UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20182019
OR
o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-38176
Venator Materials PLC
(Exact name of registrant as specified in its charter)
|
| |
England and Wales | 98-1373159 |
(State or other jurisdiction | (I.R.S. Employer Identification No.) |
of incorporation or organization) | |
Titanium House, Hanzard Drive, Wynyard Park,
Stockton-On-Tees, TS22, 5FD, United Kingdom
+44 (0) (0) 1740608 001
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Ordinary Shares, $0.001 par value per share | VNTR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO oYes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES þ NO oYes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company," in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | | | | |
Large accelerated filero | ☑ | Accelerated filero | ☐ | Non-accelerated filerþ | ☐ | Smaller reporting companyo | ☐ | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þYes ☐ No ☑
As of October 19, 2018,July 30, 2019, the registrant had outstanding 106,406,761106,558,572 ordinary shares, $0.001 par value per share.
VENATOR MATERIALS PLC AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10‑Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
Venator Materials PLC and our other registered and common-law trade names, trademarks, and service marks appearing in this Quarterly Report on Form 10‑Q for the three months ended September 30, 2018 (“Quarterly Report”) are the property of Venator Materials PLC or our subsidiaries.
GENERAL
Except when the context otherwise requires or where otherwise indicated, (1) all references to “Venator,”"Venator," the “Company,” “we,” “us”"Company," "we," "us" and “our”"our" refer to Venator Materials PLC and its subsidiaries, or, as the context requires, the historical Pigments and Additives business of Huntsman, (2) all references to “Huntsman”"Huntsman" refer to Huntsman Corporation our controlling shareholder, and its subsidiaries, (3) all references to the “Titanium Dioxide”"Titanium Dioxide" segment or business refer to the titanium dioxide ("TiO2”") business of Venator, or, as the context requires, the historical Pigments and Additives segment of Huntsman and the related operations and assets, liabilities and obligations, (4) all references to the “Performance Additives”"Performance Additives" segment or business refer to the functional additives, color pigments, timber treatment and water treatment businesses of Venator, or, as the context requires, the Pigments and Additives segment of Huntsman and the related operations and assets, liabilities and obligations, (5) all references to “other businesses” refer to certain businesses that Huntsman retained in connection with the separation and that are reported as discontinued operations in our consolidated and combined financial statements, (6) all references to “Huntsman International” refer to Huntsman International LLC, a wholly-owned subsidiary of Huntsman and the entity through which Huntsman operates all of its businesses, (7) we refer to the internal reorganization prior to our initial public offering ("IPO"), the separation transactions initiated to separate the Venator business from Huntsman’s other businesses, including the entry into and effectiveness of the separation agreement and ancillary agreements, and the financing arrangements and debt, comprising the senior secured term loan facility (the "Term Loan Facility"), the asset-based revolving facility (the "ABL Facility" and, together with the Term Loan Facility, the "Senior Credit Facilities") and the 5.75% senior notes due 2025 (the "Senior Notes"), including the use of the net proceeds of the Senior Credit Facilities and the Senior Notes, which were used to repay intercompany debt we owed to Huntsman and to pay related fees and expenses, as the “separation” and (8) the “Rockwood acquisition” refers to Huntsman’s acquisition of the performance and additives and TiO2 businesses of Rockwood Holdings, Inc. (“Rockwood”) completed"separation," which occurred on October 1, 2014.August 8, 2017.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information set forth in this report contains “forward-looking statements”"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). All statements other than historical or current factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other projected financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, construction cost estimates, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions, divestitures, spin-offs or other distributions, strategic opportunities, securities offerings, share repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; legal proceedings, environmental, health and safety (“EHS”("EHS") matters, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic and capital markets conditions; the timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. In some cases, forward-looking statements can be identified by terminology such as “believes,”"believes," "expects,” “may,” “will,” “should,” “anticipates,” “estimates”" "may," "will," "should," "anticipates," "estimates" or “intends”"intends" or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.
Forward-looking statements are based on certain assumptions and expectations of future events which may not be accurate or realized. Forward-looking statements also involve risks and uncertainties, many of which are beyond our control. Important factors that may materially affect such forward-looking statements and projections include:
volatile global economic conditions;
| |
• | cyclical and volatile TiO2 products markets; product applications; |
highly competitive industries and the need to innovate and develop new products;
industry production capacity and operating rates;
our ability to successfully transfer production of certain specialty and differentiated products from our Pori, Finland manufacturing facility to other sites within our manufacturing network and the costs associated with such transfer and the closure of the facility;
economic conditions and regulatory changes following the likely exit of the United Kingdom (the "U.K.") from the European Union ("EU");
| |
• | increased manufacturing regulations for some of our products, including the outcome of the pending potential classification of TiO2 as a carcinogen in the European Union (“EU”)EU or any increased regulatory scrutiny; |
planned and unplanned production shutdowns, turnarounds, outages and other disruptions in production at our or our suppliers' manufacturing facilities;
our ability to transfer technologycover costs from production disruptions, including construction costs and manufacturing capacity fromlost revenue, with insurance proceeds;
fluctuations in currency exchange rates and tax rates;
impacts on the markets for our Pori, Finland manufacturing facility to other sites in our manufacturing network;
the costs associated with the Pori transfer and the closure of our Pori facility;
| |
• | impacts on TiO2 marketsproducts and the broader global economy from the imposition of tariffs by the U.S. and other countries;
|
fluctuations in currency exchange rates and tax rates;
price volatility or interruptions in supply of raw materials and energy;
our ability to realize financial and operational benefits from our business improvement plans and initiatives;
changes to laws, regulations or the interpretation thereof;
significant investments associated with effortsour ability to successfully grow and transform our business;business, including by way of acquisitions, divestments and restructuring initiatives;
differences in views with our joint venture participants;
high levels of indebtedness;
EHS laws and regulations;
our ability to obtain future capital on favorable terms;
seasonal sales patterns in our product markets;
our ability to successfully defend legal claims against us, including antitrust claims;or to pursue legal claims against third parties;
our ability to adequately protect our critical information technology systems;
economic conditions and regulatory changes following the likely exit of the United Kingdom (the “U.K.”) from the EU;our ability to comply with expanding data privacy regulations;
failure to maintain effective internal controls over financial reporting and disclosure;
our indemnification of Huntsman and other commitments and contingencies;
financial difficulties and related problems experienced by our customers, vendors, suppliers and other business partners;
failure to enforce our intellectual property rights;
our ability to effectively manage our labor force; and
conflicts, military actions, terrorist attacks, cyber-attacks and general instability; andinstability.
our ability to realize the expected benefits of our separation from Huntsman.
All forward-looking statements, including, without limitation, management’s examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that management’s expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements whether because of new information, future events or otherwise, except as required by securities and other applicable law.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks disclosedset forth in “Part"Part II. Item 1A. Risk Factors.”"
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
VENATOR MATERIALS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(Unaudited)
| | (In millions, except par value) | September 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
ASSETS | Current assets: | | | | | | |
Cash and cash equivalents(a) | $ | 251 |
| | $ | 238 |
| $ | 50 |
| | $ | 165 |
|
Accounts receivable (net of allowance for doubtful accounts of $5, each)(a) | 398 |
| | 380 |
| 423 |
| | 351 |
|
Accounts receivable from affiliates | — |
| | 12 |
| |
Inventories(a) | 513 |
| | 454 |
| 508 |
| | 538 |
|
Prepaid expenses | 28 |
| | 19 |
| 9 |
| | 20 |
|
Other current assets | 72 |
| | 66 |
| 66 |
| | 51 |
|
Total current assets | 1,262 |
| | 1,169 |
| 1,056 |
| | 1,125 |
|
Property, plant and equipment, net(a) | 1,022 |
| | 1,367 |
| 965 |
| | 994 |
|
Operating lease right-of-use assets | | 41 |
| | — |
|
Intangible assets, net(a) | 17 |
| | 20 |
| 23 |
| | 16 |
|
Investment in unconsolidated affiliates | 81 |
| | 86 |
| 87 |
| | 83 |
|
Deferred income taxes | 171 |
| | 167 |
| 189 |
| | 178 |
|
Other noncurrent assets | 39 |
| | 38 |
| 93 |
| | 89 |
|
Total assets | $ | 2,592 |
| | $ | 2,847 |
| $ | 2,454 |
| | $ | 2,485 |
|
LIABILITIES AND EQUITY | Current liabilities: | | | | | | |
Accounts payable(a) | $ | 375 |
| | $ | 385 |
| $ | 299 |
| | $ | 382 |
|
Accounts payable to affiliates | 14 |
| | 16 |
| 14 |
| | 18 |
|
Accrued liabilities(a) | 161 |
| | 244 |
| 116 |
| | 135 |
|
Current operating lease liability | | 9 |
| | — |
|
Current portion of debt(a) | 7 |
| | 14 |
| 32 |
| | 8 |
|
Total current liabilities | 557 |
| | 659 |
| 470 |
| | 543 |
|
Long-term debt | 741 |
| | 743 |
| 738 |
| | 740 |
|
Operating lease liability | | 34 |
| | — |
|
Other noncurrent liabilities | 281 |
| | 306 |
| 292 |
| | 313 |
|
Noncurrent payable to affiliates | 34 |
| | 34 |
| 34 |
| | 34 |
|
Total liabilities | 1,613 |
| | 1,742 |
| 1,568 |
| | 1,630 |
|
Commitments and contingencies (Notes 11 and 12) |
| |
| |
Commitments and contingencies (Notes 12 and 13) | |
| |
|
Equity | | | | | | |
Ordinary shares $0.001 par value, 200 shares authorized, 106 issued and outstanding, each | — |
| | — |
| |
Ordinary shares $0.001 par value, 200 shares authorized, each, 107 and 106 issued and outstanding, respectively | | — |
| | — |
|
Additional paid-in capital | 1,314 |
| | 1,311 |
| 1,319 |
| | 1,316 |
|
Retained (deficit) earnings | (27 | ) | | 67 |
| |
Retained deficit | | (78 | ) | | (96 | ) |
Accumulated other comprehensive loss | (317 | ) | | (283 | ) | (362 | ) | | (373 | ) |
Total Venator Materials PLC shareholders' equity | 970 |
| | 1,095 |
| 879 |
| | 847 |
|
Noncontrolling interest in subsidiaries | 9 |
| | 10 |
| 7 |
| | 8 |
|
Total equity | 979 |
| | 1,105 |
| 886 |
| | 855 |
|
Total liabilities and equity | $ | 2,592 |
| | $ | 2,847 |
| $ | 2,454 |
| | $ | 2,485 |
|
| |
(a) | At SeptemberJune 30, 20182019 and December 31, 2017,2018, the following amounts from consolidated variable interest entities are included in the respective balance sheet captions above: $3 and $5 each of cash and cash equivalents; $6$4 and $7$5 of accounts receivable, net; $1 and $2each of inventories; $5 each of property, plant and equipment, net; $15$13 and $17$14 of intangible assets, net; $1 each of accounts payable; $3 and $4 of accrued liabilities; and $2 each of current portion of debt, respectively, from consolidated variable interest entities are included in the respective balance sheet captions above.debt. See "Note 5."Note 6. Variable Interest Entities.Entities." |
See notes to unaudited condensed consolidated and combined financial statements.statements.
VENATOR MATERIALS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(Dollars in millions, except per share amounts) | 2018 | | 2017 | | 2018 | | 2017 |
Trade sales, services and fees, net | $ | 533 |
| | $ | 582 |
| | $ | 1,781 |
| | $ | 1,681 |
|
Cost of goods sold | 463 |
| | 448 |
| | 1,110 |
| | 1,356 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative (includes corporate allocations from Huntsman Corporation of nil, $9, nil and $62, respectively) | 52 |
| | 50 |
| | 162 |
| | 157 |
|
Restructuring, impairment, and plant closing and transition costs | 428 |
| | 16 |
| | 573 |
| | 49 |
|
Other expense (income), net | 5 |
| | (6 | ) | | (8 | ) | | 1 |
|
Total operating expenses | 485 |
| | 60 |
| | 727 |
| | 207 |
|
Operating (loss) income | (415 | ) | | 74 |
| | (56 | ) | | 118 |
|
Interest expense | (14 | ) | | (30 | ) | | (41 | ) | | (54 | ) |
Interest income | 4 |
| | 22 |
| | 11 |
| | 25 |
|
Other income | 4 |
| | 1 |
| | 8 |
| | 3 |
|
(Loss) income from continuing operations before income taxes | (421 | ) | | 67 |
| | (78 | ) | | 92 |
|
Income tax benefit (expense) | 55 |
| | (14 | ) | | (10 | ) | | (26 | ) |
(Loss) income from continuing operations | (366 | ) | | 53 |
| | (88 | ) | | 66 |
|
Income from discontinued operations, net of tax | — |
| | — |
| | — |
| | 8 |
|
Net (loss) income | (366 | ) | | 53 |
| | (88 | ) | | 74 |
|
Net income attributable to noncontrolling interests | (2 | ) | | (2 | ) | | (6 | ) | | (8 | ) |
Net (loss) income attributable to Venator | $ | (368 | ) | | $ | 51 |
| | $ | (94 | ) | | $ | 66 |
|
| | | | | | | |
Basic (loss) earnings per share: | | | | | | | |
(Loss) income from continuing operations attributable to Venator Materials PLC ordinary shareholders | $ | (3.46 | ) | | $ | 0.48 |
| | $ | (0.88 | ) | | $ | 0.55 |
|
Income from discontinued operations attributable to Venator Materials PLC ordinary shareholders | — |
| | — |
| | — |
| | 0.08 |
|
Net (loss) income attributable to Venator Materials PLC ordinary shareholders | $ | (3.46 | ) | | $ | 0.48 |
| | $ | (0.88 | ) | | $ | 0.63 |
|
| | | | | | | |
Diluted (loss) earnings per share: | | | | | | | |
(Loss) income from continuing operations attributable to Venator Materials PLC ordinary shareholders | $ | (3.46 | ) | | $ | 0.48 |
| | $ | (0.88 | ) | | $ | 0.54 |
|
Income from discontinued operations attributable to Venator Materials PLC ordinary shareholders | — |
| | — |
| | — |
| | 0.08 |
|
Net (loss) income attributable to Venator Materials PLC ordinary shareholders | $ | (3.46 | ) | | $ | 0.48 |
| | $ | (0.88 | ) | | $ | 0.62 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
(Dollars in millions, except per share amounts) | 2019 | | 2018 | | 2019 | | 2018 |
Trade sales, services and fees, net | $ | 578 |
| | $ | 626 |
| | $ | 1,140 |
| | $ | 1,248 |
|
Cost of goods sold | 511 |
| | 193 |
| | 997 |
| | 647 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative | 45 |
| | 56 |
| | 93 |
| | 110 |
|
Restructuring, impairment, and plant closing and transition costs | — |
| | 136 |
| | 12 |
| | 145 |
|
Other operating (income) expense, net | — |
| | (10 | ) | | 7 |
| | (13 | ) |
Total operating expenses | 45 |
| | 182 |
| | 112 |
| | 242 |
|
Operating income | 22 |
| | 251 |
| | 31 |
| | 359 |
|
Interest expense | (13 | ) | | (14 | ) | | (27 | ) | | (27 | ) |
Interest income | 3 |
| | 4 |
| | 6 |
| | 7 |
|
Other income | 1 |
| | 2 |
| | 2 |
| | 4 |
|
Income before income taxes | 13 |
| | 243 |
| | 12 |
| | 343 |
|
Income tax benefit (expense) | 9 |
| | (45 | ) | | 8 |
| | (65 | ) |
Net income | 22 |
| | 198 |
| | 20 |
| | 278 |
|
Net income attributable to noncontrolling interests | (1 | ) | | (2 | ) | | (2 | ) | | (4 | ) |
Net income attributable to Venator | $ | 21 |
| | $ | 196 |
| | $ | 18 |
| | $ | 274 |
|
| | | | | | | |
Per Share Data: | | | | | | | |
Income attributable to Venator Materials PLC ordinary shareholders, basic | $ | 0.20 |
| | $ | 1.84 |
| | $ | 0.17 |
| | $ | 2.58 |
|
Income attributable to Venator Materials PLC ordinary shareholders, diluted | $ | 0.20 |
| | $ | 1.84 |
| | $ | 0.17 |
| | $ | 2.57 |
|
See notes to unaudited condensed consolidated and combined financial statements.statements.
VENATOR MATERIALS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
(Dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Net (loss) income | $ | (366 | ) | | $ | 53 |
| | $ | (88 | ) | | $ | 74 |
| |
Other comprehensive income (loss), net of tax: | | | | |
|
| |
|
| |
Net income | | $ | 22 |
| | $ | 198 |
| | $ | 20 |
| | $ | 278 |
|
Other comprehensive (loss) income, net of tax: | | | | | |
|
| |
|
|
Foreign currency translation adjustment | 9 |
| | (4 | ) | | (49 | ) | | 75 |
| (13 | ) | | (115 | ) | | (2 | ) | | (58 | ) |
Pension and other postretirement benefits adjustments | 3 |
| | 8 |
| | 10 |
| | 36 |
| 4 |
| | 4 |
| | 8 |
| | 7 |
|
Hedging instruments | — |
| | — |
| | 5 |
| | — |
| 1 |
| | 12 |
| | 5 |
| | 5 |
|
Total other comprehensive income (loss), net of tax | 12 |
| | 4 |
| | (34 | ) | | 111 |
| |
Comprehensive (loss) income | (354 | ) | | 57 |
| | (122 | ) | | 185 |
| |
Total other comprehensive (loss) income, net of tax | | (8 | ) | | (99 | ) | | 11 |
| | (46 | ) |
Comprehensive income | | 14 |
| | 99 |
| | 31 |
| | 232 |
|
Comprehensive income attributable to noncontrolling interest | (2 | ) | | (2 | ) | | (6 | ) | | (8 | ) | (1 | ) | | (2 | ) | | (2 | ) | | (4 | ) |
Comprehensive (loss) income attributable to Venator | $ | (356 | ) | | $ | 55 |
| | $ | (128 | ) | | $ | 177 |
| |
Comprehensive income attributable to Venator | | $ | 13 |
| | $ | 97 |
| | $ | 29 |
| | $ | 228 |
|
See notes to unaudited condensed consolidated and combined financial statements.
VENATOR MATERIALS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Venator Materials PLC Equity | | | | |
(Dollars in millions) | Parent's Net Investment and Advances | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings (Deficit) | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest in Subsidiaries | | Total |
Balance, January 1, 2018 | $ | — |
| | $ | — |
| | $ | 1,311 |
| | $ | 67 |
| | $ | (283 | ) | | $ | 10 |
| | $ | 1,105 |
|
Net (loss) income | — |
| | — |
| | — |
| | (94 | ) | | — |
| | 6 |
| | (88 | ) |
Net changes in other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (34 | ) | | — |
| | (34 | ) |
Dividends paid to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
Activity related to stock plans | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
Balance, September 30, 2018 | $ | — |
| | $ | — |
| | $ | 1,314 |
| | $ | (27 | ) | | $ | (317 | ) | | $ | 9 |
| | $ | 979 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Venator Materials PLC Equity | | | | |
| Ordinary Shares | | Additional Paid-in Capital | | Retained Deficit | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest in Subsidiaries | | Total |
(In millions) | Shares | Amount | | | | | |
Balance, January 1, 2019 | 106 |
| $ | — |
| | $ | 1,316 |
| | $ | (96 | ) | | $ | (373 | ) | | $ | 8 |
| | $ | 855 |
|
Net (loss) income | — |
| — |
| | — |
| | (3 | ) | | — |
| | 1 |
| | (2 | ) |
Other comprehensive income, net of tax | — |
| — |
| | — |
| | — |
| | 19 |
| | — |
| | 19 |
|
Dividends paid to noncontrolling interests | — |
| — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Activity related to stock plans | 1 |
| — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Balance, March 31, 2019 | 107 |
| $ | — |
| | $ | 1,317 |
| | $ | (99 | ) | | $ | (354 | ) | | $ | 8 |
| | $ | 872 |
|
Net income | — |
| — |
| | — |
| | 21 |
| | — |
| | 1 |
| | 22 |
|
Other comprehensive loss, net of tax | — |
| — |
| | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) |
Dividends paid to noncontrolling interests | — |
| — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
Activity related to stock plans | — |
| — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Balance, June 30, 2019 | 107 |
| $ | — |
| | $ | 1,319 |
| | $ | (78 | ) | | $ | (362 | ) | | $ | 7 |
| | $ | 886 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Venator Materials PLC Equity | | | | |
(Dollars in millions) | Parent's Net Investment and Advances | | Ordinary Shares | | Additional Paid-in Capital | | Retained Deficit | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest in Subsidiaries | | Total |
Balance, January 1, 2017 | $ | 588 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (423 | ) | | $ | 12 |
| | $ | 177 |
|
Net income (loss) | 67 |
| | — |
| | — |
| | (1 | ) | | — |
| | 8 |
| | 74 |
|
Net changes in other comprehensive income | — |
| | — |
| | — |
| | — |
| | 111 |
| | — |
| | 111 |
|
Dividends paid to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (9 | ) | | (9 | ) |
Net changes in parent’s net investment and advances | 663 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 663 |
|
Conversion of parent's net investment and advances to paid-in capital | (1,318 | ) | | — |
| | 1,318 |
| | — |
| | — |
| | — |
| | — |
|
Balance, September 30, 2017 | $ | — |
| | $ | — |
| | $ | 1,318 |
| | $ | (1 | ) | | $ | (312 | ) | | $ | 11 |
| | $ | 1,016 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Venator Materials PLC Equity | | | | |
| Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest in Subsidiaries | | Total |
(In millions) | Shares | Amount | | | | | |
Balance, January 1, 2018 | 106 |
| $ | — |
| | $ | 1,311 |
| | $ | 67 |
| | $ | (283 | ) | | $ | 10 |
| | $ | 1,105 |
|
Net income | — |
| — |
| | — |
| | 78 |
| | — |
| | 2 |
| | 80 |
|
Other comprehensive income, net of tax | — |
| — |
| | — |
| | — |
| | 53 |
| | — |
| | 53 |
|
Dividends paid to noncontrolling interests | — |
| — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
Activity related to stock plans | — |
| — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Balance, March 31, 2018 | 106 |
| $ | — |
| | $ | 1,312 |
| | $ | 145 |
| | $ | (230 | ) | | $ | 10 |
| | $ | 1,237 |
|
Net income | — |
| — |
| | — |
| | 196 |
| | — |
| | 2 |
| | 198 |
|
Other comprehensive loss, net of tax | — |
| — |
| | — |
| | — |
| | (99 | ) | | — |
| | (99 | ) |
Dividends paid to noncontrolling interests | — |
| — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
Activity related to stock plans | — |
| — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Balance, June 30, 2018 | 106 |
| $ | — |
| | $ | 1,313 |
| | $ | 341 |
| | $ | (329 | ) | | $ | 9 |
| | $ | 1,334 |
|
See notes to unaudited condensed consolidated and combined financial statements.
VENATOR MATERIALS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
| | | Nine months ended September 30, | Six months ended June 30, |
(Dollars in millions) | 2018 | | 2017 | 2019 | | 2018 |
Operating Activities: | | | | | | |
Net (loss) income | $ | (88 | ) | | $ | 74 |
| |
Income from discontinued operations, net of tax | — |
| | (8 | ) | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Net income | | $ | 20 |
| | $ | 278 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | |
Depreciation and amortization | 102 |
| | 95 |
| 55 |
| | 69 |
|
Deferred income taxes | (6 | ) | | (2 | ) | (12 | ) | | 28 |
|
Noncash restructuring and impairment charges | 539 |
| | 7 |
| (2 | ) | | 133 |
|
Noncash interest expense | 1 |
| | 18 |
| |
Noncash (gain) loss on foreign currency transactions | (4 | ) | | 1 |
| |
Other, net | 6 |
| | 2 |
| 8 |
| | 2 |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (14 | ) | | (54 | ) | (77 | ) | | (56 | ) |
Inventories | (67 | ) | | 22 |
| 30 |
| | (46 | ) |
Prepaid expenses | (9 | ) | | (1 | ) | 10 |
| | 9 |
|
Other current assets | (17 | ) | | (8 | ) | (2 | ) | | (14 | ) |
Other noncurrent assets | (1 | ) | | 6 |
| — |
| | (1 | ) |
Accounts payable | (18 | ) | | 8 |
| (44 | ) | | (17 | ) |
Accrued liabilities | (94 | ) | | 40 |
| (18 | ) | | (59 | ) |
Other noncurrent liabilities | (24 | ) | | (20 | ) | (18 | ) | | (21 | ) |
Net cash provided by operating activities from continuing operations | 306 |
| | 180 |
| |
Net cash provided by operating activities from discontinued operations | — |
| | 1 |
| |
Net cash provided by operating activities | 306 |
| | 181 |
| |
Net cash (used in) provided by operating activities | | (50 | ) | | 305 |
|
Investing Activities: | | | | | | |
Capital expenditures | (272 | ) | | (97 | ) | (83 | ) | | (167 | ) |
Insurance proceeds for recovery of property damage | — |
| | 50 |
| |
Net advances to affiliates | — |
| | 121 |
| |
Repayment of government grant | — |
| | (5 | ) | |
Cash received from unconsolidated affiliates | 25 |
| | 37 |
| 20 |
| | 14 |
|
Investment in unconsolidated affiliates | (19 | ) | | (33 | ) | (24 | ) | | (9 | ) |
Net cash (used in) provided by investing activities from continuing operations | (266 | ) | | 73 |
| |
Net cash used in investing activities from discontinued operations | — |
| | (1 | ) | |
Net cash (used in) provided by investing activities | (266 | ) | | 72 |
| |
Cash received from notes receivable | | 6 |
| | — |
|
Other, net | | (1 | ) | | — |
|
Net cash used in investing activities | | (82 | ) | | (162 | ) |
Financing Activities: | | | | | | |
Net borrowings under ABL Facility | | 24 |
| | — |
|
Repayment of third-party debt | (10 | ) | | (5 | ) | (2 | ) | | (9 | ) |
Net repayments on affiliate accounts payable | — |
| | (86 | ) | |
Final settlement of affiliate balances at separation | — |
| | (732 | ) | |
Dividends paid to noncontrolling interests | (7 | ) | | (9 | ) | (3 | ) | | (5 | ) |
Proceeds from issuance of long-term debt | — |
| | 750 |
| |
Debt issuance costs paid | — |
| | (18 | ) | |
Other financing activities | — |
| | 1 |
| |
Net cash used in financing activities | (17 | ) | | (99 | ) | |
Other, net | | (2 | ) | | — |
|
Net cash provided by (used in) financing activities | | 17 |
| | (14 | ) |
Effect of exchange rate changes on cash | (10 | ) | | 2 |
| — |
| | (13 | ) |
Net change in cash and cash equivalents, including discontinued operations | 13 |
| | 156 |
| |
Cash and cash equivalents at beginning of period, including discontinued operations | 238 |
| | 30 |
| |
Cash and cash equivalents at end of period, including discontinued operations | $ | 251 |
| | $ | 186 |
| |
Net change in cash and cash equivalents | | (115 | ) | | 116 |
|
Cash and cash equivalents at beginning of period | | 165 |
| | 238 |
|
Cash and cash equivalents at end of period | | $ | 50 |
| | $ | 354 |
|
| | | | |
Supplemental cash flow information: | | | | | | |
Cash paid for interest | $ | 41 |
| | $ | 2 |
| $ | 23 |
| | $ | 25 |
|
Cash paid for income taxes | 28 |
| | 11 |
| 3 |
| | 20 |
|
Supplemental disclosure of noncash activities: | | | | | | |
Capital expenditures included in accounts payable as of September 30, 2018 and 2017, respectively | $ | 50 |
| | $ | 19 |
| |
Received settlements of notes receivable from affiliates | — |
| | 57 |
| |
Settlement of long-term notes payable/notes receivable with affiliates | — |
| | 792 |
| |
Capital expenditures included in accounts payable as of June 30, 2019 and 2018, respectively | | $ | 26 |
| | $ | 49 |
|
See notes to unaudited condensed consolidated and combined financial statements.
VENATOR MATERIALS PLC AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 1. General, Description of Business, Recent Developments and Basis of Presentation
General
For convenience in this report, the terms “our,” “us,” “we” or “Venator” may be used to refer to Venator Materials PLC and, unless the context otherwise requires, its subsidiaries.
Description of Business
Venator became an independent publicly traded company following our IPO and separation from Huntsman Corporation in August 2017. Venator operates in two segments: Titanium Dioxide and Performance Additives. The Titanium Dioxide segment primarily manufactures and sells primarily TiO2, and operates eight TiO2 manufacturing facilities across the globe, predominantly in Europe.globe. The Performance Additives segment manufactures and sells functional additives, color pigments, timber treatment and water treatment chemicals. This segment operates 17 color pigments, functional additives, water treatment and timber treatment16 manufacturing and processing facilities in Europe, North America, Asia and Australia.globally.
In conjunction with our IPO completed on August 8, 2017, we entered into a separation agreement to effect the separation of the Titanium Dioxide and Performance Additives businesses from Huntsman. This arrangement is referred to herein as the "separation."
Recent Developments
Potential Acquisition of Tronox European Paper Laminates Business
On July 16, 2018, we announced that we reached an agreement with Tronox Limited (“Tronox”) to purchase the European paper laminates business (the “8120 Grade”) from Tronox upon the closing of their proposed merger with The National Titanium Dioxide Company Limited ("Cristal"). In connection with the acquisition, Tronox would supply the 8120 Grade to us under a Transitional Supply Agreement until the transfer of the manufacturing of the 8120 Grade to our Greatham, U.K., facility has been completed.
Additionally, we announced that we entered into an agreement with Tronox providing, among other things, that the parties would engage in exclusive negotiations until September 29, 2018, regarding the purchase by us of the Ashtabula, Ohio, TiO2 manufacturing complex currently owned by Cristal. Following the expiration of the exclusivity period, we announced our intention to continue to negotiate with Tronox on a nonexclusive basis, but have not reached agreement regarding the potential divestiture.
Pori Fire
On January 30, 2017, our TiO2 manufacturing facility in Pori, Finland, experienced fire damage. The loss was covered by insurance for property damage as well as business interruption losses subject to retained deductibles of $15 million and 60 days, respectively.
On April 13, 2018 we received a final payment from our insurers of €191 million, or $236 million, bringing our total insurance receipts to €468 million, or $551 million, which was the limit of our insurance proceeds. We elected to receive the insurance proceeds in Euro in order to match the currency of the related business interruption losses and capital expenditures resulting from the Pori fire. For the nine months ended September 30, 2018, we received €243 million, or $298 million, of insurance proceeds, while €225 million, or $253 million, was received during 2017.
During the nine months ended September 30, 2018, we recorded $371 million of income related to insurance recoveries in cost of goods sold while $187 million was recognized in 2017. The difference between payments received from our insurers of $551 million and the insurance recovery income of $558 million is related to the foreign exchange movements of the U.S. Dollar against the Euro during the periods.
$68 million of deferred income for insurance recoveries was reported in accrued liabilities as of December 31, 2017.
We recorded a loss of $7 million and $18 million for cleanup and other non-capital reconstruction costs in cost of goods sold for the nine months ended September 30, 2018 and 2017, respectively. We recorded a loss of $31 million for the write-off of fixed assets and lost inventory in cost of goods sold in our unaudited condensed consolidated and combinedstatements of operations for the nine months ended September 30, 2017.
On September 12, 2018, following our review of the Pori facility and options within our manufacturing network, and as a result of unanticipated cost escalation and extended timeline associated with reconstruction, we announced that we intend to close our Pori, Finland, TiO2 manufacturing facility and transfer the specialty and differentiated product grades to other sites. We intend to continue to operate the Pori facility at reduced production rates through the transition period, which is expected to last through 2021. As part of the plan, we recorded restructuring expense of approximately $415 million for the three and nine months ended September 30, 2018, of which $367 million related to acceleration depreciation, $39 million related to employee benefits, and $9 million related to the write off of other assets. This restructuring expense consists of $30 million of cash and $385 million of noncash charges.
Basis of Presentation
Venator’sOur unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP" or "U.S. GAAP") and in management’s opinion reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results of operations, comprehensive income, financial position and cash flows for the periods presented. Results for interim periods are not necessarily indicative of those to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated and combined financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP” or “U.S. GAAP”). Priorand notes to the separation, Venator’s operations were included in Huntsman’s financial results in different legal forms, including but not limited to: (1) wholly-owned subsidiaries for which the Titanium Dioxide and Performance Additives businesses were the sole businesses; (2) legal entities which are comprised of other businesses and include the Titanium Dioxide and Performance Additives businesses; and (3) variable interest entities in which the Titanium Dioxide and Performance Additives and other businesses are the primary beneficiaries. The unaudited condensed consolidated and combined financial statements include all revenues, costs, assets, liabilities and cash flows directly attributable to Venator, as well as allocations of direct and indirect corporate expenses, which are based upon an allocation method thatincluded in the opinion of management is reasonable. Such corporate cost allocation transactions between Venator and Huntsman have been considered to be effectively settled for cash in the unaudited condensed consolidated and combined financial statements at the time the transaction is recorded and the net effect of the settlement of these intercompany transactions is reflected in the unaudited condensed consolidated and combined statements of cash flows as a financing activity. Because the historical unaudited condensed consolidated and combined financial informationAnnual Report on Form 10‑K for the periods indicated reflect the combination of these legal entities under common control, the historical unaudited condensed consolidated and combined financial information includes the results of operations of other Huntsman businesses that are not a part ofyear ended December 31, 2018 for our operations after the separation. We report the results of those other businesses as discontinued operations. Please see “Note 15. Discontinued Operations.”Company.
For purposes of these unaudited condensed consolidated and combined financial statements, all significant transactions with Huntsman International have been included in group equity. All intercompany transactions within the consolidated and combined business have been eliminated.
Prior to the separation, Huntsman's executive, information technology, EHS and certain other corporate departments performed certain administrative and other services for Venator. Additionally, Huntsman performed certain site services for Venator. Expenses incurred by Huntsman and allocated to Venator were determined based on specific services provided or are allocated based on Venator’s total revenues, total assets, and total employees in proportion to those of Huntsman. Management believes that such expense allocations are reasonable. Corporate allocations include allocated selling, general, and administrative expenses of nil and $9 million for the three months ended September 30, 2018 and 2017, respectively, and nil and $62 million for the nine months ended September 30, 2018 and 2017, respectively.
In the notes to unaudited condensed consolidated and combined financial statements, all dollar and share amounts, except per share amounts, in tabulations are in millions unless otherwise indicated.
Recent Developments
9
On April 26, 2019, we acquired intangible assets related to the European paper laminates product line from Tronox Limited ("Tronox") for a purchase price of €8 million payable as follows: €1 million upon completion of the acquisition and the remaining €7 million in two installments over two years. A note payable for $8 million is included within accrued liabilities and other noncurrent liabilities on our unaudited condensed consolidated balance sheets at June 30, 2019.
Note 2. Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted During the Period
In May 2014, the FinancialEffective January 1, 2019, we adopted Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”("ASU") No. 2014-09, Revenue from Contracts with Customers2016-02, Leases (Topic 606). This ASU along with subsequently issued amendments, outline a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers and supersedes most previously issued revenue recognition guidance. Under this guidance, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received. These ASUs are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We adopted these ASUs effective January 1, 2018 and we have elected842) using the modified retrospective approach aswhich applies the transition method. As a resultprovisions of the adoption of these amendments, we revised our accounting policy for revenue recognition as detailed in “Note 3. Revenue,” and, except forstandard at the changes noted in "Note 3. Revenue" no material changes have been made to our significant policies disclosed in "Note 1. Description of Business, Recent Developments, Basis of Presentation and Summary of Significant Accounting Policies" of our Annual Report on Form 10-K, filed on February 23, 2018, foreffective date without adjusting the year ended December 31, 2017 (the "2017 Form 10-K").comparative periods presented. The adoption of these ASUs did not have a significant impact on our unaudited condensed consolidated and combined financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and include specific guidance to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in this ASU should be applied using a retrospective transition method to each period presented. We adopted the amendments of this ASU effective January 1, 2018, and the initial adoption of the amendment in this ASU did not impact our unaudited condensed consolidated and combined financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendmentsresult in this ASU require that an employer report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of income from operations. The amendments in this ASU also allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset). The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit cost in assets. We adopted the amendments of this ASU effective January 1, 2018, which impacted the presentation of our financial statements. Our historical presentation of service cost components was consistent with the amendments in this ASU. The other components of net periodic pension and postretirement benefit costs are presented within other nonoperating income, whereas we historically presented these within cost of goods sold and selling, general and administrative expenses. As a result of the retrospective adoption of this ASU, for the three and nine months ending September 30, 2017, cost of goods sold increased by $2 million and $5 million, respectively, selling, general and administrative expenses decreased by $1 million and $2 million, respectively, and other income increased by $1 million and $3 million, respectively, within our unaudited condensed consolidated and combined statements of operations.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships as well as the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity’s intended hedging strategies. The amendments in this ASU also include certain targeted improvements to ease
the application of current guidance related to the assessment of hedge effectiveness. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted in any interim period after the issuance of this ASU. Transition requirements and elections should be applied to hedging relationships existing on the date of adoption. For cash flow and net investment hedges, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness, and the amended presentation and disclosure guidance is required only prospectively. We adopted the amendments of this ASU effective January 1, 2018, and the initial adoption of the amendment in this ASU did not have an impact on our unaudited condensed consolidated and combined financial statements.
Accounting Pronouncements Pending Adoption in Future Periods
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU will increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU will require lessees to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application of the amendments in this ASU is permitted for all entities. We plan to adopt ASU 2016-02 using the alternative transition method set forth in ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, issued in July 2018, which allows for the recognition of a cumulative-effectcumulative effect adjustment to the opening balance of retained earningsearnings. This ASU requires substantially all leases to be recognized on the balance sheet as right-of-use assets ("ROU assets") and lease obligations. Additional qualitative and quantitative disclosures are also required. Adoption of the new standard resulted in the periodrecording of adoption. We are currently evaluating the impactan operating lease ROU asset of the$47 million and a lease liability of $49 million. The adoption of the amendments in this ASU did not have a material impact on our financialcondensed consolidated statements of operations or cash flows. Our accounting for finance leases remained substantially unchanged.
We elected the following optional practical expedients allowed under the ASU: (i) we applied the package of practical expedients permitting entities not to reassess under the new standard our prior conclusions about lease identification, classification or initial direct costs for any leases existing prior to the effective date; (ii) we elected to account for lease and believe, based on our preliminary assessment, thatassociated non-lease components as a single lease component for all asset classes with the exception of buildings and (iii) we will record significant additional right-of-usedo not recognize ROU assets and related lease obligations.obligations with lease terms of 12 months or less from the commencement date.
In February 2018, the FASBFinancial Accounting Standards Board ("FASB") issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income (loss) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). This standard is effective for interim and annual reporting periods beginning after December 15, 2018,2018. The adoption of this ASU did not have a material impact on our unaudited condensed consolidated statement of comprehensive income.
Accounting Pronouncements Pending Adoption in Future Periods
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The new standard is effective for fiscal years beginning after December 15, 2019, with early adoption is permitted.permitted for fiscal years beginning after December 15, 2018. We have not completed our assessment butand we do not anticipate this will have a material impact on our unaudited consolidated and combined statement of comprehensive income.financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20). The amendments in this ASU add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. This ASU eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The ASU also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This standard is effective for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. We are evaluatingSince the effect of adoptingASU is related to disclosure requirements only, this new accounting guidance, but do not expect adoption will not have a material impact on our consolidated financial position.statements.
Note 3. RevenueLeases
We accounthave leases for revenues from contractswarehouses, office space, land, office equipment, production equipment and automobiles. ROU assets and lease obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. Operating lease ROU assets and liabilities are included in operating lease right-of-use assets, current operating lease liabilities, and operating lease liabilities on our condensed consolidated balance sheet. Finance leases ROU assets are included in property, plant and equipment, net, while finance lease liabilities are included in other non-current liabilities. As the implicit rate is not readily determinable in most of our lease arrangements, we use our incremental borrowing rate based on information available at the commencement date in order to determine the net present value of lease payments. We give consideration to our recent debt issuances as well as publicly available data for instruments with customers under ASC 606, Revenue from Contracts with Customers,similar characteristics when calculating our incremental borrowing rates. We have lease agreements that contain lease and non-lease components.
We determine if an arrangement is a lease or contains a lease at inception. Certain leases contain renewal options that can extend the term of the lease for one year or more. Our leases have remaining lease terms of up to 93 years, some of which became effective January 1, 2018. Asinclude options to extend the lease term for up to 20 years. Options are recognized as part of our ROU assets and lease liabilities when it is reasonably certain that we will extend that option. Sublease arrangements and leases with residual value guarantees, sale leaseback terms or material restrictive covenants, are immaterial. Lease payments include fixed and variable lease components. Variable components are derived from usage or market-based indices, such as the consumer price index. As of June 30, 2019, we do not have leases initiated but not yet commenced which are expected to commence during the remainder of 2019.
The components of lease expense were as follows:
|
| | | | | | | |
Lease Cost | Three months ended June 30, 2019 | | Six months ended June 30, 2019 |
Operating lease cost | $ | 3 |
| | $ | 7 |
|
Finance lease cost: | | | |
Amortization of right-of-use assets | 1 |
| | 1 |
|
Interest on lease liabilities | — |
| | — |
|
Short-term lease cost | — |
| | 1 |
|
Supplemental balance sheet information related to leases was as follows:
|
| | | |
Leases | As of June 30, 2019 |
Assets | |
Operating Lease Right-of-Use Assets | $ | 41 |
|
| |
Finance Lease Right-of-Use Assets, at cost | $ | 13 |
|
Accumulated Depreciation | (4 | ) |
Finance Lease Right-of-Use Assets, net | $ | 9 |
|
| |
Liabilities | |
Operating Lease Obligation | |
Current | $ | 9 |
|
Non-Current | 34 |
|
Total Operating Lease Liabilities | $ | 43 |
|
| |
Finance Lease Obligation | |
Current | $ | 1 |
|
Non-Current | 8 |
|
Total Finance Lease Liabilities | $ | 9 |
|
Cash paid for amounts included in the present value of operating lease liabilities were as follows:
|
| | | | | | | |
Cash Flow Information | Three months ended June 30, 2019 | | Six months ended June 30, 2019 |
Operating cash flows from operating leases | $ | 3 |
| | $ | 7 |
|
Operating cash flows from finance leases | 1 |
| | 1 |
|
Financing cash flows from finance leases | — |
| | — |
|
|
| | |
Lease Term and Discount Rate | As of June 30, 2019 |
Weighted average remaining lease term (years) | |
Operating leases | 12.5 |
|
Finance leases | 7.3 |
|
Weighted average discount rate | |
Operating leases | 7.2 | % |
Financing leases | 5.2 | % |
Maturities of lease liabilities were as follows:
|
| | | | | | | | | | | |
June 30, 2019 | Operating Leases | | Finance Leases | | Total |
2019 (remaining) | $ | 6 |
| | $ | 1 |
| | $ | 7 |
|
2020 | 10 |
| | 2 |
| | 12 |
|
2021 | 8 |
| | 1 |
| | 9 |
|
2022 | 6 |
| | 1 |
| | 7 |
|
2023 | 4 |
| | 1 |
| | 5 |
|
After 2023 | 38 |
| | 4 |
| | 42 |
|
Total lease payments | $ | 72 |
| | $ | 10 |
| | $ | 82 |
|
Less: Interest | 29 |
| | 1 |
| | 30 |
|
Present value of lease liabilities | $ | 43 |
| | $ | 9 |
| | $ | 52 |
|
Disclosures related to periods prior to adoption of ASC 606, we applied the new standard on a modified retrospective basis analyzing open contractsNew Lease Standard
The total expense recorded under operating lease agreements in the consolidated and combined statements of operations was $16 million for the year ended December 31, 2018. Future minimum lease payments under noncancelable operating leases as of January 1, 2018. However, no cumulative effect adjustment to retained earnings was necessaryDecember 31, 2018 were as no revenue recognition differences were identified when comparing the revenue recognition criteria under ASC 606 to previous requirements.follows:
|
| | | | | | | |
December 31, | Operating Leases | | Capital Leases |
2019 | $ | 13 |
| | $ | 1 |
|
2020 | 11 |
| | 2 |
|
2021 | 9 |
| | 1 |
|
2022 | 6 |
| | 1 |
|
2023 | 4 |
| | 1 |
|
Thereafter | 40 |
| | 7 |
|
Total | $ | 83 |
| | $ | 13 |
|
Less: Amounts representing interest | | | 3 |
|
Present value of minimum lease payments | | | $ | 10 |
|
Less: Current portion of capital leases | | | 1 |
|
Long-term portion of capital leases | | | $ | 9 |
|
Note 4. Revenue
We generate substantially all of our revenues through sales of inventory in the open market and via long-term supply agreements. At contract inception, we assess the goods promised in our contracts and identify a performance obligation for each promise to transfer to the customer a good that is distinct. In substantially all cases, a contract has a single performance obligation to deliver a promised good to the customer. Revenue is recognized when the performance obligations under the terms of our contracts are satisfied. Generally, this occurs at the time of shipping, at which point the control of the goods transfers to the customer. Further, in determining whether control has transferred, we consider if
there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferred goods. Sales, value-added,value added, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. We have elected to account for all shipping and handling activities as fulfillment costs. We recognize these costs for shipping and handling when control over products have transferred to the customer as an expense in cost of goods sold. We have also elected to expense commissions when incurred as the amortization period of the commission asset that we would have otherwise recognized is less than one year.
The following table disaggregates our revenue by major geographical region for the three and ninesix months ended SeptemberJune 30, 2019 and 2018:
| | | For the Three Months Ended September 30, 2018 | | For the Nine Months Ended September 30, 2018 | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| Titanium Dioxide | | Performance Additives | | Total | | Titanium Dioxide | | Performance Additives | | Total | | Titanium Dioxide | | Performance Additives | | Total | | Titanium Dioxide | | Performance Additives | | Total |
Europe | | | $ | 215 |
| | $ | 49 |
| | $ | 264 |
| | $ | 428 |
| | $ | 104 |
| | $ | 532 |
|
North America | $ | 73 |
| | $ | 68 |
| | $ | 141 |
| | $ | 225 |
| | $ | 223 |
| | $ | 448 |
| | 88 |
| | 65 |
| | 153 |
| | 165 |
| | 122 |
| | 287 |
|
Europe | 192 |
| | 48 |
| | 240 |
| | 661 |
| | 165 |
| | 826 |
| |
Asia | 85 |
| | 21 |
| | 106 |
| | 278 |
| | 78 |
| | 356 |
| | 92 |
| | 22 |
| | 114 |
| | 184 |
| | 43 |
| | 227 |
|
Other | 39 |
| | 7 |
| | 46 |
| | 136 |
| | 15 |
| | 151 |
| | 44 |
| | 3 |
| | 47 |
| | 87 |
| | 7 |
| | 94 |
|
Total Revenues | $ | 389 |
| | $ | 144 |
| | $ | 533 |
| | $ | 1,300 |
| | $ | 481 |
| | $ | 1,781 |
| | $ | 439 |
| | $ | 139 |
| | $ | 578 |
| | $ | 864 |
| | $ | 276 |
| | $ | 1,140 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| | Titanium Dioxide | | Performance Additives | | Total | | Titanium Dioxide | | Performance Additives | | Total |
Europe | | $ | 229 |
| | $ | 59 |
| | $ | 288 |
| | $ | 470 |
| | $ | 117 |
| | $ | 587 |
|
North America | | 80 |
| | 78 |
| | 158 |
| | 151 |
| | 155 |
| | 306 |
|
Asia | | 96 |
| | 30 |
| | 126 |
| | 192 |
| | 57 |
| | 249 |
|
Other | | 50 |
| | 4 |
| | 54 |
| | 98 |
| | 8 |
| | 106 |
|
Total Revenues | | $ | 455 |
| | $ | 171 |
| | $ | 626 |
| | $ | 911 |
| | $ | 337 |
| | $ | 1,248 |
|
The following table disaggregates our revenue by major product line for the three and ninesix months ended SeptemberJune 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| | Titanium Dioxide | | Performance Additives | | Total | | Titanium Dioxide | | Performance Additives | | Total |
TiO2 | | $ | 439 |
| | $ | — |
| | $ | 439 |
| | $ | 864 |
| | $ | — |
| | $ | 864 |
|
Color Pigments | | — |
| | 70 |
| | 70 |
| | — |
| | 140 |
| | 140 |
|
Functional Additives | | — |
| | 33 |
| | 33 |
| | — |
| | 65 |
| | 65 |
|
Timber Treatment | | — |
| | 31 |
| | 31 |
| | — |
| | 60 |
| | 60 |
|
Water Treatment | | — |
| | 5 |
| | 5 |
| | — |
| | 11 |
| | 11 |
|
Total Revenues | | $ | 439 |
| | $ | 139 |
| | $ | 578 |
| | $ | 864 |
| | $ | 276 |
| | $ | 1,140 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2018 | | For the Nine Months Ended September 30, 2018 |
| Titanium Dioxide | | Performance Additives | | Total | | Titanium Dioxide | | Performance Additives | | Total |
TiO2 | $ | 389 |
| | $ | — |
| | $ | 389 |
| | $ | 1,300 |
| | $ | — |
| | $ | 1,300 |
|
Color Pigments | — |
| | 71 |
| | 71 |
| | — |
| | 237 |
| | 237 |
|
Functional Additives | — |
| | 34 |
| | 34 |
| | — |
| | 114 |
| | 114 |
|
Timber Treatment | — |
| | 34 |
| | 34 |
| | — |
| | 112 |
| | 112 |
|
Water Treatment | — |
| | 5 |
| | 5 |
| | — |
| | 18 |
| | 18 |
|
Total Revenues | $ | 389 |
| | $ | 144 |
| | $ | 533 |
| | $ | 1,300 |
| | $ | 481 |
| | $ | 1,781 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| | Titanium Dioxide | | Performance Additives | | Total | | Titanium Dioxide | | Performance Additives | | Total |
TiO2 | | $ | 455 |
| | $ | — |
| | $ | 455 |
| | $ | 911 |
| | $ | — |
| | $ | 911 |
|
Color Pigments | | — |
| | 84 |
| | 84 |
| | — |
| | 166 |
| | 166 |
|
Functional Additives | | — |
| | 39 |
| | 39 |
| | — |
| | 80 |
| | 80 |
|
Timber Treatment | | — |
| | 41 |
| | 41 |
| | — |
| | 78 |
| | 78 |
|
Water Treatment | | — |
| | 7 |
| | 7 |
| | — |
| | 13 |
| | 13 |
|
Total Revenues | | $ | 455 |
| | $ | 171 |
| | $ | 626 |
| | $ | 911 |
| | $ | 337 |
| | $ | 1,248 |
|
The amount of consideration we receive and revenue we recognize is based upon the terms stated in the sales contract, which may contain variable consideration such as discounts or rebates. We also give our customers a limited right to return products that have been damaged, do not satisfy their specifications, or for other specific reasons. Payment terms on product sales to our customers typically range from 30 days to 90 days. Although certain exceptions exist where
standard payment terms are exceeded, these instances are infrequent and do not exceed one year. Discounts are allowed for some customers for early payment or if a certain volume iscommitments are met. As our standard payment terms are less than one year, we have elected to not assess whether a contract has a significant financing component. In order to estimate the applicable variable consideration at the time of revenue recognition, we use historical and current trend information to estimate the amount of discounts, rebates, or returns to which customers are likely to be entitled. Historically, actual discount or rebate adjustments relative to those estimated and accrued at the point of which revenue is recognized have not materially differed.
Note 4.5. Inventories
Inventories are stated at the lower of cost or market, with cost determined using first-in, first-out and average cost methods for different components of inventory. Inventories at SeptemberJune 30, 20182019 and December 31, 20172018 consisted of the following:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Raw materials and supplies | $ | 163 |
| | $ | 165 |
|
Work in process | 62 |
| | 56 |
|
Finished goods | 283 |
| | 317 |
|
Total | $ | 508 |
| | $ | 538 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Raw materials and supplies | $ | 166 |
| | $ | 149 |
|
Work in process | 50 |
| | 46 |
|
Finished goods | 297 |
| | 259 |
|
Total | $ | 513 |
| | $ | 454 |
|
Note 5.6. Variable Interest Entities
We evaluate our investments and transactions to identify variable interest entities for which we are the primary beneficiary. We hold a variable interest in the following joint ventures for which we are the primary beneficiary:
Pacific Iron Products Sdn Bhd is our 50%-owned joint venture with Coogee Chemicals that manufactures products for Venator. It was determined that the activities that most significantly impact its economic performance are raw material supply, manufacturing and sales. In this joint venture we supply all the raw materials through a fixed cost supply contract, operate the manufacturing facility and market the products of the joint venture to customers. Through a fixed price raw materials supply contract with the joint venture we are exposed to the risk related to the fluctuation of raw material pricing. As a result, we concluded that we are the primary beneficiary.
Viance, LLC ("Viance") is our 50%-owned joint venture with Dow Chemical Company.DuPont de Nemours, Inc. Viance markets timber treatment products for Venator. We have determined that the activity that most significantly impacts Viance’s economic performance is manufacturing. The joint venture sources all of its products through a contract manufacturing arrangement at our Harrisburg, North Carolina facility and we bear a disproportionate amount of working capital risk of loss due to the supply arrangement whereby we control manufacturing on Viance’s behalf. As a result, we concluded that we are the primary beneficiary.
Creditors of these entities have no recourse to Venator’s general credit. As the primary beneficiary of these variable interest entities at SeptemberJune 30, 2018,2019, the joint ventures’ assets, liabilities and results of operations are included in Venator’s unaudited condensed consolidated and combined financial statements.
The revenues, income from continuing operations before income taxes and net cash provided by operating activities for our variable interest entities for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 are as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 25 |
| | $ | 35 |
| | $ | 47 |
| | $ | 66 |
|
Income before income taxes | 3 |
| | 5 |
| | 5 |
| | 9 |
|
Net cash provided by operating activities | 4 |
| | 3 |
| | 6 |
| | 12 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues | $ | 28 |
| | $ | 31 |
| | $ | 94 |
| | $ | 97 |
|
Income from continuing operations before income taxes | 3 |
| | 4 |
| | 11 |
| | 16 |
|
Net cash provided by operating activities | 2 |
| | 6 |
| | 14 |
| | 20 |
|
Note 6.7. Restructuring, Impairment, and Plant Closing and Transition Costs
Venator has initiated various restructuring programs in an effort to reduce operating costs and maximize operating efficiency. As of September 30, 2018 and December 31, 2017, accrued restructuring and plant closing and transition costs by type of cost and initiative consisted of the following:
|
| | | | | | | | | | | |
| Workforce reductions(1) | | Other restructuring costs | | Total(2) |
Accrued liabilities as of December 31, 2017 | $ | 34 |
| | $ | — |
| | $ | 34 |
|
2018 charges for 2017 and prior initiatives | 4 |
| | 13 |
| | 17 |
|
2018 charges for 2018 initiatives | 17 |
| | — |
| | 17 |
|
2018 payments for 2017 and prior initiatives | (14 | ) | | (13 | ) | | (27 | ) |
2018 payments for 2018 initiatives | (1 | ) | | — |
| | (1 | ) |
Foreign currency effect on liability balance | (1 | ) | | — |
| | (1 | ) |
Accrued liabilities as of September 30, 2018 | $ | 39 |
| | $ | — |
| | $ | 39 |
|
| |
(1)
| The total workforce reduction reserves of $39 million relate to the termination of 619 positions, of which zero positions had been terminated as of September 30, 2018. |
| |
(2)
| Accrued liabilities remaining at September 30, 2018 and December 31, 2017 by year of initiatives were as follows: |
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
2016 initiatives and prior | $ | 7 |
| | $ | 9 |
|
2017 initiatives | 17 |
| | 25 |
|
2018 initiatives | 15 |
| | — |
|
Total | $ | 39 |
| | $ | 34 |
|
Details with respect to our reserves for restructuring and plant closing and transition costs are provided below by segment and initiative:
|
| | | | | | | | | | | |
| Titanium Dioxide | | Performance Additives | | Total |
Accrued liabilities as of December 31, 2017 | $ | 30 |
| | $ | 4 |
| | $ | 34 |
|
2018 charges for 2017 and prior initiatives | 16 |
| | 1 |
| | 17 |
|
2018 charges for 2018 initiatives | 15 |
| | 2 |
| | 17 |
|
2018 payments for 2017 and prior initiatives | (23 | ) | | (4 | ) | | (27 | ) |
2018 payments for 2018 initiatives | — |
| | (1 | ) | | (1 | ) |
Foreign currency effect on liability balance | (1 | ) | | — |
| | (1 | ) |
Accrued liabilities as of September 30, 2018 | $ | 37 |
| | $ | 2 |
| | $ | 39 |
|
Current portion of restructuring reserves | 23 |
| | 2 |
| | 25 |
|
Long-term portion of restructuring reserve | 14 |
| | — |
| | 14 |
|
Details with respect to cash and noncash restructuring charges and impairment of assets for the three and nine months ended September 30, 2018 and 2017 by initiative are provided below:
|
| | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2018 | | September 30, 2018 |
Cash charges | $ | 22 |
| | $ | 34 |
|
Pension related charges | 24 |
| | 24 |
|
Accelerated depreciation | 373 |
| | 505 |
|
Other noncash charges | 9 |
| | 10 |
|
Total 2018 Restructuring, Impairment and Plant Closing and Transition Costs | $ | 428 |
| | $ | 573 |
|
|
| | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2017 | | September 30, 2017 |
Cash charges | $ | 16 |
| | $ | 42 |
|
Impairment of assets | — |
| | 3 |
|
Other noncash charges | — |
| | 4 |
|
Total 2017 Restructuring, Impairment and Plant Closing and Transition Costs | $ | 16 |
| | $ | 49 |
|
Restructuring Activities
Company-wide Restructuring
In December 2014,January 2019, we implemented a comprehensive restructuring programplan to reduce costs and improve the global competitivenessefficiency of our Titanium Dioxide and Performance Additives segments.certain company-wide functions. As part of the program, we are reducing our workforce by approximately 900 positions. In connection with this restructuring program, we recorded restructuring expense of nil$1 million and $4 million for the three and ninesix months ended SeptemberJune 30, 2018, each.2019, all of which related to workforce reductions. We do not expect that additional costs related to incur any additional charges as part of this program and the remaining cash paymentsplan will be made through the end of 2019.immaterial.
Titanium Dioxide Segment
In July 2016, we announced plansimplemented a plan to close our Umbogintwini, South Africa TiO2Titanium Dioxide manufacturing facility. As part of the program, we recorded restructuring expense of approximately$1 million, each, for the three and six months ended June 30, 2019 and $1 million and $3$2 million for the three and ninesix months ended SeptemberJune 30, 2018, respectively.respectively, all of which related to plant shutdown costs. We expect further charges as part of this program to incur additional charges of approximately $11 million through the end of 2022.be immaterial.
In March 2017, we announcedimplemented a plan to close the white end finishing and packaging operation of our TiO2Titanium Dioxide manufacturing facility at our Calais, France site. The announced plan follows the 2015 closure of the black end manufacturing operations and would result in the closure of the entire facility. In connection with this closure, we recorded restructuring expense of $3 million and $12 million for the three and nine months ended September 30, 2018, respectively. We expect to incur additional charges of approximately $45 million through the end of 2022.
In September 2017, we announced a plan to close our St. Louis and Easton manufacturing facilities. As part of the program, we recorded restructuring expense of approximately $6$1 million and $13$2 million related to accelerated depreciation for the three and ninesix months ended June 30, 2019, respectively, and $4 million and $9 million for the three and six months ended June 30, 2018, respectively, all of which related to plant shutdown costs. We expect to incur additional plant shutdown costs of approximately $5 million through 2020.
In September 2018, we implemented a plan to close our Pori, Finland Titanium Dioxide manufacturing facility. As part of the program, we recorded restructuring gain of $3 million for the three months ended June 30, 2019, of which a gain of $14 million related to early settlement of contractual obligation was partially offset by $8 million of accelerated depreciation, $2 million related to employee benefits, and $1 million related to plant shutdown costs. This restructuring gain consists of a noncash gain of $6 million partially offset by $3 million of cash expense. We recorded restructuring expense of $3 million for the six months ended June 30, 2019, of which a gain of $14 million related to early settlement of contractual obligation was offset by $11 million of accelerated depreciation, $4 million related to employee benefits, and $2 million related to plant shutdown costs. This restructuring expense consists of $6 million of cash expense and a noncash gain, net, of $3 million. We expect to incur additional charges of approximately $112 million through the end of 2024, of which $24 million relates to accelerated depreciation, $78 million relates to plant shut down costs, $8 million relates to other employee costs and $2 million related to the write off of other assets. Future charges consist of $26 million of noncash costs and $86 million of cash costs.
Performance Additives Segment
In September 2017, we implemented a plan to close our Performance Additives manufacturing facilities in St. Louis, Missouri and Easton, Pennsylvania. As part of the program, we recorded restructuring expense of nil for the three and six months ended June 30, 2019. We recorded restructuring expense of $5 million and $8 million for the three and six months ended June 30, 2018, respectively. We do not expect to incur any additional charges as part of this program.
In August 2018, we implemented a plan to close our Performance Additives manufacturing site in Beltsville, Maryland. As part of the program, we recorded restructuring expense of $1 million and $2 million for the three and six months ended June 30, 2019, all of which related to accelerated depreciation through the enddepreciation. We do not expect to incur any additional charges as part of 2018.this program.
In May 2018, we implemented a plan to close portions of our Color PigmentsPerformance Additives manufacturing facility in Augusta, Georgia. As part of the program, we recorded restructuring expense of nil for the three and six months ended June 30, 2019. We recorded restructuring expense of $127 million for the three and ninesix months ended SeptemberJune 30, 2018, respectively. We expect to incur additional charges of approximately $2 million through the end of 2019.
In August 2018, we announced a plan to close our Color Pigments manufacturing sites in Beltsville, Maryland. As part of the program, we expect to incur charges of approximately $3 million through 2019, of which $2 million relates to accelerated depreciation.
In September 2018, we announced a plan to close our Pori, Finland TiO2 manufacturing facility. As part of the program, we recorded restructuring expense of approximately $415 million for the three and nine months ended September 30, 2018, each, of which $367$125 million related to accelerated depreciation, $39$1 million related to employee benefits,other noncash charges and $9$1 million related to the write off of other assets. This restructuring expense consists of $30 million of cash and $385 million of noncash charges. We do not expect to incur any additional charges as part of approximately $220 million throughthis program.
Accrued Restructuring and Plant Closing and Transition Costs
As of June 30, 2019 and December 31, 2018, accrued restructuring and plant closing and transition costs by type of cost and year of initiative consisted of the endfollowing:
|
| | | | | | | | | | | |
| Workforce reductions(1) | | Other restructuring costs | | Total(2) |
Accrued liabilities as of December 31, 2018 | $ | 32 |
| | $ | — |
| | $ | 32 |
|
2019 charges for 2018 and prior initiatives | 5 |
| | 5 |
| | 10 |
|
2019 charges for 2019 initiatives | 4 |
| | — |
| | 4 |
|
2019 payments for 2018 and prior initiatives | (19 | ) | | (5 | ) | | (24 | ) |
2019 payments for 2019 initiatives | (3 | ) | | — |
| | (3 | ) |
Accrued liabilities as of June 30, 2019 | $ | 19 |
| | $ | — |
| | $ | 19 |
|
Current portion of restructuring reserves | 8 |
| | $ | — |
| | 8 |
|
Long-term portion of restructuring reserve | 11 |
| | — |
| | 11 |
|
| |
(1) | The total workforce reduction reserves of $19 million relate to the termination of 258 positions, of which 12 positions had been terminated but not yet paid as of June 30, 2019. |
| |
(2) | Accrued liabilities remaining at June 30, 2019 and December 31, 2018 by year of initiatives were as follows: |
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
2017 initiatives and prior | $ | 9 |
| | $ | 18 |
|
2018 initiatives | 9 |
| | 14 |
|
2019 initiatives | 1 |
| | — |
|
Total | $ | 19 |
| | $ | 32 |
|
Our restructuring accruals are all related to our Titanium Dioxide segment.
Restructuring, Impairment and Plant Closing and Transition Costs
Details with respect to major cost type of 2024,restructuring charges and impairment of which $111 million relates to accelerated depreciation, $105 million relates to plant shut down costs,assets for the three and $4 million relates to other employee costs. Future charges consistsix months ended June 30, 2019 and 2018 by initiative are provided below:
|
| | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2019 | | June 30, 2019 |
Cash charges | $ | 6 |
| | $ | 14 |
|
Early settlement of contractual obligation | (14 | ) | | (14 | ) |
Accelerated depreciation | 8 |
| | 12 |
|
Total 2019 Restructuring, Impairment and Plant Closing and Transition Costs | $ | — |
| | $ | 12 |
|
|
| | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2018 | | June 30, 2018 |
Cash charges | $ | 6 |
| | $ | 12 |
|
Accelerated depreciation | 129 |
| | 132 |
|
Other noncash charges | 1 |
| | 1 |
|
Total 2018 Restructuring, Impairment and Plant Closing and Transition Costs | $ | 136 |
| | $ | 145 |
|
Note 7.8. Debt
Outstanding debt, net of debt issuance costs of $12$14 million and $13 million as of June 30, 2019 and December 31, 2018, respectively, consisted of the following:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Senior Notes | $ | 371 |
| | $ | 370 |
|
Term Loan Facility | 363 |
| | 365 |
|
Other | 36 |
| | 13 |
|
Total debt | 770 |
| | 748 |
|
Less: short-term debt and current portion of long-term debt | 32 |
| | 8 |
|
Long-term debt | $ | 738 |
| | $ | 740 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Senior Notes | $ | 370 |
| | $ | 370 |
|
Term Loan Facility | 365 |
| | 367 |
|
Other | 13 |
| | 20 |
|
Total debt | 748 |
| | 757 |
|
Less: short-term debt and current portion of long-term debt | 7 |
| | 14 |
|
Total long-term debt | $ | 741 |
| | $ | 743 |
|
The estimated fair value of the Senior Notes was $341$345 million and $396$300 million as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. The estimated fair value of the Term Loan Facility was $372$365 million and $378$355 million as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. The estimated fair values of the Senior Notes and the Term Loan Facility are based upon quoted market prices (Level 1).
We have $24 million in aggregate principal outstanding under our ABL Facility. The fair value of our borrowings under the ABL Facility approximates the carrying amount due to the short term nature of the borrowing.
The weighted average interest rate on our outstanding balances under the Senior Notes and Term Loan Facility as of SeptemberJune 30, 2018 and December 31, 20172019 was approximately 5% each..
Senior Notes
On July 14, 2017, our subsidiaries Venator Finance S.à.r.l. and Venator Materials LLC (the “Issuers”"Issuers") entered into an indenture in connection with the issuance of the Senior Notes. The Senior Notes are general unsecured senior obligations of the Issuers and are guaranteed on a general unsecured senior basis by Venator and certain of Venator’s subsidiaries. The indenture related to the Senior Notes imposes certain limitations on the ability of Venator and certain of its subsidiaries to, among other things, incur additional indebtedness secured by any principal properties, incur indebtedness of non-guarantor subsidiaries, enter into sale and leaseback transactions with respect to any principal properties and consolidate or merge with or into any other person or lease, sell or transfer all or substantially all of its properties and assets. The Senior Notes bear interest of 5.75% per year payable semi-annually and will mature on July 15, 2025. The Issuers may redeem the Senior Notes in whole or in part at any time prior to July 15, 2020 at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, and an early redemption premium, calculated on an agreed percentage of the outstanding principal amount, providing compensation on a portion of foregone future interest payables. The Senior Notes will be redeemable in whole or in part at any time on or after July 15, 2020 at the redemption prices set forth in the indenture, plus accrued and unpaid interest, if any, up to, but not including, the redemption date. In addition, at any time prior to July 15, 2020, the Issuers may redeem up to 40% of the aggregate principal amount of the Senior Notes with an amount not greater than the net cash proceeds of certain equity offerings or contributions to Venator’s equity at 105.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date. Upon the occurrence of certain change of control events (other than the separation), holders of the Venator Notes will have the right to require that the Issuers purchase all or a portion of such holder’s Senior Notes in cash at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
Senior Credit Facilities
On August 8, 2017, we entered into the Senior Credit Facilities that provide for first lien senior secured financing of up to $675 million, consisting of:
the Term Loan Facility in an aggregate principal amount of $375 million, with a maturity of seven years; and
the ABL Facility in an aggregate principal amount of up to $300 million, with a maturity of five years.
The Term Loan Facility will amortizeamortizes in aggregate annual amounts equal to 1% of the original principal amount of the Term Loan Facility payable quarterly commencing inand is paid quarterly.
On June 20, 2019 the fourth quarterABL facility was increased to an aggregate principal amount of 2017.up to $350 million, with no change to the maturity dates.
Availability to borrow under the $300$350 million of commitments under the ABL Facility is subject to a borrowing base calculation comprised of accounts receivable and inventory in the U.S., Canada, the U.K., Germany and accounts receivable in France and Spain, that fluctuate from time to time and may be further impacted by the lenders’ discretionary ability to impose reserves and availability blocks that might otherwise incrementally increase borrowing availability. As a result, the aggregate amount available for extensions of credit under the ABL Facility at any time is the lesser of $300$350 million and the borrowing base calculated according to the formula described above minus the aggregate amount of extensions of credit outstanding under the ABL Facility at such time.
Borrowings under the Term Loan Facility bear interest at a rate equal to, at Venator’s option, either (a) a London Interbank Offering Rate (“LIBOR”("LIBOR") based rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs subject to an interest rate floor to be agreed or (b) a base rate determined by reference to the highest of (i) the rate of interest per annum determined from time to time by JPMorgan Chase Bank, N.A. as its prime rate in effect at its principal office in New York City, (ii) the federal funds rate plus 0.50% per annum and (iii) the one-month adjusted LIBOR plus 1.00% per annum, in each case plus an applicable margin to be agreed upon. Borrowings under the ABL Facility bear interest at a variable rate equal to an applicable margin based on the applicable quarterly average excess availability under the ABL Facility plus either a LIBOR or a base rate. The applicable margin percentage is calculated and established once every three calendar months
and varies from 150 to 200 basis points for LIBOR loans depending on the quarterly average excess availability under the ABL Facility for the immediately preceding three-month period.
Guarantees
All obligations under the Senior Credit Facilities are guaranteed by Venator and substantially all of our subsidiaries (the “Guarantors”"Guarantors") and are secured by substantially all of the assets of Venator and the Guarantors, in each case subject to certain exceptions. Lien priority as between the Term Loan Facility and the ABL Facility with respect to the collateral will be governed by an intercreditor agreement.
Cash Pooling Program
Prior to the separation, Venator addressed cash flow needs by participating in a cash pooling program with Huntsman. Cash pooling transactions were recorded as either amounts receivable from affiliates or amounts payable to affiliates and are presented as “Net advances to affiliates” and “Net borrowings on affiliate accounts payable” in the investing and financing sections, respectively, in the unaudited condensed consolidated and combined statements of cash flows. Interest income was earned if an affiliate was a net lender to the cash pool and paid if an affiliate was a net borrower from the cash pool based on a variable interest rate determined historically by Huntsman. Venator exited the cash pooling program prior to the separation and all receivables and payables generated through the cash pooling program were settled in connection with the separation.
Notes Receivable and Payable of Venator to Huntsman
Substantially all Huntsman receivables or payables were eliminated in connection with the separation, other than a payable to Huntsman for a liability pursuant to the Tax Matters Agreement dated August 7, 2017, by and among Venator Materials PLC and Huntsman (the “Tax Matters Agreement”) entered into at the time of the separation which
has been presented as “Noncurrent payable to affiliates” on our unaudited condensed consolidated and combined balance sheet. See “Note 9. Income Taxes” for further discussion.
A/R Programs
Certain of our entities participated in the accounts receivable securitization programs ("A/R Programs") sponsored by Huntsman International. Under the A/R Programs, such entities sold certain of their trade receivables to Huntsman International. Huntsman International granted an undivided interest in these receivables to a special purpose entity, which served as security for the issuance of debt of Huntsman International. On April 21, 2017, Huntsman International amended its accounts receivable securitization facilities, which, among other things, removed existing receivables sold into the program by Venator and at which time we discontinued our participation in the A/R Programs.
The entities’ allocated losses on the A/R Programs for the three and nine months ended September 30, 2017 was nil and $1 million, respectively. The allocation of losses on sale of accounts receivable is based upon the pro-rata portion of total receivables sold into the securitization program as well as other program and interest expenses associated with the A/R Programs.
Note 8.9. Derivative Instruments and Hedging Activities
To reduce cash flow volatility from foreign currency fluctuations, we enter into forward and swap contracts to hedge portions of cash flows of certain foreign currency transactions. We do not use derivative financial instruments for trading or speculative purposes.
Cross-Currency Swaps
In December 2017, we entered into three cross-currency swap agreements to convert a portion of our intercompany fixed-rate, U.S. dollar denominated notes, including the semi-annual interest payments and the payment of remaining principal at maturity, to a fixed-rate, Euro denominated debt. The economic effect of the swap agreement was to eliminate the uncertainty of the cash flows in U.S. Dollars associated with the notes by fixing the principle amount at €169 million with a fixed annual rate of 3.43%. These hedges have been designated as cash flow hedges and the critical terms of the cross-currency swap agreements correspond to the underlying hedged item. These swaps mature in July 2022, which is our best estimate of the repayment date of these intercompany loans. The amount and timing of the semi-annual principle payments under the cross-currency swap also correspond with the terms of the intercompany loans. Gains and losses from these hedges offset the changes in the value of interest and principal payments as a result of changes in foreign exchange rates.
We formally assessed the hedging relationship at the inception of the hedge in order to determine whether the derivatives that are used in the hedging transactions are highly effective in offsetting cash flows of the hedged item and we will continue to assess the relationship on an ongoing basis. We use the hypothetical derivative method in conjunction with regression analysis to measure effectiveness of our cross-currency swap agreement. The portion of the hedge that is ineffective will be recorded in earnings in other income. We did not record any ineffectiveness during 2018.
The effective portion of the changes in the fair value of the swaps are deferred in other comprehensive lossincome and subsequently recognized in other income net in the unaudited condensed consolidated and combined statementsstatement of operations when the hedged item impacts earnings. Cash flows related to our cross-currency swap that relate to our periodic interest settlement will be classified as operating activities and the cash flows that relates to principal balances will be designated as financing activities. The fair value of these hedges was nil$11 million and $5$6 millionat SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, and was recorded as other long-term liabilitiesnoncurrent assets on our unaudited condensed consolidated and combined balance sheets. We estimate the fair values of our cross-currency swaps by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, credit default swap rates and cross-currency basis swap spreads. The cross-currency swap has been classified as Level 2 because the fair value is based upon observable market-based inputs or unobservable inputs that are corroborated by market data.
For the ninesix months ended SeptemberJune 30, 2019 and 2018, the change in accumulated other comprehensive loss associated with these cash flow hedging activities was a gain of approximately $5 million.million, each. As of SeptemberJune 30, 2018,2019, accumulated
other comprehensive loss of nil is expected to be reclassified to earnings during the next twelve months. The actual amount that will be reclassified to earnings over the next twelve months may vary from this amount due to changing market conditions.
We would be exposed to credit losses in the event of nonperformance by a counterparty to our derivative financial instruments. We continually monitor our position and the credit rating of our counterparties, and we do not anticipate nonperformance by the counterparties.
Forward Currency Contracts Not Designated as Hedges
We transact business in various foreign currencies and we enter into currency forward contracts to offset the riskrisks associated with the risks of foreign currency exposure. At SeptemberJune 30, 20182019 and December 31, 2017,2018, we had approximately $95$79 million and $109$89 million, respectively, notional amount (in U.S. dollar equivalents) outstanding in foreign currency contracts with a term of approximately one month. The contracts are valued using observable market rates (Level 2).
Note 9.10. Income Taxes
Venator uses the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. We evaluate deferred tax assets to determine whether it is more likely than not that they will be realized. Valuation allowances are reviewed on a tax jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets for each jurisdiction. These conclusions require significant judgment. In evaluating the objective evidence that historical results provide, we consider the cyclicality of Venator and cumulative income or losses during the applicable period. Cumulative losses incurred over the period limits our ability to consider other subjective evidence such as our projections for the future. Changes in expected future income in applicable tax jurisdictions could affect the realization of deferred tax assets in those jurisdictions.
During the nine months ended September 30, 2018, based upon our intention to close our Pori, Finland TiO2 facility, we recognized a full valuation allowance on net deferred tax assets in Finland. Given anticipated project wind-down and closure costs expected to be incurred over the coming years and Finland’s ten-year carryover of net operating losses (“NOLs”), we expect all Finland NOLs will expire unused. As a result, we recorded a valuation allowance against net deferred tax assets that resulted in $11 million of income tax expense and a reduction to deferred tax assets on our unaudited condensed consolidated and combined balance sheet. In addition, we recognized no income tax benefit for 2018 year-to-date Finland losses on our unaudited condensed consolidated and combined statements of operations for the nine months ended September 30, 2018.
We recorded income tax benefit of $9 million and income tax expense of $55 million and $14$45 million, respectively, for the three months ended SeptemberJune 30, 2019 and 2018, respectively, and 2017, respectively,income tax benefit of $8 million and income tax expense of $10 million and $26$65 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. Our tax expense is significantly affected by the mix of income and losses in tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions.
For U.S. federal income tax purposes Huntsman will recognizerecognized a gain as a result of the internal restructuringIPO and IPOthe separation to the extent the fair market value of the assets associated with our U.S. businesses exceeded the basis of such assets for U.S. federal income tax purposes at the time of the separation. As a result of such gain recognized, the basis of the assets associated with our U.S. businesses haswas increased. This basis step up gave rise to a deferred tax asset of $36 million that we recognized for the year ended December 31, 2017.
Pursuant to the Tax Matters Agreement dated August 7, 2017, entered into by and among Venator Materials PLC and Huntsman (the "Tax Matters Agreement") at the time of the separation, we are required to make a future payment to Huntsman for any actual U.S. federal income tax savings we recognize as a result of any such basis increase for tax years through December 31, 2028. It is currently estimated (based on a value of our U.S. businesses derived from the IPO price of our ordinary shares and current tax rates) that the aggregate future payments required by this provision are expected to be approximately $34 million. We recognized a noncurrent liability for this amount at
June 30, 2019 and December 31, 2017.2018, this "Noncurrent payable to affiliates" was $34 million, each, on our unaudited condensed consolidated balance sheets. Moreover, any subsequent adjustment asserted by U.S. taxing authorities could increase the amount of gain recognized and the corresponding basis increase, and could result in a higher liability for us under the Tax Matters Agreement.
On December 22, 2017, the U.S. government enacted the Tax Act into law. The Tax Act made broad and complex changes to the U.S. tax code that will impact the Company, including but not limited to (1) a reduction of the U.S. federal corporate income tax rate from 35% to 21%, (2) immediate expensing of certain qualified property, (3) limitations on the deductibility of interest expense and (4) the creation of the base erosion anti-abuse tax, a new minimum tax.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
For the year ended December 31, 2017 we recorded a provisional decrease to our net deferred tax assets of $3 million, with a corresponding net deferred tax expense of $3 million. While we were able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, return to accrual adjustments including completion of computations and analysis of 2017 expenditures that qualify for immediate expensing.
For the period ended September 30, 2018 we have not made any additional measurement-period adjustments related to deferred taxes during the quarter as we have not yet completed our accounting for the income tax effects of certain elements of the Tax Act. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may adjust the provisional amounts. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made. We expect to complete our accounting within the prescribed measurement period.
Note 10.11. Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income attributable to Venator ordinary shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflects all potential dilutive ordinary shares outstanding during the period and is computed by dividing net income available to Venator ordinary shareholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities. For the periods prior to our IPO, the average number of ordinary shares outstanding used to calculate basic and diluted earnings per share was based on the ordinary shares that were outstanding at the time of our IPO.
Basic and diluted earnings per share are determined using the following information:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Numerator: | | | | | | | |
Basic and diluted (loss) income from continuing operations: | | | | | | | |
(Loss) income from continuing operations attributable to Venator Materials PLC ordinary shareholders | $ | (368 | ) | | $ | 51 |
| | $ | (94 | ) | | $ | 58 |
|
Basic and diluted income from discontinued operations: | | | | | | | |
Income from discontinued operations attributable to Venator Materials PLC ordinary shareholders | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8 |
|
Basic and diluted net (loss) income: | | | | | | | |
Net (loss) income attributable to Venator Materials PLC ordinary shareholders | $ | (368 | ) | | $ | 51 |
| | $ | (94 | ) | | $ | 66 |
|
Denominator: | | | | | | | |
Weighted average shares outstanding | 106.4 |
| | 106.3 |
| | 106.4 |
| | 106.3 |
|
Dilutive share-based awards | 0.3 |
| | 0.3 |
| | 0.4 |
| | 0.3 |
|
Total weighted average shares outstanding, including dilutive shares | 106.7 |
| | 106.6 |
| | 106.8 |
| | 106.6 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | | | | | | |
Net income attributable to Venator Materials PLC ordinary shareholders | $ | 21 |
| | $ | 196 |
| | $ | 18 |
| | $ | 274 |
|
Denominator: | | | | | | | |
Weighted average shares outstanding | 106.6 |
| | 106.4 |
| | 106.5 |
| | 106.4 |
|
Dilutive share-based awards | — |
| | 0.3 |
| | — |
| | 0.4 |
|
Total weighted average shares outstanding, including dilutive shares | 106.6 |
| | 106.7 |
| | 106.5 |
| | 106.8 |
|
For each of the three and ninesix months ended SeptemberJune 30, 2018 and 2017,2019, the number of anti-dilutive employee share-based awards excluded from the computation of diluted EPSearnings per share was not significant.2 million, each. For the three and six months ended June 30, 2018, the number of anti-dilutive employee share-based awards excluded from the computation of dilutive earnings per share was nil, each.
Note 11.12. Commitments and Contingencies
Legal Proceedings
Antitrust MattersShareholder Litigation
In the past,On February 8, 2019 we, certain of our executive officers, Huntsman and certain banks who acted as underwriters in connection with our IPO and secondary offering were named as a defendant in multiple civil antitrust suits alleging that we, our co-defendants and other alleged co-conspirators conspired to fix prices of TiO2 sold in the U.S. We settled litigation involving both direct purchasers of TiO2 and purchasers who opted out of the direct purchaser litigation for amounts immaterial to our unaudited condensed consolidated and combined financial statements.
We were also named as a defendantdefendants in a proposed class action civil antitrust suit filed in the District Court for the State of Texas, Dallas County (the "Dallas District Court"), by an alleged purchaser of our ordinary shares in connection with our IPO on August 3, 2017 and our secondary offering on December 1, 2017. The plaintiff, Macomb County Employees’ Retirement System, alleges that inaccurate and misleading statements were made regarding the impact to our operations, and prospects for restoration thereof, resulting from the fire that occurred at our Pori, Finland manufacturing facility, among other allegations. Additional complaints making substantially the same allegations were filed in the Dallas District Court by the Firemen's Retirement System of St. Louis on March 15, 20134, 2019 and by Oscar Gonzalez on March 13, 2019, with the third case naming two of our directors as additional defendants. A fourth case was filed in the U.S. District Court for the NorthernSouthern District of CaliforniaNew York by purchasersthe City of products made from TiO2 (the “Indirect Purchasers”)Miami General Employees' & Sanitation Employees' Retirement Trust on July 31, 2019, making essentiallysubstantially the same allegations, adding claims under sections 10(b) and 20(a) of the U.S. Exchange Act, and naming all of our directors as didadditional defendants.
The plaintiffs in these cases seek to determine that the direct purchasers. proceedings should be certified as class actions and to obtain alleged compensatory damages, costs, rescission and equitable relief. The cases filed in the Dallas District Court have been consolidated into a single action.
On October 14, 2014, plaintiffsMay 8, 2019, we filed their Second Amended Class Action Complaint narrowinga “special appearance” in the class of plaintiffs to those merchantsDallas District Court action contesting the court’s jurisdiction over the Company and consumers of architectural coatings containing TiO2. On August 11, 2015, the court granted oura motion to dismiss the Indirect Purchasers litigation with leavetransfer venue to amend the complaint. A Third Amended Class Action Complaint was filedMontgomery County, Texas and on September 29, 2015 further limiting the class to consumers of architectural paints. Plaintiffs have raised state antitrust claims under the laws of 15 states, consumer protection claims under the laws of nine states, and unjust enrichment claims under the laws of 16 states. On November 4, 2015,June 7, 2019 we and our co-defendantscertain defendants filed another motionmotions to dismiss. On July 9, 2019, a hearing was held on the motions, but no ruling has been made following the hearing.
We may be required to indemnify our executive officers and directors, Huntsman, and the banks who acted as underwriters in our IPO and secondary offerings, for losses incurred by them in connection with these matters pursuant to our agreements with such parties. Because of the early stage of this litigation, we are unable to reasonably estimate any possible loss or range of loss and we have not accrued for a loss contingency with regard to these matters.
Tronox Litigation
On April 26, 2019, we acquired intangible assets related to the European paper laminates product line from Tronox. A separate agreement with Tronox entered into on July 14, 2018 requires that Tronox promptly pay us a “break fee” of $75 million upon the consummation of Tronox’s merger with The National Titanium Dioxide Company Limited (“Cristal”) once the sale of the European paper laminates business to us was consummated, if the sale of Cristal’s Ashtabula manufacturing complex to us was not completed. The deadline for such payment was May 13, 2019. On April 26, 2019, Tronox publicly stated that it believes it is not obligated to pay the break fee.
On May 14, 2019, we commenced a lawsuit in the Delaware Superior Court against Tronox arising from Tronox's breach of its obligation to pay the break fee. We are seeking a judgment for $75 million, plus pre- and post-judgment interest, and reasonable attorneys' fees and costs. On June 13, 2016,17, 2019, Tronox filed an answer denying that it is obligated to pay the court substantially deniedbreak fee and asserting affirmative defenses and counterclaims of approximately $400 million, alleging that we failed to negotiate the motionpurchase of the Ashtabula complex in good faith. Because of the early stage of this litigation, we are unable to dismiss except asreasonably estimate any possible gain, loss or range of gain or loss and we have not made any accrual with regard to consumer protection claimsthis matter.
Neste Engineering Services Matter
We are party to an arbitration proceeding initiated by Neste Engineering Services Oy (“NES”) on December 19, 2018 for payment of invoices allegedly due of approximately €14 million in one state. We have agreedconnection with the delivery of services by NES to settle this matter for an amount immaterial tothe Company in respect of the Pori site rebuild project. These invoices were accrued in full on our unaudited condensed consolidated balance sheet as of June 30, 2019 and combined financial statements. The court gave final approval on August 16, 2018 and the judge signed the final judgment on October 22,December 31, 2018.
The Indirect Purchasers sought to recover injunctive relief, treble damages or the maximum damages allowed by state law, costs of suit and attorneys’ fees. We are contesting the validity of these invoices and filed counterclaims against NES on March 8, 2019. The timetable for the arbitration has not awareyet been set. On July 2, 2019, NES separately instigated a lawsuit in Finland for €1.6 million of any illegal conduct by us or any of our employees.unpaid invoices, which we also intend to contest.
Other Proceedings
We are a party to various other proceedings instituted by private plaintiffs, governmental authorities and others arising under provisions of applicable laws, including various environmental, products liability and other laws. Except as otherwise disclosed in these unaudited condensed consolidated and combinedfinancial statements, we do not believe that the outcome of any of these matters will have a material effect on our financial condition, results of operations or liquidity.
Note 12.13. Environmental, Health and Safety Matters
Environmental, Health and Safety Capital Expenditures
We may incur future costs for capital improvements and general compliance under EHS laws, including costs to acquire, maintain and repair pollution control equipment. For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, our capital expenditures for EHS matters totaled $5$8 million each.and $3 million, respectively. Because capital expenditures for these matters are subject to evolving regulatory requirements and depend, in part, on the timing, promulgation and enforcement of specific requirements, our capital expenditures for EHS matters have varied significantly from year to year and we cannot provide assurance that our recent expenditures are indicative of future amounts we may spend related to EHS and other applicable laws.
Environmental Reserves
We accrue liabilities relating to anticipated environmental cleanup obligations, site reclamation and closure costs, and known penalties. Liabilities are recorded when potential liabilities are either known or considered probable and can be reasonably estimated. Our liability estimates are calculated using present value techniques as appropriate and are based upon requirements placed upon us by regulators, available facts, existing technology, and past experience. The environmental liabilities do not include amounts recorded as asset retirement obligations. As of June 30, 2019 and December 31, 2018, we had environmental reserves of $10 million and $12 million, respectively.
Environmental Matters
We have incurred, and we may in the future incur, liability to investigate and clean up waste or contamination at our current or former facilities or facilities operated by third parties at which we may have disposed of waste or other materials. Similarly, we may incur costs for the cleanup of waste that was disposed of prior to the purchase of our businesses. Under some circumstances, the scope of our liability may extend to damages to natural resources.
In the EU, the Environmental Liability Directive (Directive 2004/35/EC) has established a framework based on the "polluter pays" principle for the prevention and remediation of environmental damage, which establishes measures to prevent and remedy environmental damage. The directive defines "environmental damage" as damage to protected species and natural habitats, damage to water and damage to soil. Operators carrying out dangerous activities listed in the Directive are strictly liable for remediation, even if they are not at fault or negligent.
Under EU Directive 2010/75/EU on industrial emissions, permitted facility operators may be liable for significant pollution of soil and groundwater over the lifetime of the activity concerned. We are in the process of plant closures at facilities in the EU and liability to investigate and clean up waste or contamination may arise during the surrender of operators' permits at these locations under the directive and associated legislation such as the Water Framework Directive (Directive 2000/60/EC) and the Groundwater Directive (Directive 2006/118/EC).
Under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”("CERCLA") and similar state laws, a current or former owner or operator of real property in the U.S. may be liable for remediation costs regardless of whether the release or disposal of hazardous substances was in compliance with law at the time it occurred, and a current owner or operator may be liable regardless of whether it owned or operated the facility at the time of the release. Outside the U.S., analogous contaminated property laws, such as those in effect in France, can hold past owners and/or operators liable for remediation at former facilities. We have not been notified by third parties of claims against us for cleanup liabilities at former facilities or third-party sites, including, but not limited to, sites listed under CERCLA.
Under the Resource Conservation and Recovery Act in the U.S. and similar state laws, we may be required to remediate contamination originating from our properties as a condition to our hazardous waste permit. Some of our manufacturing sites have an extended history of industrial chemical manufacturing and use, including on-site waste disposal and we have made accruals for related remediation activity. We are aware of soil, groundwater or surface contamination from past operations at some of our sites and have made accruals for related remediation activity, and we may find contamination at other sites in the future. Similar laws exist in a number of locations in which we currently operate, or previously operated, manufacturing facilities, such as France and Italy.facilities.
Pori Remediation
In connection with our previously announced intention to close our TiO2 manufacturing facility in Pori, Finland, we expect to incur environmental costs related to the cleanup of the facility upon its eventual closure, including remediation costs related to the landfill located on the site.and closure costs. While we do not currently have enough information to be able to estimate the range of potential costs for the cleanupclosure of this facility, these costs could be material to our unaudited condensed consolidated and combined financial statements.
Environmental Reserves
We accrue liabilities relating to anticipated environmental cleanup obligations, site reclamation and closure costs, and known penalties. Liabilities are recorded when potential liabilities are either known or considered probable and can be reasonably estimated. Our liability estimates are calculated using present value techniques as appropriate and are based upon requirements placed upon us by regulators, available facts, existing technology, and past experience. The
environmental liabilities do not include amounts recorded as asset retirement obligations. As of September 30, 2018 and December 31, 2017, we had environmental reserves of $11 million and $12 million, respectively. We may incur losses for environmental remediation.
Note 13.14. Other Comprehensive Income (Loss)
Other comprehensive income (loss) consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment(a) | | Pension and other postretirement benefits adjustments net of tax(b) | | Other comprehensive loss of unconsolidated affiliates | | Hedging Instruments | | Total | | Amounts attributable to noncontrolling interests | | Amounts attributable to Venator |
Beginning balance, January 1, 2018 | $ | (6 | ) | | $ | (267 | ) | | $ | (5 | ) | | $ | (5 | ) | | $ | (283 | ) | | $ | — |
| | $ | (283 | ) |
Other comprehensive (loss) income before reclassifications, gross | (49 | ) | | — |
| | — |
| | 5 |
| | (44 | ) | | — |
| | (44 | ) |
Tax benefit | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amounts reclassified from accumulated other comprehensive loss, gross(c) | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
Tax expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net current-period other comprehensive (loss) income | (49 | ) | | 10 |
| | — |
| | 5 |
| | (34 | ) | | — |
| | (34 | ) |
Ending balance, September 30, 2018 | $ | (55 | ) | | $ | (257 | ) | | $ | (5 | ) | | $ | — |
| | $ | (317 | ) | | $ | — |
| | $ | (317 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment(d) | | Pension and other postretirement benefits adjustments net of tax(e) | | Other comprehensive loss of unconsolidated affiliates | | Total | | Amounts attributable to noncontrolling interests | | Amounts attributable to Venator |
Beginning balance, January 1, 2017 | $ | (112 | ) | | $ | (306 | ) | | $ | (5 | ) | | $ | (423 | ) | | $ | — |
| | $ | (423 | ) |
Adjustments due to discontinued operations, gross | 5 |
| | 24 |
| | — |
| | 29 |
| | — |
| | 29 |
|
Tax expense | — |
| | (3 | ) | | — |
| | (3 | ) | | — |
| | (3 | ) |
Other comprehensive income before reclassifications, gross | 68 |
| | 3 |
| | — |
| | 71 |
| | — |
| | 71 |
|
Tax expense | 2 |
| | 1 |
| | — |
| | 3 |
| | — |
| | 3 |
|
Amounts reclassified from accumulated other comprehensive loss, gross(c) | — |
| | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
|
Tax benefit | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net current-period other comprehensive income | 75 |
| | 36 |
| | — |
| | 111 |
| | — |
| | 111 |
|
Ending balance, September 30, 2017 | $ | (37 | ) | | $ | (270 | ) | | $ | (5 | ) | | $ | (312 | ) | | $ | — |
| | $ | (312 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment(a) | | Pension and other postretirement benefits adjustments net of tax(b) | | Other comprehensive loss of unconsolidated affiliates | | Hedging Instruments | | Total | | Amounts attributable to noncontrolling interests | | Amounts attributable to Venator |
Beginning balance, January 1, 2019 | $ | (96 | ) | | $ | (278 | ) | | $ | (5 | ) | | $ | 6 |
| | $ | (373 | ) | | $ | — |
| | $ | (373 | ) |
Other comprehensive (loss) income before reclassifications, gross | (2 | ) | | — |
| | — |
| | 5 |
| | 3 |
| | — |
| | 3 |
|
Tax benefit | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amounts reclassified from accumulated other comprehensive loss, gross(c) | — |
| | 8 |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
Tax expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net current-period other comprehensive (loss) income | (2 | ) | | 8 |
| | — |
| | 5 |
| | 11 |
| | — |
| | 11 |
|
Ending balance, June 30, 2019 | $ | (98 | ) | | $ | (270 | ) | | $ | (5 | ) | | $ | 11 |
| | $ | (362 | ) | | $ | — |
| | $ | (362 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment(d) | | Pension and other postretirement benefits adjustments net of tax(e) | | Other comprehensive loss of unconsolidated affiliates | | Hedging Instruments | | Total | | Amounts attributable to noncontrolling interests | | Amounts attributable to Venator |
Beginning balance, January 1, 2018 | $ | (6 | ) | | $ | (267 | ) | | $ | (5 | ) | | $ | (5 | ) | | $ | (283 | ) | | $ | — |
| | $ | (283 | ) |
Other comprehensive (loss) income before reclassifications, gross | (58 | ) | | — |
| | — |
| | 5 |
| | (53 | ) | | — |
| | (53 | ) |
Tax benefit | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amounts reclassified from accumulated other comprehensive loss, gross(c) | — |
| | 7 |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
Tax expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net current-period other (loss) comprehensive income | (58 | ) | | 7 |
| | — |
| | 5 |
| | (46 | ) | | — |
| | (46 | ) |
Ending balance, June 30, 2018 | $ | (64 | ) | | $ | (260 | ) | | $ | (5 | ) | | $ | — |
| | $ | (329 | ) | | $ | — |
| | $ | (329 | ) |
| |
(a) | Amounts are net of tax of nil as of SeptemberJune 30, 20182019 and January 1, 2018,2019, each. |
| |
(b) | Amounts are net of tax of $52$50 million as of SeptemberJune 30, 20182019 and January 1, 2018,2019, each. |
| |
(c) | See table below for details about the amounts reclassified from accumulated other comprehensive loss. |
| |
(d) | Amounts are net of tax of $2 million and nil as of SeptemberJune 30, 20172018 and January 1, 2017, respectively.2018, each. |
| |
(e) | Amounts are net of tax of $54 million and $56$52 million as of SeptemberJune 30, 20172018 and January 1, 2017, respectively.2018, each. |
| | | Three months ended September 30, | | Nine months ended September 30, | | Affected line item in the statement | Three months ended June 30, | | Six months ended June 30, | | Affected line item in the statement where net income is presented |
| 2018 | | 2017 | | 2018 | | 2017 | | where net income is presented | 2019 | | 2018 | | 2019 | | 2018 | |
Details about Accumulated Other Comprehensive Loss Components(a): | | | | | | | | | | | | | | | | |
Amortization of pension and other postretirement benefits: | | | | | | | | | | | | | | | | |
Actuarial loss | $ | 3 |
| | $ | 5 |
| | $ | 10 |
| | $ | 13 |
| | Non operating other income | $ | 4 |
| | $ | 4 |
| | $ | 8 |
| | $ | 7 |
| | Other income |
Prior service credit | — |
| | (1 | ) | | — |
| | (2 | ) | | Non operating other income | — |
| | — |
| | — |
| | — |
| | Other income |
Total amortization | 3 |
| | 4 |
| | 10 |
| | 11 |
| | Total before tax | 4 |
| | 4 |
| | 8 |
| | 7 |
| | Total before tax |
Income tax expense | — |
| | — |
| | — |
| | — |
| | Income tax expense | — |
| | — |
| | — |
| | — |
| | Income tax expense |
Total reclassifications for the period | $ | 3 |
| | $ | 4 |
| | $ | 10 |
| | $ | 11 |
| | Net of tax | $ | 4 |
| | $ | 4 |
| | $ | 8 |
| | $ | 7 |
| | Net of tax |
| |
(a) | Pension and other postretirement benefit amounts in parentheses indicate credits on our unaudited condensed consolidated statements of operations. |
Note 14.15. Operating Segment Information
We derive our revenues, earnings and cash flows from the manufacture and sale of a wide variety of commodity chemical products.TiO2, functional additives, color pigments, timber treatment and water treatment chemicals. We have reported our operations through our two segments, Titanium Dioxide and Performance Additives, and organized our business and derived our operating segments around differences in product lines. We have historically conducted other business within components of legal entities we operated in conjunction with Huntsman businesses, and such businesses are included within the corporate and other line item below.
The major product groups of each reportable operating segment are as follows:
|
| | |
Segment | | Product Group |
Titanium Dioxide | | titanium dioxide |
Performance Additives | | functional additives, color pigments, timber treatment and water treatment chemicals |
Sales between segments are generally recognized at external market prices and are eliminated in consolidation. Adjusted EBITDA is presented as a measure of the financial performance of our global business units and for reporting the results of our operating segments. The revenues and adjusted EBITDA for each of the two reportable operating segments are as follows:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Revenues: | | | | | | | | | | | | | | |
Titanium Dioxide | $ | 389 |
| | $ | 431 |
| | $ | 1,300 |
| | $ | 1,217 |
| $ | 439 |
| | $ | 455 |
| | $ | 864 |
| | $ | 911 |
|
Performance Additives | 144 |
| | 151 |
| | 481 |
| | 464 |
| 139 |
| | 171 |
| | 276 |
| | 337 |
|
Total | $ | 533 |
| | $ | 582 |
| | $ | 1,781 |
| | $ | 1,681 |
| $ | 578 |
| | $ | 626 |
| | $ | 1,140 |
| | $ | 1,248 |
|
Segment adjusted EBITDA(1) | | | | | | | | |
Adjusted EBITDA(1) | | | | | | | | |
Titanium Dioxide | $ | 75 |
| | $ | 127 |
| | $ | 365 |
| | $ | 268 |
| $ | 55 |
| | $ | 147 |
| | $ | 116 |
| | $ | 290 |
|
Performance Additives | 12 |
| | 15 |
| | 59 |
| | 57 |
| 16 |
| | 23 |
| | 31 |
| | 47 |
|
| 87 |
| | 142 |
| | 424 |
| | 325 |
| 71 |
| | 170 |
| | 147 |
| | 337 |
|
Corporate and other | (10 | ) | | (8 | ) | | (33 | ) | | (48 | ) | (10 | ) | | (13 | ) | | (26 | ) | | (23 | ) |
Total | 77 |
| | 134 |
| | 391 |
| | 277 |
| 61 |
| | 157 |
| | 121 |
| | 314 |
|
Reconciliation of adjusted EBITDA to net income: | | | | | | | | | | | | | | |
Interest expense | (14 | ) | | (30 | ) | | (41 | ) | | (54 | ) | (13 | ) | | (14 | ) | | (27 | ) | | (27 | ) |
Interest income | 4 |
| | 22 |
| | 11 |
| | 25 |
| 3 |
| | 4 |
| | 6 |
| | 7 |
|
Income tax benefit (expense) - continuing operations | 55 |
| | (14 | ) | | (10 | ) | | (26 | ) | |
Income tax benefit (expense) | | 9 |
| | (45 | ) | | 8 |
| | (65 | ) |
Depreciation and amortization | (33 | ) | | (35 | ) | | (102 | ) | | (95 | ) | (29 | ) | | (35 | ) | | (55 | ) | | (69 | ) |
Net income attributable to noncontrolling interests | 2 |
| | 2 |
| | 6 |
| | 8 |
| 1 |
| | 2 |
| | 2 |
| | 4 |
|
Other adjustments: | | | | | | | | | | | | | | |
Business acquisition and integration expenses | (5 | ) | | (4 | ) | | (9 | ) | | (2 | ) | |
Business acquisition and integration adjustments (expenses) | | 1 |
| | (2 | ) | | (1 | ) | | (4 | ) |
Separation expense, net | — |
| | — |
| | (1 | ) | | — |
| — |
| | — |
| | — |
| | (1 | ) |
Net income of discontinued operations, net of tax | — |
| | — |
| | — |
| | 8 |
| |
Loss on disposition of business/assets | — |
| | — |
| | (2 | ) | | — |
| — |
| | (2 | ) | | — |
| | (2 | ) |
Certain legal settlements and related expenses | — |
| | — |
| | — |
| | (1 | ) | (1 | ) | | — |
| | (1 | ) | | — |
|
Amortization of pension and postretirement actuarial losses | (3 | ) | | (5 | ) | | (10 | ) | | (13 | ) | (4 | ) | | (4 | ) | | (8 | ) | | (7 | ) |
Net plant incident (costs) credits | (21 | ) | | (1 | ) | | 252 |
| | (4 | ) | (6 | ) | | 273 |
| | (13 | ) | | 273 |
|
Restructuring, impairment and plant closing and transition costs | (428 | ) | | (16 | ) | | (573 | ) | | (49 | ) | — |
| | (136 | ) | | (12 | ) | | (145 | ) |
Net (loss) income | $ | (366 | ) | | $ | 53 |
| | $ | (88 | ) | | $ | 74 |
| |
Net income | | $ | 22 |
| | $ | 198 |
| | $ | 20 |
| | $ | 278 |
|
| |
(1) | Adjusted EBITDA is defined as net incomeincome/loss of Venator before interest expense, interest income, income tax from continuing operations,expense/benefit, depreciation and amortization and net income attributable to noncontrolling interests, as well as eliminating the following adjustments: (a) business acquisition and integration expenses/adjustments; (b) separation expense/gain, net; (c) loss/gain on disposition of business/assets; (d) certain legal settlements and related expenses/gains; (e) amortization of pension and postretirement actuarial losses/gains; (f) net plant incident costs/credits; and (g) restructuring, impairment, and plant closing and transition costs/credits. |
following adjustments from net income: (a) business acquisition and integration expenses; (b) separation expense, net; (c) net income of discontinued operations, net of tax; (d) loss on disposition of business/assets; (e) certain legal settlements and related expenses; (f) amortization of pension and postretirement actuarial losses; (g) net plant incident (costs) credits; and (g) restructuring, impairment, and plant closing and transition costs.
Note 15. Discontinued Operations
The Titanium Dioxide, Performance Additives and other businesses were included in Huntsman's financial results in different legal forms, including, but not limited to: (1) wholly-owned subsidiaries for which the Titanium Dioxide and Performance Additives businesses were the sole businesses; (2) legal entities that were comprised of other businesses and include the Titanium Dioxide and/or Performance Additives businesses; and (3) variable interest entities in which the Titanium Dioxide, Performance Additives and other businesses are the primary beneficiaries. Because the historical unaudited condensed consolidated and combined financial information for the periods indicated reflect the combination of these legal entities under common control, the historical condensed consolidated and combined financial information includes the results of operations of other Huntsman businesses that are not a part of our operations after the separation. The legal entity structure of Huntsman was reorganized during the second quarter of 2017 such that the other businesses would not be included in Venator’s legal entity structure and as such, the discontinued operations presented below reflect financial results of the other businesses through the date of such reorganization.
The following table summarizes the operations data for discontinued operations:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | |
Trade sales, services and fees, net | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15 |
|
Related party sales | — |
| | — |
| | — |
| | 17 |
|
Total revenues | — |
| | — |
| | — |
| | 32 |
|
Cost of goods sold | — |
| | — |
| | — |
| | 26 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative (includes corporate allocations of nil, nil, nil and $1, respectively) | — |
| | — |
| | — |
| | (7 | ) |
Restructuring, impairment and plant closing costs | — |
| | — |
| | — |
| | 1 |
|
Other income, net | — |
| | — |
| | — |
| | 1 |
|
Total operating expenses | — |
| | — |
| | — |
| | (5 | ) |
Income from discontinued operations before tax | — |
| | — |
| | — |
| | 11 |
|
Income tax expense | — |
| | — |
| | — |
| | (3 | ) |
Net income from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated and combined financial statements and the related notes included in Item 1 hereto.
This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in any forward-looking statement because of various factors, including those described in the section titled “Note"Note Regarding Forward-Looking Statements” in this Part IStatements" and “Part"Part II. Item 1A. Risk Factors."
Basis of Presentation
Prior to the separation, our operations were included in Huntsman’s financial results in different legal forms, including but not limited to: (1) wholly-owned subsidiaries for which the Titanium Dioxide and Performance Additives businesses were the sole businesses; (2) legal entities which are comprised of other businesses and include the Titanium Dioxide and/or Performance Additives businesses; and (3) variable interest entities in which the Titanium Dioxide and Performance Additives businesses are the primary beneficiaries. The unaudited condensed consolidated and combined financial statements include all revenues, costs, assets, liabilities and cash flows directly attributable to us. The unaudited condensed consolidated and combined financial statements also include allocations of direct and indirect corporate expenses through the date of the separation, which are based upon an allocation method that in the opinion of management is reasonable. Because the historical unaudited condensed consolidated and combined financial information for the periods indicated reflect the combination of these legal entities under common control, the historical unaudited condensed consolidated and combined financial information includes the results of operations of other Huntsman businesses that are not a part of our operations after the separation. We report the results of those other businesses as discontinued operations. Please see “Part I. Item 1. Note 15. Discontinued Operations” of this report.
In addition, the unaudited condensed consolidated and combined financial statements have been prepared from Huntsman’s historical accounting records through the separation and are presented on a stand-alone basis as if our operations had been conducted separately from Huntsman; however, prior to the separation, we did not operate as a separate, stand-alone entity for the periods presented and, as such, the unaudited condensed consolidated and combined financial statements reflecting balances and activity prior to the separation, may not be indicative of the financial position, results of operations and cash flows had we been a stand-alone company.
For purposes of these unaudited condensed consolidated and combined financial statements, all significant transactions with Huntsman International have been included in group equity. All intercompany transactions within the consolidated and combined business have been eliminated.
Executive Summary
We are a leading global manufacturer and marketer of chemical products that improve the quality of life for downstream consumers and promote a sustainable future. Our products comprise a broad range of innovative chemicals and formulations that bring color and vibrancy to buildings, protect and extend product life, and reduce energy consumption. We market our products globally to a diversified group of industrial customers through two segments: Titanium Dioxide, which consists of our TiO2 business, and Performance Additives, which consists of our functional additives, color pigments, timber treatment and water treatment businesses. We are a leading global producer in many of our key product lines, including TiO2, color pigments and functional additives, a leading North American producer of timber treatment products and a leading European producer of water treatment products.
Recent Developments
Potential Acquisition of Tronox European Paper Laminates Business
On July 16, 2018, we announced that we reached an agreement with Tronox Limited (“Tronox”) to purchase the European paper laminates business (the “8120 Grade”) from Tronox upon the closing of their proposed merger with The National Titanium Dioxide Company Limited ("Cristal"). In connection with the acquisition, Tronox would supply the 8120 Grade to us under a Transitional Supply Agreement until the transfer of the manufacturing of the 8120 Grade to our Greatham, U.K., facility has been completed.
Additionally, we announced that we entered into an agreement with Tronox providing, among other things, that the parties would engage in exclusive negotiations until September 29, 2018, regarding the purchase by us of the Ashtabula, Ohio, TiO2 manufacturing complex currently owned by Cristal. Following the expiration of the exclusivity period, we announced our intention to continue to negotiate with Tronox on a nonexclusive basis, but have not reached agreement regarding the potential divestiture.
Pori Fire
On January 30, 2017, our TiO2 manufacturing facility in Pori, Finland, experienced fire damage. The loss was covered by insurance for property damage as well as business interruption losses subject to retained deductibles of $15 million and 60 days, respectively. The Pori facility had a nameplate capacity of 130,000 metric tons per year, which represented approximately 17% of our total TiO2 nameplate capacity and approximately 2% of total global TiO2 demand. Prior to the fire, 60% of the site capacity produced specialty products which, on average, contributed greater than 75% of the site EBITDA from January 1, 2015 through January 30, 2017. We have restored 20% of the total prior capacity, which is dedicated to production of specialty products.
On April 13, 2018, we received a final payment from our insurers of €191 million, or $236 million, bringing our total insurance receipts to €468 million, or $551 million, which was the limit of our insurance proceeds. We elected to receive the insurance proceeds in Euro in order to match the currency of the related business interruption losses and capital expenditures resulting from the Pori fire. For the nine months ended September 30, 2018, we received €243 million, or $298 million, of insurance proceeds, while €225 million, or $253 million, was received during 2017.
During the nine months ended September 30, 2018, we recorded $371 million of income related to insurance recoveries in cost of goods sold while $187 million was recognized in 2017. The difference between payments received from our insurers of $551 million and the insurance recovery income of $558 million is related to the foreign exchange movements of the U.S. Dollar against the Euro during the periods.
$68 million of deferred income for insurance recoveries was reported in accrued liabilities as of December 31, 2017.
We recorded a loss of $7 million and $18 million for cleanup and other non-capital reconstruction costs in cost of goods sold for the nine months ended September 30, 2018 and 2017, respectively. We recorded a loss of $31 million for the write-off of fixed assets and lost inventory in cost of goods sold in our unaudited condensed consolidated and combinedstatements of operations for the nine months ended September 30, 2017.
On September 12, 2018, following our review of the Pori facility and options within our manufacturing network, and as a result of unanticipated cost escalation and extended timeline associated with reconstruction, we announced that we intend to close our Pori, Finland, TiO2 manufacturing facility and transfer the specialty and differentiated product grades to other sites. We intend to continue to operate the Pori facility at reduced production rates through the transition period, which is expected to last through 2021. As part of the plan, we recorded restructuring expense of approximately $415 million for the three and nine months ended September 30, 2018, of which $367 million related to acceleration depreciation, $39 million related to employee benefits, and $9 million related to the write-off of other assets. This restructuring expense consists of $30 million of cash and $385 million of noncash charges.
Please see “Part II, Item 1A. Risk Factors—Risks Relating to our Business—Disruptions in production at our manufacturing facilities, including at our TiO2 manufacturing facility in Pori, Finland, may have a material adverse impact on our business, results of operations and/or financial condition.”
Recent Trends and Outlook
We expect near-term business trends in our Titanium Dioxide segment to be driven by: (i) a soft economic environment, primarily in China and Europe, including the effects of China-US trade negotiations and potential impacts from Brexit; (ii) stable sequential pricing trends with regional differences reflecting specific supply and demand balances; (iii) raw material increases; (v) volume trends to reflect historical seasonal patterns; (vi) increased sales of new TiO2 product grades; (vii) stable demand for specialty TiO2 and (viii) additional benefit through lower costs and operational improvement actions as part of our 2019 Business Improvement Program. In the Performance Additives segment, we expect near-term business trends to be driven by: (i) volume trends reflecting historical seasonal patterns; (ii) a soft economic environment, primarily in China and Europe, including the effects of China-US trade negotiations and the potential impacts from Brexit; (iii) raw material costs inflation; and (iv) stable average selling prices.
In the fourth quarter of 2018, we commenced our 2019 Business Improvement Program and are underway with the implementation, having realized $7 million of savings through the second quarter of 2019. We continue to expect that this cost and operational improvement program will provide approximately $40 million of annual adjusted EBITDA benefit compared to year-end 2018. We expect the following factorsprogram will be fully implemented in 2020, ending the year at the full run-rate level.
In 2019, we expect to impactspend approximately $130 million on capital expenditures, which includes spending to transfer our operating resultsspecialty technology from our Pori, Finland site to other sites in the near term:our manufacturing network and excludes other Pori-related cash items.
| |
• | TiO2 pricing to reflect historical seasonal patterns, consistent with quarterly demand trends, with regional price differentials converging
|
Increasing raw material (ore) and energy costs
Continued benefit from the ongoing $90 million Business Improvement Program
| |
• | Transfer of our specialty and differentiated product grades from Pori to other sites within our network and the subsequent closure of our Pori, Finland TiO2 manufacturing facility
|
| |
• | Industry fundamentals to support ongoing profitability in TiO2
|
•We expect that our corporate and other costs will be approximately $50$55 million per year.in 2019.
We continue to implement our Business Improvement Program which we expect to be completed by the first quarter of 2019 and continue to provide contributions to adjusted EBITDA. Of the $60 million we previously estimated for annualized savings, we have realized approximately $37 million of savings through the third quarter of 2018 as a result of these programs. In addition to these savings, we achieved approximately $6 million of EBITDA in the third quarter of 2018 from volume improvements as part of the Business Improvement Program. If successfully implemented, we expect the general cost reductions and optimization of our manufacturing network to result in additional contributions to our adjusted EBITDA of approximately $23 million per year by the first quarter of 2019, with additional projected contributions to adjusted EBITDA from volume growth.
In 2018, we expect to spend approximately $120 million of capital expenditures, excluding expenditures related to our Pori, Finland facility.
Our tax expense is significantly affected by the mix of income and losses in tax jurisdictions in which we operate. We expect our adjusted long-term effective tax rate will be approximately 15% to 20%. We believe the impact of the Tax Act on our adjusted long-term effective tax rate will not be material, given the low percentage of our global pre-tax income earned in the United States. We expect our near-term cash tax rate will be between 10% to 15%. In addition, based on the recent years’ profitability in our Titanium Dioxide segment in the U.K. and Spain, we anticipate sufficient positive evidence to support the partial release of valuation allowances on certain net deferred tax assets in late 2018. Due to application of the local tax rules in the U.K. and Spain, which limit the amount of net operating loss carryforward that may be utilized on an annual basis, we currently estimate a partial valuation allowance release of approximately $25 million to $35 million for these jurisdictions during the quarter ended December 31, 2018.
Results of Operations
The following table sets forth our consolidated results of operations for the three and six months ended SeptemberJune 30, 20182019 and 2017 and nine months ended September 30, 2018 and 2017:2018:
| | | Three Months Ended | | | | Nine Months Ended | | | Three Months Ended | | | | Six Months Ended | | |
| September 30, | | | | September 30, | | | June 30, | | | | June 30, | | |
(Dollars in millions) | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
Revenues | $ | 533 |
| | $ | 582 |
| | (8 | )% | | $ | 1,781 |
| | $ | 1,681 |
| | 6 | % | $ | 578 |
| | $ | 626 |
| | (8 | %) | | $ | 1,140 |
| | $ | 1,248 |
| | (9 | %) |
Cost of goods sold | 463 |
| | 448 |
| | 3 | % | | 1,110 |
| | 1,356 |
| | (18 | )% | 511 |
| | 193 |
| | 165 | % | | 997 |
| | 647 |
| | 54 | % |
Operating expenses(4) | 57 |
| | 44 |
| | 30 | % | | 154 |
| | 158 |
| | (3 | )% | 45 |
| | 46 |
| | (2 | %) | | 100 |
| | 97 |
| | 3 | % |
Restructuring, impairment and plant closing and transition costs | 428 |
| | 16 |
| | 2,575 | % | | 573 |
| | 49 |
| | 1,069 | % | — |
| | 136 |
| | (100 | %) | | 12 |
| | 145 |
| | (92 | %) |
Operating (loss) income | (415 | ) | | 74 |
| | NM |
| | (56 | ) | | 118 |
| | NM |
| |
Operating income | | 22 |
| | 251 |
| | (91 | %) | | 31 |
| | 359 |
| | (91 | %) |
Interest expense, net | (10 | ) | | (8 | ) | | (25 | )% | | (30 | ) | | (29 | ) | | (3 | )% | (10 | ) | | (10 | ) | | — | % | | (21 | ) | | (20 | ) | | (5 | %) |
Other income | 4 |
| | 1 |
| | 300 | % | | 8 |
| | 3 |
| | 167 | % | 1 |
| | 2 |
| | (50 | %) | | 2 |
| | 4 |
| | (50 | %) |
(Loss) income from continuing operations before income taxes | (421 | ) | | 67 |
| | NM |
| | (78 | ) | | 92 |
| | NM |
| |
Income before income taxes | | 13 |
| | 243 |
| | (95 | %) | | 12 |
| | 343 |
| | (97 | %) |
Income tax benefit (expense) | 55 |
| | (14 | ) | | NM |
| | (10 | ) | | (26 | ) | | (62 | )% | 9 |
| | (45 | ) | | NM |
| | 8 |
| | (65 | ) | | NM |
|
(Loss) income from continuing operations | (366 | ) | | 53 |
| | NM |
| | (88 | ) | | 66 |
| | NM |
| |
Income from discontinued operations | — |
| | — |
| | NM |
| | — |
| | 8 |
| | (100 | )% | |
Net (loss) income | (366 | ) | | 53 |
| | NM |
| | (88 | ) | | 74 |
| | NM |
| |
Net income | | 22 |
| | 198 |
| | (89 | %) | | 20 |
| | 278 |
| | (93 | %) |
Reconciliation of net income to adjusted EBITDA: | | | | |
|
| | | | | | | | | | |
|
| | | | | | |
Interest expense, net | 10 |
| | 8 |
| | 25 | % | | 30 |
| | 29 |
| | 3 | % | 10 |
| | 10 |
| | — | % | | 21 |
| | 20 |
| | 5 | % |
Income tax (benefit) expense - continuing operations | (55 | ) | | 14 |
| | NM |
| | 10 |
| | 26 |
| | (62 | )% | |
Income tax (benefit) expense | | (9 | ) | | 45 |
| | NM |
| | (8 | ) | | 65 |
| | NM |
|
Depreciation and amortization | 33 |
| | 35 |
| | (6 | )% | | 102 |
| | 95 |
| | 7 | % | 29 |
| | 35 |
| | (17 | %) | | 55 |
| | 69 |
| | (20 | %) |
Net income attributable to noncontrolling interests | (2 | ) | | (2 | ) | | — | % | | (6 | ) | | (8 | ) | | 25 | % | (1 | ) | | (2 | ) | | 50 | % | | (2 | ) | | (4 | ) | | 50 | % |
Other adjustments: | | | | | | | | | | | | | | | | | | | | | | |
Business acquisition and integration expenses | 5 |
| | 4 |
| | | | 9 |
| | 2 |
| | | |
Business acquisition and integration (adjustments) expenses | | (1 | ) | | 2 |
| | | | 1 |
| | 4 |
| | |
Separation expense, net | — |
| | — |
| | | | 1 |
| | — |
| | | — |
| | — |
| | | | — |
| | 1 |
| | |
Net income of discontinued operations, net of tax | — |
| | — |
| | | | — |
| | (8 | ) | | | |
Loss on disposition of business/assets | — |
| | — |
| | | | 2 |
| | — |
| | | — |
| | 2 |
| | | | — |
| | 2 |
| | |
Certain legal settlements and related expenses | — |
| | — |
| | | | — |
| | 1 |
| | | 1 |
| | — |
| | | | 1 |
| | — |
| | |
Amortization of pension and postretirement actuarial losses | 3 |
| | 5 |
| | | | 10 |
| | 13 |
| | | 4 |
| | 4 |
| | | | 8 |
| | 7 |
| | |
Net plant incident costs (credits) | 21 |
| | 1 |
| | | | (252 | ) | | 4 |
| | | 6 |
| | (273 | ) | | | | 13 |
| | (273 | ) | | |
Restructuring, impairment and plant closing and transition costs | 428 |
| | 16 |
| | | | 573 |
| | 49 |
| | | — |
| | 136 |
| | | | 12 |
| | 145 |
| | |
Adjusted EBITDA(1) | $ | 77 |
| | $ | 134 |
| | | | $ | 391 |
| | $ | 277 |
| | | $ | 61 |
| | $ | 157 |
| | | | $ | 121 |
| | $ | 314 |
| | |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities from continuing operations | | | | | | | $ | 306 |
| | $ | 180 |
| | 70 | % | |
Net cash (used in) provided by investing activities from continuing operations | | | | | | | (266 | ) | | 73 |
| | NM |
| |
Net cash used in financing activities | | | | | | | (17 | ) | | (99 | ) | | (83 | )% | |
Net cash (used in) provided by operating activities | | | | | | | | $ | (50 | ) | | $ | 305 |
| | NM |
|
Net cash used in investing activities | | | | | | | | (82 | ) | | (162 | ) | | (49 | %) |
Net cash provided by (used in) financing activities | | | | | | | | 17 |
| | (14 | ) | | NM |
|
Capital expenditures | | | | | | | (272 | ) | | (97 | ) | | 180 | % | | | | | | | (83 | ) | | (167 | ) | | (50 | %) |
| | | Three Months Ended | | Three Months Ended | | | | | |
| September 30, 2018 | | September 30, 2017 | Three Months Ended | | Three Months Ended |
(Dollars in millions, except per share amounts) | Gross | | Tax(3) | | Net | | Gross | | Tax(3) | | Net | June 30, 2019 | | June 30, 2018 |
Reconciliation of net income to adjusted net income: | | | | | | | | | | | | |
Net (loss) income | | | | | $ | (366 | ) | | | | | | $ | 53 |
| |
Reconciliation of net income to adjusted net income attributable to Venator Materials PLC ordinary shareholders: | | | | |
Net income | | $ | 22 |
| | $ | 198 |
|
Net income attributable to noncontrolling interests | | | | | (2 | ) | | | | | | (2 | ) | (1 | ) | | (2 | ) |
Other adjustments: | | | | | | | | | | | | | | |
Business acquisition and integration expenses | 5 |
| | (1 | ) | | 4 |
| | 4 |
| | (1 | ) | | 3 |
| |
Business acquisition and integration (adjustments) expenses | | (1 | ) | | 2 |
|
Loss on disposition of business/assets | | — |
| | 2 |
|
Certain legal settlements and related expenses | | 1 |
| | — |
|
Amortization of pension and postretirement actuarial losses | 3 |
| | (1 | ) | | 2 |
| | 5 |
| | — |
| | 5 |
| 4 |
| | 4 |
|
Net plant incident costs | 21 |
| | (3 | ) | | 18 |
| | 1 |
| | — |
| | 1 |
| |
Net plant incident costs (credits) | | 6 |
| | (273 | ) |
Restructuring, impairment and plant closing and transition costs | 428 |
| | (50 | ) | | 378 |
| | 16 |
| | (1 | ) | | 15 |
| — |
| | 136 |
|
Adjusted net income(2) | | | | | $ | 34 |
| | | | | | $ | 75 |
| |
Income tax adjustments(3) | | (17 | ) | | 24 |
|
Adjusted net income attributable to Venator Materials PLC ordinary shareholders(2) | | $ | 14 |
| | $ | 91 |
|
| | | | | | | | | | | | | | |
Weighted-average shares-basic | | | | | 106.4 |
| | | | | | 106.3 |
| 106.6 |
| | 106.4 |
|
Weighted-average shares-diluted | | | | | 106.7 |
| | | | | | 106.6 |
| 106.6 |
| | 106.7 |
|
| | | | | | | | | | | | | | |
Net (loss) income attributable to Venator Materials PLC ordinary shareholders: | | | | | | | | | | | | |
Net income attributable to Venator Materials PLC ordinary shareholders per share: | | | | |
Basic | | | | | $ | (3.46 | ) | | | | | | $ | 0.48 |
| $ | 0.20 |
| | $ | 1.84 |
|
Diluted | | | | | $ | (3.46 | ) | | | | | | $ | 0.48 |
| $ | 0.20 |
| | $ | 1.84 |
|
| | | | | | | | | | | | | | |
Other non-GAAP measures: | | | | | | | | | | | | | | |
Adjusted net income per share(2): | | | | | | | | | | | | | | |
Basic | | | | | $ | 0.32 |
| | | | | | $ | 0.71 |
| $ | 0.13 |
| | $ | 0.86 |
|
Diluted | | | | | $ | 0.32 |
| | | | | | $ | 0.70 |
| $ | 0.13 |
| | $ | 0.85 |
|
| | | Nine Months Ended | | Nine Months Ended | | | | | |
| September 30, 2018 | | September 30, 2017 | Six Months Ended | | Six Months Ended |
(Dollars in millions, except per share amounts) | Gross | | Tax(3) | | Net | | Gross | | Tax(3) | | Net | June 30, 2019 | | June 30, 2018 |
Reconciliation of net income to adjusted net income: | | | | | | | | | | | | |
Net (loss) income | | | | | $ | (88 | ) | | | | | | $ | 74 |
| |
Reconciliation of net income to adjusted net income attributable to Venator Materials PLC ordinary shareholders: | | | | |
Net income | | $ | 20 |
| | $ | 278 |
|
Net income attributable to noncontrolling interests | | | | | (6 | ) | | | | | | (8 | ) | (2 | ) | | (4 | ) |
Other adjustments: | | | | | | | | | | | | | | |
Business acquisition and integration expenses | 9 |
| | (2 | ) | | 7 |
| | 2 |
| | (1 | ) | | 1 |
| 1 |
| | 4 |
|
Separation expense, net | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| — |
| | 1 |
|
Net income of discontinued operations | — |
| | — |
| | — |
| | (11 | ) | | 3 |
| | (8 | ) | |
Loss on disposition of business/assets | 2 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| — |
| | 2 |
|
Certain legal settlements and related expenses | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| 1 |
| | — |
|
Amortization of pension and postretirement actuarial losses | 10 |
| | (2 | ) | | 8 |
| | 13 |
| | — |
| | 13 |
| 8 |
| | 7 |
|
Net plant incident (credits) costs | (252 | ) | | 49 |
| | (203 | ) | | 4 |
| | (1 | ) | | 3 |
| |
Net plant incident costs (credits) | | 13 |
| | (273 | ) |
Restructuring, impairment and plant closing and transition costs | 573 |
| | (78 | ) | | 495 |
| | 49 |
| | (4 | ) | | 45 |
| 12 |
| | 145 |
|
Adjusted net income(2) | | | | | $ | 216 |
| | | | | | $ | 121 |
| |
Income tax adjustments(3) | | (25 | ) | | 23 |
|
Adjusted net income attributable to Venator Materials PLC ordinary shareholders(2) | | $ | 28 |
| | $ | 183 |
|
| | | | | | | | | | | | | | |
Weighted-average shares-basic | | | | | 106.4 |
| | | | | | 106.3 |
| 106.5 |
| | 106.4 |
|
Weighted-average shares-diluted | | | | | 106.8 |
| | | | | | 106.6 |
| 106.5 |
| | 106.8 |
|
| | | | | | | | | | | | | | |
Net (loss) income attributable to Venator Materials PLC ordinary shareholders: | | | | | | | | | | | | |
Net income attributable to Venator Materials PLC ordinary shareholders per share: | | | | |
Basic | | | | | $ | (0.88 | ) | | | | | | $ | 0.63 |
| $ | 0.17 |
| | $ | 2.58 |
|
Diluted | | | | | $ | (0.88 | ) | | | | | | $ | 0.62 |
| $ | 0.17 |
| | $ | 2.57 |
|
| | | | | | | | | | | | | | |
Other non-GAAP measures: | | | | | | | | | | | | | | |
Adjusted net income per share(2): | | | | | | | | | | | | | | |
Basic | | | | | $ | 2.03 |
| | | | | | $ | 1.14 |
| $ | 0.26 |
| | $ | 1.72 |
|
Diluted | | | | | $ | 2.02 |
| | | | | | $ | 1.14 |
| $ | 0.26 |
| | $ | 1.71 |
|
NM—Not meaningful
| |
(1) | Our management uses adjusted EBITDA to assess financial performance. Adjusted EBITDA is defined as net incomeincome/loss before interest income/expense, net, income tax from continuing operations,expense/benefit, depreciation and amortization, and net income attributable to noncontrolling interests, as well as eliminating the following:following adjustments: (a) business acquisition and integration expenses;expenses/adjustments; (b) separation expense,expense/gain, net; (c) net income of discontinued operations, net of tax; (d) lossloss/gain on disposition of business/assets; (e)(d) certain legal settlements and related expenses; (f)expenses/gains; (e) amortization of pension and postretirement actuarial losses; (g)losses/gains; (f) net plant incident costs (credits);costs/credits; and (h)(g) restructuring, impairment, and plant closing and transition costs.costs/credits. We believe that net income is the performance measure calculated and presented in accordance with generally accepted accounting principles in the United States (“("U.S. GAAP”GAAP" or “GAAP”"GAAP") that is most directly comparable to adjusted EBITDA. |
We believe adjusted EBITDA is useful to investors in assessing our ongoing financial performance and provides improved comparability between periods through the exclusion of certain items that management believes are not indicative of our operational profitability and that may obscure underlying business results and trends. However, this measure should not be considered in isolation or viewed as a substitute for net income or other measures of performance determined in accordance with U.S. GAAP. Moreover, adjusted EBITDA as used herein is not necessarily comparable to other similarly titled measures of other companies due to potential inconsistencies in the
methods of calculation. Our management believes this measure is useful to compare general operating performance from period to period and to make certain related management decisions. Adjusted EBITDA is also used by
securities analysts, lenders and others in their evaluation of different companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be highly dependent on a company’s capital structure, debt levels and credit ratings. Therefore, the impact of interest expense on earnings can vary significantly among companies. In addition, the tax positions of companies can vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the various jurisdictions in which they operate. As a result, effective tax rates and tax expense can vary considerably among companies. Finally, companies employ productive assets of different ages and utilize different methods of acquiring and depreciating such assets. This can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.
Nevertheless, our management recognizes that there are limitations associated with the use of adjusted EBITDA in the evaluation of us as compared to net income. Our management compensates for the limitations of using adjusted EBITDA by using this measure to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business rather than U.S. GAAP results alone.
In addition to the limitations noted above, adjusted EBITDA excludes items that may be recurring in nature and should not be disregarded in the evaluation of performance. However, we believe it is useful to exclude such items to provide a supplemental analysis of current results and trends compared to other periods because certain excluded items can vary significantly depending on specific underlying transactions or events, and the variability of such items may not relate specifically to ongoing operating results or trends and certain excluded items, while potentially recurring in future periods, may not be indicative of future results. For example, while EBITDA from discontinued operations is a recurring item, it is not indicative of ongoing operating results and trends or future results.
| |
(2) | Adjusted net income attributable to Venator Materials PLC ordinary shareholders is computed by eliminating the after-tax amounts related to the following from net income attributable to Venator Materials PLC ordinary shareholders: (a) business acquisition and integration expenses;expenses/adjustments; (b) separation expense,expense/gain, net; (c) net income of discontinued operations; (d) lossloss/gain on disposition of business/assets; (e)(d) certain legal settlements and related expenses; (f)expenses/gains; (e) amortization of pension and postretirement actuarial losses; (g)losses/gains; (f) net plant incident costs (credits); (h)costs/credits; and (g) restructuring, impairment, and plant closing and transition costs.costs/credits. Basic adjusted net income per share excludes dilution and is computed by dividing adjusted net income by the weighted average number of shares outstanding during the period. Adjusted diluted net income per share reflects all potential dilutive ordinary shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities. For the periods prior to our IPO, the average number of ordinary shares outstanding used to calculate basic and diluted adjusted net income per share was based on the ordinary shares that were outstanding at the time of our IPO. Adjusted net income and adjusted net income per share amounts are presented solely as supplemental information. |
Adjusted net income (loss) and adjusted net income (loss) per share amounts are presented solely as supplemental information. These measures exclude similar noncash items as Adjusted EBITDA in order to assist our investors in comparing our performance from period to period and as such, bear similar risks as Adjusted EBITDA as documented in footnote (1) above. For that reason, adjusted net income and the related per share amounts, should not be considered in isolation and should be considered only to supplement analysis of U.S. GAAP results.
| |
(3) | ThePrior to the second quarter of 2019, the income tax impacts, if any, of each adjusting item representrepresented a ratable allocation of the total difference between the unadjusted tax expense and the total adjusted tax expense, computed without consideration of any adjusting items using a with and without approach. We do not adjust for changes in tax valuation allowances because we do not believe it provides more meaningful information than is provided under GAAP. |
Beginning in the three- and six-month periods ended June 30, 2019, income tax expense is adjusted by the amount of additional tax expense or benefit that we would accrue if we used non-GAAP results instead of GAAP results in the calculation of our tax liability, taking into consideration our tax structure. We use a normalized effective tax rate of 35%, which reflects the weighted average tax rate applicable under the various jurisdictions in which we operate. This non-GAAP tax rate eliminates the effects of non-recurring and period specific items which are often attributable to restructuring and acquisition decisions and can vary in size and frequency. This rate is subject to change over time for various reasons, including changes in the geographic business mix, valuation allowances, and changes in statutory tax rates.
We eliminate the effect of significant changes to income tax valuation allowances from our presentation of adjusted net income to allow investors to better compare our ongoing financial performance from period to period. We do not adjust for insignificant changes in tax valuation allowances because we do not believe it provides more meaningful
information than is provided under GAAP. We believe that our revised approach enables a clearer understanding of the long term impact of our tax structure on post tax earnings.
| |
(4) | As presented within Item 2, operating expenses includes selling, general and administrative expenses and other operating expense (income), net. |
Three Months Ended SeptemberJune 30, 20182019 Compared to the Three Months Ended SeptemberJune 30, 20172018
For the three months ended SeptemberJune 30, 2018,2019, net lossincome was $366$22 million on revenues of $533$578 million, compared with net income of $53$198 million on revenues of $582$626 million for the same period in 2017.2018. The decrease of $419$176 million in net income was the result of the following items:
Revenues for the three months ended SeptemberJune 30, 20182019 decreased by $49$48 million, or 8%, as compared with the same period in 2017.2018. The decrease was due to a $42$16 million decrease in revenue in our Titanium Dioxide segment primarily related to decreases in volumes, and a $7$32 million decrease in revenue in our Performance Additives segment duesegment. See "—Segment Analysis" below.
Cost of goods sold for the three month period ended June 30, 2019 increased by $318 million from the same period in the prior year primarily as a result of the recognition of $325 million of insurance proceeds which was a credit to decreasescost of goods sold in volumes. See “—Segment Analysis” below.2018.
Our operating expenses for the three months ended SeptemberJune 30, 2018 increased2019 decreased by $13$1 million, or 30%2%, as compared with the same period in 2017,2018, primarily related to $7a $11 million of incremental SG&A costsdecrease in 2018 which are required to operate asselling, general and administrative expense offset by a stand-alone company$10 million decrease in other operating income. The decrease in selling, general and $4 million of income recognized in 2017 for sales of raw materials, for which similar sales in 2018 are reported as revenues.
Restructuring, impairment and plant closing and transition costs for the three months ended September 30, 2018 increased to $428 million from $16 million for the same period in 2017administrative expense is primarily as athe result of reductions in personnel costs while the planned closuredecrease in other operating income can be attributed to the sale of our plantcarbon credits in Pori, Finland beginning in the third quarter of 2018. For more information concerning restructuring and plant closing activities, see "Note 6. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated and combined financial statements.
| |
• | Restructuring, impairment and plant closing and transition costs for the three months ended June 30, 2019 decreased to nil from $136 million for the same period in 2018 primarily as a result of the closure of a portion of our Augusta, Georgia plant in the second quarter of 2018. For more information concerning restructuring and plant closing activities, see "Note 7. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated financial statements. |
| |
• | Our income tax benefit for the three months ended June 30, 2019 was $9 million compared to income tax expense of $45 million for the same period in 2018. Our income taxes are significantly affected by the mix of income and losses in the tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions. For further information concerning taxes, see "Note 10. Income Taxes" of the notes to unaudited condensed consolidated financial statements. |
Our income taxes for the three months ended September 30, 2018 was $55 million of income tax benefit compared to $14 million of income tax expense for the same period in 2017. Our income taxes are significantly affected by the mix of income and losses in the tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions. For further information concerning taxes, see "Note 9. Income Taxes" of the notes to unaudited condensed consolidated and combined financial statements.
Segment Analysis
| | | Three Months Ended | | Percent Change Favorable (Unfavorable) | Three Months Ended | | Percent Change Favorable (Unfavorable) |
| September 30, | | June 30, | |
(Dollars in millions) | 2018 | | 2017 | | 2019 | | 2018 | |
Revenues | | | | | | | | | | |
Titanium Dioxide | $ | 389 |
| | $ | 431 |
| | (10 | )% | $ | 439 |
| | $ | 455 |
| | (4 | %) |
Performance Additives | 144 |
| | 151 |
| | (5 | )% | 139 |
| | 171 |
| | (19 | %) |
Total | $ | 533 |
| | $ | 582 |
| | (8 | )% | $ | 578 |
| | $ | 626 |
| | (8 | %) |
Segment adjusted EBITDA | | | | | | |
Adjusted EBITDA | | | | | | |
Titanium Dioxide | $ | 75 |
| | $ | 127 |
| | (41 | )% | $ | 55 |
| | $ | 147 |
| | (63 | %) |
Performance Additives | 12 |
| | 15 |
| | (20 | )% | 16 |
| | 23 |
| | (30 | %) |
| 87 |
| | 142 |
| | (39 | )% | 71 |
| | 170 |
| | (58 | %) |
Corporate and other | (10 | ) | | (8 | ) | | (25 | )% | (10 | ) | | (13 | ) | | 23 | % |
Total | $ | 77 |
| | $ | 134 |
| | (43 | )% | $ | 61 |
| | $ | 157 |
| | (61 | %) |
| | | Three Months Ended September 30, 2018 vs. 2017 | Three Months Ended June 30, 2019 vs. 2018 |
| Average Selling Price(1) | | | | | Average Selling Price(1) | | | | |
| Local Currency | | Foreign Currency Translation Impact | | Mix & Other | | Sales Volumes(2) | Local Currency | | Foreign Currency Translation Impact | | Mix & Other | | Sales Volumes(2) |
Period-Over-Period Increase (Decrease) | | | | | | | | | | | | | | |
Titanium Dioxide | 7 | % | | — | % | | 1 | % | | (18 | )% | (9 | %) | | (4 | %) | | — | % | | 9 | % |
Performance Additives | 2 | % | | — | % | | (1 | )% | | (6 | )% | (1 | %) | | (3 | %) | | 1 | % | | (16 | %) |
| |
(1) | Excludes revenues from tolling arrangements, by-products and raw materials. |
| |
(2) | Excludes sales volumes of by-products and raw materials. |
Titanium Dioxide
The Titanium Dioxide segment generated revenues of $389$439 million in the three months ended SeptemberJune 30, 2018,2019, a decrease of $42$16 million, or 10%4%, compared to the same period in 2017.2018. The decrease was primarily due to an
18%a 9% decline in sales volumesthe average TiO2 selling price and a 4% unfavorable impact from foreign currency translation partially offset by a 7%9% increase in sales volumes. The decrease in the average selling price was primarily attributable to lower European prices and a 1% benefit from mix and other. The impact from foreign exchange rates, was neutralsofter business conditions in the quarter.
Asia Pacific. Sales volumes decreasedof functional and specialty TiO2 products increased globally and broadly across end-use applications due to lower demand for functional grade product as a resulthigher availability of customer destockingcertain products and lower product availability due to extended planned maintenance turnarounds. The increase in selling prices compared to the prior year period reflects more favorable business conditions for TiO2, allowing for an increase in prices globally.increased sales of new products.
Adjusted EBITDA for ourthe Titanium Dioxide segment decreased $52was $55 million for the three months ended June 30, 2019, a decrease of $92 million compared to the same period in 2017. In the prior year period, we recognized $202018, or a decrease of $69 million after excluding $23 million of adjusted EBITDAlost earnings attributable to lost earnings at our Pori, Finland TiO2 manufacturing facility, which were reimbursed through insurance proceeds.proceeds in 2018. The remaining decrease in adjusted EBITDA was primarily attributable to lower revenue and lower margins as a result of lower TiO2 margins due to a lower average TiO2 selling price, higher raw material costs, and energy costs,$6 million from the sale of carbon credits in the prior year period, partially offset by higher sales volumes and a $3 million of savingsbenefit from our 2019 Business Improvement Program.
Performance Additives
The Performance Additives segment generated $144$139 million of revenuerevenues in the three months ended SeptemberJune 30, 2018, which is $72019, a decline of $32 million, or 5%19%, lower thancompared to the same period in 2017. This decrease2018. The decline was the result ofprimarily due to a 6%16% decrease in sales volumes, relatinga 3% unfavorable impact of foreign currency translation and a 1% decrease in average selling price and was partially offset by a 1% increase from mix and other. The decline in volume was attributable to weaker than expectedlower construction activity in North America and Europe, lower demand for certain products used in automotive, electronics and plastics applications and a 1% decreasediscontinuation of sales of a product to a Timber Treatment customer. The average selling price declined due to the composition of sales mix and other, partially offset by a 2% increase in average selling prices. Selling prices increased in certainwithin our functional additives and timber treatment product lines to offset increases in raw material and energy costs.color pigments businesses.
Adjusted EBITDA in ourthe Performance Additives segment decreased by $3was $16 million, a decrease of $7 million for the three months ended SeptemberJune 30, 20182019 compared to the same period in 2017,2018, primarily due to lower sales volumes and a result of increased raw material and energy costs impacting revenue and segment margins,lower average selling price, partially offset by $3lower costs and a $1 million of savingsbenefit from our 2019 Business Improvement Program.
Corporate and Other
Corporate and other represents expenses which are not allocated to our segments. Losses from Corporate and other were $10 million, or $2$3 million morelower in the three months ended SeptemberJune 30, 2018 than2019 compared to the same period in 2017,2018, primarily as a result of an increase in selling, general and administrative costs to operate as a standalone company.the timing of corporate costs.
Six Months Ended SeptemberJune 30, 20182019 Compared to the NineSix Months Ended SeptemberJune 30, 20172018
For the ninesix months ended SeptemberJune 30, 2018,2019, net lossincome was $88$20 million on revenues of $1,781$1,140 million, compared with net income of $74$278 million on revenues of $1,681$1,248 million for the same period in 2017.2018. The decrease of $162$108 million in net income was the result of the following items:
Revenues for the nine months ended September 30, 2018 increased by $100 million, or 6% | |
• | Revenues for the six months ended June 30, 2019 decreased by $108 million, or 9%, as compared with the same period in 2018. The decrease was due to a $47 million, or 5% decline in revenue in our Titanium Dioxide segment primarily related to lower average TiO2 selling prices, and a $61 million, or 18% decline in revenue in our Performance Additives segment, primarily due to lower sales volumes. See “—Segment Analysis” below. |
Cost of goods sold for the six month period ended June 30, 2019 increased by $350 million from the same period in 2017. The increasethe prior year primarily as a result of the recognition of $325 million of insurance proceeds which was duea credit to a $83 million increasecost of goods sold in revenue in our Titanium Dioxide segment primarily related to increases in average selling prices, and a $17 million increase in revenue in our Performance Additives segment due to increases in selling prices. See “—Segment Analysis” below.2018.
Our operating expenses for the ninesix months ended SeptemberJune 30, 2018 decreased2019 increased by $4$3 million, or 3%, as compared with the same period in 2017,2018, primarily related to the impact$13 million of foreign exchange rates.
Restructuring, impairment and plant closing and transition costs for the nine months ended September 30, 2018 increased to $573 million from $49 million for the same periodcarbon credits sold in 2017 primarily as a result of the closure of a portion of our Augusta, Georgia plant in the second quarter of 2018 and the closure of our plantnegative affects foreign exchange rates, offset by reductions in Pori, Finland beginning in the third quarter of 2018. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated and combined financial statements.
personnel costs.
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• | Restructuring, impairment and plant closing and transition costs for the six months ended June 30, 2019 decreased to $12 million from $145 million for the same period in 2018 primarily as a result of the closure of a portion of our Augusta, Georgia plant in the second quarter of 2018 and the closure of our plant in Pori, Finland beginning in the third quarter of 2018. For more information concerning restructuring activities, see "Note 7. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated financial statements. |
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• | Our income tax benefit for the six months ended June 30, 2019 was $8 million compared to income tax expense of $65 million for the same period in 2018. Our income tax expense is significantly affected by the mix of income and losses in the tax jurisdictions in which we operated, as impacted by the presence of valuation allowances in certain tax jurisdictions. For further information concerning taxes, see "Note 10. Income Taxes" of the notes to unaudited condensed consolidated financial statements. |
Our income tax expense for the nine months ended September 30, 2018 decreased to $10 million from $26 million for the same period in 2017. Our income tax expense is significantly affected by the mix of income and losses in the tax jurisdictions in which we operated, as impacted by the presence of valuation allowances in certain tax jurisdictions. For further information concerning taxes, see "Note 9. Income Taxes" of the notes to unaudited condensed consolidated and combined financial statements.
Segment Analysis
| | | Nine Months Ended | | Percent Change Favorable (Unfavorable) | Six Months Ended | | Percent Change Favorable (Unfavorable) |
| September 30, | | June 30, | |
(Dollars in millions) | 2018 | | 2017 | | 2019 | | 2018 | |
Revenues | | | | | | | | | | |
Titanium Dioxide | $ | 1,300 |
| | $ | 1,217 |
| | 7 | % | $ | 864 |
| | $ | 911 |
| | (5 | %) |
Performance Additives | 481 |
| | 464 |
| | 4 | % | 276 |
| | 337 |
| | (18 | %) |
Total | $ | 1,781 |
| | $ | 1,681 |
| | 6 | % | $ | 1,140 |
| | $ | 1,248 |
| | (9 | %) |
Segment adjusted EBITDA | | | | | | | | | | |
Titanium Dioxide | $ | 365 |
| | $ | 268 |
| | 36 | % | $ | 116 |
| | $ | 290 |
| | (60 | %) |
Performance Additives | 59 |
| | 57 |
| | 4 | % | 31 |
| | 47 |
| | (34 | %) |
| 424 |
| | 325 |
| | 30 | % | 147 |
| | 337 |
| | (56 | %) |
Corporate and other | (33 | ) | | (48 | ) | | 31 | % | (26 | ) | | (23 | ) | | (13 | %) |
Total | $ | 391 |
| | $ | 277 |
| | 41 | % | $ | 121 |
| | $ | 314 |
| | (61 | %) |
| | | Nine Months Ended September 30, 2018 vs. 2017 | Six Months Ended June 30, 2019 vs. 2018 |
| Average Selling Price(1) | | | | | Average Selling Price(1) | | | | |
| Local Currency | | Foreign Currency Translation Impact | | Mix & Other | | Sales Volumes(2) | Local Currency | | Foreign Currency Translation Impact | | Mix & Other | | Sales Volumes(2) |
Period-Over-Period Increase (Decrease) | | | | | | | | | | | | | | |
Titanium Dioxide | 16 | % | | 5 | % | | 1 | % | | (15 | )% | (7 | %) | | (4 | %) | | — | % | | 6 | % |
Performance Additives | 4 | % | | 3 | % | | (2 | )% | | (1 | )% | (1 | %) | | (3 | %) | | 1 | % | | (15 | %) |
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(1) | Excludes revenues from tolling arrangements, by-products and raw materials. |
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(2) | Excludes sales volumes of by-products and raw materials. |
Titanium Dioxide
The Titanium Dioxide segment generated revenues of $1,300$864 million in the ninesix months ended SeptemberJune 30, 2018, an increase2019, a decrease of $83$47 million, or 7%5%, compared to the same period in 2017.2018. The increasedecline was primarily due to a 16% increase7% decrease in the average TiO2selling prices, a 5% improvement driven by the favorable impact of foreign exchange rates,price and a 1% increase due to mix and other partially offset by a 15% decrease in sales volumes.
Sales volumes decreased due to customer destocking, lower product availability due to extended planned maintenance turnarounds, the impact of the fire at our Pori, Finland manufacturing facility and as a result of plant closures as part of our restructuring programs. Excluding the impact of the fire at our Pori plant and the impact of plants closed as part of our restructuring programs, sales volumes decreased by 9%. The increase in selling prices compared to the prior year period reflects more favorable business conditions for TiO2, allowing for an increase in prices globally.
Adjusted EBITDA for our Titanium Dioxide segment increased $97 million for the nine months ended September 30, 2018 compared to the same period in 2017. This increase was primarily as a result of improvements in pricing, $14 million of energy credits sold in 2018, a $14 million of benefits from our business improvement program, partially offset by declines in revenues and margins as a result of higher raw materials and energy costs.
Performance Additives
The Performance Additives segment generated $481 million of revenue in the nine months ended September 30, 2018, which is $17 million, or 4%, higher compared to the same period in 2017 resulting from a 4% increase in average selling prices, a 3% improvement driven by the favorableunfavorable impact of foreign exchange rates, partially offset by a 2%6% increase in sales volumes. The decrease in the average selling price was primarily attributable to lower European prices and softer business conditions in Asia Pacific. Sales volumes of functional and specialty TiO2 increased globally due to less favorablehigher availability of certain products and increased sales mixof new products.
Adjusted EBITDA for our Titanium Dioxide segment decreased $174 million for the six months ended June 30, 2019 compared to the same period in 2018, or a decrease of $143 million after excluding $41 million of lost earnings attributable to our Pori, Finland TiO2 manufacturing facility, which were reimbursed through insurance proceeds in 2018. The decrease was primarily as a result of lower TiO2 margins, due to a lower average TiO2 selling price, higher raw material costs and other$13 million of carbon credits sold in the six months ended June 30, 2018, partially offset by higher sales volumes and a $5 million benefit from our 2019 Business Improvement Program.
Performance Additives
The Performance Additives segment generated $276 million of revenue in the six months ended June 30, 2019, which is $61 million, or 18%, lower compared to the same period in 2018 resulting from a 15% decrease in volumes, a 3% unfavorable impact of foreign exchange rates and a 1% decrease in volumes. Selling prices increasedthe average selling price, partially offset by a 1% increase due to mix and other. Sales volumes reflect lower construction activity in North America and Europe, lower demand for certain products used in automotive, electronics and plastics applications, the impact of plant shutdowns as part of prior restructuring actions and a discontinuation of sales of a product to a Timber Treatment customer. The average selling price declined due to the composition of sales within our functional additives and color pigment, and timber treatment product lines to offset increases in raw material and energy costs.pigments businesses.
Adjusted EBITDA in our Performance Additives segment increaseddecreased by $2$16 million, or 4%34%, for the ninesix months ended SeptemberJune 30, 20182019 compared to the same period in 2017,2018, primarily due to $7 million of benefits from our business improvement program,lower sales volumes and a lower average selling price, partially offset by increases in raw materiallower selling, general and energy costs.administrative costs and a $2 million benefit from our Business Improvement Program.
Corporate and Other
Corporate and other represents expenses which are not allocated to our segments. Losses from Corporate and other were $33$26 million, or $15$3 million lowerhigher for the ninesix months ended SeptemberJune 30, 20182019 than the same period in 2017 as our costs to operate2018 primarily as a standalone company are lower than thoseresult the timing of corporate costs historically allocated to usand the unfavorable impact of foreign currency translation arising from Huntsman.weakness in the Euro versus the U.S. dollar.
Liquidity and Capital Resources
Prior to the separation, our primary source of liquidity and capital resources had been cash flows from operations, our participation in a cash pooling program with Huntsman and debt incurred by Huntsman. Following the separation, we have not received any funding through the Huntsman cash pooling program. We had cash and cash equivalents of$25150 millionand $238$165 million as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. We expect to have adequate liquidity to meet our obligations over the next 12 months. Additionally, we believe our future obligations, including needs for capital expenditures, will be met by available cash generated from operations and borrowings under the ABL Facility.borrowings.
On August 8, 2017, in connection with our IPO and the separation, we entered into new financing arrangements and incurred new debt, including $375 million of Senior Notes issued by our subsidiaries Venator Finance S.à.r.l. and Venator Materials LLC, (the "Issuers"),as Issuers, and borrowings of $375 million under the Term Loan Facility. We used the net proceeds of the Senior Notes and the Term Loan Facility to repay approximately $732 million of net intercompany debt owed to Huntsman and to pay related fees and expenses of approximately $18 million. Substantially all Huntsman receivables or payables were eliminated in connection with the separation, other than a A payable to Huntsman for a liability pursuant to the Tax Matters Agreement entered into at the time of the separation which has been presented as noncurrent"Noncurrent payable to affiliate within the affiliates" on our unaudited condensed consolidated and combinedbalance sheet.sheets.
In addition to the Senior Notes and the Term Loan Facility, we entered into the ABL Facility. On June 20, 2019 the ABL facility was increased to an aggregate principal amount of up to $350 million, with no change to the maturity dates. Availability to borrow under the ABL Facility is subject to a borrowing base calculation comprising both accounts receivable and inventory in the U.S., Canada, the U.K. and Germany and only accounts receivable in France and Spain. Thus, the base calculation may fluctuate from time to time and may be further impacted by the lenders’ discretionary ability to impose reserves and availability blocks that might otherwise incrementally increase borrowing availability. Assuming all proposed borrowers currently participate in the facility, theThe borrowing base calculation as of SeptemberJune 30, 20182019 is in excess of $269292 million, of which $260 $257 million wasis available to borrowers. To participate in the facility, each borrower is required to deliver certain documentation and security agreements to the satisfaction of the administrative agent, which was achieved in January 2018.be drawn.
Items Impacting Short-Term and Long-Term Liquidity
Our liquidity can be significantly impacted by various factors. The following matters had, or are expected to have, a significant impact on our liquidity:
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• | Cash invested in our accounts receivable and inventory, net of accounts payable, as reflected in our unaudited condensed consolidated statements of cash flows decreased by $28 million for the six months ended June 30, 2019 as compared to the same period in the prior year. We expect volatility in our working capital components to continue due to seasonal changes in working capital throughout the year. |
Cash invested in our accounts receivable and inventory, net of accounts payable, increased by approximately $75 million for the nine months ended September 30, 2018 as reflected in our unaudited condensed consolidated and combined statements of cash flows. We expect volatility in our working capital components to continue due to seasonal changes in working capital throughout the year.
We expect to spend approximately $48$130 million on capital expenditures during the fourth quarter of 2018.2019. Our future expenditures include certain EHS maintenance and upgrades, periodic maintenance and repairs applicable to major units of manufacturing facilities,facilities; expansions of our existing facilities or construction of new facilities, andfacilities; certain cost reduction projects.projects; and the cost to transfer specialty and differentiated manufacturing from Pori, Finland to other sites within our manufacturing network. We expect to fund this spending with cash on hand as well as cash provided by operations.operations and borrowings.
During the ninesix months ended SeptemberJune 30, 2018,2019, we made contributions to our pension and postretirement benefit plans of $21$12 million. During the remainder of 2018,2019, we expect to contribute an additional amount of approximately $19$23 million to these plans.
We are involved in a number of cost reduction programs for which we have established restructuring accruals. As of September 30, 2018, we had $39 million of accrued restructuring costs of which $25 million is classified as current. We expect to incur additional restructuring and plant closing costs of approximately $10 million, including $5 million for non-cash charges, and pay approximately $8 million, through the remainder of 2018. For further discussion of these plans and the costs involved, see "Note 6. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated and combined financial statements.
Further, although the Business Improvement Program is expected to be completed by the first quarter of 2019, we expect to incur additional restructuring charges well beyond this period. We expect the Business Improvement Program to provide additional contributions to adjusted EBITDA in 2018 and 2019.
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• | We are involved in a number of cost reduction programs for which we have established restructuring accruals. As of June 30, 2019, we had $19 million of accrued restructuring costs of which $8 million is classified as current. We expect to incur additional restructuring and plant closing costs of approximately $28 million, including $9 million for noncash charges, and pay approximately $16 million through the remainder of 2019. For further discussion of these plans and the costs involved, see "Note 7. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated financial statements. |
In the fourth quarter of 2018 we commenced additional cost reduction initiatives which are expected to provide approximately $40 million of annual adjusted EBITDA benefit compared to 2018. We expect actions will be complete in 2020, ending the year at the full run-rate level.
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• | On January 30, 2017, our TiO2 manufacturing facility in Pori, Finland, experienced fire damage. The loss was covered by insurance for property damage as well as business interruption losses subject to retained deductiblesWe are in the process of $15 millionclosing our Pori, Finland, TiO2 manufacturing facility and 60 days, respectively. The Pori facility had a nameplate capacity of 130,000 metric tons per year, which represented approximately 17% of our total TiO2 nameplate capacity and approximately 2% of total global TiO2 demand. We restored 20% oftransferring the total prior capacity, which is dedicated to production of specialty products.and differentiated product grades to other sites within our existing network. In the first half of 2019, we had capital expenditures of $35 million related to project wind-down and closure costs. We intend to operate the Pori facility at reduced production rates through the transition period, which is expected to last through at least 2022, subject to economic and other factors. |
On September 12, 2018, following our review of the Pori facility and options within our manufacturing network, and as a result of unanticipated cost escalation and extended timeline associated with reconstruction, we announced that we intend to close our Pori, Finland, TiO2 manufacturing facility and transfer the specialty and differentiated product grades to other sites. We intend to continue to operate the Pori facility at reduced production rates through the transition period, which is expected to last through 2021. Please see “Part II, Item 1A. Risk Factors-Risks Relating to our Business-Disruptions in production at our manufacturing facilities, including at our TiO2 manufacturing facility in Pori, Finland, may have a material adverse impact on our business, results of operations and/or financial condition.”
We have $746$734 million in aggregate principal outstanding consisting of $371 million of 5.75% Senior Notes due 2025, and a $363 million Term Loan Facility. In addition we have $24 million in aggregate principal outstanding under $375 million, 5.75% of Senior Notes due 2025, and a $371 million Term Loanour ABL Facility. See further discussion under "Financing Arrangements."
Following the separation and our IPO, we no longer rely on Huntsman’s earnings, assets, cash flow or credit and we are responsible for obtaining and maintaining sufficient working capital and servicing our debt. See “Part I. Item 1A. Risk Factors—Risks Related to Our Relationship with Huntsman—If we are unable to
generate sufficient cash flow from our operations, our business, financial condition and results of operations may be materially and adversely affected” in our 2017 Form 10-K.
As of SeptemberJune 30, 20182019 and December 31, 20172018, we had $7$32 million and $14$8 million, respectively, classified as current portion of debt.
As of SeptemberJune 30, 20182019 and December 31, 20172018, we had approximately $29$13 million and $31$36 million, respectively, of cash and cash equivalents held outside of the U.S. and Europe, including our variable interest entities. As of SeptemberJune 30, 20182019, our non-U.K. subsidiaries have no plan to distribute earningsfunds in a manner that would cause them to be subject to U.K., U.S., or other local country taxation. In the first quarter of 2019, a non-U.K. subsidiary distributed $12 million to a U.K. subsidiary subject to a 5% withholding tax.
Cash Flows for the NineSix Months Ended SeptemberJune 30, 20182019 Compared to the NineSix Months Ended SeptemberJune 30, 20172018
Net cash provided byused in operating activities from continuing operations was $306$50 million for the ninesix months ended SeptemberJune 30, 20182019 while net cash provided by operating activities from continuing operations was $180$305 million for the ninesix months ended SeptemberJune 30, 2017.2018. The increaseunfavorable variance in net cash provided byfrom operating activities from continuing operations for the ninesix months ended SeptemberJune 30, 20182019 compared with the same period in 20172018 was primarily attributable to noncash restructuring charges of $539 million in 2018 compared to $7 million in 2017, offset by the $162a $258 million decrease in net income as described in “—"—Results of Operations”Operations" above, and a $237$135 million unfavorable variance in noncash restructuring and impairment charges, a $40 million unfavorable variance in deferred income taxes, offset by a $86 million favorable variance in operating assets and liabilities for 20182019 as compared with 2017.the same period in 2018.
Net cash used in investing activities from continuing operations was $266$82 million for the ninesix months ended SeptemberJune 30, 2018,2019, compared to net cash provided by investing activities from continuing operations of $73$162 million for the ninesix months ended SeptemberJune 30, 2017.2018. The increasedecrease in net cash used in investing activities from continuing operations for the nine months ended September 30, 2018 compared with the same period in 2017 was primarily attributable to a decrease in insurance proceeds received for recovery of property damage of $50 million and an increase in capital expenditures of $175$84 million comparedas a result of higher capital expenditures related to our TiO2 manufacturing facility in Pori, Finland in the prior year period, a decrease in net repayments from affiliates of $121 million and a decrease in net cash received from unconsolidated affiliates.period.
Net cash used inprovided by financing activities from continuing operations was $17 million for the ninesix months ended SeptemberJune 30, 2018,2019, compared to net cash$14 million used in financing activities from continuing operations of $99 million for the ninesix months ended SeptemberJune 30, 2017.2018. The decrease in net cash used in financing activities from continuing operations for the ninesix months ended SeptemberJune 30, 20182019 compared with the same period in 20172018 was primarily attributable to a decrease in final settlement$24 million of affiliate balances at separation, a decrease in repayments on affiliate accounts payable of $86 million from 2017 to 2018, partially offset by a decrease in proceeds received from issuance of short-term debt and a $7 million decrease in repayment of long-term debt.
Changes in Financial Condition
The following information summarizes our working capital as of SeptemberJune 30, 20182019 and December 31, 20172018:
| | | September 30, | | December 31, | | Increase | | Percent | | | | | | | | | |
(Dollars in millions) | 2018 | | 2017 | | (Decrease) | | Change | June 30, 2019 | | December 31, 2018 | | Increase (Decrease) | | Percent Change |
Cash and cash equivalents | $ | 251 |
| | $ | 238 |
| | $ | 13 |
| | 5 | % | $ | 50 |
| | $ | 165 |
| | $ | (115 | ) | | (70 | %) |
Accounts receivable, net | 398 |
| | 380 |
| | 18 |
| | 5 | % | 423 |
| | 351 |
| | 72 |
| | 21 | % |
Accounts receivable from affiliates | — |
| | 12 |
| | (12 | ) | | (100 | )% | |
Inventories | 513 |
| | 454 |
| | 59 |
| | 13 | % | 508 |
| | 538 |
| | (30 | ) | | (6 | %) |
Prepaid expenses | 28 |
| | 19 |
| | 9 |
| | 47 | % | 9 |
| | 20 |
| | (11 | ) | | (55 | %) |
Other current assets | 72 |
| | 66 |
| | 6 |
| | 9 | % | 66 |
| | 51 |
| | 15 |
| | 29 | % |
Total current assets from continuing operations | 1,262 |
| | 1,169 |
| | 93 |
| | 8 | % | |
Total current assets | | $ | 1,056 |
| | $ | 1,125 |
| | $ | (69 | ) | | (6 | %) |
Accounts payable | 375 |
| | 385 |
| | (10 | ) | | (3 | )% | 299 |
| | 382 |
| | (83 | ) | | (22 | %) |
Accounts payable to affiliates | 14 |
| | 16 |
| | (2 | ) | | (13 | )% | 14 |
| | 18 |
| | (4 | ) | | (22 | %) |
Accrued liabilities | 161 |
| | 244 |
| | (83 | ) | | (34 | )% | 116 |
| | 135 |
| | (19 | ) | | (14 | %) |
Current operating lease liability | | 9 |
| | — |
| | 9 |
| | NM |
|
Current portion of debt | 7 |
| | 14 |
| | (7 | ) | | (50 | )% | 32 |
| | 8 |
| | 24 |
| | 300 | % |
Total current liabilities from continuing operations | 557 |
| | 659 |
| | (102 | ) | | (15 | )% | |
Total current liabilities | | $ | 470 |
| | $ | 543 |
| | $ | (73 | ) | | (13 | %) |
Working capital | $ | 705 |
| | $ | 510 |
| | $ | 195 |
| | 38 | % | $ | 586 |
| | $ | 582 |
| | $ | 4 |
| | 1 | % |
Our working capital increased by $195$4 million as a result of the net impact of the following significant changes:
Cash and cash equivalents increaseddecreased by $13$115 million primarily due to inflowsoutflows of $306$50 million from operating activities, of continuing operations offset by cash outflows of $266and $82 million from investing activities, partially offset by inflows of continuing operations and $17 million fromprovided by financing activities of continuing operations.activities.
Accounts receivable increased by $18$72 million primarily due to seasonally higher revenues in the thirdsecond quarter of 20182019 compared to the fourth quarter of 2017.2018.
Inventory decreased $30 million reflecting lower levels of finished goods at June 30, 2019 as compared to the prior year end as a result of seasonality and efforts across the organization to manage inventory levels.
Accounts payable decreased by $83 million primarily as a result of the timing of cash payments versus receipt of raw materials and a $44 million reduction in capital accruals.
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• | InventoryCurrent portion of debt increased $59by $24 million primarily as a resultdue to the issuance of a $56 million increaseshort-term debt in TiO2 inventory and a $4 million increase in Performance Additives inventory. The increase in TiO2 inventory is driven by an increase in raw material costs year over year and an increase in inventory volumes fromthe second quarter of 2019 compared to the fourth quarter of 2017 to the third quarter of 2018 while the increase in Performance Additives inventory is primarily due to a change in product mix in our functional additives product line.2018.
|
Accrued liabilities decreased by $83$19 million primarily due to a reduction in accrued interest and accrued payroll which is a reflection of the recognitiontiming of deferred income in the secondpayments versus the amounts accrued at June 30, 2019 as compared to December 31, 2018.
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• | Current operating lease liability increased by $9 million as a result of the adoption of ASU No. 2016-02, Leases (Topic 842) in the first quarter of 2019. See "Note 2. Recently Issued Accounting Pronouncements" of the notes to unaudited condensed consolidated financial statements for further discussion of the implementation of this accounting standard. |
Financing Arrangements
For a discussion of 2018 recorded in connection with the progress payments received from our insurer related to the fire at our Pori, Finland manufacturing facility.
Accounts receivable from and accounts payable to affiliates represent financing arrangements with affiliates of Huntsman. For further information, see “"Note 7.8. Debt—Cash Pooling Program”" of the notes to unaudited condensed consolidated and combined financial statements.
Financing Arrangements
Senior Notes
On July 14, 2017, the Issuers entered into an indenture in connection with the issuance of the Senior Notes. The Senior Notes are general unsecured senior obligations of the Issuers and are guaranteed on a general unsecured senior basis by Venator and certain of Venator’s subsidiaries. The indenture related to the Senior Notes imposes certain limitations on the ability of Venator and certain of its subsidiaries to, among other things, incur additional indebtedness secured by any principal properties, incur indebtedness of non-guarantor subsidiaries, enter into sale and leaseback transactions with respect to any principal properties and consolidate or merge with or into any other person or lease, sell or transfer all or substantially all of its properties and assets. The Senior Notes bear interest of 5.75% per year payable semi-annually and will mature on July 15, 2025. The Issuers may redeem the Senior Notes in whole or in part at any time prior to July 15, 2020 at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, and an early redemption premium, calculated on an agreed percentage of the outstanding principal amount, providing compensation on a portion of foregone future interest payables. The Senior Notes will be redeemable in whole or in part at any time on or after July 15, 2020 at the redemption prices set forth in the indenture, plus accrued and unpaid interest, if any, up to, but not including, the redemption date. In addition, at any time prior to July 15, 2020, the Issuers may redeem up to 40% of the aggregate principal amount of the Senior Notes with an amount not greater than the net cash proceeds of certain equity offerings or contributions to Venator’s equity at 105.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date. Upon the occurrence of certain change of control events (other than the separation), holders of the Venator Notes will have the right to require that the Issuers purchase all or a portion of such holder’s Senior Notes in cash at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
Senior Credit Facilities
On August 8, 2017, we entered into the Senior Credit Facilities that provide for first lien senior secured financing of up to $675 million, consisting of:
the Term Loan Facility in an aggregate principal amount of $375 million, with a maturity of seven years; and
the ABL Facility in an aggregate principal amount of up to $300 million, with a maturity of five years.
The Term Loan Facility will amortize in aggregate annual amounts equal to 1% of the original principal amount of the Term Loan Facility, payable quarterly commenced in the fourth quarter of 2017.
Availability to borrow under the $300 million of commitments under the ABL Facility is subject to a borrowing base calculation comprised of accounts receivable and inventory in U.S., Canada, the U.K., Germany and accounts receivable in France and Spain, that fluctuate from time to time and may be further impacted by the lenders’ discretionary ability to impose reserves and availability blocks that might otherwise incrementally increase borrowing availability. As a result, the aggregate amount available for extensions of credit under the ABL Facility at any time is the lesser of $300 million and the borrowing base calculated according to the formula described above minus the aggregate amount of extensions of credit outstanding under the ABL Facility at such time.
Borrowings under the Term Loan Facility bear interest at a rate equal to, at Venator’s option, either (a) a London Interbank Offering Rate (“LIBOR”) based rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs subject to an interest rate floor to be agreed or (b) a base rate determined by reference to the highest of (i) the rate of interest per annum determined from time to time by JPMorgan Chase Bank, N.A. as its prime rate in effect at its principal office in New York City, (ii) the federal funds rate plus 0.50% per annum and (iii) the one-month adjusted LIBOR plus 1.00% per annum, in each case plus an applicable margin to be agreed upon. Borrowings under the ABL Facility bear interest at a variable rate equal to an applicable margin based on the applicable quarterly average excess availability under the ABL Facility plus either a LIBOR or a base rate. The applicable margin percentage is calculated and established once every three calendar months and varies from 150 to 200 basis points for LIBOR loans depending on the quarterly average excess availability under the ABL Facility for the immediately preceding three-month period.
Guarantees
All obligations under the Senior Credit Facilities are guaranteed by Venator and substantially all of our subsidiaries (the “Guarantors”) and are secured by substantially all of the assets of Venator and the Guarantors, in each case subject to certain exceptions. Lien priority as between the Term Loan Facility and the ABL Facility with respect to the collateral will be governed by an intercreditor agreement.
Augusta Matter
In February 2017, Huntsman filed suit against the legacy owner and certain former executives of Rockwood, primarily related to the failure of new technology that Huntsman acquired in the Rockwood acquisition that was to be implemented at the new Augusta, Georgia facility and subsequently at other facilities. Huntsman is seeking various forms of legal remedy, including compensatory damages, punitive damages, expectation damages, consequential damages and restitution. Venator is not party to the suit.
Restructuring, Impairment and Plant Closing and Transition Costs
For a discussion of our restructuring plans and the costs involved, see “"Note 6.7. Restructuring, Impairment, and Plant Closing and Transition Costs”" of the notes to unaudited condensed consolidated and combined financial statements.statements.
Legal Proceedings
For a discussion of legal proceedings, see “"Note 11.12. Commitments and Contingencies—Legal Matters”Matters" of the notes to unaudited condensed consolidated and combined financial statements.statements.
Environmental, Health and Safety Matters
As noted in the 20172018 Form 10-K, specifically within “Part"Part I. Item 1. Business—Environmental, Health and Safety Matters”Matters" and “Part"Part I. Item 1A. Risk Factors,”" we are subject to extensive environmental regulations, which may impose significant additional costs on our operations in the future. While we do not expect any of these enactments or proposals to have a material adverse effect on us in the near term, we cannot predict the longer-term effect of any of these regulations or proposals on our future financial condition. For a discussion of EHS matters, see “"Note 12.13. Environmental, Health and Safety Matters”" of the notes to unaudited condensed consolidated and combined financial statements.statements.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see “"Note 2. Recently Issued Accounting Pronouncements”" of the notes to unaudited condensed consolidated and combined financial statements.statements.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in our unaudited condensed consolidated and combined financial statements. There have been no changes to our critical accounting policies or estimates other than changes to our revenue recognition policy as a result of the adoption of ASC 606, Revenue from Contracts with Customers as detailed below.
estimates. See the Company’s critical accounting policies in “Part"Part 2. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies”Policies" in the 20172018 Form 10-K.
Revenue Recognition
Venator generates substantially all of its revenues through sales of inventory in the open market and via long-term supply agreements. Revenue is recognized when the performance obligations under the terms of our contracts are satisfied. Generally, this occurs at the time of shipping at which point the control of the goods transfers to the customer, there is a present right to payment and legal title, and the risks and rewards of ownership have transferred to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferred goods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, such as changes in interest rates, and foreign exchange rates.rates, and commodity prices. We manage these risks through normal operating and financing activities and, when appropriate, through the use of derivative instruments. We do not invest in derivative instruments for speculative purposes.
Interest Rate Risk
We are exposed to interest rate risk through the structure of our debt portfolio which includes a mix of fixed and floating rates. Actions taken to reduce interest rate risk include managing the mix and rate characteristics of various interest-bearing liabilities.
The carrying value of our floating rate debt is approximately $365$363 million at SeptemberJune 30, 2018.2019. A hypothetical 1% increase in interest rates on our floating rate debt as of SeptemberJune 30, 20182019 would increase our interest expense by approximately $4 million on an annualized basis.
Foreign Exchange Rate Risk
We are exposed to market risks associated with foreign exchange risk.exchange. Our cash flows and earnings are subject to fluctuations due to exchange rate variation. Our revenues and expenses are denominated in various foreign currencies. We enter into foreign currency derivative instruments to minimize the short-term impact of movements in foreign currency rates. Where practicable, we generally net multicurrency cash balances among our subsidiaries to help reduce exposure to foreign currency exchange rates. Certain other exposures may be managed from time to time through financial market transactions, principally through the purchase of spot or forward foreign exchange contracts (generally with maturities of three months or less). We do not hedge our foreign currency exposures in a manner that would eliminate the effect of changes in exchange rates on our cash flows and earnings. At SeptemberJune 30, 20182019 and December 31, 2017,2018, we had approximately $95$79 million and $109$89 million, respectively, notional amount (in U.S. dollar equivalents) outstanding in foreign currency contracts with a term of approximately one month.
In December 2017, we entered into three cross-currency swap agreements to convert a portion of our intercompany fixed-rate, U.S. dollar denominated notes, including the semi-annual interest payments and the payment of remaining principle at maturity, to a fixed-rate, Euro denominated debt. The economic effect of the swap agreement was to eliminate the uncertainty of the cash flows in U.S. Dollars associated with the notes by fixing the principle amount at €169 million with a fixed annual rate of 3.43%. These hedges have been designated as cash flow hedges and the critical terms of the cross-currency swap agreements correspond to the underlying hedged item. These swaps mature in July 2022, which is our best estimate of the repayment date of these intercompany loans. The amount and timing of the semi-annual principle payments under the cross-currency swap also correspond with the terms of the intercompany loans. Gains and losses from these hedges offset the changes in the value of interest and principal payments as a result of changes in foreign exchange rates.
During 2018,2019, the changes in accumulated other comprehensive loss associated with these cash flow hedging activities was a gain of approximately $5 million.
Commodity Price Risk
A portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate with the
changes in the business cycle. We try to protect against such instability through various business strategies. These include provisions in sales contracts allowing us to pass on higher raw material costs through timely price increases and formula price contracts to transfer or share commodity price risk. We did not have any commodity derivative instruments in place as of SeptemberJune 30, 20182019 and December 31, 2017.2018.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by ruleRule 13-a 15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report.Quarterly Report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of SeptemberJune 30, 2018,2019, our disclosure controls and procedures were effective, in that they ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurity and Exchange Commission’s rules and forms, and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting during the three months ended SeptemberJune 30, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). However, we can only give reasonable assurance that our internal controlscontrol over financial reporting will prevent or detect material misstatements on a timely basis. Ineffective internal controlscontrol over financial reporting could cause investors to lose confidence in our reported financial information and could result in a lower trading price for our securities.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DuringShareholder Litigation
On February 8, 2019 we, certain of our executive officers, Huntsman and certain banks who acted as underwriters in connection with our IPO and secondary offering were named as defendants in a proposed class action civil suit filed in the three months ended September 30, 2018, thereDistrict Court for the State of Texas, Dallas County (the "Dallas District Court"), by an alleged purchaser of our ordinary shares in connection with our IPO on August 3, 2017 and our secondary offering on December 1, 2017. The plaintiff, Macomb County Employees’ Retirement System, alleges that inaccurate and misleading statements were made regarding the impact to our operations, and prospects for restoration thereof, resulting from the fire that occurred at our Pori, Finland manufacturing facility, among other allegations. Additional complaints making substantially the same allegations were filed in the Dallas District Court by the Firemen's Retirement System of St. Louis on March 4, 2019 and by Oscar Gonzalez on March 13, 2019, with the third case naming two of our directors as additional defendants. A fourth case was filed in the U.S. District Court for the Southern District of New York by the City of Miami General Employees' & Sanitation Employees' Retirement Trust on July 31, 2019, making substantially the same allegations, adding claims under sections 10(b) and 20(a) of the U.S. Exchange Act, and naming all of our directors as additional defendants.
The plaintiffs in these cases seek to determine that the proceedings should be certified as class actions and to obtain alleged compensatory damages, costs, rescission and equitable relief. The cases filed in the Dallas District Court have been consolidated into a single action.
On May 8, 2019, we filed a “special appearance” in the Dallas District Court action contesting the court’s jurisdiction over the Company and a motion to transfer venue to Montgomery County, Texas and on June 7, 2019 we and certain defendants filed motions to dismiss. On July 9, 2019, a hearing was held on the motions, but no material developmentsruling has been made following the hearing.
We may be required to indemnify our executive officers and directors, Huntsman, and the banks who acted as underwriters in our IPO and secondary offerings, for losses incurred by them in connection with respectthese matters pursuant to material legal proceedings referencedour agreements with such parties. Because of the early stage of this litigation, we are unable to reasonably estimate any possible loss or range of loss and we have not accrued for a loss contingency with regard to these matters.
Tronox Litigation
On April 26, 2019, we acquired intangible assets related to the European paper laminates business from Tronox. A separate agreement with Tronox entered into on July 14, 2018 requires that Tronox promptly pay us a “break fee” of $75 million upon the consummation of Tronox’s merger with Cristal once the sale of the European paper laminates business to us was consummated, if the sale of Cristal’s Ashtabula manufacturing complex to us was not completed. The deadline for such payment was May 13, 2019. On April 26, 2019, Tronox publicly stated that it believes it is not obligated to pay the break fee.
On May 14, 2019, we commenced a lawsuit in “Part I. Item 3. Legal Proceedings”the Delaware Superior Court against Tronox arising from Tronox's breach of its obligation to pay the break fee. We are seeking a judgment for $75 million, plus pre- and post-judgment interest, and reasonable attorneys' fees and costs. On June 17, 2019, Tronox filed an answer denying that it is obligated to pay the break fee and asserting affirmative defenses and counterclaims of approximately $400 million, alleging that we failed to negotiate the purchase of the Ashtabula complex in good faith. Because of the early stage of this litigation, we are unable to reasonably estimate any possible gain, loss or range of gain or loss and we have not made any accrual with regard to this matter.
Huelva, Spain EHS Matters
On April 28, 2019, a release of acidic effluent occurred at our 2017 Form 10-K.Huelva facility in Spain impacting an adjacent watercourse and soils. Remediation work has been undertaken following the incident. We are fully cooperating with the regulatory authorities investigating this matter. Because of the early stage of this investigation we are unable to reasonably
estimate any sanction that may be imposed by the local regulator, Junta de Andalucia, however we believe that such sanctions could exceed $100,000.
On June 20 2019, a release of nitrous oxide gas occurred at our Huelva facility in Spain. The gas cloud quickly dissipated but temporarily created an off-site visual impact. We are fully cooperating with the regulatory authorities investigating this matter. Because of the early stage of this investigation we are unable to reasonably estimate any sanction that may be imposed by Junta de Andalucia, however we believe that such sanctions could exceed $100,000.
ITEM 1A. RISK FACTORS
As of the date of this filing, the Company and its operations continue to be subject to the risk factors previously disclosed in “Part"Part I. Item 1A. Risk Factors”Factors" of our 20172018 Form 10-K. In addition to the risk factors noted in the Form 10‑K, the following risk factor included substantive changesis applicable to us:
Restrictions on disposal of waste from those disclosed in our 2017 Form 10-K:
Risks Related to Our Business
Disruptions in production at our manufacturing facilities, including at our TiO2 manufacturing facilityprocesses could result in Pori, Finland, may have a material adversehigher costs and negatively impact on our business, results of operations and/or financial condition.
Manufacturing facilities in our industry are subject to planned and unplanned production shutdowns, turnarounds, outages and other disruptions. Any serious disruption at any of our facilities could impair our ability to useoperate our facilitiesmanufacturing facilities.
Our manufacturing processes generate byproducts, some of which are saleable and have a material adverse impact on our revenuesothers of which are not and increase our costsmust be reused or disposed of as waste. The storage, transportation, reuse and expenses. Alternative facilities with sufficient capacity may notdisposal of waste are generally regulated by governmental authorities in the jurisdictions in which we operate. If existing arrangements for reuse or disposal of waste cease to be available may cost substantially more or may require a significant amount of time to increase production or qualify with our customers, any of which could negatively impact our business, results of operations and/or financial condition. Long-term production disruptions may cause our customers to seek alternative supply which could further adversely affect our profitability.
Unplanned production disruptions may occur for external reasons including natural disasters, weather, disease, strikes, transportation interruption, government regulation, political unrest or terrorism, or internal reasons, such as fire, unplanned maintenance or other manufacturing problems. Any such production disruption could have a material impact on our operations, operating results and financial condition.
For example, on January 30, 2017, our TiO2 manufacturing facility in Pori, Finland, experienced fire damage. The Pori facility had a nameplate capacity of 130,000 metric tons per year, which represented approximately 17% of our total TiO2 nameplate capacity and approximately 2% of total global TiO2 demand. We restored 20% of the total prior capacity, which is dedicated to production of specialty products. On September 12, 2018, following our review of the Pori facility and options within our manufacturing network, andus, as a result of unanticipated cost escalationnew rules, regulations or interpretations thereof, exhaustion of reclamation activities, landfill closures, or otherwise, we will need to find new arrangements for reuse or disposal, which could result in increased costs to us and extended timeline associated with reconstruction, we announcednegatively impact our consolidated financial statements. For example, gypsum is generated by our TiO2 manufacturing facilities that use the sulfate process, such as those at Scarlino, Italy and Telok Kalong, Malaysia. The gypsum from our Scarlino facility is currently used in the reclamation of a nearby former quarry. We are currently seeking an extension of our existing permit which, if granted, would allow the facility to continue to use the material to reclaim the site for approximately 16 months and we intend to close our Pori, Finland, TiO2 manufacturing facilityseek an additional extension thereafter to the extent physical capacity remains available. We are also currently pursuing replacement options for sale, reuse and/or disposal of gypsum produced at the Scarlino facility. Such options generally require governmental approval and transfer the specialty and differentiated product gradesthere can be no assurance that such approvals will be received in a timely manner or at all. Failure to other sites. We intend to continue to operate the Pori facility at reduced production rates through the transition period, which is expected to last through 2021. Even if we are able to transition production on this schedule, we may lose customers that have in the meantime found alternative suppliers elsewhere.
We expect to accountfind viable new disposal arrangements for our closure costs,manufacturing byproducts, including those originating at our Scarlino, Italy site, could significantly impact our manufacturing operations, up to and including the coststemporary or permanent closure of demolition, remediation and contract termination costs, as restructuring expense and fund them from cash from operations, which will decrease our liquidity in the periods those costs are incurred. In addition, our premiums and deductibles may increase substantially as a result of the fire.related manufacturing facilities.
In addition, we rely on a number of vendors, suppliers and, in some cases, sole-source suppliers, service providers, toll manufacturers and collaborations with other industry participants to provide us with chemicals, feedstocks and other raw materials, along with energy sources and, in certain cases, facilities that we need to operate our business. If the business of these third parties is disrupted, some of these companies could be forced to reduce their output, shut down their operations or file for bankruptcy protection. If this were to occur, it could adversely affect their ability to provide us with the raw materials, energy sources or facilities that we need, which could materially disrupt our operations, including the production of certain of our products. Moreover, it could be difficult to find replacements for certain of our business partners without incurring significant delays or cost increases. All of these risks could have a material adverse effect on our business, results of operations, financial condition and liquidity.
While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that could disrupt our business, we cannot provide assurances that our plans would fully protect us from the effects of all such disasters or from events that might increase in frequency or intensity due to climate change. In addition, insurance may not adequately compensate us for any losses incurred as a result of natural or other disasters. In areas prone to frequent natural or other disasters, insurance may become increasingly expensive or not available at all. Furthermore, some potential climate-driven losses, particularly flooding due to sea-level rises, may pose long-term risks to our physical facilities such that operations cannot be restored in their current locations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to shares of equity-based awards granted under our share incentive plans that we withheld upon vesting to satisfy our tax withholding obligations during the three months ended September 30, 2018.
|
| | | | | | | | | | | | | | |
| | Total number of shares purchased(1) | | Average price paid per share(1) | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs |
July | | — |
| | $ | — |
| | — |
| | $ | — |
|
August | | — |
| | — |
| | — |
| | — |
|
September | | 4,769 |
| | 8.83 |
| | — |
| | — |
|
Total | | 4,769 |
| | $ | 8.83 |
| | — |
| | $ | — |
|
| |
(1)
| Represents shares purchased from employees to satisfy the tax withholding obligations in connection with the vesting of restricted stock units. |
ITEM 6. EXHIBITS
Each exhibit identified below is filed as a part of this report. Exhibits designated with an "*" are filed as an exhibit to this Quarterly Report on Form 10-Q and Exhibits designated with an "+" indicates a management contract or compensatory plan.
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| | | | | | | | |
| | | | Incorporated by Reference |
Exhibit
Number | | Description | | Schedule
Form | | Exhibit | | Filing Date |
31.1* | | | | | | | | |
31.2* | | | | | | | | |
32.1* | | | | | | | | |
32.2* | | | | | | | | |
101.INS* | | XBRL Instance Document | | | | | | |
101.SCH* | | XBRL Taxonomy Extension Schema Document | | | | | | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | |
101.DEF* | | XBRL Taxonomy Definition Linkbase Document | | | | | | |
101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document | | | | | | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | |
|
| | | | | | | | |
| | | | Incorporated by Reference |
Exhibit Number | | Description | | Schedule Form | | Exhibit | | Filing Date |
10.1 | | | | 8-K | | 10.1 | | June 24, 2019 |
31.1* | | | | | | | | |
31.2* | | | | | | | | |
32.1* | | | | | | | | |
32.2* | | | | | | | | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | |
101.SCH* | | XBRL Taxonomy Extension Schema Document | | | | | | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | |
101.DEF* | | XBRL Taxonomy Definition Linkbase Document | | | | | | |
101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document | | | | | | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
| | VENATOR MATERIALS PLC (Registrant) |
| | |
Date: | October 30, 2018August 6, 2019 | By: | /s/ Kurt D. Ogden |
| | | Kurt D. Ogden |
| | Senior | Executive Vice President and Chief Financial Officer |
| | |
Date: | October 30, 2018August 6, 2019 | By: | /s/ Stephen Ibbotson |
| | | Stephen Ibbotson |
| | | Vice President and Controller |