Chemours Co. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are against Q1 2021 unless otherwise noted. Amounts are in U.S. dollars. Chemours is a global performance-chemicals producer with reportable segments in titanium dioxide, refrigerants and specialty solutions, and advanced performance materials.
Financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $1.764 billion | $1.436 billion |
| Gross profit | $486 million | $297 million |
| Income before taxes | $280 million | $101 million |
| Net income | $234 million | $96 million |
| Diluted EPS | $1.43 | $0.57 |
| Adjusted EBITDA, non-GAAP | $403 million | $268 million |
| Cash from operations | $2 million | $39 million |
| Capital expenditures | $106 million | $60 million |
| Free cash flow, non-GAAP | $(104) million | $(21) million |
Sales rose 23%, with price up 25% and volume up 4%; unfavorable currency reduced sales by 2%, while the Mining Solutions divestiture reduced them by 4%. Gross margin was approximately 27.6%, versus 20.7%. Higher pricing and segment performance lifted earnings, while inflation in raw materials, energy, freight and logistics remained a cost headwind. The effective tax rate was 16%, compared with 5%.
Adjusted EBITDA by segment was $206 million for Titanium Technologies, $174 million for Thermal & Specialized Solutions, and $88 million for Advanced Performance Materials; Corporate and Other costs were $65 million. Segment margins were 22%, 41%, and 23%, respectively. The company changed its corporate-cost allocation methodology and recast prior segment figures.
Liquidity, debt and capital allocation
At March 31, cash and cash equivalents were $1.145 billion, including $100 million of restricted cash reported separately; total current assets were $3.393 billion and current liabilities were $1.775 billion. Total debt principal was $3.748 billion, with $24 million classified as current and $3.692 billion of long-term debt, net. Net debt principal was $2.603 billion and the company reported a 1.8x net leverage ratio, a non-GAAP measure. No borrowings were outstanding under the $900 million revolving facility; $103 million of letters of credit used facility capacity.
Cash declined by $306 million, including operating working-capital needs, $106 million of capital expenditures, $144 million of share repurchases and $40 million of dividends. The company repurchased 4.85 million shares for $146 million during the quarter. It stated that liquidity was sufficient to fund planned operations and obligations through at least May 2023. A further $100 million PFAS-related escrow deposit was expected by September 30, 2022.
Outlook, commentary and material risks
- 2022 outlook: Management expected continued strength in demand across most titanium dioxide markets, improved refrigerant demand and Opteon adoption, and continued demand for advanced materials. It cited raw-material inflation and shortages, logistics and customer supply-chain constraints, energy costs, and semiconductor-related automotive weakness as offsets. Expected 2022 capital expenditures were approximately $400 million. The filing gives no full-year revenue, earnings or cash-flow guidance.
- Environmental and PFAS exposure: Environmental remediation liabilities totaled $566 million, including $366 million for Fayetteville Works. Management estimated potential environmental liability could be up to approximately $660 million above recorded accruals under adverse changes; this is not an estimate of maximum exposure. Costs and timing remain uncertain, and the company warned that outcomes could materially affect financial position, results and cash flows.
- Fayetteville: A barrier wall and groundwater extraction and treatment system was planned, with construction expected to start in 2022 and completion planned for Q1 2023, subject to regulatory review and permits. Management estimated barrier-wall and groundwater-operation costs could reach $310 million, of which $170 million was accrued. Additional costs or delays were possible but not estimable. Downstream-county PFAS assessment and water-supply liabilities were accrued at $17 million; the company could not estimate a reasonable high-end amount.
- Other legal matters: The MOU with DuPont, Corteva and former parent EID provides for sharing certain legacy PFAS costs up to an aggregate $4 billion, with Chemours bearing half and DuPont/Corteva collectively bearing half. The filing states aggregate Qualified Spend was $182 million to date. New Jersey sought a $943 million remediation funding source for Chambers Works; Chemours disputed the request and said the potential loss was reasonably possible but not estimable. Several PFAS, environmental and securities cases remain unresolved.
- Other unusual items: Q1 included $5 million of asset charges related to suspending business with Russian entities and $5 million of severance charges. The Russian and Ukrainian markets were not material to revenue, but management cautioned that escalation could disrupt broader markets and supply chains. The company also recognized $14 million of Qualified Spend recovery in its non-GAAP reconciliation.
Most important facts for investors to verify
- Whether price increases and margin gains can be sustained as raw-material, energy, freight and logistics costs evolve.
- Working-capital conversion and operating cash flow: Q1 operating cash flow was only $2 million despite reported net income of $234 million.
- Fayetteville remediation design approvals, project costs and schedule, and the scope and cost of downstream drinking-water measures.
- Potential additional PFAS and environmental liabilities, including the requested New Jersey remediation funding source and the stated potential exposure above accrued remediation liabilities.
- Liquidity and debt maturities, including the 2025 term-loan maturities and the planned $100 million escrow deposit in 2022.