Tronox Limited — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results are in U.S. dollars; amounts below are in millions except per-share data.
Business context and comparability
Tronox produces titanium dioxide pigment (TiO₂), titanium feedstock and zircon. It reports Mineral Sands and Pigment segments, alongside Corporate and Other. The mineral sands acquisition closed June 15, 2012, so the 2012 comparison periods include only a short period of the acquired business in reported results. The 2012 results also include a $1.055 billion bargain-purchase gain; therefore, reported year-over-year earnings comparisons are not representative of underlying operating trends.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $525 | $429 | $995 | $863 |
| Gross margin | $50 (10% of sales) | $125 (29%) | $82 (8%) | $282 (33%) |
| Operating income (loss) | $9 | $22 | $(10) | $135 |
| Net income (loss), consolidated | $(1) | $1,144 | $(46) | $1,230 |
| Net income (loss) attributable to Tronox | $(13) | $1,144 | $(70) | $1,230 |
| Adjusted EBITDA (non-GAAP) | $101 | $147 | $174 | $298 |
Q2 2013 basic and diluted loss per share was $0.11; six-month loss per share was $0.62. Interest and debt expense was $35 in Q2 and $62 for the first half, versus $14 and $22 in the corresponding 2012 periods. The 2013 first-half result also includes a $4 debt-extinguishment loss.
At June 30, 2013, cash was $1.389 billion, total debt was $2.408 billion and net debt was $1.019 billion. Current assets were $2.654 billion and current liabilities $336 million. Reported total liquidity was $1.756 billion, comprising cash and $275 million available under the UBS revolver plus $92 million under the ABSA revolver. The company reported compliance with debt covenants.
For the six months, operating cash flow was $79 million, capital expenditures were $79 million, and financing provided $681 million. Cash increased $673 million, primarily reflecting refinancing proceeds; operating cash flow less capital expenditures was approximately zero. Capital expenditures were expected to be $175–$235 million for 2013.
Material changes and management commentary
- Sales rose 22% in Q2 and 15% in the first half, reflecting acquisition contribution and higher volumes, partly offset by lower selling prices. Acquired businesses contributed $300 million of first-half net sales.
- Gross margin declined substantially, driven by lower pigment selling prices, higher feedstock and chemical costs, lower capacity utilization and purchase-accounting depreciation and amortization.
- Pigment segment operating results turned to a loss: $(56) million in Q2 and $(124) million for the first half, compared with income of $37 million and $146 million in 2012. Lower prices and higher costs outweighed volume gains.
- Mineral Sands segment operating income was $68 million in Q2 and $164 million for the first half. Management cited acquired operations and increased volumes, while noting depressed zircon pricing and lower selling prices.
- The company refinanced its prior term debt in March 2013 with a $1.5 billion senior secured term loan maturing in 2020; it repaid the $149 million delayed-draw balance. The $900 million senior notes mature in 2020 and bear 6.375% interest.
- Management said vertical integration was progressing, with more internally sourced feedstock and cancellation of contracts with two external ore suppliers. It expected sequential demand momentum in both businesses during 2013. Q2 pigment volumes increased from Q1 across major regions, but prices declined; announced TiO₂ price increases were proposed, and implementation or effect was uncertain.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. The filing gives the capital expenditure range above and management’s expectation of sequential demand momentum.
- Commodity prices, particularly pigment and mineral-sands prices, remain exposed to supply-and-demand fluctuations. The ten largest TiO₂ customers represented about 45% of TiO₂ sales, though no single customer exceeded 10% of total sales.
- Foreign-exchange movements affect reported results; the U.S. dollar strengthened against the South African rand in the period. No forward currency contracts were outstanding at June 30. A 1% interest-rate increase was estimated to improve annualized pretax income by about $10 million, given floating-rate assets and debt.
- Management cited possible environmental compliance and remediation costs, greenhouse-gas regulation, and an estimated approximately $7 million annual impact from Australia’s carbon tax. It said it was compliant with applicable environmental requirements and had no outstanding violation notices or orders; it could not reliably estimate all future environmental expenditures.
- Political and labor instability in South Africa could disrupt production. The company said labor agreements had been concluded through June 2014 and described employee relations as stable.
- Purchase commitments were $347 million, and contractual obligations totaled $3.892 billion, including debt and lease financing, purchase obligations and operating leases. Letters of credit, bank guarantees and performance bonds totaled about $45 million.
- A Western Australia stamp-duty assessment of $5 million was paid in January 2013; Tronox objected to the $2 million penalty component and expected resolution by year-end 2013. Environmental and other proceedings may have material effects, though the filing says known probable and estimable environmental costs are adequately reserved. The Anadarko adversary proceeding remained open; any proceeds had been assigned to creditors.
Important facts for investors to verify
- How much of the year-over-year sales and earnings movement reflects acquisition scope, pricing, volume, utilization and purchase-accounting charges; compare with the company’s supplemental pro forma 2012 figures where appropriate.
- Whether pigment pricing and margins stabilize, and whether announced TiO₂ price increases are implemented and sustained.
- Cash generation and capital spending against the $175–$235 million full-year capex expectation, including the effect of working capital and dividends.
- Debt terms, refinancing effects, interest-rate exposure, covenant compliance and the availability of cash held in foreign jurisdictions.
- Developments in environmental obligations, South African operating conditions, the stamp-duty dispute and the Anadarko litigation.