15
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.
As of March 31, 2020 we had $71 million issued and outstanding letters of credit and bank guarantees to third parties. Of this amount, $49 million were issued by various banks on an unsecured basis with the remaining $22 million issued from our secured ABL facility.
Note 9.8. 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 three3 cross-currency swap agreements to convert a portion of our intercompany fixed-rate, U.S. dollarDollar 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 principleexchanging a notional amount of $200 million at a fixed rate of 5.75% for €169 million with a fixed annual rate of 3.43%. These hedges have beenwere designated as cash flow hedges and the critical terms of the cross-currency swap agreements correspond to the underlying hedged item. These swaps mature inhad a maturity date of July 2022, which is ourwas the 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
In August 2019, we terminated the 3 cross-currency interest rate swaps entered into in 2017, resulting in cash proceeds of $15 million. Concurrently, we entered into 3 new cross-currency interest rate swaps which notionally exchanged $200 million at a fixed rate of 5.75% for €181 million on which a weighted average rate of 3.73% is payable. The cross-currency swaps have been designated as cash flow hedges of a fixed rate U.S. Dollar intercompany loan and losses from these hedges offset the changeseconomic effect is to eliminate uncertainty on the U.S. Dollar cash flows. The cross-currency swaps are set to mature in July 2024, which is the valuebest estimate of interest and principal payments as a result of changes in foreign exchange rates.the repayment date on the intercompany loan.
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 changes in the fair value of the swaps are deferred in other comprehensive income and subsequently recognized in other income in the unaudited condensed consolidated statement 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 $10an asset of $8 million and $6a liability of $3 millionat March 31, 20192020 and December 31, 2018,2019, respectively, and was recorded as other noncurrent liabilitiesassets on our unaudited condensed consolidated 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 three months ended March 31, 20192020 and 2018,2019, the change in accumulated other comprehensive loss associated with these cash flow hedging activities was a gain of $4$11 million and a loss of $7$4 million, respectively. As of March 31, 2019,2020, we do not expect to reclassify any 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 risks associated with foreign currency exposure. At March 31, 20192020 and December 31, 2018,2019, we had $102$64 million and $89$75 million, respectively, notional amount (in U.S. dollarDollar equivalents) outstanding in foreign currency contracts with a term of approximately one month. The contracts are valued using observable market rates (Level 2).
Note 10.9. 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.
We recorded income tax benefit of $2 million and income tax expense of $1 million and $20 million, respectively, for the three months ended March 31, 20192020 and 2018,2019, 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 recognized a gain as a result of the IPO and the 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 was 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$30 million. As of March 31, 20192020 and December 31, 2018,2019, this "Noncurrent payable to affiliates" was $34$30 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 March 27, 2020, President Trump signed into U.S. tax law the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, eliminating NOL limitations, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The CARES Act did not have a material impact to our income tax provision for the three months ended March 31, 2020.
Note 11.10. 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.
Basic and diluted earnings per share are determined using the following information:
| | | | | | | | | | | | | | | |
| Three months ended
March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income (loss) attributable to Venator Materials PLC ordinary shareholders | $ | 7 | | | $ | (3) | | | | | |
| Denominator: | | | | | | | |
| Weighted average shares outstanding | 106.7 | | | 106.5 | | | | | |
| Dilutive share-based awards | — | | | 0.3 | | | | | |
| Total weighted average shares outstanding, including dilutive shares | 106.7 | | | 106.8 | | | | | |
|
| | | | | | | |
| | Three months ended
March 31, |
| | 2019 | | 2018 |
| Numerator: | | | |
| Basic and diluted net (loss) income: | | | |
| Net (loss) income attributable to Venator Materials PLC ordinary shareholders | $ | (3 | ) | | $ | 78 |
|
| Denominator: | | | |
| Weighted average shares outstanding | 106.5 |
| | 106.4 |
|
| Dilutive share-based awards | 0.3 |
| | 0.4 |
|
| Total weighted average shares outstanding, including dilutive shares | 106.8 |
| | 106.8 |
|
For the three months ended March 31, 2019 and 2018,2020, the number of anti-dilutive employee share-based awards excluded from the computation of diluted earnings per share was 3 million. For the three months ended March 31, 2019, the number of anti-dilutive employee share-based awards excluded from the computation of dilutive earnings per share was 1 million and nil, respectively.million.
Note 12.11. Commitments and Contingencies
Legal Proceedings
Shareholder 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 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,November 30, 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. The first two ofcases filed in the three cases have beenDallas District Court were consolidated into a single action, In re Venator Materials PLC Securities Litigation.
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 expectand certain defendants filed motions to dismiss. On July 9, 2019, a hearing was held on certain of these motions, which were subsequently denied. On January 21, 2020, the thirdCourt of Appeals for the Fifth District of Texas reversed the Dallas District Court’s order that denied the special appearances of Venator and certain other defendants, and rendered judgment dismissing the claims against Venator and certain other defendants for lack of jurisdiction. The Court of Appeals also remanded the case for the Dallas District Court to beenter an order transferring the claims against Huntsman to the Montgomery County District Court. On March 19, 2020, plaintiffs from the Dallas District Court case filed suit in New York State Court (New York County) against Venator and the other defendants dismissed from the Dallas District Court case, making substantially the same allegations as were filed in the Dallas District Court.
An additional case was filed on July 31, 2019, in the U.S. District Court for the Southern District of New York by the City of Miami General Employees' & Sanitation Employees' Retirement Trust, 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. A case also was filed in the U.S. District Court for the Southern District of Texas by the Cambria County Employees Retirement System on September 13, 2019, making substantially the same allegations as those made by the plaintiff in the case pending in the Southern District of New York. On October 29, 2019, the U.S. District Court for the Southern District of New York entered an order transferring the case brought by the city of Miami General Employees' & Sanitation Employees' Retirement Trust to the U.S. District Court for the Southern District of Texas, where it was consolidated into a single action with themthe case brought by the Cambria County Employees' Retirement Trust and is now known as well. In re: Venator Materials PLC Securities Litigation. On January 17, 2020, plaintiffs in the consolidated federal action filed a consolidated class action complaint. On February 18, 2020, all defendants joined in a motion to dismiss the consolidated complaint, which plaintiffs have opposed, and for which oral argument has been scheduled for May 14, 2020.
The plaintiffs in these cases seek to determine that the proceedingproceedings should be certified as a class actionactions and to obtain alleged compensatory damages, costs, rescission and equitable relief. 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 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. Discovery is ongoing in this matter. 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.
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 connection with the delivery of services by NES to the Company in respect of the Pori site rebuild project. These invoices were accrued in full on our unaudited condensed consolidated balance sheet as of March 31, 2019. We are contesting the validity of these invoices and filed counterclaims against NES on March 8, 2019. The timetable forIn the arbitration proceeding, our defense and counterclaim were filed on April 17, 2020.
On July 2, 2019, NES separately instigated a lawsuit in Finland for €1.6 million of unpaid invoices, which we are contesting. We are fully accrued for these invoices and they are reflected in our unaudited condensed consolidated balance sheet as of March 31, 2020.
Calais Pipeline Matter
The Region Hauts-de-France (the “Region”) has issued 2 duplicate title perception demands against us requiring repayment of €12 million. This sum was previously paid to us by the Region under a settlement agreement, pursuant to which we were required to move an effluent pipeline at our Calais site. We filed claims with the Administrative Court in Lille, France on February 14, 2018 and April 12, 2018, requesting orders that the demands be set
aside, which suspended enforcement of the demands. On July 12, 2018, the court set aside the first demand. The second demand remains suspended, but in dispute. The parties have lodged various arguments and responses regarding the second demand with the court. The court hearing for this matter has been postponed due to court closures in France resulting from the COVID-19 pandemic.
Gasum Arbitration
We entered into a natural gas supply agreement with Skangass Oy (now Gasum LNG Oy) in 2015 to supply natural gas to our Pori, Finland manufacturing facility. The initial fixed term of the agreement was ten years. We are entitled to terminate the agreement upon closure of the facility by giving 12 months’ notice of the closure. Upon such termination, a compensation fee would be payable to Gasum.
The agreement requires us to purchase a minimum annual quantity, subject to a mechanism for making up shortfalls. The minimum annual quantity can be reduced (even to zero) in the event of a “Force Majeure Event". We declared that the fire at our Pori facility in January 2017 was a Force Majeure Event under the agreement, reducing the minimum annual quantity to the actual quantity purchased. Gasum alleges that this Force Majeure Event subsequently ceased to apply, and that we were thereafter again obliged to purchase the original minimum annual quantity.
Gasum continues to supply natural gas to the Pori facility. On April 17, 2020, Gasum filed arbitration proceedings seeking declaratory relief to require us to take or pay the original minimum annual quantities of natural gas. In their request, Gasum estimated that the monetary value of declaratory relief to be approximately €27 million should we close the Pori facility by the end of 2022. Because of the early stage of this proceeding, we are unable to reasonably estimate any possible loss or range of loss and we have not yet been set.accrued for a loss contingency with regard to this matter.
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 financial 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 13.12. 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 three months ended March 31, 20192020 and 2018,March 31, 2019, our capital expenditures for EHS matters totaled $4$6 million and $1$4 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. A number of our EHS capital expenditures will be subject to extended timelines as a result of the COVID-19 pandemic. Changes to timelines may be related to regulatory orders or guidelines that cause suppliers or contractors to cease or slow down operational activities, including as a result of changes to social distancing rules, among other factors. The impacts may vary significantly between different jurisdictions.
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 March 31, 20192020 and December 31, 2018,2019, we had environmental reserves of $11$8 million and $12$9 million, respectively.
Environmental Matters
We have incurred, and we may in the future incur, liabilityliabilities 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") 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.
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 financial statements.
Note 14.13. Other Comprehensive Income
Other comprehensive income 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, 2020 | $ | (97) | | | $ | (295) | | | $ | (5) | | | $ | 12 | | | $ | (385) | | | $ | — | | | $ | (385) | |
| Other comprehensive (loss) income before reclassifications, gross | (36) | | | — | | | — | | | 11 | | | (25) | | | — | | | (25) | |
| Tax expense | — | | | — | | | — | | | (1) | | | (1) | | | — | | | (1) | |
Amounts reclassified from accumulated other comprehensive loss, gross(c) | — | | | 3 | | | — | | | — | | | 3 | | | — | | | 3 | |
| Tax expense | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net current-period other comprehensive (loss) income | (36) | | | 3 | | | — | | | 10 | | | (23) | | | — | | | (23) | |
Ending balance, March 31, 2020 | $ | (133) | | | $ | (292) | | | $ | (5) | | | $ | 22 | | | $ | (408) | | | $ | — | | | $ | (408) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 income before reclassifications, gross | 11 |
| | — |
| | — |
| | 4 |
| | 15 |
| | — |
| | 15 |
|
| Tax benefit | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amounts reclassified from accumulated other comprehensive loss, gross(c) | — |
| | 4 |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Tax expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net current-period other comprehensive income | 11 |
| | 4 |
| | — |
| | 4 |
| | 19 |
| | — |
| | 19 |
|
Ending balance, March 31, 2019 | $ | (85 | ) | | $ | (274 | ) | | $ | (5 | ) | | $ | 10 |
| | $ | (354 | ) | | $ | — |
| | $ | (354 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2019 | $ | (96) | | | $ | (278) | | | $ | (5) | | | $ | 6 | | | $ | (373) | | | $ | — | | | $ | (373) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other comprehensive income before reclassifications, gross | 11 | | | — | | | — | | | 4 | | | 15 | | | — | | | 15 | |
| Tax expense | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Amounts reclassified from accumulated other comprehensive loss, gross(c) | — | | | 4 | | | — | | | — | | | 4 | | | — | | | 4 | |
| Tax expense | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net current-period other comprehensive income | 11 | | | 4 | | | — | | | 4 | | | 19 | | | — | | | 19 | |
Ending balance, March 31, 2019 | $ | (85) | | | $ | (274) | | | $ | (5) | | | $ | 10 | | | $ | (354) | | | $ | — | | | $ | (354) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 income (loss) before reclassifications, gross | 57 |
| | — |
| | — |
| | (7 | ) | | 50 |
| | — |
| | 50 |
|
| Tax benefit | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amounts reclassified from accumulated other comprehensive loss, gross(c) | — |
| | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Tax expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net current-period other comprehensive income (loss) | 57 |
| | 3 |
| | — |
| | (7 | ) | | 53 |
| | — |
| | 53 |
|
Ending balance, March 31, 2018 | $ | 51 |
| | $ | (264 | ) | | $ | (5 | ) | | $ | (12 | ) | | $ | (230 | ) | | $ | — |
| | $ | (230 | ) |
(a)Amounts are net of tax of NaN as of March 31, 2020 and January 1, 2020, each.
(b)Amounts are net of tax of $50 million as of March 31, 2020 and January 1, 2020, each.
(c)See table below for details about the amounts reclassified from accumulated other comprehensive loss.
(d)Amounts are net of tax of NaN as of March 31, 2019 and January 1, 2019, each.
(e)Amounts are net of tax of $50 million as of March 31, 2019 and January 1, 2019, each.
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended
March 31, | | | | | | | | Affected line item in the statement where net income is presented |
| 2020 | | 2019 | | | | | | |
Details about Accumulated Other Comprehensive Loss Components(a): | | | | | | | | | |
| Amortization of pension and other postretirement benefits: | | | | | | | | | |
| Actuarial loss | $ | 3 | | | $ | 4 | | | | | | | Other income |
| Prior service credit | — | | | — | | | | | | | Other income |
| Total before tax | 3 | | | 4 | | | | | | | |
| Income tax expense | — | | | — | | | | | | | Income tax benefit (expense) |
| Total reclassifications for the period, net of tax | $ | 3 | | | $ | 4 | | | | | | | |
| |
(a)
| Amounts are net of tax of nil as of March 31, 2019 and January 1, 2019, each. |
| |
(b)
| Amounts are net of tax of $50 million as of March 31, 2019 and January 1, 2019, each. |
| |
(c)
| See table below for details about the amounts reclassified from accumulated other comprehensive loss. |
| |
(d)
| Amounts are net of tax of nil as of March 31, 2018 and January 1, 2018, each. |
| |
(e)
| Amounts are net of tax of $52 million as of March 31, 2018 and January 1, 2018, each. |
|
| | | | | | | | | |
| | Three months ended
March 31, | | Affected line item in the statement where net income is presented |
| | 2019 | | 2018 | |
Details about Accumulated Other Comprehensive Loss Components(a): | | | | | |
| Amortization of pension and other postretirement benefits: | | | | | |
| Actuarial loss | $ | 4 |
| | $ | 3 |
| | Other income |
| Prior service credit | — |
| | — |
| | Other income |
| Total amortization | 4 |
| | 3 |
| | Total before tax |
| Income tax expense | — |
| | — |
| | Income tax expense |
| Total reclassifications for the period | $ | 4 |
| | $ | 3 |
| | Net of tax |
| |
(a)
| Pension and other postretirement benefit amounts in parentheses indicate credits on our unaudited condensed consolidated statements of operations. |
(a)Pension and other postretirement benefit amounts in parentheses indicate credits on our unaudited condensed consolidated statements of operations.
Note 15.14. Operating Segment Information
We derive our revenues, earnings and cash flows from the manufacture and sale of TiO2, functional additives, color pigments, timber treatment and water treatment products.chemicals. We have reported our operations through our two2 segments, Titanium Dioxide and Performance Additives, and organized our business and derived our operating segments around differences in product lines.
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 two2 reportable operating segments are as follows:
| | | | | | | | | | | | | | | |
| Three months ended
March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| Revenues: | | | | | | | |
| Titanium Dioxide | $ | 402 | | | $ | 425 | | | | | |
| Performance Additives | 130 | | | 137 | | | | | |
| Total | $ | 532 | | | $ | 562 | | | | | |
Adjusted EBITDA(1) | | | | | | | |
| Titanium Dioxide | $ | 46 | | | $ | 61 | | | | | |
| Performance Additives | 22 | | | 15 | | | | | |
| 68 | | | 76 | | | | | |
| Corporate and Other | (11) | | | (16) | | | | | |
| Total | 57 | | | 60 | | | | | |
| Reconciliation of adjusted EBITDA to net income: | | | | | | | |
| Interest expense | (13) | | | (14) | | | | | |
| Interest income | 3 | | | 3 | | | | | |
| Income tax benefit (expense) | 2 | | | (1) | | | | | |
| Depreciation and amortization | (28) | | | (26) | | | | | |
| Net income attributable to noncontrolling interests | 1 | | | 1 | | | | | |
| Other adjustments: | | | | | | | |
| Business acquisition and integration expenses | (1) | | | (2) | | | | | |
| | | | | | | |
| | | | | | | |
| Loss on disposition of business/assets | (2) | | | — | | | | | |
| | | | | | | |
| Amortization of pension and postretirement actuarial losses | (3) | | | (4) | | | | | |
| Net plant incident costs | (1) | | | (7) | | | | | |
| Restructuring, impairment and plant closing and transition costs | (7) | | | (12) | | | | | |
| Net income (loss) | $ | 8 | | | $ | (2) | | | | | |
|
| | | | | | | |
| | Three months ended
March 31, |
| | 2019 | | 2018 |
| Revenues: | | | |
| Titanium Dioxide | $ | 425 |
| | $ | 456 |
|
| Performance Additives | 137 |
| | 166 |
|
| Total | $ | 562 |
| | $ | 622 |
|
Adjusted EBITDA(1) | | | |
| Titanium Dioxide | $ | 61 |
| | $ | 143 |
|
| Performance Additives | 15 |
| | 24 |
|
| | 76 |
| | 167 |
|
| Corporate and other | (16 | ) | | (10 | ) |
| Total | 60 |
| | 157 |
|
| Reconciliation of adjusted EBITDA to net (loss) income: | | | |
| Interest expense | (14 | ) | | (13 | ) |
| Interest income | 3 |
| | 3 |
|
| Income tax expense | (1 | ) | | (20 | ) |
| Depreciation and amortization | (26 | ) | | (34 | ) |
| Net income attributable to noncontrolling interests | 1 |
| | 2 |
|
| Other adjustments: | | | |
| Business acquisition and integration expenses | (2 | ) | | (2 | ) |
| Separation expense, net | — |
| | (1 | ) |
| Amortization of pension and postretirement actuarial losses | (4 | ) | | (3 | ) |
| Net plant incident costs | (7 | ) | | — |
|
| Restructuring, impairment and plant closing and transition costs | (12 | ) | | (9 | ) |
| Net (loss) income | $ | (2 | ) | | $ | 80 |
|
| |
(1)
| Adjusted EBITDA is defined as net (loss) income of Venator before interest expense, interest income, income tax benefit (expense), depreciation and amortization and net income attributable to noncontrolling interests, as well as eliminating the following adjustments: (a) business acquisition and integration expenses; (b) separation expense, net; (c) amortization of pension and postretirement actuarial losses; (d) net plant incident costs; and (e) restructuring, impairment, and plant closing and transition costs. |
(1)Adjusted EBITDA is defined as net income/loss of Venator before interest expense, interest income, income tax 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) loss/gain on disposition of business/assets; (c) amortization of pension and postretirement actuarial losses/gains; (d) net plant incident costs/credits; and (e) restructuring, impairment, and plant closing and transition costs/credits.
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 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 Regarding Forward-Looking Statements" and "Part II. Item 1A. Risk Factors."
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 DevelopmentsCOVID-19
AcquisitionThe COVID-19 pandemic and related economic repercussions have created significant disruption to the global economy and will likely have an adverse effect on our business and the markets in which we operate, the extent of Tronox European Paper Laminates Businesswhich cannot fully be determined at this time.
On April 26, 2019,We have a team focused on managing our business through the pandemic and we completedhave enacted rigorous safety measures across our acquisitionorganization, including stopping non-essential business travel, increasing the personal protective equipment requirements at our manufacturing sites, removing contractors from site, increasing cleaning and sanitizing measures, implementing social distancing protocols, requiring work-from-home arrangements for those employees who do not need to be physically present and reducing the amount of employees working at a site at any given time. We expect to continue these measures until we determine that COVID-19 is adequately contained for purposes of safeguarding our employees and our business. We may take further actions as government authorities require or recommend, or as we determine to be in the best interest of our employees, customers, partners and suppliers.
We have not yet experienced significant impacts or interruptions to our supply chain as a result of the European paper laminatesCOVID-19 pandemic. However, certain of our suppliers have faced difficulties maintaining operations due to government-ordered restrictions and shelter-in-place mandates. While we have thus far been able to identify alternative sourcing arrangements without disrupting our supply chain, financial hardship on our suppliers caused by the COVID-19 pandemic could cause material disruptions in our raw material supply. We are proactively managing our supplier network by maintaining close contact and ensuring alternative arrangements are available in case our primary suppliers are impacted by the COVID-19 pandemic.
While the COVID-19 pandemic has not had a material impact on demand for our products for the three months ended March 31, 2020, we anticipate a decline in orders across our business (the "8120 Grade")during the second quarter of 2020 as orders begin to reflect the impact of government ordered restrictions on our customers. We cannot currently predict the duration and severity of impacts to our business from Tronox Limited (“Tronox”) for a purchase pricethe global economic slowdown caused by the COVID-19 pandemic. Because of €8 million payable as follows: €1 million upon completionthis, we cannot reasonably estimate with any degree of certainty the future adverse impact the COVID-19 pandemic may have on our results of operations, financial position, or liquidity; however, the impact could be material. See further discussion of the acquisitionpotential impact to our liquidity under "Liquidity and the remaining €7 million in two installments over two years. In connection with the acquisition, Tronox will supply the 8120 Grade to us under a Transitional Supply Agreement until the transferCapital Resources." See "Part II. Item 1A. Risk Factors" for further details of the manufacturing ofrisks that the 8120 GradeCOVID-19 pandemic may present to our Greatham, U.K., facility has been completed.business.
A separate agreement with Tronox entered into on July 14, 2018 requires that Tronox promptly pay us a “break fee”
Recent Trends and Outlook
In 2019, we
We expect resultsnear-term business trends in our Titanium Dioxide segment to reflect:be driven by the following factors: (i) customer destocking, which began in 2018,the global economic environment impacted by geopolitical events such as the global COVID-19 pandemic (with regional variations), trade negotiations between the U.S. and China and Brexit; (ii) demand for our products will be adversely impacted by the COVID-19 pandemic and the global economic environment; (iii) TiO2 pricing to persist throughout the first half of 2019 at a diminishing rate; (ii)reflect regional disparities in TiO2 pricing trends reflecting specific supply and demand balances; (iii)balances, increased competition in certain regions for certain of our products and our customer-tailored approach; (iv) a soft economic environment, primarilymanageable increase in China and Europe, including the effectsaverage cost of Brexit and the China-US trade negotiations; (iv)our mix of ore feedstocks requirements; (v) lower raw materialmaterials and energy cost increases; (v) volume trends to reflect historical seasonal patterns;costs excluding feedstocks; (vi) increased production of specialtyan additional benefit from our 2019 Business Improvement Program; and differentiated product grades; (vii) increased sales of new TiO2 product grades ; and (viii)a benefit from additional cost and operational improvement actions. actions, including those we have taken in response to the COVID-19 pandemic.
In our Performance Additives segment, we expect near-term business trends to be driven by:by the following factors: (i) a seasonal improvement in sales volumes compared to the first quarter of 2019 partially offset by customer destocking in certain product applications; (ii) a softglobal economic environment impacted by geopolitical events such as the global COVID-19 pandemic (with regional variations), trade negotiations between the U.S. and China and Brexit; (ii) demand for our products will be adversely impacted by the COVID-19 pandemic and the global economic environment; (iii) a weaker demand environment for certain products, primarily in Chinathe automotive, coatings, and Europe, including the effects of Brexit and the China-US trade negotiations; (iii)construction end-use applications; (iv) manageable raw material cost increases and lower energy costs inflation;costs; (v) an additional benefit from our 2019 Business Improvement Program; and (iv)(vi) a benefit from additional cost and operational improvement actions.actions, including those we have taken in response to COVID-19.
In the fourth quarter of 2018, we commenced our 2019 Business Improvement Program and are underway with the implementation, having realized $3have delivered $24 million of savings through the first quarter of 2020, $4 million of which was achieved in the first quarter of 2019.2020. We continue to expect that when fully implemented, this cost and operational improvement program will provide approximately $40 million of annual adjusted EBITDA benefit compared to year-end 2018. We currently expect actions will be complete in 2020, endingto end the year at the full run rate level.run-rate level; however, the timing, constituent elements and expected benefit may be adjusted in response to the COVID-19 pandemic. We continue to evaluate the impact of COVID-19 on our 2019 Business Improvement Program.
In 2019, we expect to spend approximately $130 million on2020, total capital expenditures which includes spendingare expected to be $60 million. We do not expect any material capital expenditures relating to the transfer of our specialty technologyand differentiated business from our Pori, Finland manufacturing site to other sites in our manufacturing network.network during 2020. We intend to optimize the remaining transfer of our specialty and differentiated business from our Pori, Finland TiO2 manufacturing facility, but the timing of this transfer will be elongated, due in part to the COVID-19 pandemic, and may result in a lower total expected capital outlay and a lower associated adjusted EBITDA benefit than originally estimated.
We expect our corporate and other costs will be approximately $50 million in 2019.2020.
Results of Operations
The following table sets forth our consolidated results of operations for the three months ended March 31, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended | | | | |
| | | | | | | March 31, | | | | |
| (Dollars in millions) | | | | | | | 2020 | | 2019 | | % Change |
| Revenues | | | | | | | $ | 532 | | | $ | 562 | | | (5 | %) |
| Cost of goods sold | | | | | | | 471 | | | 486 | | | (3 | %) |
Operating expenses(4) | | | | | | | 42 | | | 55 | | | (24 | %) |
| Restructuring, impairment and plant closing and transition costs | | | | | | | 7 | | | 12 | | | (42 | %) |
| Operating income | | | | | | | 12 | | | 9 | | | 33 | % |
| Interest expense, net | | | | | | | (10) | | | (11) | | | 9 | % |
| Other income | | | | | | | 4 | | | 1 | | | 300 | % |
| Income (loss) before income taxes | | | | | | | 6 | | | (1) | | | NM | |
| Income tax benefit (expense) | | | | | | | 2 | | | (1) | | | NM | |
| Net income (loss) | | | | | | | 8 | | | (2) | | | NM | |
| Reconciliation of net income (loss) to adjusted EBITDA: | | | | | | | | | | | |
| Interest expense, net | | | | | | | 10 | | | 11 | | | (9 | %) |
| Income tax (benefit) expense | | | | | | | (2) | | | 1 | | | NM | |
| Depreciation and amortization | | | | | | | 28 | | | 26 | | | 8 | % |
| Net income attributable to noncontrolling interests | | | | | | | (1) | | | (1) | | | — | % |
| Other adjustments: | | | | | | | | | | | |
| Business acquisition and integration expenses | | | | | | | 1 | | | 2 | | | |
| | | | | | | | | | | |
| Loss on disposition of business/assets | | | | | | | 2 | | | — | | | |
| | | | | | | | | | | |
| Amortization of pension and postretirement actuarial losses | | | | | | | 3 | | | 4 | | | |
| Net plant incident costs | | | | | | | 1 | | | 7 | | | |
| Restructuring, impairment and plant closing and transition costs | | | | | | | 7 | | | 12 | | | |
Adjusted EBITDA(1) | | | | | | | $ | 57 | | | $ | 60 | | | |
| | | | | | | | | | | |
| Net cash used in operating activities | | | | | | | $ | (58) | | | $ | (29) | | | 100 | % |
| Net cash used in investing activities | | | | | | | (27) | | | (53) | | | (49 | %) |
| Net cash provided by (used in) financing activities | | | | | | | 56 | | | (3) | | | NM | |
| Capital expenditures | | | | | | | (31) | | | (52) | | | (40 | %) |
|
| | | | | | | | | | |
| | Three Months Ended | | |
| | March 31, | | |
| (Dollars in millions) | 2019 | | 2018 | | % Change |
| Revenues | $ | 562 |
| | $ | 622 |
| | (10 | )% |
| Cost of goods sold | 486 |
| | 454 |
| | 7 | % |
Operating expenses(4) | 55 |
| | 51 |
| | 8 | % |
| Restructuring, impairment and plant closing and transition costs | 12 |
| | 9 |
| | 33 | % |
| Operating income | 9 |
| | 108 |
| | (92 | )% |
| Interest expense, net | (11 | ) | | (10 | ) | | (10 | )% |
| Other income | 1 |
| | 2 |
| | (50 | )% |
| (Loss) income before income taxes | (1 | ) | | 100 |
| | NM |
|
| Income tax expense | (1 | ) | | (20 | ) | | (95 | )% |
| Net (loss) income | (2 | ) | | 80 |
| | NM |
|
| Reconciliation of net loss (income) to adjusted EBITDA: | | | | |
|
|
| Interest expense, net | 11 |
| | 10 |
| | 10 | % |
| Income tax expense | 1 |
| | 20 |
| | (95 | )% |
| Depreciation and amortization | 26 |
| | 34 |
| | (24 | )% |
| Net income attributable to noncontrolling interests | (1 | ) | | (2 | ) | | 50 | % |
| Other adjustments: | | | | | |
| Business acquisition and integration expenses | 2 |
| | 2 |
| | |
| Separation expense, net | — |
| | 1 |
| | |
| Amortization of pension and postretirement actuarial losses | 4 |
| | 3 |
| | |
| Net plant incident costs (credits) | 7 |
| | — |
| | |
| Restructuring, impairment and plant closing and transition costs | 12 |
| | 9 |
| | |
Adjusted EBITDA(1) | $ | 60 |
| | $ | 157 |
| | |
| | | | | | |
| Net cash (used in) provided by operating activities | (29 | ) | | 51 |
| | NM |
|
| Net cash used in investing activities | (53 | ) | | (67 | ) | | (21 | )% |
| Net cash used in financing activities | (3 | ) | | (8 | ) | | (63 | )% |
| Capital expenditures | (52 | ) | | (73 | ) | | (29 | )% |
| | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | | | | | Three Months Ended |
| (Dollars in millions, except per share amounts) | | | | | March 31, 2020 | | | | | | March 31, 2019 |
| | | | | | | | | | | |
| Reconciliation of net income to adjusted net income attributable to Venator Materials PLC ordinary shareholders: | | | | | | | | | | | |
| Net income (loss) | | | | | $ | 8 | | | | | | | $ | (2) | |
| Net income attributable to noncontrolling interests | | | | | (1) | | | | | | | (1) | |
| Other adjustments: | | | | | | | | | | | |
| Business acquisition and integration expenses | | | | | 1 | | | | | | | 2 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Loss on disposition of business/assets | | | | | 2 | | | | | | | — | |
| | | | | | | | | | | |
| Amortization of pension and postretirement actuarial losses | | | | | 3 | | | | | | | 4 | |
| Net plant incident costs | | | | | 1 | | | | | | | 7 | |
| Restructuring, impairment and plant closing and transition costs | | | | | 7 | | | | | | | 12 | |
Income tax adjustments(3) | | | | | (9) | | | | | | | (8) | |
Adjusted net income attributable to Venator Materials PLC ordinary shareholders(2) | | | | | $ | 12 | | | | | | | $ | 14 | |
| | | | | | | | | | | |
| Weighted-average shares-basic | | | | | 106.7 | | | | | | | 106.5 | |
| Weighted-average shares-diluted | | | | | 106.7 | | | | | | | 106.8 | |
| | | | | | | | | | | |
| Net income (loss) attributable to Venator Materials PLC ordinary shareholders per share: | | | | | | | | | | | |
| Basic | | | | | $ | 0.07 | | | | | | | $ | (0.03) | |
| Diluted | | | | | $ | 0.07 | | | | | | | $ | (0.03) | |
| | | | | | | | | | | |
| Other non-GAAP measures: | | | | | | | | | | | |
Adjusted net income per share(2): | | | | | | | | | | | |
| Basic | | | | | $ | 0.11 | | | | | | | $ | 0.13 | |
| Diluted | | | | | $ | 0.11 | | | | | | | $ | 0.13 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended |
| | March 31, 2019 | | March 31, 2018 |
| (Dollars in millions, except per share amounts) | Gross | | Tax(3) | | Net | | Gross | | Tax(3) | | Net |
| Reconciliation of net (loss) income to adjusted net income attributable to Venator Materials PLC ordinary shareholders: | | | | | | | | | | | |
| Net (loss) income | | | | | $ | (2 | ) | | | | | | $ | 80 |
|
| Net income attributable to noncontrolling interests | | | | | (1 | ) | | | | | | (2 | ) |
| Other adjustments: | | | | | | | | | | | |
| Business acquisition and integration expenses | 2 |
| | (1 | ) | | 1 |
| | 2 |
| | (1 | ) | | 1 |
|
| Separation expense, net | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Amortization of pension and postretirement actuarial losses | 4 |
| | (1 | ) | | 3 |
| | 3 |
| | — |
| | 3 |
|
| Net plant incident costs | 7 |
| | (2 | ) | | 5 |
| | — |
| | — |
| | — |
|
| Restructuring, impairment and plant closing and transition costs | 12 |
| | (4 | ) | | 8 |
| | 9 |
| | (1 | ) | | 8 |
|
Adjusted net income attributable to Venator Materials PLC ordinary shareholders(2) | | | | | $ | 14 |
| | | | | | $ | 91 |
|
| | | | | | | | | | | | |
| Weighted-average shares-basic | | | | | 106.5 |
| | | | | | 106.4 |
|
| Weighted-average shares-diluted | | | | | 106.8 |
| | | | | | 106.8 |
|
| | | | | | | | | | | | |
| Net (loss) income attributable to Venator Materials PLC ordinary shareholders per share: | | | | | | | | | | | |
| Basic | | | | | $ | (0.03 | ) | | | | | | $ | 0.73 |
|
| Diluted | | | | | $ | (0.03 | ) | | | | | | $ | 0.73 |
|
| | | | | | | | | | | | |
| Other non-GAAP measures: | | | | | | | | | | | |
Adjusted net income per share(2): | | | | | | | | | | | |
| Basic | | | | | $ | 0.13 |
| | | | | | $ | 0.86 |
|
| Diluted | | | | | $ | 0.13 |
| | | | | | $ | 0.85 |
|
NM—Not meaningful
| |
(1)
| Our management uses adjusted EBITDA to assess financial performance. Adjusted EBITDA is defined as net (loss) income before interest expense, net, income tax (benefit) expense, depreciation and amortization, and net income attributable to noncontrolling interests, as well as eliminating the following adjustments: (a) business acquisition and integration expenses; (b) separation expense, net; (c) amortization of pension and postretirement actuarial losses; (d) net plant incident costs; and (e) restructuring, impairment and plant closing and transition costs. 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" or "GAAP") that is most directly comparable to adjusted EBITDA. |
(1)Our management uses adjusted EBITDA to assess financial performance. Adjusted EBITDA is defined as net income/loss before interest income/expense, net, income tax 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) loss/gain on disposition of business/assets; (c) amortization of pension and postretirement actuarial losses/gains; (d) net plant incident costs/credits; and (e) restructuring, impairment, and plant closing and transition costs/credits. We believe that net income is the performance measure calculated and presented in accordance with U.S. 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.
| |
(2)
| Adjusted net income attributable to Venator Material 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; (b) separation expense, net; (c) amortization of pension and postretirement actuarial losses; (d) net plant incident costs; (e) restructuring, impairment and plant closing and transition costs. 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. |
(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/adjustments; (b) loss/gain on disposition of business/assets; (c) amortization of pension and postretirement actuarial losses/gains; (d) net plant incident costs/credits; and (e) restructuring, impairment, and plant closing and transition 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.
Adjusted net income (loss) and adjusted net income (loss) per share amounts are presented solely as supplemental information. These measures exclude similar non-cashnoncash 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)Prior to the second quarter of 2019, the income tax impacts, if any, of each adjusting item represented 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.
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. (3)
| The income tax impacts, if any, of each adjusting item represent 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 eliminated 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. |
| |
(4)
| As presented within Item 2, operating expenses includes selling, general and administrative expenses and other operating expense (income), net. |
Three Months Ended March 31, 20192020 Compared to the Three Months Ended March 31, 20182019
For the three months ended March 31, 2019,2020, net income was $8 million on revenues of $532 million, compared with net loss wasof $2 million on revenues of $562 million compared with net income of $80 million on revenues of $622 million for the same period in 2018.2019. The decrease of $82 millionincrease in net income of $10 million was the result of the following items:
•Revenues for the three months ended March 31, 20192020 decreased by $60$30 million, or 10%5%, as compared with the same period in 2018.2019. The decrease was due to a $31$23 million decrease in revenue in our Titanium Dioxide
segment and a $29$7 million decrease in revenue in our Performance Additives segment. See "—Segment Analysis" below.
•Our operating expenses for the three months ended March 31, 2019 increased2020 decreased by $4$13 million, or 8%24%, as compared with the same period in 2018,2019, primarily related to a $5$7 million unfavorable impactreduction of foreign currency year over yearpersonnel related expenses due to costs savings initiatives, partially in response to COVID-19, and a $3 million unfavorable change in other income and expense offset by a $4 million decrease in SG&A costs from 2018 to 2019. The decline in other income and expense was driven by salesthe effects of carbon credits in the first quarter of 2018 for which there were no comparable sales in the same period of 2019.foreign exchange rates.
•Restructuring, impairment and plant closing and transition costs for the three months ended March 31, 2019 increased2020 decreased to $12$7 million from $9$12 million for the same period in 2018 primarily as a result of the planned closure of our plant in Pori, Finland beginning in the third quarter of 2018.2019. For more information concerning restructuring and plant closing activities, see "Note 7."Note 6. Restructuring, Impairment, and Plant Closing and Transition Costs"Costs" of the notes to unaudited condensed consolidated financial statements.
statements.
•Our income tax expensebenefit for the three months ended March 31, 20192020 was $1$2 million compared to $20income tax expense of $1 million for the same period in 2018.2019. 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."Note 9. Income Taxes"Taxes" of the notes to unaudited condensed consolidated financial statements.
statements.
Segment Analysis
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Percent Change Favorable (Unfavorable) |
| March 31, | | | | |
| (Dollars in millions) | 2020 | | 2019 | | |
| Revenues | | | | | |
| Titanium Dioxide | $ | 402 | | | $ | 425 | | | (5 | %) |
| Performance Additives | 130 | | | 137 | | | (5 | %) |
| Total | $ | 532 | | | $ | 562 | | | (5 | %) |
| Adjusted EBITDA | | | | | |
| Titanium Dioxide | $ | 46 | | | $ | 61 | | | (25 | %) |
| Performance Additives | 22 | | | 15 | | | 47 | % |
| 68 | | | 76 | | | (11 | %) |
| Corporate and Other | (11) | | | (16) | | | 31 | % |
| Total | $ | 57 | | | $ | 60 | | | (5 | %) |
|
| | | | | | | | | | |
| | Three Months Ended | | Percent Change Favorable (Unfavorable) |
| | March 31, | |
| (Dollars in millions) | 2019 | | 2018 | |
| Revenues | | | | | |
| Titanium Dioxide | $ | 425 |
| | $ | 456 |
| | (7 | )% |
| Performance Additives | 137 |
| | 166 |
| | (17 | )% |
| Total | $ | 562 |
| | $ | 622 |
| | (10 | )% |
| Adjusted EBITDA | | | | | |
| Titanium Dioxide | $ | 61 |
| | $ | 143 |
| | (57 | )% |
| Performance Additives | 15 |
| | 24 |
| | (38 | )% |
| | 76 |
| | 167 |
| | (54 | )% |
| Corporate and other | (16 | ) | | (10 | ) | | (60 | )% |
| Total | $ | 60 |
| | $ | 157 |
| | (62 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 vs. 2019 | | | | | | |
| Average Selling Price(1) | | | | | | |
| Local Currency | | Foreign Currency Translation Impact | | Mix & Other | | Sales Volumes(2) |
| Period-Over-Period Increase (Decrease) | | | | | | | |
| Titanium Dioxide | (1 | %) | | (2 | %) | | (1 | %) | | (1 | %) |
| Performance Additives | 1 | % | | (1 | %) | | (1 | %) | | (4 | %) |
|
| | | | | | | | | | | |
| | Three Months Ended March 31, 2019 vs. 2018 |
| | Average Selling Price(1) | | | | |
| | Local Currency | | Foreign Currency Translation Impact | | Mix & Other | | Sales Volumes(2) |
| Period-Over-Period Increase (Decrease) | | | | | | | |
| Titanium Dioxide | (6 | )% | | (4 | )% | | — | % | | 3 | % |
| Performance Additives | (2 | )% | | (2 | )% | | 1 | % | | (14 | )% |
| |
(1)
| Excludes revenues from tolling arrangements, by-products and raw materials. |
| |
(2)
| Excludes sales volumes of by-products and raw materials. |
(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 $425$402 million in the three months ended March 31, 2019,2020, a decrease of $31$23 million, or 7%5%, compared to the same period in 2018.2019. The decrease was primarily due to a 6%1% decline in the average TiO2selling prices andprice, a 4%2% unfavorable impact from foreign currency translation, partially offset by a 3% increase1% decrease in sales volumes.volumes, and a 1% unfavorable impact due to mix and other. The decreasedecline in the average TiO2selling pricesprice was primarily attributable to a convergence of higher European selling prices towards North American priceslower global average functional TiO2 price. Sales volumes declined compared to the prior year period primarily in certain specialty applications and softer business conditions in Asia Pacific,were partially offset by continued strength in pricinghigher demand for our specialty TiO2new products globally. Sales volumes of functional TiO2 products increased in Europe primarily due to the impact of accelerated purchases related to Brexit and modest growth. Volumes of functional TiO2 products increased modestly in North America and decreased in Asia Pacific. Specialty TiO2 volumes increased 11% globally, due to higher production for certain products.plastics applications.
Adjusted EBITDA for the Titanium Dioxide segment was $61 million, a decrease of $82$46 million for the three months ended March 31, 20192020, a decrease of $15 million compared to the same period in 2018, or a decrease of $64 million after excluding $18 million of lost earnings attributable to our Pori, Finland TiO2 manufacturing facility, which were reimbursed through insurance proceeds in 2018.2019. The decreasedecline was primarily a result of a lower average TiO2 selling prices,price, higher ore costs, and a decline in overall TiO2 volumes. This was partially offset by lower selling, general and administrative costs, a decline in other raw materialmaterials and energy costs the aforementioned lost earnings attributable to our Pori, Finland manufacturing facility and $7 million from the sale of carbon credits in the prior year period and partially offset by higher sales volumes and a $2$3 million benefit from our 2019 Business Improvement Program.
Performance Additives
The Performance Additives segment generated $137$130 million of revenuerevenues in the three months ended March 31, 2019,2020, a decline of $29$7 million, or 17%5%, compared to the same period in 2018. This resulted from2019. The decline was primarily due to a 14%4% decrease in sales volumes, a 2% decrease in average selling prices and a 2% decrease due to the1% unfavorable impact of foreign currency translation and a 1% unfavorable impact of mix and other, partially offset by a 1% increase from mix and other.in the average selling price. The decline in sales volumes was primarily as a result of lower demand for certain coatings and construction-related products, principallyand portfolio optimization in construction-related applications driven by adverse weather conditions in North America, the impact of plant shutdowns as part of prior restructuring actions and customer destocking. Average selling prices declined due to the composition of sales within our color pigments and functional additives businesses.timber treatment.
Adjusted EBITDA in the Performance Additives segment was $15$22 million, a decreasean increase of $9$7 million for the three months ended March 31, 20192020 compared to the same period in 2018,2019. The increase was primarily due to lower average selling prices and lowerfavorable mix of sales volumes, partially offset by lower raw material and energy costs,within the businesses, lower selling, general and administrative costs, lower raw material, energy and other costs, and a $1 million benefit from our 2019 Business Improvement Program.Program, partially offset by a decline in sales volumes.
Corporate and Other
Corporate and other represents expenses which are not allocated to our segments. Losses from Corporate and otherOther were $16$11 million, or $6$5 million higherlower in the three months ended March 31, 2019 than2020 compared to the same period in 2018,2019. This was primarily as a result of the unfavorable impact offavorable foreign currency translation arising from weaknessand lower costs in the Euro versus the U.S. dollar.various corporate functions.
Liquidity and Capital Resources
We had cash and cash equivalents of$80 $25 millionand $165$55 million as of March 31, 20192020 and December 31, 2018,2019, respectively. We expecthave an ABL Facility with an available aggregate principal amount of up 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.
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, as Issuers, and borrowings of $375 million under the Term Loan Facility. A payable to Huntsman for a liability pursuant to the Tax Matters Agreement has been presented as "Noncurrent payable to affiliates" on our unaudited condensed consolidated balance sheets.
In addition to the Senior Notes and the Term Loan Facility, we entered into the ABL Facility. $350 million. 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 timefluctuates and may be further impacted by the lenders’ discretionary ability to impose reserves and availability blocks that might otherwise incrementally increase borrowing availability. The borrowing base calculation as of March 31, 20192020 is in excess of approximately $273 million,of which $264 $191 millionis available to be drawn.
As we cannot predict the duration or scope of the COVID-19 pandemic and its impact on our customers and suppliers, the potential adverse financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the business to improve cash flow and ensure adequate liquidity, which we believe will help us emerge from this environment a stronger and more resilient company. Such measures, which are incremental to ongoing improvement programs, include implementing additional actions to reduce costs, managing our production network to align with customer demand, managing our inventories and reducing planned capital expenditures. In addition, various governments in the countries and localities in which we operate have established economic relief and stimulus programs to support their economies during the COVID-19 pandemic. We are participating in certain smaller value programs and we continue to assess the potential for the impact that other programs may have on our liquidity as they become available. We believe that these steps to improve cash flow and liquidity will allow us to meet our anticipated funding requirements for the next twelve months. We may also seek to take advantage of opportunities to raise capital through additional debt financing, and may, from time to time, discuss such opportunities with potential credit investors.
Items Impacting Short-Term and Long-Term Liquidity
Our liquidity can be significantly impacted by various factors.factors in addition to those described below. The following matters had, or are expected to have, a significant impact on our liquidity:
•Cash invested in our accounts receivable and inventory, net of accounts payable, as reflected in our unaudited condensed consolidated statements of cash flows increased by $7$25 million for the three months ended March 31, 20192020 as compared to the same period in the prior year. We expect volatility in our working capital components to continue duebe a source of liquidity through 2020 as we take measures to seasonal changesrespond to the impact of the COVID-19 pandemic, which are incremental to efforts already in working capital throughout the year.
place, including managing our production network and inventory levels to align with customer demand.
•We expect to spend approximately $130$60 million on capital expenditures during 2019. 2020, which reflects a decrease from the expected 2020 capital expenditures of $80 million to $90 million reported in the fourth quarter of 2019, primarily as a result of actions we expect to take to preserve liquidity in response to the impact of the COVID-19 pandemic.
•Our future capital expenditures include certain EHS maintenance and upgrades, planned periodic maintenance and repairs applicable to major units of manufacturing facilities; expansions of our existing facilities or construction of new facilities; certain cost reduction projects; and the cost to transfer specialty and differentiated manufacturing from Pori, Finland to other sites within our manufacturing network. This excludes other Pori site capital expenditures. We expect to fund this spending with cash on hand as well as cash provided by operations and borrowings.
•During the three months ended March 31, 2019,2020, we made contributions to our pension and postretirement benefit plans of $6$11 million. During the remainder of 2019,2020, we expect to contribute an additional amount of approximately $30$24 million to these plans.
•We are involved in a number of cost reduction programs for which we have established restructuring accruals. As of March 31, 2019,2020, we had $28$13 million of accrued restructuring costs of which $17$7 million is classified as current. We expect to incur additional restructuring and plant closing costs of approximately $17 million, including $10$1 million for non-cashnoncash charges, and pay approximately $22$21 million through the remainder of 2019. 2020.
For further discussion of these plans and the costs involved, see "Note 7."Note 6. Restructuring, Impairment, and Plant Closing and Transition Costs"Costs" of the notes to unaudited condensed consolidated financial statements.
statements.
•In the fourth quarter of 2018, we commenced our 2019 Business Improvement Program and have delivered $24 million of savings through the first quarter of 2019 we announced additional2020, $4 million of which was achieved in the first quarter of 2020. We continue to expect that when fully implemented, this cost reduction initiatives which are expected toand operational improvement program will provide approximately $40 million of annual adjusted EBITDA benefit compared to year-end 2018. We currently expect actions will be complete in 2020, endingto end the year at the full run rate level.run-rate level; however, the timing, constituent elements and expected benefit may be adjusted in response to the COVID-19 pandemic. We continue to evaluate the impact of COVID-19 on our 2019 Business Improvement Program.
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• | On January 30, 2017, our TiO2 manufacturing facility in Pori, Finland, experienced fire damage. We are in the process of closing our Pori, Finland, TiO2 manufacturing facility and transferring the production of specialty and differentiated product grades to other sites within our existing network. In the first quarter of 2019, we had capital expenditures of $24 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 January 30, 2017, our TiO2 manufacturing facility in Pori, Finland, experienced fire damage. We are in the process of closing our Pori, Finland, TiO2 manufacturing facility and transferring our specialty and differentiated business to other sites in our manufacturing network. We intend to operate the Pori facility at reduced production rates through the transition period, subject to economic and other factors. We do not expect any material capital expenditures relating to the transfer during 2020. We intend to optimize the remaining transfer of our specialty and differentiated business from our Pori, Finland manufacturing site to other sites in our manufacturing network, but the timing of this transfer will be elongated, due in part to the COVID-19 pandemic, and may result in a lower total expected capital outlay and a lower associated adjusted EBITDA benefit than originally estimated.
•In the first quarter of 2020, we initiated consultations with employee representatives on a proposal to restructure our manufacturing facility at our German operations. Until the consultation process is concluded, the restructuring is not considered probable, and the total potential costs associated with this contemplated proposal, which are expected to be significant, cannot be determined. If the consultation process is successfully concluded, the Company would expect, at that time, to record charges related to the program including employee severance costs, accelerated depreciation and other costs associated with restructuring our manufacturing facility. The amount and timing of the recognition of these charges and the related cash expenditures will depend on a number of factors, including the timing of the completion of the consultation process and the negotiated elements of the associated plan. We expect the cash benefit of this potential restructuring to more than offset cash expenditures to be incurred for its implementation.
•We have $733$732 million in aggregate principalprinciple outstanding under $370consisting of $371 million of 5.75% of Senior Notes due 2025, and a $363$361 million Term Loan Facility. We also had $60 million outstanding on our ABL Facility. Through March 31, 2020, we are in compliance with all applicable financial covenants included in the terms of our Senior Notes and Senior Credit Facility. In July 2017, the U.K.'s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. We are currently evaluating the potential effect of the eventual replacement of LIBOR on our financial statements. Accounting guidance has been recently issued to ease the transition to alternative reference rates from a financial reporting perspective. See "Note 2. Recently Issued Accounting Pronouncements" of the notes to unaudited condensed consolidated financial statements. See further discussion under "Financing Arrangements."
As of March 31, 20192020 and December 31, 20182019, we had $7$70 million and $8$13 million, respectively, classified as current portion of debt.
As of March 31, 20192020 and December 31, 20182019, we had $18$14 million and $36$16 million, respectively, of cash and cash equivalents held outside of the U.S. and Europe, including our variable interest entities. As of March 31, 20192020, our
non-U.K. subsidiaries have no plan to distribute funds in a manner that would cause them to be subject to U.K., or other local country taxation. DuringIn the three months ended March 31,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 Three Months Ended March 31, 20192020 Compared to the Three Months Ended March 31, 20182019
Net cash used in operating activities was $58 million for the three months ended March 31, 2020, compared to $29 million for the three months ended March 31, 2019 while2019. The unfavorable variance in net cash provided byused in operating activities was $51 million
for the three months ended March 31, 2018. The unfavorable variance in net cash from operating activities for the three months ended March 31, 20192020 compared with the same period in 20182019 was primarily attributable to an $82a $33 million decreaseunfavorable variance in operating assets and liabilities for 2020 as compared with the same period in 2019, partially offset by a $10 million increase in net income as described in "—Results of Operations" above, a $19 million reduction in insurance proceeds for business interruption, offset by a $28 million favorable variance in operating assets and liabilities for 2019 as compared with 2018.above.
Net cash used in investing activities was $27 million for the three months ended March 31, 2020, compared to $53 million for the three months ended March 31, 2019, compared to $67 million for the three months ended March 31, 2018.2019. The decrease in net cash used in investing activities was primarily attributable to a decrease in capital expenditures of $21 million comparedprimarily as a result of higher capital expenditures related to our TiO2 manufacturing facility in Pori, Finland in the prior year period, offset by a $7 million unfavorable variance in cash received from and cash invested in unconsolidated affiliates.period.
Net cash used inprovided by financing activities was $3$56 million for the three months ended March 31, 2019,2020, compared to $8$3 million for the three months ended March 31, 2018. The decrease in net cash used in financing activities for the three months ended March 31, 20192019. The increase in net cash provided by financing activities for the three months ended March 31, 2020 compared with the same period in 20182019 was primarily attributable to a decrease$63 million of proceeds from issuance of short-term debt, partially offset by $5 million increase in repaymentsnet payments on long-term debt.notes payable.
Changes in Financial Condition
The following information summarizes our working capital as of March 31, 20192020 and December 31, 20182019:
| | | (Dollars in millions) | March 31, 2019 | | December 31, 2018 | | Increase (Decrease) | | Percent Change | (Dollars in millions) | March 31, 2020 | | December 31, 2019 | | Increase (Decrease) | | Percent Change |
| Cash and cash equivalents | $ | 80 |
| | $ | 165 |
| | $ | (85 | ) | | (52 | )% | Cash and cash equivalents | $ | 25 | | | $ | 55 | | | $ | (30) | | | (55 | %) |
| Accounts receivable, net | 400 |
| | 351 |
| | 49 |
| | 14 | % | Accounts receivable, net | 367 | | | 321 | | | 46 | | | 14 | % |
| Accounts receivable from affiliates | 10 |
| | — |
| | 10 |
| | NM |
| Accounts receivable from affiliates | 10 | | | — | | | 10 | | | NM | |
| Inventories | 503 |
| | 538 |
| | (35 | ) | | (7 | )% | Inventories | 492 | | | 513 | | | (21) | | | (4 | %) |
| Prepaid expenses | 17 |
| | 20 |
| | (3 | ) | | (15 | )% | Prepaid expenses | 16 | | | 21 | | | (5) | | | (24 | %) |
| Other current assets | 53 |
| | 51 |
| | 2 |
| | 4 | % | Other current assets | 58 | | | 67 | | | (9) | | | (13 | %) |
| Total current assets | $ | 1,063 |
| | $ | 1,125 |
| | $ | (62 | ) | | (6 | )% | Total current assets | $ | 968 | | | $ | 977 | | | $ | (9) | | | (1 | %) |
| Accounts payable | 331 |
| | 382 |
| | (51 | ) | | (13 | )% | Accounts payable | 284 | | | 334 | | | (50) | | | (15 | %) |
| Accounts payable to affiliates | 15 |
| | 18 |
| | (3 | ) | | (17 | )% | Accounts payable to affiliates | 17 | | | 17 | | | — | | | — | % |
| Accrued liabilities | 124 |
| | 135 |
| | (11 | ) | | (8 | )% | Accrued liabilities | 104 | | | 116 | | | (12) | | | (10 | %) |
| Current operating lease liability | 10 |
| | — |
| | 10 |
| | NM |
| Current operating lease liability | 8 | | | 8 | | | — | | | — | |
| Current portion of debt | 7 |
| | 8 |
| | (1 | ) | | (13 | )% | Current portion of debt | 70 | | | 13 | | | 57 | | | 438 | % |
| Total current liabilities | $ | 487 |
| | $ | 543 |
| | $ | (56 | ) | | (10 | )% | Total current liabilities | $ | 483 | | | $ | 488 | | | $ | (5) | | | (1 | %) |
| Working capital | $ | 576 |
| | $ | 582 |
| | $ | (6 | ) | | (1 | )% | Working capital | $ | 485 | | | $ | 489 | | | $ | (4) | | | (1 | %) |
