Chemours Co. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Chemours is a global performance-chemicals producer operating through Fluoroproducts, Chemical Solutions, and Titanium Technologies.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $1.305 billion | $1.376 billion |
| Gross profit / gross margin | $298 million / 22.8% | $296 million / 21.5% |
| Income before taxes | $77 million | $107 million |
| Net income attributable to Chemours | $100 million | $94 million |
| Diluted EPS | $0.61 | $0.55 |
| Adjusted EBITDA (non-GAAP) | $257 million | $262 million |
| Operating cash flow | $44 million | $(44) million |
| Capital expenditures | $106 million | $133 million |
| Free cash flow (non-GAAP) | $(62) million | $(177) million |
- Gross profit was nearly flat despite lower sales, reflecting lower cost of goods sold. SG&A fell $31 million to $125 million.
- Net income rose despite lower pretax income, principally because of a $23 million income-tax benefit versus a $13 million tax expense a year earlier. The 2020 benefit included an $18 million one-time tax benefit related to recovery of previously disallowed depreciation tax basis.
- Other expense was $15 million, versus $40 million of other income in Q1 2019, driven mainly by a $30 million unfavorable year-over-year swing in foreign-exchange gains and losses and $23 million less EU refrigerant quota authorization income.
- At March 31, cash was $714 million, down from $943 million at year-end. Total debt was $4.069 billion, including $4.012 billion of long-term debt, for approximate net debt of $3.355 billion. Current assets were $2.591 billion and current liabilities $1.343 billion.
- Cash provided by operations included the effect of $125 million in receivables sold under the amended securitization arrangement. The company reported $44 million of operating cash flow less $106 million of capital spending.
- Segment Adjusted EBITDA: Fluoroproducts $140 million (down from $159 million; 23% margin, unchanged); Chemical Solutions $15 million (unchanged; margin 16% versus 11%); Titanium Technologies $138 million (up from $126 million; 23% margin, unchanged). Corporate and Other costs were $36 million, versus $38 million.
Material changes versus Q1 2019
- Sales declined 5%, with price down 5%, currency down 1%, and portfolio effects down 2%, partly offset by 3% higher volume.
- Fluoroproducts sales fell 13% to $600 million, reflecting lower refrigerant and polymer demand, pricing pressure, foreign exchange, and COVID-related shutdowns. Chemical Solutions sales fell 31% to $92 million, substantially reflecting the exit from the Methylamines and Methylamides business, alongside weaker demand and prices.
- Titanium Technologies sales rose 10% to $613 million on 19% volume growth and share gains, partly offset by an 8% price decline and currency effects.
- Adjusted EBITDA declined 2%. Earnings comparisons also reflect lower 2019 EU quota-sale income and lower 2019 legal and environmental charges, while 2020 included $11 million of restructuring and asset-related charges.
- Q1 operating cash flow improved by $88 million year over year; free cash flow remained negative. Cash used in financing was $155 million, including repayment of $110 million of securitization borrowings and $41 million of dividends. No share repurchases occurred in the quarter.
Outlook, risks, contingencies, and unusual items
- COVID-19 and outlook: Management reported minimal first-quarter operational disruption but early demand impacts and expected further weakness. It withdrew previously issued full-year 2020 financial guidance because the pandemic’s duration and effects were uncertain.
- Management targeted approximately $160 million of 2020 cost reductions, including discretionary-spending cuts, hiring restrictions, plant-cost actions, and temporary salary reductions; it also planned to reduce 2020 capital spending by $125 million. Further actions may be considered if conditions worsen.
- On April 8, 2020, after quarter-end, Chemours drew $300 million under its $800 million revolving credit facility as a precaution. Management expected available cash, operating cash flow, and financing arrangements to provide sufficient liquidity through at least May 2021 and anticipated covenant compliance through that period. This outlook depends on uncertain market and operating conditions.
- The company maintained a quarterly dividend of $0.25 per share, announced for Q2 2020, but said it did not plan near-term share repurchases.
- Environmental and litigation exposure: Environmental remediation liabilities were $396 million, including $196 million for Fayetteville Works. Management disclosed that, under adverse changes in circumstances, potential environmental liability could be up to approximately $540 million above accrued amounts. The company said additional PFAS/PFOA losses were reasonably possible but not estimable.
- At Fayetteville, the thermal oxidizer was reported to control PFAS air emissions at average efficiency exceeding 99.999% in initial testing. The company was awaiting the regulator’s response to its remediation plan; changes to required remediation could lead to additional, currently unestimable losses. The U.S. Attorney’s Office closed its criminal investigation without pursuing action, while other regulatory and civil matters remained.
- A jury awarded $40 million in compensatory and emotional-distress damages and $10 million in consortium damages in a PFOA testicular-cancer case; the jury declined punitive damages. Chemours said it would appeal and management considered the probability of loss remote. Other PFAS matters, including government inquiries and claims, remain unresolved and may have material effects.
- Other disclosed uncertainties include a securities class action concerning environmental disclosures, disputes with DuPont over indemnification, and a legal challenge that could affect construction of the Mining Solutions facility in Mexico. If the construction suspension is upheld, the company cited $26 million of contract termination fees; it reported the related assets and goodwill were recoverable at quarter-end.
- An interim goodwill impairment test prompted by COVID-19 resulted in no impairment. Management warned that sustained deterioration in markets, performance, or share price could lead to future impairment charges.
Important facts for investors to verify
- Subsequent-period sales, volumes, pricing, and margins—especially as pandemic effects extend beyond Q1.
- Cash generation and working-capital needs, including how much operating cash flow benefited from receivables sales and the effect of the $300 million revolver draw.
- Debt, covenant headroom, refinancing needs, and the company’s ability to sustain its dividend under weaker conditions.
- Future Fayetteville remediation requirements and the adequacy of the $196 million site accrual, as well as developments in other PFAS/PFOA and environmental proceedings.
- Delivery of the stated $160 million cost reductions and $125 million capital-spending reduction, and any resulting operational or growth trade-offs.
- Progress and potential costs associated with the Mexico facility litigation, DuPont indemnification dispute, securities litigation, and PFOA verdict appeal.