The Chemours Company — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in millions of dollars except per-share data. Chemours operates Titanium Technologies, Fluoroproducts, and Chemical Solutions. The 2015 comparison is based on predecessor-business results before Chemours became independent on July 1, 2015, and may not represent results as a stand-alone company.
Financial performance
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Net sales | $1,383 | $1,508 | $2,680 | $2,871 |
| Gross profit | $267 | $226 | $468 | $478 |
| Net income (loss) | $(18) | $(18) | $33 | $25 |
| Diluted EPS | $(0.10) | $(0.10) | $0.18 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $187 | $127 | $315 | $272 |
| Operating cash flow | Not presented here as a quarterly figure | $126 | $(233) |
Q2 gross margin was approximately 19.3%, compared with 15.0% a year earlier; H1 gross margin was approximately 17.5%, compared with 16.6%. Q2 loss reflected a $58 Sulfur-business impairment and higher interest expense, partly offset by stronger gross profit and a $23 tax benefit. H1 income included an $88 gain on the Beaumont aniline-facility sale. H1 free cash flow, as defined by the company as operating cash flow less capital expenditures, was approximately $(42).
Sales declined 8% in Q2 and 7% in H1. Price was the main drag: company-wide price, volume, currency, and portfolio/other changes were respectively (5)%, (1)%, (1)%, and (1)% in Q2, and (5)%, 1%, (2)%, and (1)% in H1. Q2 Adjusted EBITDA improved to $187, led by Fluoroproducts and cost reductions. H1 Fluoroproducts EBITDA rose to $190 from $129; Titanium Technologies fell to $166 from $184, while Chemical Solutions increased to $21 from $5.
Liquidity, debt, and capital
- At June 30, cash was $383; current assets were $2,292 and current liabilities $1,444. Total liabilities were $6,052 and equity $169.
- Debt carrying value was $3,859, including $3,823 long-term and $36 current. The company repurchased $50 principal of term loans and $42 principal of 2023 notes during Q2. Debt maturities are principally in 2022 and later, with scheduled term-loan repayments before then.
- The amended revolving credit facility has a $750 commitment, with $138 of letters of credit outstanding. Chemours reported covenant compliance at quarter-end. The agreement imposes tightening leverage and interest-coverage requirements over time.
- H1 operating cash flow of $126 improved from $(233), reflecting working-capital improvements and a $190 advance payment from DuPont; about $60 of the advance had been used by June 30. Capital expenditures were $168. Cash from operations therefore includes a material advance that is not necessarily recurring.
Portfolio actions, outlook, and risks
- Chemours completed the $140 Beaumont aniline-facility sale in March. It agreed to sell the Sulfur business for $325; the sale closed July 29, 2016, with approximately $311 received at closing, net of estimated adjustments. A $58 impairment was recorded before closing. A separate $230 sale of the Clean & Disinfect business to LANXESS was expected to close in the second half of 2016; the company expected a gain of about $185, subject to adjustments and closing conditions.
- The five-point transformation plan targets $500 of incremental Adjusted EBITDA improvement through 2017 versus 2015: approximately $350 from cost savings and $150 from growth. Management said about $100 of savings had been achieved and expected an additional $200 of structural cost reductions in 2016.
- Management forecast 2016 capital expenditures below $400 and modestly positive free cash flow. It expected full-year Adjusted EBITDA above 2015, supported by transformation actions and TiO2 price increases. These expectations depend on market conditions, currency, TiO2 pricing, demand, and execution; no specific full-year EBITDA amount is given.
- Environmental remediation liabilities were $290, with potential exposure estimated at up to $600 above the accrual under adverse circumstances. Pompton Lakes accounted for $86 accrued; possible total remediation costs there were estimated up to $119, including accrued amounts.
- PFOA matters remain a significant uncertainty. The company accrued $19 for PFOA matters, but said potential losses from the Ohio multidistrict litigation could not be reasonably estimated. Two bellwether cases resulted in plaintiff verdicts, including a July 2016 verdict with $5.1 compensatory damages and $0.5 punitive damages and attorneys’ fees; appeals and post-trial motions were planned. Unfavorable outcomes or DuPont indemnification claims could materially affect Chemours.
- Other noted contingencies include asbestos litigation (accrual $44) and benzene cases for which a loss range could not be estimated. Management cautioned that PFOA and indemnification disputes with DuPont could materially adversely affect financial condition, results, or liquidity.
Investor verification priorities
- Track TiO2 pricing, demand, margins, and whether cost savings and growth initiatives deliver the stated 2017 targets.
- Confirm the LANXESS transaction’s closing, proceeds, and realized gain, and assess the completed Sulfur sale against its impairment and estimated adjustments.
- Assess recurring cash generation separately from the DuPont advance, and monitor working capital, capital spending, and free cash flow.
- Review debt covenant headroom, revolver availability, and the ability to meet tightening covenant thresholds and future repayments.
- Follow PFOA verdicts, appeals, trial scheduling, potential DuPont indemnification disputes, and changes to environmental remediation estimates.