10-Q 1 vntr-20170930x10q.htm 10-Q vntr_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10‑Q

(Check one)

 

☑   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

OR

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-38176

 


 

LOGO

Venator Materials PLC

(Exact name of registrant as specified in its charter)

 


 

 

 

England and Wales

98‑1373159

(State or other jurisdiction

(I.R.S. Employer Identification No.)

of incorporation or organization)

 

 

Titanium House, Hanzard Drive, Wynyard Park,

Stockton-On-Tees, TS22, 5FD, United Kingdom

+44 (0) 1740 608 001

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☑ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES ☑ NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b‑2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☑

Smaller reporting company ☐

Emerging growth company ☐

 

 

(Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).

YES ☐ NO ☑

 


 

As of October 27, 2017, the registrant has outstanding 106,283,070 ordinary shares, $0.001 par value per share.

 

 

 

 


 

VENATOR MATERIALS PLC AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10‑Q FOR THE QUARTERLY PERIOD

ENDED SEPTEMBER 30, 2017

 

TABLE OF CONTENTS

 

 

 

    

Page

NOTE REGARDING FORWARD-LOOKING STATEMENTS 

 

2

 

 

 

 

PART I  

FINANCIAL INFORMATION

 

3

 

 

 

 

ITEM 1.  

Condensed Consolidated and Combined Financial Statements (Unaudited)

 

3

 

 

 

 

 

Condensed Consolidated and Combined Balance Sheets

 

3

 

 

 

 

 

Condensed Consolidated and Combined Statements of Operations

 

4

 

 

 

 

 

Condensed Consolidated and Combined Statements of Comprehensive Income (Loss)

 

5

 

 

 

 

 

Condensed Consolidated and Combined Statements of Equity

 

6

 

 

 

 

 

Condensed Consolidated and Combined Statements of Cash Flows

 

7

 

 

 

 

 

Notes to Unaudited Condensed Consolidated and Combined Financial Statements

 

8

 

 

 

 

ITEM 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

 

 

 

ITEM 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

 

ITEM 4. 

Controls and Procedures

 

43

 

 

 

 

PART II  

OTHER INFORMATION

 

45

 

 

 

 

ITEM 1. 

Legal Proceedings

 

45

 

 

 

 

ITEM 1A. 

Risk Factors

 

45

 

 

 

 

ITEM 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

 

 

ITEM 6. 

Exhibits

 

47

 

 

 

 

 

Signatures

 

50

 

Venator Materials PLC and our other registered and common-law trade names, trademarks, and service marks appearing in this Quarterly Report on Form 10‑Q for the three months ended September 30, 2017 (“Quarterly Report”) are the property of Venator Materials PLC or our subsidiaries. 

1


 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information set forth in this Quarterly Report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other projected financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions, divestitures, spin-offs, or other distributions, strategic opportunities, securities offerings, share repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; legal proceedings, environmental, health and safety (“EHS”) matters, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic and capital markets conditions; the timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. In some cases, forward-looking statements can be identified by terminology such as "believes," "expects," "may," "will," "should," "anticipates" or "intends" or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.

 

Forward-looking statements are based on certain assumptions and expectations of future events which may not be accurate or realized. Forward-looking statements also involve risks and uncertainties, many of which are beyond our control. Important factors that may materially affect such forward-looking statements and projections include volatile global economic conditions; cyclical and volatile titanium dioxide (“TiO2”) products markets; highly competitive industries and the need to innovate and develop new products; increased manufacturing regulations for some of our products,  including the outcome of the pending potential classification of TiO2 as a carcinogen in the European Union and any resulting increased regulation; disruptions in production at our manufacturing facilities and our ability to cover resulting costs and lost revenue with insurance proceeds, including at our TiO2 manufacturing facility in Pori, Finland; fluctuations in currency exchange rates and tax rates; price volatility or interruptions in supply of raw materials and energy; changes to laws, regulations or the interpretation thereof; significant investments associated with efforts to transform our business; differences in views with our joint venture participants; high levels of indebtedness; EHS laws and regulations; our ability to obtain future capital on favorable terms; seasonal sales patterns in our product markets; legal claims against us, including antitrust claims; our ability to adequately protect our critical information technology systems; economic conditions and regulatory changes following the United Kingdom’s likely exit from the European Union; failure to maintain effective internal controls over financial reporting and disclosure; our indemnification of Huntsman Corporation (“Huntsman”) and other commitments and contingencies; financial difficulties and related problems experienced by our customers, vendors, suppliers and other business partners; failure to enforce our intellectual property rights; our ability to effectively manage our labor force; conflicts, military actions, terrorist attacks and general instability; and our ability to realize the expected benefits of our separation from Huntsman.

 

All forward-looking statements, including, without limitation, management’s examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that management’s expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements whether because of new information, future events or otherwise, except as required by securities and other applicable law.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward‑looking statements contained in or contemplated by this report. Any forward‑looking statements should be considered in light of the risks set forth in our Risk Factors previously disclosed in our Prospectus (the “Prospectus”) filed with the Securities and Exchange Commission (the “SEC”) on August 4, 2017 pursuant to Rule 424(b) of the Securities Act.

2


 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)

 

VENATOR MATERIALS PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

(In millions, except par value)

 

2017

 

2016

ASSETS

Current assets:

 

 

  

 

 

  

Cash and cash equivalents(a)

 

$

186

 

$

29

Accounts receivable (net of allowance for doubtful accounts of $4 each)(a)

 

 

411

 

 

247

Accounts receivable from affiliates

 

 

 9

 

 

243

Inventories(a)

 

 

431

 

 

426

Prepaid expenses

 

 

11

 

 

11

Other current assets

 

 

73

 

 

59

Current assets of discontinued operations

 

 

 —

 

 

84

Total current assets

 

 

1,121

 

 

1,099

Property, plant and equipment, net(a)

 

 

1,264

 

 

1,178

Intangible assets, net(a)

 

 

21

 

 

23

Investment in unconsolidated affiliates

 

 

77

 

 

85

Deferred income taxes

 

 

200

 

 

142

Notes receivable from affiliates

 

 

 —

 

 

57

Other noncurrent assets

 

 

41

 

 

35

Noncurrent assets of discontinued operations

 

 

 —

 

 

42

Total assets

 

$

2,724

 

$

2,661

LIABILITIES AND EQUITY

Current liabilities:

 

 

  

 

 

  

Accounts payable(a)

 

$

319

 

$

297

Accounts payable to affiliates

 

 

15

 

 

695

Accrued liabilities(a)

 

 

213

 

 

146

Current portion of debt(a)

 

 

 4

 

 

10

Current liabilities of discontinued operations

 

 

 —

 

 

27

Total current liabilities

 

 

551

 

 

1,175

Long-term debt

 

 

747

 

 

13

Long-term debt to affiliates

 

 

 —

 

 

882

Deferred income taxes

 

 

 9

 

 

12

Other noncurrent liabilities

 

 

328

 

 

324

Noncurrent payable to affiliates

 

 

73

 

 

 —

Noncurrent liabilities of discontinued operations

 

 

 —

 

 

78

Total liabilities

 

 

1,708

 

 

2,484

Commitments and contingencies (Notes 11 and 12)

 

 

  

 

 

  

Equity

 

 

  

 

 

  

Parent’s net investment and advances

 

 

 —

 

 

588

Ordinary shares $0.001 par value, 200 shares authorized, 106 and nil issued and 106 and nil outstanding, respectively

 

 

 —

 

 

 —

Additional paid-in capital

 

 

1,318

 

 

 —

Accumulated deficit

 

 

(1)

 

 

 —

Accumulated other comprehensive loss

 

 

(312)

 

 

(423)

Total Venator Materials PLC shareholders' equity

 

 

1,005

 

 

165

Noncontrolling interest in subsidiaries

 

 

11

 

 

12

Total equity

 

 

1,016

 

 

177

Total liabilities and equity

 

$

2,724

 

$

2,661


(a)

At September 30, 2017 and December 31, 2016,  $6 and $4 of cash and cash equivalents, $7 and $6 of accounts receivable, (net), $1 each of inventories, $4  each of property, plant and equipment, (net), $18 and $20 of intangible assets, (net), $1 each of accounts payable, $3 and $4 of accrued liabilities, and $2 each of current portion of debt, respectively, from consolidated variable interest entities are included in the respective balance sheet captions above. See "Note 5. Variable Interest Entities."

 

See notes to unaudited condensed consolidated and combined financial statements.

3


 

VENATOR MATERIALS PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

(Dollars in millions, except per share amounts)

    

2017

    

2016

    

2017

    

2016

Trade sales, services and fees, net

 

$

582

 

$

532

 

$

1,681

 

$

1,648

Cost of goods sold

 

 

446

 

 

491

 

 

1,351

 

 

1,547

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative (includes corporate allocations from Huntsman Corporation of $9, $27, $62 and $76, respectively)

 

 

51

 

 

55

 

 

159

 

 

168

Restructuring, impairment and plant closing costs

 

 

16

 

 

 7

 

 

49

 

 

31

Other income, net

 

 

(6)

 

 

(22)

 

 

 1

 

 

(33)

Total expenses

 

 

61

 

 

40

 

 

209

 

 

166

Operating income (loss)

 

 

75

 

 

 1

 

 

121

 

 

(65)

Interest expense

 

 

(30)

 

 

(14)

 

 

(54)

 

 

(44)

Interest income

 

 

22

 

 

 2

 

 

25

 

 

13

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

 1

Income (loss) from continuing operations before income taxes

 

 

67

 

 

(11)

 

 

92

 

 

(95)

Income tax (expense) benefit

 

 

(14)

 

 

 7

 

 

(26)

 

 

14

Income (loss) from continuing operations

 

 

53

 

 

(4)

 

 

66

 

 

(81)

Income from discontinued operations, net of tax

 

 

 —

 

 

 2

 

 

 8

 

 

 8

Net income (loss)

 

 

53

 

 

(2)

 

 

74

 

 

(73)

Net income attributable to noncontrolling interests

 

 

(2)

 

 

(3)

 

 

(8)

 

 

(8)

Net income (loss) attributable to Venator

 

$

51

 

$

(5)

 

$

66

 

$

(81)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (losses) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to Venator Materials PLC ordinary shareholders

 

$

0.48

 

$

(0.07)

 

$

0.55

 

$

(0.84)

Income from discontinued operations attributable to Venator Materials PLC ordinary shareholders

 

 

 —

 

 

0.02

 

 

0.08

 

 

0.08

Net income (loss) attributable to Venator Materials PLC ordinary shareholders

 

$

0.48

 

$

(0.05)

 

$

0.63

 

$

(0.76)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (losses) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to Venator Materials PLC ordinary shareholders

 

$

0.48

 

$

(0.07)

 

$

0.54

 

$

(0.84)

Income from discontinued operations attributable to Venator Materials PLC ordinary shareholders

 

 

 —

 

 

0.02

 

 

0.08

 

 

0.08

Net income (loss) attributable to Venator Materials PLC ordinary shareholders

 

$

0.48

 

$

(0.05)

 

$

0.62

 

$

(0.76)

 

See notes to unaudited condensed consolidated and combined financial statements.

4


 

VENATOR MATERIALS PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

(Dollars in millions)

    

2017

    

2016

    

2017

    

2016

Net income (loss)

 

$

53

 

$

(2)

 

$

74

 

$

(73)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(4)

 

 

(30)

 

 

75

 

 

(91)

Pension and other postretirement benefits adjustments

 

 

 8

 

 

 4

 

 

36

 

 

16

Other comprehensive income (loss), net of tax

 

 

 4

 

 

(26)

 

 

111

 

 

(75)

Comprehensive income (loss)

 

 

57

 

 

(28)

 

 

185

 

 

(148)

Comprehensive income attributable to noncontrolling interest

 

 

(2)

 

 

(3)

 

 

(8)

 

 

(8)

Comprehensive income (loss) attributable to Venator

 

$

55

 

$

(31)

 

$

177

 

$

(156)

 

See notes to unaudited condensed consolidated and combined financial statements.

5


 

VENATOR MATERIALS PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Venator Materials PLC Equity

 

 

 

 

 

 

 

    

Parent’s Net

 

 

 

 

 

 

    

Accumulated

    

 

 

    

 

 

 

 

Investment

 

 

 

Additional

 

 

 

Other

 

Noncontrolling

 

 

 

 

 

and

 

Ordinary

 

Paid-in

 

Accumulated

 

Comprehensive

 

Interest in

 

 

 

(Dollars in millions)

 

Advances

 

Shares

 

Capital

 

Deficit

 

Loss

 

Subsidiaries

 

Total

Balance, January 1, 2017

 

$

588

 

$

 —

 

$

 —

 

$

 —

 

$

(423)

 

$

12

 

$

177

Net income (loss)

 

 

67

 

 

 —

 

 

 —

 

 

(1)

 

 

 —

 

 

 8

 

 

74

Net changes in other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

111

 

 

 —

 

 

111

Dividends paid to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9)

 

 

(9)

Net changes in parent’s net investment and advances

 

 

663

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

663

Conversion of parent's net investment and advances to paid-in capital

 

 

(1,318)

 

 

 —

 

 

1,318

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Balance, September 30, 2017

 

$

 —

 

$

 —

 

$

1,318

 

$

(1)

 

$

(312)

 

$

11

 

$

1,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Venator Materials PLC Equity

 

 

 

 

 

 

 

    

Parent’s Net

 

 

 

 

 

 

    

Accumulated

    

 

 

    

 

 

 

 

Investment

 

 

 

Additional

 

 

 

Other

 

Noncontrolling

 

 

 

 

 

and

 

Ordinary

 

Paid-in

 

Accumulated

 

Comprehensive

 

Interest in

 

 

 

(Dollars in millions)

 

Advances

 

Shares

 

Capital

 

Deficit

 

Loss

 

Subsidiaries

 

Total

Balance, January 1, 2016

 

$

1,112

 

$

 —

 

$

 —

 

$

 —

 

$

(401)

 

$

17

 

$

728

Net (loss) income

 

 

(81)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 8

 

 

(73)

Net changes in other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(75)

 

 

 —

 

 

(75)

Dividends paid to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10)

 

 

(10)

Net changes in parent’s net investment and advances

 

 

(318)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2)

 

 

(320)

Balance, September 30, 2016

 

$

713

 

$

 —

 

$

 —

 

$

 —

 

$

(476)

 

$

13

 

$

250

 

See notes to unaudited condensed consolidated and combined financial statements. 

6


 

VENATOR MATERIALS PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 

(Dollars in millions)

    

2017

    

2016

Operating Activities:

 

 

  

 

 

  

Net income (loss)

 

$

74

 

$

(73)

Income from discontinued operations, net of tax

 

 

(8)

 

 

(8)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

 

95

 

 

84

Deferred income taxes

 

 

(2)

 

 

(17)

Noncash restructuring and impairment charges

 

 

 7

 

 

 9

Noncash interest

 

 

18

 

 

32

Noncash loss on foreign currency transactions

 

 

 1

 

 

 2

Gain on disposal of businesses/assets, net

 

 

 —

 

 

(23)

Other, net

 

 

 2

 

 

 3

Changes in operating assets and liabilities:

 

 

  

 

 

 

Accounts receivable

 

 

(54)

 

 

(5)

Inventories

 

 

22

 

 

113

Prepaid expenses

 

 

(1)

 

 

(1)

Other current assets

 

 

(8)

 

 

 2

Other noncurrent assets

 

 

 6

 

 

(7)

Accounts payable

 

 

 8

 

 

 6

Accrued liabilities

 

 

40

 

 

(25)

Other noncurrent liabilities

 

 

(20)

 

 

(5)

Net cash provided by operating activities from continuing operations

 

 

180

 

 

87

Net cash provided by operating activities from discontinued operations

 

 

 1

 

 

 6

Net cash provided by operating activities

 

 

181

 

 

93

Investing Activities:

 

 

  

 

 

  

Capital expenditures

 

 

(97)

 

 

(76)

Insurance proceeds for recovery of property damage

 

 

50

 

 

 —

Net repayments from (advances to) affiliates

 

 

121

 

 

(36)

Repayment of government grant

 

 

(5)

 

 

 —

Cash received from unconsolidated affiliates

 

 

37

 

 

25

Investment in unconsolidated affiliates

 

 

(33)

 

 

(21)

Proceeds from sale of businesses/assets

 

 

 —

 

 

 9

Net cash provided by (used in) investing activities from continuing operations

 

 

73

 

 

(99)

Net cash used in investing activities from discontinued operations

 

 

(1)

 

 

(6)

Net cash provided by (used in) investing activities

 

 

72

 

 

(105)

Financing Activities:

 

 

  

 

 

  

Repayment of long-term debt

 

 

(5)

 

 

(1)

Net repayments on affiliate accounts payable

 

 

(86)

 

 

23

Final settlement of affilate balances at Separation

 

 

(732)

 

 

 —

Dividends paid to noncontrolling interests

 

 

(9)

 

 

(10)

Proceeds from issuance of long-term debt

 

 

750

 

 

 —

Debt issuance costs paid

 

 

(18)

 

 

 —

Other financing activities

 

 

 1

 

 

(2)

Net cash (used in) provided by financing activities

 

 

(99)

 

 

10

Effect of exchange rate changes on cash

 

 

 2

 

 

 —

Net change in cash and cash equivalents, including discontinued operations

 

 

156

 

 

(2)

Cash and cash equivalents at beginning of period, including discontinued operations

 

 

30

 

 

22

Cash and cash equivalents at end of period, including discontinued operations

 

$

186

 

$

20

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

  

 

 

  

Cash paid for interest

 

$

 2

 

$

 4

Cash paid for income taxes

 

 

11

 

 

 6

Supplemental disclosure of noncash activities:

 

 

 

 

 

 

Capital expenditures included in accounts payable as of September 30, 2017 and 2016, respectively

 

$

19

 

$

17

Received settlements of notes receivable from affiliates

 

 

57

 

 

230

Settlement of long-term notes payable/notes receivable with affiliates

 

 

792

 

 

(1)

 

See notes to unaudited condensed consolidated and combined financial statements.

7


 

VENATOR MATERIALS PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

NOTE 1. GENERAL, DESCRIPTION OF BUSINESS, RECENT DEVELOPMENTS AND BASIS OF PRESENTATION

 

General

 

Except when the context otherwise requires or where otherwise indicated, (1) all references to "Venator," the "Company," "we," "us" and "our" refer to Venator Materials PLC and its subsidiaries, or, as the context requires, the historical Pigments and Additives business of Huntsman, (2) all references to "Huntsman" refer to Huntsman Corporation, our controlling shareholder, and its subsidiaries, other than us, (3) all references to the "Titanium Dioxide" segment or business refer to the TiO2 business of Venator, or, as the context requires, the historical Pigments and Additives segment of Huntsman and the related operations and assets, liabilities and obligations, (4) all references to the "Performance Additives" segment or business refer to the functional additives, color pigments, timber treatment and water treatment businesses of Venator, or, as the context requires, the Pigments and Additives segment of Huntsman and the related operations and assets, liabilities and obligations, (5) all references to "other businesses" refer to certain businesses that Huntsman retained in connection with the Separation and that are reported as discontinued operations in our condensed consolidated and combined financial statements, (6) all references to "Huntsman International" refer to Huntsman International LLC, a wholly-owned subsidiary of Huntsman, and the entity through which Huntsman operates all of its businesses, and (7) we refer to the internal reorganization prior to our initial public offering (our “IPO”), the separation transactions initiated to separate the Venator business from Huntsman’s other businesses, including the entry into and effectiveness of the separation agreement and ancillary agreements, and the Senior Credit Facilities (as defined below) and Senior Notes (as defined below), including the use of the net proceeds of the Senior Credit Facilities and the Senior Notes, which were used to repay intercompany debt we owed to Huntsman and to pay related fees and expenses, as the "Separation" and (8) the “Rockwood acquisition” refers to Huntsman’s acquisition of the performance and additives and TiO2 businesses of Rockwood Holdings, Inc. (“Rockwood”) completed on October 1, 2014.

 

Description of Business

 

Venator operates in two segments: Titanium Dioxide and Performance Additives. The Titanium Dioxide segment manufactures and sells primarily TiO2, and operates eight TiO2 manufacturing facilities across the globe, predominantly in Europe. The Performance Additives segment manufactures and sells functional additives, color pigments, timber treatment and water treatment chemicals. This segment operates 19 color pigments, functional additives, water treatment and timber treatment manufacturing and processing facilities in Europe, North America, Asia and Australia.

 

Recent Developments

 

Initial Public Offering and Separation

 

On August 8, 2017, we completed our IPO of 26,105,000 of our outstanding 106,271,712 ordinary shares, par value $0.001 per share, which includes 3,405,000 ordinary shares issued upon the exercise in full by the underwriters of their option to purchase additional shares, at a public offering price of $20.00 per share. All of the ordinary shares were sold by Huntsman, and we did not receive any proceeds from the offering. The ordinary shares began trading August 3, 2017 on the New York Stock Exchange under the symbol “VNTR.” Following our IPO, Huntsman owns approximately 75% of Venator’s outstanding ordinary shares. The material terms of our IPO are described in the Prospectus.

 

In connection with our IPO and the Separation, Venator and Huntsman entered into certain agreements that allocated between Venator and Huntsman the various assets, employees, liabilities and obligations that were previously part of Huntsman and that govern various interim and ongoing relationships between the parties.

 

On August 15, 2017, we registered 14,025,000 ordinary shares on Form S-8 which are reserved in connection with awards under our 2017 Stock Incentive Plan.

 

8


 

Senior Credit Facilities and Senior Notes

 

On August 8, 2017, in connection with our IPO and the Separation, we entered into new financing arrangements and incurred new debt, including borrowings of $375 million under a new senior secured term loan facility with a maturity of seven years (the “Term Loan Facility”). In addition to the Term Loan Facility, we entered into a $300 million asset-based revolving lending facility with a maturity of five years (the “ABL Facility” and, together with the Term Loan Facility, the “Senior Credit Facilities”). On July 14, 2017, in connection with our IPO and the Separation, our subsidiaries Venator Finance S.à.r.l. and Venator Materials LLC (the “Issuers”), issued $375 million in aggregate principal amount of 5.75% of Senior Notes due 2025 (the “Senior Notes”). Promptly following consummation of the Separation, the proceeds of the Senior Notes were released from escrow and Venator used the net proceeds of the Senior Notes and borrowings under the Term Loan Facility to repay approximately $732 million of net intercompany debt owed to Huntsman and to pay related fees and expenses of approximately $18 million.

 

Pori Fire

 

On January 30, 2017, our TiO2 manufacturing facility in Pori, Finland experienced fire damage and we continue to repair the facility. Prior to the fire, 60% of the site capacity produced specialty products which, on average, contributed greater than 75% of the site EBITDA from January 1, 2015 through January 30, 2017. We are currently operating at 20% of total prior capacity but producing only specialty products, and we currently intend to restore manufacturing of the balance of these more profitable specialty products by the fourth quarter of 2018. The remaining 40% of site capacity is more commoditized and we will determine if and when to rebuild this commoditized capacity depending on market conditions, costs and projected long term returns relative to our other investment opportunities.

 

We have recorded a loss of $31 million for the write-off of fixed assets and lost inventory in other operating income, net in our condensed consolidated and combined statements of operations for the nine months ending September 30, 2017. In addition, we recorded a loss of $18 million of costs for cleanup of the facility in other operating income, net through September 30, 2017. The site is insured for property damage as well as business interruption losses subject to retained deductibles of $15 million and 60 days, respectively, with a limit of $500 million. Due to prevailing strong market conditions, our TiO2 selling prices continue to improve and our business is benefitting from the resulting improved profitability and cash flows.  This also has the effect of increasing our total anticipated business interruption losses from the Pori site. We currently believe the combination of increased TiO2 profitability and recently estimated reconstruction costs will result in losses and costs in excess of our $500 million insurance limit. We currently expect to contain these over-the-limit costs within $100 million to $150 million, and to account for them as capital expenditures. However, these are preliminary estimates based on a number of significant assumptions, and as a result uninsured costs could exceed current estimates. Factors that could materially impact our current estimates include our actual future TiO2 profitability and related impact on our business interruption losses; the accuracy of our current property damage estimates; the actual costs and timing of our reconstruction efforts; the extent to which we rebuild the 40% of site capacity that produces commoditized products; our ability to secure government subsidies related to our reconstruction efforts; and a number of other significant market and facility-related assumptions. Please see “Part II. Item 1A. Risk Factors—Disruptions in production at our manufacturing facilities, including our Pori facility, may have a material adverse impact on our business, results of operations and/or financial condition.”

 

The fire at our Pori facility did not have a material impact on our 2017 third quarter operating results as losses incurred were offset by insurance proceeds. We received $141 million of non-refundable partial progress payments from our insurer through September 30, 2017 and we received an additional $112 million payment on October 9, 2017.  During the first nine months of 2017, we recorded $128 million of income related to property damage and business interruption insurance recoveries in other operating income, net and cost of goods sold in our condensed consolidated and combined statements of operations to offset property damage and business interruption losses recorded during the period.  We recorded $17 million as deferred income in accrued liabilities as of September 30, 2017 for insurance proceeds received for costs not yet incurred. The difference between payments received from our insurers of $141 million and the sum of income of $128 million and deferred income of $17 million is related to the foreign exchange movements of the U.S. Dollar against the Euro during the first nine months of the year.

 

Basis of Presentation

 

Venator’s unaudited condensed consolidated and combined financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP" or "U.S. GAAP") and in

9


 

management’s opinion reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results of operations, comprehensive income (loss), financial position and cash flows for the periods presented. Results of interim periods are not necessarily indicative of those to be expected for the full year. These unaudited condensed consolidated and combined financial statements should be read in conjunction with the audited combined financial statements and notes to combined financial statements included in the Prospectus.

 

Prior to the Separation, Venator’s operations were included in Huntsman’s financial results in different legal forms, including but not limited to: (1) wholly-owned subsidiaries for which the Titanium Dioxide and Performance Additives businesses were the sole businesses; (2) legal entities which are comprised of other businesses and include the Titanium Dioxide and/or Performance Additives businesses; and (3) variable interest entities in which the Titanium Dioxide and Performance Additives businesses are the primary beneficiaries. The unaudited condensed consolidated and combined financial statements include all revenues, costs, assets, liabilities and cash flows directly attributable to Venator. The unaudited condensed consolidated and combined financial statements also include allocations of direct and indirect corporate expenses through the date of the Separation, which are based upon an allocation method that in the opinion of management is reasonable. Because the historical condensed consolidated and combined financial information for the periods indicated reflect the combination of these legal entities under common control, the historical condensed consolidated and combined financial information includes the results of operations of other businesses that are not a part of our operations after the Separation. We report the results of those other businesses as discontinued operations. See “Note 3. Discontinued Operations” for further discussion of discontinued operations.

 

In addition, the unaudited condensed consolidated and combined financial statements have been prepared from Huntsman’s historical accounting records through the Separation and are presented on a stand-alone basis as if Venator’s operations had been conducted separately from Huntsman; however, prior to the Separation, Venator did not operate as a separate, stand-alone entity for the periods presented and, as such, the condensed consolidated and combined financial statements reflecting balances and activity prior to the Separation, may not be indicative of the financial position, results of operations and cash flows had Venator been a stand-alone company.

 

For purposes of these unaudited condensed consolidated and combined financial statements, all significant transactions with Huntsman International have been included in group equity. All intercompany transactions within the consolidated business have been eliminated.

 

Prior to the Separation, Huntsman’s executive, information technology, EHS and certain other corporate departments performed certain administrative and other services for Venator. Additionally, Huntsman performed certain site services for Venator. Expenses incurred by Huntsman and allocated to Venator were determined based on specific services provided or were allocated based on Venator’s total revenues, total assets, and total employees in proportion to those of Huntsman. Management believes that such expense allocations are reasonable. Corporate allocations include allocated selling, general, and administrative expenses of $9 million and $27 million for the three months ended September 30, 2017 and 2016, respectively, and $62 million and $76 million for the nine months ended September 30, 2017 and 2016, respectively.

 

NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

Accounting Pronouncements Pending Adoption in Future Periods

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014‑09, Revenue from Contracts with Customers (Topic 606), outlining a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers and supersedes most current revenue recognition guidance. In August 2015, the FASB issued ASU No. 2015‑14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, deferring the effective date of ASU No. 2014‑09 for all entities by one year. Further, in March 2016, the FASB issued ASU No. 2016‑08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarifying the implementation guidance on principal versus agent considerations, in April 2016, the FASB issued ASU No. 2016‑10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, clarifying the implementation guidance on identifying performance obligations in a contract and determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time), in May 2016, the FASB issued ASU No. 2016‑12, Revenue from Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,  

10


 

providing clarifications and practical expedients for certain narrow aspects in Topic 606, and in December 2016, the FASB issued ASU 2016‑20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in these ASUs are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments in ASU No. 2014‑09, ASU No. 2016‑08, ASU No. 2016‑10, ASU No. 2016‑12 and ASU No. 2016‑20 should be applied retrospectively, and early application is permitted. We are substantially complete with our analysis to identify areas that will be impacted by the adoption of the amendments in ASU No. 2014‑09, ASU No. 2016‑08, ASU No. 2016‑10, ASU No. 2016‑12 and ASU No. 2016‑20 on our financial statements. At this time, other than additional required disclosures, we do not expect the adoption of the amendments in these ASUs to have a significant impact on our financial statements. The standard will be adopted in our fiscal year 2018 and we have elected the modified retrospective approach as the transition method.

 

In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842). The amendments in this ASU will increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU will require lessees to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application of the amendments in this ASU is permitted for all entities. Reporting entities are required to recognize and measure leases under these amendments at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating the impact of the adoption of the amendments in this ASU on our financial statements and believe, based on our preliminary assessment, that we will record significant additional right-of-use assets and lease obligations.

 

In August 2016, the FASB issued ASU No. 2016‑15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify and include specific guidance to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in this ASU should be applied using a retrospective transition method to each period presented. We do not expect the adoption of the amendments in this ASU to have a significant impact on our financial statements.

 

In October 2016, the FASB issued ASU No. 2016‑16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in this ASU require entities to recognize the current and deferred income taxes for an intra-entity transfer of an asset other than inventory when the transfer occurs, as opposed to deferring the recognition of the income tax consequences until the asset has been sold to an outside party. The amendments in this ASU are effective for annual reporting periods beginning after December 31, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We do not expect the adoption of the amendments in this ASU to have a significant impact on our financial statements.

 

In March 2017, the FASB issued ASU No. 2017‑07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this ASU require that an employer report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of income from operations. The amendments in this ASU also allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset). The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit cost in assets. The amendments in this ASU will impact the presentation of our financial statements. Our current presentation of service cost components is consistent with the amendments in this ASU. Upon

11


 

adoption of the amendments in this ASU, we expect to present the other components within other nonoperating income, whereas we currently present these within cost of goods sold and selling, general and administrative expenses.

 

In August 2017, the FASB issued ASU No. 2017‑12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships as well as the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity’s intended hedging strategies. The amendments in this ASU also include certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted in any interim period after the issuance of this ASU. Transition requirements and elections should be applied to hedging relationships existing on the date of adoption. For cash flow and net investment hedges, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness, and the amended presentation and disclosure guidance is required only prospectively. We are currently evaluating the impact of the adoption of the amendments in this ASU on our financial statements.

 

NOTE 3. DISCONTINUED OPERATIONS

 

The Titanium Dioxide, Performance Additives and other businesses were included in Huntsman's financial results in different legal forms, including, but not limited to: (1) wholly-owned subsidiaries for which the Titanium Dioxide and Performance Additives businesses were the sole businesses; (2) legal entities that were comprised of other businesses and include the Titanium Dioxide and/or Performance Additives businesses; and (3) variable interest entities in which the Titanium Dioxide, Performance Additives and other businesses are the primary beneficiaries. Because the historical condensed consolidated and combined financial information for the periods indicated reflect the combination of these legal entities under common control, the historical condensed consolidated and combined financial information includes the results of operations of other Huntsman businesses that are not a part of our operations after the Separation. The legal entity structure of Huntsman was reorganized during the fourth quarter of 2016 and the second quarter of 2017 such that the other businesses would not be included in Venator’s legal entity structure and as such, the discontinued operations presented below reflect financial results of the other businesses through the date of such reorganization.

 

12


 

The following table summarizes the balance sheet data for discontinued operations:

 

 

 

 

 

 

    

December 31, 

(Dollars in millions)

 

2016

ASSETS

Current assets:

 

 

  

Cash and cash equivalents

 

$

 1

Accounts receivable (net of allowance for doubtful accounts of $1)

 

 

10

Accounts receivable from affiliates

 

 

61

Inventories

 

 

 9

Prepaid expenses

 

 

 1

Other current assets

 

 

 2

Total current assets of discontinued operations

 

 

84

Property, plant and equipment, net

 

 

19

Intangible assets, net

 

 

 2

Deferred income taxes

 

 

21

Noncurrent assets of discontinued operations

 

 

42

Total assets of discontinued operations

 

$

126

LIABILITIES

Current liabilities:

 

 

  

Accounts payable

 

$

 7

Accounts payable to affiliates

 

 

 2

Accrued liabilities

 

 

18

Total current liabilities of discontinued operations

 

 

27

Deferred income taxes

 

 

 1

Other noncurrent liabilities

 

 

77

Noncurrent liabilities of discontinued operations

 

 

78

Total liabilities of discontinued operations

 

$

105

 

The following table summarizes the operations data for discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

(Dollars in millions)

    

2017

    

2016

    

2017

    

2016

Revenues:

 

 

  

 

 

  

 

 

  

 

 

  

Trade sales, services and fees, net

 

$

 —

 

$

28

 

$

15

 

$

83

Related party sales

 

 

 —

 

 

15

 

 

17

 

 

51

Total revenues

 

 

 —

 

 

43

 

 

32

 

 

134

Cost of goods sold

 

 

 —

 

 

36

 

 

26

 

 

110

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Selling, general and administrative (includes corporate allocations of nil, $2, $1 and $5, respectively)

 

 

 —

 

 

 6

 

 

(7)

 

 

16

Restructuring, impairment and plant closing costs

 

 

 —

 

 

 —

 

 

 1

 

 

 —

Other (income) expense, net

 

 

 —

 

 

(1)

 

 

 1

 

 

(2)

Total expenses (income)

 

 

 —

 

 

 5

 

 

(5)

 

 

14

Income from discontinued operations before tax

 

 

 —

 

 

 2

 

 

11

 

 

10

Income tax expense

 

 

 —

 

 

 —

 

 

(3)

 

 

(2)

Net income from discontinued operations

 

$

 —

 

$

 2

 

$

 8

 

$

 8

 

 

13


 

NOTE 4. INVENTORIES

 

Inventories are stated at the lower of cost or market, with cost determined using the average cost method. Inventories at September 30, 2017 and December 31, 2016 consisted of the following:

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

(Dollars in millions)

 

2017

 

2016

Raw materials and supplies

 

$

164

 

$

134

Work in process

 

 

42

 

 

46

Finished goods

 

 

225

 

 

246

Total

 

$

431

 

$

426

 

 

NOTE 5. VARIABLE INTEREST ENTITIES

 

We evaluate our investments and transactions to identify variable interest entities for which we are the primary beneficiary. We hold a variable interest in the following joint ventures for which we are the primary beneficiary:

 

·

Pacific Iron Products Sdn Bhd is our 50%-owned joint venture with Coogee Chemicals that manufactures products for Venator. It was determined that the activities that most significantly impact its economic performance are raw material supply, manufacturing and sales. In this joint venture we supply all the raw materials through a fixed cost supply contract, operate the manufacturing facility and market the products of the joint venture to customers. Through a fixed price raw materials supply contract with the joint venture we are exposed to the risk related to the fluctuation of raw material pricing. As a result, we concluded that we are the primary beneficiary.

 

·

Viance, LLC ("Viance") is our 50%-owned joint venture with Dow Chemical Company. Viance markets timber treatment products for Venator. We have determined that the activity that most significantly impacts Viance’s economic performance is manufacturing. The joint venture sources all of its products through a contract manufacturing arrangement at our Harrisburg, North Carolina facility and we bear a disproportionate amount of working capital risk of loss due to the supply arrangement whereby we control manufacturing on Viance’s behalf. As a result, we concluded that we are the primary beneficiary.

 

Creditors of these entities have no recourse to Venator’s general credit. As the primary beneficiary of these variable interest entities at September 30, 2017, the joint ventures’ assets, liabilities and results of operations are included in Venator’s condensed consolidated and combined financial statements.

 

The revenues, income from continuing operations before income taxes and net cash provided by operating activities for our variable interest entities for the three and nine months ended September 30, 2017 and 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

(Dollars in millions)