Business context and reporting period
Tronox Limited’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. The company produces titanium dioxide pigment (TiO₂) and mineral-sands products, including titanium feedstock, zircon and pig iron. Its reportable segments are Mineral Sands and Pigment. The filing identifies the registrant as Tronox Limited.
Financial results and liquidity
Amounts are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $490 | $525 | $908 | $995 |
| Gross profit | $60 | $50 | $85 | $82 |
| Gross margin | 12% | 10% | 9% | 8% |
| Operating income (loss) | $15 | $9 | $(6) | $(10) |
| Net income (loss) | $2 | $(1) | $(52) | $(46) |
| Net income (loss) attributable to Tronox | $0 | $(13) | $(58) | $(70) |
| Adjusted EBITDA (non-GAAP) | $108 | $101 | $172 | $174 |
- Q2 sales fell 7%; first-half sales fell 9%. Lower prices and product mix were the principal drivers. Gross profit and margin improved, reflecting stronger pigment margins and favorable currency effects, partly offset by lower selling prices.
- First-half operating cash flow was $35, down from $79 in 2013. Capital expenditures were $67, versus $79; financing cash outflow was $69, versus $681 of inflow in 2013, which included $945 of borrowing proceeds. Cash declined $103 to $1,375.
- At June 30, cash was $1,375, total debt was $2,405 and net debt was $1,030. Total liquidity was $1,754, including $1,375 cash and undrawn availability of $294 under the UBS revolver and approximately $85 under the ABSA revolver. No revolver borrowings were outstanding.
- Working capital was $2,228, compared with $2,290 at year-end 2013. Total assets were $5,566 and total equity was $2,323. The company reported compliance with financial covenants.
Material changes versus the prior comparable period
- Mineral Sands revenue fell 27% in Q2 and 34% in the first half, primarily due to lower selling prices amid market oversupply and lower volumes. Segment operating income was $18 in Q2 versus $68; first-half income was $1 versus $164.
- Pigment revenue increased 8% in Q2 and 5% in the first half, mainly on higher volumes, while prices and product mix declined. Segment operating results improved to $8 income in Q2 from a $56 loss, and a $5 first-half loss from a $124 loss.
- Net interest and debt expense rose to $67 for the first half from $62. Other income fell to $3 from $32, largely because foreign-currency gains were substantially lower.
- Cash dividends totaled $58 in the first half, at $0.25 per share for each of Q1 and Q2. Net debt increased from $935 at December 31, 2013.
Outlook, commentary, risks and unusual items
- Management said pigment markets had substantially stabilized, with first-half sales volumes slightly higher and prices relatively level; it expected stable prices with positive movement in the second half of 2014. Management described feedstock markets as oversupplied and expected gradual improvement as pigment markets strengthened.
- Due to inadequate returns on high-grade chloride feedstock, Tronox expected to direct chloride-processed titanium slag and natural rutile to its own Pigment business until slag market conditions improve.
- Fairbreeze mine construction continued. Subject to regulatory approval and construction timing, management expected operations to begin in the second half of 2015 and full operation in 2016. Estimated remaining-2014 capital expenditures were $170–$185.
- The April 2014 term-loan amendment reduced the current margin from 350 to 300 basis points over LIBOR, subject to a 1% LIBOR floor. The amendment generated an $8 debt-extinguishment charge and $2 of new issuance costs. Total debt maturities, including interest and lease financing, were reported as $3,135, with $2,455 due after five years.
- The $5.15 billion Anadarko settlement was approved in May 2014; Tronox will receive none of the settlement proceeds. The filing says it believes it may claim tax deductions as the trusts spend settlement funds on remediation and compensation over time.
- Management recorded out-of-period adjustments affecting 2014 results; it concluded they were not material to previously issued statements or expected 2014 annual results. Q2 adjustments increased cost of goods sold by $6 and reduced SG&A by $1.
- Risks include continued mineral-sands oversupply and commodity pricing, foreign-exchange movements, floating-rate debt, environmental compliance and remediation obligations, and possible constraints on funding or cash transfers. The filing reports a full valuation allowance on U.S. net deferred tax assets, excluding the alternative minimum tax credit. It also notes that legal and environmental proceedings could have a material adverse effect, though no material regulatory notices or orders were outstanding.
Important facts for investors to verify
- Whether pigment pricing and volumes improved as management expected, and whether feedstock oversupply eased.
- Cash generation, capital spending and dividend sustainability, given first-half operating cash flow of $35 and $2,405 of total debt.
- Progress, approvals, costs and timing for the Fairbreeze mine and the replacement of Hillendale production.
- The realization and timing of tax deductions linked to Anadarko settlement trust spending, and the effect of U.S. deferred-tax valuation allowances.
- Potential environmental, legal and asset-retirement exposures, along with the impact of foreign exchange and floating interest rates.