Tronox Limited — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated financial statements; amounts are in millions of U.S. dollars unless stated otherwise. Tronox produces titanium dioxide (TiO₂) pigment and mineral-sands products, including titanium feedstock, zircon and pig iron.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $491 | $487 | $1,486 | $1,350 |
| Gross margin | $54 (11% of sales) | $43 (9%) | $136 (9%) | $325 (24%) |
| Operating income (loss) | $9 | $(17) | $(1) | $118 |
| Net income (loss) | $(41) | $(1) | $(87) | $1,229 |
| Net income (loss) attributable to Tronox | $(49) | $(3) | $(119) | $1,227 |
| Basic and diluted EPS attributable to Tronox | $(0.43) | $(0.03) | $(1.05) | $12.95 basic; $12.59 diluted |
| Operating cash flow | Not presented separately | Not presented separately | $210 | $75 |
| Capital expenditures | Not presented separately | Not presented separately | $104 | $91 |
Q3 gross margin improved as lower costs and favorable currency effects more than offset lower selling prices. For the nine-month period, gross margin declined substantially, principally because of lower selling prices and higher purchase-accounting depreciation, depletion and amortization. Q3 selling, general and administrative expense was $45, down from $60; nine-month expense was $137, down from $207.
Management reported Q3 EBITDA of $88 and Adjusted EBITDA of $92, versus $53 and $134, respectively, in Q3 2012. Nine-month EBITDA was $250 and Adjusted EBITDA was $266, versus $1,292 and $432 in 2012. These are non-GAAP measures; 2012 EBITDA included the $1,055 bargain-purchase gain.
Liquidity, debt and cash flow
- Cash and cash equivalents were $1,457 at September 30, 2013, compared with $716 at year-end 2012. Working capital was $2,381, versus $1,706.
- Total debt was $2,404, up from $1,615; net debt was $947, compared with $929. The filing reports total liquidity of $1,814, including cash and available borrowing capacity of $267 under the UBS revolver and $90 under the ABSA revolver. Neither revolver was drawn.
- Long-term debt included a $1.5 billion senior secured term loan maturing in 2020 and $900 million of 6.375% senior notes due 2020. The term loan’s stated average effective interest rate was 5.0%. The company was in compliance with debt covenants; the amended term-loan agreement eliminated financial maintenance covenants.
- Nine-month financing cash flow was $646, including $945 of borrowing proceeds, $185 of debt repayments, $29 of debt issuance costs and $86 of dividends paid. Cash increased by $741 during the period.
- Cash is geographically distributed ($711 Europe, $446 Australia, $165 South Africa and $135 United States); the filing notes restrictions on certain intercompany transfers and potential tax consequences of distributing some earnings.
Changes, outlook and notable items
- Q3 sales rose 1% year over year: higher volume was offset by lower prices and mix. Nine-month sales rose 10%, reflecting acquired operations and increased volume, partly offset by lower prices. Comparisons are affected by the June 2012 mineral-sands acquisition: the 2012 nine-month results include Tronox Incorporated before the transaction and are not fully comparable. The 2012 period also included a $1,055 bargain-purchase gain.
- By segment, Q3 Mineral Sands operating income was $41 versus $32 a year earlier; Pigment recorded an operating loss of $29 versus a $4 loss. For nine months, Mineral Sands operating income was $205 versus $129, while Pigment recorded a $153 loss versus $142 income. Lower pigment prices and mix were the principal pressure on Pigment results.
- Management said feedstock prices weakened in Q3 and expected continued pressure into Q4, with a moderate decline possible for some products before a recovery expected in the first half of 2014. Zircon and low-manganese pig-iron prices were described as stable, with stability forecast for Q4. TiO₂ sales volumes were stable sequentially, while selling prices decreased slightly. No formal earnings guidance was provided.
- Vertical integration was described as on track; by Q3, all Pigment feedstock purchases were from Mineral Sands. The company had cancelled two external ore-supply contracts earlier in 2013.
- Construction at the Fairbreeze mine in South Africa was suspended after a conservancy appealed the water-use license. Tronox planned to seek permission to resume construction while the appeal proceeded; the outcome was uncertain.
- Unusual items included a noncash $10 loss on liquidation of a Zurich branch and a $4 loss on early debt extinguishment. Nine-month other income included a $28 foreign-exchange gain and $5 of interest income. Currency translation reduced nine-month other comprehensive income by $206.
- Environmental liabilities and proceedings may require future costs; management said known probable and estimable environmental exposures were adequately reserved, but future additions could not be reliably estimated. A $5 million Western Australia stamp-duty assessment was paid in January 2013; the company’s objection to the interest penalty was denied in October, and it was evaluating options.
- Purchase commitments were $480 in total under the contractual-obligations schedule; long-term debt and lease payments, including interest, totaled $3,267. Management expected $70–$80 of capital expenditures for the remainder of 2013.
Most important facts for investors to verify
- Whether weakening mineral-sands and TiO₂ pricing, and the Pigment segment’s losses, persist or improve as management expected.
- The Fairbreeze appeal’s effect on construction timing, capital needs and project economics.
- Debt refinancing terms, interest burden, covenant headroom and the availability and location of reported cash.
- The sustainability of operating cash flow and dividend payments relative to capital spending, debt service and other commitments.
- The comparability of 2012 results with 2013, particularly the acquisition accounting, purchase-accounting charges and 2012 bargain-purchase gain.
- Potential changes in environmental reserves, legal matters and foreign-exchange exposure. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter.