The Chemours Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Dollar amounts are in millions except per-share data. Chemours is a global performance-chemicals company with Fluoroproducts, Chemical Solutions, and Titanium Technologies segments.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,816 | $1,588 | $3,546 | $3,024 |
| Gross profit | $557 | $438 | $1,094 | $794 |
| Net income attributable to Chemours | $281 | $161 | $578 | $311 |
| Diluted EPS | $1.53 | $0.84 | $3.11 | $1.64 |
| Adjusted EBITDA (non-GAAP) | $497 | $361 | $965 | $647 |
| Operating cash flow | Not separately provided for Q2 | $539 | $225 | |
| Free cash flow (non-GAAP) | Not separately provided for Q2 | $311 | $87 |
- Gross margin was approximately 30.7% in Q2 and 30.9% for the first half, versus approximately 27.6% and 26.3%, respectively, a year earlier. Adjusted EBITDA margin was approximately 27.4% in Q2 and 27.2% for the first half.
- Revenue rose 14% in Q2 and 17% year to date. Management attributed growth principally to higher selling prices, with volume and favorable currency also contributing. Cost of goods sold increased 9% and 10%, respectively, reflecting raw-material, freight, logistics, and process-water-treatment costs.
- Segment Q2 sales and Adjusted EBITDA: Fluoroproducts $801 and $230; Chemical Solutions $153 and $16; Titanium Technologies $862 and $295. Titanium Technologies’ EBITDA rose 53%, driven mainly by TiO2 pricing.
- At June 30, cash was $1,217, including approximately $1.0 billion held by foreign subsidiaries. Current assets were $3,397 and current liabilities $1,622. Total debt was $4,021, including $3,960 of long-term debt net; cash-adjusted debt was approximately $2,804. The $800 revolving facility had no borrowings and $105 of letters of credit outstanding. Chemours reported covenant compliance.
- Six-month investing cash outflow was $230, including $228 of capital expenditures and $37 for the ICOR acquisition; financing cash outflow was $641. Cash declined $339 from year-end 2017.
Material changes and unusual items
- Q2 and first-half net income attributable to Chemours increased 75% and 86%, respectively. Adjusted EBITDA increased 38% and 49%. Results benefited from prices, Fluoroproducts and Chemical Solutions volume growth, and favorable currency.
- A $42 gain on the Linden, New Jersey land sale contributed to first-half other income. The East Chicago site sale generated a further $3 gain. These and other asset-sale gains are not necessarily recurring.
- A $38 debt-extinguishment loss reduced reported earnings: $3 related to refinancing the secured credit facilities and $35 to the 2023-note tender and redemption and 2026 euro-note issuance.
- Q2 tax expense was $41 (13% effective rate), versus $64 (28%); first-half tax expense was $125 (18%), versus $87 (22%). Tax effects included debt-extinguishment benefits, share-based-payment windfalls, asset-sale taxes, and U.S. tax-reform provisions.
- Chemours completed a $500 share-repurchase authorization by May 31, buying 10.1 million shares at an average $49.58. In August, the board approved a new authorization of up to $750 through December 2020 and raised the quarterly dividend to $0.25 from $0.17.
Outlook, risks, and contingencies
- Management expected 2018 earnings growth to meet or exceed its three-year targets. Key assumptions included TiO2 average prices above 2017, continued Opteon refrigerant adoption, increased fluoropolymer demand, and strong Mining Solutions demand. Planned 2018 capital expenditures were $475–$525.
- Fayetteville, North Carolina operations face environmental and regulatory scrutiny over GenX and other fluorinated compounds. The process-wastewater permit was suspended; the company is capturing and separately disposing of process wastewater and cooperating with investigations. Further litigation, permit changes, or court orders could adversely affect continued operations. Management said outcomes and potential financial effects could not be predicted clearly.
- Environmental remediation liabilities totaled $247 at June 30. The filing says potential liability could be up to approximately $500 above the accrual under adverse changes in circumstances, while management characterized that scenario as remote. Environmental costs and remediation timing remain uncertain.
- Additional PFOA-related claims and litigation, including Ohio’s action and post-settlement personal-injury matters, could result in losses that management said were reasonably possible but not estimable. The filing also discusses asbestos, benzene, and East Chicago Superfund-related matters.
- Management expected approximately $35 of Fayetteville process-water-treatment costs in 2018. It also anticipated approximately $10 of additional Niagara Falls decommissioning charges through 2021, approximately $30 for Chambers Works demolition through 2020, and $10–$15 of 2017 restructuring-program charges through 2018.
- The company expects refinancing transactions to reduce annual interest charges by $25–$30 beginning in Q3 2018. It cautioned that actual results depend on markets, currency, demand, pricing, costs, and other risk factors.
Investor verification priorities
- Verify the sustainability of TiO2 pricing, segment margins, and the assumptions behind the 2018 earnings and capital-expenditure outlook.
- Track Fayetteville permit, regulatory, and litigation developments, including potential effects on operations and treatment costs.
- Review environmental accruals and exposures, including the stated potential additional liability range and any changes in remediation estimates.
- Assess refinancing economics, debt maturities, covenant headroom, foreign-held cash availability, and the timing of expected interest savings.
- Separate recurring operating performance from asset-sale gains, the debt-extinguishment loss, and other adjustments in reported and non-GAAP results.
- Confirm the effects of the new $750 share-repurchase program and higher dividend on liquidity, leverage, and capital allocation.