The Chemours Company — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Dollars in millions, except per-share data. Chemours makes industrial and specialty chemicals across Titanium Technologies, Fluoroproducts, and Chemical Solutions. Comparisons with 2015 are affected because Chemours became a separate company on July 1, 2015; earlier 2015 results were prepared on a stand-alone basis from DuPont records and may not represent results as an independent company.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,398 | $1,486 | $4,078 | $4,357 |
| Gross profit | $342 | $264 | $811 | $742 |
| Gross margin | 24.5% | 17.8% | 19.9% | 17.0% |
| Net income (loss) | $204 | $(29) | $237 | $(4) |
| Diluted EPS | $1.11 | $(0.16) | $1.30 | $(0.02) |
| Adjusted EBITDA | $268 | $169 | $583 | $441 |
- Q3 net income included a $172 gain on the sale of the Clean & Disinfect business; other income also reflected business-sale gains and foreign-exchange losses. Nine-month other income included $258 of net gains on asset and business sales. These items make reported earnings less representative of ongoing operations.
- Q3 Adjusted EBITDA rose about 59%; nine-month Adjusted EBITDA rose about 32%. Titanium Technologies benefited from higher quarterly TiO2 prices and productivity, while Fluoroproducts gained from Opteon sales, improved margins, and lower costs. Chemical Solutions revenue fell substantially following divestitures.
- Cash from operations was $324 for the first nine months, versus cash used of $120 in 2015. Investing provided $469, including asset-sale proceeds; capital spending was $235. Defined as operating cash flow less capital expenditures, free cash flow was $89. Operating cash flow benefited from working-capital improvement and a $190 DuPont advance payment; the advance is a deferred liability, with about $93 remaining at quarter-end.
- Cash and equivalents were $957 at September 30, up from $366 at year-end 2015. Current assets were $2,757 and current liabilities $1,436. Total debt, including current maturities, was approximately $3,745; cash-adjusted debt was approximately $2,788. Debt declined from approximately $3,954 at year-end 2015. The company had a $750 revolving facility, with $141 of letters of credit outstanding; availability is subject to covenant limitations.
- Management reported compliance with debt covenants. The revolver’s maximum secured net leverage covenant tightens over time, and the minimum interest-coverage requirement rises. Most debt maturities are in 2022 and later; required term-loan amortization applies before then.
Changes, outlook, and management commentary
- Sales declined 6% in both the quarter and nine-month period. Divestitures were the principal portfolio-related driver; lower prices also affected year-to-date sales. Q3 Titanium Technologies sales increased 1%, Fluoroproducts increased 3%, and Chemical Solutions decreased 38% year over year.
- Chemours sold the Sulfur business, Clean & Disinfect business, and Beaumont aniline facility in 2016. Proceeds were approximately $321, $223, and $140, respectively, net of disclosed adjustments where applicable. The company said proceeds would fund future capital expenditures. The Sulfur sale involved a $58 impairment and a further $3 loss on sale; the Clean & Disinfect and Beaumont sales generated gains.
- Q3 restructuring and asset-related charges were $60, including a $46 impairment of the Pascagoula aniline facility. Nine-month charges were $145, including the $46 impairment and $58 Sulfur-business impairment. Additional closure and decommissioning costs were expected at several sites.
- The transformation plan targets $500 of incremental Adjusted EBITDA improvement from 2015 through 2017: approximately $350 from cost savings and $150 from growth initiatives. Management reported approximately $160 of cost savings achieved to date.
- For full-year 2016, management expected Adjusted EBITDA of $740–$775, net income of approximately $265–$290, capital expenditures approaching $350, and positive free cash flow. The outlook depended on cost reductions and growth initiatives, TiO2 pricing, currency, and end-market demand.
- Management said available cash, operating cash flow, asset dispositions, and the revolving facility should support operations and obligations over the next 12 months. It intends to use free cash flow and asset-sale proceeds to reduce debt while selectively investing and paying dividends.
Risks, contingencies, and unusual items
- PFOA litigation: Approximately 3,500 lawsuits were pending in consolidated litigation, including 30 wrongful-death claims. Two bellwether trials resulted in plaintiff verdicts; one was appealed and post-trial motions and appeals were underway in the other. The company said a probable loss was possible but could not reasonably estimate a range. Significant adverse outcomes or indemnification claims from DuPont could materially affect financial condition, results, or liquidity.
- Environmental remediation: The recorded liability was $281, with payments expected over an estimated 15–20 years. Under adverse changes in circumstances, potential liability could be up to approximately $600 above the accrual. The Pompton Lakes accrual was $84; management said total remediation there could reach $119, including amounts accrued.
- In October 2016, residents filed a putative class action concerning the East Chicago Superfund site; DuPont sought defense and indemnification. Management considered a loss reasonably possible but not estimable. Other disclosed matters include asbestos (accrual $44) and benzene litigation, for which a loss was considered reasonably possible but not estimable.
- Other exposures include foreign-exchange movements, competitive pricing and demand, tighter debt covenants, and the possibility that actual results differ from management’s estimates. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether full-year Adjusted EBITDA, net-income, capital-expenditure, and positive-free-cash-flow guidance was achieved, and how much was attributable to recurring operations rather than divestitures or adjustments.
- Underlying TiO2 pricing, Fluoroproducts growth and margins, and the ongoing effects of portfolio exits on Chemical Solutions.
- Cash-flow quality, including the effects of the DuPont advance, asset-sale proceeds, working capital, and planned capital spending.
- Debt repayment progress, covenant headroom and step-downs, revolver availability, and the effect of future cash-flow sweep requirements.
- Developments in PFOA litigation and DuPont indemnification disputes, environmental remediation estimates, and the East Chicago matter.