Chemours Co. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Chemours completed its spin-off from DuPont on July 1, 2015. Prior-period results are historical stand-alone allocations prepared while the business was part of DuPont, so comparisons are not fully like-for-like; 2014 also excludes the debt and interest expense incurred in 2015.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1.486bn | $1.632bn | $4.357bn | $4.883bn |
| Gross profit | $264m | $359m | $742m | $1.059bn |
| Net income (loss) | $(29)m | $108m | $(4)m | $322m |
| Adjusted EBITDA | $169m | $235m | $441m | $671m |
| Operating cash flow | Not separately stated | Not separately stated | $(120)m | $13m |
- Q3 sales declined 9%; the filing attributes the decrease principally to lower TiO2 prices and unfavorable foreign exchange, partly offset by volume growth. Nine-month sales fell 11%.
- Gross margin was approximately 17.8% in Q3 versus 22.0% a year earlier; cost of goods sold rose to 82% of sales from 78%. Q3 adjusted EBITDA margin was approximately 11.4%, versus 14.4%.
- Q3 included $184m of employee-separation and asset-related charges and a $25m goodwill impairment. Nine-month amounts were $245m and $25m, respectively. Other income included $44m of Q3 net foreign-exchange gains; interest expense was $51m in Q3 and $79m for nine months.
- At September 30, cash was $215m; current assets were $2.481bn and current liabilities $1.505bn. Total liabilities were $6.361bn and equity $90m. Debt carrying value was approximately $3.962bn including current maturities; disclosed debt principal was about $4.0bn.
- The $1.0bn revolving facility was undrawn, with approximately $753m available after letters of credit and other limitations. Capital expenditures were $392m for nine months. The company paid a $100m dividend and declared a further $0.03-per-share dividend.
Segments and material changes
- Titanium Technologies: Q3 sales were $616m, down 18%; adjusted EBITDA was $78m versus $189m, with margin falling to 13% from 25%. Pricing pressure, currency effects and weak TiO2 demand were key factors.
- Fluoroproducts: Q3 sales were $575m, up 1%; adjusted EBITDA increased to $89m from $70m. Opteon adoption, favorable mix, normalized operations and cost reductions supported results.
- Chemical Solutions: Q3 sales were $295m, down 4%; adjusted EBITDA was $7m versus $9m. The company recorded a $45m asset impairment and a $25m goodwill impairment in the segment.
- Q3 restructuring included closure of the Edge Moor TiO2 site and a New Johnsonville production line, plus Fluoroproducts line shutdowns. Edge Moor-related charges were about $126m; approximately $65m of additional decommissioning and dismantling costs were expected through early 2017.
Outlook, risks and contingencies
- The transformation plan targets $500m of Adjusted EBITDA improvement by 2017. Management aims to reduce net debt to Adjusted EBITDA to approximately 3x by year-end 2017 through operating cash flow, lower capital spending and potential asset-sale proceeds. These are targets, not guarantees.
- Management forecast 2015 capital spending, excluding separation costs, of approximately $400m–$450m, declining in 2016–2017; normalized maintenance and growth spending was expected to be about $350m annually in 2017. It stated liquidity should be sufficient for planned operations and near-term obligations.
- Credit agreement covenants include a maximum net leverage ratio of 5.75x through year-end 2015, stepping down during 2016, and a minimum interest coverage ratio of 3.0x. Chemours reported compliance at September 30; lenders amended the EBITDA covenant definition to include pro forma benefits of announced cost reductions.
- Environmental remediation liabilities were $300m, with potential costs estimated as high as $630m above accruals under adverse circumstances. Pompton Lakes had an $88m accrual; possible total liability was estimated up to $119m. About $50m of Pompton Lakes work was expected over two to three years.
- PFOA-related medical-monitoring and litigation costs could not be reasonably estimated. The filing described about 3,500 related lawsuits and warned that significant unfavorable outcomes in multiple cases could materially affect financial position, results or liquidity. Two trial verdicts had been returned after quarter-end; Chemours said it planned to appeal.
- Other risks include TiO2 market weakness, currency and raw-material volatility, debt service and refinancing, execution of cost reductions, and legal, environmental, regulatory and operational exposures. Management said disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the transformation plan delivers the stated $500m EBITDA improvement and approximately 3x leverage target by 2017.
- TiO2 pricing, utilization and margins, and whether Fluoroproducts gains can offset weakness elsewhere.
- Cash generation, working-capital needs, capital spending, debt covenant headroom and liquidity after separation-related settlements.
- Actual restructuring, closure and decommissioning costs versus estimates, including the expected additional Edge Moor costs.
- Developments in PFOA litigation and environmental remediation, including potential exposure beyond recorded accruals.