The Chemours Company: Q3 2020 Form 10-Q
Business context and reporting period. Chemours is a global performance-chemicals producer operating through Fluoroproducts, Chemical Solutions and Titanium Technologies. This unaudited filing covers the quarter and nine months ended September 30, 2020; amounts are in millions of dollars except per-share data.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,233 | $1,390 | $3,631 | $4,173 |
| Gross profit | $257 | $294 | $754 | $913 |
| Net income attributable to Chemours | $76 | $76 | $200 | $265 |
| Diluted EPS | $0.46 | $0.46 | $1.21 | $1.58 |
| Adjusted EBITDA | $210 | $248 | $633 | $793 |
| Operating cash flow | Not provided for quarter | $454 | $250 | |
| Capital expenditures | Not provided for quarter | $214 | $385 | |
| Free cash flow | Not provided for quarter | $240 | $(135) |
Q3 gross margin was approximately 20.8%, versus 21.2% a year earlier. For the nine-month period, gross margin was approximately 20.8%, versus 21.9%. Adjusted EBITDA margin was approximately 17.0% in Q3, versus 17.8%; nine-month adjusted EBITDA margin was approximately 17.4%, versus 19.0%.
Balance sheet and liquidity at September 30, 2020. Cash and cash equivalents were $956, total debt was $4,127 (including current maturities), and net debt was approximately $3,171. Current assets were $2,605 and current liabilities $1,308. The company had no revolving-credit borrowings outstanding; $98 of letters of credit reduced availability under its $800 revolving facility. Management expected available cash, operating cash flow and financing arrangements to provide sufficient liquidity through at least November 2021.
Material changes versus the prior comparable period
- Q3 sales fell 11%; nine-month sales fell 13%. Lower prices and volumes drove the declines, with the pandemic weighing on demand and the Chemical Solutions portfolio also reflecting the exit from Methylamines and Methylamides.
- Q3 net income was unchanged at $76, but adjusted EBITDA declined $38 to $210. Nine-month net income decreased $65 and adjusted EBITDA fell $160.
- Q3 segment adjusted EBITDA was $112 in Fluoroproducts (down from $122), $12 in Chemical Solutions (down from $23), and $129 in Titanium Technologies (down from $137). Titanium Technologies sales were nearly flat; Fluoroproducts and Chemical Solutions sales declined.
- Nine-month operating cash flow rose to $454 from $250, while capital spending fell to $214 from $385. Management attributed the cash-flow improvement partly to lower inventory purchases, cost actions, reduced tax payments and $125 of receivables sold under the amended securitization arrangement.
- Other expense was $5 in Q3 versus $25 of other income in Q3 2019, and $6 expense for nine months versus $81 income. Drivers included unfavorable foreign-exchange movements, lower EU F-gas quota sales, and a $9 non-cash site-sale gain in 2019.
Outlook, risks and unusual items
- Guidance and outlook: Chemours withdrew its February 2020 outlook and was not providing full-year 2020 financial guidance. Management described market recovery as uneven and expected weakened consumer demand to continue affecting results. It forecast approximately $160 of 2020 cost reductions and a $125 reduction in 2020 capital spending; further actions could be considered if conditions deteriorate.
- COVID-19 response: The company reported minimal operational disruption but material demand effects. It drew and repaid $300 under its revolver during 2020, deferred approximately $80 of tax payments, and ended temporary salary reductions in September. The deferred taxes were largely expected to be paid in Q1 2021.
- Environmental and legal exposure: Accrued environmental remediation liabilities totaled $398, including $199 for Fayetteville Works. The filing says adverse changes could produce environmental liability up to approximately $560 above accrued amounts. Numerous PFAS/PFOA matters remain pending, and potential additional losses are generally not estimable. A Fayetteville consent-order addendum approved in October set remediation measures and deadlines, including a barrier wall and groundwater extraction system targeted for completion by March 2023.
- Other contingencies: The company reported a PFOA-related jury award of $50 in a two-plaintiff case and said it would appeal; management considered loss on the verdict remote based on post-trial motions and appeal. A Mexican facility’s environmental permit was nullified in October 2020, and construction-related litigation remains pending; the company said its related assets were recoverable at quarter-end. A supplier contract dispute was not expected to materially affect results or ore supply.
- Tax and restructuring items: Nine-month results included an $18 tax benefit from an IRS-approved accounting method change and an $11 net tax benefit related to the 2019 federal return. The company recorded $37 of restructuring, asset-related and other charges in the first nine months, including costs related to exiting the Aniline business and asset impairments. It planned to stop Pascagoula Aniline production by year-end 2020 and expected about $9 of additional exit charges through 2021.
- Capital returns: The company paid $123 in dividends during the first nine months and declared a Q4 dividend of $0.25 per share. It did not repurchase shares in Q3 and said it did not plan near-term repurchases despite $428 remaining under its program.
Important facts for investors to verify
- How demand, pricing and volumes evolve across the three segments, particularly amid continuing COVID-19 uncertainty.
- Whether operating cash flow and liquidity support debt service, dividends and planned remediation costs; confirm the timing of deferred tax payments and financing needs.
- Progress, final design, costs and compliance deadlines for Fayetteville remediation, and developments in PFAS/PFOA litigation and environmental proceedings.
- Execution and cash costs of the Aniline exit and other restructuring actions, and whether projected savings and reduced capital spending are achieved.
- Debt maturity and refinancing risk, including the $921 principal maturity in 2023 and the term loans’ springing maturity provisions tied to the 2023 notes.