Tronox Limited — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial figures are in millions unless noted. Tronox produces titanium-bearing mineral sands and titanium dioxide (TiO₂) pigment. Following the September sale of its Alkali business, continuing operations comprise one reportable segment, TiO₂.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales, continuing operations | $435 | $339 | $1,234 | $957 |
| Gross profit | $106 | $48 | $263 | $80 |
| Gross margin | 24% | 14% | 21% | 8% |
| Operating income (loss), continuing operations | $51 | $0 | $78 | $(57) |
| Net income (loss) from continuing operations | $(25) | $(62) | $(95) | $(238) |
| Net income (loss) attributable to Tronox | $(247) | $(37) | $(285) | $(182) |
| Adjusted EBITDA (non-GAAP) | $123 | $58 | $285 | $106 |
- Q3 sales rose 28% year over year; nine-month sales rose 29%. Management attributed the increases mainly to higher TiO₂ selling prices, with additional contribution from prices and volumes for mineral-sands products.
- Gross margin improvement principally reflected higher selling prices. For the nine-month period, higher prices and volumes and lower production costs were partly offset by unfavorable currency translation.
- Reported net loss includes discontinued Alkali operations and the sale loss. The Alkali disposal loss was $233 million; total loss from discontinued operations was $216 million in Q3 and $179 million for the nine months. Q3 loss per share was $2.07, versus a $0.33 loss a year earlier; nine-month loss per share was $2.40, versus $1.57.
- Interest and debt expense was $47 million in Q3 and $140 million for the nine months, broadly comparable to prior-year periods. Debt extinguishment generated a $28 million loss in 2017.
Cash flow, liquidity and debt
- For the first nine months, continuing-operations operating cash flow was $94 million, compared with $13 million in 2016. Capital expenditures were $63 million.
- Investing activities provided $612 million, including $1.325 billion of Alkali sale proceeds and a $650 million term-loan amount held as restricted cash. Financing activities provided $20 million after substantial debt proceeds and repayments, issuance costs, a call premium and $17 million of dividends.
- At September 30, cash and cash equivalents were $1.058 billion; restricted cash was $653 million. The restricted amount included the $650 million Blocked Term Loan intended for the Cristal acquisition. Revolver availability was $238 million, subject to the borrowing base. The company reported total available liquidity of $1.296 billion, comprising cash and revolver availability.
- Long-term debt, net, was $3.129 billion, with $11 million due within one year; total borrowings before specified discounts and issuance costs were approximately $3.2 billion. Debt less cash and cash equivalents was $2.1 billion. The new first-lien term loan matures in 2024; notes outstanding include $600 million due 2022 and $450 million due 2025. The company reported no significant principal payments due until 2022.
- The September refinancing repaid the prior term loan and 2020 notes, issued a $2.15 billion term facility and $450 million of 5.75% notes due 2025, and replaced the prior revolver with a $550 million asset-based facility. The company said the refinancing lowered borrowing costs, extended weighted-average maturities and improved covenant terms. It reported no financial covenants in the new revolver or term loan and compliance with reporting covenants.
Material developments, outlook and risks
- Alkali sale: Completed September 1 for $1.325 billion in cash, subject to a working-capital adjustment. Proceeds are intended in part to fund the Cristal transaction and support the refinancing. Alkali is presented as discontinued operations.
- Cristal acquisition: Agreed consideration is $1.673 billion in cash, subject to adjustment, plus 37.58 million Class A shares. Shareholders approved the share issuance on October 2. Closing was expected by Q1 2018, subject to regulatory approvals and customary conditions; the FTC had issued a Second Request, with Tronox reporting substantial compliance. A $100 million termination fee may apply if specified conditions are met and closing has not occurred by May 21, 2018. The company expected to use cash, including restricted cash, and revolver liquidity to fund the transaction.
- Trading conditions: Management described a continuing TiO₂ industry recovery, successive quarterly pigment price increases since Q1 2016, and tight supply-demand conditions. It reported high plant utilization and expected 2017 zircon sales volumes to exceed 2016 as Fairbreeze production ramped up. No quantified earnings or revenue guidance was provided.
- Liquidity outlook: Management expected operations and available revolving borrowings to fund operating expenses, capital spending, interest, debt repayments and dividends over the next twelve months. This outlook depends on revenues, costs, working-capital needs and external financing conditions.
- Key risks: Commodity prices and margins, foreign exchange exposure (particularly the South African rand and Australian dollar), floating-rate debt, customer and credit concentration, and environmental compliance. The ten largest customers represented 35% of Q3 sales and 36% of nine-month sales, versus 25% and 23% in 2016, respectively.
- An EU risk-assessment committee recommended classifying TiO₂ as a Category 2 carcinogen by inhalation; the European Commission had yet to decide whether to adopt the classification. Possible consequences include marketing and regulatory constraints and higher costs. Exxaro’s October share sale and the planned Cristal share issuance may trigger U.S. tax ownership-change limits on use of net operating losses; further Exxaro sales could increase this risk.
- Tronox disclosed an $11 million prior-period misstatement related to a liability from a late statutory filing. Management deemed prior statements not materially misstated but said it would revise affected periods; comparative figures in the filing reflect revisions. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Cristal acquisition received all required regulatory approvals, closed on expected terms and timing, and was funded without materially weakening liquidity.
- Final Alkali sale proceeds after the working-capital adjustment and any remaining indemnification obligations or related claims.
- Actual unrestricted cash and borrowing-base availability, including the release or repayment terms for the $650 million restricted loan proceeds.
- Whether TiO₂ pricing, demand, production costs and currency movements sustain the reported margin improvement.
- The effect of any EU TiO₂ classification and potential ownership changes on customer demand, compliance costs and tax-loss utilization.
- The scope and presentation of the prior-period financial statement revisions in subsequent filings.