HUN

Huntsman Corporation 2008 10-K Summary

Business Context and Reporting Period

This Annual Report on Form 10-K covers the fiscal year ended December 31, 2008, for Huntsman Corporation and its wholly-owned subsidiary, Huntsman International LLC. Huntsman is a global manufacturer of differentiated organic and inorganic chemical products operating in four primary segments: Polyurethanes, Materials and Effects, Performance Products, and Pigments. The company completed the sale of its commodity Polymers and Base Chemicals businesses in 2006 and 2007, which are reported as discontinued operations.

Key Financial Metrics (2008)

Note: Net income includes a significant non-operating gain of $780 million related to the settlement of the terminated merger with Hexion.

Material Changes vs. Prior Period

• Profitability Surge: Net income improved from a loss of $172 million in 2007 to a profit of $609 million in 2008. This turnaround was primarily driven by a $780 million gain from the settlement of the Hexion merger litigation, rather than core operating performance.
• Operating Performance Decline: Excluding the merger gain, core operating income fell significantly from $537 million in 2007 to $165 million in 2008. Gross profit decreased 18% to $1,264 million due to lower sales volumes and higher raw material costs.
• Revenue Growth: Total revenues increased 6% to $10.2 billion, driven by higher average selling prices across all segments, which partially offset lower sales volumes caused by the global economic downturn.
• Segment Performance:
  • Polyurethanes: EBITDA dropped 35% due to lower margins and inventory write-downs.
  • Materials and Effects: EBITDA dropped 42% due to lower textile demand and higher costs.
  • Performance Products: EBITDA increased 38% due to expanded margins.
  • Pigments: EBITDA dropped 67% due to lower volumes and margins.

Guidance, Outlook, and Risks

Management Commentary and Outlook: Management anticipates continued challenging economic conditions in 2009. In January 2009, the company announced a cost reduction initiative targeting the elimination of approximately 1,250 full-time positions (10% of the workforce) to achieve $150 million in annual operating cost savings. Additionally, the company plans to close its Grimsby, U.K. titanium dioxide plant in Q1 2009 to save $28 million annually. Capital expenditures for 2009 are projected at $230 million, down from $418 million in 2008.

Key Risks and Contingencies:

• Merger Litigation: While the Hexion merger was settled for $1 billion, the company continues to pursue the "Texas Bank Litigation" against lenders who refused to fund the merger. A trial is scheduled for June 2009.
• Liquidity and Debt: The company carries significant leverage with a debt-to-total capitalization ratio of approximately 71%. While the $1 billion settlement proceeds were used to pay down the revolving credit facility, the company remains dependent on credit markets for liquidity.
• MTBE Liability: The company faces ongoing litigation regarding MTBE groundwater contamination, with 14 pending lawsuits. The potential exposure is currently unquantifiable.
• Antitrust Investigations: The company is a defendant in civil antitrust suits regarding alleged price-fixing of polyether polyol products, with a trial set for 2011.
• Raw Material Volatility: Profitability is sensitive to fluctuations in crude oil and natural gas prices, which drive feedstock costs.

Investor Verification Checklist

• Quality of Earnings: Verify the extent to which the 2008 net income is driven by the one-time $780 million merger settlement gain versus sustainable operating cash flow.
• Debt Covenants: Confirm compliance with the 3.75:1 debt-to-EBITDA leverage covenant on the $650 million revolving facility, especially given the projected economic downturn.
• Cost Reduction Execution: Monitor the progress of the announced 10% workforce reduction and the closure of the Grimsby plant to ensure projected $150 million in savings are realized.
• Legal Exposure: Track the status of the Texas Bank Litigation and MTBE contamination lawsuits for potential future liabilities or recoveries.
• Convertible Notes: Review the terms of the $250 million 7% convertible notes issued to Apollo affiliates, including the conversion price ($7.857) and potential dilution impact.