The Chemours Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the same 2016 periods unless noted. Chemours is a global performance-chemicals company reporting through Titanium Technologies, Fluoroproducts, and Chemical Solutions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,584m | $1,398m | $4,608m | $4,078m |
| Gross profit | $467m | $342m | $1,267m | $811m |
| Net income attributable to Chemours | $207m | $204m | $518m | $237m |
| Diluted EPS | $1.08 | $1.11 | $2.72 | $1.30 |
| Adjusted EBITDA | $381m | $268m | $1,028m | $583m |
| Operating cash flow | — | $336m | $324m | |
| Capital expenditures | — | $246m | $235m |
Sales increased 13% in both periods. Gross margin was approximately 29.5% in Q3 and 27.5% year to date, versus 24.5% and 19.9%, respectively, in 2016. Adjusted EBITDA margin was approximately 24.1% in Q3 and 22.3% year to date, versus 19.2% and 14.3%. Nine-month free cash flow, defined by the company as operating cash flow less capital expenditures, was $90m, versus $89m.
At September 30, cash was $1,535m, total debt was $4,146m and net debt was approximately $2,611m. Current assets were $3,433m and current liabilities $1,570m. The $750m revolving facility had no borrowings outstanding and $102m of letters of credit; the company reported covenant compliance. Cash included $1.0bn held by foreign subsidiaries.
Changes and drivers
- Q3 sales growth reflected 9% higher price, 6% higher volume and 1% favorable currency, partly offset by a 3% portfolio/other decline. Nine-month growth reflected 7% higher price and 12% higher volume, offset by a 6% portfolio/other decline.
- Titanium Technologies benefited from higher TiO₂ prices and volumes: Q3 sales rose 28% and Adjusted EBITDA increased to $249m from $144m. Fluoroproducts sales rose 8% in Q3 on demand for Opteon refrigerants and fluoropolymers; Adjusted EBITDA was $158m versus $143m. Chemical Solutions sales fell 19% in Q3, primarily reflecting divestitures and the Reactive Metals Solutions shutdown, although Adjusted EBITDA rose to $18m from $9m.
- Q3 net income was nearly flat despite higher sales and operating performance. 2016 included a $169m gain on the sale of the Clean & Disinfect product line; nine-month 2016 other income included $258m of asset-sale gains. These nonrecurring gains make reported profit comparisons less representative of underlying operations.
- Cash from operations was $336m, including the $335m PFOA settlement payment and the use of a $190m DuPont prepayment received in 2016. Cash increased by $633m during the period, supported by $494m net debt issuance and foreign-exchange effects.
Outlook, risks and unusual items
- Management expected strong revenue and earnings for the remainder of 2017, full-year Adjusted EBITDA improvement substantially exceeding its transformation goals, and positive full-year free cash flow including the PFOA settlement payment. It targeted approximately $150m of additional structural cost savings, expected to be fully realized in 2018 and beyond.
- Full-year 2017 capital expenditures were forecast at $400m–$450m, including investment in an Opteon plant in Texas and a Mining Solutions expansion in Mexico. Management said liquidity from operations, cash and financing arrangements was expected to cover needs over the next 12 months.
- The 2017 restructuring program, including an October voluntary separation program expected to affect approximately 300–350 employees by end-2018, was expected to incur $45m–$55m of charges through 2018. No voluntary-separation costs were accrued at September 30.
- Fayetteville, North Carolina discharges involving GenX/HFPO Dimer Acid and other compounds prompted regulatory inquiries, two federal grand-jury subpoenas, state proceedings and multiple lawsuits. Chemours said it was cooperating and voluntarily capturing and disposing of certain wastewater; on October 24, NC DEQ said permit suspension was not then necessary. The company stated the matters were at an early stage and could materially affect results.
- Environmental remediation liabilities were accrued at $268m. The company disclosed that, under adverse changes in circumstances, potential liability could be as much as $510m above the accrual. It paid the $335m accrued for the PFOA MDL settlement; additional PFOA claims and costs remain possible and are not estimable. During a five-year sharing period, Chemours bears annual future PFOA costs up to $25m, DuPont bears the next $25m if exceeded, and Chemours bears further excess costs, subject to the agreement.
- Other pressures include variable-rate debt, currency and commodity exposure, regulatory developments affecting TiO₂ and fluorochemicals, and indemnification obligations and disputes with DuPont. The company reported no material change in other market risks disclosed in its 2016 Form 10-K.
Investor facts to verify
- Whether TiO₂ pricing, demand and margins remain strong, and how raw-material, distribution and other cost inflation affects profitability.
- Progress and costs of the Fayetteville investigations and litigation, any permit or operating restrictions, and the potential for additional claims or sites.
- Environmental remediation exposure relative to the $268m accrual and disclosed potential additional liability of up to $510m.
- Debt, interest costs, covenant headroom and the availability of revolver capacity, considering letters of credit and facility conditions.
- Delivery of the 2017 earnings and free-cash-flow outlook, planned capital spending, and the timing and cost of restructuring savings.