Chemours Co quarterly report, Q2 FY2019

Business context and reporting period

The Chemours Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2019. Chemours is a global performance-chemicals company with three reportable segments: Fluoroproducts, Chemical Solutions, and Titanium Technologies.

Financial performance and liquidity

Gross margin was approximately 23% in Q2 2019 versus 31% a year earlier; for the six-month periods it was approximately 22% versus 31%. Six-month operating cash flow was negative $38M, compared with positive $539M in 2018. Free cash flow, as defined by the company, was negative $295M versus positive $311M.

At June 30, cash was $630M, down from $1.201B at year-end 2018. Current assets were $2.832B and current liabilities $1.448B. Total debt, including finance and build-to-suit lease obligations, was $4.249B; long-term debt, net, was $4.190B. The company drew $150M on its revolving facility during the first half; it repaid that balance in July. In July, it also borrowed $125M under a new receivables securitization facility to support liquidity.

Material changes versus the prior comparable period

• Sales fell 22% in Q2 and 21% for the first half, principally due to lower volumes; company-wide price and currency effects were smaller. Titanium Technologies was the largest source of the decline.
• Titanium Technologies sales fell 34% in Q2 and 35% in the first half, reflecting lower market demand and share loss. Segment Adjusted EBITDA declined 57% in both comparisons; margins fell to 22% and 23%, respectively, from 34%.
• Fluoroproducts sales declined 11% in Q2 and 9% in the first half. Adjusted EBITDA fell 22% in both periods; management cited lower volume and pricing, currency effects, roughly $30M of first-half costs from facility start-up and outages, partly offset by higher EU F-gas quota sales.
• Chemical Solutions sales fell 15% in Q2 and 11% in the first half, including lower volume from a scheduled turnaround, customer mine operating issues, and softer demand. Adjusted EBITDA increased modestly, helped by pricing and product mix.
• Cash from operations weakened substantially, with management citing lower net income and cash outflows from payments on accounts payable and other accrued liabilities. Capital spending was $257M, versus $228M in the first half of 2018.
• 2018 included a $42M gain on the sale of the Linden, New Jersey site and a $38M debt-extinguishment loss; neither recurred in 2019. Q2 2019 also included $7M of restructuring and other charges.

Outlook, risks, contingencies, and unusual items

• Management expects 2019 Titanium Technologies volume below 2018 as it executes its Ti-Pure Value Stabilization strategy; continued Opteon refrigerant adoption to be offset by illegal EU imports of legacy HFC refrigerants; and continued demand for Mining Solutions products. Expected 2019 capital expenditures are approximately $500M. No full-year earnings or sales guidance is provided in the supplied filing text.
• Environmental remediation liabilities were $244M. The company estimated potential exposure could be up to approximately $480M above the accrual, while warning that adverse changes could produce amounts beyond that range. Costs and timing remain uncertain.
• For PFAS/PFOA matters, management said losses above accrued amounts are reasonably possible but not estimable. Fayetteville-related accrued liabilities were $87M at June 30, including $56M classified as litigation and $31M as environmental remediation. A consent order requires additional site actions, with stipulated penalties for missed requirements. Government investigations and civil claims remain ongoing; a criminal or civil proceeding, fines, penalties, or other remedies are possible.
• Chemours is contesting DuPont’s asserted indemnification rights in a Delaware Chancery Court lawsuit; DuPont seeks dismissal in favor of private arbitration. The dispute concerns liabilities transferred at the spin-off and could affect Chemours materially.
• Construction of the planned Mining Solutions facility in Mexico remained stopped amid permitting litigation. No impairment was recorded on tested assets, but management warned that resumed construction is uncertain and assets could be impaired if work cannot restart.
• A Netherlands pension-plan annuity transaction completed in July is expected to trigger a non-cash settlement charge of $350M–$400M in Q3 2019, subject to Dutch regulator approval; most of the amount was already recorded in accumulated other comprehensive loss.
• Chemours returned $405M to shareholders in the first half through $322M of repurchases and $83M of dividends. It had $428M remaining under its $1B repurchase authorization at June 30. Management stated that available liquidity and financing arrangements are expected to meet needs over the next 12 months.

Important facts for investors to verify

• Whether sales and margins stabilize, particularly in Titanium Technologies, and whether the stated volume and market-demand expectations develop as anticipated.
• Operating cash generation, inventory levels, capital spending, and the company’s ability to fund shareholder returns while maintaining liquidity and managing debt.
• Developments in PFAS/PFOA litigation and regulation, Fayetteville consent-order compliance, and whether environmental liabilities exceed current accruals.
• The outcome and timing of the DuPont indemnification dispute, the Mexico facility stoppage, and the expected Q3 pension settlement charge.
• The July securitization borrowing and revolver repayment, including subsequent balances, costs, and available borrowing capacity.