Tronox Limited — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; the filing also presents unaudited quarterly results. Amounts are in U.S. dollars unless stated otherwise.
Business context
Tronox is an integrated producer of titanium dioxide (TiO₂) pigment and titanium-bearing mineral sands, with mining and processing operations in South Africa and Australia and pigment plants in the United States, the Netherlands, and Australia. It also sells zircon, pig iron, and feedstock products. The company reports one operating segment, TiO₂.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1.819 billion | $1.698 billion |
| Gross profit / margin | $498 million / 27% | $389 million / 23% |
| Operating income | $200 million | $141 million |
| Continuing-operations net income (loss) | $30 million | $(93) million |
| Net income (loss) attributable to Tronox | $(7) million | $(285) million |
| Operating cash flow | $170 million | $165 million |
| Capital expenditures | $117 million | $91 million |
| Adjusted EBITDA | $513 million | $420 million |
Adjusted EBITDA is a non-U.S. GAAP measure. Operating cash flow less capital expenditures was approximately $53 million in 2018, a simple derived measure. Year-end cash and cash equivalents were $1.034 billion, with an additional $662 million of restricted cash largely associated with the blocked acquisition loan. Reported available liquidity was $1.283 billion, including undrawn revolver capacity. Net debt was approximately $2.1 billion, excluding restricted cash; total debt was approximately $3.2 billion. Working capital was $2.2 billion.
Revenue growth was driven mainly by higher selling prices: pigment revenue rose 5% to $1.265 billion, zircon rose 40% to $293 million, and pig iron rose 38% to $87 million. Feedstock and other revenue fell 15% to $137 million. Pigment sales volume declined 6%, partly offsetting a 12% increase in average prices. The company cited higher direct-material costs and lower volumes/product mix as offsets to price gains.
Fourth-quarter results and changes
In Q4 2018, net sales were $429 million, gross profit was $118 million, net income was $6 million, and net loss attributable to Tronox was $5 million. Q4 2017 sales were $464 million and gross profit was $125 million; net income was $2 million and net loss attributable to Tronox was nil. Management cited reduced demand versus Q4 2017 in Europe and Asia amid customer destocking, and moderate pigment price declines in the third and fourth quarters, principally in Europe.
For the full year, operating income improved by $59 million and continuing-operations net income improved by $123 million versus 2017. Cash from operations increased only $5 million, as working-capital changes used $118 million. The 2017 comparison also included the Alkali business sale, which generated $1.325 billion of proceeds and a $233 million loss on sale; no discontinued-operations amounts were recorded in 2018.
Outlook, transactions, risks, and unusual items
- Cristal acquisition remained pending. The proposed purchase was for $1.673 billion cash, subject to adjustment, plus 37.58 million Class A shares. Eight of nine required regulatory approvals had been received, but U.S. FTC approval remained outstanding. A federal court had issued a preliminary injunction, and an administrative law judge had issued an initial decision against the deal; Tronox appealed. The agreement’s outside date was extended to May 19, 2019. A potential North American divestiture to INEOS was under discussion at approximately $700 million. If the acquisition failed to close, the filing described potential break/termination fees and an $800 million term-loan prepayment requirement.
- Funding and leverage: The company said operating cash and available borrowings were expected to fund the acquisition, Exxaro-related payments, operations, capital expenditures, interest, and debt repayments over the next 12 months. The $650 million blocked term loan was restricted pending the Cristal transaction.
- Debt refinancing: Tronox issued $615 million of 6.5% notes due 2026 and used the proceeds to redeem approximately $584 million of 7.5% notes due 2022. It recorded $30 million of debt-extinguishment costs, including a $22 million call premium.
- Other strategic actions: Tronox loaned AMIC $64 million in 2018 to support start-up of a Saudi titanium-slag facility, with a further $25 million loaned in January 2019. Any option or put to acquire 90% of the facility depended on completion of the Cristal transaction. The company also announced a proposed Australian-to-U.K. re-domiciliation and arrangements for Exxaro’s remaining approximately 23% stake to be sold during 2019.
- Unusual items: The sale of the Henderson Electrolytic Operations generated a $31 million pretax impairment/loss. A $48 million release of a Netherlands deferred-tax valuation allowance benefited tax expense; an $11 million Australian tax settlement provision was paid. A $3 million prior-period settlement gain was recorded in 2018 and disclosed as an immaterial out-of-period adjustment.
- Principal risks: TiO₂ and feedstock price/demand volatility, competition and customer destocking; energy and raw-material costs; South African mining, power, water, labor, and regulatory risks; foreign exchange; environmental and product-classification exposure, including proposed EU TiO₂ carcinogen classification; debt and liquidity constraints; and potential limits on tax attributes. The filing identifies approximately $4.1 billion of U.S. net operating losses and $1.1 billion of interest carryforwards potentially at risk from an ownership change.
No quantified operating guidance was provided in the supplied filing text. Management’s outlook discussion emphasized market conditions, acquisition execution, cost pressures, and the expectation that available liquidity would support planned needs. The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether the Cristal acquisition closed by the extended deadline, the final FTC remedy, total consideration, and any fees or required debt prepayments.
- Available liquidity after the restricted acquisition funds, the Exxaro-related $148 million cash redemption completed in February 2019, and other acquisition-related commitments.
- Whether customer destocking, pigment pricing, and sales volumes improved after Q4 2018, particularly in Europe and Asia.
- Progress and funding needs for the AMIC/Jazan facility, and whether Tronox exercised or was required to exercise an acquisition option.
- Exposure to South African Mining Charter requirements, power and water constraints, and any eventual EU classification or regulation of TiO₂.