The Chemours Company: Q1 2016 Form 10-Q
Business context and reporting period
Reports the three months ended March 31, 2016. Chemours is a global chemicals company with three reportable segments: Titanium Technologies, Fluoroproducts, and Chemical Solutions. The comparison with Q1 2015 requires care: Chemours was part of DuPont and did not operate as a standalone company for that period; historical results include allocated DuPont costs and may not be indicative of standalone results.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $1,297 million | $1,363 million |
| Gross profit; gross margin | $202 million; approximately 15.6% | $252 million; approximately 18.5% |
| Net income | $51 million | $43 million |
| Diluted EPS | $0.28 | $0.24 |
| Adjusted EBITDA | $128 million | $145 million |
| Operating cash flow | $36 million | $(238) million |
| Capital expenditures | $89 million | $137 million |
- Q1 2016 free cash flow, defined as operating cash flow less capital expenditures, was approximately $(53) million. Cash increased $69 million to $435 million.
- At March 31, 2016, total assets were $6.380 billion, current assets $2.371 billion, and current liabilities $1.487 billion. Total debt was approximately $3.954 billion, including current maturities; long-term debt, net, was $3.920 billion.
- Interest expense was $57 million. The company paid dividends of $5 million, or $0.03 per share.
- Adjusted EBITDA margin was approximately 9.9%, versus 10.6% a year earlier. Segment Adjusted EBITDA: Titanium Technologies $54 million (10% margin), Fluoroproducts $85 million (16%), and Chemical Solutions $10 million (4%); Corporate and Other was $(21) million.
Changes versus prior period
- Sales fell 5%: lower prices, particularly for TiO2, and unfavorable currency more than offset higher volume. Reported sales impacts were local price down 6%, volume up 4%, currency down 2%, and portfolio/other down 1%.
- Adjusted EBITDA declined $17 million. Titanium Technologies EBITDA decreased to $54 million from $93 million, reflecting lower prices and currency effects. Fluoroproducts rose to $85 million from $75 million, partly because prior-year plant outage costs did not recur. Chemical Solutions rose to $10 million from $1 million, supported by cost reductions and better plant costs.
- Net income increased despite weaker gross profit and Adjusted EBITDA, largely because other income included an $89 million pretax gain on the Beaumont aniline facility sale. Adjusted net income was $11 million, versus $59 million in Q1 2015.
- Operating cash flow improved from $(238) million to $36 million, aided by working capital and a $190 million advance payment from DuPont for goods and services expected to be provided over 12–15 months. Approximately $166 million remained recorded as a deferred liability at quarter-end. Q1 2015 also included $397 million of net financing transfers from DuPont.
Outlook, developments, and risks
- Management expected an additional $200 million of structural cost reductions in 2016 and targeted $350 million of reductions through 2017. It expected full-year 2016 Adjusted EBITDA to exceed 2015 performance and modestly positive free cash flow, subject to currency, TiO2 pricing, end-market demand, and execution.
- The Beaumont aniline facility sale to Dow closed March 1 for $140 million cash and generated the $89 million gain. Chemours also agreed to supply Dow with additional aniline under an initial two-year agreement.
- An April 2016 agreement to sell the Clean & Disinfect business to LANXESS for $230 million cash, subject to adjustments, approvals, and closing conditions, was expected to close in the second half of 2016.
- The revolving credit commitment was reduced from $1.0 billion to $750 million and covenant terms were amended. The company reported covenant compliance at March 31; $141 million of letters of credit were outstanding. Management said liquidity sources were expected to be sufficient over the next 12 months.
- Environmental remediation liabilities were $293 million. Management said potential environmental costs could be up to approximately $600 million above the amount accrued under adverse circumstances. The Pompton Lakes accrual was $86 million; possible costs there could reach $119 million including accrued amounts. Planned remediation activity includes approximately $50 million over two to three years.
- PFOA matters remain a significant uncertainty: the company had a $20 million accrual for specified PFOA matters, but said potential losses from the Ohio multidistrict litigation could not be estimated. Approximately 3,500 lawsuits were pending; unfavorable outcomes in multiple cases could materially affect financial condition, results, or liquidity. The filing also describes asbestos and benzene litigation and possible indemnification disputes with DuPont.
- Restructuring and shutdown charges were $17 million in Q1. Management expected further decommissioning charges of approximately $40 million for Edge Moor and $5 million for certain Fluoroproducts lines through early 2017.
Key facts for investors to verify
- Whether cost reductions and growth initiatives deliver the stated 2016 EBITDA and free-cash-flow outlook, especially amid TiO2 pricing and currency pressures.
- Cash generation excluding the DuPont advance payment and asset-sale proceeds, and the timing of obligations to provide the contracted goods and services.
- Debt covenant headroom and available revolver capacity following the reduced commitment and amended covenants.
- Developments in PFOA litigation, environmental remediation estimates, and related DuPont indemnification arrangements.
- Closing, proceeds, and business effects of the proposed LANXESS sale and the consequences of the Beaumont sale and supply agreement.