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TROX > SEC Filings for TROX > Form 10-Q on 8-May-2014All Recent SEC Filings

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Form 10-Q for TRONOX LTD


8-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Tronox Limited's unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013. This discussion and other sections in this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, and actual results could differ materially from those discussed in the forward-looking statements as a result of numerous factors. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements also can be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," and similar terms.

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain financial measures, in particular the presentation of EBITDA and Adjusted EBITDA, which are not presented in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). We are presenting these non-U.S. GAAP financial measures because they provide us and readers of this Form 10-Q with additional insight into our operational performance relative to earlier periods and relative to our competitors. We do not intend for these non-U.S GAAP financial measures to be a substitute for any U.S. GAAP financial information. Readers of these statements should use these non-U.S. GAAP financial measures only in conjunction with the comparable U.S. GAAP financial measures. A reconciliation of Net income to EBITDA and Adjusted EBITDA is also provided herein.

Executive Overview

We are a global leader in the production and marketing of titanium bearing mineral sands and titanium dioxide ("TiO2") pigment. We are the third largest global producer and marketer of TiO2 manufactured via chloride technology, as well as the third largest global producer of titanium feedstock and a leader in global zircon production. We have operations in North America, Europe, South Africa, and the Asia-Pacific region. We operate three TiO2 pigment facilities at the following locations: Hamilton, Mississippi; Botlek, The Netherlands; and Kwinana, Western Australia, representing an aggregate of approximately 465,000 metric tons of annual TiO2 production capacity. Additionally, we operate three separate mining operations: KwaZulu-Natal ("KZN") Sands located in South Africa, Namakwa Sands located in South Africa and Cooljarloo Sands located in Western Australia, which have a combined annual production capacity of approximately 753,000 metric tons of titanium feedstock and approximately 265,000 metric tons of zircon.

We have two reportable operating segments, Mineral Sands and Pigment. Corporate and Other is comprised of our electrolytic manufacturing and marketing operations, as well as our corporate activities.

The Mineral Sands segment includes the exploration, mining, and beneficiation of mineral sands deposits. These operations produce titanium feedstock, including chloride slag, slag fines, and rutile, as well as zircon and pig iron. Titanium feedstock is used primarily to manufacture TiO2 pigment. Zircon is a mineral which is primarily used as an opacifier in ceramic glazes for tiles, plates, dishes, and industrial products. Pig iron is a metal material used in the steel and metal casting industries to create wrought iron, cast iron, and steel.

The Pigment segment primarily produces and markets TiO2, which is used in a wide range of products due to its ability to impart whiteness, brightness, and opacity. TiO2 pigment is used extensively in the manufacture of paint and other coatings, plastics and paper, and in a wide range of other applications, including inks, fibers, rubber, food, cosmetics, and pharmaceuticals. Moreover, it is a critical component of everyday consumer applications due to its superior ability to cover or mask other materials effectively and efficiently relative to alternative white pigments and extenders. We believe that, at present, TiO2 has no effective substitute because no other white pigment has the physical properties for achieving comparable opacity and brightness or can be incorporated in a cost-effective manner.

Recent Developments

Dividends - On May 6, 2014, the Board of Directors declared a quarterly dividend of $0.25 per share to holders of our Class A ordinary shares ("Class A Shares") and Class B ordinary shares ("Class B Shares") at the close of business on May 19, 2014, totaling $29 million, which will be paid on June 2, 2014. On February 25, 2014, the Board of Directors declared a quarterly dividend of $0.25 per share to holders of our Class A Shares and Class B Shares at the close of business on March 10, 2014, totaling $29 million, which was paid on March 24, 2014.

Amendments to Term Loan - On April 23, 2014, we entered into a Third Amendment to the Credit and Guaranty Agreement, which provides for the re-pricing of our $1.5 billion senior secured term loan (the "Term Loan"). See Note 11 of Notes to unaudited Condensed Consolidated Financial Statements.


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Litigation Settlement - On April 3, 2014, a proposed settlement was reached with Anadarko Petroleum Corp. ("Anadarko") for $5.15 billion. We will not receive any portion of the settlement amount. Instead, 88% of the $5.15 billion will go to trusts and other governmental entities for the remediation of polluted sites by Kerr-McGee Corp. ("Kerr-McGee"). The remaining 12% will be distributed to a tort trust to compensate individuals injured as a result of Kerr-McGee's environmental failures. See Note 2 of Notes to unaudited Condensed Consolidated Financial Statements.

Changes in Certifying Accountant - On April 7, 2014, our Audit Committee of the Board of Directors nominated PricewaterhouseCoopers LLP ("PWC") for appointment to serve as our independent registered public accounting firm for the fiscal year ending December 31, 2014. Such appointment is subject to the dismissal of Grant Thornton LLP ("Grant Thornton"), our current independent registered public accounting firm, which dismissal is conditioned upon and will be effective upon
(i) the required consent of the Australian Securities and Investments Commission to Grant Thornton Audit Pty Ltd's resignation as our Australian statutory auditor, which was submitted to the Audit Committee of the Board of Directors on April 7, 2014, and (ii) the approval of our shareholders of the appointment of PWC at our Annual General Meeting of Shareholders to be held on May 21, 2014.

Executive Management Appointment - On March 1, 2014, we appointed Richard L. Muglia, our former Deputy General Counsel, as Senior Vice President, General Counsel and Secretary.

Executive Management Departure - On February 28, 2014, we entered into a Separation Letter Agreement (the "Separation Agreement") with Michael J. Foster, former Senior Vice President, General Counsel and Secretary. Pursuant to the Separation Agreement, Mr. Foster resigned as General Counsel and Secretary effective March 1, 2014. Mr. Foster will remain in the role of Senior Vice President and Counsel through May 31, 2014 or such earlier date as is mutually agreed by us and Mr. Foster.

Business Environment

The following discussion includes trends and factors that may affect future operating results.

The price of TiO2 pigment in all regions globally showed volatility during 2013; however, by the end of 2013, prices appeared to be back to normal levels. We expect pigment prices to remain stable with positive movement in the second half of 2014. Sales volumes during 2014 have increased slightly from the end of 2013, primarily in the North America and Europe. The demand for TiO2 during a given year is subject to seasonal fluctuations. Because TiO2 is widely used in paint and other coatings, titanium feedstock is in higher demand prior to the painting season in the Northern Hemisphere (spring and summer).

We believe the feedstock market continues to be oversupplied. During the first quarter of 2014, we have seen feedstock prices decrease due to excess supply in the market. At March 31, 2014, we recognized a $13 million net lower of cost or market charge due to market price declines in ilmenite (feedstock). The ilmenite market is different from high quality feedstock, which is our primary market. There are only three major producers of high quality feedstock in the world, including us. As pigment producers begin to utilize their inventory on hand, we expect pigment production to increase thereby increasing the demand for high quality feedstock.

We continue to be uniquely tax-advantaged by the following factors:

Tax loss carryforwards totaling $2 billion of U.S. federal and state, and foreign net operating losses;

Interest expense deductions of $2 billion over ten years resulting from U.S. borrowing activity, subject to an annual taxable income limitation;

Deductions for cash and property we contributed to litigation trusts in connection with our emergence from bankruptcy (originally $350 million, currently in the amount of $290 million), which we will be able to claim as the trusts spend the money: and

On April 3, 2014, a proposed settlement was reached with Anadarko for $5.15 billion. We will not receive any portion of the settlement amount. Instead, 88% of the $5.15 billion will go to trusts and other governmental entities for the remediation of polluted sites by Kerr-McGee. The remaining 12% will be distributed to a tort trust to compensate individuals injured as a result of Kerr-McGee's environmental failures. However, we should be entitled to tax deductions equal to the amount spent by the trusts to remediate environmental matters and to compensate the injured individuals. These deductions will accrue over the life of the trusts as the $5.15 billion is spent. We believe that these expenditures and the accompanying tax deductions may continue for decades.

These tax-advantaged factors are not currently recognized as assets on our balance sheet, but create opportunities for our operations to benefit for years to come.

Planned construction on the Fairbreeze mine has continued during 2014. The Fairbreeze mine will serve as a replacement source of feedstock production for our Hillendale mine, which ceased mining operations in December 2013. Depending on the timing of regulatory approval and subsequent construction, we expect the Fairbreeze mine to begin operations in the second half of 2015, and be fully operational in 2016. The Fairbreeze mine is estimated to have a life expectancy of approximately 15 years.


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Going forward, we will continue to review strategic opportunities both in the U.S. and in foreign jurisdictions. We believe we bring a strong set of attributes to the table in either an acquisition or a business combination. As such, we will continue to seek opportunities to realize those value creating attributes, whether in the form of a single transaction with a large party, or a series of transactions to expand our portfolio.

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