Huntsman Corporation and Huntsman International LLC — Form 10-Q
Period clarification: The supplied filing is for the quarter ended September 30, 2014, with comparisons to 2013; this differs from the request metadata identifying 2013 Q3. Huntsman International LLC is Huntsman Corporation’s wholly owned principal operating subsidiary. Unless noted, financial amounts are in millions of U.S. dollars.
Business context and reporting period
Huntsman is a global chemicals manufacturer operating five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. Its products serve industrial and consumer markets worldwide. The filing presents unaudited third-quarter and nine-month results through September 30, 2014.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $2,884 | $2,842 | $8,627 | $8,374 |
| Gross profit | $515 | $507 | $1,470 | $1,307 |
| Operating income | $202 | $198 | $568 | $389 |
| Net income attributable to Huntsman Corporation | $188 | $64 | $361 | $87 |
| Diluted earnings per share | $0.76 | $0.26 | $1.47 | $0.36 |
| EBITDA | $293 | $303 | $881 | $664 |
| Adjusted EBITDA | $356 | $376 | $1,048 | $900 |
- Gross margin was approximately 17.9% in Q3 2014 versus 17.8% a year earlier, and 17.0% for the first nine months versus 15.6%.
- Q3 net income benefited substantially from a $94 tax benefit tied to utilization of previously valuation-allowanced U.S. foreign tax credits. Nine-month income tax expense was $39; absent that tax benefit, the company said it would have been $133. The reported earnings increase should therefore be considered alongside this discrete tax item.
- For the nine months, operating cash flow was $343 versus $388 in 2013; capital expenditures were $351 versus $295. Investing cash outflow was $337, financing cash inflow $62, and cash increased $62 to $582.
- At September 30, current assets were $4,494 and current liabilities $2,122, leaving working capital of $2,372. Reported liquidity was $1,365, including $592 cash and restricted cash, $583 available under the revolver and $190 available under receivables programs.
- Debt excluding affiliate obligations was $4,026, up from $3,910 at year-end 2013; $274 was current. Huntsman International separately reported $813 of notes payable to affiliates, for total debt of $4,839 including those obligations.
- The quarterly common dividend was $0.125 per share. Nine-month capital spending was elevated, and management expected approximately $550 of full-year 2014 capital expenditures, including about $50 for the acquired Rockwood businesses.
Material changes versus prior comparable period
- Q3 revenue increased 1%, but EBITDA fell 3% and adjusted EBITDA fell from $376 to $356. Polyurethanes EBITDA declined to $162 from $203, principally on weaker PO/MTBE earnings; the Port Neches disruption contributed to lower volumes.
- Nine-month revenue rose 3%, operating income rose 46%, and adjusted EBITDA increased 16%. Segment EBITDA improved notably in Performance Products ($332 versus $260), Advanced Materials ($142 versus $60) and Textile Effects ($25 versus a loss of $54). Polyurethanes and Pigments EBITDA declined to $506 from $533 and $31 from $55, respectively.
- Nine-month restructuring, impairment and plant-closing charges decreased to $91 from $110. These included a $16 noncash impairment of Rotterdam MDI expansion engineering costs after Huntsman began studying an expansion at Geismar.
- Cash from operations fell despite higher earnings, principally because of an unfavorable change in operating assets and liabilities, including increased receivables and inventories. Capital expenditures rose $56.
- Other comprehensive income was pressured by foreign currency translation: the nine-month translation adjustment was a loss of $108, compared with a loss of $44 in 2013.
Outlook, management commentary and significant events
- On October 1, 2014, after quarter-end, Huntsman completed its $1.04 billion cash acquisition of Rockwood’s Performance Additives and Titanium Dioxide businesses, assumed certain unfunded pension liabilities and financed the transaction with a $1.2 billion term loan. The preliminary purchase accounting assigned no amount to goodwill and remained subject to revision.
- Management cited growing demand for MDI, amines, aerospace composites, and textile dyes and chemicals, and anticipated Rockwood integration synergies of approximately $130. It expected those synergies to support earnings growth over the next several years.
- Management’s 2014 adjusted effective tax-rate expectation was approximately 30%, including Rockwood. It expected seasonal slowdowns in several businesses in Q4 2014 and a PO/MTBE maintenance outage in Q1 2015. The outlook also cited improving amines volumes and margins, benefits from European surfactants restructuring in 2015, and environmental rules increasing Textile Effects raw-material costs.
- Management said ongoing cost-reduction programs were expected to reduce costs by approximately $240, with savings expected through early 2015. It expected to contribute a further approximately $30 to pension and postretirement plans in the remainder of 2014.
- The Port Neches production unit was offline for about three weeks in Q3, disrupting MTBE, PO and propylene glycol production and internal PO supply. Management estimated a negative Polyurethanes EBITDA impact of approximately $30; no injuries were reported.
- Huntsman agreed to sell its TiO2 printing-ink product line, without manufacturing assets, to Henan Billions as part of Rockwood regulatory approvals; closing was expected in Q4 2014.
Risks, contingencies and unusual items
- Arabian Amines, a consolidated 50%-owned joint venture, had $163 of debt and was not in compliance with certain financial covenants. The debt was classified as current. Huntsman did not guarantee it, and said the issue did not affect its other debt; discussions with lenders continued.
- Huntsman reported it was in compliance with covenants on its material financing arrangements. The revolver’s leverage covenant, receivables-program performance requirements, and cross-default provisions could restrict liquidity or accelerate debt if breached.
- A product-delivery claim had current asserted claims of approximately €113 (about $149); Huntsman estimated a possible loss range of €0–€113, recorded no accrual and said it believed insurance covered liability above $10.
- TiO2 antitrust litigation remained outstanding, including direct-purchaser opt-out and indirect-purchaser actions. Huntsman said it could not reasonably estimate potential losses and had made no accrual for these claims.
- Environmental liabilities accrued were $44, up from $27 at year-end 2013. The filing describes remediation exposures and regulatory matters whose ultimate costs may exceed accrued amounts; indemnity recoveries are not assured. A Port Neches flare matter remained under discussion with regulators, with potential penalties or injunctive relief not estimable.
- Asbestos matters included $10 accrued and a corresponding $10 indemnity receivable for tendered cases, plus $228,000 accrued for non-indemnified cases. Huntsman warned actual liabilities could exceed accruals.
- Q3 earnings included unusual tax-credit benefits; results also included restructuring and impairment charges, acquisition/integration costs, pension costs and foreign-exchange effects. Adjusted EBITDA and adjusted net income are non-GAAP measures and are not directly comparable across companies.
Important facts for investors to verify
- Confirm the actual reporting period: the filing covers Q3 2014, not Q3 2013.
- Separate recurring operating improvement from the $94 U.S. foreign-tax-credit benefit when assessing reported earnings and EPS.
- Track Rockwood’s post-close debt, integration execution, purchase-price allocation and delivery of the stated approximately $130 synergy target.
- Monitor operating cash conversion, working-capital needs, capital spending and liquidity after the acquisition and term-loan financing.
- Follow resolution of Arabian Amines’ covenant noncompliance and any resulting reclassification or financing effects.
- Review subsequent developments in the product-delivery, TiO2 antitrust, asbestos and environmental matters, including adequacy of accruals and indemnities.