Business context and reporting period
Tronox Limited’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; amounts are U.S. dollars in millions unless stated otherwise. The company operated TiO₂ and mineral-sands businesses and a natural soda ash business (“Alkali”).
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $622 | $538 | $1,191 | $1,014 |
| Gross profit | $124 | $59 | $214 | $80 |
| Gross margin | 20% | 11% | 18% | 8% |
| Operating income (loss) | $55 | $9 | $71 | $(22) |
| Net income (loss) | $5 | $(50) | $(33) | $(144) |
| Net income (loss) attributable to Tronox | $3 | $(52) | $(38) | $(145) |
| Basic and diluted earnings (loss) per share | $0.02 | $(0.44) | $(0.32) | $(1.24) |
| Adjusted EBITDA (non-GAAP) | $140 | $71 | $241 | $111 |
Q2 sales rose 16% year over year, primarily from higher prices and, to a lesser extent, higher volumes and product mix. TiO₂ sales increased 26% to $421 million; Alkali sales declined 2% to $201 million. Q2 operating income included $29 million of corporate costs, up from $10 million, including transaction-related professional fees and higher compensation expense.
For the first half, sales increased 17%. TiO₂ sales rose 29% to $799 million, while Alkali sales decreased 1% to $392 million. Operating improvement was led by higher TiO₂ prices and lower production costs. Interest and debt expense was $46 million in Q2 and $92 million for the half, unchanged year over year.
Cash, debt and liquidity
- Six-month operating cash flow was $137 million, versus $69 million in 2016; capital expenditures were $56 million. Cash increased $55 million to $303 million. Financing cash outflow was $31 million, including $12 million of dividends and $8 million of debt repayments.
- At June 30, cash was $303 million, short-term debt $150 million, and long-term debt, net, $2.886 billion. Net debt was approximately $2.7 billion, compared with $2.8 billion at year-end 2016.
- Working capital was $772 million. The company reported $181 million available under its UBS revolver, for total stated liquidity of $484 million. The approximately $100 million ABSA facility expired June 14, 2017; renewal discussions were ongoing.
- Management said existing cash, operations and revolver availability were expected to fund obligations for the next 12 months. No significant principal payments were due before 2020; scheduled debt maturities are concentrated in 2020. The company reported compliance with financial covenants.
Material changes, outlook and risks
- Cristal acquisition: Tronox agreed to acquire Cristal’s TiO₂ business for $1.673 billion cash, subject to adjustment, plus 37.58 million Class A shares. Closing was expected by Q1 2018, subject to financing, regulatory approvals, customary conditions and shareholder approval. The FTC issued a second request; a $100 million termination fee may apply in specified circumstances if closing has not occurred by May 21, 2018.
- Alkali sale: On August 2, 2017, after quarter-end, Tronox agreed to sell the Alkali business to Genesis Energy for $1.325 billion cash, subject to adjustment, with closing expected in the second half of 2017. The company expected an approximately $200 million after-tax loss, plus costs to sell. Alkali was still classified as held and used at June 30; beginning in Q3, its assets and liabilities were to be classified as held for sale and results presented as discontinued operations.
- Management described TiO₂ market conditions as recovering, with successive price increases since Q1 2016, tight supply-demand conditions and inventories at or below normal levels. It expected 2017 zircon sales volumes to exceed 2016. Alkali was described as sold out; the company cited expected global soda ash demand growth of about 2% annually through 2024. These are management expectations, not quantified company earnings guidance.
- Key exposures include commodity pricing and input costs, foreign exchange (particularly the South African rand and Australian dollar), floating interest rates, customer credit and funding/closing risks associated with the two transactions. A 1% interest-rate increase was estimated to raise annualized pretax loss by about $13 million.
- New risk disclosures address uncertainty over South African Black Economic Empowerment/mining charter requirements and potential effects of an EU proposal to classify TiO₂ as a Category 2 carcinogen by inhalation. The company said the revised South African charter was under legal challenge and suspended pending the process; the EU Commission had yet to decide on regulatory measures.
- The filing revised prior-period financial statements for an $11 million aggregate misstatement related to a liability arising from a late statutory filing, which management concluded was not material to those previously issued statements. 2016 comparisons presented here reflect revisions. The six-month 2016 cash flow totals were unchanged.
- The company said no pending legal or administrative proceeding was then expected to have a material adverse effect, individually or in aggregate. It also disclosed environmental compliance and reclamation obligations, including approximately $80 million secured by Wyoming mine surety bonds.
Important facts for investors to verify
- Progress on Cristal’s financing, FTC review and other regulatory and shareholder approvals, including timing and potential termination-fee exposure.
- Completion terms and timing of the Alkali sale, net proceeds after adjustments and costs, and the expected approximately $200 million after-tax loss.
- Whether stronger TiO₂ pricing and margins persist, and the effect of currency movements, production costs and soda ash pricing and mix.
- Liquidity after the ABSA facility’s expiration, the status of its renewal, refinancing plans and covenant headroom against substantial 2020 maturities.
- The detailed revised prior-period financial statements and developments in South African mining requirements and proposed EU TiO₂ classification.