Tronox Limited — Q3 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2014, compared with the same periods in 2013. Tronox produces titanium dioxide (TiO₂) pigment and mineral sands products, including titanium feedstock, zircon and pig iron. Its reportable segments are Mineral Sands and Pigment.
Financial performance and position
| Metric (USD millions, except per-share data and percentages) | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | 429 | 491 | 1,337 | 1,486 |
| Gross profit | 68 | 54 | 153 | 136 |
| Gross margin | 16% | 11% | 11% | 9% |
| Operating income (loss) | 11 | 9 | 5 | (1) |
| Net loss attributable to Tronox | (93) | (49) | (151) | (119) |
| Loss per share | (0.82) | (0.43) | (1.33) | (1.05) |
| Adjusted EBITDA | 100 | 92 | 272 | 266 |
- For the nine months, operating cash flow was $89 million, versus $210 million; capital expenditures were $106 million versus $104 million. Cash declined $133 million to $1.345 billion.
- At September 30, cash and cash equivalents were $1.345 billion; unused availability was $279 million under the UBS revolver and about $80 million under the ABSA facility. Total liquidity was $1.704 billion, and working capital was $2.178 billion.
- Total debt was $2.398 billion, including $18 million due within one year; net debt was $1.053 billion, up from $935 million at year-end 2013. Nine-month net interest and debt expense was $101 million. The company reported compliance with financial covenants.
- Q3 and nine-month dividends paid were $29 million per quarter and $87 million total, respectively. A further $0.25-per-share dividend, totaling $29 million, was declared November 5, payable December 3, 2014.
Material changes versus comparable periods
- Sales fell 13% in Q3 and 10% year to date. Lower selling prices and product mix reduced Q3 sales by $25 million and nine-month sales by $99 million; lower volumes reduced them by $37 million and $57 million, respectively.
- Higher gross profit and margins reflected improved Pigment results and lower production costs, partly offset by weaker Mineral Sands pricing and margins. Pigment operating income was $35 million in Q3 and $30 million year to date, versus losses of $29 million and $153 million. Mineral Sands operating income fell to $8 million and $9 million, from $41 million and $205 million.
- Net loss attributable to Tronox worsened by $44 million in Q3 and $32 million year to date. Interest expense increased, and Q3 included a $35 million noncash loss on liquidation of a non-operating subsidiary. The nine-month results also included an $8 million debt-extinguishment charge and a $56 million increase in the Netherlands tax valuation allowance.
- Foreign currency translation produced a $68 million other comprehensive loss in the first nine months of 2014, compared with a $206 million loss in 2013.
Outlook, commentary, risks and unusual items
- Management described pigment markets as seasonally lighter in Q4, with some positive developments anticipated in 2015. It said mineral feedstock remained oversupplied and expected gradual improvement as pigment markets strengthen. Tronox planned to direct chloride processed slag and natural rutile to its own Pigment business until market conditions improve.
- A September cost-reduction initiative targets approximately 80 employee positions and 65 contractor positions. The expected pretax charge is about $16 million ($10 million recorded in Q3 and $6 million expected in Q4), with approximately $25 million of annual savings expected in 2015. About $14 million is expected to be paid in cash, mostly in Q4 2014 and Q1 2015.
- Fairbreeze mine construction continued. Subject to regulatory approval and construction timing, operations were expected to begin in the second half of 2015, with full operation in 2016. Capital expenditures for the remainder of 2014 were expected to be $75–$90 million.
- The Term Loan was repriced to 300 basis points plus LIBOR, subject to a 1% LIBOR floor, from 350 basis points plus LIBOR. The loan maturity remained March 2020.
- The $5.15 billion Anadarko settlement is not payable to Tronox: 88% is directed to remediation trusts and governmental entities, and 12% to a tort trust. Tronox said it believes it will receive tax deductions as trust expenditures occur over time; these deductions may extend for decades.
- Tax valuation allowances, foreign exchange, feedstock and pigment market conditions, and substantial debt and interest costs are key considerations. Tronox also faces environmental compliance costs, asset-retirement obligations, and legal or administrative proceedings that could have a material adverse effect. It reported no material outstanding regulatory notices of violation or orders.
- The $35 million liquidation loss was noncash. Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly titled measures at other companies. No formal earnings or sales forecast was provided in the filing.
Important facts for investors to verify
- Whether pigment demand, pricing and margins improve as management anticipated, and whether mineral-feedstock oversupply eases.
- Whether the restructuring is completed on schedule, achieves the estimated $25 million annual savings, and stays within its expected costs.
- Fairbreeze regulatory approvals, construction progress, and expected startup timing.
- Cash conversion, capital spending, dividend commitments, net debt and interest-rate exposure, including the availability and terms of revolving facilities.
- The timing and realization of tax benefits, including the effects of valuation allowances and deductions related to Anadarko settlement trust spending.
- Potential environmental, rehabilitation and litigation exposures, and any changes to the company’s covenant compliance or disclosed risk factors.