The Chemours Company — Q1 2017 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless stated otherwise. Chemours operates through Titanium Technologies, Fluoroproducts and Chemical Solutions, with products including titanium dioxide, refrigerants and industrial chemicals. All dollar amounts are in millions unless noted.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1,437 | $1,297 | +11% |
| Gross profit / gross margin | $358 / 24.9% | $202 / 15.6% | Margin +9.3 percentage points |
| Income before taxes | $173 | $70 | +$103 |
| Net income attributable to Chemours | $150 | $51 | +$99 |
| Diluted EPS | $0.79 | $0.28 | +$0.51 |
| Adjusted EBITDA | $285 | $128 | +$157 |
| Adjusted EBITDA margin | 19.8% | 9.9% | +9.9 percentage points |
| Cash from operations | $41 | $36 | +$5 |
| Capital expenditures | $69 | $89 | -$20 |
Q1 free cash flow, calculated as operating cash flow less capital expenditures, was negative $28, versus negative $53 in Q1 2016. Cash and equivalents were $898 at quarter-end, compared with $902 at December 31, 2016. Current assets of $2,711 exceeded current liabilities of $1,735. Long-term debt, net, was $3,538, with $14 of current maturities; the revolving credit facility had no borrowings and $123 of letters of credit outstanding. Total reported debt before discounts and current maturities was approximately $3.6 billion. Debt covenants were in compliance at March 31.
Material changes and segment performance
- Titanium Technologies: Sales rose 24% to $646 and Adjusted EBITDA rose to $159 from $54. Management cited higher TiO2 prices and volumes; average selling price was about 12% higher and volume about 13% higher year over year.
- Fluoroproducts: Sales rose 23% to $652 and Adjusted EBITDA increased to $155 from $85. Strong Opteon refrigerant demand drove results; lower fluoropolymer prices and unfavorable mix partly offset improvement.
- Chemical Solutions: Sales fell 43% to $139, principally following 2016 divestitures of the aniline facility, Clean & Disinfect business and sulfur business. Adjusted EBITDA increased to $12 from $10, reflecting cost reductions and improved margins.
- Company-wide sales growth reflected approximately 15% higher volume and 5% favorable pricing, partly offset by an 8% portfolio/other impact and 1% unfavorable currency impact.
- Net income and EBITDA benefited from stronger core performance. Comparisons also reflect unusual items: 2016 included an $89 gain on the Beaumont aniline facility sale, while 2017 included a $16 gain on asset sales, primarily the Edge Moor site. Other income was $34 versus $93.
Liquidity, debt and outlook
- Operating cash flow was modest despite higher earnings, including working-capital outflows: receivables used $103 and inventories/other operating assets used $31. Cash declined by $4 during the quarter.
- Management expects full-year 2017 capital expenditures to approach $450, including investment in a new Opteon plant and a planned Mining Solutions expansion.
- The company expects positive full-year 2017 free cash flow excluding payments related to the PFOA multidistrict litigation settlement. It anticipates strong performance in Ti-Pure TiO2 and Opteon refrigerants, full-year Adjusted EBITDA improvement substantially in line with transformation goals, and approximately $150 of additional structural cost savings, about half expected in 2018.
- The transformation plan targets $500 of incremental Adjusted EBITDA improvement over 2015–2017. Chemours reported approximately $200 of cost savings through year-end 2016 and expects divestitures, fluoropolymer pricing/mix and market factors to partly offset improvements.
- On April 3, 2017, a credit agreement amendment replaced the existing term loan with €400 and $940 of new term loans, without incremental debt. The new loans retain the May 2022 maturity and have lower stated margins; the company expected approximately $3 of debt-extinguishment loss and related fees in Q2. The amendment also increased certain incurrence limits. The April 2017 headquarters sale generated $32 gross proceeds, with net proceeds expected to repay term loans; a portion of the building was leased back.
- Management stated that available cash, operating cash generation and financing arrangements should fund anticipated obligations over the next 12 months. Significant expected payments include interest, capital expenditures, restructuring, dividends and the PFOA settlement.
Risks, contingencies and unusual items
- PFOA: Chemours recorded approximately $351 of total PFOA-related accruals at March 31, including about $335 for its half of the $670.7 MDL settlement agreed by DuPont and plaintiffs. The settlement provides for releases of settling claims and includes a walk-away provision if participation falls below a specified threshold. The company’s contractual obligations table allocated $338 of legal settlements to the remainder of 2017. Additional PFOA losses beyond recorded amounts are considered reasonably possible but not estimable. If the MDL settlement does not proceed, stayed or additional claims may go to trial.
- For five years after the MDL settlement becomes effective, a DuPont-Chemours agreement provides limited sharing of certain future PFOA liabilities: Chemours bears the first $25 annually, DuPont the next $25, and Chemours bears further amounts under the separation agreement. The settlement and indemnity arrangements, and possible disputes with DuPont, are material risks.
- Environmental remediation accruals were $279. Management estimated that, under adverse changes in circumstances, potential liability could be up to approximately $480 above the accrued amount. Remediation costs and timing are uncertain and may extend over many years.
- Other litigation includes asbestos (approximately 1,900 pending cases; $41 accrued), benzene claims (loss reasonably possible but not estimable), and East Chicago USS Lead litigation (loss reasonably possible but not estimable). The filing also describes ongoing regulatory matters at LaPorte, Texas, and requests for information concerning the Dordrecht, Netherlands site.
- Q1 restructuring charges were $12, primarily decommissioning and dismantling costs. Chemours expected approximately $5 of additional decommissioning and site redevelopment charges in 2017 for the Niagara Falls site.
- The 13% effective tax rate included approximately $10 of windfall tax benefits from stock option exercises and RSU vesting; management expects the adopted stock-compensation guidance to add volatility to future tax rates.
- Management identified foreign currency and commodity-price exposures. A hypothetical 10% dollar move against the currencies in outstanding forward contracts was estimated to change net loss by approximately $4, with underlying exposures expected largely to offset derivatives.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; the filing reported no material change in internal control over financial reporting and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the PFOA MDL settlement satisfies its participation conditions, when payment is made, and whether further PFOA or DuPont indemnification exposures arise.
- Whether strong TiO2 pricing and Opteon demand persist, and whether fluoropolymer price pressure or Chemical Solutions portfolio changes affect results.
- Progress toward the transformation savings targets, including the timing and realization of the remaining approximately $150 in structural savings.
- Whether Chemours achieves positive full-year free cash flow excluding PFOA settlement payments while funding approximately $450 of capital expenditures and other obligations.
- Environmental remediation estimates, including potential exposure above the $279 accrual, and developments in major site and USS Lead matters.
- Effects of the April 2017 refinancing, including realized interest savings, covenant headroom and required repayment of headquarters-sale proceeds.