Tronox Limited (NYSE: TROX) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also reports unaudited fourth-quarter results. The registrant in the filing is Tronox Limited. Financial statements are presented in U.S. dollars under U.S. GAAP.
Business context
Tronox produces titanium dioxide pigment (TiO₂), titanium-bearing mineral sands and related products, including zircon and pig iron. Its two reportable segments are Mineral Sands and Pigment; Corporate and Other includes electrolytic and other chemical operations. Tronox’s acquisition of mineral-sands operations closed June 15, 2012, so 2012 results include the acquired business only after closing and are not fully comparable with 2013.
Financial performance
| Metric (US$ millions, except percentages and per-share data) | 2013 | 2012 |
|---|---|---|
| Net sales | 1,922 | 1,832 |
| Gross profit / gross margin | 190 / 9.9% | 264 / 14.4% |
| Operating income | 3 | 25 |
| Net income (loss) | (90) | 1,133 |
| Net income (loss) attributable to Tronox | (126) | 1,134 |
| Adjusted EBITDA (non-GAAP) | 362 | 503 |
| Cash from operating activities | 337 | 118 |
| Capital expenditures | 172 | 166 |
- Sales rose 5%: higher volumes and the full-year contribution of the acquired operations more than offset lower selling prices and mix. Management attributed $480 million of the sales change to lower prices and mix, offset by $294 million from higher volumes and $273 million from acquired businesses.
- Gross margin fell to about 10% from 14%, primarily because of lower selling prices. Purchase-accounting depreciation, depletion and amortization also weighed on reported gross profit: $159 million in 2013 versus $75 million in 2012.
- Mineral Sands segment operating income increased to $238 million from $156 million; Pigment shifted to an operating loss of $179 million from income of $57 million. Lower pigment prices were the principal pressure.
- 2012 net income included a $1.055 billion noncash bargain-purchase gain from the mineral-sands acquisition; this makes headline net income comparisons especially distorted. 2013 other income included a $24 million noncash gain from liquidating two non-operating subsidiaries and $39 million in foreign-exchange gains.
Fourth-quarter results
| Metric (US$ millions, except per-share data) | Q4 2013 | Q4 2012 |
|---|---|---|
| Net sales | 436 | 482 |
| Gross profit (loss) | 54 | (61) |
| Net income (loss) attributable to Tronox | (7) | (93) |
| Basic and diluted earnings (loss) per share | (0.06) | (0.82) |
Quarterly figures are unaudited. Q4 sales were lower year over year, while gross profit and attributable loss improved substantially; the filing does not provide a clear Q4 segment-level reconciliation in the quarterly-results table.
Cash, debt and liquidity
- At December 31, 2013, cash and cash equivalents were $1.478 billion, long-term debt was $2.413 billion, net debt was $935 million, and working capital was $2.290 billion. Total liquidity was $1.774 billion, including cash and $296 million of available revolver capacity.
- Operating cash flow was $337 million; investing cash outflow was $171 million and financing cash inflow was $614 million. Cash increased $762 million during the year, substantially reflecting borrowing proceeds.
- Debt included a $1.5 billion senior secured term loan due 2020 and $900 million of 6.375% senior notes due 2020. Interest and debt expense rose to $130 million from $65 million. The company reported compliance with its debt covenants at year-end; neither revolving facility was drawn.
- 2013 dividends paid were $115 million. Cash and cash equivalents were held across Europe ($775 million), Australia ($318 million), the United States ($218 million) and South Africa ($167 million); the filing notes restrictions on certain intercompany transfers.
Outlook, material developments and risks
- Management expected 2014 capital expenditures of approximately $250 million. It said pigment and high-grade feedstock inventories were nearing normal levels, with feedstock inventories expected to normalize through 2014; it expected prices to remain affected by surplus inventories.
- Hillendale mining ceased in December 2013. Fairbreeze is intended to replace it; management expected possible operations in the second half of 2015 and full operation in 2016, subject to regulatory approval and construction. A conservancy appeal had suspended the water-use license, but the Department of Water Affairs lifted the suspension on February 5, 2014; mediation and the appeal remained unresolved.
- On March 19, 2013, Tronox refinanced its term facility with a $1.5 billion term loan due 2020 and repaid a $149 million delayed-draw loan. Floating-rate exposure, currency movements, commodity prices and input costs remain relevant sensitivities.
- A December 2013 bankruptcy-court ruling found Anadarko liable in the Tronox litigation and indicated damages of $5 billion to $14 billion, subject to final calculation, offsets and possible appeal. Tronox said it would receive no immediate or direct proceeds: most funds would go to environmental and tort trusts. Potential tax deductions depend on final recovery and trust spending and were not recognized as an asset.
- Key disclosed risks include TiO₂ price and demand cyclicality, competition and cost inflation; South African political, labor, power, water and regulatory risks; operational and environmental incidents; reserve-estimate uncertainty; foreign exchange exposure; debt and cash-transfer restrictions; and Exxaro’s significant voting influence (about 44.4% at year-end).
Important facts for investors to verify
- Whether pigment pricing and margins recovered after the 2013 decline, and whether reported volume gains translated into stronger operating earnings.
- Whether 2014 capital spending, cash generation and dividend payments were supported by operating cash flow rather than additional borrowing.
- Term-loan and note terms, floating-rate exposure, covenant headroom, and the practical availability and transferability of cash across jurisdictions.
- Fairbreeze appeal and permitting status, construction progress, cost, and timing relative to Hillendale’s closure.
- Final Anadarko damages, appeal outcomes, trust distributions and any resulting tax benefits; these remained contingent in the filing.
- Mineral reserve assumptions and changes: reported total heavy-mineral reserves were approximately 1.139 billion metric tons of ore containing 69.2 million metric tons of heavy minerals, with reserve estimates subject to geological, operational and economic assumptions.