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TROX > SEC Filings for TROX > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for TRONOX LTD


Quarterly Report

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

The following discussion and analysis should be read in conjunction with the information contained in Tronox Incorporated's audited Consolidated Financial Statements for the years ended December 31, 2011, 2010 and 2009 and the related notes thereto. This discussion contains forward-looking statements 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. See "Cautionary Note Regarding Forward-Looking Statements."

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain financial measures, in particular the presentation of Income from Operations, 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 quarterly statement 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 Income from Operations to Income from Continuing Operations, the most comparable U.S. GAAP measure is provided herein. 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 pigment ("TiO2"). We are the third largest global producer and marketer of TiO2 manufactured via chloride technology, as well as the second largest global producer of titanium feedstock and the second largest global producer of zircon. We have operations in North America, Europe, South Africa and the Asia-Pacific region. We operate three TiO2 facilities at the following locations: Hamilton, Mississippi; Botlek, the Netherlands; and Kwinana, Western Australia representing approximately 465,000 tonnes 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 723,000 tonnes of titanium feedstock and approximately 265,000 tonnes of zircon.

We have two reportable operating segments, minerals and pigment. Corporate and other is comprised of our electrolytic manufacturing and marketing operations, as well as our corporate activities, including businesses that are no longer in operation.

The minerals segment includes the exploration, mining and beneficiation of mineral sands deposits. These operations produce titanium feedstock, including ilmenite, chloride slag, slag fines and rutile, as well as zircon, pig iron and activated charcoal. Titanium feedstock is used primarily to manufacture TiO2. Zircon is a mineral which is primarily used as an opacifier in ceramic glazes for tiles, plates, dishes and industrial products.

The pigment segment primarily produces and markets TiO2, and has production facilities in the United States, Australia, and the Netherlands. TiO2 is used in a wide range of products due to its ability to impart whiteness, brightness and opacity. TiO2 is used extensively in the manufacture of coatings, plastics and paper and in a wide range of other applications, including inks, fibers, rubber, food, cosmetics and pharmaceuticals. TiO2 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 as cost-effective a manner.

Acquisition of Exxaro Mineral Sands Operations

Consistent with our strategy to become a fully integrated global producer of mineral sands and TiO2 with production facilities and sales and marketing presence strategically positioned throughout the world, we acquired 74% of Exxaro Resources Ltd's ("Exxaro") South African mineral sands operations, including its Namakwa and KZN Sands mines, separation and slag furnaces, along with its 50% share of the Tiwest Joint Venture in Western Australia (together the "mineral sands business") (the "Transaction"). On June 15, 2012, the date of the Transaction (the "Transaction Date"), the existing business of Tronox Incorporated was combined with the mineral sands business under Tronox Limited.

The Transaction was effectuated in two primary steps. In the first step, Tronox Incorporated became a subsidiary of Tronox Limited, with Tronox Incorporated stockholders receiving one Class A ordinary share ("Class A Shares") and $12.50 in cash ("Merger Consideration") for each share of Tronox Incorporated common stock. In the second step, Tronox Limited issued 9,950,856 Class B ordinary shares ("Class B Shares") to Exxaro and one of its subsidiaries in consideration for the mineral sands business. Upon completion of the Transaction, former Tronox Incorporated stockholders and Exxaro held 15,413,083 Class A Shares and 9,950,856 Class B Shares, respectively, representing approximately 60.8% and 39.2%, respectively, of the voting power in Tronox Limited.

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Exxaro retained a 26% ownership interest in the South African operations that are part of the mineral sands business in order to comply with the Black Economic Empowerment ("BEE") legislation of South Africa.

Prior to the Transaction Date, Tronox Incorporated operated the Tiwest Joint Venture with Exxaro Australia Sands Pty Ltd., a subsidiary of Exxaro, which operated a chloride process TiO2 plant located in Kwinana, Western Australia (the "Kwinana Facility"), a mining operation in Cooljarloo, Western Australia, and a mineral separation plant and a synthetic rutile processing facility, both in Chandala, Western Australia. As noted above, in the second step, we acquired the mineral sands business, which was comprised of (i) 74% of Exxaro Sands and Exxaro TSA Sands in South Africa, and (ii) Exxaro's 50.0% interest in the Tiwest Joint Venture. As such, as of the Transaction Date, we own 100% of the Tiwest Joint Venture.

We accounted for the Transaction using the acquisition method of accounting guidance for business combinations included in ASC 805, Business Combinations ("ASC 805"), which required recording assets and liabilities at fair value. The acquisition resulted in a bargain purchase gain of $1,045.6 million. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information on the fair value of assets acquired and liabilities assumed, as well as the bargain purchase gain recorded.

Emergence from Chapter 11

On January 12, 2009 (the "Petition Date"), Tronox Incorporated and certain of its subsidiaries (collectively, the "Debtors") filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). On November 30, 2010 (the "Confirmation Date"), the Bankruptcy Court confirmed (the "Confirmation Order") the Debtors' First Amended Joint Plan of Reorganization pursuant to Chapter 11 of the Bankruptcy Code, dated November 5, 2010 (as amended and confirmed, the "Plan"). Material conditions to the Plan were resolved during the period from the Confirmation Date until January 26, 2011. Subsequently, on February 14, 2011 (the "Effective Date"), Tronox Incorporated emerged from bankruptcy and continued operations as reorganized Tronox Incorporated.

The consummation of the Plan resulted in a substantial realignment of the interests in Tronox Incorporated between existing prepetition creditors and stockholders. As a result, Tronox Incorporated was required to adopt fresh-start accounting. Having resolved the material contingencies related to implementing the Plan on January 26, 2011 and due to the proximity to the end of month accounting period, which closed on January 31, 2011, Tronox Incorporated applied fresh-start accounting as of January 31, 2011. Tronox Incorporated evaluated the activity between January 26, 2011 and January 31, 2011 and, based upon the immateriality of such activity, concluded that the use of January 31, 2011 to reflect the fresh-start accounting adjustments was appropriate for financial reporting purposes. The use of the January 31, 2011 date is for financial reporting purposes only and does not affect the Effective Date of the Plan. Accordingly, the financial information set forth in this report, unless otherwise expressly set forth or as the context otherwise indicates, reflects the consolidated results of operations and financial condition of Tronox Incorporated and its subsidiaries on a fresh-start basis for the period following January 31, 2011 ("Successor"), and of Tronox Incorporated and its subsidiaries on a historical basis for the periods through January 31, 2011 ("Predecessor").

Recent Developments

Dividends Declared-On November 8, 2012, our Board of Directors declared a quarterly dividend of $0.25 per share to holders of our Class A Shares and Class B Shares, totaling approximately $28.3 million, payable on December 3, 2012 to shareholders of record at the close of business on November 23, 2012. On June 26, 2012, our Board of Directors declared a quarterly dividend of $0.25 per share to holders of our Class A Shares and Class B Shares, totaling $31.5 million, which was paid on August 13, 2012 to shareholders of record at the close of business on July 13, 2012.

Exxaro Class A Share Purchase Agreement-On October 4, 2012, Exxaro and J.P. Morgan Securities LLC ("JPMS") entered into a Rule 10b5-1/Rule 10b-18 Purchase Plan Agreement (the "JPMS Tronox Class A Trading Plan") authorizing JPMS to purchase up to 1,400,000 Class A Shares (which represents approximately 2.2% of all outstanding Tronox Limited Class A Shares and approximately 1.2% of Tronox Limited's voting securities) on Exxaro's behalf beginning on October 5, 2012 in compliance with all applicable securities laws and regulations, including Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules, policies and procedures of the markets where the transactions are placed. During October 2012, Exxaro purchased 1,400,000 Class A Shares in market purchases pursuant to the JPMS Tronox Class A Trading Plan.

Executive Management Departure-On September 30, 2012, we entered into a Separation Letter Agreement with Robert C. Gibney, former Senior Vice President and Chief Administrative Officer of Tronox Limited. Mr. Gibney's resignation was effective on September 29, 2012 (the "Separation Date"). Pursuant to his agreement, among other things, Mr. Gibney will receive severance in the amount of $650,000 payable biweekly over the 365 days following the Separation Date. We accrued for Mr. Gibney's severance as of the Separation Date. Additionally, 7,500 shares of restricted stock vested immediately and all remaining unvested awards were immediately forfeited and cancelled without any consideration being paid.

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T-Bucks Employee Participation Plan ("T-Bucks EPP")-During the third quarter of 2012, we created the T-Bucks EPP for the benefit of certain of our employees in South Africa (the "Participants"). We made an initial capital contribution to the T-Bucks Trust (the "Trust") of R123.8 million (approximately $14.6 million), which represents a capital contribution equal to R75,000 for each Participant. Contributions to the plan were used to acquire 548,234 Class A Shares of Tronox Limited. On September 3, 2012, the Participants were awarded shares units in the Trust which entitles them to receive shares of Tronox Limited upon completion of the vesting period on May 31, 2017. Compensation expense will be recognized over the life of the plan based upon the Grant Date fair value of the Tronox Limited shares acquired by the plan. See Note 20 of Notes to Unaudited Condensed Consolidated Financial Statements.

Regulatory Approval-During September 2012, the South African Department of Mineral Resources approved our amendment application to the Environmental Management Program for our KZN Sands Fairbreeze mine project. This, together with the National Environmental Management Act authorization received earlier this year, allows us to commence with selected construction activities while awaiting further authorizations. During October 2012, the Mtunzini Conservatory filed an application for an injunction to halt the early-phase construction at our KZN Fairbreeze mine. We opposed the injunction and remain strong in our belief that the early-phase construction, is within the required legislative framework.

Secured Bonds-On August 20, 2012, Tronox Limited's wholly-owned subsidiary, Tronox Finance LLC, issued $900.0 million aggregate principal amount of 6.375% senior notes due 2020 (the "Senior Notes"). The Senior Notes bear interest semiannually at a rate equal to 6.375% and were sold at par value. See Note 10 of Notes to Unaudited Condensed Consolidated Financial Statements.

Stock Split Declared-On June 26, 2012, our Board of Directors approved a 5-to-1 stock split for holders of our Class A Shares and Class B Shares at the close of business on July 20, 2012, by issuance of four additional shares for each share of the same class. See Note 19 of Notes to Unaudited Condensed Consolidated Financial Statements.

Repurchase Authorized-On June 26, 2012, the Board authorized the repurchase 10% of Tronox Limited's Class A and Class B shares in open market transactions, which will subsequently be cancelled in accordance with Australian law. During the three months and nine months ended September 30, 2012, the Company repurchased 12,541,400 Class A Shares, affected for the 5-for-1 stock split, at an average price of $25.85 per share, inclusive of commissions, for a total cost of $324.2 million and 12,626,400 Class A Shares, affected for the 5-for-1 stock split, at an average price of $25.84 per share, inclusive of commissions, for a total cost of $326.2 million, respectively. On September 27, 2012, the Company announced the successful completion of its share repurchase program.

UBS Revolver-On June 18, 2012, in connection with the closing of the Transaction, we entered into a global senior secured asset-based revolving credit agreement with UBS AG, Stamford branch (the "UBS Revolver") with a maturity date of June 18, 2017. The UBS Revolver provides us with a committed source of capital with a principal borrowing amount of up to $300.0 million, subject to a borrowing base. See Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements.

Refinancing of the Wells Revolver- On February 8, 2012, Tronox Incorporated amended the Wells Revolver to facilitate the Transaction while keeping the revolver in force. On June 18, 2012, in connection with the Transaction, we utilized the UBS Revolver to refinance the $125.0 million senior secured credit agreement with Wells Fargo Capital Finance, LLC (the "Wells Revolver"). See Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements.

ABSA Revolver-In connection with the Transaction, we entered into a R900.0 million revolving credit facility with ABSA Bank Limited acting through its ABSA Capital Division with a maturity date of June 14, 2017 (the "ABSA Revolver"). See Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements.

Term Loan Draw Down-On June 14, 2012, in connection with the closing of the Transaction, we drew down the $150.0 million on the Senior Secured Delayed Draw Term Loan (as discussed below). See Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements.

Exit Facility Refinancing-On February 8, 2012, Tronox Incorporated refinanced its $425.0 million exit facility due October 21, 2015 (the "Exit Financing Facility"), and obtained a new Goldman Sachs facility comprised of a $550.0 million Senior Secured Term Loan and a $150.0 million Senior Secured Delayed Draw Term Loan (together, the Term Facility). The Term Facility expressly permitted the Transaction and, together with existing cash, funded the cash needs of the combined business, including cash needs in the Transaction. See Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements.

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Business Environment

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

Supply and Demand-Historically, the majority of our revenue has come from the sale of TiO2 (86% and 93% in the three and nine months ended September 30, 2011, respectively), however, with the acquisition of the mineral sands business in June 2012, our revenue has become more diversified. During the three and nine months ended September 30, 2012, revenue generated from the sale of TiO2 decreased to 57% and 73%, respectively. During 2012, we saw a softening of TiO2 sales volumes due to continued customer destocking and decline in global demand, primarily as a result of weaker residential and commercial construction markets in Europe and Asia. While we are encouraged by signs of recovery in U.S. housing and increasingly stimulative national policy in China, we are expecting market conditions for TiO2 pigment in the fourth quarter of 2012 to be similar to those of the third quarter. We believe that we are in an advantaged strategic position in our industry under any macro-economic conditions and across business cycles. Vertical integration gives us enduring advantages such as our low-cost position which is enabled by capturing feedstock margin on pigment sales and selling the most attractively-priced feedstock in the merchant market, which we believe will result in higher margins, lower earnings volatility and significant free cash flow generation.

Raw Materials-Titanium feedstock ores, the primary raw materials used in the production of TiO2, experienced a significant rise in selling prices during 2011 and continuing into 2012. The vertical integration of titanium feedstock and TiO2 production provides us with a secure and cost competitive supply of high grade titanium feedstock over the long term. Our ability to supply all of the feedstock that our pigment operations require enables us to balance our consumption and sales in ways that our competitors cannot. This low cost position should enable us to achieve higher margins, significantly reduced earnings volatility and strong cash generation under any market conditions by selling feedstock indirectly into the market and by consuming feedstock at the cost of extraction and beneficiation for our pigment business.

Competition-We believe that we are in an advantaged strategic position, more so than our competitors in this industry under any macro-economic conditions and across business cycles. Vertical integration gives us enduring advantages. Our low-cost position is enabled by capturing feedstock margin on pigment sales and selling the most attractively-priced feedstock in the merchant market, which has resulted in higher margins, lower earnings volatility and significant free cash flow generation. By demonstrating these advantages through our performance in subsequent quarters, in combination with our strong financial position, we will continue our focus on driving shareholder value and cash return to address our current undervaluation in the equity market.

Pricing-During the third quarter, average selling prices of TiO2 were approximately 6 percent lower than those in the second quarter. Given the softening of sales volumes in our pigment segment, we expect further, modest price declines in average global pigment markets in the fourth quarter relative to the third quarter.

However, with the exception of zircon sales, we anticipate that sales volumes of our other mineral sands products will remain steady and, as such, prices will be higher in the second half of 2012 compared to 2011. As the largest vertically integrated company in our industry, we now benefit from the same rising ore prices that TiO2 producers will face as advantaged ore contracts expire. We believe that we are built to optimize market swings on either side of the supply chain and are well positioned to thrive in changing market conditions.

Seasonality-The demand for TiO2 during a given year is subject to seasonal fluctuations. TiO2 sales are generally higher in the second and third quarters of the year primarily due to the increase in paint production to meet demand resulting from the spring and summer painting season in North America and Europe.

Currency Exchange Rates-The financial condition and results of operations of our operating entities in the Netherlands, South Africa and Australia are reported in various foreign currencies and then converted into U.S. dollars at the applicable exchange rate for inclusion in our unaudited condensed consolidated financial statements. As a result, any volatility of the U.S. dollar against these foreign currencies creates uncertainty for and may have a positive or negative impact on reported sales and operating results. Foreign currency effects appear in our financial statements in several ways. First, they impact reported amounts of revenues and expenses and are embedded in each line item of the financial statements. Second, for changes in reported asset and liability amounts, changes are reported in either other income (expense) on the unaudited Condensed Consolidated Statements of Operations or in cumulative translation adjustments in "Accumulated other comprehensive income (loss)" on the unaudited Condensed Consolidated Balance Sheets.

Environmental-We currently report and manage greenhouse gas ("GHG") emissions as required by law for sites located in areas (European Union/Australia) requiring such managing and reporting. While the United States has not adopted any federal climate change legislation, the EPA has introduced some GHG programs. For example, under the EPA's GHG "Tailoring Rule," expansions or new construction could be subject to the Clean Air Act's Prevention of Significant Deterioration ("PSD") requirements. Some of

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our facilities are currently subject to GHG emissions monitoring and reporting. Changes or additional requirements due to GHG regulations could impact our capital and operating costs. However, it is not possible at the present time to estimate any financial impacts to these U.S. operating sites. Also, some in the scientific community believe that increasing concentrations of GHGs in the atmosphere may result in climatic changes. Depending on the severity of climatic changes, our operations could be adversely affected. The Western Australian operations are subject to a new Australian carbon tax law that went into effect in July 2012, resulting in an approximate A$10.0 million impact annually.

Political and social unrest in South Africa-South Africa has been experiencing political and social unrest in the platinum and gold industries. Changes to or instability in the economic or political environment in South Africa or neighboring countries, especially if such changes create political instability, actual or potential shortages of production materials or labor unrest, could result in production delays and production shortfalls and materially impact our production and results of operations. We have recently negotiated new labor contracts with the unions in South Africa. We consider relations with our employees to be good.

Consolidated Results of Operations

The following discussion presents the results of operations for the periods indicated. References to 2011 refer to the combined nine month period ended September 30, 2011, which includes the Successor period and the Predecessor period, unless otherwise indicated.

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