Tronox Limited — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Figures are in U.S. dollars; financial statement amounts are in millions unless noted. The filing identifies the registrant as Tronox Limited.
Business context and reporting period
Tronox produces titanium-bearing mineral sands, titanium dioxide (TiO₂) pigment, and related products. On April 1, 2015, it acquired FMC Corporation’s Alkali Chemicals business for approximately $1.65 billion in cash, adding natural soda ash and specialty sodium products. The company reports two segments: TiO₂ and Alkali. Alkali results are included from the acquisition date, so reported revenue comparisons are not like-for-like.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $617 (2015); $490 (2014) | $1,002 (2015); $908 (2014) |
| Gross profit | $24; $60 | $59; $85 |
| Gross margin | 4%; 12% | 6%; 9% |
| Operating income (loss) | $(50); $15 | $(59); $(6) |
| Net income (loss) | $(118); $2 | $(164); $(52) |
| Net loss attributable to Tronox | $(119); — | $(168); $(58) |
| Adjusted EBITDA | $67; $108 | $131; $172 |
- Segment results: Q2 TiO₂ sales were $409 million versus $490 million, and operating loss was $41 million versus operating income of $30 million. Alkali contributed $208 million of sales and $25 million of operating income from April 1 through June 30; its operating income included a $9 million inventory fair-value step-up charge.
- Cash flow: First-half operating cash flow was $13 million, compared with $35 million in 2014. Investing cash outflow was $1.746 billion, primarily the $1.653 billion Alkali acquisition and $93 million of capital expenditures. Financing cash inflow was $670 million, including $600 million of new notes and a $150 million revolver draw; dividends paid were $59 million. Cash ended at $205 million, down from $1.276 billion at year-end.
- Liquidity and debt: Reported total liquidity was $610 million: $205 million cash and $405 million of stated revolver availability. Total borrowings were approximately $3.134 billion, including $150 million short-term revolver debt; reported net debt was $2.9 billion, compared with $1.1 billion at December 31, 2014. Long-term debt included a $1.5 billion variable-rate term loan, $900 million of 6.375% notes due 2020, and $600 million of 7.5% notes due 2022. Tronox reported compliance with its financial covenants.
- Other metrics: Working capital was $972 million, versus $2.0 billion at year-end. Capital expenditures were $93 million, versus $67 million in the first half of 2014. Two quarterly dividends of $0.25 per share were paid; a further $0.25 dividend was declared in August for payment by September 3, 2015.
Material changes versus the prior comparable period
- Reported Q2 sales rose 26% and first-half sales rose 10%, principally reflecting the newly acquired Alkali business. Excluding its contribution, TiO₂ sales declined 17% in Q2 and 13% in the first half, driven by lower selling prices, product mix, volumes, and unfavorable currency translation.
- Gross profit and operating results weakened. Tronox cited lower TiO₂ prices and a substantial increase in lower-of-cost-or-market inventory charges. The Q2 charge was $49 million and the first-half charge was $58 million; the increase versus 2014 included a $41 million charge on an ilmenite sale contract.
- Q2 SG&A rose to $72 million from $45 million; first-half SG&A rose to $116 million from $91 million, reflecting acquisition-related spending and higher professional fees, partly offset by a partial reversal of an Australian stamp-tax accrual.
- Interest and debt expense rose to $52 million in Q2 and $86 million in the first half, from $33 million and $67 million, respectively. The new 2022 notes, revolver borrowing, and $8 million of Bridge Facility fees in each 2015 period contributed to the increase.
- Net debt increased substantially after the acquisition. The company used existing cash and new debt to fund the purchase.
Outlook, management commentary, risks and unusual items
- TiO₂: Management reported sequentially higher Q2 pigment volumes in North America, Europe, and Asia-Pacific, partly offset by lower prices. Inventory was modestly above normal seasonal levels, and management expected competitive pricing near term. It noted that industry curtailments and closures could help rebalance supply and demand.
- Alkali: Management described soda ash fundamentals as strong, citing projected global demand growth of 3.3% CAGR through 2024 and a balanced-to-tight market excluding China. Volumes increased sequentially; prices were marginally lower due to customer mix. Management expected pricing to remain stable through year-end. These are management expectations, not formal earnings guidance.
- Operations and spending: Fairbreeze mine construction continued; the mine was expected to begin operating at the end of 2015 and reach full operation in 2016. Tronox also planned to cease production at its Hamilton, Mississippi sodium chlorate plant in late November 2015, with approximately 40 positions affected and $2 million of restructuring charges recorded.
- Liquidity outlook: Management expected operations and available revolver borrowings to fund near-term operating costs, capital expenditures, interest, debt repayments, and dividends. It identified weaker segment revenue, higher expenses, working-capital needs, debt capacity, interest rates, credit ratings, and capital-market volatility as factors that could affect funding.
- Controls: Management concluded disclosure controls were not effective at June 30, 2015 because previously identified material weaknesses in South African financial reporting communication and SAP access/segregation of duties remained. Remediation was underway. Alkali controls were still being incorporated into the company’s control framework.
- Taxes and Anadarko: Tronox received none of the $5.2 billion Anadarko settlement proceeds; most went to environmental remediation trusts and the remainder to a tort trust. Tronox expects tax deductions as trust funds are spent. Approximately $1.8 billion of trust expenditures had occurred by June 30, 2015; related deferred tax assets were fully offset by valuation allowances.
- Contingencies and risks: The filing cites environmental and regulatory exposure, mining and equipment hazards, commodity-price and energy/freight costs, soda ash demand and competition, reliance on a rail line and ANSAC for export sales, and lease/permit renewal risks. It states that no currently pending legal or administrative proceedings were expected to have a material adverse effect, individually or in aggregate. Contractual obligations totaled $5.114 billion, including debt and lease financing, purchase obligations, operating leases, and asset retirement obligations.
Important facts for investors to verify
- Whether the Alkali acquisition delivers the anticipated diversification and earnings contribution, and how its results compare on a full-period basis.
- TiO₂ pricing, volumes, inventory levels, and the extent and timing of further inventory valuation charges.
- Cash generation, working-capital trends, acquisition-related debt, revolver availability, and upcoming debt-service needs.
- Progress on remediation of internal-control material weaknesses and integration of Alkali controls.
- Fairbreeze start-up timing and budget, the Hamilton plant closure, and the associated restructuring and operational effects.
- Exposure to environmental liabilities, soda ash market and logistics risks, and the timing and realizability of tax benefits tied to Anadarko trust expenditures.