Tronox Limited — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Figures are in U.S. dollars; financial statement amounts are in millions unless noted. Tronox produces titanium dioxide pigment (TiO₂) and titanium-bearing mineral sands, including feedstock and zircon, with operations in North America, Europe, South Africa and Australia.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $470 | $434 |
| Gross margin | $32; approximately 7% of sales | $157; approximately 36% of sales |
| Operating income (loss) | $(19) | $113 |
| Net income (loss) | $(45) | $86 |
| Net income (loss) attributable to Tronox | $(57); $(0.50) per share | $86; $1.14 basic per share |
| Adjusted EBITDA | $73 | $151 |
| Cash from operating activities | $(1) | $(26) |
| Capital expenditures | $45 | $21 |
Q1 2013 sales rose 8%, but gross margin fell sharply as higher input and production costs and lower TiO₂ selling prices more than offset higher volumes and acquired-business sales. Q1 cost of goods sold included $8 million of noncash purchase-accounting amortization. Interest and debt expense was $27 million, versus $8 million; a further $4 million loss arose from early debt extinguishment. The $12 million of income attributable to noncontrolling interests explains why the consolidated net loss of $45 million became a $57 million loss attributable to Tronox.
Balance sheet at March 31: Cash was $1.375 billion, total debt $2.411 billion, and net debt $1.036 billion, compared with $716 million, $1.615 billion and $929 million, respectively, at December 31, 2012. Working capital was $2.330 billion. Reported total liquidity was $1.748 billion, including cash and available borrowing capacity; neither the $300 million UBS revolver nor the ABSA revolver was drawn. Cash increased by $659 million, largely from financing activity associated with the debt refinancing, not operating cash generation.
Material changes and comparability
- March 2013 sales include acquired mineral-sands operations and full ownership of Tiwest. The Q1 2012 statements reflect Tronox Incorporated before the June 2012 transaction and do not provide a like-for-like comparison. The filing’s illustrative Q1 2012 pro forma figures were $562 million sales, $200 million operating income and $153 million net income; the company cautions that these are not necessarily indicative.
- Mineral Sands segment operating income increased to $96 million from $51 million, with acquired operations contributing materially. Pigment segment shifted to a $68 million operating loss from $109 million of income, primarily due to lower selling prices and higher feedstock and chemical costs.
- On March 19, 2013, Tronox obtained a $1.5 billion senior secured term loan maturing in March 2020, refinancing and replacing the prior term facility structure. It repaid the $149 million delayed-draw loan in February. Total debt rose, while the refinancing substantially increased reported cash.
- Foreign-currency translation adjustments reduced other comprehensive income by $119 million before the noncontrolling-interest allocation; the filing reports a $118 million total other comprehensive loss.
Outlook, risks and contingencies
- Management expected sequential demand momentum in both businesses and anticipated stronger mineral-sands and pigment markets in the second half of 2013. It reported higher pigment volumes versus Q4 2012 but lower selling prices in Q1. These are expectations, not quantified earnings guidance.
- Management said vertical integration was progressing, with more internally sourced feedstock and cancellation of contracts with two external ore suppliers. It expects integration and a low-cost position to support margins and cash generation if markets strengthen.
- Capital expenditures for the rest of 2013 were expected to be $175 million–$235 million. The Board declared a $0.25-per-share quarterly dividend in May, approximately $29 million in total.
- Key exposures include commodity-price and TiO₂ demand fluctuations, foreign exchange, customer credit concentration, environmental compliance and remediation, and South African political, labor and electricity disruption. The U.S. dollar strengthened about 8% against the South African rand in Q1. The Australian carbon tax was estimated to have an approximately $7 million annual impact.
- The company reported compliance with debt covenants at March 31. The term-loan amendment removed financial maintenance covenants for that facility, but customary restrictions remain; the ABSA revolver retained a financial maintenance covenant.
- Western Australia’s revenue authority assessed $5 million in stamp duty and penalties relating to historical share transfers. Tronox paid the assessment in January and disputed the $2 million penalty component; the outcome was pending. Tronox also disclosed environmental and other proceedings and said future environmental costs may be difficult to estimate.
Important facts for investors to verify
- How much of the reported year-over-year change reflects the acquisition and consolidation differences versus underlying price, volume and cost movements; compare with the filing’s explicitly non-indicative pro forma figures.
- Whether pigment pricing, input costs and utilization improve as management expects, and whether Mineral Sands gains offset continued pigment weakness.
- Cash availability and location, refinancing terms, debt service and covenant headroom; cash was concentrated in Australia, and reported liquidity includes undrawn facilities.
- Delivery of the stated 2013 capital-spending plan and the expected returns from vertical integration.
- Resolution of the stamp-duty penalty objection and any changes in environmental, rehabilitation or other legal liabilities.