Huntsman Corporation — 2017 Form 10-K
Period note: The supplied filing is the annual report for the fiscal year ended December 31, 2017, not a 2016 Q4 filing. It includes unaudited quarterly data for 2017 and 2016.
Business context and reporting period
Huntsman is a global chemicals manufacturer operating through Polyurethanes, Performance Products, Advanced Materials and Textile Effects. In August 2017, it separated and partially floated its Titanium Dioxide and Performance Additives business as Venator; results from that business are reported as discontinued operations. Huntsman retained approximately 55% of Venator at year-end (approximately 53% after a January 2018 over-allotment sale).
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $8.358 billion | $7.518 billion |
| Gross profit / gross margin | $1.812 billion / 21.7% | $1.526 billion / 20.3% |
| Operating income / operating margin | $851 million / 10.2% | $675 million / 9.0% |
| Income from continuing operations | $583 million | $365 million |
| Net income attributable to Huntsman Corporation | $636 million | $326 million |
| Diluted EPS | $2.61 | $1.36 |
| Adjusted EBITDA (non-GAAP) | $1.259 billion | $997 million |
| Operating cash flow from continuing operations | $842 million | $974 million |
| Free cash flow from continuing operations (company-defined) | $594 million | $656 million |
| Total debt at year-end | $2.298 billion | $4.173 billion |
Revenue rose 11%, principally on higher selling prices; gross profit increased 19%. Earnings also included $158 million of after-tax income from discontinued operations, compared with an $8 million loss in 2016. The 2017 effective tax provision included a provisional net benefit of $52 million from U.S. tax reform. Cash from continuing operations fell 14%, primarily because of an unfavorable working-capital movement. Reported cash and restricted cash totaled $481 million; available liquidity, including unused revolving and receivables facilities, was $1.247 billion. Year-end debt-to-total-capitalization was approximately 41%.
Material changes and segment results
- Polyurethanes: Revenue increased 20% to $4.399 billion and adjusted EBITDA rose 49% to $850 million, driven mainly by stronger MDI prices and margins. The company said favorable margins from supply constraints were expected to soften.
- Performance Products: Revenue decreased 1% to $2.109 billion and adjusted EBITDA decreased 6% to $296 million. The prior-year sale of the European differentiated surfactants business, weather-related outages and lower upstream-intermediate margins weighed on results.
- Advanced Materials: Revenue rose 2% to $1.040 billion; adjusted EBITDA declined 2% to $219 million, reflecting higher raw-material and fixed costs.
- Textile Effects: Revenue rose 3% to $776 million and adjusted EBITDA increased 14% to $83 million, supported by volume growth, particularly in Asia.
Huntsman repaid $2.1 billion of debt during 2017, including all outstanding senior secured term loans, using free cash flow and proceeds associated with the Venator separation and offerings. The repayments generated $54 million of losses on early debt extinguishment. The proposed Huntsman-Clariant merger was terminated by mutual agreement; Huntsman recorded $28 million in 2017 merger costs.
Outlook, risks and unusual items
- For 2018, management expected solid MDI demand, continued growth in differentiated products, recovery and EBITDA growth in Performance Products, solid Advanced Materials and Textile Effects growth, and new China projects coming online. It cautioned that Polyurethanes’ favorable supply-constrained margins could ease, MTBE margins remained depressed, and the wind market remained challenging.
- Management forecast approximately $325 million in 2018 capital expenditures and an adjusted effective tax rate of 21%–23%, before potential valuation-allowance releases. It estimated possible 2018 partial releases of about $20 million in the U.K. and $100 million in Switzerland; these were estimates, not guarantees.
- The 2017 U.S. tax reform accounting was provisional: a $137 million deferred-tax remeasurement benefit and an $85 million transition-tax expense. Huntsman said implementation guidance and further analysis could change these amounts.
- Key exposures include cyclical chemical markets, volatile raw-material and energy costs, plant outages and weather events, foreign-exchange movements, environmental and process-safety obligations, pension funding, and regulatory or market shifts affecting MTBE. The company reported $21 million of accrued environmental liabilities and noted that possible remediation costs beyond accruals could not be estimated.
- At year-end, $2.880 billion of current assets and $1.692 billion of current liabilities were classified as held for sale, principally relating to Huntsman’s retained Venator interest and associated discontinued-business balances; this significantly affects comparisons of current assets and working capital.
- After year-end, the board authorized up to $400 million of additional share repurchases, on top of $50 million remaining under the prior authorization, and raised the quarterly dividend to $0.1625 per share beginning in March 2018.
Most important facts for investors to verify
- Confirm the intended reporting period: this filing reports FY 2017, although the request specifies 2016 Q4.
- Review the reconciliation of GAAP earnings and cash flow to adjusted EBITDA and company-defined free cash flow; these non-GAAP measures exclude specified items.
- Assess the sustainability of Polyurethanes’ 2017 margin gains and the forecast easing of supply-driven pricing, alongside the weaker Performance Products and Advanced Materials trends.
- Track the timing, proceeds and use of proceeds from the planned monetization of Huntsman’s remaining Venator stake, and the related held-for-sale balances.
- Verify final U.S. tax-reform accounting, expected valuation-allowance releases, and the ability to fund capital spending, pension contributions and shareholder returns while maintaining liquidity.