Tronox Holdings plc — 2016 Form 10-K
Reporting period: Year ended December 31, 2016. This is an annual filing, not a standalone quarterly report; fourth-quarter figures are unaudited quarterly data included in the filing. Unless otherwise noted, amounts are in millions of U.S. dollars.
Business context
Tronox produces titanium-bearing mineral sands and titanium dioxide (TiO₂) pigment, and natural soda ash. It reports two segments: TiO₂, including mining, feedstock, pigment and electrolytic products; and Alkali, producing soda ash and specialty sodium products. The Alkali business was acquired in April 2015, so 2015 comparisons include only nine months of Alkali results versus a full year in 2016.
Key financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $2,093 | $2,112 |
| Gross profit / gross margin | $247 / 12% | $120 / 6% |
| Operating income (loss) | $36 | $(118) |
| Net loss | $(58) | $(307) |
| Net loss attributable to Tronox | $(59) | $(318) |
| Operating cash flow | $211 | $216 |
| Capital expenditures | $119 | $191 |
| Adjusted EBITDA (non-GAAP) | $314 | $272 |
Fourth-quarter 2016 sales were $548, gross profit was $90 and net income attributable to Tronox was $122; fourth-quarter 2015 sales were $535, gross profit was $22 and net loss attributable to Tronox was $90. The fourth-quarter 2016 profit included a $137 benefit from the corporate reorganization, principally the reversal of withholding-tax accruals.
By segment, 2016 sales were $1,309 for TiO₂ (down from $1,510) and $784 for Alkali (up from $602, largely reflecting the additional three months). Segment operating income was $6 for TiO₂ versus a loss of $123 in 2015, and $84 for Alkali versus $69.
Liquidity, debt and cash flow
- Year-end cash and cash equivalents were $248; working capital was $731, down from $753.
- Reported liquidity was $533: cash of $248, $190 available under the UBS revolver and $95 under the ABSA revolver.
- Total debt principal was approximately $3.1 billion; net debt was $2.8 billion. Debt included a $1.5 billion variable-rate term loan, $900 million of 6.375% notes due 2020 and $600 million of 7.50% notes due 2022. The term loan matures in 2020.
- Cash from operations was $211; investing used $117, including $119 of capital expenditures; financing used $77, including $46 of dividends and $31 of debt repayments.
- Management said operations and available revolver borrowings were expected to fund operating costs, capital spending, interest, debt repayments and dividends over the next 12 months. The company reported compliance with financial covenants at year-end.
Material changes and management commentary
- Sales declined 1% year over year. Management attributed the overall decrease to lower prices and product mix ($124), lower volumes ($84) and currency, partly offset by the full-year Alkali contribution ($190).
- Gross profit improved by $127, reflecting lower production costs and product mix, favorable currency effects and the full-year Alkali contribution; lower selling prices partly offset these gains. TiO₂ pigment pricing recovered during 2016, with management reporting prices 9% above December 2015 and capacity utilization above 90%.
- Management reported $73 of incremental TiO₂ cash-cost reductions and approximately $142 of working-capital reductions. The global TiO₂ restructuring was completed in 2016.
- Fairbreeze mine in South Africa entered commercial production in April 2016. The Natronx joint venture ceased operations during 2016; Tronox recorded a $1 reserve for its share of exit costs and expected no further costs.
- Other income/expense shifted to a $29 expense from $28 income, principally reflecting a $32 foreign-currency loss. Interest and debt expense rose to $184 from $176.
Outlook, risks and contingencies
- Management described TiO₂ industry demand and pricing as recovering, with tight supply-demand conditions, but noted weak third-party demand for high-grade feedstock and zircon prices below prior-year levels. It expected 2017 zircon sales volumes to exceed 2016 as Fairbreeze production ramped up.
- Management described Alkali as sold out and expected global soda ash demand to grow about 2% annually through 2024; export pricing remains exposed to Chinese producer costs and new Turkish capacity.
- Key risks include volatile TiO₂ and soda ash prices, energy and raw-material costs, foreign exchange, high debt and restrictive covenants, labor and operating disruptions, and environmental and permitting obligations. South African power, water, regulatory and labor conditions, plus reliance on a single rail line for most Alkali shipments, are notable exposures.
- A French REACH authority proposal to classify TiO₂ as carcinogenic by inhalation could, if adopted, affect product marketing and compliance costs; no final classification was reported in this filing.
- After year-end, on February 21, 2017, Tronox agreed to acquire Cristal’s TiO₂ business for $1.673 billion cash plus 37.58 million Class A shares, subject to approvals and financing. Tronox also announced plans to pursue a sale of Alkali and selected other assets to help fund the cash consideration. The agreement provides for a $100 million termination fee in specified circumstances; completion was expected before first-quarter 2018.
- Standard & Poor’s lowered Tronox’s corporate credit rating to B, negative outlook, on January 23, 2017; year-end ratings were S&P B+ and Moody’s B2, both with negative outlook.
- The filing reported no pending legal or administrative proceeding expected to have a material adverse effect. The WDEQ was reviewing the company’s approximately $80 million self-bond for reclamation obligations; management did not expect any resulting remediation to materially affect the financial statements.
Important facts for investors to verify
- Whether the fourth-quarter and full-year earnings picture is sustainable without the $137 corporate-reorganization benefit, and how the benefit reconciles to the full-year net loss.
- TiO₂ pricing, volumes, feedstock demand and cost savings, alongside the segment’s 2016 operating income of only $6.
- Cash generation, revolver availability, covenant headroom and the 2020 debt maturities, particularly after the post-year-end rating downgrade.
- Whether Cristal transaction approvals and financing are obtained, whether Alkali and other asset sales generate sufficient proceeds, and the implications of the share issuance and potential termination fee.
- Developments in the proposed EU TiO₂ classification, South African operating and water risks, and renewal of Wyoming soda-ash leases.