Chemours Co. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unless noted otherwise, dollar amounts are in millions. Chemours was a DuPont subsidiary during the periods presented; DuPont completed the spin-off on July 1, 2015. The historical statements were prepared from DuPont records on a stand-alone basis and may not indicate Chemours’ future results as an independent company.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $1,508 | $1,682 | $2,871 | $3,251 |
| Gross profit | $226 | $371 | $478 | $700 |
| Gross margin | 15.0% | 22.1% | 16.6% | 21.5% |
| Net income (loss) | $(18) | $116 | $25 | $214 |
| Pro forma EPS | $(0.10) | $0.64 | $0.14 | $1.18 |
| Adjusted EBITDA, company-reported | $127 | $235 | $272 | $436 |
- Q2 sales fell 10%; first-half sales fell 12%. Management attributed the declines to lower prices, unfavorable foreign exchange and, in the first half, lower volumes.
- Q2 cost of goods sold was 85% of sales versus 78% a year earlier; first-half ratio was 83% versus 78%.
- Q2 adjusted EBITDA declined by $108. Management cited approximately $95 of TiO₂ pricing pressure, $48 of currency headwinds and $15 of planned and unplanned outages, partly offset by lower operating costs.
- Q2 segment adjusted EBITDA: Titanium Technologies $95 (prior year $210); Fluoroproducts $66 ($77); Chemical Solutions $7 ($8). Corporate and Other was $(41) (prior year $(60)).
Cash flow, debt and liquidity
- First-half operating cash flow was $(233), compared with $(229) in 2014; investing cash flow was $(323), versus $(202). Capital expenditures were $287, including $59 of separation-related spending.
- Financing provided $803, including debt proceeds and DuPont separation-related funding and transfers. Cash at June 30 was $247; Chemours noted this was immediately before separation.
- Debt was approximately $4.0 billion in principal: $1.5 billion term loan and approximately $2.5 billion notes. Balance-sheet debt was $3.943 billion, including current maturities and net of issuance costs. Cash was $247.
- The $1.0 billion revolving facility had no borrowings outstanding; $126 of letters of credit were issued and reported availability was approximately $385. Chemours reported compliance with debt covenants at June 30. A 5.75-to-1 maximum net leverage covenant applied through December 31, 2015; the facility also included a 3.00-to-1 minimum interest coverage covenant.
- Current assets were $2,483 and current liabilities $1,441. A $100 dividend declared before the spin-off was payable September 11, 2015. The independent board would determine future dividends.
Changes, outlook and management commentary
- The May 2015 financing and July spin-off made Chemours a newly independent public company. The company expects transition and stand-alone corporate costs; historical DuPont cost allocations may not predict future expenses.
- Management targeted $140 of adjusted EBITDA improvement in the second half of 2015 versus the first half, assuming TiO₂ prices at or near cyclical lows. It cited cost reductions, Opteon growth and normalized operations after maintenance shutdowns as potential contributors.
- Full-year 2015 capital expenditures, excluding separation costs, were projected at $400–$450. Management expected spending to decline as the Altamira expansion neared completion, with normalized maintenance and growth spending around $350 annually.
- A 2015 restructuring charge of $61 was recorded, with about $53 of future severance and benefit payments expected. Management anticipated approximately $40 of pre-tax savings in the second half of 2015 and approximately $80 annually thereafter; actions and payments were expected to be substantially complete by the end of 2016.
- After quarter-end, Chemours announced a transformation plan targeting $500 of adjusted EBITDA improvement by 2017 and leverage of approximately three times by year-end 2017. It also began evaluating strategic alternatives for Chemical Solutions, excluding cyanides; the filing warned this could lead to a material goodwill impairment.
- Management expected the 2015 effective tax rate in the mid-to-high 20% range. A change in the permanent-reinvestment assertion for foreign earnings could result in estimated tax expense of up to $160.
Risks, contingencies and unusual items
- Environmental: Environmental remediation liabilities were accrued at $302; potential exposure could be up to approximately $650 above the accrual under adverse circumstances. At Pompton Lakes, $86 was accrued, with potential total liability up to $116; approximately $50 of remediation spending was expected over two to three years.
- PFOA: The filing reported a $14 accrual for specified PFOA matters, approximately 3,500 personal-injury lawsuits, and 37 wrongful-death lawsuits. The company said additional losses could not be reasonably estimated. A medical-monitoring commitment could reach $235 plus administrative costs.
- Other litigation: Approximately 2,500 asbestos lawsuits were pending, with a $38 accrual. The filing also describes other product, environmental, commercial and regulatory proceedings.
- Market and operating risks: The business is exposed to TiO₂ cyclicality, commodity and energy costs, foreign exchange, outages, regulatory transitions in fluoroproducts, and execution risks for restructuring and the transformation plan. Management assessed the TiO₂ market as likely near breakeven in its cycle.
- The filing disclosed a non-material correction of a pension-related deferred-tax error, reducing net investment by $72 at June 30. Management concluded disclosure controls were effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether the announced EBITDA improvements and cost savings are achieved, and how management defines and reconciles adjusted EBITDA.
- TiO₂ pricing, sales volumes, foreign-exchange effects and the durability of the second-half recovery assumptions.
- Debt service capacity, covenant headroom, actual revolver availability and progress toward the stated deleveraging target.
- Cash requirements and potential outcomes for PFOA claims, environmental remediation—especially Pompton Lakes—and asbestos litigation.
- Post-spin operating costs, DuPont transition arrangements, the Chemical Solutions strategic review and any resulting impairment.
- Whether foreign cash repatriation decisions create tax expense, and the independent board’s policy on future dividends.