Business context and reporting period
Tronox Limited’s unaudited Form 10-Q covers the three months ended March 31, 2018. Tronox produces titanium dioxide (TiO2) pigment and titanium-bearing mineral sands and operates as one reportable segment. Comparatives are for Q1 2017; Alkali, sold in 2017, is presented as discontinued operations in the prior-period results.
Key financial results
Amounts are in U.S. dollars, millions except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $442 | $378 |
| Gross profit / margin | $115 / 26% | $63 / 17% |
| Operating income (loss) | $14 | $(3) |
| Net loss from continuing operations | $(41) | $(53) |
| Net loss attributable to Tronox | $(44) | $(41) |
| Basic and diluted loss per share | $(0.36) | $(0.35) |
| Operating cash flow, continuing operations | $(4) | $2 |
| Capital expenditures | $28 | $20 |
Adjusted EBITDA, a non-GAAP measure, was $113 million versus $63 million; adjusted EBITDA margin was 26% versus 17%. TiO2 segment adjusted EBITDA was $138 million versus $85 million. The filing cautions that these measures may not be comparable across companies.
Financial position and changes
- Cash and cash equivalents were $1.074 billion; restricted cash was $655 million, including $653 million tied to the Cristal-related Blocked Term Loan. Total debt was approximately $3.2 billion; reported net debt was $2.1 billion, excluding the $650 million of Blocked Term Loan cash.
- Current assets were $2.623 billion and current liabilities $320 million. Reported working capital was $2.3 billion and includes $650 million funded by the Blocked Term Loan.
- Liquidity, as defined by the company, totaled $1.379 billion: cash and cash equivalents plus $242 million available under the Wells Fargo revolver and $63 million under the ABSA revolver; this excludes restricted cash.
- Revenue increased 17%. Higher prices added $81 million, led by pigment and zircon, and favorable euro movements added $14 million; lower shipment volumes reduced revenue by $30 million. Pigment volume declined 2% year over year.
- Gross margin rose 9 percentage points. Higher prices and a $9 million South African royalty refund helped; lower volumes/product mix, higher production costs (including a $14 million inventory valuation charge), and unfavorable currency effects partly offset gains.
- Operating cash flow declined to a $4 million use, primarily from timing-related reductions in payables and accrued liabilities and higher inventories. Investing and financing cash uses were $28 million and $15 million, respectively.
Outlook, material developments and risks
- Management reported high pigment-plant utilization, a tight global pigment supply-demand balance, and successive industry price gains since Q1 2016. It expected moderate cost increases for certain inputs and expected zircon price gains to continue in 2018. No specific earnings or revenue guidance was provided.
- The proposed $1.673 billion cash-and-share acquisition of Cristal remained subject to regulatory approval. Seven of nine jurisdictions had approved it; the FTC had challenged the deal, and the European Commission had raised objections. Tronox was pursuing remedies and had extended the termination date to June 30, 2018, with automatic three-month extensions through March 31, 2019, if needed. If terminated, the $650 million Blocked Term Loan must be repaid and Tronox must also prepay $800 million of other term-loan borrowings.
- Tronox agreed to sell its Henderson Electrolytic Operations for $13 million, subject to working-capital adjustments, with closing targeted for the second half of 2018. It recorded a $25 million impairment and expected-sale loss.
- On April 6, 2018, Tronox issued $615 million of 6.5% notes due 2026 to fund redemption of its 7.5% notes due 2022. The company expected approximately $30 million of debt-extinguishment costs, including a roughly $22 million call premium, in Q2 2018.
- On May 9, 2018, Tronox entered an option arrangement concerning a Saudi titanium slag facility. It may provide up to $125 million in loans for startup costs; acquisition of a 90% interest is conditional, and the arrangement includes a potential seller put if specified production conditions are met.
- Other risks include commodity and foreign-exchange volatility, floating-rate debt, customer/industry concentration, environmental obligations and litigation. Full valuation allowances remained on certain deferred tax assets; management warned that Exxaro’s future share sales could affect favorable tax positions. The filing also notes potential U.S. tax-loss limitations if an ownership change occurs.
Important facts for investors to verify
- Progress, remedy terms and closing status of the Cristal transaction, including its effects on restricted cash, debt repayments and liquidity.
- Whether pigment pricing, volume, input costs and the reported margin improvement are sustainable; review the impact of the royalty refund and inventory charge.
- Completion proceeds and final costs for the Electrolytic sale, and the timing and size of the expected Q2 debt-extinguishment charge.
- Cash available for operations versus restricted cash, debt covenants and floating-rate exposure; the company reported adequate liquidity for the next 12 months.
- Potential tax consequences of ownership changes and Exxaro share sales, as well as developments in environmental and other contingencies.