Chemours Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are to Q1 2020 unless otherwise noted. Chemours is a global performance-chemicals producer with four segments: Titanium Technologies, Thermal & Specialized Solutions, Advanced Performance Materials, and Chemical Solutions. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Net sales | $1,436 | $1,305 | Up 10%; volume +11%, currency +2%, price −2%, portfolio −1% |
| Gross profit / margin | $297 / 20.7% | $298 / 22.8% | Profit essentially flat; margin contracted |
| Income before taxes | $101 | $77 | Up $24 |
| Net income | $96 | $100 | Down $4 |
| Diluted EPS | $0.57 | $0.61 | Adjusted diluted EPS was $0.71 in both periods |
| Segment Adjusted EBITDA | $323 | $293 | After Corporate and Other costs of $(55) and $(36), respectively, consolidated Adjusted EBITDA was $268 vs. $257 |
| Operating cash flow | $39 | $44 | Lower primarily due to receivables and inventory working-capital needs |
| Capital spending / free cash flow | $60 / $(21) | $106 / $(62) | Free cash flow is operating cash flow less capital spending; Q1 2021 spending includes $22 of construction-in-progress assets received in a contract termination |
| Cash and cash equivalents | $1,008 | $1,105 at Dec. 31, 2020 | Quarter-end cash included $793 held by foreign subsidiaries |
| Debt principal / net debt | $4,027 / $3,019 | — | Net debt equals debt principal less cash; net leverage ratio was 3.4x, versus 3.3x at March 31, 2020 |
Cost of goods sold rose $132, exceeding sales growth, with higher sales, freight and logistics costs, and Winter Storm Uri downtime and utility costs cited. Uri-related repairs and excess utility charges were approximately $16; storm downtime also added $9 of fixed-cost under-absorption. No storm-related insurance recovery was expected. The effective tax rate was 5%, versus negative 30% in Q1 2020, which included a one-time $18 tax benefit.
Segments and material changes
| Segment | Sales | Adjusted EBITDA | Key comparison |
|---|---|---|---|
| Titanium Technologies | $723, up 18% | $169, up from $138 | Volume +16%; margin held at 23%. Growth reflected broad demand and favorable currency, partly offset by lower pricing and higher ore-mix costs. |
| Thermal & Specialized Solutions | $304, down 1% | $93, up from $88 | Volume +4% but price −6%; margin improved to 31% from 29%. Refrigerant demand improved, while price mix and contractual reductions weighed on sales. |
| Advanced Performance Materials | $333, up 14% | $51, down from $52 | Volume +13%; margin declined to 15% from 18%, reflecting price mix and storm-related under-absorption. |
| Chemical Solutions | $76, down 17% | $10, down from $15 | Sales fell largely because of the Aniline business exit; lower licensing income and storm-related costs reduced EBITDA. |
Corporate and Other costs increased to $55 from $36, attributed mainly to legacy environmental remediation costs, higher performance-related compensation, and prior-year COVID-19 cost reductions. Other income improved to $1 from an expense of $15, mainly due to foreign-exchange movements. Net interest expense fell to $49 from $54.
Cash and working-capital movements included a $213 operating cash use from receivables, while inventories rose $49 from year-end and accounts payable increased $132. Current assets were $2,786 and current liabilities $1,501 at March 31, 2021. The $800 revolving credit facility had no borrowings outstanding; $106 of letters of credit were issued. The receivables securitization facility limit was increased to $150, with $25 unused capacity.
Outlook, risks and unusual items
- Management expected strong Titanium Technologies volume growth and improved pricing; stronger demand across Advanced Performance Materials; and improved refrigerant demand, partly offset by illegal imports of legacy HFC refrigerants into the EU. Chemical Solutions outlook cited continued demand for performance chemicals and improved mining demand.
- Expected 2021 capital expenditures were approximately $350. Management stated available cash, operating cash generation, receivables securitization, and existing debt arrangements were expected to provide sufficient liquidity through at least May 2022. COVID-19 demand, supply-chain, and operational effects remained uncertain.
- In March 2021, Chemours began a strategic review assessing a potential sale of Mining Solutions; no sale was stated as completed. The under-construction Gomez Palacio, Mexico facility had $155 of assets under construction. Management believed permits would ultimately be obtained, but adverse rulings could lead to impairment.
- A January 2021 binding MOU with DuPont, Corteva, and EID provides for sharing specified potential legacy PFAS liabilities: Chemours bears 50%, with DuPont and Corteva collectively bearing 50%, subject to the MOU’s term and conditions. Chemours and the other parties are scheduled to fund escrow deposits, including a $100 Chemours deposit by September 30, 2021 and another $100 by September 30, 2022. The escrow remains Chemours’ asset while restricted; access is limited under the agreement. First-quarter qualified spend was estimated at $14, with no recovery receivable recorded because recovery was not considered realizable.
- Accrued environmental remediation liabilities were $394, including $191 for Fayetteville, North Carolina. The filing disclosed that adverse changes could result in potential liability up to approximately $570 above the accrued amount. Fayetteville remediation and water-supply obligations, regulatory matters, and PFAS litigation remain significant uncertainties; additional losses were described as reasonably possible but not estimable for certain matters.
- The company accrued $22 for its share of a PFOA settlement; the balance was paid in April 2021. The filing also describes extensive PFAS, environmental, and other litigation, including an unresolved testicular-cancer verdict Chemours planned to appeal. Outcomes and potential losses in multiple matters could not be reasonably estimated.
- The quarter included a $9 net gain from terminating a service-provider contract for the Mining Solutions project, partly offset by a $13 impairment of acquired construction assets; the resulting net gain is reflected in other charges. The filing also reports a $5 credit in restructuring, asset-related, and other charges overall.
- The quarterly dividend was $0.25 per share; $41 was paid during the quarter. On April 29, 2021, Chemours announced a $0.25-per-share dividend for Q2. The 2018 repurchase program had $428 of authorization remaining, with no repurchases in Q1.
Investor verification points
- Verify the sustainability of sales growth and pricing, particularly in Titanium Technologies and refrigerants, and whether segment margins recover after storm and supply-chain effects.
- Track receivables, inventory, operating cash flow, capital spending, and free cash flow to assess cash conversion and liquidity.
- Review debt maturities, net leverage, refinancing needs, and the scheduled PFAS escrow funding against management’s liquidity outlook.
- Monitor the Mining Solutions strategic review and Mexican facility permits, construction progress, and impairment exposure.
- Follow PFAS and environmental litigation, Fayetteville remediation costs and milestones, and the operation of the legacy-liability MOU and escrow.
- Assess GAAP results alongside management’s non-GAAP Adjusted EBITDA and adjusted EPS, including the exclusions for storm costs, legal and environmental charges, foreign exchange, and restructuring.