Chemours Company — Q2 2021 Form 10-Q
Business context and period. Chemours is a global performance-chemicals producer with four reportable segments: Titanium Technologies, Thermal & Specialized Solutions, Advanced Performance Materials, and Chemical Solutions. This unaudited report covers the quarter and six months ended June 30, 2021; comparisons are with the same 2020 periods unless noted. Dollars are in millions except per-share amounts.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,655 | $1,093 | $3,091 | $2,398 |
| Gross profit | $264 | $199 | $561 | $497 |
| Net income | $66 | $24 | $161 | $124 |
| Diluted EPS | $0.39 | $0.15 | $0.95 | $0.75 |
| Adjusted EBITDA | $366 | $166 | $634 | $423 |
| Adjusted diluted EPS | $1.20 | $0.18 | $1.90 | $0.90 |
| Operating cash flow | — | $295 | $155 | |
| Free cash flow | — | $168 | $(12) |
Q2 gross margin was approximately 16.0%, versus 18.2% a year earlier; first-half gross margin was approximately 18.1%, versus 20.7%. Higher revenue and segment earnings were offset in reported gross profit by increased costs, including Fayetteville environmental remediation, freight and logistics, and Winter Storm Uri-related downtime and under-absorption.
Q2 sales rose 51%, driven mainly by 46% volume growth, with 2% price and 4% currency contributions and a 1% portfolio drag. First-half sales increased 29%, led by 27% volume growth. Segment Adjusted EBITDA for Q2: Titanium Technologies $219 (prior $94); Thermal & Specialized Solutions $117 ($55); Advanced Performance Materials $74 ($42); Chemical Solutions $19 ($19). Chemical Solutions first-half sales and EBITDA declined 3% and 12%, respectively, partly reflecting the Aniline exit and higher costs.
Balance sheet, liquidity, and capital allocation
- At June 30, cash and equivalents were $1,139; current assets $3,047 and current liabilities $1,674. The resulting current ratio was approximately 1.8.
- Total debt principal was $4,020, compared with cash of $1,139, for net debt of $2,881. Net leverage was 2.6x, versus 3.7x at June 30, 2020. Long-term debt, net, was $3,964; no revolving-credit borrowings were outstanding, with an $800 revolving facility and $111 of letters of credit issued.
- Environmental remediation liabilities were $556, including $154 current, up from $390 at December 31, 2020. Accounts receivable rose to $802 from $511 and inventories to $1,046 from $939.
- First-half capital expenditures were $127. The company paid $82 in dividends, repurchased $13 of shares in cash, and made $27 in debt repayments. The quarterly dividend was $0.25 per share; $413 remained authorized for repurchases.
- Management said available cash, operating cash generation, receivables securitization, and financing arrangements should provide sufficient liquidity through at least July 2022. The $150 receivables securitization facility was fully utilized at quarter-end.
Material changes, outlook, and commentary
- Management described demand recovery across most businesses. Segment outlook for 2021 called for strong TiO2 volume and improved pricing; higher refrigerant demand, partly offset by illegal legacy-HFC imports into Europe; stronger polymers demand; and continued demand for performance chemicals and mining solutions. Full-year capital expenditures were expected to be approximately $350. The filing does not provide a clear numerical full-year sales, earnings, or EPS forecast.
- Fayetteville remediation estimates increased materially in Q2. Chemours accrued $49 for barrier-wall construction and $60 for future operation of the groundwater extraction and treatment system, alongside other site-related amounts. Fayetteville remediation liabilities reached $355, versus $194 at year-end. Total environmental liabilities could, in adverse circumstances, be up to approximately $680 above the amount accrued; this is an estimated exposure, not a booked liability.
- A January 2021 MOU with DuPont and Corteva provides for sharing certain pre-July 2015 PFAS liabilities: Chemours bears half, and DuPont and Corteva collectively bear half, subject to the agreement’s terms and limits. Qualified Spend for the first half was estimated at $43. Chemours is scheduled to fund $100 into escrow by September 30, 2021 and again in 2022, then $50 annually through 2028; the funds remain Chemours’ asset while in escrow, subject to withdrawal restrictions.
- On July 13, 2021, Chemours and the other parties agreed to a $50 settlement with Delaware; Chemours’ share is $25. On July 26, Chemours agreed to sell Mining Solutions for $520 cash, with closing expected in Q4 2021 subject to customary conditions and regulatory approvals. Management expected a pre-tax gain of approximately $80–$130. These are subsequent events.
- Other notable items: Winter Storm Uri disrupted operations and added first-half costs; COVID-19 was causing minimal operational disruption at the reporting date, but future demand and supply-chain effects remained uncertain. Mark E. Newman became CEO effective July 1, 2021, succeeding Mark P. Vergnano.
Risks, contingencies, and unusual items
- PFAS-related environmental remediation, litigation, regulatory actions, and permitting remain major uncertainties. Fayetteville treatment-system design, approvals, construction costs, operating needs, and potential penalties could change. The company reported an EPA objection to a Washington Works permit modification after quarter-end.
- Numerous PFAS matters, including claims involving water contamination and natural-resource damages, remain unresolved; some potential losses cannot currently be reasonably estimated. Chemours also disclosed a securities class action and related derivative suits, with outcomes and potential losses not estimable at this stage.
- The 10-Q identifies a potential additional environmental liability range of up to approximately $680 above accruals under adverse changes in circumstances. At Fayetteville, the upper estimate for the barrier wall and groundwater operation and maintenance was $303, of which $173 was accrued; the unaccrued upper-range amount is subject to uncertainty.
- Q2 Adjusted EBITDA includes substantial exclusions: the reconciliation identifies $195 of legal and environmental charges, including $169 related to Fayetteville and $25 for Delaware settlement costs. Adjusted measures are non-GAAP and should be considered alongside GAAP results.
- Other risks include the Mining Solutions facility’s unresolved permit process in Mexico (with $157 of construction assets at June 30), possible changes to PFAS regulation in Europe, and the October 2021 implementation of additional TiO2 labeling requirements in the EU.
Investor verification checklist
- Track Fayetteville design and permitting approvals, final remediation scope and cost, cash spending, and any additional accruals or penalties.
- Confirm Chemours’ PFAS escrow funding and cost-sharing recoveries, and monitor developments in PFAS litigation and regulatory matters.
- Verify completion terms, timing, proceeds, and gain recognition for the Mining Solutions sale.
- Assess whether volume recovery, pricing, input costs, freight, and operational disruptions support the stated segment outlook and margins.
- Reconcile reported earnings with Adjusted EBITDA and adjusted EPS, particularly the large environmental and legal adjustments.
- Monitor working-capital movements, use of the fully utilized receivables facility, debt reduction, and liquidity relative to management’s July 2022 sufficiency statement.