Chemours Company — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Chemours is a global performance chemicals company with three reportable segments: Titanium Technologies, Thermal & Specialized Solutions, and Advanced Performance Materials. Dollar figures are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,777 | $1,680 | $5,456 | $4,770 |
| Gross profit | $432 | $427 | $1,414 | $988 |
| Gross margin | 24.3% | 25.4% | 25.9% | 20.7% |
| Net income | $240 | $214 | $675 | $375 |
| Diluted EPS | $1.52 | $1.27 | $4.21 | $2.21 |
| Adjusted EBITDA (non-GAAP) | $363 | $372 | $1,241 | $1,006 |
Q3 sales rose 6%, driven by 18% higher pricing, partly offset by 5% lower volume, currency headwinds of 3%, and a 4% portfolio impact from the Mining Solutions divestiture. Nine-month sales increased 14%, driven by 22% higher pricing. Higher raw-material, energy, freight, and logistics costs pressured margins. Q3 adjusted EBITDA was nearly flat year over year, while GAAP net income benefited from higher other income and a debt-extinguishment gain.
Segment trends, Q3: Titanium Technologies sales fell 3% to $877 and adjusted EBITDA declined to $137 from $221, reflecting weaker demand and higher costs. Thermal & Specialized Solutions sales rose 31% to $417 and adjusted EBITDA increased to $162 from $103. Advanced Performance Materials sales rose 26% to $450 and adjusted EBITDA increased to $112 from $76. Segment adjusted EBITDA totals exclude Corporate and Other costs.
Cash flow, nine months: Operating cash flow was $594 versus $606; capital expenditures were $240 versus $194; reported free cash flow (non-GAAP) was $354 versus $412. Investing cash use was $219. Financing cash use was $495, including $351 of share repurchases, $117 of dividends, and $64 of debt repayments. Cash and cash equivalents were $1,167 at September 30, down from $1,451 at year-end 2021; an additional $201 was restricted cash, primarily for the PFAS escrow.
Debt and liquidity: Debt principal was $3,562 ($3,510 long-term debt, net, plus current maturities); cash-adjusted debt principal was $2,395. Net leverage was 1.5x, compared with 2.3x at September 2021. No borrowings were outstanding under the $900 revolving credit facility; $104 of letters of credit were outstanding. Management said liquidity was sufficient to fund operations and obligations through at least November 2023.
Current assets were $3,543 and current liabilities $1,951 at quarter-end. Receivables rose to $980 from $720 and inventories to $1,321 from $1,099, increasing working-capital needs. Chemours declared a $0.25-per-share quarterly dividend. It repurchased $357 of shares in the first nine months and had $644 remaining under its $750 share-repurchase authorization.
Material changes and unusual items
- Nine-month 2022 results included $29 of gains from the Beaumont and Pascagoula divestitures. Other income also benefited from a patent-infringement settlement and foreign-exchange gains; the filing does not provide a clear amount for the patent settlement.
- Q3 included a $7 gain on extinguishment of debt after repurchasing $61 principal amount of senior notes for $53 cash. Interest expense declined year over year, partly due to prior refinancing.
- Fayetteville environmental remediation liabilities rose to $486 from $359 at year-end, contributing to total environmental remediation liabilities of $692, up from $562. A $108 increase in estimated off-site drinking-water costs and additional barrier-wall project estimates were significant drivers.
- Chemours deposited another $100 into the PFAS escrow in September, bringing restricted escrow funds to $201. Under its MOU with DuPont and Corteva, Chemours generally bears half of qualifying future legacy PFAS costs, with the other half shared by those parties, subject to the agreement’s terms and limits.
- The company repurchased $87 of shares in Q3 and terminated its interest-rate swaps in September, receiving an $8 cash settlement.
Outlook, risks, and contingencies
Management expected 2022 capital expenditures of approximately $350. Its outlook described weakening demand, raw-material constraints, and logistics challenges for Titanium Technologies; seasonal refrigerant demand and continued Opteon adoption for Thermal & Specialized Solutions; and sustained demand for differentiated products but softer non-strategic markets in Q4 for Advanced Performance Materials. No specific full-year revenue or earnings guidance is stated in the supplied filing text.
Key uncertainties include PFAS-related litigation and regulation, environmental cleanup costs, and the Fayetteville remediation program. Chemours estimated that environmental liabilities could reach approximately $720 above the $692 accrued under adverse changes in circumstances; this is not an estimate of maximum exposure. The company said additional PFAS losses beyond accrued amounts could be material but could not be reasonably estimated. EPA’s health advisories and potential future drinking-water standards may require additional spending. Construction and permitting for the Fayetteville barrier wall and groundwater treatment system remain important execution risks, including a contested discharge permit. Other risks discussed include inflation, supply constraints, foreign exchange, commodity prices, and geopolitical effects from the Russia-Ukraine conflict.
Management reported that disclosure controls and procedures were effective as of September 30, 2022, and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether pricing can continue to offset weaker demand and elevated input, energy, and logistics costs, particularly in Titanium Technologies.
- How Fayetteville remediation estimates, the barrier-wall schedule, permits, and off-site drinking-water obligations develop, and whether further accruals are required.
- Potential financial exposure from PFAS litigation, regulatory actions, and the MOU cost-sharing and escrow provisions; many possible losses remain unestimable.
- Whether working-capital growth, capital spending, shareholder returns, and environmental payments affect cash generation and the stated liquidity outlook.
- The sustainability of reported earnings after considering unusual income, divestiture gains, debt repurchases, and non-GAAP adjustments.