Chemours Co. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed July 31, 2020. Dollars in millions except per-share amounts. Chemours supplies performance chemicals through Fluoroproducts, Chemical Solutions, and Titanium Technologies.
Financial performance
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net sales | $1,093 | $1,408 | $2,398 | $2,784 |
| Gross profit | $199 | $323 | $497 | $619 |
| Net income attributable to Chemours | $24 | $96 | $124 | $189 |
| Diluted EPS | $0.15 | $0.57 | $0.75 | $1.12 |
| Adjusted EBITDA | $166 | $283 | $423 | $545 |
| Operating cash flow | Not separately reported | Not separately reported | $155 | $(38) |
| Capital expenditures | Not separately reported | Not separately reported | $167 | $257 |
| Free cash flow | Not separately reported | Not separately reported | $(12) | $(295) |
- Q2 sales fell 22% year over year, reflecting lower volume (16 percentage points), price (4 points), and portfolio change (2 points). H1 sales fell 14%.
- Q2 gross margin was approximately 18.2%, versus 22.9% a year earlier. Adjusted EBITDA margin was approximately 15.2%, versus 20.1%.
- Q2 results included a $4 income-tax benefit, versus a $37 tax provision in Q2 2019. H1 included a one-time $18 tax benefit from an IRS-approved accounting method change.
- Q2 Adjusted EBITDA by segment: Fluoroproducts $97 (prior-year $180); Chemical Solutions $19 ($16); Titanium Technologies $94 ($127). Chemical Solutions improved profitability despite lower sales, largely from cost savings following the exit of its Methylamines and Methylamides business.
Balance sheet, debt, and liquidity
- At June 30, cash and equivalents were $1,031, versus $943 at year-end 2019. Total debt was $4,380, versus $4,196; cash less total debt implies net debt of approximately $3,349.
- Current assets were $2,717 and current liabilities $1,156. Total liabilities were $6,375 and equity $659.
- Chemours drew $300 on its $800 revolving credit facility in April as a precaution; $101 of letters of credit were outstanding. It also deferred approximately $75 of tax payments, largely expected to be paid in 2021.
- Management expected available cash, operating cash flow, and financing arrangements to provide sufficient liquidity through at least July 2021, and anticipated covenant compliance through that period.
- H1 operating cash flow improved to $155 from $(38), while investing used $163 and financing provided $92. Cash flow benefited from receivables sales and working-capital changes. The amended receivables facility permits sales up to $125; the company continues to service the receivables and guarantees payment to the bank.
Changes, outlook, and key risks
- COVID-19 weakened demand across markets and caused some production lines to be temporarily idled, though the company reported minimal disruption to operations. Fluoroproducts and Titanium Technologies were pressured by lower customer demand; auto-sector shutdowns affected Fluoroproducts, while TiO2 demand and seasonal volume growth weakened in Q2.
- Management withdrew its February 2020 full-year guidance on May 5 and was not providing full-year 2020 financial guidance. Cost actions, including reduced discretionary spending, hiring freezes, plant-cost reductions, and temporary salary cuts, were expected to reduce 2020 costs by about $160. Planned 2020 capital spending was reduced by $125.
- The company decided to stop production at its Pascagoula, Mississippi Aniline plant by year-end 2020. Q2 charges included $6 for asset impairments, $4 for environmental liabilities, and $2 for employee separation liabilities; approximately 75 employees were expected to leave in 2021.
- Environmental remediation liabilities totaled $405, including $201 for Fayetteville Works. The filing states that potential environmental liability could be up to approximately $540 above accrued amounts under adverse changes in circumstances, though management characterized this possibility as remote. Fayetteville remediation plans remained subject to regulatory review; COVID-19 temporarily suspended some well testing and water-system installations.
- PFAS/PFOA matters, including governmental inquiries, regulatory actions, and litigation, remain significant. Chemours said potential losses beyond accruals were reasonably possible but not estimable for many matters. A Q2 jury awarded $50 million in a PFOA-related testicular cancer case; the company planned to appeal and considered loss probability remote based on post-trial motions and appeal grounds. A July 2020 grand jury subpoena sought PFAS documents.
- Other contingencies include a securities class action and derivative suits relating to environmental-liability disclosures, and a dispute with DuPont over separation-related indemnification. A Mexican construction suspension affecting a Mining Solutions facility could trigger $26 of contract termination fees if upheld; management considered the related assets recoverable at quarter-end.
- The board declared a Q3 dividend of $0.25 per share. The company said it did not plan near-term share repurchases despite $428 remaining under its authorization.
Investor verification priorities
- Track demand, pricing, production utilization, and segment EBITDA as COVID-related market conditions evolve; full-year guidance was withdrawn.
- Assess liquidity and debt-service capacity, including the revolver draw, deferred taxes, receivables-sale arrangement, and covenant headroom.
- Monitor Fayetteville remediation costs and regulatory decisions, broader PFAS/PFOA litigation and investigations, and the potential range of environmental liabilities.
- Confirm execution and cash costs of the Pascagoula closure, announced cost reductions, and lower capital-spending plan.
- Review the outcomes of the PFOA verdict appeal, DuPont indemnification dispute, securities litigation, and Mexican facility proceeding.