The Chemours Company — Q2 2017 Form 10-Q
Business context and reporting period. Chemours is a global performance chemicals company with Titanium Technologies, Fluoroproducts and Chemical Solutions segments. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Dollar amounts are in millions, except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,588 | $1,383 | $3,024 | $2,680 |
| Gross profit | $441 | $267 | $799 | $468 |
| Net income (loss) attributable to Chemours | $161 | $(18) | $311 | $33 |
| Diluted EPS | $0.84 | $(0.10) | $1.64 | $0.18 |
| Adjusted EBITDA (non-GAAP) | $361 | $187 | $647 | $315 |
- Q2 gross margin was approximately 27.8%, up from 19.3%; Q2 Adjusted EBITDA margin was approximately 22.7%, versus 13.5%.
- Q2 net sales rose 15%, reflecting 7% higher pricing and 15% higher volume, partly offset by a 6% portfolio/other impact and 1% unfavorable currency. For the first half, sales rose 13%, with 6% higher pricing and 14% higher volume, offset by a 7% portfolio/other impact.
- Segment Q2 Adjusted EBITDA: Titanium Technologies $193 (prior-year $111); Fluoroproducts $197 ($105); Chemical Solutions $7 ($11). Titanium Technologies benefited from higher TiO₂ prices and demand; Fluoroproducts from Opteon refrigerant and fluoropolymer volumes. Chemical Solutions sales and earnings were affected by divestitures and the RMS plant shutdown.
- Six-month operating cash flow was $224, versus $126; capital expenditures were $138, yielding approximately $86 of free cash flow before other considerations. Cash increased to $1,529 from $902 at year-end, substantially supported by financing proceeds. Receivables and inventories also increased, by $187 and $81, respectively.
- At June 30, cash was $1,529; current assets were $3,440 and current liabilities $1,750. Total debt was $4,123 (net carrying value of long-term debt $4,056 plus current maturities of $14); cash less total debt implies net debt of approximately $2,594. The $750 revolving facility had no borrowings and $104 of letters of credit outstanding; the company reported covenant compliance.
Material changes and financing
- Q2 results improved substantially year over year, while the first-half comparison also reflects the prior-year $88 gain from selling the Beaumont aniline facility and $58 impairment charge related to the Sulfur business. Restructuring and asset-related charges fell to $6 in Q2 from $67, primarily because the 2016 period included that impairment.
- In May, Chemours issued $500 of 5.375% senior unsecured notes due 2027, receiving approximately $489 net. In April, it refinanced its existing term loan with $940 of U.S. dollar and €400 of euro term loans, with the same 2022 maturity and no incremental debt from the refinancing. The new notes increased debt outstanding; Q2 interest expense was $55 versus $50.
- The company paid $15 toward the PFOA multi-district litigation settlement during Q2. It also sold its Wilmington headquarters for net proceeds of $29, using $13 to repay term loans, and leased back part of the building.
Outlook, risks and unusual items
- Management expects strong revenue and earnings performance for the rest of 2017, full-year Adjusted EBITDA improvement substantially in line with transformation goals, and approximately $150 of additional structural cost savings targeted through 2018. It expects 2017 full-year capital expenditures of $400–$450 and breakeven free cash flow, including PFOA settlement payments. No precise full-year revenue or earnings forecast is provided.
- The company’s transformation plan targets $500 of incremental Adjusted EBITDA improvement over 2015–2017; management reported approximately $200 of cost savings realized through year-end 2016. Results may be affected by TiO₂ pricing, demand, currency, seasonality, portfolio changes and costs to achieve transformation initiatives.
- The PFOA MDL settlement totals $670.7, split equally between Chemours and DuPont. Chemours had accrued approximately $320 for its MDL share at June 30 and expected the settlement to close in Q3 2017. Other PFOA liabilities may exceed accrued amounts, but additional losses were not estimable. The agreement also provides for limited sharing of certain future PFOA liabilities with DuPont for five years, subject to its terms.
- Environmental remediation liabilities were accrued at $278; the filing describes a possible additional exposure of up to approximately $480 under adverse circumstances, characterized as remote. GenX discharges from the Fayetteville facility prompted government inquiries and investigations; the company began capturing and separately disposing of affected wastewater. No lawsuits had been filed on this issue as of the filing, but the company said developments could materially affect results.
- Other notable contingencies include asbestos litigation (approximately 1,700 pending cases; $41 accrued), benzene cases and East Chicago USS Lead litigation. Management said potential losses in some matters could not be reasonably estimated. The filing also notes the company’s indemnification obligations to DuPont may be material in certain circumstances.
Important facts for investors to verify
- Whether the PFOA MDL settlement closed as expected in Q3 2017, and the final timing and amount of Chemours’ payments and related funding.
- Progress and costs related to GenX inquiries, wastewater controls and any developments at other sites.
- Whether environmental remediation estimates, including the stated potential exposure above the $278 accrual, change as investigations and regulatory decisions progress.
- Delivery of management’s 2017 Adjusted EBITDA and breakeven free-cash-flow outlook, including the effects of settlement payments and $400–$450 of planned capital expenditures.
- Debt, liquidity and covenant headroom as the revolving-credit covenants tighten; the filing reports compliance at June 30, 2017.