Huntsman Corporation 10-Q Summary: Period Ended June 30, 2006
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended June 30, 2006, for Huntsman Corporation and its principal operating subsidiary, Huntsman International LLC. Huntsman is a global manufacturer of differentiated and commodity chemical products, organized into six segments: Polyurethanes, Materials and Effects, Performance Products, Pigments, Polymers, and Base Chemicals. The company operates in over 100 countries with approximately 15,000 employees.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2006 | Six Months Ended June 30, 2006 |
|---|---|---|
| Total Revenues | $3,343.9 | $6,531.6 |
| Net Income | $262.9 | $331.9 |
| Net Income Available to Common Stockholders | $262.9 | $331.9 |
| Diluted EPS | $1.13 | $1.42 |
| Operating Income | $335.4 | $502.9 |
| EBITDA | $499.3 | $780.5 |
| Cash and Cash Equivalents (End of Period) | $200.1 | $200.1 |
| Total Debt | $4,432.1 | $4,432.1 |
| Net Cash Provided by Operating Activities | N/A | $323.5 |
Note: Gross margins declined due to raw material and energy costs increasing faster than selling prices. Net income includes a significant extraordinary gain from an acquisition.
Material Changes vs. Prior Period
- Revenue: For the six months ended June 30, 2006, revenues decreased 2% to $6,531.6 million compared to $6,688.8 million in the prior year period. This was driven by lower sales volumes in Polyurethanes, Performance Products, Polymers, and Base Chemicals, partially offset by higher volumes in Materials and Effects and Pigments.
- Profitability: Net income increased significantly to $331.9 million (six months) from $60.3 million in the prior year. This increase is largely attributable to a $50.5 million extraordinary gain on the acquisition of the Textile Effects business and a $90.9 million gain on the sale of the U.S. butadiene and MTBE business.
- Gross Profit: Gross profit decreased 24% to $836.6 million (six months) due to lower contribution margins as raw material and energy costs outpaced price increases.
- Restructuring Costs: Restructuring, impairment, and plant closing costs decreased to $17.0 million (six months) from $29.2 million in the prior year, though this included $9.4 million in asset write-offs related to the Port Arthur fire.
Outlook, Risks, and Unusual Items
- Acquisition of Textile Effects: On June 30, 2006, the company acquired the Textile Effects business from Ciba Specialty Chemicals for approximately $172.1 million. The fair value of net assets exceeded the purchase price, resulting in a $50.5 million extraordinary gain. Operations will be consolidated into the Materials and Effects segment starting July 1, 2006.
- Port Arthur Plant Fire: A major fire on April 29, 2006, at the Port Arthur, Texas olefins plant caused significant damage. Operations remain largely shut down with a restart expected in early Q2 2007. The company recorded $9.4 million in asset write-offs and estimates lost profits of approximately $47.1 million for the quarter. Insurance claims are being filed for property damage and business interruption.
- Sale of U.S. Butadiene and MTBE Business: On June 27, 2006, the company sold these assets for approximately $262 million, recognizing a pre-tax gain of $90.9 million. An additional $70 million is contingent on the restart of the Port Arthur unit.
- Debt Management: The company continues to reduce indebtedness. In July and August 2006 (post-period), the company repurchased and redeemed $100 million of senior notes and made a voluntary $50 million repayment on term loans.
- Risks: Key risks include the impact of the Port Arthur fire on Base Chemicals profitability, volatility in raw material and energy costs, potential liabilities from the Textile Effects acquisition, and ongoing litigation regarding MTBE environmental effects and antitrust matters.
Investor Verification Checklist
- Extraordinary Gains: Verify the sustainability of earnings by excluding the $50.5 million acquisition gain and $90.9 million asset sale gain from core operating performance analysis.
- Port Arthur Restart: Monitor the timeline and cost estimates for the restart of the Port Arthur olefins unit, currently projected for Q2 2007, and the status of insurance recoveries.
- Textile Effects Integration: Assess the integration progress and financial performance of the newly acquired Textile Effects business, which begins contributing to results in Q3 2006.
- Debt Covenants: Review compliance with financial covenants in the Senior Credit Facilities, particularly given the recent debt repayments and the impact of the fire on cash flows.
- Raw Material Costs: Evaluate the company's ability to pass on rising raw material and energy costs to customers to protect gross margins.