VENATOR MATERIALS PLC 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.
COVID-19
The COVID-19 pandemic has created significant disruption to the global economy and has had an adverse effect on our business and the markets in which we operate. This is evidenced by a decrease in sales of 19% and 9% in the second and third quarters of 2020, respectively, as compared to the prior year periods. We are actively managing our business through the pandemic and have enacted rigorous safety measures across our organization, including stopping non-essential business travel, increasing personal protective equipment requirements, requiring temperature checks at our sites, removing contractors from site where necessary, increasing cleaning and sanitizing measures, implementing social distancing protocols, requiring work-from-home arrangements as appropriate and reducing the amount of employees working at a site at any given time. We continue to evaluate the appropriate measures to have in place to safeguard our employees and our business and 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 expect to continue these measures until we determine that COVID-19 is adequately contained at each relevant location for purposes of safeguarding our employees and our business. We have not experienced significant impacts or interruptions to our supply chain as a result of the COVID-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 seeking alternative arrangements in case our primary suppliers are impacted by the COVID-19 pandemic. We cannot currently predict the duration and severity of impacts to our business from the global economic slowdown caused by the COVID-19 pandemic. Because of this, 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. See further discussion of the potential impact to our liquidity under "Liquidity and Capital Resources." See "Part II. Item 1A. Risk Factors" for further details of the risks that the COVID-19 pandemic may present to our business. Recent Trends and Outlook
The COVID-19 pandemic introduced a period of decline in demand for our products across our business in the second quarter of 2020. We began to see signs of economic recovery from the COVID-19 pandemic during the third
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quarter across our business; however, the future impact of COVID-19 on our
global demand will depend in part upon the extent to which governments continue
or introduce restrictive measures to respond to COVID-19.
We also expect geopolitical events such as Brexit and ongoing trade negotiations
between the
In our Titanium Dioxide segment, we expect near-term business trends to be driven by the following factors: (i) variability in demand for our products based on end-use application; (ii) TiO2 pricing to reflect regional supply and demand balances, increased competition in certain regions for certain of our products and our customer-tailored approach; (iii) lower cost of ore feedstocks and higher cost of energy; and (iv) additional benefit from our 2020 Business Improvement Program which includes benefits from operational cost savings and improved manufacturing efficiencies we have taken in response to the COVID-19 pandemic and our plan to align capacity at one of our German manufacturing facilities to the customers it serves. In our Performance Additives segment, we expect near-term business trends to be driven by the following factors: (i) a soft but improving demand environment for certain products, primarily those in the automotive, coatings, and certain construction end-use applications; (ii) portfolio optimization actions; and (iii) additional benefit from our 2020 Business Improvement Program which includes benefits from cost savings and manufacturing improvements we have taken in response to the COVID-19 pandemic and our plan to align capacity at one of our German manufacturing facilities to the customers it serves.
During 2020, in response to the adverse impact of the COVID-19 pandemic, we implemented our COVID-19 response program to reduce our costs, including non-recurring personnel cost reductions and operational cost savings at our manufacturing facilities. Personnel cost management actions included a temporary reduction in salaries, changes and reductions to bonus schemes and employee furloughs, as well as reduced spending on other discretionary items.
In the fourth quarter of 2018, we commenced our
During the third quarter of 2020, we announced our 2020 Business Improvement Program that will save approximately$55 million compared to 2019. This program is in addition to our 2019 Business Improvement Program and replaces our non-recurring COVID-19 cost savings initiatives delivered in 2020. We expect that this program will be fully implemented by the end of 2022. In 2020, total capital expenditures are expected to be approximately$65 million . We do not expect any material capital expenditures relating to the transfer of our specialty and differentiated business from our Pori,Finland manufacturing site to other sites in our manufacturing 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
OnAugust 28, 2020 , we announced that funds advised bySK Capital have agreed to purchase approximately 42.5 million shares, representing just under 40% of Venator's outstanding shares, from Huntsman for a purchase price of approximately$100 million , including a 30-month option for the sale of Huntsman's remaining approximate 9.5 million shares it holds at$2.15 per share. While Venator is not a party to the agreement, it is cooperating in the preparation of regulatory filings necessary to complete the transaction. The transaction received prior approval under article 134 of Venator's Articles of Association by the nonconflicted independent members of Venator's board of directors. The transaction is subject to regulatory approvals and is expected to close near year-end. Pursuant to the Tax Matters Agreement, we are required to make a future payment to Huntsman for any actualU.S. federal income tax savings we recognize as a result of any basis step up we received inU.S. assets for tax years throughDecember 31, 2028 . We recognized a noncurrent payable to affiliates of$30 million for this payment as ofSeptember 30, 2020 andDecember 31, 2019 . However, due to a change of control limitation on certain Venator tax 27 -------------------------------------------------------------------------------- Table of Contents assets, including tax net operating losses, upon completion ofSK Capital's acquisition of 42.5 million Venator shares from Huntsman, we expect to write off a significant portion of this liability along with any associated deferred tax assets in connection with the basis step up. Net deferred tax assets related to ourU.S. business atSeptember 30, 2020 andDecember 31, 2019 were$24 million and$25 million , respectively.
Results of Operations
The following table sets forth our consolidated results of operations for the
three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 2020 2019 % Change 2020 2019 % Change
Revenues $ 474 $ 526 (10 %) $ 1,462 $ 1,666 (12 %)
Cost of goods sold 454 464 (2 %) 1,336 1,461 (9 %)
Operating expenses(4) 33 50 (34 %) 121 150 (19 %)
Restructuring, impairment and plant closing
and transition costs 13 12 8 % 25 24 4 %
Operating (loss) income (26) - NM (20) 31 NM
Interest expense, net (15) (10) (50 %) (37) (31) (19 %)
Other income 5 1 400 % 12 3 300 %
(Loss) income before income taxes (36) (9) 300 % (45) 3 NM
Income tax expense (3) (8) (63 %) (3) - NM
Net (loss) income (39) (17) 129 % (48) 3 NM
Reconciliation of net (loss) income to
adjusted EBITDA:
Interest expense, net 15 10 50 % 37 31 19 %
Income tax expense 3 8 (63 %) 3 - NM
Depreciation and amortization 29 27 7 % 85 82 4 %
Net income attributable to noncontrolling
interests (3) (2) (50 %) (6) (4) (50 %)
Other adjustments: Business acquisition and integration expenses - 2 1 3 (Gain) loss on disposition of business/assets (6) 1 (4) 1 Certain legal expenses/settlements - 2 3 3 Amortization of pension and postretirement actuarial losses 3 3 10 11 Net plant incident costs 2 4 5 17 Restructuring, impairment and plant closing and transition costs 13 12 25 24 Adjusted EBITDA(1)$ 17 $ 50 $ 111 $ 171 Net cash used in operating activities $ -$ (36) (100
%)
Net cash used in investing activities (43) (101) (57
%)
Net cash provided by financing activities 195 13 1,400 %
Capital expenditures (54) (110) (51 %)
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Three Months Ended Three Months Ended
(Dollars in millions, except per share amounts) September 30, 2020 September 30, 2019
Reconciliation of net loss to adjusted net (loss) income
attributable to
$ (39) $ (17)
Net income attributable to noncontrolling interests (3) (2)
Other adjustments:
Business acquisition and integration adjustments - 2
(Gain) loss on disposition of business/assets (6) 1
Certain legal expenses/settlements - 2
Amortization of pension and postretirement actuarial losses 3 3
Net plant incident costs 2 4
Restructuring, impairment and plant closing and transition costs 13 12
Income tax adjustments(3) 12 3
Adjusted net (loss) income attributable to
$ (18) $ 8
Weighted-average shares - basic 106.7 106.6
Weighted-average shares - diluted 106.7 106.6
Net loss attributable to Venator Materials PLC ordinary
shareholders per share:
Basic $ (0.39) $ (0.18)
Diluted $ (0.39) $ (0.18)
Other non-GAAP measures:
Adjusted net (loss) income per share(2):
Basic $ (0.17) $ 0.08
Diluted $ (0.17) $ 0.08
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Nine Months Ended Nine Months Ended
(Dollars in millions, except per share amounts) September 30, 2020 September 30, 2019
Reconciliation of net (loss) income to adjusted net (loss) income
attributable to
$ (48) $ 3
Net income attributable to noncontrolling interests (6) (4)
Other adjustments:
Business acquisition and integration expenses 1 3
(Gain) loss on disposition of business/assets (4) 1
Certain legal expenses/settlements 3 3
Amortization of pension and postretirement actuarial losses 10 11
Net plant incident costs 5 17
Restructuring, impairment and plant closing and transition costs 25 24
Income tax adjustments(3) $ 5 $ (22)
Adjusted net (loss) income attributable to
$ (9) $ 36
Weighted-average shares - basic 106.7 106.5
Weighted-average shares - diluted 106.7 106.5
Net loss attributable to Venator Materials PLC ordinary
shareholders per share:
Basic (0.51) (0.01)
Diluted (0.51) (0.01)
Other non-GAAP measures:
Adjusted net (loss) income per share(2):
Basic (0.08) 0.34
Diluted (0.08) 0.34
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) loss/gain on
disposition of business/assets; (c) certain legal expenses/settlements; (d)
amortization of pension and postretirement actuarial losses/gains; (e) net plant
incident costs/credits; and (f) 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
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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 it 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 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) certain legal
expenses/settlements; (d) amortization of pension and postretirement actuarial
losses/gains; (e) net plant incident costs/credits; and (f) 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
noncash items as Adjusted EBITDA in order to assist our investors in comparing
our performance from period to period and as such, bear similar risks as
Adjusted EBITDA as documented in footnote (1) above. For that reason, adjusted
net income and the related per share amounts, should not be considered in
isolation and should be considered only to supplement analysis of U.S. GAAP
results.
(3)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.
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(4)As presented within Item 2, operating expenses includes selling, general and
administrative expenses and other operating expense (income), net.
Three Months Ended
For the three months ended
•Revenues for the three months endedSeptember 30, 2020 decreased by$52 million , or 10%, as compared with the same period in 2019. The decrease was due to a$53 million decrease in revenue in our Titanium Dioxide segment partially offset by a$1 million increase in revenue in our Performance Additives segment. See "-Segment Analysis" below. •Our operating expenses for the three months endedSeptember 30, 2020 decreased by$17 million , or 34%, as compared with the same period in 2019, primarily related to a$7 million decrease selling, general and administrative costs primarily due to cost savings from our COVID-19 response program, a$6 million gain on the sale of our property in Umbogintwini,South Africa during the quarter, and a$2 million benefit from the favorable impact of foreign exchange rates. •Restructuring, impairment and plant closing and transition costs for the three months endedSeptember 30, 2020 increased to$13 million from$12 million for the same period in 2019. For more information concerning restructuring and plant closing activities, see "Note 6. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated financial statements. •Our income tax expense for the three months endedSeptember 30, 2020 was$3 million compared to$8 million for the same period in 2019. Our income taxes are significantly affected by the mix of income and losses in the tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions. For further information concerning taxes, see "Note 9. Income Taxes" of the notes to unaudited condensed consolidated financial statements. Segment Analysis Three Months Ended Percent Change September 30, Favorable (Dollars in millions) 2020 2019 (Unfavorable) Revenues Titanium Dioxide$ 343 $ 396 (13 %) Performance Additives 131 130 1 % Total$ 474 $ 526 (10 %) Adjusted EBITDA Titanium Dioxide$ 21 $ 51 (59 %) Performance Additives 5 13 (62 %) 26 64 (59 %) Corporate and other (9) (14) 36 % Total$ 17 $ 50 (66 %) 32
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Three Months Ended
Average Selling Price(1)
Foreign Currency
Local Currency Translation Impact Mix & Other Sales Volumes(2)
Period-Over-Period Increase (Decrease)
Titanium Dioxide (2 %) 2 % (2 %) (11 %)
Performance Additives 2 % 1 % 2 % (4 %)
(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$343 million for the three months endedSeptember 30, 2020 , a decrease of$53 million , or 13%, compared to the same period in 2019. The decrease was primarily due to an 11% decline in TiO2 sales volumes, a 2% decrease in average local currency selling prices and a 2% unfavorable impact due to Mix and Other, partially offset by a 2% favorable impact from foreign currency translation. TiO2 sales volumes declined across all product categories and regions, most notably inEurope , primarily due to lower demand as a result of the impact of COVID-19 and inNorth America due to the impact of Hurricane Laura. Adjusted EBITDA for the Titanium Dioxide segment was$21 million for the three months endedSeptember 30, 2020 , a decrease of$30 million compared to the same period in 2019. The decrease was primarily attributable to lower revenue and lower plant utilization resulting in higher production costs of approximately$18 million compared to the third quarter of 2019. The comparison was also impacted by a benefit in the third quarter of 2019 due to a change in plant utilization rates. These unfavorable impacts on our adjusted EBITDA were partially offset by benefits from our 2020 Business Improvement Program and non-recurring benefits from our COVID-19 response program.
Performance Additives
The Performance Additives segment generated revenues of$131 million for the three months endedSeptember 30, 2020 , an increase of$1 million , or 1%, compared to the same period in 2019. The increase was primarily attributable to a 2% increase in the average local currency selling price, a 2% favorable impact of Mix and Other and a 1% favorable impact of foreign currency translation, partially offset by a 4% decrease in sales volumes. The decline in sales volumes was primarily a result of lower demand in our functional additives businesses due to the impact of the COVID-19 pandemic. The average selling price increased primarily as a result of favorable mix within our color pigments and timber treatment businesses while the favorable impact of Mix and Other reflects higher sales of timber treatment products. Adjusted EBITDA for the Performance Additives segment was$5 million for the three months endedSeptember 30, 2020 , a decrease of$8 million compared to the same period in 2019. The decrease was primarily attributable to lower plant utilization in our functional additives business resulting in higher production costs of approximately$5 million compared to the third quarter of 2019. The comparison was also impacted by a benefit in the third quarter of 2019 due to a change in plant utilization rates, and a non-recurring benefit included in operating income in 2019 related to finalization of asset retirement obligations, partially offset by benefits from our 2020 Business Improvement Program and non-recurring benefits from our COVID-19 response program.
Corporate and other
Corporate and other represents expenses which are not allocated to our segments.
Losses from Corporate and other were
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2019. This was primarily cost savings from actions taken in response to the
COVID-19 pandemic and a favorable variance in foreign exchange rates compared to
the prior year.
Nine Months Ended
For the nine months endedSeptember 30, 2020 , net loss was$48 million on revenues of$1,462 million , compared with net income of$3 million on revenues of$1,666 million for the same period in 2019. The decrease of$51 million in net income was the result of the following items: •Revenues for the nine months endedSeptember 30, 2020 decreased by$204 million , or 12%, as compared with the same period in 2019. The decrease was due to a$177 million , or 14%, decline in revenue in our Titanium Dioxide segment and a$27 million , or 7%, decline in revenue in our Performance Additives segment. See "-Segment Analysis" below. •Our operating expenses for the nine months endedSeptember 30, 2020 decreased by$29 million , or 19%, as compared with the same period in 2019, primarily related to a$21 million savings from selling, general and administrative expense due to cost savings from our COVID-19 response program, and a$6 million gain on the sale of our property in Umbogintwini,South Africa during the quarter. •Restructuring, impairment and plant closing and transition costs for the nine months endedSeptember 30, 2020 was$25 million compared to$24 million for the same period in 2019. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated financial statements. •Our income tax expense for the nine months endedSeptember 30, 2020 was$3 million compared to nil for the same period in 2019. 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 "Note 9. Income Taxes" of the notes to unaudited condensed consolidated financial statements. 34 --------------------------------------------------------------------------------
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Segment Analysis
Nine Months Ended
September 30,
(Dollars in millions) 2020 2019 Percent Change Favorable (Unfavorable)
Revenues
Titanium Dioxide $ 1,083 $ 1,260 (14 %)
Performance Additives 379 406 (7 %)
Total $ 1,462 $ 1,666 (12 %)
Segment adjusted EBITDA
Titanium Dioxide $ 102 $ 167 (39 %)
Performance Additives 40 44 (9 %)
142 211 (33 %)
Corporate and other (31) (40) 23 %
Total $ 111 $ 171 (35 %)
Nine Months Ended
Average Selling Price(1)
Local Foreign Currency
Currency Translation Impact Mix & Other Sales Volumes(2)
Period-Over-Period Increase (Decrease)
Titanium Dioxide (2 %) - % (1 %) (11 %)
Performance Additives 2 % (1 %) - % (8 %)
(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$1,083 million for the nine months endedSeptember 30, 2020 , a decrease of$177 million , or 14%, compared to the same period in 2019. The decrease was primarily attributable to an 11% decline in TiO2 sales volumes, a 2% decrease in the average TiO2 selling price, and a 1% unfavorable impact due to Mix and Other. The decline in TiO2 sales volumes was primarily a result of the impact of the COVID-19 pandemic on demand in the second and third quarters of 2020 and as a result of the impact of Hurricane Laura in the third quarter of 2020. The decline in demand was broadly across all regions and for functional, differentiated and specialty TiO2 products, and partially offset by higher demand for new products and for plastics applications. Adjusted EBITDA for the Titanium Dioxide segment was$102 million for the nine months endedSeptember 30, 2020 , a decrease of$65 million , or 39%, compared to the same period in 2019. The decrease was primarily attributable to lower revenue, lower plant utilization resulting in higher production costs of approximately$12 million compared to the third quarter of 2019, higher ore costs, and the impact of a benefit in the third quarter of 2019 due to a change in plant utilization rates. These unfavorable impacts on our adjusted EBITDA were partially offset by benefits from our Business Improvement Programs and non-recurring benefits from our COVID-19 response program. 35 -------------------------------------------------------------------------------- Table of Contents Performance Additives The Performance Additives segment generated revenue of$379 million for the nine months endedSeptember 30, 2020 , a decline of$27 million , or 7%, compared to the same period in 2019. The decline was primarily due to an 8% decrease in sales volumes and a 1% unfavorable impact of foreign currency translation, partially offset by a 2% increase in the average local currency selling price. The decline in sales volumes was primarily a result of lower demand for color pigments and functional additives products due to the impact of COVID-19 on demand for construction, coatings and automotive end-use applications. The average selling price increased primarily as a result of favorable mix within our color pigments and timber treatment businesses. Adjusted EBITDA in the Performance Additives segment was$40 million , a decrease of$4 million , or 9%, for the nine months endedSeptember 30, 2020 compared to the same period in 2019. The decrease was primarily attributable to a decrease in sales, lower plant utilization resulting in higher production costs in our functional additives business of approximately$7 million compared to the third quarter of 2019, and the impact of non-recurring benefits in the third quarter of 2019, partially offset by benefits from our Business Improvement Programs, and non-recurring benefits from our COVID-19 response program.
Corporate and other
Corporate and other represents expenses which are not allocated to our segments. Losses from Corporate and other were$31 million , or$9 million lower for the nine months endedSeptember 30, 2020 than the same period in 2019. This was primarily a result of savings related to actions taken in response to the COVID-19 pandemic and the favorable impact of foreign exchange rates.
Liquidity and Capital Resources
We had cash and cash equivalents of$208 million and$55 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. We have an ABL Facility with an available aggregate principal amount of up to$350 million . 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 fluctuates 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 ofSeptember 30, 2020 is approximately$291 million , of which$264 million is 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 include our COVID-19 response program, our 2020 Business Improvement Program, 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 may also seek to take advantage of opportunities to raise or refinance capital through debt financing, and may, from time to time, discuss such opportunities with potential lenders or investors. 36 -------------------------------------------------------------------------------- Table of Contents OnMay 22, 2020 , we completed an offering of$225 million in aggregate principal amount of Senior Secured Notes due onJuly 1, 2025 at 98% of their face value. The Senior Secured Notes are obligations of our wholly owned subsidiaries, Venator Finance S.à r.l. andVenator Materials LLC and bear interest of 9.5% per year payable semi-annually in arrears. The Senior Secured Notes are guaranteed on a senior secured basis by Venator and each of Venator's restricted subsidiaries (other than the Issuers and certain other excluded subsidiaries) that is a guarantor under Venator's Term Loan Facility and ABL Facility. The Senior Secured Notes are secured on a first-priority basis by liens on all of the assets that secure the Term Loan Facility on a first-priority basis and are secured on a second-priority basis in all inventory, accounts receivable, deposit accounts, securities accounts, certain related assets and other current assets that secure the ABL Facility on a first-priority basis and the Term Loan Facility on a second-priority basis, in each case, other than certain excluded assets. Upon the occurrence of certain change of control events, holders of the Venator Senior Secured Notes will have the right to require that the Issuers purchase all or a portion of such holder's Senior Secured Notes in cash at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
Items Impacting Short-Term and Long-Term Liquidity
Our liquidity can be significantly impacted by various 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 decreased by$67 million for the nine months endedSeptember 30, 2020 as compared to the same period in the prior year. We expect our working capital to be a source of liquidity in 2020 as we take measures to respond to the impact of the COVID-19 pandemic, which are incremental to efforts already in place, including managing our production network and inventory levels to align with customer demand. •We expect to spend approximately$65 million on capital expenditures during 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; 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 nine months endedSeptember 30, 2020 , we made contributions to our pension and postretirement benefit plans of$23 million . During the remainder of 2020, we expect to contribute an additional amount of approximately$19 million to these plans. •We are involved in a number of cost reduction programs for which we have established restructuring accruals. As ofSeptember 30, 2020 , we had$10 million of accrued restructuring costs of which$4 million is classified as current. We expect to incur additional restructuring and plant closing costs of approximately$6 million , none of which are for noncash charges, and pay approximately$6 million through the remainder of 2020. For further discussion of these plans and the costs involved, see "Note 6. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated financial statements. •During 2020, in response to the adverse impact of the COVID-19 pandemic, we implemented our COVID-19 response program to reduce our costs, including non-recurring personnel cost reductions and operational cost savings at our manufacturing facilities. Personnel cost management actions included a temporary reduction in salaries, changes and reductions to bonus schemes and employee furloughs, as well as reduced spending on other discretionary items. We realized approximately$23 million of non-recurring savings from our COVID-19 response program in 2020 which will be replaced by savings from our 2020 Business Improvement Program. 37 -------------------------------------------------------------------------------- Table of Contents •During the third quarter of 2020, we announced our 2020 Business Improvement Program that will save approximately$55 million compared to 2019. This program is in addition to our 2019 Business Improvement Program and replaces our non-recurring COVID-19 cost savings initiatives delivered in 2020. We expect that this program will be fully implemented by the end of 2022. •OnJanuary 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$945 million in debt outstanding under our$359 million Term Loan Facility,$215 million of 9.5% Senior Secured Notes due 2025 and$371 million of 5.75% Senior Unsecured Notes due 2025. ThroughSeptember 30, 2020 , we are in compliance with all applicable financial covenants included in the terms of our Senior Credit Facility, Senior Secured Notes and Senior Unsecured Notes. InJuly 2017 , theU.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
As ofSeptember 30, 2020 andDecember 31, 2019 , we had$11 million and$16 million , respectively, of cash and cash equivalents held outside of theU.S. andEurope , including our variable interest entities. As ofSeptember 30, 2020 , our non-U.K. subsidiaries have no plan to distribute funds in a manner that would cause them to be subject toU.K. , or other local country taxation. In the first quarter of 2019, a non-U.K. subsidiary distributed$12 million to aU.K. subsidiary subject to a 5% withholding tax.
Cash Flows for the Nine Months Ended
Net cash used in operating activities was nil for the nine months endedSeptember 30, 2020 , compared to$36 million for the nine months endedSeptember 30, 2019 . The favorable variance in net cash used in operating activities for the nine months endedSeptember 30, 2020 compared with the same period in 2019 was primarily attributable to a$74 million favorable variance in operating assets and liabilities and a$9 million favorable variance in noncash restructuring 38
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and impairment charges for 2020 as compared with the same period in 2019,
partially offset by a
Net cash used in investing activities was$43 million for the nine months endedSeptember 30, 2020 , compared to$101 million for the nine months endedSeptember 30, 2019 . The decrease in net cash used in investing activities was primarily attributable to a decrease in capital expenditures of$56 million . Net cash provided by financing activities was$195 million for the nine months endedSeptember 30, 2020 , compared to$13 million for the nine months endedSeptember 30, 2019 . The increase in net cash provided by financing activities for the nine months endedSeptember 30, 2020 compared with the same period in 2019 was primarily attributable to$221 million of proceeds from issuance of long-term debt, partially offset by a$16 million decrease in net borrowings under notes payable and a$15 million decrease in proceeds from the termination of cross currency swap contracts received in 2019.
Changes in Financial Condition
The following information summarizes our working capital as of
September 30, December 31, Increase
(Dollars in millions) 2020 2019 (Decrease) Percent Change
Cash and cash equivalents $ 208 $ 55 $ 153 278 %
Accounts receivable, net 306 321 (15) (5 %)
Inventories 438 513 (75) (15 %)
Prepaid expenses 25 21 4 19 %
Other current assets 52 67 (15) (22 %)
Total current assets $ 1,029 $ 977 $ 52 5 %
Accounts payable 212 334 (122) (37 %)
Accounts payable to affiliates 3 17 (14) (82 %)
Accrued liabilities 99 116 (17) (15 %)
Current operating lease liability 8 8 - -
Current portion of debt 7 13 (6) (46 %)
Total current liabilities $ 329 $ 488 $ (159) (33 %)
Working capital $ 700 $ 489 $ 211 43 %
Our working capital increased by
•Cash and cash equivalents increased by$153 million primarily due to inflows of$195 million provided by financing activities, and was partially offset by outflows of$43 million from investing activities as a result of a decrease in capital expenditures in the current year. •Accounts receivable decreased by$15 million , or 5%, fromDecember 31, 2019 toSeptember 30, 2020 . Collections on accounts receivable during 2020 have not been materially impacted by COVID-19, although we cannot currently predict the impact that the pandemic will have in future periods. •Inventory decreased$75 million atSeptember 30, 2020 as compared to the prior year-end, reflecting a decrease in raw materials and finished goods as a result of plant moderation during the quarter in order to manage our inventory levels to respond to reductions in customer demand during the COVID-19 pandemic. •Accounts payable decreased by$136 million primarily as a result of$25 million less in capital accruals and due to inventory reductions during 2020. •Accrued liabilities decreased by$17 million primarily due to a decrease in accrued compensation costs. •Current portion of debt decreased by$6 million primarily due to net payments on notes payable during 2020. 39
-------------------------------------------------------------------------------- Table of Contents Financing Arrangements
For a discussion of financing arrangements see "Note 7. Debt" of the notes to unaudited condensed consolidated financial statements.
Restructuring, Impairment and Plant Closing and Transition Costs
For a discussion of our restructuring plans and the costs involved, see "Note 6. Restructuring, Impairment, and Plant Closing and Transition Costs" of the notes to unaudited condensed consolidated financial statements.
Legal Proceedings
For a discussion of legal proceedings, see "Note 11. Commitments and Contingencies-Legal Matters" of the notes to unaudited condensed consolidated financial statements.
Environmental, Health and Safety Matters
As noted in the 2019 Form 10-K, specifically within "Part I. Item 1. Business-Environmental, Health and Safety Matters" and "Part I. Item 1A. Risk Factors," we are subject to extensive environmental regulations, which may impose significant additional costs on our operations in the future. While we do not expect any of these enactments or proposals to have a material adverse effect on us in the near term, we cannot predict the longer-term effect of any of these regulations or proposals on our future financial condition. For a discussion of EHS matters, see "Note 12. Environmental, Health and Safety Matters" of the notes to unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see "Note 2. Recently Issued Accounting Pronouncements" of the notes to unaudited condensed consolidated financial statements.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity withU.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in our unaudited condensed consolidated financial statements. There have been no changes to our critical accounting policies or estimates. See the Company's critical accounting policies in "Part 2. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the 2019 Form 10-K.
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