The Chemours Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Chemours is a global performance-chemicals company with Fluoroproducts, Chemical Solutions, and Titanium Technologies segments. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,730 | $1,437 |
| Gross profit | $537 | $356 |
| Income before income taxes | $381 | $173 |
| Net income attributable to Chemours | $297 | $150 |
| Diluted EPS | $1.58 | $0.79 |
| Adjusted EBITDA | $468 | $285 |
| Cash from operating activities | $196 | $41 |
| Free cash flow | $94 | $(28) |
- Sales rose 20%: price contributed 10 percentage points, volume 6 points, and currency 4 points. Gross margin was approximately 31% versus 25% in Q1 2017.
- Adjusted EBITDA by segment: Titanium Technologies $294 (up from $159), Fluoroproducts $206 (up from $155), Chemical Solutions $11 (down from $12), and Corporate and Other $(43) (versus $(41)).
- The Titanium Technologies segment’s Adjusted EBITDA margin increased to 34% from 25%; Fluoroproducts’ rose to 28% from 24%; Chemical Solutions’ declined to 8% from 9%.
- Cash and cash equivalents were $1,434 at quarter-end, down from $1,556 at year-end 2017. Total debt was $4,202, including $14 current maturities; long-term debt, net, was $4,141. The company reported no borrowings on its $750 revolving facility and $106 of outstanding letters of credit.
- Capital expenditures were $102. The company repurchased shares for $240 cash and paid $31 in dividends during the quarter.
Changes and drivers versus prior period
- Management attributed growth to higher TiO₂ pricing and customer preference for Ti-Pure, strong Opteon refrigerant and fluoropolymer demand, and solid demand for Mining Solutions and performance chemicals. Higher raw-material costs and distribution expenses partly offset these gains.
- Titanium Technologies sales increased 32%, led by 22% higher pricing, 5% higher volume, and 5% favorable currency. Fluoroproducts sales rose 12%, primarily on volume and currency; Chemical Solutions sales rose 4%.
- GAAP results included a $42 gain on the sale of the Linden, New Jersey site, generating $39 net cash proceeds. Adjusted EBITDA excludes the gain; Adjusted Net Income was $266 versus $131.
- Effective tax rate increased to 22% from 13%, reflecting higher profitability, geographic mix, and U.S. tax reform-related expense. Q1 2018 tax expense included $8 related to certain tax reform provisions.
- Adoption of Topic 606 had no material effect on total income or cash flows; it reclassified certain royalty income and technical-service costs among statement lines.
Outlook, risks, and unusual items
- Management said it expected earnings growth to meet or exceed its three-year targets. Its 2018 outlook assumed TiO₂ average prices above 2017, continued Opteon transition, increased fluoropolymer demand, and strong Mining Solutions demand. Planned 2018 capital expenditures were $475–$525.
- The filing cautions that outlook depends on market conditions, including currency, TiO₂ pricing, and end-market demand, and is subject to risks. It does not provide a specific 2018 earnings or revenue forecast.
- Environmental remediation liabilities were $254 at March 31, 2018. Management stated that, under adverse changes in circumstances, potential liability could be up to approximately $510 above the accrued amount. Estimated remediation spending was about $170 over the next three years across the cited site groups.
- GenX and other fluorinated-compound matters at Fayetteville, North Carolina include regulatory inquiries, permit actions, an ongoing federal investigation, and civil litigation. Chemours was capturing and separately disposing of process wastewater. The filing says these matters could materially affect results or operations and could lead to further regulatory demands or affect facility operations; outcomes were not estimable.
- Other PFOA exposures include post-settlement injury claims and an Ohio state action naming Chemours, among other proceedings. The filing describes possible additional losses as not estimable. A $16 PFOA-related accrual was reported at March 31, 2018; the previously accrued $335 share of the 2017 MDL settlement had been paid.
- In Mexico, a complaint led to suspension of permits for the Laguna Mining Solutions project; construction was idled and Chemours declared force majeure with vendors while appealing and engaging with authorities and community leaders.
- Q1 restructuring charges were $10. The company expected approximately $3 of additional charges for Niagara Falls decommissioning, approximately $30 for Chambers Works demolition through 2020, and approximately $20 for its 2017 restructuring program through 2018.
- Subsequent events: Chemours acquired ICOR International in April for $35 total consideration ($32 paid at closing). It also refinanced its secured term loans under an amended credit agreement, with a new $800 revolving facility; the transaction reduced senior secured debt by approximately $75. In April it repurchased an additional $39 of shares.
Investor verification priorities
- Assess the sustainability of Q1’s sharp profit and margin improvement, particularly TiO₂ pricing, segment volumes, and the contribution of the $42 land-sale gain.
- Track operating cash conversion and working capital, including the quarter’s increases in receivables and inventories, against planned capital spending and shareholder returns.
- Review leverage, interest costs, and covenant headroom under the April refinancing, including the new revolving-facility leverage tests and variable interest rates.
- Monitor environmental remediation estimates and developments in the Fayetteville GenX, PFOA, and other litigation matters, where potential outcomes and additional costs remain uncertain.
- Follow the Laguna project permit appeal and construction delays, and verify the expected financial contribution and purchase accounting for ICOR.