also corrected the timing of other previously recorded immaterial out-of-period adjustments and reflected them in the revised prior period financial statements. The previously recorded immaterial out-of-period adjustments include a $6 million decrease to cost of goods sold due to an overstated depreciation expense and a $7 million increase to cost of goods sold related to royalty tax both originating in 2013 and previously recorded as out-of-period corrections in 2014; a $5 million decrease to cost of goods sold that originated in 2012 and was previously recorded as an out-of-period correction in 2014 due to overstated depletion expense; and other miscellaneous immaterial corrections. Periods not presented herein will be revised, as applicable, in future filings.

 

The effects on our unaudited condensed consolidated financial statements are as follows:

Unaudited Condensed Consolidated Statement of Operations

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

Unaudited Condensed Consolidated Balance Sheet

(1)

Amounts reflect the results of Alkali as discontinued operations.

Unaudited Condensed Consolidated Statement of Cash Flows

There was no net impact to operating, investing and financing cash flows from the revisions for continuing operations for the nine months ended September 30, 2016.

 

Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies various aspects related to how share-based payments are accounted for and presented in the financial statements including income taxes and forfeitures of awards. We adopted ASU 2016-09 during the first quarter of 2017. Its adoption did not have a material impact on our unaudited condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”), which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or a change in a critical term of the hedging relationship. As long as all other hedge accounting criteria in ASC 815, Derivatives and Hedging (“ASC 815”) are met, a hedging relationship in which the hedging derivative instrument is novated would not be discontinued or require redesignation. This clarification applies to both cash flow and fair value hedging relationships. We adopted ASU 2016-05 during the first quarter of 2017. Its adoption did not have an impact on our unaudited condensed consolidated financial statements.

In July 2015, as part of its simplification initiative, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring entities to remeasure inventory at the lower of cost and net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted ASU 2015-11 during the first quarter of 2017. The adoption of ASU 2015-11 did not have an impact on our unaudited condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

We consider the applicability and impact of all recently issued ASUs. Those not listed below were assessed and determined to be either not applicable or expected to have a minimal impact on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 is effective for annual periods beginning on or after December 15, 2018, including interim periods within those periods. Early adoption is permitted which we are considering. We do not expect the adoption of ASU 2017-12 to have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under ASU 2017-09, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective prospectively for annual periods beginning on or after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The impact, if any, that ASU 2017-09 will have on our consolidated financial statements will depend on any future award modification.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”) which amends the requirements in ASC 715, Compensation — Retirement Benefits, which requires employers that sponsor defined benefit pension and/or other postretirement plans to aggregate the various components of net periodic benefit cost for presentation purposes but does not prescribe where they should be presented in the income statement. ASU 2017-07 requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from service rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. Employers will have to disclose the line item(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted as of the beginning of an annual period for which an entity’s financial statements (interim or annual) have not been issued. ASU 2017-07 requires the presentation of the components of net periodic benefit cost in the income statement retrospectively while the guidance limiting the capitalization of net periodic benefit cost in assets to the service component will be applied prospectively. We do not expect the adoption of ASU 2017-07 to have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early application of the amendments in ASU 2017-01 is allowed under certain circumstances. The amendments in ASU 2017-01 should be applied prospectively on or after the effective date. The impact, if any, that ASU 2017-01 will have on our consolidated financial statements will depend on the nature of future acquisitions of assets or businesses.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that the reconciliation of the beginning-of-period and end-of period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. ASU 2016-18 does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied retrospectively to all periods presented. The adoption of ASU 2016-18 will require us to include and reconcile the amount of “Restricted cash”, together with “Cash and cash equivalents”, for cash flow purposes for all periods presented commencing with the three months ending March 31, 2018.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This amendment should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The impact, if any, that ASU 2016-16 will have on our consolidated financial statements will depend upon future intra-entity transfers of assets other than inventory.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) which provides guidance intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. We have not yet determined the impact, if any, that ASU 2016-15 will have on our consolidated financial statements as it will depend on the nature of future cash flow transactions impacted by the new guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) which includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or an operating lease. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We have developed an implementation plan for adopting ASU 2016-02, which includes utilizing a software program to manage our lease obligations. We are evaluating the impact that ASU 2016-02 will have on our consolidated financial statements and have concluded that we will not early adopt ASU 2016-02. Refer to Note 14 and 17 included in our Annual Report on Form 10-K for the year ended December 31, 2016 regarding current obligations under lease agreements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires several new disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted, and may be applied either retrospectively or on a modified retrospective basis. Subsequent to the issuance of the May 2014 guidance, several clarifications and updates have been issued on this topic, the most recent of which was issued in May 2017. We are executing our implementation plan for adopting ASU 2014-09 and are currently operating in line with that plan. We have completed phase 1 of our contract evaluation process and are continuing to review additional contracts while currently validating the results of applying the new revenue guidance. We have also started documenting our accounting policies and evaluating the new disclosure requirements and we expect to complete the evaluation of the impact of the accounting and disclosure requirements on our business processes, controls and systems in the fourth quarter of 2017. We are evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and will adopt the new standard using the modified retrospective approach effective January 1, 2018.

2.	Discontinued Operations

Concurrent with the announcement of the Cristal Transaction, we expressed intent to begin a process to market our Alkali soda ash business which met the criteria as held for sale in the third quarter and was sold on September 1, 2017. The sale of Alkali is an important step in positioning us as a global leader in the titanium dioxide (TiO₂) industry. The proceeds will be used to fund a portion of the cash consideration for the Cristal acquisition and a portion was also used in the refinancing of our debt. See Notes 1 and 11. The criteria for presentation of Alkali as a discontinued operation in accordance with Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity was met in the third quarter of 2017.  This disposal is considered a strategic shift that has and will have a major effect on the Company’s operations and financial results; therefore, the results of Alkali have been classified as discontinued operations for all periods presented.  Alkali assets as of December 31, 2016 have been segregated from continuing operations and presented as current assets or current liabilities from discontinued operations.

Alkali, which was previously one of our two operating and reportable segments, included certain allocated corporate costs which have been reallocated to Corporate. The amount of allocated corporate costs was $1 million and $3 million, respectively, for each of the three and nine months ended September 30, 2017 and 2016.  After the sale, we now operate in a single operating and reportable segment, TiO₂.

The following table presents the major classes of Alkali’s line items constituting the “Income (loss) from discontinued operations, net of tax” in our Condensed Consolidated Statements of Operations:

 

The following table is a summary of the carrying amounts of Alkali’s assets and liabilities included as “Total assets of discontinued operations” and “Total liabilities of discontinued operations” of December 31, 2016:

3.	Income Taxes

Our operations are conducted through our various subsidiaries in a number of countries throughout the world. We have provided for income taxes based upon the tax laws and rates in the countries in which operations are conducted and income is earned.

During the fourth quarter of 2016, we implemented various steps of an internal corporate restructuring plan to simplify our corporate, finance and legal structure and thereby improve operational, administrative, and commercial synergies (the “Corporate Reorganization”). As a result of this Corporate Reorganization, we reduced our cross jurisdictional financing arrangements during 2016; therefore, the three and nine months period ended September 30, 2017 is not impacted by withholding tax accruals on interest income. In connection with the Corporate Reorganization during the three months period ended March 31, 2017, Tronox Limited became managed and controlled in the United Kingdom (“U.K”), with no additional impacts to the consolidated provision for income taxes due to the valuation allowances in various jurisdictions.

During the nine months ended September 30, 2017, Tronox Limited, the public parent which is registered under the laws of the State of Western Australia, became managed and controlled in the U.K. The statutory tax rate in the U.K. at September 30, 2017 was 19%. During 2016, Tronox Limited was managed and controlled in Australia which has a statutory tax rate of 30%.

During the three months ended September 30, 2017 we sold the Alkali segment of our operations.  The Alkali results are now shown as discontinued operations and are not included in the tabular results above.  The effective tax rate for the three months ended September 30, 2017 differs from both the three months ended September 30, 2016, and the nine months ended September 30, 2017 primarily due to the discrete results of reporting the effects of this sale.

 

Additionally, the effective tax rate for the three and nine months ended September 30, 2017 differs from the U.K. statutory rate of 19% primarily due to valuation allowances, income in foreign jurisdictions taxed at rates different than 19%. The effective tax rate for the three and nine months ended September 30, 2016 differs from the Australian statutory rate of 30% primarily due to valuation allowances and income in foreign jurisdictions taxed at rates lower than 30%, and withholding tax accruals on interest income. The income tax provision for the three and nine months ended September 30, 2017 differs from the income tax provision for the three and nine months ended September 30, 2016 due to withholding tax accruals on interest income which we made during 2016.

The statutory tax rates in various countries where subsidiaries of Tronox Limited have operations are different than both the U.K. and the Australian tax rates. Tax rates in the United States (“U.S.”) (35% for corporations), South Africa (28% for limited liability companies), the Netherlands (25% for corporations), Switzerland (8.5% for corporations) and Jersey, U.K. (0% for corporations) all impact our effective tax rate.

We continue to maintain full valuation allowances related to the total net deferred tax assets in Australia, the Netherlands, and the U.S., as we cannot objectively assert that these deferred tax assets are more likely than not to be realized. Future provisions for income taxes will include no tax benefits with respect to losses incurred and tax expense only to the extent of current state tax payments until the valuation allowances are eliminated. Additionally, we have valuation allowances against specific tax assets in South Africa, and during the nine month period ended September 30, 2017 we established a valuation allowance of $7 million against deferred tax assets in the U.K. which we do not currently expect to utilize.

These conclusions were reached by the application of ASC 740, Income Taxes, which require all available positive and negative evidence be weighted to determine whether a valuation allowance should be recorded. The more significant evidential matter in Australia, the U.S., The Netherlands, and the U.K. relates to recent book losses and the lack of sufficient projected taxable income. The more significant evidential matter for South Africa relates to assets that cannot be depleted or depreciated for tax purposes and capital gains tax losses which we do not expect to utilize.

The Company is currently under audit in Australia and the United States. We believe that we have made adequate provision for income taxes that may be payable with respect to years open for examination; however, the ultimate outcome is not presently known and, accordingly, additional provisions may be necessary and/or reclassifications of noncurrent tax liabilities to current may occur in the future.

4.	Income (Loss) Per Share

The computation of basic and diluted income (loss) per share for the periods indicated is as follows:

(1)

Our participating securities do not have a contractual obligation to share in losses; therefore, when we have a net loss, none of the loss is allocated to participating securities.  Consequently, for the three and nine months ended September 30, 2017 and 2016, the two-class method did not have an effect on our net loss per ordinary share calculation, and as such, dividends paid during the year did not impact this calculation.

(2)

Loss per ordinary share amounts were calculated from exact, not rounded, loss and share information.

 

In computing diluted net income (loss) per share under the two-class method, we considered potentially dilutive shares. Anti-dilutive shares not recognized in the diluted net loss per share calculation for the nine months ended September 30, 2017 and 2016 were as follows:

(1)	Series A Warrants were converted into Class A ordinary shares at September 30, 2017 and 2016 using a rate of 6.02.  Series B Warrants were converted into Class A ordinary shares at September 30, 2017 and 2016 using a rate of 6.03.

5.	Accounts Receivable, Net of Allowance for Doubtful Accounts

Accounts receivable, net of allowance for doubtful accounts, consisted of the following:

6.	Inventories, Net

Inventories, net consisted of the following:

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(1)	Consists of processing chemicals, maintenance supplies, and spare parts, which will be consumed directly and indirectly in the production of our products.

Finished goods include inventory on consignment of $29 million and $24 million at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, inventory obsolescence reserves primarily for materials and supplies were $15 and $17 million, respectively. At September 30, 2017 and December 31, 2016, reserves for lower of cost or market were $17 million and $26 million, respectively.

 

7.	Property, Plant and Equipment, Net

Property, plant and equipment, net of accumulated depreciation, consisted of the following:

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(1)	Substantially all of these assets are pledged as collateral for our debt. See Note 11.

Depreciation expense related to property, plant and equipment during the three months ended September 30, 2017 and 2016 was $31 million and $30 million, respectively, of which $30 million and $29 million, respectively, was recorded in “Cost of goods sold” in the unaudited Condensed Consolidated Statements of Operations and $1 million each was recorded in “Selling, general and administrative expenses” in the unaudited Condensed Consolidated Statements of Operations. Depreciation expense related to property, plant and equipment during the nine months ended September 30, 2017 and 2016 was $93 million and $86 million, respectively, of which $91 million and $84 million, respectively, was recorded in “Cost of goods sold” in the unaudited Condensed Consolidated Statements of Operations and $2 million each was recorded in “Selling, general and administrative expenses” in the unaudited Condensed Consolidated Statements of Operations.

8.	Mineral Leaseholds, Net

Mineral leaseholds, net of accumulated depletion, consisted of the following:

Depletion expense relating to mineral leaseholds recorded in “Cost of goods sold” in the unaudited Condensed Consolidated Statements of Operations was $8 million during each of the three months ended September 30, 2017 and 2016 and $24 million and $26 million, respectively, during the nine months ended September 30, 2017 and 2016.

9.	Intangible Assets, Net

Intangible assets, net of accumulated amortization, consisted of the following:

Amortization expense related to intangible assets during each of the three months ended September 30, 2017 and 2016 was $6 million of which less than $1 million each was recorded in “Cost of goods sold” in the unaudited Condensed Consolidated Statements of Operations and $6 million each was recorded in “Selling, general and administrative expenses” in the unaudited Condensed Consolidated Statements of Operations. Amortization expense related to intangible assets during each of the nine months ended September 30, 2017 and 2016 was $19 million of which $1 million each was recorded in “Cost of goods sold” in the unaudited Condensed Consolidated Statements of Operations and $18 million each was recorded in “Selling, general and administrative expenses” in the unaudited Condensed Consolidated Statements of Operations. Estimated future amortization expense related to intangible assets is $6 million for the remainder of 2017, $25 million each for 2018 through 2021, and $97 million thereafter.

 

10.	Accrued Liabilities

Accrued liabilities consisted of the following:

11.

Debt

Debt Refinancing

On September 22, 2017, we completed our offering of our Senior Notes due 2025 for an aggregate principal amount of $450 million, the net proceeds of which, together with borrowings under our $2.150 billion New Term Loan Facility and proceeds from the Alkali sale, funded the redemption of the remaining outstanding balance of our Senior Notes due 2020 and repayment in full of the remaining outstanding balance of our $1.5 billion Prior Term Loan. In addition, we paid off our UBS Revolver and entered into a new asset-based revolving syndicated facility with Wells Fargo (all defined below).

The refinancing of our Senior Notes due 2020 was considered a debt extinguishment in accordance with ASC 470, Debt (“ASC 470”).  However, for refinancing of both the UBS Revolver and the New Term Loan Facility, a portion of each of these refinancing arrangements were considered modifications and a portion considered extinguishments in accordance with the requirements of ASC 470 as some of the original lenders in the original syndications were part of the new lender base.

Short-term Debt

During the third quarter of 2017, we repaid the $150 million outstanding balance under the global senior secured asset-based syndicated revolving credit facility with UBS AG (the “UBS Revolver”). Concurrent with entering into the Wells Fargo Revolver, described below, the UBS Revolver was terminated. Unamortized original debt issuance costs of $1 million relating to the UBS Revolver were included in “Gain (loss) on extinguishment of debt” in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017. The remaining unamortized balance of original debt issuance costs of $2 million relating to the UBS Revolver will be amortized over the life of the Wells Fargo Revolver.

Wells Fargo Revolver

On September 22, 2017, we entered into a new global senior secured asset-based syndicated revolving credit facility with the lenders party thereto and Wells Fargo Bank, N.A. as administrative agent (the “Wells Fargo Revolver”). The Wells Fargo Revolver provides us with up to $550 million of revolving credit loans, with an $85 million sublimit for letters of credit, and has a maturity date of September 22, 2022.  Our availability of revolving credit loans and letters of credit is subject to a borrowing base. Borrowings bear interest at our option, at either an adjusted London Interbank Offered Rate (“LIBOR”) plus an applicable margin that ranges from 1.25% to 1.75%, or a base rate, which is defined to mean the greatest of (a) the administrative agent’s prime rate, (b) the Federal funds effective rate plus 0.50% and (c) the adjusted LIBOR for a one-month period plus 1.00%, plus an applicable margin that ranges from 0.25% to 0.75%, in each case, based on the average daily borrowing availability. At September 30, 2017, there was no outstanding revolving credit loans under the Wells Fargo Revolver, except for $19 million of issued and undrawn letters of credit under the Wells Fargo Revolver. Debt issuance costs associated with the Wells Fargo Revolver of $6 million ($2 million remaining from the UBS Revolver and $4 million incurred for the Wells Fargo Revolver) were included in “Other long-term assets” in the Condensed Consolidated Balance Sheets at September 30, 2017 and will be amortized over the life of the Wells Fargo Revolver.

 

Long-term debt, net of an unamortized discount and debt issuance costs, consisted of the following:

(1)

Average effective interest rate of 5.2% and 5.1% during the three and nine months ended September 30, 2017, respectively, and 4.9% each during the three and nine months ended September 30, 2016.

(2)

Average effective interest rate of 4.5% during each of the three and nine months ended September 30, 2017.

At September 30, 2017, the scheduled maturities of our long-term debt were as follows:

Prior Term Loan

On April 23, 2014, we, along with our wholly owned subsidiary, Tronox Pigments (Netherlands) B.V., and certain named guarantor subsidiaries, entered into a Third Amended and Restated Credit and Guaranty Agreement (the “Third Agreement”) with the lenders party thereto and Goldman Sachs Bank USA, as administrative agent. Pursuant to the Third Agreement, we obtained a $1.5 billion senior secured term loan (the “Prior Term Loan”) with a maturity date of March 19, 2020. As mentioned above, on September 22, 2017, we repaid the remaining $1.4 billion outstanding balance of the $1.5 billion Prior Term Loan and entered into the New Term Loan Facility described below. Unamortized original debt discount and issuance costs of $1 million relating to the Prior Term Loan were included in “Gain (loss) on extinguishment of debt” in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017. The remaining balance of unamortized original debt discount and issuance costs of $16 million relating to the Prior Term Loan will continue to be amortized over the life of the New Term Loan Facility.

New Term Loan Facility

On September 22, 2017, we entered into a new senior secured first lien term loan facility (the “New Term Loan Facility”) with the lenders party thereto and Bank of America, N.A., as administrative agent, with a maturity date of September 22, 2024. The New Term Loan Facility consists of (i) a U.S. dollar term facility in an aggregate principal amount of $1.5 billion (the “New Term Loans”) with our subsidiary, Tronox Finance LLC (“Tronox Finance”) as the borrower and (ii) a U.S. dollar term facility in an aggregate principal amount of $650 million (the “Blocked Term Loan”)  with our unrestricted subsidiary, Tronox Blocked Borrower LLC (the “Blocked Borrower”) as the borrower, which Blocked Term Loan was funded into a blocked account.  Upon consummation of the Cristal acquisition, the Blocked Borrower will merge with and into Tronox Finance, and the Blocked Term Loan will become available to Tronox Finance. If the Cristal Acquisition is terminated, the Blocked Term Loan will be repaid to the lenders of such Blocked Term Loan. The proceeds from the Blocked Term Loan were included in “Restricted cash” in the Condensed Consolidated Balance Sheets at September 30, 2017. The term loans under the New Term Loan Facility bear interest at the “Applicable Rate” defined by reference to a grid pricing matrix that relates to our first lien net leverage ratio. Based upon our first lien net leverage ratio, the Applicable Rate under the New Term Loan Facility as of September 30, 2017 was 300 basis points plus LIBOR. The New Term Loan Facility was issued net of an original issue discount of $11 million. Debt issuance costs of $4 million relating to the New Term Loans were included in “Gain (loss) on extinguishment of debt” in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017. Debt issuance costs of $30 million associated with the New Term Loan Facility ($13 million remaining from the Prior Term Loan and $17 million incurred for the New Term Loan Facility) were recorded as a direct reduction of the carrying value of the long-term debt as described below and will be amortized over the life of the New Term Loan Facility.

 

Senior Notes due 2020

On September 25, 2017, we redeemed (the “Redemption”) the $896 million outstanding balance of our $900 million aggregate principal, 6.375% senior notes due 2020 issued by Tronox Finance (the “Senior Notes due 2020”). The total cash payment made in connection with the Redemption was approximately $917 million, and included accrued interest of $7 million and a call premium of $14 million (the “Call Premium”) included in “Gain (loss) on extinguishment of debt” in the unaudited Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2016, we repurchased $4 million of face value of the Senior Notes due 2020 at a price of 77% of par, resulting in a net gain of approximately $1 million which was included in “Gain (loss) on extinguishment of debt” in the unaudited Condensed Consolidated Statements of Operations. The Senior Notes due 2020 were fully and unconditionally guaranteed on a senior and unsecured basis by us and certain of our subsidiaries. As a result of the Redemption, we are no longer required to present guarantor condensed consolidating financial statements starting with this Form 10-Q for the period ended September 30, 2017. In connection with the Redemption, we recorded a loss on extinguishment of debt of $22 million included in “Gain (loss) on extinguishment of debt”, of which $8 million related to unamortized debt issuance costs and $14 million related to the Call Premium.

Senior Notes due 2022

We have $600 million aggregate principal amount, 7.50% Senior Notes due 2022 (the “Senior Notes due 2022”) which notes were issued pursuant to an indenture dated March 19, 2015 (the “2022 Indenture”). The Senior Notes due 2022 have not been registered under the Securities Act, and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements. There were no repayments during the three and nine months ended September 30, 2017. During the nine months ended September 30, 2016, we repurchased $16 million of face value of notes at a weighted average price of 76% of par, resulting in a net gain of approximately $3 million which was included in “Gain (loss) on extinguishment of debt” in the unaudited Condensed Consolidated Statements of Operations.

The Indenture and the Senior Notes due 2022 provide, among other things, that the Senior Notes due 2022 are senior unsecured obligations of Tronox Finance and are guaranteed on a senior and unsecured basis by us and certain of our other subsidiaries. Interest is payable on March 15 and September 15 of each year until their maturity date of March 15, 2022. The terms of the 2022 Indenture, among other things, limit, in certain circumstances, the ability of us to: incur certain additional indebtedness and issue preferred stock; make certain dividends, distributions, investments and other restricted payments; sell certain assets; incur liens; agree to any restrictions on the ability of certain subsidiaries to make payments to us; consolidate or merge with or into, or sell substantially all of our assets to, another person; enter into transactions with affiliates; and enter into new lines of business. At September 30, 2017 and December 31, 2016, debt issuance costs related to the Senior Notes due 2022 of $8 million and $10 million, respectively, were recorded as a direct reduction of the carrying value of the long-term debt as described below.

Senior Notes due 2025

On September 22, 2017, our wholly-owned subsidiary Tronox Finance plc, issued 5.75% senior notes due 2025 for an aggregate principal amount of $450 million (the “Senior Notes due 2025”), which notes were issued under an indenture dated September 22, 2017 (the “2025 Indenture”). The 2025 Indenture and the Senior Notes due 2025 provide, among other things, that the Senior Notes due 2025 are senior unsecured obligations of Tronox Finance plc and are guaranteed on a senior and unsecured basis by us and certain of our other subsidiaries. The Senior Notes due 2025 have not been registered under the Securities Act, and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements. Interest is payable on April 1 and October 1 of each year beginning on April 1, 2018 until their maturity date of October 1, 2025. The terms of the 2025 Indenture, among other things, limit, in certain circumstances, the ability of us and certain of our subsidiaries to: incur secured indebtedness, engage in certain sale-leaseback transactions and merge, consolidate or sell substantially all of our assets. The terms of the 2025 Indenture also include certain limitations on our non-guarantor subsidiaries incurring indebtedness. Debt issuance costs of $9 million relating to the Senior Notes due 2025 were recorded as a direct reduction of the carrying value of the long-term debt as described below and will be amortized over the life of the Senior Notes due 2025.

 

Liquidity and Capital Resources

As of September 30, 2017, we had $238 million available under the $550 million Wells Fargo Revolver and $1.1 billion in cash and cash equivalents. In addition, restricted cash as of September 30, 2017 included the $650 million proceeds from the Blocked Term Loan discussed above.

Lease Financing

We have capital lease obligations in South Africa, which are payable through 2031 at a weighted average interest rate of approximately 14%. At September 30, 2017 and December 31, 2016, assets recorded under capital lease obligations were $21 million and $7 million, respectively. Related accumulated amortization was $7 million and $6 million at September 30, 2017 and December 31, 2016, respectively. During each of the three and nine months ended September 30, 2017 and 2016, we made principal payments of less than $1 million.

Fair Value

Our debt is recorded at historical amounts. At September 30, 2017 and December 31, 2016, the fair value of the New Term Loan Facility was $2.2 billion. At September 30, 2017 and December 31, 2016, the fair value of the Senior Notes due 2022 was $616 million and $544 million, respectively. At September 30, 2017 the fair value of our Senior Notes due 2025 was $461 million. We determined the fair value of the New Term Loan Facility, the Senior Notes due 2022 and the Senior Notes due 2025 using quoted market prices. The fair value hierarchy for the New Term Loan Facility, the Senior Notes due 2022 and the Senior Notes due 2025 is a Level 1 input. Balances outstanding under our Wells Fargo Revolver are carried at contracted amounts, which approximate fair value based on the short term nature of the borrowing and the variable interest rate. The fair value hierarchy for our Wells Fargo Revolver is a Level 2 input.

Debt Covenants

At September 30, 2017, we had no financial covenants in the Wells Fargo Revolver and the New Term Loan Facility. We were in compliance with all our reporting covenants as of and for the three and nine months ended September 30, 2017.

Interest and Debt Expense, Net

Interest and debt expense, net in the unaudited Condensed Consolidated Statements of Operations consisted of the following:

In connection with obtaining debt, we incurred debt issuance costs, which are being amortized through the respective maturity dates using the effective interest method. At September 30, 2017, we had deferred debt issuance costs of $6 million related to the Wells Fargo Revolver which is recorded in “Other long-term assets” in the unaudited Condensed Consolidated Balance Sheets. At September 30, 2017, we had $30 million and $9 million of debt discount and issuance costs related to the New Term Loan Facility and the Senior Notes due 2025, respectively, which was recorded as a direct reduction of the carrying value of the long term debt in the unaudited Condensed Consolidated Balance Sheets. At September 30, 2017 and December 31, 2016, we had $8 million and $10 million, respectively, of debt issuance costs related to the Senior Notes 2022, which were recorded as a direct reduction of the carrying value of the long term debt in the unaudited Condensed Consolidated Balance Sheets.

 

12.	Asset Retirement Obligations

Asset retirement obligations consist primarily of rehabilitation and restoration costs, landfill capping costs, decommissioning costs, and closure and post-closure costs. Activity related to asset retirement obligations was as follows:

Asset retirement obligations in our unaudited Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 consist of a current portion of $4 million and $3 million, respectively, included in “Accrued liabilities” and a noncurrent portion of $78 million and $73 million, respectively, included in “Asset retirement obligations”.

During the nine months ended September 30, 2016, we amended our lease agreement for our TiO₂ pigment facility in Botlek, The Netherlands, which included an option to extend the lease term for an additional 25 years. This amendment increased the estimated useful life used in determining the asset retirement obligation and consequently, we recognized a $10 million reduction to this liability.

13.	Commitments and Contingencies

Purchase and Capital Commitments — At September 30, 2017, purchase commitments were $72 million for the remainder of 2017, $82 million for 2018, $57 million for 2019, $41 million for 2020, $29 million for 2021, and $118 million thereafter.

Letters of Credit — At September 30, 2017, we had outstanding letters of credit, bank guarantees, and performance bonds of $43 million, of which $19 million were letters of credit issued under the Wells Fargo Revolver, $18 million were bank guarantees issued by ABSA Bank Limited (“ABSA”), $5 million were bank guarantees issued by Standard Bank, $1 million were performance bonds issued by Westpac Banking Corporation and less than $1 million of letters of credit issued by UBS.

Other Matters—From time to time, we may be party to a number of legal and administrative proceedings involving legal, environmental, and/or other matters in various courts or agencies. These proceedings, individually and in the aggregate, may have a material adverse effect on us. These proceedings may be associated with facilities currently or previously owned, operated or used by us and/or our predecessors, some of which may include claims for personal injuries, property damages, cleanup costs, and other environmental matters. Current and former operations may also involve management of regulated materials that are subject to various environmental laws and regulations including the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act or state equivalents. Similar environmental laws and regulations and other requirements exist in foreign countries in which we operate. Currently, we are not party to any pending legal or administrative proceedings that may have a material adverse effect, either individually or in the aggregate, on our business, financial condition or results of operations.

 

14.	Shareholders’ Equity

The changes in outstanding Class A Shares and Class B Shares for the nine months ended September 30, 2017 were as follows:

Warrants

We have outstanding Series A Warrants (the “Series A Warrants”) and Series B Warrants (the “Series B Warrants”), together (the “Warrants”). At September 30, 2017, holders of the Series A Warrants and the Series B Warrants were entitled to purchase 6.02 and 6.03 of Class A Shares, respectively, and receive $12.50 in cash at an exercise price of $51.21 for each Series A Warrant and $56.51 for each Series B Warrant. The Warrants have a seven-year term from the date initially issued and will expire on February 14, 2018. A holder may exercise the Warrants by paying the applicable exercise price in cash or exercising on a cashless basis. The Warrants are freely transferable by the holder. At September 30, 2017 and December 31, 2016, there were 159,530 and 239,306 Series A Warrants outstanding, respectively, and 167,377 and 323,915 Series B Warrants outstanding, respectively.

Dividends

During 2017, we declared and paid quarterly dividends to holders of our Class A Shares and Class B Shares as follows:

 

During 2016, we declared and paid quarterly dividends to holders of our Class A Shares and Class B Shares as follows:

 

Accumulated Other Comprehensive Loss Attributable to Tronox Limited

The tables below present changes in accumulated other comprehensive income (loss) by component for the three months ended September 30, 2017 and 2016.