Chemours Co. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Dollar amounts are in millions, except per-share data. Chemours is a global performance-chemicals company with Fluoroproducts, Chemical Solutions, and Titanium Technologies segments.
Financial performance and liquidity
- Revenue: $1,376, down 20% from $1,730. Management attributed the decline mainly to a 20% decrease in volume; price rose 1% and currency reduced sales by 1%.
- Profitability: Gross profit was $296 versus $537; gross margin was approximately 21.5% versus 31.0%. Net income was $94 versus $297; diluted EPS was $0.55 versus $1.58. Adjusted EBITDA, a non-GAAP measure, was $262 versus $468; adjusted diluted EPS was $0.63 versus $1.41.
- Cash flow: Operating cash flow was negative $44 versus positive $196. Capital expenditures were $133 versus $102, producing negative free cash flow of $177 versus positive $94 (company-defined non-GAAP measure). Cash declined by $504 during the quarter to $697.
- Balance sheet and liquidity: Current assets were $2,847 and current liabilities $1,572 at March 31; cash was $697. Total debt was $4,021, including lease-related obligations, versus $4,017 at year-end; cash-adjusted debt was approximately $3,324. No borrowings were outstanding under the $800 revolving facility at quarter-end, although $103 of letters of credit were outstanding. Chemours borrowed $75 under the facility in April for general corporate purposes.
- Shareholder returns: The company spent $261 on share repurchases and paid $42 in dividends in Q1. It had $489 remaining under its $1,000 repurchase authorization at March 31.
Material changes and segment results
- Titanium Technologies: Sales fell 35% to $555 and Adjusted EBITDA declined 57% to $126; margin fell to 23% from 34%. Lower demand and expected share loss under the Ti-Pure Value Stabilization strategy drove the volume decline, with additional pressure from lower-volume margin compression and raw-material costs.
- Fluoroproducts: Sales declined 6% to $687 and Adjusted EBITDA fell 23% to $159; margin was 23% versus 28%. Lower refrigerant volumes and currency headwinds, plus approximately $33 of operating costs related to the Corpus Christi facility start-up and Louisville outages, weighed on results. EU refrigerant-quota authorization sales were $24 versus $2 and partly offset the decline.
- Chemical Solutions: Sales decreased 7% to $134, while Adjusted EBITDA increased to $15 from $11 and margin improved to 11% from 8%, supported by Mining Solutions pricing, product mix, and lower project costs.
- Consolidated Adjusted EBITDA declined to $262 from $468. Q1 2018 included a $42 gain from the sale of the Linden, New Jersey site; Q1 2019 included $27 of additional charges associated with the Fayetteville consent order.
Outlook, commentary, and risks
- 2019 outlook: Management expected Titanium Technologies volume below 2018 levels as it continued the Ti-Pure strategy; continued transition to Opteon refrigerants and increased fluoropolymer demand; and continued demand for Mining Solutions. Expected capital expenditures were approximately $500. The filing provides no numerical full-year earnings or revenue guidance.
- Environmental and legal matters: A North Carolina consent order addressed Fayetteville matters; the company accrued an additional $27 in Q1 and reported total estimated liabilities of $83 at March 31. Environmental remediation accruals totaled $233; under adverse changes in circumstances, management said potential liability could be up to approximately $450 above accrued amounts, a scenario it characterized as remote. Additional losses from PFOA/PFAS matters were considered reasonably possible but not estimable. The filing also describes ongoing government investigations and litigation; outcomes and potential financial effects remain uncertain.
- Operational and project risks: Unplanned Fluoroproducts outages and the Corpus Christi start-up raised costs. Construction of a Mining Solutions facility in Mexico remained halted pending legal proceedings; no impairment was recorded, but a significant portion of related assets could be impaired if construction cannot resume.
- Other unusual items: Other income included $24 of EU refrigerant-quota authorization sales. Adoption of the new lease standard on January 1, 2019 added operating lease right-of-use assets and liabilities to the balance sheet; it did not affect reported earnings or cash flows at adoption. Management said disclosure controls were effective and there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Titanium Technologies demand, volume, and share loss develop as management expects, and the resulting effect on margins and earnings.
- Whether Fluoroproducts operating issues are resolved and planned refrigerant capacity ramps successfully.
- Potential cash costs and changes in estimates for Fayetteville, PFOA/PFAS litigation, and the broader environmental remediation portfolio.
- Liquidity and debt capacity after negative Q1 operating cash flow, planned capital spending, dividends, and continued share repurchases.
- Whether the Mexico project resumes and whether any impairment becomes necessary.