VENATOR MATERIALS PLC The following discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the information under the headings "Note Regarding Forward-Looking Statements," "Part I. Item 1A. Risk Factors," "Part II. Item 6. Selected Financial Data" and "Part I. Item 1. Business," as well as the audited consolidated and combined financial statements and the related notes thereto. The following MD&A gives effect to the recast as described in "Part II. Item 8. Financial Statements and Supplementary Data-Note 17. Discontinued Operations" of this report.
Recent Trends and Outlook
In 2020, we expect results in our Titanium Dioxide segment to reflect: (i) modest industry demand growth; (ii) TiO2 pricing to reflect regional supply and demand balances and increased competition for certain products; (iii) a soft economic environment, primarily inChina andEurope , including the direct and indirect effects ofChina -U.S. trade negotiations, COVID-19 coronavirus and Brexit; (iv) manageable raw material (primarily ore), energy and other cost increases; (v) volume trends to reflect historical seasonal patterns (vi) increased sales of new and recently introduced TiO2 products; and (vii) additional benefit through cost and operational improvement actions as part of our 2019 Business Improvement Program and other cost and operational improvement actions. We are exploring ways to optimize the remaining transfer of our business from Pori, which may result in a lower total expected capital outlay and a lower associated EBITDA benefit than originally estimated. In our Performance Additives segment, we expect business trends to be driven by: (i) a seasonal improvement in sales volumes compared to the fourth quarter of 2019; (ii) a soft economic environment, primarily inChina andEurope , including the effects ofChina -U.S. trade negotiations, COVID-19 coronavirus and Brexit; (iii) challenging demand environment for certain products primarily in the automotive, plastic and construction end-use applications; (iv) raw material and cost increases; (v) benefits from portfolio optimization actions; (vi) additional benefit through cost and operational improvement actions including our 2019 Business Improvement Program. In the fourth quarter of 2018, we commenced our 2019 Business Improvement Program and are underway with the implementation, having realized$20 million of savings in 2019. 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 expect the program will be fully implemented in 2020, ending the year at the full run-rate level. In 2020, we expect total capital expenditures to be$80 million to$90 million . This includes capital expenditures relating to the transfer of our specialty and differentiated technology from our Pori,Finland manufacturing site to other sites in our manufacturing network.
We expect our corporate and other costs will be approximately
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Results of Operations
The following table sets forth our consolidated and combined results of
operations for the years ended December 31, 2019 , 2018 and 2017. For a
discussion of the 2017 results of operations, see "Part II. Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations" in the 2018 Form 10-K.
Percent Change
Year Ended December 31, Year Ended
2019 vs.
(Dollars in millions) 2019 2018 2017 2018 2018 vs. 2017
Revenues $ 2,130 $ 2,265 $ 2,209 (6) % 3 %
Cost of goods sold 1,892 1,550 1,744 22 % (11) %
Operating expenses(4) 192 218 226 (12) % (4) %
Restructuring, impairment and plant closing and
transition costs 33 628 52 (95) % 1,108 %
Operating income (loss) 13 (131) 187 NM NM
Interest expense, net (41) (40) (40) 3 % - %
Other income 8 6 39 33 % (85) %(Loss) income from continuing operations before income taxes
(20) (165) 186 (88) % NM
Income tax (expense) benefit from continuing operations (150)
8 (50) NM NM
(Loss) income from continuing operations (170) (157) 136 8 % NM
Income from discontinued operations, net of tax - - 8 NM (100) %
Net (loss) income (170) (157) 144 8 % NM
Reconciliation of net loss to adjusted EBITDA:
Interest expense, net 41 40 40 3 % - %
Income tax expense (benefit) from continuing operations 150 (8) 50 NM NM
Depreciation and amortization 110 132 127 (17) % 4 %
Net income attributable to noncontrolling interests (5) (6) (10) (17) % (40) %
Other adjustments:
Business acquisition and integration (credits) expense (1) 20 5
Separation (gain) expense, net (3) 2 7
U.S. income tax reform - - (34)
Net income of discontinued operations, net of tax - - (8)
Loss on disposition of businesses/assets 1 2 -
Certain legal settlements and related expenses 4 - 1
Amortization of pension and postretirement actuarial losses
14 15 17
Net plant incident costs (credits) 20 (232) 4
Restructuring, impairment and plant closing and
transition costs 33 628 52
Adjusted EBITDA(1) $ 194 $ 436 $ 395 (56) % 10 %
Net cash provided by operating activities from
continuing operations 33 282 337 (88) % (16) %
Net cash used in investing activities from continuing operations
(150) (321) (11) (53) % 2,818 %
Net cash provided by (used in) financing activities from
continuing operations 7 (18) (123) NM (85) %
Capital expenditures (152) (326) (197) (53) % 65 %
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Year Ended Year Ended Year Ended
December 31, December 31, December 31,
(Dollars in millions) 2019 2018 2017
Reconciliation of net (loss) income to adjusted net income
(loss) attributable to
$ (170) $ (157) $ 144 Net income attributable to noncontrolling interests (5) (6) (10) Other adjustments: Business acquisition and integration (credits) expenses (1) 20 5 Separation (gain) expense, net (3) 2 7 U.S. income tax reform - - (34) Net income of discontinued operations - - (11) Loss on disposition of businesses/assets 1 2 - Certain legal settlements and related expenses 4 - 1 Amortization of pension and postretirement actuarial losses 14 15 17 Net plant incident costs (credits) 20 (232) 4
Restructuring, impairment and plant closing and transition costs
33 628 52
Income tax adjustments(3) 133 (37) 11
Adjusted net income attributable to
$ 26 $ 235 $ 186 Weighted-average shares-basic 106.5 106.4 106.3 Weighted-average shares-diluted 106.5 106.7 106.7 Net loss attributable toVenator Materials PLC ordinary shareholders per share: Basic$ (1.64) $ (1.53) $ 1.26 Diluted$ (1.64) $ (1.53) $ 1.26 Other non-GAAP measures: Adjusted net income attributable toVenator Materials PLC ordinary shareholders per share:(2) Basic$ 0.24 $ 2.21 $ 1.75 Diluted$ 0.24 $ 2.20 $ 1.74 NM-Not meaningful (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) separation expense/gain, net; (c)U.S. income tax reform; (d) net income/loss of discontinued operations, net of tax; (e) loss/gain on disposition of business/assets; (f) certain legal settlements and related expenses/gains; (g) amortization of pension and postretirement actuarial losses/gains; (h) net plant incident costs/credits; and (i) restructuring, impairment, and plant closing and transition costs/credits. We believe that net income is the performance measure calculated and presented in accordance withU.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 withU.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 47 -------------------------------------------------------------------------------- Table of Contents 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 supplementU.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business rather thanU.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 amortization of pension and postretirement actuarial losses is a recurring item, it is not indicative of ongoing operating results and trends or future results. (2)Adjusted net income attributable toVenator Materials PLC ordinary shareholders is computed by eliminating the after-tax amounts related to the following from net income/loss attributable toVenator Materials PLC ordinary shareholders: (a) business acquisition and integration expenses/adjustments; (b) separation expense/gain, net; (c) U.S. income tax reform; (d) net income/loss of discontinued operations, net of tax; (e) loss/gain on disposition of business/assets; (f) certain legal settlements and related expenses/gains; (g) amortization of pension and postretirement actuarial losses/gains; (h) net plant incident costs/credits; and (i) 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 and adjusted net income per share amounts are presented solely as supplemental information. These measures exclude similar non-cash item 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 ofU.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 endedJune 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 this approach enables a clearer understanding of the long term impact of our tax structure on post tax earnings.
(4)As presented within Item 7, operating expenses include selling, general and administrative expenses and other operating expense/income.
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Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
For the year ended December 31, 2019 , net loss was $170 million on revenues of
$2,130 million , compared with a net loss of $157 million on revenues of $2,265
million for the same period in 2018. The increase of $13 million in net loss was
the result of the following items:
•Revenues for the year ended December 31, 2019 decreased by $135 million , or 6%,
as compared with the same period in 2018. The decrease was due to a $52 million ,
or 3%, decrease in revenue in our Titanium Dioxide segment and an $83 million ,
or 14%, decrease in revenue in our Performance Additives segment. See "-Segment
Analysis" below.
•Our operating expenses for the year ended December 31, 2019 decreased by $26
million , or 12%, as compared to the same period in 2018, primarily as a result
lower overhead costs, lower depreciation expense, and a decrease in Pori related
expenses, partially offset by the impact of $14 million of carbon credit sales
in 2018 and the negative impact of foreign exchange.
•Restructuring, impairment and plant closing and transition costs for the year
ended December 31, 2019 decreased to $33 million from $628 million for the same
period in 2018. For more information concerning restructuring activities, see
"Part II. Item 8. Financial Statements and Supplementary Data-Note 13.
Restructuring, Impairment and Plant Closing and Transition Costs" of this
report.
•Other income for the year ended December 31, 2019 increased by $2 million
primarily as a result of the recognition of $4 million related to the change in
the expected future payment to Huntsman pursuant to the tax matters agreement
entered into as part of our separation partially offset by a net decrease in
pension related expense.
•Income tax expense for the year ended December 31, 2019 was $150 million
compared to $8 million of income tax benefit 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 operate, as impacted by the presence of
valuation allowances in certain tax jurisdictions. In 2019, we recorded a full
valuation allowance against net deferred tax assets of $162 million . For further
information concerning taxes, see "Part II. Item 8. Financial Statements and
Supplementary Data-Note 20. Income Taxes" of this report.
Segment Analysis
Percent
Year Ended Change
December 31, Favorable
(in millions) 2019 2018 (Unfavorable)
Revenues
Titanium Dioxide $ 1,614 $ 1,666 (3) %
Performance Additives 516 599 (14) %
Total $ 2,130 $ 2,265 (6) %
Adjusted EBITDA
Titanium Dioxide $ 197 $ 417 (53) %
Performance Additives 47 62 (24) %
244 479 (49) %
Corporate and other (50) (43) (16) %
Total $ 194 $ 436 (56) %
Year Ended December 31, 2019 vs. 2018
Average Selling
Price(1)
Foreign
Currency
Local Translation Mix & Sales
Currency Impact Other Volumes(2)
Period-Over-Period Increase (Decrease)
Titanium Dioxide (7) % (3) % - % 7 %
Performance Additives - % (2) % - % (12) %
NM-Not meaningful
(1)Excludes revenues from tolling arrangements, by-products and raw materials.
(2)Excludes sales volumes of by-products and raw materials.
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Titanium Dioxide
The Titanium Dioxide segment generated revenues of $1,614 million in the twelve
months ended December 31, 2019 , a decrease of $52 million , or 3%, compared to
the same period in 2018. The decrease was primarily due to a 7% decline in the
average TiO2 selling price and a 3% unfavorable impact of foreign currency
translation, partially offset by a 7% increase in sales volumes. The decline in
the average TiO2 selling price was primarily a result of lower functional TiO2
prices in Europe and Asia and more stable prices in North America . The average
specialty TiO2 price was stable compared to the prior year. Sales volumes
increased due to sales of new products, increased product availability and
improved demand for our products.
Adjusted EBITDA for the Titanium Dioxide segment was $197 million , a decline of
$220 million in the twelve months ended December 31, 2019 compared to the same
period in 2018. This decrease is primarily a result of lower TiO2 margins due to
a lower average TiO2 selling price, reduced contribution from specialty TiO2,
higher raw material costs, $14 million of carbon credits sold in the twelve
months ended December 31, 2018 and $41 million of lost earnings attributable to
our Pori, Finland TiO2 manufacturing facility, which were reimbursed through
insurance proceeds in the comparable period of 2018. This decrease was partially
offset by higher sales volumes, a $13 million benefit from our 2019 Business
Improvement Program and a $9 million benefit due to a change in plant
utilization rates, which increased our overhead absorption and corresponding
inventory valuation at certain facilities.
Performance Additives
The Performance Additives segment generated revenues of $516 million in the
twelve months ended December 31, 2019 , a decline of $83 million , or 14%,
compared to the same period in 2018. This decrease was a result of a 12% decline
in volumes and a 2% unfavorable impact of foreign currency translation. The
average selling price was stable compared to the prior year. The decline in
volumes was primarily attributable to soft demand in automotive coatings,
plastics and electronics applications, lower sales into construction-related
applications, including the effect of portfolio optimization and a
discontinuation of sales of a product to a timber treatment customer.
Adjusted EBITDA in the Performance Additives segment was $47 million , a decrease
of $15 million , or 24%, for the twelve months ended December 31, 2019 compared
to the same period in 2018. This decrease was primarily a result of lower sales
volumes and product mix, partially offset by lower raw material and selling,
general and administrative costs, a $5 million benefit from our 2019 Business
Improvement Program and a $2 million benefit due to a change in plant
utilization which increased our overhead absorption rates at certain facilities.
Corporate and other
Corporate and other represents expenses which are not allocated to our segments.
Losses from Corporate and other were $50 million , or $7 million higher for the
twelve months ended December 31, 2019 than the same period in 2018 due to a $9
million unfavorable impact of foreign currency exchange rates partially offset
by a $2 million benefit from our 2019 Business Improvement Program.
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
For the year ended December 31, 2018 , net loss was $157 million on revenues of
$2,265 million , compared with a net income of $144 million on revenues of $2,209
million for the same period in 2017. The decrease of $301 million in net income
was the result of the following items:
•Revenues for the year ended December 31, 2018 increased by $56 million , or 3%,
as compared with the same period in 2017. The increase was due to a $62 million ,
or 4%, increase in revenue in our Titanium Dioxide segment primarily due to an
increase in average selling price, partially offset by a $6 million , or 1%,
decrease in revenue in our Performance Additives segment due primarily to
decreases in volumes. See "-Segment Analysis" below.
•Our operating expenses for the year ended December 31, 2018 decreased by $8
million , or 4%, as compared to the same period in 2017, primarily resulting from
reduced overhead costs.
•Restructuring, impairment and plant closing and transition costs for the year
ended December 31, 2018 increased to $628 million from $52 million for the same
period in 2017. For more information concerning restructuring activities, see
"Part II. Item 8. Financial Statements and Supplementary Data-Note 13.
Restructuring, Impairment and Plant Closing and Transition Costs" of this
report.
•Other income for the year ended December 31, 2018 decreased by $33 million
primarily as a result of the recognition of income in 2017 related to the change
in the future payment to Huntsman pursuant to the tax matters agreement
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entered into as part of our separation. The change in future expected payment
was due to the 2017 Tax Act's reduction of the U.S. federal corporate income tax
rate from 35% to 21%.
•Our income tax benefit for the year ended December 31, 2018 was $8 million
compared to $50 million of income tax expense 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 operate, as impacted by the presence of
valuation allowances in certain tax jurisdictions. For further information
concerning taxes, see "Part II. Item 8. Financial Statements and Supplementary
Data-Note 20. Income Taxes" of this report.
Segment Analysis
Percent
Year Ended Change
December 31, Favorable
(in millions) 2018 2017 (Unfavorable)
Revenues
Titanium Dioxide $ 1,666 $ 1,604 4 %
Performance Additives 599 605 (1) %
Total $ 2,265 $ 2,209 3 %
Segment adjusted EBITDA
Titanium Dioxide $ 417 $ 387 8 %
Performance Additives 62 72 (14) %
479 459 4 %
Corporate and other (43) (64) 33 %
Total $ 436 $ 395 10 %
Year Ended December 31, 2018 vs. 2017
Average Selling
Price(1)
Foreign
Currency
Local Translation Mix & Sales
Currency Impact Other Volumes(2)
Period-Over-Period Increase (Decrease)
Titanium Dioxide 13 % 3 % 1 % (13) %
Performance Additives 3 % 2 % (2) % (4) %
NM-Not meaningful
(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 $1,666 million in the twelve
months ended December 31, 2018 , an increase of $62 million , or 4%, compared to
the same period in 2017. The increase was primarily due to a 13% increase in
average selling price, a 3% favorable impact from foreign currency translation,
and a 1% increase due to mix and other, offset by a 13% decrease in volumes. The
increase in selling prices compared to the prior year reflects more favorable
business conditions allowing for an increase in prices globally. Sales volumes
decreased primarily due to customer destocking and lower availability of certain
specialty product grades due, in part, to extended planned maintenance
turnarounds, reduced operating rates at our Pori, Finland manufacturing facility
and other 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% compared to the prior
year.
Adjusted EBITDA for the Titanium Dioxide segment increased by $30 million for
the year ended December 31, 2018 compared to the same period in 2017. This
increase is primarily a result of improvements in pricing, $19 million of
benefits as a result of our 2017 business improvement program, and the sale of
$14 million of energy credits in 2018, offset by the impact of
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higher raw materials and energy costs and the impact of insurance proceeds
received in 2017 to reimburse lost earnings from our Pori,
Performance Additives The Performance Additives segment generated$599 million of revenue in the twelve months endedDecember 31, 2018 , a decline of$6 million , or 1%, compared to the same period in 2017 resulting from a 4% decrease in volumes and a 2% decrease due to the unfavorable impact of sales mix and other partially offset by a 3% increase in pricing and a 2% improvement from the favorable impact of foreign currency translation. The decline in volumes was primarily as a result of customer destocking in Functional Additives, the discontinuation of sales of certain Timber Treatment products to a large customer, and plant shutdowns in the second quarter of 2018 as part of our restructuring plans, while the increase in selling prices is as a result of price increases for certain products within Functional Additives, Color Pigments and Timber Treatment to offset higher raw material and energy costs. Adjusted EBITDA in the Performance Additives segment decreased by$10 million , or 14%, for the twelve months endedDecember 31, 2018 compared to the same period in 2017, primarily due to higher raw materials and energy costs, offset by higher average selling prices and$8 million of benefits from our 2017 business improvement program. Corporate and other Corporate and other represents expenses which are not allocated to our segments. Losses from Corporate and other were$43 million , or$21 million lower for the twelve months endedDecember 31, 2018 than the same period in 2017 as our costs to operate as a standalone company are lower than those costs historically allocated to us from Huntsman. Liquidity and Capital Resources We had cash and cash equivalents of$55 million and$165 million as ofDecember 31, 2019 and 2018, respectively. We expect to have adequate liquidity to meet our obligations over the next 12 months. We believe our future obligations, including needs for capital expenditures will be met by available cash generated from operations and borrowings. Our financing arrangements include$375 million of Senior Notes issued by our subsidiaries Venator Finance S.à r.l. andVenator Materials LLC (the "Issuers"), and borrowings of$375 million under the Term Loan Facility. We have a related-party note 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 payable to affiliate within the consolidated balance sheets. In addition to the Senior Notes and the Term Loan Facility, we have an ABL Facility. Availability to borrow under the ABL Facility is subject to a borrowing base calculation comprising both accounts receivable and inventory in theU.S. ,Canada , theU.K. andGermany and only accounts receivable inFrance andSpain . 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. The borrowing base calculation as ofDecember 31, 2019 is in excess of$273 million , of which$252 million is available to be drawn, as a result of$21 million of letters of credit issued and outstanding atDecember 31, 2019 . 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: •Cash inflows from our accounts receivable and inventory, net of accounts payable, increased by$119 million for the year endedDecember 31, 2019 as reflected in our consolidated and combined statements of cash flows. For 2020, we expect to spend$80 million to$90 million on capital expenditures. Our future expenditures include certain EHS maintenance and upgrades; periodic maintenance and repairs applicable to major units of manufacturing facilities; certain cost reduction projects; and the cost to transfer our 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 and borrowings. •During the year endedDecember 31, 2019 , we made contributions to our pension and postretirement benefit plans of$40 million . During the first quarter of 2020, we expect to contribute an additional amount of approximately$7 million to these plans. 52 -------------------------------------------------------------------------------- Table of Contents •We are involved in a number of cost reduction programs for which we have established restructuring accruals. As ofDecember 31, 2019 , we had$16 million of accrued restructuring costs of which$9 million is classified as current. We expect to incur approximately$19 million and pay approximately$30 million of restructuring and plant closing costs during 2020. For further discussion of these plans and the costs involved, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 13. Restructuring, Impairment and Plant Closing and Transition Costs" of this report. •In the fourth quarter of 2018, we commenced our 2019 Business Improvement Program and are underway with the implementation, having realized$20 million of savings in 2019. 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 expect the program will be fully implemented in 2020, ending the year at the full run-rate level. •OnJanuary 30, 2017 , our TiO2 manufacturing facility in Pori,Finland , experienced fire damage. OnSeptember 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 certain specialty and differentiated products to other sites. We expect to continue to wind down the limited operations at the Pori facility through the transition period. We are exploring ways to optimize the remaining transfer of our business from Pori, which may result in a lower total expected capital outlay and a lower associated 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 in Duisburg,Germany . 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 have$732 million in aggregate principal outstanding, net of debt issuance costs of$14 million , under$371 million , 5.75% of Senior Notes due 2025, and a$361 million Term Loan Facility. As ofDecember 31, 2019 and 2018, we had$13 million and$8 million , respectively, classified as current portion of debt. See further discussion under "Financing Arrangements." As ofDecember 31, 2019 and 2018, we had$16 million and$36 million , respectively, of cash and cash equivalents held outside of theU.S. andEurope . In the first quarter of 2019, a non-U.K. subsidiary distributed$12 million to aU.K. subsidiary subject to a 5% withholding tax. As ofDecember 31, 2019 , our non-U.K. subsidiaries have no plan to distribute earnings in a manner that would cause them to be subject to materialU.K. ,U.S. , or other local country taxation. For the years endedDecember 31, 2018 and 2017, our non-U.K. subsidiaries made no distribution of earnings that caused them to be subject to materialU.K. ,U.S. , or other local country taxation. Cash Flows for the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 Net cash provided by operating activities was$33 million for the twelve months endedDecember 31, 2019 , compared to net cash provided by operating activities of$282 million for the twelve months endedDecember 31, 2018 . The decrease in net cash provided by operating activities for the twelve months endedDecember 31, 2019 compared with the same period of 2018 was primarily attributable to changes in net income. The$13 million increase in net loss, as described in "-Results of Operations" above, was offset by changes in non-cash elements of net income comprised primarily of a$583 million decrease in non-cash restructuring and impairment charges and a$158 million increase in income tax expense primarily as the result of the recognition of a full valuation allowance against the deferred tax assets held at our German businesses. The increase in net loss, after giving effect to the non-cash restructuring and impairment charges and the increase in income tax expense, was partially offset by an increase in cash flows due to changes in assets and liabilities of approximately$205 million . Net cash used in investing activities was$150 million for the twelve months endedDecember 31, 2019 , compared to net cash used in investing activities of$321 million for the twelve months endedDecember 31, 2018 . The decrease in net cash used in investing activities for the twelve months endedDecember 31, 2019 compared with the same period of 2018 was primarily attributable to a$174 million decrease in capital expenditures as a result of the unreimbursed Pori capital expenditures in 2018. 53 -------------------------------------------------------------------------------- Table of Contents Net cash provided by financing activities was$7 million for the twelve months endedDecember 31, 2019 , compared to net cash used in financing activities of$18 million for the twelve months endedDecember 31, 2018 . The increase in net cash provided by financing activities for the twelve months endedDecember 31, 2019 compared with the same period of 2018 was primarily attributable to$15 million in proceeds from the termination of cross-currency swap contracts in 2019 and$13 million favorable variance in net borrowings/repayments on notes payable. Cash Flows for the Year EndedDecember 31, 2018 Compared to the Year EndedDecember 31, 2017 Net cash provided by operating activities from continuing operations was$282 million for the twelve months endedDecember 31, 2018 while net cash provided by operating activities from continuing operations was$337 million for the twelve months endedDecember 31, 2017 . The decrease in net cash provided by operating activities from continuing operations for the twelve months endedDecember 31, 2018 compared with the same period of 2017 was primarily attributable to the$301 million decrease in net income described in "-Results of Operations" above, a$263 million unfavorable variance in changes in assets and liabilities, and an unfavorable decrease in deferred income taxes of$38 million , partially offset by an increase in noncash restructuring and impairment charges of$584 million . Net cash used in investing activities from continuing operations was$321 million for the twelve months endedDecember 31, 2018 , compared to net cash used in investing activities from continuing operations of$11 million for the twelve months endedDecember 31, 2017 . The increase in net cash used in investing activities from continuing operations for the twelve months endedDecember 31, 2018 compared with the same period of 2017 was primarily attributable to a$205 million increase in capital expenditures, net of insurance proceeds for recovery of property damage, and a decrease in net payments from affiliates of$121 million year over year, partially offset by a change of$10 million related to cash received and cash invested in unconsolidated affiliates. Net cash used in financing activities from continuing operations was$18 million for the twelve months endedDecember 31, 2018 , compared to net cash used in financing activities from continuing operations of$123 million for the twelve months endedDecember 31, 2017 . The decrease in net cash used in financing activities from continuing operations for the twelve months endedDecember 31, 2018 compared with the same period of 2017 was primarily attributable to the$832 million final settlement and repayment of affiliate balances at separation reflected in our 2017 cash outflows from financing activities, offset by a decrease in proceeds received from the issuance of the Senior Notes and Senior Credit facilities net of the payment of debt issuance costs of$732 million in 2017.
Changes in Financial Condition
The following information summarizes our working capital as ofDecember 31, 2019 and 2018: Increase (Dollars in millions) December 31, 2019 December 31, 2018 (Decrease) Percent Change Cash and cash equivalents $ 55 $ 165$ (110) (67) % Accounts and notes receivable, net 321 351 (30) (9) % Inventories 513 538 (25) (5) % Prepaid expenses 21 20 1 5 % Other current assets 67 51 16 31 % Total current assets 977 1,125 (148) (13) % Accounts payable 334 382 (48) (13) % Accounts payable to affiliates 17 18 (1) (6) % Accrued liabilities 116 135 (19) (14) % Current operating lease liability 8 - 8 NM Current portion of debt 13 8 5 63 % Total current liabilities 488 543 (55) (10) % Working capital $ 489 $ 582$ (93) (16) % NM-Not meaningful
Our working capital decreased by
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•Cash and cash equivalents decreased by $110 million primarily due to cash
outflows of $150 million from investing activities, partially offset by inflows
of $33 million from operating activities and $7 million from financing
activities.
•Accounts receivable decreased by $30 million primarily due to lower sales year
over year.
•Inventories decreased by $25 million primarily due to lower levels of finished
goods at December 31, 2019 as compared to the prior year as a result of
seasonality and efforts across the organization to manage inventory levels
partially offset by an $11 million increase in inventory due to a change in
plant utilization rates which increased our overhead absorption and
corresponding inventory valuation at certain facilities in 2019.
•Accrued liabilities decreased by $19 million primarily due to a reduction of $9
million of accrued restructuring costs and $7 million of current portion of ARO
costs.
The following information summarizes our working capital as of December 31, 2018
and 2017:
Increase
(Dollars in millions) December 31, 2018 December 31, 2017 (Decrease) Percent Change
Cash and cash equivalents $ 165 $ 238 $ (73) (31) %
Accounts and notes receivable, net 351 380 (29) (8) %
Accounts receivable from affiliates - 12 (12) (100) %
Inventories 538 454 84 19 %
Prepaid expenses 20 19 1 5 %
Other current assets 51 66 (15) (23) %
Total current assets from continuing
operations 1,125 1,169 (44) (4) %
Accounts payable 382 385 (3) (1) %
Accounts payable to affiliates 18 16 2 13 %
Accrued liabilities 135 244 (109) (45) %
Current portion of debt 8 14 (6) (43) %
Total current liabilities from continuing
operations 543 659 (116) (18) %
Working capital $ 582 $ 510 $ 72 14 %
Our working capital increased by
•Cash and cash equivalents decreased by$73 million primarily due to cash outflows of$321 million from investing activities from continuing operations and outflows of$18 million from financing activities from continuing operations partially offset by cash inflows of$282 million from operating activities from continuing operations. •Accounts receivable decreased by$29 million primarily due to lower sales year over year. •Inventories increased by$84 million primarily due to customer destocking during the year endedDecember 31, 2018 . •Accrued liabilities decreased by$109 million primarily due to the decreased capital accruals for the Pori,Finland plant rebuild.
Financing Arrangements For a discussion of financing arrangements, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 16. Debt" of this report.
Cross-Currency Swap For a discussion of cross-currency swaps, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 18. Derivative Instruments and Hedging Activities" of this report.
Contractual Obligations and Commercial Commitments
Our obligations under long-term debt (including the current portion), lease
agreements and other contractual commitments from continuing operations as of
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(Dollars in millions) 2020 2021-2022
2023-2024 After 2024 Total
Long-term debt, including current portion(1)
$ 355 $ 375 $ 742 Interest(2) 39 75 67 22 203 Finance leases 2 3 2 6 13 Operating leases 11 16 9 39 75 Purchase commitments(3) 100 183 22 38 343 Total(4)(5)$ 156 $ 285 $ 455 $ 480 $ 1,376 (1)For more information, see "-Financing Arrangements." (2)Interest calculated using actual and forecasted interest rates as ofDecember 31, 2019 and contractual maturity dates. (3)We have various purchase commitments extending through 2029 for materials, supplies and services entered into in the ordinary course of business. Included in the purchase commitments table above are contracts which require minimum volume purchases that extend beyond one year or are renewable annually and have been renewed for 2019. Certain contracts allow for changes in minimum required purchase volumes in the event of a temporary or permanent shutdown of a facility. To the extent the contract requires a minimum notice period, such notice period has been included in the above table. The contractual purchase price for substantially all of these contracts is variable based upon market prices, subject to annual negotiations. We have estimated our contractual obligations by using the terms of our current pricing for each contract. We also have a limited number of contracts which require a minimum payment even if no volume is purchased. We believe that all of our purchase obligations will be utilized in our normal operations. For each of the years endedDecember 31, 2019 , 2018 and 2017, we made minimum payments of$1 million , nil and$2 million , respectively, under such take or pay contracts without taking the product. (4)Totals do not include commitments pertaining to our pension and other postretirement obligations. Our estimated future contributions to our pension and postretirement plans are as follows: Annual Average (Dollars in millions) 2020 2021-2022 2023-2024 of Next 5 Years Pension plans$ 43 $ 80 $ 21 $ 5 Other postretirement obligations - - - - (5)The above table does not reflect expected tax payments and unrecognized tax benefits due to the inability to make reasonably reliable estimates of the timing and amount of payments. For additional discussion on unrecognized tax benefits, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 20. Income Taxes" of this report. Off-Balance-Sheet Arrangements We are required to provide standby letters of credit primarily to collateralize our obligation to third parties for pension liabilities and commercial obligations in the ordinary course of business. Although the letters of credit are off-balance sheet, the obligations to which they relate are reflected as liabilities on the consolidated balance sheets. For a discussion of letters of credit, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 16. Debt" of this report.
Restructuring, Impairment and Plant Closing and Transition Costs For further discussion of these and other restructuring plans and the costs involved, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 13. Restructuring, Impairment and Plant Closing and Transition Costs" of this report.
Legal Proceedings
For a discussion of legal proceedings, see "Part II. Item 8. Financial
Statements and Supplementary Data-Note 23. Commitments and Contingencies-Legal
Matters" of this report.
Environmental, Health and Safety Matters
As noted in "Part I. Item 1. Business-Environmental, Health and Safety Matters"
and "Part I. Item 1A. Risk Factors" of this report, 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
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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 "Part II. Item 8. Financial Statements and Supplementary
Data-Note 24. Environmental, Health and Safety Matters" of this report.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see "Part II.
Item 8. Financial Statements and Supplementary Data-Note 2. Recently Issued
Accounting Pronouncements" of this report.
Critical Accounting Estimates
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 consolidated and combined financial
statements. Our significant accounting policies are summarized in "Part II. Item
8. Financial Statements and Supplementary Data-Note 1. Description Of Business,
Recent Developments and Summary Of Significant Accounting Policies" of this
report. Summarized below are our critical accounting policies:
Employee Benefit Programs
We sponsor several contributory and non-contributory defined benefit plans,
covering employees primarily in the U.S. , the U.K. , Germany and Finland , but
also covering employees in a number of other countries. We fund the material
plans through trust arrangements (or local equivalents) where the assets are
held separately from us. We also sponsor unfunded postretirement plans which
provide medical and, in some cases, life insurance benefits covering certain
employees in the U.S. and Canada . Amounts recorded in our consolidated and
combined financial statements are recorded based upon actuarial valuations
performed by various third-party actuaries. Inherent in these valuations are
numerous assumptions regarding expected long-term rates of return on plan
assets, discount rates, compensation increases, mortality rates and health care
cost trends. We evaluate these assumptions at least annually.
The discount rate is used to determine the present value of future benefit
payments at the end of the year. For our U.S. and non-U.S. plans, the discount
rates were based on the results of matching expected plan benefit payments with
cash flows from a hypothetical yield curve constructed with high-quality
corporate bond yields.
The following weighted-average discount rate assumptions were used for the
defined benefit and other postretirement plans for the year:
December 31, 2019 December 31, 2018 December 31, 2017
Defined benefit plans
Projected benefit obligation 1.60 % 2.38 % 2.21 %
Net periodic pension cost 2.38 % 2.21 % 1.86 %
Other postretirement benefit plans
Projected benefit obligation 3.27 % 3.50 % 3.38 %
Net periodic pension cost 3.51 % 3.30 % 3.72 %
The expected return on plan assets is determined based on asset allocations,
historical portfolio results, historical asset correlations and management's
expected long-term return for each asset class. The expected rate of return on
U.S. plan assets was 7.75% in 2019 and 2018, each, and the expected rate of
return on non-U.S. plans was 5.18% and 5.21% for 2019 and 2018, respectively.
The expected increase in the compensation levels assumption reflects our long-term actual experience and future expectations.
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Management, with the advice of actuaries, uses judgment to make assumptions on
which our employee pension and postretirement benefit plan obligations and
expenses are based. The effect of a 1% change in three key assumptions is
summarized as follows (dollars in millions):
Statement of Balance Sheet
Assumptions Operations(1) Impact(2)
Discount rate
1% increase $ (12) $ (169)
1% decrease 18 200
Expected long-term rates of return on plan assets
1% increase (8) -
1% decrease 8 -
Rate of compensation increase
1% increase 2 12
1% decrease (2) (9)
(1)Estimated (decrease) increase on 2019 net periodic benefit cost
(2)Estimated (decrease) increase on
Income Taxes We use 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 businesses and cumulative income or losses during the applicable period. Cumulative losses incurred over the period limit our ability to consider other subjective evidence such as our projections for the future. Changes in expected future income in applicable jurisdictions could affect the realization of deferred tax assets in those jurisdictions. As ofDecember 31, 2019 , we had total valuation allowances of$585 million . See "Part II. Item 8. Financial Statements and Supplementary Data-Note 20. Income Taxes" of this report for more information regarding our valuation allowances. As ofDecember 31, 2019 , our non-U.K. subsidiaries have no plan to distribute earnings in a manner that would cause them to be subject toU.K. ,U.S. , or other local country taxation. Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The application of income tax law is inherently complex. We are required to determine if an income tax position meets the criteria of more-likely-than-not to be realized based on the merits of the position under tax law, in order to recognize an income tax benefit. This requires us to make significant judgments regarding the merits of income tax positions and the application of income tax law. Additionally, if a tax position meets the recognition criteria of more-likely-than-not we are required to make judgments and apply assumptions in order to measure the amount of the tax benefits to recognize. These judgments are based on the probability of the amount of tax benefits that would be realized if the tax position was challenged by the taxing authorities. Interpretations and guidance surrounding income tax laws and regulations change over time. As a consequence, changes in assumptions and judgments can materially affect amounts recognized in our consolidated and combined financial statements. Long-Lived Assets The useful lives of our property, plant and equipment are estimated based upon our historical experience, engineering estimates and industry information and are reviewed when economic events indicate that we may not be able to recover the carrying value of the assets. The estimated lives of our property range from 3 to 50 years and depreciation is recorded on the straight-line method. Inherent in our estimates of useful lives is the assumption that periodic maintenance and an appropriate level of annual capital expenditures will be performed. Without on-going capital improvements and maintenance, the productivity and cost efficiency declines and the useful lives of our assets would be shorter. 58 -------------------------------------------------------------------------------- Table of Contents Management uses judgment to estimate the useful lives of our long-lived assets. AtDecember 31, 2019 , if the estimated useful lives of our property, plant and equipment had either been one year greater or one year less than their recorded lives, then depreciation expense for 2019 would have been approximately$11 million less or$14 million greater, respectively. We are required to evaluate the carrying value of our long-lived tangible and intangible assets whenever events indicate that such carrying value may not be recoverable in the future or when management's plans change regarding those assets, such as idling or closing a plant. We evaluate impairment by comparing undiscounted cash flows of the related asset groups that are largely independent of the cash flows of other asset groups to their carrying values. Key assumptions in determining the future cash flows include the useful life, technology, competitive pressures, raw material pricing and regulations. In connection with our asset evaluation policy, we reviewed all of our long-lived assets for indicators that the carrying value may not be recoverable. Restructuring and Plant Closing and Transition Costs We recorded restructuring charges in recent periods in connection with closing certain plant locations, workforce reductions and other cost savings programs in each of our business segments. These charges are recorded when management has committed to a plan and incurred a liability related to the plan. Estimates for plant closing costs include the write-off of the carrying value of the plant, any necessary environmental and/or regulatory costs, contract termination and demolition costs. Estimates for workforce reductions and other costs savings are recorded based upon estimates of the number of positions to be terminated, termination benefits to be provided and other information, as necessary. Management evaluates the estimates on a quarterly basis and will adjust the reserve when information indicates that the estimate is above or below the currently recorded estimate. For further discussion of our restructuring activities, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 13. Restructuring, Impairment and Plant Closing and Transition Costs" of this report. Contingent Loss Accruals Environmental remediation costs for our facilities are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. Estimates of environmental reserves require evaluating government regulation, available technology, site-specific information and remediation alternatives. We accrue an amount equal to our best estimate of the costs to remediate based upon the available information. The extent of environmental impacts may not be fully known and the processes and costs of remediation may change as new information is obtained or technology for remediation is improved. Our process for estimating the expected cost for remediation considers the information available, technology that can be utilized and estimates of the extent of environmental damage. Adjustments to our estimates are made periodically based upon additional information received as remediation progresses. As ofDecember 31, 2019 and 2018, we had recognized a liability of$9 million and$12 million , respectively, related to these environmental matters. For further information, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 24. Environmental, Health and Safety Matters" of this report. We are subject to legal proceedings and claims arising out of our business operations. We routinely assess the likelihood of any adverse outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known claim. We have an active risk management program consisting of numerous insurance policies secured from many carriers. These policies often provide coverage that is intended to minimize the financial impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For further information, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 23. Commitments and Contingencies-Legal Proceedings" of this report. Variable Interest Entities-Primary Beneficiary We evaluate each of our variable interest entities on an on-going basis to determine whether we are the primary beneficiary. Management assesses, on an on-going basis, the nature of our relationship to the variable interest entity, including the amount of control that we exercise over the entity as well as the amount of risk that we bear and rewards we receive in regard to the entity, to determine if we are the primary beneficiary of that variable interest entity. Management judgment is required to assess whether these attributes are significant. The factors management considers when determining if we have the power to direct the activities that most significantly impact each of our variable interest entity's economic performance include supply arrangements, manufacturing arrangements, marketing arrangements and sales arrangements. We consolidate all variable interest entities for which we have concluded that we are the primary beneficiary. For the years endedDecember 31, 2019 , 2018 and 2017, the percentage of revenues from our consolidated variable interest entities in relation to total revenues that will ultimately be attributable to Venator is 4.4%, 5.2% and 5.7%, respectively. For further information, see "Part II. Item 8. Financial Statements and Supplementary Data-Note 9. Variable Interest Entities" of this report. 59
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