Huntsman Corporation 10-Q Summary: Quarter Ended September 30, 2007
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended September 30, 2007, for Huntsman Corporation and its principal operating subsidiary, Huntsman International LLC. Huntsman is a global manufacturer of differentiated, inorganic, and commodity chemical products. The reporting period is defined by a pending merger agreement with Hexion Specialty Chemicals, Inc. (owned by Apollo Management), approved by stockholders on October 16, 2007, at a price of $28.00 per share. The company is also in the process of divesting its commodity petrochemical businesses, including the recent sale of its North American polymers business and the subsequent sale of its U.S. base chemicals business in November 2007.
Key Financial Metrics (Nine Months Ended Sept 30, 2007)
| Metric | 2007 (9 Months) | 2006 (9 Months) |
|---|---|---|
| Total Revenues | $7,284.5 million | $7,001.1 million |
| Net (Loss) Income | $(174.3) million | $149.6 million |
| Operating Income | $358.9 million | $579.4 million |
| Gross Profit | $1,161.1 million | $1,101.4 million |
| EBITDA | $272.5 million | $794.1 million |
| Net Cash Provided by Operating Activities | $43.3 million | $610.9 million |
| Total Debt | $3,712.3 million | $3,645.3 million |
| Cash and Cash Equivalents | $150.7 million | $263.2 million |
Material Changes vs. Prior Period
- Net Loss vs. Net Income: The company reported a net loss of $174.3 million compared to net income of $149.6 million in the prior year. This reversal was primarily driven by $205.0 million in merger-related expenses (including a $200 million termination fee paid to Basell) and a $240.0 million impairment charge related to the North American polymers business.
- Operating Income Decline: Operating income decreased 38% to $358.9 million. While gross profit increased 5% due to higher volumes and prices in Polyurethanes and Performance Products, operating expenses rose significantly due to restructuring costs ($33.5 million) and the aforementioned merger expenses.
- Cash Flow Reduction: Net cash provided by operating activities plummeted 93% to $43.3 million, largely due to the payment of the Basell termination fee and lower operating income.
- Segment Performance:
- Polyurethanes: Revenues increased 8%; EBITDA decreased 5% due to higher raw material costs.
- Materials and Effects: Revenues increased 48% and EBITDA increased 38%, driven by the Textile Effects acquisition.
- Polymers: EBITDA swung to a loss of $194.5 million due to the impairment charge on the discontinued North American polymers business.
- Base Chemicals: Revenues decreased 54% due to the sale of the U.S. butadiene/MTBE business and the Port Arthur plant fire outage.
Guidance, Outlook, and Risks
Merger Status: The merger with Hexion is subject to regulatory approvals, including a "second request" from the FTC. If not completed by April 5, 2008, the merger consideration increases by 8% per annum. The company faces a potential $325 million termination fee payable to Hexion if the deal fails under specific circumstances.
Dispositions: The company completed the sale of its North American polymers business in August 2007 and its U.S. base chemicals business in November 2007. Proceeds are being used to repay debt and reduce the accounts receivable securitization program.
Port Arthur Fire: The company successfully restarted its Port Arthur, Texas olefins unit in Q4 2007. Insurance recoveries are ongoing, with a deferred gain of $132.3 million recorded as of September 30, 2007. Litigation with reinsurers regarding claim settlements is pending.
Risks:
- Merger Uncertainty: Failure to close the merger could lead to stock price decline and significant termination fees.
- Legal Proceedings: Ongoing antitrust litigation (polyether polyols), MTBE groundwater contamination lawsuits, and asbestos exposure claims.
- Environmental: Compliance with EU REACH regulations and ongoing remediation liabilities at various sites.
Investor Verification Checklist
- Merger Closing Conditions: Verify the status of FTC and other regulatory approvals required to close the Hexion merger.
- Termination Fee Exposure: Confirm the specific triggers for the $325 million termination fee payable to Hexion and the $100 million reimbursement obligation to Hexion regarding the Basell fee.
- Insurance Recovery Litigation: Monitor the outcome of the lawsuit filed by reinsurers regarding the Port Arthur fire claim settlements.
- Discontinued Operations: Review the final post-closing adjustments for the North American polymers and U.S. base chemicals sales to confirm final proceeds and any remaining liabilities.
- Debt Covenants: Assess compliance with financial covenants in the Senior Credit Facilities, particularly given the recent restructuring and cash flow volatility.