Chemours Company — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Chemours is a global performance-chemicals company with Fluoroproducts, Chemical Solutions, and Titanium Technologies segments. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,390 | $1,628 | $4,173 | $5,174 |
| Gross profit | $294 | $477 | $913 | $1,571 |
| Net income attributable to Chemours | $76 | $275 | $265 | $853 |
| Diluted EPS | $0.46 | $1.51 | $1.58 | $4.62 |
| Adjusted EBITDA | $248 | $435 | $793 | $1,399 |
Q3 gross margin was approximately 21.2%, versus 29.3% a year earlier. The filing reports segment Adjusted EBITDA of $282 million for Q3 before $34 million of negative Corporate and Other results; the comparable total-company measure is $248 million.
- Cash flow: Nine-month operating cash flow was $250 million, compared with $881 million. Capital expenditures were $385 million, producing negative free cash flow of $135 million, versus positive $537 million in 2018.
- Liquidity: Cash was $694 million at September 30, down from $1,201 million at year-end 2018. Current assets were $2,827 million and current liabilities $1,643 million. Chemours reported no revolver borrowings at quarter-end and had an $800 million revolving facility, subject to its terms; $103 million of letters of credit were outstanding.
- Debt: Total debt reported on the balance sheet was $4,195 million, versus $4,017 million at year-end. Cash less reported debt implies net debt of about $3,501 million. A $122 million accounts-receivable securitization borrowing was outstanding; the facility permits up to $125 million, with an option to increase to $200 million.
- Shareholder returns: Nine-month dividends were $124 million and share repurchases were $322 million. No shares were repurchased in Q3. The repurchase program had $428 million remaining under its authorization at quarter-end.
Material changes and segment results
- Sales declined 15% in Q3 and 19% for the first nine months. Management attributed the declines principally to lower volumes; lower TiO₂ demand was a major factor. Nine-month sales fell in all three segments.
- Fluoroproducts: Q3 sales were $636 million, down 7%; Adjusted EBITDA was $122 million, down 33%, with margin declining to 19% from 27%. Management cited illegal EU imports of legacy HFC refrigerants, weaker automotive and electronics demand, price pressure, operational headwinds, and lower quota sales. Opteon adoption partly offset these pressures.
- Chemical Solutions: Q3 sales were $140 million, down 10%; Adjusted EBITDA was $23 million, down 4%, while margin improved to 17% from 16%. Nine-month EBITDA rose to $55 million from $50 million despite lower sales, supported by licensing income and lower costs.
- Titanium Technologies: Q3 sales were $614 million, down 22%; Adjusted EBITDA was $137 million, down 49%, and margin fell to 22% from 34%. Nine-month sales were down 31% and EBITDA down 54%, mainly from sharply lower TiO₂ volumes and reduced production rates. Pricing remained broadly stable under the Ti-Pure Value Stabilization strategy.
- For the nine months, cost of goods sold fell 10%, less than the 19% sales decline. SG&A fell 9%, partly reflecting lower legal and compensation costs. Restructuring, asset-related, and other charges increased to $49 million from $32 million.
Outlook, significant items, and risks
- 2019 outlook: Management expected Titanium Technologies volume below 2018 levels, continued Opteon transition offset by illegal EU HFC imports, and continued demand for Mining Solutions products. Planned capital expenditures were approximately $500 million. The filing did not provide full-year earnings or EBITDA guidance.
- Restructuring: Chemours announced plans to exit the Methylamines and Methylamides business at Belle, West Virginia. It recorded approximately $12 million of asset impairment charges and expected another $22 million of asset charges through 2019 and approximately $11 million of additional restructuring charges through 2020.
- Pension: Following regulatory non-objection to a Netherlands pension-plan transaction, Chemours expected a non-cash settlement charge of $350–$400 million in Q4 2019, most of which was already in accumulated other comprehensive loss. The annuity purchase was funded by the plan’s investment trust.
- Environmental and litigation exposure: Accrued environmental remediation liabilities were $239 million. Management estimated potential liability could be up to approximately $570 million above the accrual, with substantial uncertainty. The Fayetteville GenX/PFAS matter had total accrued liabilities of $83 million; additional loss was considered probable but not estimable. Chemours also disclosed numerous PFOA/PFAS-related proceedings and stated excess losses could be reasonably possible but not estimable.
- Other legal matters: Chemours described New Jersey environmental directives and lawsuits, Ohio and other PFAS matters, and an October 2019 securities class action alleging misleading disclosures about environmental liabilities. The company said it intended to defend the securities suit; potential loss was not estimable. It also reported a renewed construction suspension affecting its Mexico Mining Solutions facility, with $144 million of assets under construction and management believing the amounts recoverable.
- Other unusual items: Q3 other income included a $9 million non-cash gain on the Repauno site sale. Nine-month 2018 results included a $42 million gain on the Linden land sale and a $38 million debt-extinguishment loss, affecting comparisons.
Most important facts for investors to verify
- Whether TiO₂ demand, Fluoroproducts pricing and volumes, and operating performance recover, and whether the stated 2019 outlook and $500 million capex plan remain achievable.
- Cash generation and working-capital trends, given the sharp decline in operating cash flow and negative nine-month free cash flow.
- Debt, short-term liquidity, securitization-facility terms, and the company’s ability to fund capital spending, dividends, repurchases, and obligations.
- Developments in environmental remediation and PFAS/GenX litigation, including potential costs beyond recorded accruals and the timing or impact of the Fayetteville Consent Order.
- The Q4 Netherlands pension settlement charge and its effects on reported earnings and equity.