Tronox Limited
Tronox Ltd (Form: 10-Q, Received: 11/14/2012 16:13:05)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-35573

 

 

TRONOX LIMITED

(ACN 153 348 111)

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Western Australia, Australia   98-1026700

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

One Stamford Plaza

263 Tresser Boulevard, Suite 1100

Stamford, Connecticut 06901

(Address of principal executive offices)

Registrant’s telephone number, including area code: (203) 705-3800

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of October 31, 2012, there were 113,254,634 shares of the Registrant’s Class A ordinary shares and Class B ordinary shares outstanding.

 

 

 


Table of Contents

Table of Contents

 

     Page  

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

     2   

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

     37   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     53   

Item 4. Controls and Procedures

     54   

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

     54   

Item 1A. Risk Factors

     55   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     55   

Item 3. Defaults Upon Senior Securities

     55   

Item 4. Mine Safety Disclosures

     55   

Item 5. Other Information

     55   

Item 6. Exhibits

     56   

Signatures

     57   


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

     Page  

Condensed Consolidated Balance Sheets as of September 30, 2012 (Successor) and December  31, 2011 (Successor)

     3   

Condensed Consolidated Statements of Operations for the Three Months Ended September  30, 2012 and 2011 (Successor) and the Nine Months Ended September 30, 2012 (Successor), Eight Months Ended September 30, 2011 (Successor) and One Month Ended January 31, 2011 (Predecessor)

     4   

Condensed Consolidated Statements of Comprehensive Income for the Nine Months Ended September  30, 2012 (Successor), Eight Months Ended September 30, 2011 (Successor) and One Month Ended January 31, 2011 (Predecessor)

     5   

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2012 (Successor), Eight Months Ended September 30, 2011 (Successor) and One Month Ended January 31, 2011 (Predecessor)

     6   

Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September  30, 2012 (Successor), Eight Months Ended September 30, 2011 (Successor) and One Month Ended January 31, 2011 (Predecessor)

     7   

Notes to Condensed Consolidated Financial Statements

     8   

 

* On September 25, 2011, Tronox Incorporated entered into a definitive agreement (the “Transaction Agreement”) with Exxaro Resources Limited (“Exxaro”) and certain of its affiliated companies, to acquire 74% of its South African mineral sands operations, including its Namakwa and KwaZulu-Natal (“KZN”) Sands mines, separation facilities and slag furnaces, along with Exxaro’s 50% share of the Tiwest Joint Venture in Western Australia (together the “mineral sands business”) (the “Transaction”). In anticipation of the consummation of the Transaction, Tronox Incorporated formed an Australian subsidiary, Tronox Limited.

Pursuant to a Registration Statement on Form S-4 (File No. 333-178835) declared effective by the Securities and Exchange Commission (the “SEC”) on May 4, 2012 (the “Registration Statement”), Tronox Limited registered up to 16,445,827 Class A ordinary shares (“Class A Shares”) to be issued to stockholders in Tronox Incorporated in connection with the completion of the Transaction.

On June 15, 2012, the date of the Transaction, 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 Share and $12.50 in cash 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 held 15,413,083 Class A Shares and Exxaro held 9,950,856 Class B Shares, respectively, representing approximately 60.8% and 39.2%, respectively, of the voting interest in Tronox Limited.

These unaudited condensed consolidated financial statements reflect the historical results of operations and financial position of Tronox Limited and the mineral sands business for all periods after June 15, 2012. Prior to June 15, 2012, the date of the Transaction, the unaudited condensed consolidated financial statements included herein represent the financial statements of Tronox Incorporated.

 

2


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TRONOX LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Millions of dollars, except share and per share data)

 

     Successor  
     September 30,
2012
    December 31,
2011
 

Current Assets

    

Cash and cash equivalents

   $ 774.4      $ 154.0   

Accounts receivable, net of allowance for doubtful accounts of $1.2 and $0.4

     364.4        277.8   

Inventories

     1,033.1        311.2   

Prepaid and other assets

     31.2        21.7   

Deferred income taxes

     19.2        4.3   
  

 

 

   

 

 

 

Total Current Assets

     2,222.3        769.0   

Noncurrent Assets

    

Property, Plant and Equipment, Net

     1,555.8        504.3   

Mineral Leaseholds, Net

     1,342.8        38.4   

Intangible Assets, Net

     312.0        325.1   

Long-Term Deferred Tax Assets

     169.9        9.0   

Other Long-Term Assets

     63.1        11.6   
  

 

 

   

 

 

 

Total Assets

   $ 5,665.9      $ 1,657.4   
  

 

 

   

 

 

 

Current Liabilities

    

Accounts payable:

    

Third party

   $ 164.7      $ 126.9   

Related party

     —          74.8   

Accrued liabilities

     177.1        45.7   

Short-term debt

     30.4        —     

Long-term debt due within one year

     11.0        5.9   

Income taxes payable

     29.0        27.6   

Deferred income taxes

     22.9        —     
  

 

 

   

 

 

 

Total Current Liabilities

     435.1        280.9   
  

 

 

   

 

 

 

Noncurrent Liabilities

    

Long-term debt

     1,607.7        421.4   

Pension and postretirement healthcare benefits

     122.9        142.7   

Asset retirement obligations

     100.4        29.2   

Deferred income taxes

     229.2        19.1   

Other

     27.4        11.8   
  

 

 

   

 

 

 

Total Liabilities

     2,522.7        905.1   
  

 

 

   

 

 

 

Contingencies and Commitments (Note 14)

    

Shareholders’ Equity

    

Tronox Limited Class A ordinary shares, par value $0.01 — 64,624,924 shares issued and 63,486,889 shares outstanding at September 30, 2012(1)

     0.6        —     

Tronox Limited Class B ordinary shares, par value $0.01 — 49,754,280 shares issued and outstanding at September 30, 2012(1)

     0.5        —     

Tronox Incorporated common stock, par value $0.01 —100,000,000 shares authorized, 15,406,803 shares issued and 15,076,691 shares outstanding at December 31, 2011

     —          0.1   

Capital in excess of par value

     1,426.1        579.2   

Retained earnings

     1,434.5        241.5   

Accumulated other comprehensive loss

     (21.9     (57.0

Tronox Incorporated treasury stock, at cost — 94,513 shares at December 31, 2011

     —          (11.5
  

 

 

   

 

 

 

Total Shareholders’ Equity

     2,839.8        752.3   

Noncontrolling interest

     303.4        —     
  

 

 

   

 

 

 

Total Equity

     3,143.2        752.3   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 5,665.9      $ 1,657.4   
  

 

 

   

 

 

 

  

 

(1) On June 26, 2012, the Board of Directors of Tronox Limited approved a 5-to-1 stock split for holders of its Class A ordinary shares and Class B ordinary shares at the close of business on July 20, 2012, by issuance of four additional shares for each share of the same class by way of bonus issue. All references to number of shares and per share data in the Successor’s unaudited condensed consolidated financial statements have been adjusted to reflect the stock split, unless otherwise noted. See Note 19 for additional information regarding the Company’s stock split.

See notes to unaudited condensed consolidated financial statements.

 

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TRONOX LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Millions of dollars, except share and per share data)

 

     Successor     Predecessor  
     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
    Eight Months
Ended
September 30,
2011
    One Month
Ended
January 31,

2011
 

Net Sales

   $ 487.3      $ 465.4      $ 1,349.8      $ 1,160.8      $ 107.6   

Cost of goods sold

     (465.8     (322.4     (1,048.2     (862.1     (82.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Margin

     21.5        143.0        301.6        298.7        25.3   

Selling, general and administrative expenses

     (59.6     (53.8     (206.2     (111.2     (5.4

Litigation/arbitration settlement

     —          9.8        —          9.8        —     

Provision for environmental remediation and restoration, net of reimbursements

     —          0.2        —          4.5       —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) from Operations

     (38.1     99.2        95.4        201.8        19.9   

Interest and debt expense

     (18.1     (8.0     (39.0     (21.5     (2.9

Other income (expense)

     0.2        (1.3     (4.8     (1.7     1.6   

Gain on bargain purchase

     —          —          1,045.6        —          —     

Reorganization income

     —          —          —          —          613.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) from Continuing Operations before Income Taxes

     (56.0     89.9        1,097.2        178.6        632.2   

Income tax benefit (provision)

     38.0        9.0        127.5        (3.3     (0.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) from Continuing Operations

     (18.0     98.9        1,224.7        175.3        631.5   

Loss from discontinued operations, net of income tax benefit

     —          —          —          —          (0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

     (18.0     98.9        1,224.7        175.3        631.3   

Income (loss) attributable to noncontrolling interest

     (1.3     —          (0.8     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) attributable to Tronox Limited

   $ (16.7   $ 98.9      $ 1,225.5      $ 175.3      $ 631.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) per Share, Basic and Diluted(1):

            

Basic —

            

Continuing operations

   $ (0.14   $ 1.32      $ 12.94      $ 2.39      $ 15.29   

Discontinued operations

     —          —          —          —          (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share

   $ (0.14   $ 1.32      $ 12.94      $ 2.39      $ 15.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted —

            

Continuing operations

   $ (0.14   $ 1.25      $ 12.57      $ 2.26      $ 15.25   

Discontinued operations

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share

   $ (0.14   $ 1.25      $ 12.57      $ 2.26      $ 15.25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Shares Outstanding (in thousands):

            

Basic

     122,352        74,910        94,193        73,325        41,311   

Diluted

     122,352        79,175        96,903        77,660        41,399   

  

 

(1) On June 26, 2012, the Board of Directors of Tronox Limited approved a 5-to-1 stock split for holders of its Class A ordinary shares and Class B ordinary shares at the close of business on July 20, 2012, by issuance of four additional shares for each share of the same class by way of bonus issue. All references to number of shares and per share data in the Successor’s unaudited condensed consolidated financial statements have been adjusted to reflect the stock split, unless otherwise noted. See Note 19 for additional information regarding the Company’s stock split.

See notes to unaudited condensed consolidated financial statements.

 

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TRONOX LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Millions of dollars)

 

    Successor     Predecessor  
    Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
    Eight Months
Ended
September 30,
2011
    One Month
Ended
January 31,
2011
 

Net Income:

           

Net Income (Loss)

  $ (18.0   $ 98.9      $ 1,224.7      $ 175.3      $ 631.3   

Other Comprehensive Income (Loss):

           

Foreign currency translation adjustments

    14.8        (5.5     48.2        (3.3     0.9   

Retirement and postretirement plans:

           

Amortization of actuarial gains, net of taxes of nil, nil, nil, nil and nil

    —          —          —          —          0.5   

Amortization of prior service cost, net of taxes of nil, nil, nil, nil and nil

    —          —          —          —          (1.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    14.8        (5.5     48.2        (3.3     0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

  $ (3.2   $ 93.4      $ 1,272.9      $ 172.0      $ 631.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to noncontrolling interest:

           

Net income (loss)

    (1.3     —          (0.8     —          —     

Foreign currency translation adjustments

    2.8        —          13.1        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to noncontrolling interest

    1.5        —          12.3        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Tronox Limited

  $ (4.7   $ 93.4      $ 1,260.6      $ 172.0      $ 631.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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TRONOX LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Millions of dollars)

 

     Successor     Predecessor  
     Nine Months
Ended
September 30,
2012
    Eight Months
Ended
September 30,
2011
    One Month
Ended
January 31,
2011
 

Cash Flows from Operating Activities:

        

Net income

   $ 1,224.7      $ 175.3      $ 631.3   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

        

Depreciation, depletion and amortization

     120.2        56.8        4.1   

Deferred income taxes

     (154.1     (1.5     0.8   

Amortization of debt issuance costs

     7.5        0.6        0.3   

Pension and postretirement healthcare benefit (income) expense, net

     3.6        3.2        (0.4

Share-based compensation expense

     28.6        7.7        —     

Gain on bargain purchase, net of cash received

     (1,160.4     —          —     

Other noncash items affecting net income

     152.3        4.2        (0.2

Reorganization items

     —          (14.3     (953.7

Contributions to employee pension and postretirement plans

     (29.9     (5.2     —     

Changes in assets and liabilities (net of effects of acquisition):

        

(Increase) decrease in accounts receivable

     53.3        (69.7     (10.2

(Increase) decrease in inventories

     (216.9     29.6        (15.3

(Increase) decrease in prepaids and other assets

     6.5        20.9        35.4   

Increase (decrease) in accounts payable and accrued liabilities

     22.4        (20.3     23.6   

Increase (decrease) in taxes payable

     8.5        (1.6     0.2   

Other, net

     1.7        31.9        1.0   
  

 

 

   

 

 

   

 

 

 

Cash provided by (used in) operating activities

     68.0        217.6        (283.1
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

        

Capital expenditures

     (91.2     (120.7     (5.5

Cash received in acquisition of minerals sands business

     114.8        —          —     

Proceeds from sale of assets

     —          0.5       —     
  

 

 

   

 

 

   

 

 

 

Cash provided by (used in) investing activities

     23.6        (120.2     (5.5
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities

        

Reductions of debt

     (582.6     (43.6     —     

Proceeds from borrowings

     1,689.8        22.0        25.0   

Debt issuance costs and commitment fees

     (20.3     (5.5     (2.4

Merger consideration

     (192.6     —          —     

Class A ordinary share repurchases, including commissions paid

     (326.2     —          —     

Shares purchased for the Employee Participation Program

     (14.6     —          —     

Dividends paid

     (31.5     —          —     

Proceeds from conversion of warrants

     0.6        1.3        —     

Proceeds from rights offering

     —          —          185.0   
  

 

 

   

 

 

   

 

 

 

Cash provided by (used in) financing activities

     522.6        (25.8     207.6   
  

 

 

   

 

 

   

 

 

 

Effects of Exchange Rate Changes on Cash and Cash Equivalents

     6.2        (2.0     0.3   
  

 

 

   

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     620.4        69.6        (80.7

Cash and Cash Equivalents at Beginning of Period

     154.0        61.0        141.7   
  

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 774.4      $ 130.6      $ 61.0   
  

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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TRONOX LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Millions of dollars)

 

    Tronox
Limited
Class A
Ordinary
Shares
    Tronox
Limited
Class B
Ordinary
Shares
    Tronox
Incorporated
Common
Stock
    Capital
in
Excess

of
par

Value
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total
Shareholders’
Equity
    Non-
controlling
Interest
    Total
Equity
 

Successor: Nine Months Ended September 30, 2012

                   

Balance at December 31, 2011

  $ —        $ —        $ 0.1      $ 579.2      $ 241.5      $ (57.0   $ (11.5   $ 752.3      $ —        $ 752.3   

Fair value of noncontrolling interest on Transaction Date

    —          —          —          —          —          —          —          —          291.1        291.1   

Net income (loss)

    —          —          —          —          1,225.5        —          —          1,225.5        (0.8     1,224.7   

Other comprehensive income (loss)

    —          —          —          —          —          35.1        —          35.1        13.1        48.2   

Merger consideration paid

    —          —          —          (192.6     —          —          —          (192.6     —          (192.6

Issuance/exchange of Tronox Limited shares

    0.1        0.1        (0.1     1,370.0        —          —          —          1,370.1        —          1,370.1   

Tronox Limited share-based compensation

    —          —          —          1.6        —          —          —          1.6        —          1.6   

Class A Shares repurchased

    (0.1 )     —          —          (326.1     —          —          —          (326.2     —          (326.2

Shares purchases for the Employee Participation Plan

    —          —          —          (14.3     —          —          —          (14.3     —          (14.3

Issuance of Tronox Limited shares in stock-split

    0.6        0.4        —          —          (1.0     —          —          —          —          —     

Class A and Class B Share dividend declared

    —          —          —          —          (31.5     —          —          (31.5     —          (31.5

Tronox Incorporated warrants exercised

    —          —          —          0.6        —          —          —          0.6        —          0.6   

Tronox Incorporated stock-based compensation

    —          —          —          27.0        —          —          (7.8     19.2        —          19.2   

Tronox Incorporated common stock cancelled

    —          —          —          (19.3     —          —          19.3        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

  $ 0.6      $ 0.5      $ —        $ 1,426.1      $ 1,434.5      $ (21.9   $ —        $ 2,839.8      $ 303.4      $ 3,143.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) On June 26, 2012, the Board of Directors of Tronox Limited approved a 5-to-1 stock split for holders of its Class A ordinary shares and Class B ordinary shares at the close of business on July 20, 2012, by issuance of four additional shares for each share of the same class by way of bonus issue. All references to number of shares and per share data in the Successor’s unaudited condensed consolidated financial statements have been adjusted to reflect the stock split, unless otherwise noted. See Note 19 for additional information regarding the Company’s stock split.

 

     Tronox
Incorporated
Common
Stock
     Tronox
Class A
Common
Stock
    Tronox
Class B
Common
Stock
    Capital in
Excess of
par Value
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total
Stockholders’
Equity
 

Predecessor: One Month Ended January 31, 2011

  

              

Balance at December 31, 2010

   $ —         $ 0.2      $ 0.2      $ 496.2      $ (1,128.2   $ 8.8      $ (7.2   $ (630.0

Net income

     —           —          —          —          631.3        —          —          631.3   

Other comprehensive income

     —           —          —          —          —          0.3        —          0.3   

Stock-based compensation

     —           —          —          0.1        —          —          —          0.1   

Fresh-start reporting adjustments:

                 

Elimination of predecessor common stock, capital in excess of par value, and accumulated deficit

     —           (0.2     (0.2     (496.3     496.9        (9.1     7.2        (1.7

Issuance of new common stock

     0.1         —          —          564.1        —          —          —          564.2   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 31, 2011

   $ 0.1       $ —        $ —        $ 564.1      $ —        $ —        $ —        $ 564.2   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Successor: Eight Months ended September 30, 2011

                 

Balance at February 1, 2011

   $ 0.1       $ —        $ —        $ 564.1      $ —        $ —        $ —        $ 564.2   

Net income

     —           —          —          —          175.3        —          —          175.3   

Other comprehensive income

     —           —          —          —          —          (3.3     —          (3.3

Shares withheld for claims

     —           —          —          —          —          —          (6.9     (6.9

Warrants exercised

     —           —          —          1.3        —          —          —          1.3   

Stock-based compensation

     —           —          —          7.7        —          —          (2.7     5.0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 0.1       $ —        $ —        $ 573.1      $ 175.3      $ (3.3   $ (9.6   $ 735.6   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

TRONOX LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Millions of dollars, except share and per share data or unless otherwise noted)

1. The Company

Tronox Limited, a public limited company registered under the laws of the State of Western Australia, Australia, and its subsidiaries (collectively referred to as “Tronox” or “the Company”) is a global leader in the production and marketing of titanium bearing mineral sands and titanium dioxide pigment (“TiO 2 ”). The Company’s world-class, high performance TiO 2 products are critical components of everyday applications such as coatings, plastics, paper and other applications. The Company’s mineral sands business consists primarily of two product streams—titanium feedstock and zircon. Titanium feedstock is used primarily to manufacture TiO 2 . Zircon, a hard, glossy mineral, is used for the manufacture of ceramics, refractories, TV glass and a range of other industrial and chemical products. Tronox has global operations in North America, Europe, South Africa and the Asia-Pacific region. The Company operates three TiO 2 facilities at the following locations: Hamilton, Mississippi, Botlek, The Netherlands, and Kwinana, Western Australia, representing approximately 465,000 tonnes of annual TiO 2 production capacity. Additionally, Tronox operates three separate mining operations: KwaZulu-Natal (“KZN”) Sands located in South Africa, Namakwa Sands located in South Africa and the Tiwest Joint Venture 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.

Tronox Limited was formed on September 21, 2011 for the purpose of the Transaction (see below). Prior to the completion of the Transaction, the Company was wholly-owned by Tronox Incorporated, and had no operating assets or operations. On September 25, 2011, Tronox Incorporated, a Delaware corporation formed on May 17, 2005, in preparation for the contribution and transfer by Kerr-McGee Corporation (“Kerr-McGee” or “KM”) of certain entities, including those comprising substantially all of its chemical business (“Tronox Incorporated”), entered into a definitive agreement (as amended, the “Transaction Agreement”) with Exxaro Resources Limited (“Exxaro”) and certain of its affiliated companies, to acquire 74% of its South African mineral sands operations, including its Namakwa and KZN Sands mines, separation facilities and slag furnaces, along with its 50% share of the Tiwest Joint Venture (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.

Pursuant to a Registration Statement on Form S-4 (File No. 333-178835) declared effective by the Securities and Exchange Commission (the “SEC”) on May 4, 2012 (the “Registration Statement”), Tronox Limited registered Class A ordinary shares (“Class A Shares”) to be issued to stockholders of Tronox Incorporated in connection with the completion of the Transaction. On the Transaction Date, Tronox Limited issued 15,413,083 Class A Shares to stockholders in Tronox Incorporated. In addition, on the Transaction Date, 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. As part of the Transaction, Exxaro and its subsidiaries retained a 26.0% ownership interest in each of Tronox KZN Sands Pty Ltd and Tronox Mineral Sands Pty Ltd in order to comply with the ownership requirements of the Black Economic Empowerment (“BEE”) legislation in South Africa. Immediately following the Transaction, Tronox Incorporated stockholders and Exxaro held approximately 60.8% and 39.2%, respectively, of the voting securities of Tronox Limited. Under the terms of the Transaction Agreement, Exxaro agreed that for a three-year period after the completion of the Transaction, it would not engage in any transaction or other action, that would result in its beneficial ownership of the voting stock of Tronox Limited exceeding 45.0% of the total issued shares of Tronox Limited.

On June 26, 2012, the Board of Directors of Tronox Limited approved a 5-to-1 stock split for holders of its 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 by way of bonus issue. All references to the number of shares and per share data in the Successor’s condensed consolidated financial statements and notes thereto have been adjusted to reflect the stock split, unless otherwise noted or as the context otherwise acquires. See Note 19 for additional information regarding the Company’s stock split.

During the second and third quarters of 2012, the Company repurchased approximately 12.6 million Class A Shares, which was approximately 10% of the total voting securities. As a result of such buyback, Exxaro held approximately 43.5% of the voting securities of Tronox Limited.

On October 4, 2012, Exxaro and J.P. Morgan Securities LLC (“JPMS”) entered into a Purchase Plan Agreement (the “JPMS Tronox Class A Trading Plan”) authorizing JPMS to purchase up to 1,400,000 Class A Shares (approximately 2.2% of Tronox Limited’s outstanding Class A Shares and approximately 1.2% of Tronox Limited’s voting securities) on Exxaro’s behalf beginning on October 5, 2012. The Company’s constitution provides that, subject to certain exceptions, when Exxaro acquires a Class A Share, it automatically converts to a Class B Share. As such, Exxaro generally will not hold Class A Shares. During October 2012, Exxaro purchased 1,400,000 Class A Shares in market purchases pursuant to the JPMS Tronox Class A Trading Plan.

 

8


Table of Contents

2. Acquisition of the Mineral Sands Business

As discussed above, on September 25, 2011, Tronox Incorporated entered into the Transaction Agreement with Exxaro to acquire the mineral sands business. On June 15, 2012, 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 Share and $12.50 in cash (“Merger Consideration”) for each share of Tronox Incorporated common stock. In the second step, Tronox Limited issued Class B Shares to Exxaro and one of its subsidiaries in consideration for the mineral sands business. Exxaro retained an approximate 26% ownership interest in the South African operations that are part of the mineral sands business in order to comply with the BEE legislation of South Africa. The ownership interest in the South African operations may be exchanged for Class B Shares under certain circumstances.

Prior to the Transaction Date, Tronox Incorporated and Exxaro Australia Sands Pty Ltd., a subsidiary of Exxaro, operated the Tiwest Joint Venture, which operated a chloride process TiO 2 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 of the Transaction, the Company acquired the mineral sands business, which included Exxaro’s 50.0% interest in the Tiwest Joint Venture. As a result, as of the Transaction Date, the Company owns 100% of the Tiwest Joint Venture.

Purchase price and fair value of assets acquired and liabilities assumed

The Company accounted for the Transaction under Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), which requires recording assets and liabilities at fair value. Under the acquisition method of accounting, each tangible and separately identifiable intangible asset acquired and liabilities assumed were recorded based on their preliminary estimated fair values on the Transaction Date.

Because the total consideration transferred was less than the fair value of the net assets acquired, the excess of the value of the net assets acquired over the fair value of net assets acquired was recorded as an initial bargain purchase gain of approximately $1,061.1 million during the second quarter of 2012. The initial valuations were derived from estimated fair value assessments and assumptions used by management, and were preliminary. While management believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could have resulted in different values being assigned to individual assets acquired and liabilities assumed. Subsequent to the Transaction, the Company adjusted its initial valuation, which reduced the gain on bargain purchase to $1,045.6 million. The valuation process remains in progress. The final valuations are pending appraisals of certain tangible and intangible assets acquired, which will result in further adjustments to the amounts recorded and the gain on bargain purchase, which could be material. The bargain purchase gain is not taxable for income tax purposes. See Note 17 for a discussion of the tax impact of the transaction.

 

     Initial
Valuation
     Adjustments     Adjusted
Valuation
 

Consideration:

       

Number of Class B Shares(1)

     9,950,856         —          9,950,856   

Fair value of Class B Shares on the Transaction Date

   $ 137.70       $ —        $ 137.70   
  

 

 

    

 

 

   

 

 

 

Fair value of equity issued

   $ 1,370.1       $ —        $ 1,370.1   

Noncontrolling interest

     291.1         —          291.1   
  

 

 

    

 

 

   

 

 

 
   $ 1,661.2       $ —        $ 1,661.2   
  

 

 

    

 

 

   

 

 

 

Fair Value of Assets Acquired and Liabilities Assumed:

       

Current Assets:

       

Cash

   $ 114.8       $ —        $ 114.8   

Accounts receivable

     199.0         —          199.0   

Inventories(2)

     621.7         (7.8     613.9   

Prepaid and other assets

     24.1         —          24.1   
  

 

 

    

 

 

   

 

 

 

Total Current Assets

     959.6         —          951.8   

Property, plant and equipment, net, including mineral leaseholds of $1,366.0

     2,319.2         —          2,319.2   

Deferred tax asset

     26.4         —          26.4   

Other long-term assets

     19.1         —          19.1   
  

 

 

    

 

 

   

 

 

 

Total Assets

   $ 3,324.3       $ (7.8   $ 3,316.5   
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Current Liabilities:

       

Accounts payable

     36.4         —          36.4   

Accrued liabilities

     156.9         —          156.9   

Short-term debt

     76.0         —          76.0   

Current deferred tax liability

     28.3         —          28.3   

Income taxes payable

     2.1         —          2.1   

Other current liabilities

     8.5         —          8.5   
  

 

 

    

 

 

   

 

 

 

Total Current Liabilities

     308.2         —          308.2   

Long-term debt

     18.7         —          18.7   

Deferred tax liability

     211.5         (3.0     208.5   

Pension and postretirement healthcare benefits

     5.4         —          5.4   

Asset retirement obligations

     57.1         —          57.1   

Other(3)

     1.1               10.7        11.8   
  

 

 

    

 

 

   

 

 

 

Total Liabilities

     602.0         7.7        609.7   

Net Assets (Liabilities)

   $ 2,722.3       $ (15.5   $ 2,706.8   
  

 

 

    

 

 

   

 

 

 

Gain on Bargain Purchase

   $     1,061.1       $ (15.5   $     1,045.6   
  

 

 

    

 

 

   

 

 

 

 

(1) The number of Class B Shares issued in connection with the Transaction has not been restated to affect for the 5-for-1 stock split as discussed in Note 19.
(2) The valuation of certain inventories has been adjusted to more accurately reflect the fair value at the Transaction Date.
(3) The Company completed the valuation of a Long-Term Incentive Plan for certain employees in South Africa and Australia (see Note 20).

Mineral Sands Business Results of Operations

The following table includes the amount of net sales and earnings from the acquired mineral sands business included in the Company’s results since June 15, 2012.

 

     Mineral     Pigment     Corporate
and Other
    Eliminations     Total  

Net Sales

   $ 237.6      $ 32.7      $ —        $ (14.7   $ 255.6   

Loss from Operations

   $ (5.2   $ (8.7   $ (0.1   $ (7.2   $ (21.2

The following table includes the amount of net sales and earnings from the acquired mineral sands business included in the Company’s results for the three months ended September 30, 2012.

 

     Mineral     Pigment     Corporate
and Other
    Eliminations     Total  

Net Sales

   $ 207.1      $ 23.7      $ —        $ (14.7   $ 216.1   

Loss from Operations

   $ (9.6   $ (7.6   $ (0.1   $ (7.2   $ (24.5

For the three and nine months ended September 30, 2012, Income (Loss) from Operations includes $85.2 million and $108.8 million, respectively, of amortization of inventory step-up and unfavorable ore sales contracts from purchase accounting. The amortization of inventory step-up from purchase accounting is based on the fair values assigned, which are not final.

Supplemental Pro forma financial information

The following unaudited pro forma information gives effect to the Transaction as if it had occurred on the first day of the first quarter of fiscal 2011 (January 1, 2011). The unaudited pro forma financial information reflects certain adjustments related to the acquisition, such as (1) converting the mineral sands business financial statements to accounting principles generally accepted in the United States (“U.S. GAAP”), (2) conforming the mineral sands business accounting policies to those applied by Tronox Incorporated, (3) to record certain incremental expenses resulting from purchase accounting adjustments, such as incremental depreciation expense in connection with fair value adjustments to property, plant and equipment, (4) to eliminate intercompany transactions between Tronox Incorporated and the mineral sands business, (5) to record the effect on interest expense related to borrowings in connection with the transaction and (6) to record the related tax effects. The unaudited pro forma financial information also includes adjustments for certain non-recurring items as of the first day of the first quarter of fiscal 2011 (January 1, 2011) such as (1) the impact of transaction costs of approximately $95.1 million, (2) the impact of the adjusted bargain purchase gain of $1,045.6 million and (3) the impact of reorganization income arising from Tronox Incorporated’s emergence from bankruptcy in the one month ended January 31, 2011 of approximately $613.6 million. The unaudited pro forma financial information is for illustrative purposes only and should not be relied upon as being indicative of the historical results that would have been obtained if the Transaction had actually occurred on that date, nor the results of operations in the future.

 

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Table of Contents

In accordance with ASC 805, the supplemental pro forma results of operations for the three and nine months ended September 30, 2012 and 2011, as if the mineral sands business had been acquired on January 1, 2011, are as follows:

 

     Successor      Successor  
     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
     Nine Months
Ended
September 30,
2012
     Nine Months
Ended
September 30,
2011
 

Net Sales

   $ 487.3      $ 664.6       $ 1,637.1       $ 1,751.1   

Income (Loss) from Operations

   $ (27.6   $ 166.2       $ 364.3       $ 223.0   

Net Income (Loss)

   $ (7.5   $ 150.5       $ 339.5       $ 1,870.7   

Net Income (Loss) attributable to Tronox Limited

   $ (7.8   $ 149.1       $ 310.9       $ 1,871.4   

Basic Net Income (Loss) attributable to Tronox Limited per share

   $ (0.06   $ 1.18       $ 2.50       $ 14.86   

Diluted Net Income (Loss) attributable to Tronox Limited per share

   $ (0.06   $ 1.16       $ 2.44       $ 14.52   

3. Basis of Presentation

The unaudited condensed consolidated balance sheet as of September 30, 2012 relates to Tronox Limited. The unaudited condensed consolidated balance sheet as of December 31, 2011 relates to Tronox Incorporated. The unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2012 reflect the consolidated operating results of Tronox Incorporated prior to June 15, 2012, and, from June 15, 2012 through September 30, 2012, reflect the consolidated operating results of Tronox Limited. The unaudited condensed consolidated statements of operations for the three and eight months ended September 30, 2011 and one month ended January 31, 2011 and the unaudited condensed consolidated statements of cash flows for the eight months ended September 30, 2011 and one month ended January 31, 2011 reflect the consolidated operating results of Tronox Incorporated.

As stated above, prior to the Transaction Date, Tronox Incorporated operated the Tiwest Joint Venture with Exxaro Australia Sands Pty Ltd. The Tiwest Joint Venture was a contractual relationship between Tronox Incorporated and Exxaro whereby each party held an undivided interest in each asset of the joint venture, and each party was proportionally liable for each of the joint venture’s liabilities. The Tiwest Joint Venture was not a separate legal entity and did not enter into any transactions. Transactions were entered into by the joint venture partners who had the right to sell their own product, collect their proportional share of the revenues and absorb their share of costs. As such, Tronox Incorporated did not account for the Tiwest Joint Venture under the equity method. Instead, Tronox Incorporated accounted for its share of the Tiwest Joint Venture’s assets that were jointly controlled and its share of liabilities for which it was jointly responsible on a proportionate gross basis in its unaudited Consolidated Balance Sheet. Additionally, Tronox Incorporated accounted for the revenues generated from its share of the products sold and its share of the expenses of the joint venture on a gross basis in its unaudited Condensed Consolidated Statements of Operations. As of the Transaction Date, the Company owns 100% of the Tiwest Joint Venture operations. As such, the unaudited condensed consolidated balance sheet as of September 30, 2012 includes 100% of the joint venture assets and liabilities, while the unaudited condensed consolidated balance sheet as of December 31, 2011 includes Tronox Incorporated’s 50% undivided interest in each asset and liability of the joint venture. Additionally, the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2012 reflect Tronox Incorporated’s revenues generated from its share of the products sold and its share of the expenses of the joint venture on a gross basis prior to June 15, 2012, and, from June 15, 2012 through September 30, 2012, reflect 100% of the revenues and expenses of the joint venture. The unaudited condensed consolidated statements of operations for the three and eight months ended September 30, 2011 and one month ended January 31, 2011 reflect Tronox Incorporated’s revenues generated from its share of the products sold and its share of the expenses of the joint venture on a gross basis.

The accompanying unaudited condensed consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Registration Statement. The December 31, 2011 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP for complete financial statements.

 

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Table of Contents

Tronox Limited is registered under the laws of the State of Western Australia, Australia, and is considered a domestic company in Australia. As a result, Tronox Limited is required to report in Australia under International Financial Reporting Standards (“IFRS”). Additionally, as Tronox Limited is not considered a “foreign private issuer,” the Company is required to comply with the reporting and other requirements imposed by the U.S. securities laws on U.S. domestic issuers, which, among other things, requires reporting in the United States under U.S. GAAP. We publish our consolidated financial statements, both U.S. GAAP and IFRS, in U.S. dollars.

The Company’s unaudited condensed consolidated financial statements include the accounts of all majority-owned subsidiary companies. Investments in affiliated companies that are 20% to 50% owned are carried as a component of “Other Long-Term Assets” on the unaudited Condensed Consolidated Balance Sheets at cost adjusted for equity in undistributed earnings. Except for dividends and changes in ownership interest, changes in equity in undistributed earnings are included in “Other income (expense)” on the unaudited Condensed Consolidated Statements of Operations. All intercompany transactions have been eliminated.

In connection with the Transaction, Exxaro and its subsidiaries retained a 26.0% ownership interest in each of Tronox KZN Sands Pty Ltd and Tronox Mineral Sands Pty Ltd in order to comply with the ownership requirements of the BEE legislation in South Africa. The Company accounts for such ownership interest as “Noncontrolling interest” on the unaudited Condensed Consolidated Balance Sheets.

On January 26, 2011, material conditions to Tronox Incorporated’s plan of reorganization were resolved and it subsequently emerged from bankruptcy protection (see Note 5). In connection with its emergence from bankruptcy, Tronox Incorporated applied fresh-start accounting under ASC 852, Reorganizations (“ASC 852”) 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. Accordingly, the financial information of Tronox Incorporated 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 on a fresh-start basis for the period beginning February 1, 2011 (“Successor”), and on a historical basis for the period through January 31, 2011 (“Predecessor”). In applying fresh-start accounting on January 31, 2011, Tronox Incorporated recorded assets and liabilities at estimated fair value, except for deferred income taxes and certain liabilities associated with employee benefits, which were recorded in accordance with ASC 852 and ASC 740, Income Taxes (“ASC 740”), respectively. Additionally, Tronox Incorporated recorded gains relating to executing the Plan, gains related to revaluation of assets and “resetting” retained earnings and accumulated other comprehensive income to zero.

In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. It is at least reasonably possible that the effect on the financial statements of a change in estimate within one year of the date of the financial statements due to one or more future confirming events could have a material effect on the financial statements. The consolidated results of operations for interim periods are not necessarily indicative of results for the entire year.

Certain prior period amounts have been reclassified to conform to the manner and presentation in the current period. Such reclassifications did not have an impact on the Company’s net income (loss) or consolidated results of operations.

4. Recent Accounting Pronouncements

Other Comprehensive Income —In the first quarter of 2012, the Company adopted the amended guidance issued by the Financial Accounting Standards Board (the “FASB”) regarding the presentation of comprehensive income. Such guidance was designed to improve comparability, consistency and transparency. The amendment required that all changes in comprehensive income be presented either in (i) a single continuous statement of comprehensive income or in (ii) two separate but consecutive statements. The Company elected the two-statement method. The amendment was effective for interim and annual periods beginning after December 15, 2011, and is applied retrospectively.

Fair Value Measurements – In the first quarter of 2012, the Company adopted the amended fair value measurements guidance issued by the FASB, which (i) changes certain fair value measurement and disclosure requirements, (ii) clarifies the application of existing fair value measurement and disclosure requirements and (iii) provides consistency to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way. The amended guidance was effective for interim and annual periods beginning after December 15, 2011, and is applied prospectively. The adoption of the amended guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

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5. Bankruptcy Proceedings and 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 U.S. 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”). The Debtors’ Chapter 11 cases were consolidated for the purpose of joint administration.

On November 30, 2010 (the “Confirmation Date”), the Bankruptcy Court entered an order (the “Confirmation Order”) confirming 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”). Under Chapter 11 of the Bankruptcy Code, a debtor may reorganize its business for the benefit of its stakeholders with the consummation of a plan of reorganization being the principal objective. Among other things (subject to certain limited exceptions and except as otherwise provided in the Plan or the Confirmation Order), the Confirmation Order discharged the Debtors from any debt arising before the Petition Date, terminated all of the rights and interests of pre-bankruptcy equity security holders and substituted the obligations set forth in the Plan and new common stock for those pre-bankruptcy claims. Under the Plan, claims and equity interests were divided into classes according to their relative priority and other criteria.

Material conditions to the Plan were resolved during the period from the Confirmation Date until January 26, 2011, and subsequently on February 14, 2011 (the “Effective Date”), the Debtors emerged from bankruptcy and continued operations as reorganized Tronox Incorporated.

The Plan was designed to accomplish, and was premised on, a resolution of the Debtor’s legacy environmental (the “Legacy Environmental Liabilities”) and legacy tort liabilities (the “Legacy Tort Liabilities” and collectively, with the Legacy Environmental Liabilities, the “KM Legacy Liabilities”). The Plan ensured that the Debtors emerged from Chapter 11 free of the significant KM Legacy Liabilities and were sufficiently capitalized. A final settlement was reached in November 2010 with respect to the Legacy Environmental Liabilities (the “Environmental Settlement”) and the Legacy Tort Liabilities (the “Tort Settlement” and, together with the Environmental Settlement, the “Settlement”). In exchange, claimants provided the Debtors and the reorganized Tronox Incorporated with discharges and/or covenants not to sue subsequent to the Effective Date with respect to the Debtors’ liability for the Legacy Environmental Liabilities. The Settlement established certain environmental response and tort claims trusts that are now responsible for the KM Legacy Liabilities in exchange for cash, certain non-monetary assets, and the rights to the proceeds of certain ongoing litigation and insurance and other third party reimbursement agreements. The Plan also provided for the creation and funding of a torts claim trust (the “Tort Claims Trust”), which was the sole source of distributions to holders of Legacy Tort Liabilities claims, who were paid in accordance with the terms of such trust’s governing documentation. As a result of the settlement of the Debtors’ pre-petition debt and termination of the rights and interests of pre-bankruptcy equity, the Plan enabled Tronox Incorporated to reorganize around its existing operating locations, including: (a) its headquarters and technical facility at Oklahoma City, Oklahoma; (b) the TiO 2 facilities at Hamilton, Mississippi and Botlek, the Netherlands; (c) the electrolytic chemical businesses at Hamilton, Mississippi and Henderson, Nevada (except that the real property and buildings associated with the Henderson business were transferred to an environmental response trust and reorganized Tronox Incorporated is not responsible for environmental remediation related to historic contamination at such site); and (d) its interest in the Tiwest Joint Venture in Australia.

As part of the Debtor’s emergence from the Chapter 11 proceedings, Tronox Incorporated relied on a combination of debt financing and money from new equity issued to certain existing creditors. Specifically, such funding included: (i) total funded exit financing of no more than $470.0 million; (ii) the proceeds of a $185.0 million rights offering (the “Rights Offering”) open to substantially all unsecured creditors and backstopped by certain groups; (iii) settlement of government claims related to the Legacy Environmental Liabilities through the creation of certain environmental response trusts and a litigation trust; (iv) settlement of claims related to the Legacy Tort Liabilities through the establishment of a torts claim trust; (v) issuance of common stock whereby holders of the allowed general unsecured claims received their pro rata share of 50.9% of the Tronox Incorporated common stock on the Effective Date, and the opportunity to participate in the Rights Offering for an aggregate of 49.1% of the Tronox Incorporated common stock, also issued on the Effective Date; and (vi) issuance of warrants, on the Effective Date, to the holders of equity in the Predecessor to purchase their pro rata share of a combined total of 7.5% of the Tronox Incorporated common stock, after and including the issuance of any Tronox Incorporated common stock upon exercise of such warrants.

 

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6. Accounts Receivable

Accounts receivable, net of allowance for doubtful accounts, consisted of the following:

 

     Successor  
     September 30,
2012
    December 31,
2011
 

Accounts receivable — trade

   $ 346.0      $ 268.7   

Related parties

     0.3        6.9   

Other

     19.3        2.6   
  

 

 

   

 

 

 

Total

     365.6        278.2   

Allowance for doubtful accounts

     (1.2     (0.4
  

 

 

   

 

 

 

Net

   $ 364.4      $ 277.8   
  

 

 

   

 

 

 

7. Inventories

Minerals inventories are determined using the weighted-average cost to produce or acquire, while finished goods pigment inventories are determined using the first-in, first-out method. At September 30, 2012, the fair value of inventory from the acquired mineral sands business was $613.9 million.

 

     Successor  
     September 30,
2012
     December 31,
2011
 

Raw materials

   $ 227.7       $ 123.5   

Work-in-process

     164.9         9.0   

Finished goods(1)

     554.3         130.3   

Materials and supplies, net(2)

     86.2         48.4   
  

 

 

    

 

 

 

Total

   $ 1,033.1       $ 311.2   
  

 

 

    

 

 

 

 

(1) Includes inventory on consignment to others of approximately $33.1 million at September 30, 2012 and $12.0 million at December 31, 2011.
(2) Materials and supplies consist of processing chemicals, maintenance supplies and spare parts, which will be consumed directly and indirectly in the production of the Company’s products.

8. Property, Plant and Equipment and Mineral Leaseholds

 

     Successor  
     September 30,
2012
    December 31,
2011
 

Land and land improvements

   $ 93.2      $ 50.5   

Buildings

     208.0        44.9   

Machinery and equipment

     1,229.1        405.3   

Construction-in-progress

     145.2        49.1   

Furniture and fixture

       4.0   

Other

     8.7        2.8   
  

 

 

   

 

 

 

Total

     1,684.2        556.6   

Less accumulated depreciation, depletion and amortization

     (128.4     (52.3
  

 

 

   

 

 

 

Net

   $ 1,555.8      $ 504.3   
  

 

 

   

 

 

 

Depreciation expense related to property, plant and equipment for the three months ended September 30, 2012 and 2011 was $47.7 million and $15.3 million, respectively. Depreciation expense related to property, plant and equipment and for the nine months ended September 30, 2012, eight months ended September 30, 2011 and one month ended January 31, 2011 was $84.4 million, $34.9 million, and $3.8 million, respectively.

 

     Successor  
     September 30,
2012
    December 31,
2011
 

Mineral leaseholds

   $ 1,370.7      $ 42.0   

Less accumulated depreciation, depletion and amortization

     (27.9     (3.6
  

 

 

   

 

 

 

Net

   $ 1,342.8      $ 38.4   
  

 

 

   

 

 

 

 

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Depreciation expense related to mineral leaseholds for the three months ended September 30, 2012 and 2011 was $13.2 million and $0.8 million, respectively. Depreciation expense related to mineral leaseholds for the nine months ended September 30, 2012, eight months ended September 30, 2011 and one month ended January 31, 2011 was $17.2 million, $2.6 million and nil, respectively.

9. Intangible Assets

The gross cost and accumulated amortization of intangible assets, by major intangible asset category, were as follows:

 

     Successor  
     September 30, 2012  
           Gross       
Cost
     Accumulated
Amortization
    Net Carrying
Amount
 

Customer relationships

   $ 293.9       $ (33.8   $ 260.1   

TiO 2 technology

     31.9         (2.7     29.2   

Internal-use software

     17.4         (0.9     16.5   

In-process research and development

     5.0         (1.7     3.3   

Trade names

     3.6         (1.2     2.4   

Other

     0.6         (0.1     0.5   
  

 

 

    

 

 

   

 

 

 

Total

   $ 352.4       $ (40.4   $ 312.0   
  

 

 

    

 

 

   

 

 

 
     Successor  
     December 31, 2011  
     Gross
Cost
     Accumulated
Amortization
    Net Carrying
Amount
 

Customer relationships

   $ 293.9       $ (18.6   $ 275.3   

TiO 2 technology

     31.9         (1.5     30.4   

Internal-use software

     11.8         —          11.8   

In-process research and development

     5.0         (0.9     4.1   

Trade names

     3.6         (0.7     2.9   

Other

     0.7         (0.1     0.6   
  

 

 

    

 

 

   

 

 

 

Total

   $ 346.9       $ (21.8   $ 325.1   
  

 

 

    

 

 

   

 

 

 

Internal-use software relates to internal and external costs incurred during the development stage, which were being capitalized at December 31, 2011. During the second quarter of 2012, the Company began amortizing such costs. Amortization expense related to intangible assets for the three months ended September 30, 2012 and 2011 was $6.4 million and $6.0 million, respectively. Amortization expense related to intangible assets for the nine months ended September 30, 2012 and eight months ended September 30, 2011 was $18.6 million and $15.8 million, respectively. There was no amortization expense related to intangible assets for the one month ended January 31, 2011.

Estimated future amortization expense related to intangible assets is as follows:

 

     Total
Amortization
 

2012

   $ 6.3   

2013

     25.4   

2014

     24.6   

2015

     24.6   

2016

     23.0   

Thereafter

     208.1   
  

 

 

 

Total

   $ 312.0   
  

 

 

 

 

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10. Accrued Liabilities

 

     Successor  
     September 30,
2012
     December 31,
2011
 

Unfavorable sales contracts(1)

   $ 68.6       $ —     

Taxes other than income taxes(2)

     39.8         5.2   

Employee-related costs and benefits

     45.9         26.3   

Sales rebates

     11.0         8.2   

Asset retirement obligations

     1.9         0.9   

Interest

     7.5         1.3   

Other

     2.4         3.8   
  

 

 

    

 

 

 

Total

   $ 177.1       $ 45.7   
  

 

 

    

 

 

 

 

(1) In connection with the Transaction, the Company acquired sales contracts at unfavorable market terms, which were valued at $83.0 million on the Transaction Date. See Note 2.
(2) Includes transfer taxes incurred as a result of the Transaction which were recorded in selling, general and administrative expenses on the unaudited Condensed Consolidated Statements of Operation.

11. Debt

Short-term Debt

 

     Successor  
     September 30,
2012
     December 31,
2011
 

UBS Revolver(1)

   $ —         $ —     

ABSA Revolver(2)

     30.4         —     

Wells Revolver(3)

     —           —     
  

 

 

    

 

 

 

Short-term debt

   $ 30.4       $ —     
  

 

 

    

 

 

 

 

(1) Average effective interest rate of 3.9% in 2012.
(2) Average effective interest rate of 8.7% in 2012.
(3) Average effective interest rate of 4.7% in 2011 and 5.25% in 2012.

UBS Revolver

On June 18, 2012, in connection with the closing of the Transaction, the Company entered into a global senior secured asset-based syndicated revolving credit agreement with UBS AG, Stamford branch (the “UBS Revolver”) with a maturity date of the fifth anniversary of the closing date. The UBS Revolver provides the Company with a committed source of capital with a principal borrowing amount of up to $300.0 million, subject to a borrowing base. The borrowing base is related to certain eligible inventory and accounts receivable held by the Company’s U.S., Australia and Netherlands subsidiaries. Obligations under the UBS Revolver are secured by a first priority lien on substantially all of the Company’s existing, and future deposit accounts, inventory and account receivables and certain related assets, excluding those held by its South African subsidiaries, Netherland’s subsidiaries and Bahamian subsidiary, and a second priority lien on all of the Company’s other assets, including capital stock which serve as security under the Term Facility. At September 30, 2012, the Company’s borrowing base was $268.0 million.

The UBS Revolver bears interest at the Company’s option at either (i) the administrative agent’s corporate base rate (defined to mean a rate that is the greatest of (a) the lenders’ prime rate, (b) the Federal funds effective rate plus 0.50% and (c) the adjusted LIBOR rate for a one-month period plus 1.00%) or (ii) the adjusted LIBOR rate, in each case plus the applicable margin. The applicable margin ranges from 1.50% to 2.00% for borrowings at the adjusted LIBOR rate, and from 0.50% to 1.00% for borrowings at the alternate base rate, based upon the average daily borrowing availability. For the first six months following the closing date, the applicable margins shall be deemed to be 1.75% for borrowings at the adjusted LIBOR rate and 0.75% for borrowings at the alternate base rate. In connection with obtaining the ABSA Revolver, the Company incurred debt issuance costs of $6.5 million.

 

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Table of Contents

ABSA Revolving Credit Facility

In connection with the Transaction, the Company entered into a R900.0 million (approximately $110.0 million as of September 30, 2012) revolving credit facility with ABSA Bank Limited acting through its ABSA Capital Division (the “ABSA Revolver”) with a maturity date of June 14, 2017. During the third quarter of 2012, the Company had repayments of R200.0 million (approximately $24.1 million) and borrowings of R250.0 million (approximately $30.4 million). As of September 30, 2012, the Company had drawn down 250.0 million Rand (approximately $30.4 million) on the ABSA Revolver.

The ABSA Revolver bears interest at (i) the base rate (defined as one month JIBAR, which is the mid-market rate for deposits in South African Rand for a period equal to the relevant period which appears on the Reuters Screen SAFEY Page alongside the caption YLD) as of 11h00 Johannesburg time on the first day of the applicable period, plus (ii) the Margin, which is 3.50%. In connection with obtaining the ABSA Revolver, the Company incurred debt issuance costs of $1.5 million.

Wells Revolver

On February 14, 2011, Tronox Incorporated entered into a $125.0 million senior secured asset-based revolving credit agreement with Wells Fargo Capital Finance, LLC (the “Wells Revolver”). The Wells Revolver had a maturity date of February 14, 2015. The Wells Revolver provided the Company with a committed source of capital with a principal borrowing amount of up to $125.0 million subject to a borrowing base. Borrowing availability under the Wells Revolver was subject to a borrowing base, which was related to certain eligible inventory and receivables held by the Company’s U.S. subsidiaries. On February 8, 2012, the Company amended the Wells Revolver to facilitate the Transaction while keeping the revolver in force. In connection with refinancing the Wells Revolver, the Company incurred fees of $0.6 million. On June 18, 2012, the Company refinanced the Wells Revolver with the UBS Revolver.

During 2012, the Company borrowed $30.0 million against the Wells Revolver, which was repaid with borrowings under the UBS Revolver. During 2011, to facilitate its exit from bankruptcy and help pay for the buy-in of its 50% share of the Kwinana Facility TiO 2 expansion, the Company borrowed $39.0 million against the Wells Revolver, which by December 31, 2011, was fully repaid using cash generated from operations.

Long-Term Debt

 

     Initial             Successor  
     Principal
Amount
     Maturity
Date
     September 30,
2012
    December 31,
2011
 

Secured bonds

   $ 900.0         8/15/2020       $ 900.0      $ —     

Term Facility(1)

   $ 700.0         2/8/2018         692.1        —     

Exit Financing Facility(2)

   $ 425.0         10/21/2015         —          420.8   

Co-generation Unit Financing Arrangement

   $ 16.0         2/1/2016         11.0        6.5   

Lease financing

           15.6        —     
        

 

 

   

 

 

 

Total debt

           1,618.7        427.3   

Less: Long-term debt due in one year

           (11.0     (5.9
        

 

 

   

 

 

 

Long-term debt

         $ 1,607.7      $ 421.4   
        

 

 

   

 

 

 

 

(1) Average effective interest rate of 5.1% in 2012.
(2) Average effective interest rate of 7.1% and 7.2% in 2012 and 2011, respectively.

The Company’s debt is recorded at historical amounts. At September 30, 2012 the fair value of the secured notes and the term facility was $916.3 million and $707.0 million, respectively. The Company determined the fair value of both the secured notes and the term facility using the Bloomberg market price as of September 28, 2012. At December 31, 2011, the total carrying value of long-term debt approximated its fair value due to the variable interest rates and frequent repricing of such instruments. The fair value hierarchy for long-term debt is a Level 2 input.

At September 30, 2012, the scheduled maturities of the Company’s long-term debt were as follows:

 

     Total Debt  

2012

   $ 2.8   

2013

     10.7   

2014

     10.6   

2015

     10.6   

2016

     7.6   

Thereafter

     1,582.5   
  

 

 

 

Total debt

   $ 1,624.8   
  

 

 

 

 

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Table of Contents

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 were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act. The Senior Notes bear interest semiannually at a rate equal to 6.375% and were sold at par value. The Senior Notes are fully and unconditionally guaranteed on a senior, unsecured basis by Tronox Limited and certain of its subsidiaries. The Senior Notes are redeemable at any time at the Company’s discretion. The Senior Notes and related guarantees have not been registered under the Securities Act, or any state securities laws, and unless so registered, may not be offered or sold in the United States except pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws.

Approximately $326.2 million of the proceeds from the Senior Notes were used for returns of shareholder capital, in the form of share buybacks. The remainder of the proceeds will be used for general corporate purposes, and subject to required approvals may also be used for further returns of capital to shareholders from time to time (including by way of dividend).

The Company recorded debt issuance fees of $16.9 million, which are being amortized over the life of the debt, and are included in other long-term assets on the unaudited Condensed Consolidated Balance Sheet. During the three and nine months ended September 30, 2012, amortization expense amounted to$0.3 million.

Term Facility

 

     Successor  
     September 30,
2012
    December 31,
2011
 

Term Facility

   $ 698.2      $ —     

Discount

     (6.1     —     
  

 

 

   

 

 

 

Secured bonds, net

   $ 692.1      $ —     
  

 

 

   

 

 

 

On February 8, 2012, Tronox Incorporated’s wholly-owned subsidiary, Tronox Pigments (Netherlands) B.V., entered into a term loan facility with Goldman Sachs Bank USA 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 has a maturity date of February 8, 2018. The Term Facility was issued net of an original issue discount of $7.0 million, or 1.0% of the initial principal amount, which is being amortized over the life of the Term Facility. At September 30, 2012, the original issue discount was $6.1 million. On June 14, 2012, in connection with the closing of the Transaction, Tronox Pigments (Netherlands) B.V. drew down the $150.00 million Senior Secured Delayed Draw Term. During 2012, the Company has made principal repayments of $1.8 million.

The Term Facility bears interest at a base rate plus a margin of 2.25% or adjusted Eurodollar rate plus a margin of 3.25% (in each case with a possible 0.25% increase or decrease based on the Company’s public credit rating). The base rate is defined as the greater of (i) the prime lending rate as quoted in the print edition of The Wall Street Journal, (ii) the Federal funds rate plus 0.50%, or (iii) 2%.

The Term Facility is secured by a first priority lien on substantially all of the Company’s and the subsidiary guarantors’ existing and future property and assets. This includes, upon the consummation of the Transaction, certain assets acquired in the Transaction. The terms of the Term Facility provide for customary representations and warranties, affirmative and negative covenants and events of default. The terms of the covenants, subject to certain exceptions, restrict, among other things: (i) debt incurrence; (ii) lien incurrence; (iii) investments, dividends and distributions; (iv) dispositions of assets and subsidiary interests; (v) acquisitions; (vi) sale and leaseback transactions; and (vii) transactions with affiliates and shareholders.

In connection with obtaining the Term Facility, Tronox Incorporated incurred debt issuance costs of $17.2 million, of which $5.5 million was paid in 2011 and $11.7 million was paid in 2012. Such costs are recorded in “Prepaid and other assets” on the unaudited Condensed Consolidated Balance Sheet and are being amortized through the maturity date.

Exit Financing Facility

On February 14, 2011, Tronox Incorporated’s senior secured super-priority DIP and Exit Credit Agreement with Goldman Sachs Lending Partners, in accordance with its terms, converted into a $425.0 million exit facility with a maturity date of October 21, 2015 (the “Exit Financing Facility”).

 

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Table of Contents

The Exit Financing Facility bore interest at the greater of a base rate plus a margin of 4.0% or adjusted Eurodollar rate plus a margin of 5.0%. The base rate was defined as the greater of (i) the prime lending rate as quoted in the print edition of The Wall Street Journal , (ii) the Federal Funds Rate plus 0.50%, or (iii) 3%. The adjusted Eurodollar rate is defined as the greater of (i) the LIBOR rate in effect at the beginning of the interest period, or (ii) 2.0%. Interest was payable quarterly or, if the adjusted Eurodollar rate applied, it was payable on the last day of each interest period. On February 8, 2012, Tronox Incorporated refinanced the Exit Facility with the Term Facility, as discussed above.

Co-generation Unit Financing Arrangement

In March 2011, the Tiwest Joint Venture acquired a steam and electricity gas fired co-generation plant, adjacent to its Kwinana pigment plant, through a five year financing arrangement. Tronox Western Australia Pty Ltd, the Company’s wholly owned subsidiary, owned a 50% undivided interest in the co-generation plant through the Tiwest Joint Venture. In order to finance its share of the asset purchase, Tronox Incorporated incurred debt totaling $8.0 million. In connection with the Transaction, the Company acquired the remaining 50% undivided interest in the co-generation plant from Exxaro, along with its debt of $5.8 million. Under the financing arrangement, monthly payments are required and interest accrues on the remaining balance owed at the rate of 6.5% per annum.

Lease Financing

In connection with the Transaction, the Company acquired capital lease obligations, which are payable through 2032 at a weighted average interest rate of approximately 19.1%. At September 30, 2012, such obligations had a net book value of assets recorded under capital leases aggregating $9.1 million.

Financial Covenants

At September 30, 2012, the Company had financial covenants in the UBS Revolver, the ABSA Revolver and the Term Facility.

The terms of the UBS Revolver provide for customary representations and warranties, affirmative and negative covenants and events of default. The terms of the covenants, subject to certain exceptions, restrict, among other things: (i) debt incurrence; (ii) lien incurrence; (iii) investments, dividends and distributions; (iv) dispositions of assets and subsidiary interests; (v) acquisitions; (vi) sale and leaseback transactions; and (vii) transactions with affiliates and shareholders. The UBS Revolver requires the Company to maintain a Consolidated Fixed Charge Coverage Ratio of not less than 1.0 to 1.0 calculated on a quarterly basis only if excess availability on the UBS Revolver is less than the greater of (A) $20.0 million and (B) 10% of the lesser of (x) the aggregate commitments in effect at such time and (y) the borrowing base at such time. If the Company is required to maintain the Consolidated Fixed Charge Coverage Ratio then it will be required to maintain such ratio until, during the preceding 60 consecutive days, borrowing availability would have been at all times greater than the greater of (i) $20.0 million and (ii) 10% of the aggregate commitments in effect at such time.

The ABSA Revolver requires the ratio of (i) South African Consolidated EBITDA, as defined in the agreement, to South African Net Interest Expense shall not be less than 5.00: 1.00 and (ii) South African Consolidated Net Debt to South African Consolidated EBITDA, as defined in the agreement, shall be less than 2.00:1.00.

The Term Facility requires that a leverage ratio, as defined in the agreement, not exceed, as of the last day of any fiscal quarter, the correlative ratio as follows:

 

Fiscal Quarter Ending

   Total Leverage Ratio  

June 30, 2012 through December 31, 2015

     3.00:1.00   

March 31, 2016 and thereafter

     2.75:1.00   

The Term Facility and the UBS Revolver are subject to an intercreditor agreement pursuant to which the lenders’ respective rights and interests in the security are set forth.

The Company was in compliance with its financial covenants at September 30, 2012. A breach of any of the covenants imposed on the Company by the terms of the UBS Revolver or the Term Facility could result in a default under the agreement. In the event of a default, the lenders could terminate their commitments to the Company and could accelerate the repayment of all of the Company’s indebtedness under the agreement. In such case, the Company may not have sufficient funds to pay the total amount of accelerated obligations, and its lenders could proceed against the collateral pledged.

 

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Table of Contents

Interest Expense

 

     Successor            Predecessor  
     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
    Eight Months
Ended
September 30,
2011
           One Month
Ended
January 31,
2011
 

Interest expense

   $ 16.3      $ 8.0      $ 31.1      $ 21.1           $ 2.6   

Amortization of deferred debt issuance costs and discount on debt

     1.2        0.3        7.5        0.6             0.3   

Other

     0.7        —          1.0        0.4             —     

Capitalized interest

     (0.1     (0.3     (0.6     (0.6          —     
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

Interest and debt expense

   $ 18.1      $ 8.0      $ 39.0      $ 21.5           $ 2.9   
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

For the one month ended January 31, 2011, interest expense excludes $2.8 million, which would have been payable under the terms of the Company’s $350.0 million 9.5% senior unsecured notes.

12. Asset Retirement Obligations

To the extent a legal obligation exists, an asset retirement obligation (“ARO”) is recorded at its estimated fair value and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is measured using expected future cash outflows discounted at Tronox’s credit-adjusted risk-free interest rate. The Company’s unaudited condensed consolidated financial statements classify accretion expense related to asset retirement obligations as a production cost, which is included in “Cost of goods sold” on the unaudited Consolidated Statements of Operations.

The Company’s AROs are as follows:

 

   

the KZN mine and the Namakwa Sands mine, both in South Africa, to restore the areas that have been disturbed as required under the mining leases;

 

   

mine closure and rehabilitation costs in Western Australia to restore the area that has been disturbed, as required under the mining lease;

 

   

plant closure and exit costs associated with certain industrial sites in Western Australia, whereby the Company is required to return the sites to their original states under licensing conditions:

 

   

plant closure and exit costs associated with the Botlek, the Netherlands facility, whereby the Company is required to return the site back to its original state at the end of its long-term lease; and

 

   

landfill closure costs at the Hamilton, Mississippi facility to address one-time closure costs (cap with liner and cover with soil) and annual monitoring costs of the closed landfill under applicable state environmental laws in Mississippi, which is expected to be completed in 2015.

A summary of the changes in the AROs during the nine months ended September 30, 2012 is as follows:

 

Balance, December 31, 2011

   $ 30.1   

AROs acquired in the acquisition of the minerals sands business

     57.1   

Additions

     5.8   

Settlements/payments

     (1.2

Accretion expense

     2.0   

Other, including changes in estimates and remeasurement

     8.5   
  

 

 

 

Balance, September 30, 2012

   $ 102.3   
  

 

 

 

Current portion included in accrued liabilities

   $ 1.9   
  

 

 

 

Noncurrent portion

   $ 100.4   
  

 

 

 

 

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Table of Contents

A summary of the AROs by site is included in the table below:

 

Australia

   $ 57.0   

South Africa

     34.0   

Botlek

     10.2   

Hamilton

     1.1   
  

 

 

 

Total AROs

   $ 102.3   
  

 

 

 

13. Other Assets and Other Liabilities

Prepaid and Other Current Assets

 

     Successor  
     September 30, 
2012
     December 31,
2011
 

Prepaid expenses

   $ 21.5       $ 10.2   

Cash collateralized letters of credit and surety bonds

     1.4         4.9   

Other

     8.3         6.6   
  

 

 

    

 

 

 

Total

   $ 31.2       $ 21.7   
  

 

 

    

 

 

 

Other Long-Term Assets

 

     Successor  
     September 30, 
2012
     December 31,
2011
 

Debt issuance costs, net

   $ 39.2       $ 8.4   

Environmental rehabilitation trust(1)

     20.7         —     

Other, net

     3.2         3.2   
  

 

 

    

 

 

 

Total

   $ 63.1       $ 11.6   
  

 

 

    

 

 

 

 

(1) The Company has established an environmental rehabilitation trust in respect of the prospecting and mining operations in South Africa in accordance with applicable regulations. Subsequent to the Transaction Date, Exxaro has transferred the South African assets of the mineral sands business from its existing environmental rehabilitation trust to the new environmental rehabilitation trust.

Noncurrent Liabilities — Other

 

     Successor  
     September 30, 
2012
     December 31,
2011
 

Long-term incentive plan (see Note 20)

   $ 9.7       $ —     

Reserve for workers’ compensation and general liability claims

     8.7         8.5   

Reserve for uncertain tax positions

     3.4         0.9   

Other

     5.6         2.4   
  

 

 

    

 

 

 

Total

   $ 27.4       $ 11.8   
  

 

 

    

 

 

 

14. Commitments and Contingencies

Letters of Credit— At September 30, 2012, the Company had outstanding letters of credit in the amount of approximately $36.9 million, of which $29.4 million were issued under the Wells Revolver and were backstopped by a letter of credit issued under the UBS Revolver.

Other Commitments – Tronox Incorporated entered into certain agreements prior to the bankruptcy that required it to indemnify third parties for losses related to environmental matters, litigation and other claims. No material obligations are presently known and, thus, no reserve has been recorded in connection with such indemnification agreements.

 

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Environmental Contingencies— In accordance with ASC 450, Contingencies , and ASC 410, Asset Retirement and Environmental Obligations , the Company recognizes a loss and records an undiscounted liability when litigation has commenced or a claim or an assessment has been asserted, or, based on available information commencement of litigation or assertion of a claim or assessment is probable, and the associated costs can be estimated. It is not possible for the Company to reliably estimate the amount and timing of all future expenditures related to environmental matters because, among other reasons, environmental laws and regulations, as well as enforcement policies and clean up levels, are continually changing, and the outcome of court proceedings, alternative dispute resolution proceedings (including mediation) and discussions with regulatory agencies are inherently uncertain.

The Company believes that it has reserved adequately for the probable and reasonably estimable costs of known contingencies. There is no environmental litigation, claim or assessment that has been asserted nor is there any probability of an assessment or a claim for which the Company has not recorded a liability. However, additions to the reserves may be required as additional information is obtained that enables the Company to better estimate its liabilities. The Company cannot reliably estimate the amount of future additions to the reserves at this time. In certain situations, reserves may be probable but not estimable. Additionally, sites may be identified in the future where the Company could have potential liability for environmental related matters. If a site is identified, the Company will evaluate to determine what reserve, if any, should be established.

Legal The Western Australia Office of State Revenue (the “OSR”) continues to review their technical position on the imposition of stamp duty on the transfer of Tronox Incorporated’s shares related to Kerr-McGee’s restructuring in 2002 and from the share transfer related to the spinoff of Tronox Incorporated from Kerr-McGee in 2005. On January 17, 2012, the OSR contacted the Company seeking additional information related to the 2005 spinoff. In addition, the OSR informed the Company that it has made a preliminary determination that the Company was land rich at the time of the 2002 share transfers and, as a result, the Company may be liable for stamp duty and penalties arising from that share transfer. A company is considered “land rich” if the value of its land, goods, wares and merchandise is greater than 60% of the total value of all the property that the entity owns. The OSR has not made an assessment at this time and continues discussions with the Company and its legal advisors. The Company has accrued stamp duty on the 2002 transaction in the amount of $3.2 million based upon its position that the Company was not land rich at the time of the share transfers. The Company intends to exercise all of its legal and administrative remedies in the event that the OSR makes an assessment based upon its claim that it is land rich.

In August 2011, the outstanding legal disputes between the Company and RTI Hamilton, Inc. dating back to 2008 came to a close with the parties reaching an agreement in principle. The agreement reflects a compromise and settlement of disputed claims in complete accord and satisfaction thereof. RTI Hamilton paid Tronox the sum of $10.5 million within five business days of receipt of the Bankruptcy Court Approval. Of the total payment, $0.7 million constitutes payment for capital costs incurred by Tronox in relation to the agreement, plus interest.

Registration Rights Agreement —On the Effective Date, Tronox Incorporated entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with certain stockholders of Tronox Incorporated party thereto. Pursuant to the Registration Rights Agreement, among other things, Tronox Incorporated was required to file with the SEC, pursuant to Section 13(a) of the Exchange Act, a registration statement for its common stock prior to September 30, 2011. Tronox Incorporated did not meet the September 30, 2011 deadline, and therefore, was subject to liquidation damages of approximately $2.0 million. Tronox Incorporated accrued $2.0 million related to such liability during 2011 and, as of December 31, 2011, Tronox Incorporated received and paid claims in the amount of $0.6 million. The remaining $1.4 million of claims were received and paid during the first quarter of 2012.

Other Matters —From time to time, the Company may be party to a number of legal and administrative proceedings involving environmental and/or other matters in various courts or agencies. These proceedings, individually and in the aggregate, may have a material adverse effect on the Company. These proceedings may be associated with facilities currently or previously owned, operated or used by the Company and/or its predecessors, some of which may include claims for personal injuries, property damages, cleanup costs and other environmental matters. Current and former operations of the Company may also involve management of regulated materials, which are subject to various environmental laws and regulations including the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act (RCRA) or state equivalents. Similar environmental laws and regulations and other requirements exist in foreign countries in which the Company operates.

15. Noncontrolling Interest

In connection with the Transaction, Exxaro and its subsidiaries retained a 26.0% ownership interest in each of Tronox KZN Sands (Pty) Ltd and Tronox Mineral Sands (Pty) Ltd in order to comply with the ownership requirements of the BEE legislation in South Africa. Exxaro is entitled to exchange this interest for approximately 3.2% in additional Class B Shares under certain circumstances (i.e., the earlier of the termination of the Empowerment Period or the tenth anniversary of completion of the Transaction).

 

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Table of Contents

A reconciliation of the beginning and ending balances of noncontrolling interest on the Company’s unaudited Condensed Consolidated Balance Sheets is presented below.

 

Balance at January 1, 2012

   $ —     

Fair value of noncontrolling interest on the Transaction Date(1)

     291.1   

Earnings attributable to noncontrolling interest

     (0.8

Effect of exchange rate changes

     13.1   
  

 

 

 

Balance at September 30, 2012

   $ 303.4   
  

 

 

 

 

  

(1)    The fair value of noncontrolling interest is preliminary and based upon valuations derived from estimated fair value assessments and assumptions used by management. While management believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different values being assigned.

         

16. Other Income (Expense)

 

     Successor            Predecessor  
     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
    Eight Months
Ended
September 30,
2011
           One Month
Ended
January 31,
2011
 

Net unrealized and realized foreign currency gain (loss)

   $ (1.6   $ (0.6   $ (6.3   $ (1.1        $ 1.5   

Interest income

     0.5        0.2        0.9        0.4             0.1   

Other

     1.3        (0.9     0.6        (1.0          —     
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

Total

   $ 0.2      $ (1.3   $ (4.8   $ (1.7        $ 1.6   
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

17. Income Taxes

The following table presents the income tax provisions, along with income from continuing operations and the effective tax rates:

 

     Successor            Predecessor  
     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
    Eight Months
Ended
September 30,
2011
           One Month
Ended
January 31,
2011
 

Income tax benefit (provision)

   $ 38.0      $ 9.0      $ 127.5      $ (3.3        $ (0.7

Income (Loss) from Continuing Operations Before Income Taxes

     (56.0     89.9        1,097.2        178.6             632.2   

Effective Tax Rate

     67.9     (10.0 )%      (11.6 )%      1.8          0.1

The negative effective tax rate for the 2012 Successor nine months ended September 30, 2012, differs from the U.S. statutory rate of 35% primarily as a consequence of the Company re-domiciling in Australia. Because the Australian tax laws provide for a resetting of the tax basis of the business assets to market value, the Company recorded a tax benefit related to this market value basis adjustment. The overall tax benefit from this basis adjustment increase was partially offset by a valuation allowance established for the portion of the tax benefit which the Company believes will not be realized. Because this basis change did not pertain to an entity acquired in the Transaction, this net tax benefit was recorded through tax expense and did not impact the Company’s gain on bargain purchase.

Additionally, the effective tax rate for the nine months ended September 30, 2012, was impacted by the release of a valuation allowance in the Netherlands, continuing valuation allowances in the United States, income in foreign jurisdictions taxed at rates lower than 35%, and the Company’s gain on the bargain purchase, which was recorded net of the financial tax impact and is not subject to income tax in any jurisdiction.

The high effective tax rate for the three months ended September 30, 2012, differs from the U.S. statutory rate of 35% primarily because the Company incurred a book operating loss for the quarter while recording a tax benefit from the release of a valuation allowance in the Netherlands.

 

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Table of Contents

The effective tax rates for the 2011 Successor periods differ from the U.S. statutory rate of 35% primarily due to valuation allowances in the United States, income in foreign jurisdictions taxed at rates lower than 35% and statute lapses in a foreign jurisdiction which released significant liabilities related to uncertain tax positions. In the one month ended January 31, 2011, the effective tax rate for the Predecessor period differs from the U.S. statutory rate of 35% primarily due to fresh-start adjustments, which were recorded net of tax. Additionally, the Predecessor period effective tax rate was impacted by valuation allowances in multiple jurisdictions and income in foreign jurisdictions taxed at rates lower than 35%.

The application of business combination accounting on June 15, 2012 resulted in the re-measurement of deferred income taxes associated with recording the assets and liabilities of acquired entities at fair value pursuant to ASC 805. As a result, deferred income taxes of $202.3 million were recorded at amounts determined in accordance with ASC 740 as part of the Company’s gain on bargain purchase.

The application of fresh-start accounting on January 31, 2011, resulted in the re-measurement of deferred income tax liabilities associated with the revaluation of Tronox Incorporated’s assets and liabilities pursuant to ASC 852. As a result, deferred income taxes were recorded at amounts determined in accordance with ASC 740 of $11.8 million as part of reorganization income. Additionally, during 2011, Tronox Incorporated released valuation allowances against certain of its deferred tax assets in the Netherlands and Australia resulting from this re-measurement.

For U.S. federal income tax purposes, typically the amount of cancellation of debt income (“CODI”) recognized, and accordingly the amount of tax attributes that may be reduced, depends in part on the fair market value of non-cash consideration given to creditors. On Tronox Incorporated’s date of emergence, the fair market value of non-cash consideration given was such that the creditors received consideration in excess of their claims. For this reason, Tronox Incorporated did not recognize any CODI and retained all of its U.S. tax attributes. In addition, Tronox Incorporated reflected a tax deduction for the premium paid to the creditors of $1,129.7 million. This deduction will increase the Company’s net operating losses (“NOL’s”) in the United States and in various states where the Company has filing requirements. The resulting federal tax benefit of $395.4 million and the estimated corresponding state tax benefit of $51.0 million, net of the deferred federal effect, have been fully offset by a valuation allowance in accordance with ASC 740, after considering all available positive and negative evidence. Because the financial offset for the consideration given to creditors was recorded through equity, neither the tax benefits nor the offsetting valuation allowance impacts were shown in the effective tax rate calculations. Instead, the excess tax benefit, which netted to zero with the valuation allowance, was reflected as an equity adjustment.

The Company does not believe an ownership change occurred as a result of the Transaction. Upon the Company’s emergence from bankruptcy in the period ended January 31, 2011 the Company experienced an ownership change resulting in a limitation under IRC Sections 382 and 383 related to its U.S. NOL’s generated prior to emergence from bankruptcy. The Company does not expect that the application of these limitations will have any material affect upon its U.S. federal or state income tax liabilities.

Earnings of certain foreign subsidiaries of Tronox Incorporated, which were undistributed to the U.S., totaled $144.0 million at December 31, 2011. Under the new Australian holding company, it is expected that undistributed earnings of certain subsidiaries will continue to increase. At September 30, 2012, no provision for deferred U.S. or Australian income taxes has been made for these earnings because they were considered to be indefinitely reinvested outside of the parent’s taxing jurisdictions. The distribution of these earnings in the form of dividends or otherwise may subject the Company to U.S. federal and state or foreign income taxes and, possibly, foreign withholding taxes. However, because of the complexities of taxation of foreign earnings, it is not practicable to estimate the amount of additional tax that might be payable on the eventual remittance of these earnings to their parent corporations.

The Company continues to maintain a valuation allowance related to the net deferred tax assets in the United States. Future provisions for income taxes will include no tax benefits with respect to losses incurred and tax expense only to the extent of current alternative minimum tax and state tax payments until the valuation allowance in the United States is eliminated. ASC 740 requires that all available positive and negative evidence be weighted to determine whether a valuation allowance should be recorded.

18. Earnings Per Share

Certain unvested awards issued under the Tronox Limited Management Equity Incentive Plan and the T-Bucks Employee Participation Plan, as further discussed in Note 20, contain non-forfeitable rights to dividends declared on Class A Shares. Any unvested shares that participate in dividends are considered participating securities, and are included in the Company’s computation of basic and diluted earnings per share using the two-class method, unless the effect of including such shares would be antidilutive. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of ordinary shares and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.

 

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Table of Contents

Basic earnings per share is computed utilizing the two-class method, and is calculated based on weighted-average number of common shares outstanding during the periods presented. Diluted earnings per share is computed using the weighted-average number of common and common equivalent shares outstanding during the periods utilizing the two-class method for nonvested restricted shares, warrants and options. As we recognized a net loss for the three months ended September 30, 2012, the unvested share-based payments and options were not recognized in the diluted earnings per share calculations as they were antidilutive.

The following table sets forth the number of shares utilized in the computation of basic and diluted earnings per share from continuing operations for the periods indicated. The weighted average shares outstanding, potentially dilutive shares, earnings per share and anti-dilutive shares of the Successor have been restated to affect the 5-for-1 stock split discussed in Note 19.

 

     Successor            Predecessor  
     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
    Eight Months
Ended
September 30,
2011
           One Month
Ended
January 31,
2011
 

Numerator – Basic and Diluted:

               

Income (Loss) from Continuing Operations

   $ (18.0   $ 98.9      $ 1,224.7      $ 175.3           $ 631.5   

Less: Income attributable to noncontrolling interest

     (1.3     —          (0.8     —               —     

Less: Dividends paid

     —          —          31.5        —               —     
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

Undistributed earnings (losses)

     (16.7     98.9        1,194.0        175.3             631.5   

Percentage allocated to common shares

     100     100     99.42     100          100
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 
 

Undistributed earnings allocated to common shares

     (16.7     98.9        1,187.1        175.3             631.5   

Add: Dividends declared allocated to common shares

     —          —          31.4        —               —     
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

Earnings available to common shares

   $ (16.7   $ 98.9      $ 1,218.5      $ 175.3           $ 631.5   
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 
 

Denominator – Basic:

               

Weighted-average common shares (In thousands)

     122,352        74,910        94,193        73,325             41,311   

Add: Effect of Dilutive Securities:

               

Restricted shares

     —          1,120        66        1,200             88   

Warrants

     —          3,145        2,638        3,135             —     

Options

     —          —          6        —               —     
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

Denominator – Diluted

     122,352        79,175        96,903        77,660             41,399   
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 
 

Earnings per Share:

               

Basic Income (Loss) per Share

   $ (0.14   $ 1.32      $ 12.94      $ 2.39           $ 15.29   
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

Diluted Income (Loss) per Share

   $ (0.14   $ 1.25      $ 12.57      $ 2.26           $ 15.25   
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

In computing diluted earnings per share under the two-class method, the Company considered potentially dilutive shares. For the three months ended September 30, 2012, 308,555 options with an average exercise price of $27.91 were not recognized in the diluted earnings per share calculation as they were antidilutive. For the one month ended January 31, 2011, 1,152,408 options with an average exercise price of $9.54 were anti-dilutive because they were not “in the money.” There were no options outstanding during the three and eight months ended September 30, 2011.

During the third quarter of 2012, the Company created the T-Bucks Employee Purchase Plan for the benefit of certain employees at Tronox subsidiaries in South Africa. Shares held by the Trust are not considered outstanding for purposes of computing earnings per share. See Note 20 for additional information on the T-Bucks Employee Purchase Plan.

 

25


Table of Contents

19. Shareholders’ Equity

Stock Split Declared

On June 26, 2012, the Board approved a 5-to-1 stock split for holders of its 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. As a result of the stock split, the Company recorded an increase to “Tronox Limited Class A ordinary shares” of $0.6 million and an increase to “Tronox Limited Class B ordinary shares” of $0.4 million, with corresponding decreases to “Retained earnings” on the unaudited Condensed Consolidated Balance Sheets.

Ordinary Shares and Common Stock

The changes in ordinary shares and common stock outstanding and treasury shares for the nine months ended September 30, 2012 were as follows:

 

Tronox Limited Class A Shares outstanding:

  

Balance at December 31, 2011

     —     

Shares issued in connection with the Transaction(1)

     76,644,650   

Shares issued for share-based compensation

     7,550   

Shares issued for warrants exercised

     9,323   

Shares purchased by the T-Bucks Trust(2)

     (548,234

Shares repurchased/cancelled(3)

     (12,626,400
  

 

 

 

Balance at September 30, 2012

     63,486,889   
  

 

 

 

 

Tronox Limited Class B Shares outstanding:

  

Balance at December 31, 2011

     —     

Shares issued in connection with the Transaction(1)

     49,754,280   
  

 

 

 

Balance at September 30, 2012

     49,754,280   
  

 

 

 

Tronox Incorporated common stock outstanding:

  

Balance at December 31, 2011

     75,383,455   

Shares issued for stock-based compensation

     570,785   

Shares issued for warrants exercised

     690,385   

Shares issued for claims

     25   

Shares exchanged in connection with the Transaction(1)

     (76,644,650
  

 

 

 

Balance at September 30, 2012

     —     
  

 

 

 

Tronox Incorporated common stock held as treasury:

  

Balance at December 31, 2011

     472,565   

Shares issued for stock-based compensation

     239,360   

Shares cancelled in connection with the Transaction(3)

     (711,925
  

 

 

 

Balance at September 30, 2012

     —     
  

 

 

 

 

(1) Shares issued in connection with the Transaction have been adjusted for the 5-for-1 stock split. On the Transaction Date, the Company issued 15,328,930 Class A Shares and 9,950,856 Class B Shares.
(2) During the third quarter of 2012, the Company created the T-Bucks Employee Participation Plan for the benefit of certain employees at Tronox subsidiaries in South Africa. See Note 20 for additional information on the Employee Participation Plan.
(3) In accordance with Australian law, the Company is not permitted to hold its own ordinary shares. As such, all Class A Shares that were repurchased by the Company have been cancelled. Additionally, all shares of Tronox Incorporated common stock that were held by Tronox Incorporated on the Transaction date were cancelled in connection with the Transaction. The number of Class A Shares repurchased has been adjusted for the 5-for-1 stock split.

 

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Table of Contents

Warrants

As part of its emergence from bankruptcy, Tronox Incorporated issued warrants to existing holders of its equity in two tranches, Series A warrants and Series B warrants (collectively, the “Tronox Incorporated Warrants”), to purchase up to an aggregate of 1,216,216 shares, or 7.5%, of Tronox Incorporated’s common stock. In connection with the Transaction, and pursuant to the terms of the Tronox Incorporated Warrant Agreement, Tronox Limited entered into an amended and restated warrant agreement, dated as of the Transaction Date, whereby the holders of the Tronox Limited Warrants were entitled to purchase one Class A Share and receive $12.50 in cash at the initial exercise prices of $62.13 for each Series A Warrant (the “Series A Warrants”) and $68.56 for each Series B Warrant (the “Series B Warrants”, collectively with the Series A Warrants, the “Warrants”). On the Transaction Date, there were 841,302 Warrants outstanding. The Warrants have a seven-year term from the date initially issued and will expire on February 14, 2018. A holder may exercise the Warrants by paying the applicable exercise price in cash or on a cashless basis. The Warrants are freely transferable by the holder thereof.

In connection with the stock split, holders of the Warrants are entitled to purchase five Class A Shares and receive $12.50 in cash at the initial exercise prices of $62.13 for each Series A Warrant and $68.56 for each Series B Warrants. As a result of the dividend declared on June 26, 2012, the exercise price of the Series A and Series B Warrants were reduced to $61.84 and $68.24, respectively, as of the close of business on July 13, 2012. As of September 30, 2012 there were 364,819 Series A Warrants and 474,425 Series B Warrants outstanding.

Share Repurchases

On June 26, 2012, the Board authorized the repurchase of 10% of Tronox Limited’s Class A shares in open market transactions. 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. Repurchased shares were subsequently cancelled in accordance with Australian law. On September 27, 2012, the Company announced the successful completion of its share repurchase program.

20. Share-Based Compensation

Compensation expense related to employee restricted share awards was $1.1 million and $1.4 million for the three months ended September 30, 2012 and 2011, respectively, and $24.1 million and $6.6 million for the nine months ended September 30, 2012 and the eight months ended September 30, 2011, respectively. Compensation expense related to restricted share awards granted to the Board of Directors was $0.3 million and $0.4 million for the three months ended September 30, 2012 and 2011, respectively, and $3.4 million and $1.1 million for the nine months ended September 30, 2012 and the eight months ended September 30, 2011, respectively. Compensation expense related to the Company’s nonqualified option awards for the three and nine months ended September 30, 2012 was $0.2 million and $1.1 million, respectively.

Tronox Limited Management Equity Incentive Plan

On the Transaction Date, Tronox Limited adopted the Tronox Limited management equity incentive plan (the “Tronox Limited MEIP”), which permits the grant of awards that constitute incentive options, nonqualified options, share appreciation rights, restricted shares, restricted share units, performance awards and other share-based awards, cash payments and other forms such as the compensation committee of the Board in its discretion deems appropriate, including any combination of the above. Subject to further adjustment, the maximum number of shares which may be the subject of awards (inclusive of incentive options) is 12,781,225 Class A Shares.

Restricted Shares

During 2012, the Company granted 161,411 restricted share awards to employees, which have both time requirements and performance requirements. The time provisions are graded vesting, while the performance provisions are cliff vesting and have a variable payout. During 2012, the Company granted 23,160 restricted share awards with graded vesting to members of its Board of Directors. In accordance with ASC 718, Compensation – Stock Compensation, the restricted share awards issued during 2012 are classified as equity awards and are accounted for using the fair value established at the grant date.

 

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The following table summarizes restricted share activity with employees for the nine months ended September 30, 2012.

 

     Number of
Shares
    Fair
Value(1)
 

Balance at December 31, 2011

     —          —     

Awards converted from Tronox Incorporated to Tronox Limited in connection with the Transaction

     420,765        16.99   

Awards granted

     161,411        27.28   

Awards earned

     (7,550     25.90   

Awards forfeited

     (7,985     29.29   
  

 

 

   

 

 

 

Balance at September 30, 2012

     566,641      $ 19.62   
  

 

 

   

 

 

 

Outstanding awards expected to vest

     559,727      $ 19.53   
  

 

 

   

 

 

 

 

(1) Represents the weighted-average grant-date fair value.

The following table summarizes restricted share activity with Tronox Limited Board of Directors for the nine months ended September 30, 2012.

 

     Number of
Shares
     Fair
Value(1)
 

Balance at December 31, 2011

     —           —     

Awards granted

     23,160         25.90   
  

 

 

    

 

 

 

Balance at September 30, 2012

     23,160       $ 25.90   
  

 

 

    

 

 

 

Outstanding awards expected to vest

     23,160       $ 25.90   
  

 

 

    

 

 

 

 

(1) Represents the weighted-average grant-date fair value.

Options

During 2012, the Company granted 158,960 options to employees to purchase Class A Shares, which vest over a three year period. The following table presents a summary of activity for the Tronox Limited options for the nine months ended September 30, 2012:

 

     Number of
Options
    Price (1)      Contractual
Life
Years (1)
     Intrinsic
Value(2)
 

Balance at December 31, 2011

     —        $ —           —         $ —     

Options converted to Tronox Limited in connection with the Transaction

     517,330        24.56         9.34         —     

Options issued

     158,960        25.62         9.75         —     

Options forfeited

     (152,320     22.38         —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2012

     523,970      $ 25.52         9.49       $ 0.1   
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding options expected to vest

     488,791      $ 25.59         9.50       $ 0.1   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Represents weighted average exercise price and weighted average remaining contractual life, as applicable. The fair value of awards granted in connection with the stock split has been adjusted to reflect the estimated fair value on the date of such stock split.
(2) Reflects aggregate intrinsic value based on the difference between the market price of the Company’s share at September 30, 2012 and the options’ exercise price. Options issued in connection with the stock split had no effect on the intrinsic value of outstanding options.

July 31, 2012 Grant

Valuation and Cost Attribution Methods . The fair value of the options issued was determined on the date of grant using the Black-Scholes option-pricing model and is recognized in earnings on a straight-line basis over the employee service period of three years necessary to earn the awards.

 

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The Company ran the Black-Scholes option-pricing model for the 15,808 options granted on July 31, 2012 and used the following assumptions:

 

     2012  

Risk-free interest rate

     0.83

Expected dividend yield

     4.32

Expected volatility

     56

Expected term (years)

     10.0   

Per-unit fair value of options granted

   $ 8.21   

The Company used the fair market value and exercise price of $23.17, which was the closing price of Class A Shares, New York Stock Exchange symbol TROX, recorded on July 31, 2012.

Expected Volatility  — In setting the volatility assumption, the Company considered the most recent reported volatility of each compensation peer company. For the 2012 valuation, the peer company group included the following companies: Cabot Corporation, Celanese Corporation, Cliffs Natural Resources Inc., Cytec Industries Inc., Eastman Chemical Company, FMC Corporation, Freeport-McMoRan Copper & Gold Inc., Georgia Gulf Corporation, Huntsman Corporation, Kronos Worldwide, Inc., PPG Industries, Inc., Rockwood Holdings, Inc., RPM International Inc., The Sherwin-Williams Company, Southern Copper Corporation, Teck Resources Limited, The Valspar Corporation, W.R. Grace & Co, and Westlake Chemical Corporation.

Risk-free interest rate  — The Company used a risk-free interest rate of 0.83%, which was the risk-free interest rate based on U.S. Treasury Strips available with maturity period consistent with expected life assumption.

August 31, 2012 Grant

Valuation and Cost Attribution Methods . Options’ fair value was determined on the date of grant using the Black-Scholes option-pricing model and is recognized in earnings on a straight-line basis over the employee service period of three years necessary to earn the awards. The Company ran the Black-Scholes option-pricing model for the 7,257 options granted on August 31, 2012 and used the following assumptions:

 

     2012  

Risk-free interest rate

     0.85

Expected dividend yield

     3.88

Expected volatility

     56

Expected term (years)

     10.0   

Per-unit fair value of options granted

   $ 9.51   

The Company used the fair market value and exercise price of $25.79, which was the closing price of Class A Shares, New York Stock Exchange symbol TROX, recorded on August 31, 2012.

Expected Volatility  — In setting the volatility assumption, the Company considered the most recent reported volatility of each compensation peer company. For the 2012 valuation, the peer company group included the following companies: Cabot Corporation, Celanese Corporation, Cliffs Natural Resources Inc., Cytec Industries Inc., Eastman Chemical Company, FMC Corporation, Freeport-McMoRan Copper & Gold Inc., Georgia Gulf Corporation, Huntsman Corporation, Kronos Worldwide, Inc., PPG Industries, Inc., Rockwood Holdings, Inc., RPM International Inc., The Sherwin-Williams Company, Southern Copper Corporation, Teck Resources Limited, The Valspar Corporation, W.R. Grace & Co, and Westlake Chemical Corporation.

Risk-free interest rate  — The Company used a risk-free interest rate of 0.85%, which was the risk-free interest rate based on U.S. Treasury Strips available with maturity period consistent with expected life assumption.

T-Bucks Employee Participation Plan (“T-Bucks EPP”)

During the third quarter of 2012, the Company created the T-Bucks EPP for the benefit of certain qualifying employees (the “Participants”) of Tronox subsidiaries in South Africa (the “Employer Companies”). In accordance with the terms of the Trust Deed of the T-Bucks Trust (the “T-Bucks Trust Deed”), the Employer Companies funded the T-Bucks Trust (the “Trust”) in the amount of R123.8 million (approximately $14.6 million), which represents a capital contribution equal to R75,000 for each Participant. The funded amount was used to acquire 548,234 Class A Shares. Additional contributions may be made in the future at the discretion of the Board.

 

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Table of Contents

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. The Participants are also entitled to receive dividends on the Tronox shares during the vesting period. Forfeited shares are retained by the Trust and are allocated to future participants in accordance with the Trust Deed. Under certain conditions, as outlined in the Trust Deed, Participants may receive share units awarded before May 31, 2017. The fair value of the awards is the fair value of the shares determined at the Grant Date. Compensation costs are recognized over the vesting period using the straight-line method. Compensation expense for the three months ended September 30, 2012 was $0.2 million. In accordance with ASC 718, the T-Bucks EPP is classified as an equity-settled shared-based payment plan.

 

     Number of
Shares
     Fair
Value(1)
 

Balance at December 31, 2011

     —           —     

Shares acquired by the Trust

     548,234         25.79   
  

 

 

    

 

 

 

Balance at September 30, 2012

     548,234       $ 25.79   
  

 

 

    

 

 

 

Outstanding awards expected to vest

     548,234       $ 25.79   
  

 

 

    

 

 

 

 

(1) Represents the fair value on the date of purchase by the Trust.

Long-Term Incentive Plan

In connection with the Transaction, the Company acquired a long-term incentive plan (the “LTIP”) for the benefit of certain qualifying employees of Tronox subsidiaries in South Africa and Australia. The LTIP is classified as cash settled compensation plan and is re-measured to fair value at each reporting date. At the Transaction Date, the fair value of the LTIP plan was $10.5 million.

Tronox Incorporated Management Equity Incentive Plan

On the Effective Date, Tronox Incorporated adopted the Tronox Incorporated management equity incentive plan (the “Tronox Incorporated MEIP”), which permitted the grant of awards that constitute incentive options, nonqualified options, share appreciation rights, restricted share, restricted share units, performance awards and other share-based awards, cash payments and other forms such as the compensation committee of the Tronox Incorporated Board of Directors in its discretion deems appropriate, including any combination of the above. The number of shares available for delivery pursuant to the awards granted under the Tronox Incorporated MEIP was 1.2 million shares.

On the Transaction Date, 748,980 shares of Tronox Incorporated restricted stock vested in connection with the Transaction. The remaining shares of Tronox Incorporated restricted stock were converted to Tronox Limited restricted shares.

Grants to Tronox Incorporated Board Members

As noted above, the Tronox Incorporated MEIP authorized the issuance of restricted shares to eligible directors who were serving on the Tronox Incorporated Board of Directors on the Effective Date.

The following table summarizes restricted shares activity with Board of Directors of Tronox Incorporated members for the nine months ended September 30, 2012.

 

     Primary Award      Secondary Award  

Restricted Shares

   Number
Of
Shares
    Weighted-Avg.
Grant  Date
Fair Value
     Number
of
Shares
    Weighted-Avg.
Grant  Date
Fair Value
 

Balance at December 31, 2011

     50,040      $ 24.50         122,485      $ 24.50   

Awards earned

     (50,040     24.50         (122,485     24.50   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2012

     —        $ —           —        $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding awards expected to vest

     —        $ —           —        $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Grants to employees

During 2012, Tronox Incorporated granted 52,915 shares to employees, which have graded vesting provisions. The plan allows Tronox Incorporated to withhold, for tax purposes, the highest combined maximum rate imposed under all applicable federal, state, local and foreign tax laws on behalf of the employees that have received these awards. In accordance with ASC 718, such restricted share awards were classified as liability awards and were re-measured to fair value at each reporting date. The following table summarizes restricted share activity with employees for the nine months ended September 30, 2012.

 

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Table of Contents
     Number of
Shares
    Fair
Value(1)
 

Balance at December 31, 2011

     1,005,470      $ 21.58   

Awards granted

     52,915        24.36   

Awards earned

     (637,620     24.21   

Awards converted to Tronox Limited restricted shares in connection with the Transaction

     (420,765     16.99   
  

 

 

   

 

 

 

Balance at September 30, 2012

     —        $ —     
  

 

 

   

 

 

 

 

(1) Represents the weighted-average grant-date fair value.

Options

The following table presents a summary of activity for the Tronox Incorporated options for the nine months ended September 30, 2012:

 

     Number of
Options
    Price
(1)
     Contractual
Life
Years (1)
     Intrinsic
Value(2)
 

Balance at December 31, 2011

     345,000      $ 22.00         9.95       $ 0.7   

Options issued

     172,330        29.69         9.87         —     

Options converted to Tronox Limited in connection with the Transaction

     (517,330     24.56         9.59         0.7   
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2012

     —        $ —           —         $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Represents weighted average exercise price and weighted average remaining contractual life, as applicable.
(2) Reflects aggregate intrinsic value based on the difference between the market price of the Company’s shares at September 30, 2012 and the options’ exercise price.

Predecessor

Upon emergence from bankruptcy, all predecessor common stock equivalents, including but not limited to stock options and restricted stock units of Tronox Incorporated were vested and immediately cancelled with the Plan.

Overview  — Tronox Incorporated’s Long Term Incentive Plan (the “Predecessor LTIP”) authorized the issuance of shares of Tronox Incorporated common stock to certain employees and non-employee directors any time prior to November 16, 2015, in the form of fixed-price stock options, restricted stock, stock appreciation rights or performance awards. As of the Effective Date, all stock-based awards previously issued under the Predecessor’s LTIP plan vested and were immediately cancelled.

For the one month ended January 31, 2011, Tronox Incorporated recognized $0.1 million of compensation expense related to restricted stock-based awards, which was based on the fair value of the awards. During the one month ended January 31, 2011, the tax benefit associated with compensation expense had a corresponding offset to the valuation allowance, yielding no overall income tax benefit.

The following table summarizes information about restricted stock award, performance award and stock option activity for the one month ended January 31, 2011:

 

     Restricted Stock Awards  &
Stock Opportunity Grants
     Performance
Awards
    Stock Options  

Restricted Shares

   Number of
Shares
    Fair
Value(1)
     Number Of
Units
    Number of
Options
    Price(2)      Contractual
Life  (Years)(2)
     Intrinsic
Value(3)
 

Balance at December 31, 2010

     148,053      $ 4.92         2,689,150        1,152,408      $ 9.54         5.31       $ 9.54   

Awards vested/cancelled

     (148,053     —           (2,689,150     (1,152,408     —           —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance at January 31, 2011

     —        $ —           —          —        $ —           —         $ —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Represents the weighted average grant date fair value.
(2) Represents weighted average exercise price and weighted average remaining contractual life, as applicable.
(3) Reflects aggregate intrinsic value based on the difference between the market price of the Company’s stock and the options’ exercise price.

 

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Table of Contents

21. Cash Flows Statement Data

Other noncash items included in the reconciliation of net income (loss) to net cash flows from operating activities include the following:

 

     Successor             Predecessor  
     Nine Months 
Ended
September 30,
2012
     Eight Months
Ended
September 30,
2011
            One Month
Ended
January 31,
2011
 

Amortization of fair value inventory step-up and unfavorable ore sales contracts

   $ 108.8       $ —              $ —     

Accrued transfer taxes

     37.0         —                —     

Other net adjustments

     6.5         4.2              (0.2
  

 

 

    

 

 

         

 

 

 

Total

   $ 152.3       $ 4.2            $ (0.2
  

 

 

    

 

 

         

 

 

 

Reorganization items included in the reconciliation of net income (loss) to net cash flows from operating activities include the following:

 

     Successor            Predecessor  
     Nine Months 
Ended
September 30,
2012
     Eight Months
Ended
September 30,
2011
           One Month
Ended
January 31,
2011
 

Noncash reorganization items

   $ —         $ —             $ (636.6

Environmental settlement funding

     —           —               (270.0

Claims paid with cash

     —           (14.3          (18.6

Tort settlement funding

     —           —               (16.5

Professional and legal fees

     —           —               (12.0
  

 

 

    

 

 

        

 

 

 

Total

   $ —         $ (14.3        $ (953.7
  

 

 

    

 

 

        

 

 

 

Other, net, included in the reconciliation of net income to net cash flows from operating activities includes the following:

 

     Successor            Predecessor  
     Nine Months 
Ended
September 30,
2012
     Eight Months
Ended
September 30,
2011
           One Month
Ended
January 31,
2011
 

Environmental expenditures, net of reimbursements

   $ —         $ 33.1           $ —     

Other net adjustments

     1.7         (1.2          1.0   
  

 

 

    

 

 

        

 

 

 

Total

   $ 1.7       $ 31.9           $ 1.0   
  

 

 

    

 

 

        

 

 

 

22. Pension and Other Postretirement Healthcare Benefits

Defined Benefit Retirement Plans

The Company is the sponsor of noncontributory defined benefit retirement plans in the United States, a contributory defined benefit retirement plan in the Netherlands and a U.S. contributory postretirement plan for health care insurance. Substantially all U.S. employees may become eligible for the postretirement healthcare benefits if they reach retirement age while working for the Company.

 

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Table of Contents

The components of net periodic pension and postretirement healthcare cost for the three months ended September 30, 2012 and 2011, and the nine months ended September 30, 2012, eight months ended September 30, 2011 and one month ended January 31, 2011 were as follows:

 

     Retirement Plans        
     Successor     Predecessor  
     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
    Eight Months
Ended
September 30,
2011
    One Month
Ended
January 31,
2011
 

Net periodic cost:

            

Service cost

   $ 0.6      $ 0.8      $ 1.9      $ 2.0      $ 0.2   

Interest cost

     5.4        6.0        16.3        15.7        1.9