Tronox Holdings plc — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing also reports fourth-quarter results. Tronox produces titanium dioxide (TiO2), titanium feedstocks and related mineral products, and, following its April 1, 2015 acquisition of FMC’s Alkali business, natural soda ash and specialty sodium products.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $2.112 billion | $1.737 billion |
| Gross profit; gross margin | $120 million; 6% | $207 million; 12% |
| Operating income (loss) | $(118) million | $0 |
| Net income (loss) | $(307) million | $(417) million |
| Net loss attributable to Tronox; diluted loss per share | $(318) million; $(2.75) | $(427) million; $(3.74) |
| Operating cash flow | $216 million | $141 million |
| Capital expenditures | $191 million | $187 million |
| Cash and cash equivalents at year-end | $229 million | $1.276 billion |
| Total debt; net debt | $3.121 billion; $2.89 billion | $2.393 billion; $1.1 billion |
| Working capital | $753 million | $2.015 billion |
Cash from operations less capital expenditures was approximately $25 million in 2015. Net sales rose 22%, principally because Alkali contributed $602 million from the date of acquisition. Excluding that addition, TiO2 segment sales fell 13%: lower prices and product mix reduced sales by $205 million and unfavorable currency translation by $48 million, partly offset by $26 million of higher volume. Cost of goods sold rose 30%, including the acquired business and higher inventory valuation charges. Interest and debt expense increased to $176 million from $133 million.
TiO2 segment operating results deteriorated to a $123 million loss from $78 million of income. Alkali contributed $602 million in sales and $69 million of operating income for the nine months owned; its results included a $9 million inventory fair-value step-up charge. Adjusted EBITDA, a non-GAAP measure, was $272 million versus $353 million in 2014; TiO2 contributed $215 million and Alkali $129 million, offset by $72 million of corporate costs.
Fourth-quarter 2015 sales were $535 million, gross profit was $22 million and net loss was $89 million (loss attributable to Tronox: $90 million; diluted loss per share: $0.78). In fourth-quarter 2014, sales were $400 million, gross profit was $54 million and net loss was $275 million. The comparison is affected by the Alkali acquisition and, in 2014, a large tax valuation allowance.
Liquidity, debt and capital resources
Year-end liquidity was $530 million: $229 million cash, $217 million available under the UBS revolving facility and approximately $84 million available under the ABSA facility. Tronox reported compliance with financial covenants and no significant scheduled principal payments until 2020; ratings were BB- with negative outlook from S&P and B2 with negative outlook from Moody’s. Management expected operations and revolver availability to fund the next 12 months’ operating costs, capital spending, interest, debt repayments and dividends.
The $1.65 billion Alkali purchase was funded with existing cash and new debt, including $600 million of 7.50% senior notes due 2022 and a $150 million revolver draw. The $1.5 billion term loan bears variable interest; its reported average effective rate was 4.7% in 2015. The company paid $117 million in dividends during the year and declared a further $0.25-per-share quarterly dividend in February 2016.
Material changes, outlook and risks
- Market and operations: Management described TiO2 pigment and high-grade feedstock pricing as weak and under pressure amid excess supply. Pigment sales volume rose about 1% year over year, but lower prices weighed on results. Zircon demand was fairly steady, with competitive pricing and pressure in China.
- Cost actions and curtailments: Tronox reported $90 million of 2015 TiO2 annual cash-cost reductions after implementation costs, above its $60 million target, and expected these reductions to continue in 2016. It expected more than $600 million of aggregate cash generation from its initiatives over 2015–2017. It also began a restructuring expected to conclude in the first half of 2016, including approximately 500 TiO2 employee and contractor reductions. Production was curtailed at pigment lines, South African smelter furnaces and the Chandala kiln; the Cooljarloo North mine was suspended, and the sodium chlorate business was closed.
- Growth and market assumptions: Fairbreeze was in commissioning, with commercial production expected in early 2016 to replace depleted Hillendale supply. Management cited expected global soda ash demand growth of about 3% annually through 2024, while noting the risk that increased Chinese exports could pressure prices in Asian markets.
- Leverage and liquidity risk: Net debt increased substantially following the acquisition, while cash declined. Lower product prices, weaker demand, working-capital needs, interest costs, covenants and restricted movement of subsidiary cash could constrain financial flexibility.
- Other principal risks: Foreign exchange and energy-cost volatility; South African political, power, water and labor risks; a collective bargaining agreement at the Wyoming facilities expiring July 1, 2016; dependence on a single rail line for over 90% of Alkali shipments; environmental, mine-safety and rehabilitation obligations; and uncertain reserve, permit and lease assumptions. More than 51% of Alkali’s leased acreage was scheduled to expire within five years.
- Contingencies and unusual items: 2015 included $21 million of restructuring expense and a $54 million net lower-of-cost-or-market inventory charge, including $41 million related to an ilmenite sale contract. Tronox disclosed no pending legal or administrative proceeding expected to have a material adverse effect, individually or in aggregate. Fairbreeze mining approvals had been challenged; the appeals were ruled unlawful, though the company noted residual risk of a reversal or compromise.
- Controls and audit: Management and the auditor reported effective internal control over financial reporting at year-end, and management said prior material weaknesses had been remediated. Alkali, representing 33% of assets and 29% of sales, was excluded from the 2015 controls assessment because it had been acquired during the year.
Most important facts for investors to verify
- How much of reported sales growth and cash generation is attributable to the Alkali acquisition versus underlying performance, and whether Alkali results remain comparable after the full-year ownership period.
- Whether TiO2 pricing, margins and inventory valuation stabilize, and whether the 2015 cost reductions and 2015–2017 cash-generation target are achieved.
- Whether liquidity remains adequate as cash is deployed and debt service continues; review debt covenants, refinancing needs and the negative credit-rating outlook.
- Whether Fairbreeze achieves commercial production on schedule and within expected cost, and whether any remaining legal or permitting challenge affects operations.
- Whether the Wyoming labor agreement is renewed without disruption and whether rail service, South African power and water availability, and mineral lease renewals remain secure.