Huntsman Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2012. The supplied filing is for Q1 2012, although the request metadata says Q1 2011. Huntsman International LLC is a wholly owned subsidiary and principal operating company; the filing presents information for both registrants.
Business context and financial performance
Huntsman is a global chemicals manufacturer operating in Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. Dollar amounts below are in millions unless stated otherwise.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $2,913 | $2,679 |
| Gross profit | $550 | $460 |
| Gross margin | 18.9% | 17.2% |
| Operating income | $285 | $162 |
| Operating margin | 9.8% | 6.0% |
| Net income attributable to Huntsman Corporation | $163 | $62 |
| Diluted EPS | $0.68 | $0.26 |
| Adjusted EBITDA | $397 | $304 |
| Operating cash flow | $190 | $(124) |
| Capital expenditures | $81 | $60 |
- Revenue grew 9%; management attributed the increase principally to higher selling prices in Polyurethanes, Performance Products and Pigments, and higher sales volumes in most segments.
- Gross profit increased 20%. Net income growth also reflected lower operating expenses, including fewer legal-related costs, and a smaller discontinued-operations loss. Income tax expense rose to $60 from $22, primarily with higher pretax income.
- Segment EBITDA: Polyurethanes $171 (up from $114); Performance Products $89 (down from $115); Advanced Materials $31 (down from $39); Textile Effects $(5) (versus $(11)); Pigments $146 (up from $84). Corporate and other was $(41), compared with $(81), helped by the absence of $34 in prior-year legal settlements.
Cash, liquidity and debt
- Cash and cash equivalents were $463 at quarter-end, down $91 from year-end; restricted cash was $15. Cash flow from operations improved by $314 year over year, supported by higher operating income and a favorable working-capital variance.
- Investing cash outflow was $109, including $81 of capital spending and $34 invested in an unconsolidated affiliate. Financing cash outflow was $176, including debt repayments and $24 of dividends.
- Total debt excluding affiliate debt was $3,821, down from $3,942 at December 31, 2011; including affiliate debt, reported total debt was $3,825 for Huntsman Corporation. Huntsman International separately reported $4,462 including amounts payable to affiliates. Do not combine these entity-level figures.
- Management reported $1,109 of combined cash and unused borrowing capacity: $478 cash and restricted cash, $381 available under the $400 revolving facility, and $250 available under receivables programs. The revolver had no borrowings and approximately $19 of letters of credit and bank guarantees outstanding.
- Current assets were $4,209 and current liabilities $1,986; reported working capital was $2,223, up $103 from year-end. Receivables and inventories increased $295 and $99, respectively, while accounts payable rose $216.
- On March 6, Huntsman International extended the revolving facility maturity to 2017, increased its capacity from $300 to $400, and extended $346 of Term Loan B to 2017 at LIBOR plus 3.00%. The company also redeemed €64 million (about $86) of 7.50% subordinated notes and repaid its remaining Australian credit facility of about $27.
Outlook, commentary and material risks
- Management cited improving Pigments margins and improved Polyurethanes margins, including high PO/MTBE margins partly supported by industry outages and higher MDI prices. It expected PO/MTBE margins to moderate as supply recovered in Q2.
- Management expected improving demand in North America, Northern Europe and most of Asia, but was cautious about Southern Europe and expected slower growth in China. Segment considerations included near-term amines margin pressure and planned Q3 maintenance; higher Pigments raw-material costs; and expected titanium dioxide price increases. These are outlook statements, not quantified earnings guidance.
- Expected 2012 capital spending was $425–$450. The long-term effective tax rate expectation was approximately 30%–35%. Management expected an additional $108 of pension and postretirement contributions during 2012.
- Cost-reduction programs were expected to produce approximately $190 of savings through Q3 2013. Management cited $75 of continuing-operations restructuring accruals and approximately $26 of additional restructuring and plant-closing costs expected through 2013.
- Debt covenants, cross-default provisions and acceleration triggers present liquidity risks. The revolving-facility leverage covenant is a maximum 3.75-to-1 net senior secured leverage ratio when applicable. Management stated it was in compliance at the reporting date.
- Contingencies include a customer product-delivery claim with a stated possible loss range of €0–€153 (approximately $0–$200); no accrual was recorded, and the company said it believed insurance covered liability above $10. Unresolved asbestos cases and antitrust proceedings also remain; certain asbestos liabilities are indemnified, but the company cannot assure full recovery or estimate potential losses beyond recorded accruals. Environmental and regulatory obligations, including remediation and evolving emissions requirements, could add costs.
- Q1 restructuring charges were offset by a $12 reversal of reserves no longer required; no net restructuring, impairment or plant-closing cost was reported in the income statement. Discontinued operations generated a $4 loss, compared with $14 in Q1 2011. The filing states disclosure controls were effective and no material change to internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Confirm the intended comparison period: this filing reports Q1 2012, not Q1 2011.
- Assess the sustainability of Q1 margin and EBITDA gains, particularly the anticipated moderation in PO/MTBE margins and the recovery in industry supply.
- Review working-capital cash use, planned capital spending, pension contributions and the availability and terms of committed liquidity.
- Check refinancing and covenant risks, including the stated maturity-acceleration conditions tied to 2016 obligations.
- Monitor the product-delivery claim, asbestos and environmental exposures, and the progress and realized savings of restructuring programs.
- Distinguish GAAP net income and cash flow from company-defined adjusted EBITDA and adjusted net income; these non-GAAP measures have limitations described in the filing.