Huntsman Corporation — Form 10-Q Summary
Period: The supplied request specifies 2012 Q2, but the filing is for the quarter ended June 30, 2013, with comparisons to 2012. The filing covers Huntsman Corporation and its wholly owned operating subsidiary, Huntsman International LLC. Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Huntsman is a global manufacturer of differentiated organic and inorganic chemicals, operating through Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. Results are unaudited; management cautions that interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
- Second-quarter revenue: $2,830, down 3% from $2,914 a year earlier. Gross profit was $451 versus $527; gross margin was approximately 15.9% versus 18.1%. Operating income was $141 versus $250, and operating margin approximately 5.0% versus 8.6%.
- Second-quarter earnings: Net income attributable to Huntsman Corporation was $47 versus $124; diluted EPS was $0.19 versus $0.52. Adjusted EBITDA was $304 versus $376, down 19%; adjusted net income was $94 versus $147. These adjusted measures are non-GAAP.
- First-half results: Revenue was $5,532, down 5%; gross profit was $800 versus $1,077, and operating income was $191 versus $535. Net income attributable to Huntsman Corporation was $23 versus $287; diluted EPS was $0.10 versus $1.19. Adjusted EBITDA was $524 versus $783.
- Cash flow: First-half operating cash flow was negative $2, compared with positive $348 in 2012. Investing cash use was $182, including $181 of capital expenditures. Financing cash use was $27. Cash and cash equivalents fell by $215 to $172; restricted cash was $9.
- Debt and liquidity: Debt excluding affiliate balances was $3,771, compared with $3,702 at year-end 2012; total debt including affiliate notes was $3,775 at Huntsman Corporation. Current debt was $317. Management reported $838 of combined cash, restricted cash and unused borrowing capacity. Working capital was $1,841, down $97 from year-end.
- Dividends: The company paid $0.125 per share in each of the first two quarters, versus $0.10 per share in each comparable 2012 quarter.
Material changes versus the prior comparable period
- Profitability weakened substantially, driven by lower gross margins, lower selling prices in Pigments, weaker sales volumes in several segments, and higher restructuring costs. First-half restructuring, impairment and plant-closing costs rose to $73 from $5.
- Pigments was a major drag: second-quarter segment EBITDA was $25 versus $131, and first-half EBITDA was $28 versus $277, amid lower selling prices and elevated industry inventories.
- Second-quarter EBITDA improved in Performance Products ($105 versus $86) and Advanced Materials ($24 versus $22); Textile Effects remained loss-making but improved slightly (negative $9 versus negative $10). Polyurethanes EBITDA was $163 versus $170.
- First-half results also reflected an estimated $55 impact from scheduled maintenance at Performance Products facilities and an estimated $25 second-quarter impact from the Rotterdam MDI outage. Interest expense declined, but a $35 loss on early debt extinguishment (versus $1) weighed on first-half earnings.
Outlook, management commentary, risks and unusual items
- Management estimated the Rotterdam force majeure’s impact at approximately $25 for the second quarter and expected an additional approximately $10 impact in the third quarter; supply-chain restoration was expected in the third quarter. The facility was back online, but the force majeure remained in effect at filing time.
- Management’s 2013 segment outlook: Polyurethanes and Performance Products adjusted EBITDA similar to 2012; Advanced Materials better than 2012; Textile Effects positive; and Pigments below 2012. Pigments margins were expected to improve in the second half as industry inventories declined.
- Expected 2013 capital expenditures were approximately $450. Management forecast an adjusted effective tax rate of approximately 35% and an unadjusted rate of approximately 50%; the long-term effective tax rate was estimated at 30%–35%.
- Cost-reduction programs in Polyurethanes, Advanced Materials and Textile Effects were expected to deliver approximately $220 of savings by mid-2014. Additional restructuring charges of up to approximately $74 were expected; the Textile Effects program included an estimated $66 of additional charges through March 2014.
- Arabian Amines, a consolidated 50%-owned joint venture, had $178 of debt and was not complying with payment and other loan obligations. Huntsman said it was negotiating with lenders and expected resolution; the debt was classified as current. The company said this did not affect its other debt obligations.
- Material exposures include the unresolved indirect-purchaser titanium-dioxide antitrust case; a product-delivery claim with possible losses estimated at €0–€113 (with insurance believed to cover liability above $10); environmental remediation, including a $26 accrual for the former West Footscray site; and a Port Neches flaring matter for which penalties and injunctive relief could not yet be estimated.
- On July 15, 2013, after quarter-end, Huntsman agreed to a settlement with direct purchasers in the titanium-dioxide antitrust litigation for an amount described as not material; court approval remained pending. The indirect-purchaser case was not resolved. On July 5, Huntsman agreed to acquire Oxid for up to $75, expected to close in the third quarter.
- Disclosure controls were reported effective as of June 30, 2013, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Confirm the intended period: this source is the 2013 Q2 filing, not a 2012 Q2 filing.
- Track recovery from the Rotterdam MDI force majeure and whether the projected third-quarter impact and supply restoration matched expectations.
- Assess Pigments pricing, inventory normalization and margin recovery, and verify delivery of segment-level adjusted EBITDA outlook.
- Review operating cash generation, working-capital demands, the $450 capital-spending plan, and liquidity availability against upcoming debt and pension contributions.
- Monitor resolution of Arabian Amines’ loan noncompliance, restructuring costs and projected savings, and the material legal and environmental exposures.