Tronox Limited — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in U.S. dollars unless noted. Tronox produces titanium dioxide (TiO₂), mineral sands products and, following its April 1 acquisition of FMC’s Alkali Chemicals business, natural soda ash and related products.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $575 million | $429 million | $1.577 billion | $1.337 billion |
| Gross profit / margin | $39 million / 7% | $68 million / 16% | $98 million / 6% | $153 million / 11% |
| Operating income (loss) | $(21) million | $11 million | $(80) million | $5 million |
| Net loss | $(54) million | $(90) million | $(218) million | $(142) million |
| Net loss attributable to Tronox | $(60) million | $(93) million | $(228) million | $(151) million |
| Loss per share, basic and diluted | $(0.52) | $(0.82) | $(1.97) | $(1.33) |
| Operating cash flow | Not separately presented for the quarter | $45 million | $89 million | |
| Adjusted EBITDA (non-GAAP) | $81 million | $100 million | $212 million | $272 million |
- Q3 sales rose 34%, principally because Alkali contributed $195 million. TiO₂ sales declined 11% to $380 million as lower prices and product mix and unfavorable currency effects outweighed volume gains. Alkali contributed $21 million of operating income in Q3.
- For the nine months, Alkali contributed $403 million of sales and $46 million of operating income. TiO₂ operating loss was $58 million, versus $61 million of operating income in the prior-year period.
- Management attributed weaker profitability mainly to lower TiO₂ selling prices, higher production costs and inventory valuation charges. Nine-month cost-of-goods-sold charges included $63 million of lower-of-cost-or-market adjustments, including $41 million related to an ilmenite sale.
- Nine-month investing cash outflow was $1.794 billion, including $1.653 billion for the Alkali acquisition and $141 million of capital expenditures. Financing cash inflow was $637 million, mainly from $600 million of 2022 notes and a $150 million revolver draw, partly offset by dividends and debt costs.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $145 million, down from $1.276 billion at December 31, 2014. Working capital was $864 million, compared with $2.0 billion at year-end.
- Total borrowings were $2.977 billion, including $150 million outstanding under the UBS revolver; long-term debt was $2.961 billion. Management reported net debt of approximately $3.0 billion, versus $1.1 billion at year-end.
- Reported total liquidity was $540 million: $145 million of cash, $301 million available under the UBS facility and $94 million available under the ABSA facility. Tronox said it expected operations and available borrowing capacity to fund the next 12 months’ operating costs, capital expenditures, interest, debt repayments and dividends.
- Debt includes a $1.5 billion variable-rate term loan due 2020, $900 million of 6.375% notes due 2020, and $600 million of 7.50% notes due 2022. The company reported compliance with financial covenants and no significant principal payments due until 2020.
Material changes, outlook and risks
- The $1.65 billion Alkali acquisition, funded with cash and new debt, diversified the business into soda ash. Purchase accounting valuations remained preliminary, with the measurement period ending no later than March 31, 2016.
- TiO₂ market conditions were weak: demand fell short of expectations in Europe and Asia-Pacific, inventories were above normal seasonal levels and pricing remained competitive. Management expected near-term pricing pressure to continue.
- Tronox suspended or planned to suspend production at selected TiO₂ lines and South African furnaces. It began a TiO₂ restructuring expected to eliminate about 250 employee roles and 250 contractor positions, incur approximately $20 million of pretax charges, and generate about $40 million of annual savings. Completion was expected in the first half of 2016. The Cooljarloo North Mine was scheduled for suspension at year-end 2015; the Hamilton sodium chlorate plant was to cease production in late November 2015.
- Management described soda ash fundamentals as balanced to tight and anticipated stable pricing through the remainder of 2015, while noting Alkali’s Q3 sales volumes declined sequentially due primarily to outages.
- Environmental, commodity-price, foreign-exchange, customer-credit and interest-rate risks remain relevant. A hypothetical 1% rate increase was estimated to increase annualized pretax loss by about $5 million. The company disclosed environmental compliance obligations and asset-retirement obligations of $82 million; it reported no pending legal or administrative proceeding expected to have a material adverse effect individually or in aggregate.
- The Anadarko settlement proceeds of $5.2 billion were paid to trusts and other entities, not to Tronox. The company believes it may receive tax deductions as trust expenditures occur; related deferred tax assets are fully offset by valuation allowances. About $2.1 billion of trust expenditures had occurred by September 30, 2015.
- Disclosure controls and procedures were deemed ineffective as of September 30 because previously reported material weaknesses remained in South African financial reporting processes and SAP access/segregation of duties. Remediation was underway; Alkali controls were being incorporated into Tronox’s control framework.
Key investor verification points
- Track whether TiO₂ pricing, volumes and inventory levels stabilize, and whether cost cuts and production curtailments improve segment profitability.
- Verify Alkali’s ongoing contribution to earnings and cash flow, and monitor integration, acquisition accounting adjustments and the debt-funded acquisition’s impact on leverage.
- Assess cash generation against capital spending, dividends, debt service and the company’s stated liquidity outlook; confirm revolver availability and borrowing-base capacity.
- Review the size and timing of restructuring charges and the realization of stated annual savings; confirm planned plant and mine shutdowns proceed as disclosed.
- Monitor remediation of internal-control material weaknesses, environmental and asset-retirement obligations, and tax valuation allowances.