Chemours Co. — Q3 2018 Form 10-Q
Business context and period. Chemours is a global performance-chemicals producer with three segments: Fluoroproducts, Chemical Solutions, and Titanium Technologies. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the same 2017 periods unless noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,628 | $1,584 | $5,174 | $4,608 |
| Gross profit | $477 | $465 | $1,571 | $1,261 |
| Net income attributable to Chemours | $275 | $207 | $853 | $518 |
| Diluted EPS | $1.51 | $1.08 | $4.62 | $2.72 |
| Adjusted EBITDA | $435 | $381 | $1,399 | $1,028 |
| Cash from operations | Not stated for quarter | Not stated for quarter | $881 | $337 |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $344 | $246 |
| Free cash flow | Not stated for quarter | Not stated for quarter | $537 | $91 |
- Q3 sales increased 3%; nine-month sales increased 12%. Gross margin was approximately 29.3% for Q3 versus 29.4%, and 30.4% for the nine-month period versus 27.4%.
- For the first nine months, segment Adjusted EBITDA was $619 for Fluoroproducts, $50 for Chemical Solutions, and $856 for Titanium Technologies; Corporate and Other was a $126 loss. Adjusted EBITDA is a non-GAAP measure.
- At September 30, cash was $1,275 (including $811 held by foreign subsidiaries); total debt was $4,044, including $14 current maturities. Net debt, calculated as total debt less cash, was $2,769. The $800 revolving facility had no borrowings and $104 of letters of credit outstanding.
- Current assets were $3,448 and current liabilities $1,698. Cash declined by $281 from year-end 2017. Total liabilities were $6,366; stockholders’ equity was $1,146.
Changes and drivers versus prior periods
- Management attributed results primarily to higher TiO2 selling prices and strong Fluoroproducts demand. Q3 price rose 6% overall, while volume fell 3%; for nine months, price rose 8%, volume 3%, and currency contributed 1%.
- Titanium Technologies Q3 sales fell 1% as volume declined 10% amid faster-than-expected customer destocking, largely offset by a 9% price increase. Its nine-month sales rose 15%, with Adjusted EBITDA up 42% to $856.
- Fluoroproducts sales rose 7% in Q3 and 11% for nine months, supported by Opteon refrigerant adoption and demand for base refrigerants and fluoropolymers. Chemical Solutions sales rose 5% and 4%, respectively, primarily on higher pricing.
- Nine-month operating cash flow improved from $337 to $881, reflecting higher earnings and the prior-year $335 PFOA settlement payment. Capital spending increased to $344.
- Cash financing outflows included $675 of debt repayments, $520 of share repurchases, and $106 of dividends. The company refinanced term loans, issued €450 of 4.0% notes due 2026, and tendered or redeemed 2023 notes; the transactions contributed to a $38 debt-extinguishment loss for the nine months.
Outlook, commentary, and risks
- Management expected 2018 TiO2 average prices to exceed 2017 levels, while warning that Titanium Technologies volume could be affected by destocking. It also cited continued Opteon transition, increased fluoropolymer demand, and strong Mining Solutions demand. Expected 2018 capital expenditures were approximately $500. Management said it expected earnings growth to meet or exceed its three-year targets; no specific full-year earnings figure was provided.
- Fayetteville, North Carolina: the company recorded an additional $30 estimated liability in Q3, bringing its accrual for related legal and environmental matters to $43. It continued capturing and separately disposing of process wastewater and committed to invest over $100 in environmental controls. Management said further costs were probable, but the ultimate cost and scope could not be estimated; permit or court actions could affect continued operations.
- Environmental remediation liabilities totaled $239. The filing described a remote adverse-case potential of up to approximately $470 above the accrued amount. PFOA-related claims, including newer actions and unresolved claims outside the prior MDL settlement, remain uncertain and not estimable in some cases. Other exposures include asbestos litigation and potential DuPont indemnification disputes.
- Construction of the new Mining Solutions facility in Mexico was stopped following a court suspension relating to a permitting challenge; the company appealed and declared force majeure with vendors.
- Other unusual items included a $42 gain on the Linden land sale, EU quota authorization income of $38 for nine months, and discrete tax benefits. Q3 included a 2% tax benefit rate; the nine-month effective tax rate was 12%. Tax Act estimates could still change.
- The company reported compliance with debt covenants at September 30. A new $750 share-repurchase authorization was approved in August; $136 was spent in Q3, with $614 remaining at quarter-end. A further $114 of repurchases occurred in October.
Most important facts for investors to verify
- Whether Titanium Technologies destocking persists and how pricing, volume, and raw-material costs affect margins.
- The final scope, costs, and operational consequences of Fayetteville environmental measures, regulatory proceedings, and related litigation.
- Potential future environmental and PFOA liabilities, including exposure above recorded reserves and the stated possible remediation range.
- Whether operating cash generation supports planned capital spending, dividends, and repurchases while managing debt and upcoming maturities.
- Progress, timing, and cost of the Mexico Mining Solutions project and the company’s approximately $500 2018 capital-spending outlook.