Business context and reporting period
Tronox Limited’s unaudited Form 10-Q covers the three months ended March 31, 2015; amounts are in U.S. dollars. Tronox produces titanium-bearing mineral sands and titanium dioxide (TiO₂) pigment, with Mineral Sands and Pigment as its reportable segments.
Financial performance and liquidity
- Revenue and margins: Net sales were $385 million, down 8% from $418 million. Gross profit rose to $35 million from $25 million; gross margin was approximately 9% versus 6%. The company reported an operating loss of $9 million, improved from $21 million.
- Profit: Net loss was $46 million versus $54 million; loss attributable to Tronox was $49 million versus $58 million. Loss per share was $0.42 versus $0.51. Interest and debt expense remained $34 million.
- Cash flow: Operating cash use was $65 million, compared with $19 million. Investing cash use was $632 million, principally reflecting $600 million placed in restricted cash for the Alkali acquisition, plus $32 million of capital expenditures. Financing provided $569 million, including $600 million of note proceeds and $29 million of dividends. Cash and equivalents ended at $1.139 billion, excluding $608 million restricted cash.
- Debt and liquidity: Total borrowings were $2.988 billion, up from $2.393 billion at year-end, including $600 million of 7.5% senior notes due 2022 issued to help fund Alkali. Reported net debt was $1.8 billion versus $1.1 billion. Stated liquidity was $1.4 billion, comprising $1.1 billion cash and $248 million of borrowing availability across the UBS and ABSA facilities; restricted cash was excluded. Tronox was in compliance with financial covenants.
- Balance sheet: Total assets were $5.436 billion and total liabilities $3.778 billion at March 31. Working capital was $2.6 billion, up $541 million from year-end, largely because of the note proceeds held in escrow.
- Non-GAAP measure: Adjusted EBITDA was $64 million, unchanged year over year; reported EBITDA was $58 million versus $49 million.
Changes versus prior comparable period
- Sales fell $33 million: lower prices and product mix reduced revenue by $28 million, unfavorable currency translation by $13 million, partly offset by $8 million from higher volumes.
- Mineral Sands sales increased to $208 million from $178 million and segment operating income improved to $9 million from a $17 million loss, supported by higher volumes, currency effects and lower inventory valuation charges.
- Pigment sales declined to $246 million from $291 million, reflecting lower prices, mix, volumes and currency. Segment operating income nevertheless improved to $4 million from a $13 million loss, principally on lower feedstock and production costs.
- Foreign currency translation contributed a $63 million comprehensive loss, compared with an $8 million loss in Q1 2014.
Outlook, notable events and risks
- Management said pigment volumes increased sequentially, but expected competitive pricing in the near term; it described feedstock markets as oversupplied. No quantified earnings or revenue guidance was provided.
- On April 1, 2015, after quarter-end, Tronox completed its $1.64 billion cash acquisition of FMC’s Alkali Chemicals business, the world’s largest natural soda ash producer. Acquisition accounting and pro forma disclosures were still being prepared for the second quarter. The company also borrowed $150 million under its amended UBS revolver on April 1.
- Fairbreeze mine construction continued. Management expected operations to begin at the end of 2015 and full operation in 2016; the mine is estimated to have a 15-year life.
- Management expected operations and available revolver capacity to fund near-term operating costs, capital spending, debt payments and dividends. The board declared a further $0.25-per-share quarterly dividend after quarter-end.
- Disclosure controls were deemed ineffective at March 31 because of previously reported material weaknesses involving South African information flows and royalty accrual controls, and SAP access segregation and journal-entry review. Remediation was in progress.
- Tax benefits were constrained by full valuation allowances in Australia and the Netherlands. The filing says Tronox received no proceeds from the $5.2 billion Anadarko settlement; it believes trust expenditures may generate tax deductions over time, but related deferred tax assets were fully valuation-allowanced.
- Tronox recorded prior-period out-of-period adjustments that reduced Q1 cost of goods sold by $3 million and net loss by $2 million; management said they were not material to prior or expected 2015 statements. The filing reported no pending legal or administrative proceedings expected to have a material adverse effect, while noting ongoing environmental compliance and remediation exposure.
Important facts for investors to verify
- How Alkali’s purchase price, financing, acquired assets and liabilities, and subsequent operating results affect leverage, cash flow and earnings.
- Whether pigment pricing and feedstock oversupply persist, and whether volume and cost improvements can offset them.
- Unrestricted cash and borrowing availability after acquisition funding, including restrictions on moving cash among jurisdictions.
- Progress and independent validation of remediation for the disclosed material weaknesses and ineffective disclosure controls.
- Fairbreeze’s construction schedule, costs and expected production ramp, alongside environmental and other commitments.
- The continued effect of tax valuation allowances and the timing and realization of any deductions associated with Anadarko trust spending.