Business context and reporting period
Tronox Incorporated filed this unaudited Form 10-Q for the quarter ended March 31, 2012. Tronox produces and markets titanium dioxide (TiO₂) pigment, with additional electrolytic and specialty chemical operations. Tronox Limited had no assets or operations at quarter-end; the financial statements report Tronox Incorporated’s historical results.
Comparisons require care: 2012 reflects three months on a successor basis, while 2011 results span two successor months and one predecessor month before fresh-start accounting. Management’s year-over-year discussion combines the 2011 periods; the reorganization gain in the predecessor period also makes reported net income comparisons unusually large.
Key financial metrics
Amounts are in U.S. dollars, millions except per-share data.
| Metric | Q1 2012 | Comparable Q1 2011 |
|---|---|---|
| Net sales | $433.6 | $374.7 combined |
| Gross margin | $157.3; 36.3% | $62.6; 16.7% |
| Income from operations | $113.0 | $37.7 combined |
| Net income | $86.3 | $641.5 combined, including $613.6 reorganization income |
| Basic / diluted EPS | $5.72 / $5.48 | $16. - not a meaningful operating comparison; includes the predecessor reorganization gain |
The comparable-period EPS value is not presented as a combined figure in the filing; the individual 2011 periods report basic EPS of $0.68 and $15.29 and diluted EPS of $0.65 and $15.25, respectively.
Revenue rose 15.7% year over year. Higher prices increased sales by $130.4 million, partly offset by a $61.7 million reduction from lower volumes and $3.3 million of unfavorable currency effects. TiO₂ accounted for 85.1% of Q1 2012 sales. Pigment-segment sales were $402.5 million and operating income was $141.1 million; electrolytic and other chemical products recorded a $1.1 million operating loss.
Cash was $222.7 million at March 31, up $68.7 million from year-end. Working capital was $704.1 million. Total debt was $556.3 million, including a $550 million secured term loan; cash less total debt was approximately $333.6 million. The company reported $98.7 million of available capacity under its $125 million asset-based revolver, for total liquidity of $321.4 million. It reported compliance with financial covenants at quarter-end.
Cash flow disclosures conflict: the cash-flow statement reports $25.8 million used in operating activities and a $5.0 million positive exchange-rate effect, while MD&A reports $19.7 million used in operations and a $1.1 million negative exchange-rate effect. Both sections report $20.7 million used in investing, $110.2 million provided by financing, and a $68.7 million increase in cash. Capital expenditures were $20.7 million.
Material changes versus the prior comparable period
- Gross margin and operating income improved substantially, principally due to higher TiO₂ and mineral-product prices, despite lower sales volumes and higher production costs.
- TiO₂ price per metric tonne increased 37% excluding currency effects, while sales volume decreased 17%. Titanium-feedstock raw-material prices increased by more than 100% year over year.
- SG&A increased to $44.3 million from $24.9 million, reflecting about $9.1 million of transaction-related costs and about $9.1 million of higher employee variable compensation and benefits.
- On February 8, 2012, the company refinanced its $425 million exit facility with a $550 million secured term loan and a $150 million delayed-draw term loan. Q1 financing cash flows included the refinancing; the company paid $19 million of debt issuance costs during the quarter.
- Cash and working capital increased, while receivables and inventories rose, driven in part by higher selling prices and raw-material costs.
Outlook, commentary, risks and contingencies
- Management expected TiO₂ supply and demand to remain balanced, with prices at current levels or increasing moderately. It cited long-term demand growth of approximately 3%–4% annually, while noting seasonality, customer destocking and economic slowdown in China.
- Management expected titanium-feedstock supply to remain constrained and costs to continue rising. Q1 raw-material prices were more than double the prior-year quarter.
- Management projected 2012 capital expenditures of $85–$95 million, excluding acquired businesses, and said cash, operating flows and other liquidity sources should meet projected requirements.
- The proposed Exxaro transaction would combine Tronox with Exxaro’s South African mineral-sands operations and its 50% Tiwest interest. At the filing date, stockholder approval and completion remained pending. The filing described approximately $190 million in cash consideration for Tronox Incorporated shareholders and an IPO by Tronox Limited.
- Management said it intended to recommend, after the transaction, additional debt of $750 million–$1 billion, a $25-per-share special dividend, up to $250 million in share repurchases, a regular dividend beginning in Q4 2012, and a share split. These were proposals only, subject to financing, business performance and board approval.
- Key exposures include volatile commodity and feedstock prices, competition, customer credit, Australian-dollar currency exposure and variable-rate debt. A hypothetical 1 percentage-point increase in rates on $550 million of variable-rate debt would reduce annual net income by about $5.5 million. No FX forward contracts were outstanding at quarter-end.
- Ongoing-business environmental reserves totaled $0.6 million. Separately, Western Australia’s revenue office had made a preliminary determination that the company may owe stamp duty and penalties on 2002 share transfers; no assessment had been issued. The company had accrued $3.2 million based on its position that it was not land-rich.
- The company disclosed contractual obligations of $2.31 billion, including $1.27 billion under ore contracts; approximately 58% of current annual ore usage was acquired from one supplier.
Important facts for investors to verify
- Reconcile the conflicting Q1 operating cash-flow and foreign-exchange figures between the financial statements and MD&A.
- Confirm the term facility’s stated maturity: the debt table lists February 2018, but the narrative contains a February 2012 maturity date.
- Track completion and financing of the Exxaro transaction, including the shareholder vote, IPO and actual cash required.
- Assess the effect of continued feedstock-cost inflation, TiO₂ pricing, destocking and lower volumes on margins and cash generation.
- Monitor leverage, covenant headroom and the contingent nature of the proposed post-transaction debt issuance and capital returns.
- Follow the Western Australian stamp-duty review and any changes to environmental or other contingency exposures.