Business context and reporting period
The Chemours Company’s Form 10-K covers the fiscal year ended December 31, 2016; quarterly figures below identify the three months ended December 31, 2016. Chemours is a global performance-chemicals company with three segments: Titanium Technologies, Fluoroproducts and Chemical Solutions. It began operating independently from DuPont on July 1, 2015, so some historical comparisons reflect a recently separated business.
Financial performance and position
Dollar amounts are in millions, except per-share data and percentages.
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $5,400 | $5,717 |
| Gross profit / gross margin | $1,110 / 20.6% | $955 / 16.7% |
| Operating result before tax | Loss of $11 | Loss of $188 |
| Net income (loss) attributable to Chemours | $7 / $0.04 per diluted share | $(90) / $(0.50) per diluted share |
| Adjusted EBITDA (non-GAAP) | $822 | $573 |
| Cash from operations | $594 | $182 |
| Capital expenditures | $338 | $519 |
| Cash and cash equivalents at year-end | $902 | $366 |
| Borrowings and capital lease obligations, net | $3,544 | $3,954 |
| Working capital | $782 | $835 |
2016 free cash flow, calculated as operating cash flow less capital expenditures, was approximately $256 million, compared with approximately negative $337 million in 2015. Cash from investing activities was $357 million, including $708 million of net asset-sale proceeds; financing activities used $396 million. The reported leverage ratio was approximately 3.3x net debt to Adjusted EBITDA at year-end. The $750 million revolving facility had no borrowings outstanding; $132 million of letters of credit were issued against it. The company reported compliance with debt covenants.
Fourth-quarter 2016 net sales were $1,322 million, pretax loss was $273 million, net loss was $230 million and diluted loss per share was $1.26. The quarter included the $335 million PFOA multidistrict-litigation accrual.
Material changes versus the prior comparable period
- Full-year sales declined 6%, principally due to Chemical Solutions divestitures and lower TiO₂ prices. Higher Fluoroproducts volumes, including Opteon refrigerants, and increased Titanium Technologies volumes partially offset the decline.
- Gross profit increased despite lower sales, reflecting lower raw-material and operating costs and improved plant utilization. Adjusted EBITDA rose 43% year over year.
- Titanium Technologies sales were $2,364 million and Adjusted EBITDA was $466 million, versus $2,392 million and $326 million. Fluoroproducts sales were $2,264 million and Adjusted EBITDA was $445 million, versus $2,230 million and $300 million. Chemical Solutions sales fell to $772 million from $1,095 million after portfolio changes; Adjusted EBITDA increased to $39 million from $29 million.
- Cash from operations increased by $412 million and capital spending fell by $181 million. Debt declined as the company repaid or repurchased portions of term loans and notes, using $354 million of cash for debt retirements in addition to scheduled payments.
- Chemours sold its Beaumont aniline facility, Sulfur Products business and Clean & Disinfect business, receiving approximately $685 million in gross proceeds, and ceased production at its Reactive Metals Solutions facility.
Outlook, commentary, risks and unusual items
- Management targeted an additional $150 million of structural cost reductions in 2017 and continued to expect the transformation plan to deliver $500 million of incremental Adjusted EBITDA improvement over 2015–2017: approximately $350 million from cost savings and $150 million from growth initiatives. Approximately $200 million of cost savings had been achieved through year-end 2016.
- For 2017, management expected Adjusted EBITDA to be in line with transformation-plan goals. It cited Opteon growth, improved TiO₂ pricing and the Altamira expansion as supports, partly offset by Fluoroproducts headwinds and divestiture-related earnings losses. Planned 2017 capital expenditures were approximately $450 million; management targeted leverage of about 3x by year-end 2017.
- On February 11, 2017, DuPont and plaintiffs’ counsel entered an agreement in principle to settle the PFOA MDL claims for $670.7 million, split equally between DuPont and Chemours. Chemours accrued $335 million at year-end 2016. The settlement includes a participation-related termination right and is not an admission of liability. A separate five-year arrangement would share certain future PFOA liabilities, subject to specified annual thresholds; Chemours’ indemnification obligations would otherwise continue.
- Other notable 2016 items included a $254 million net gain on asset and business sales, $119 million of asset impairment charges, $213 million of net interest expense and $57 million of net foreign-exchange losses. The tax benefit was $18 million; a $50 million valuation allowance was recorded against U.S. foreign tax credits.
- Environmental remediation accruals were $278 million for approximately 212 sites. The filing says potential liability could be up to approximately $535 million above the accrued amount under adverse changes, although management considered such an outcome remote. Some site obligations and future PFOA claims cannot be reliably estimated.
- Key risks include substantial indebtedness, refinancing and covenant constraints, cyclical TiO₂ prices and demand, raw-material and energy costs, foreign exchange, environmental and product-stewardship obligations, litigation and indemnification exposure, and execution of cost savings and growth projects.
Most important facts for investors to verify
- Whether the PFOA MDL settlement became effective, the timing and funding of Chemours’ $335 million share, and the scope of future indemnification exposure.
- Whether operating cash flow and working-capital improvements support debt reduction while funding planned capital expenditures and dividends.
- Progress against the transformation-plan savings and growth targets, and whether the 2017 Adjusted EBITDA outlook was achieved.
- TiO₂ pricing, demand and Altamira ramp-up, alongside Opteon adoption and Fluoropolymers pricing and mix.
- Whether environmental remediation estimates, including the disclosed potential exposure above accruals, change materially.
- Available revolver capacity after letters of credit, covenant headroom and the company’s ability to manage upcoming interest, debt and investment requirements.