Huntsman Corporation — Form 10-Q Summary
Period: Quarter and six months ended June 30, 2012; filed August 1, 2012. The request metadata says 2011 Q2, but the filing itself reports 2012 Q2. Huntsman International LLC is the wholly owned principal operating subsidiary; amounts below are primarily Huntsman Corporation consolidated, in millions of U.S. dollars unless stated otherwise.
Business context and financial performance
Huntsman is a global chemicals manufacturer operating in Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $2,914 | $2,934 | $5,827 | $5,613 |
| Gross profit | $527 | $501 | $1,077 | $961 |
| Gross margin | 18.1% | 17.1% | 18.5% | 17.1% |
| Operating income | $250 | $220 | $535 | $382 |
| Operating margin | 8.6% | 7.5% | 9.2% | 6.8% |
| Net income attributable to Huntsman Corporation | $124 | $114 | $287 | $176 |
| Diluted earnings per share | $0.52 | $0.47 | $1.19 | $0.72 |
| EBITDA (company-reported measure) | $352 | $323 | $742 | $562 |
| Adjusted EBITDA (non-GAAP) | $365 | $321 | $762 | $625 |
Cash flow, debt and liquidity
- Six-month operating cash flow was $348, versus $1 in 2011. Capital expenditures were $163, making operating cash flow less capital expenditures $185, compared with negative $123 in 2011.
- Investing cash outflow was $185 and financing cash outflow was $264. Cash and cash equivalents declined $102 to $452 at June 30; restricted cash was $9.
- Debt excluding affiliate debt was $3,744, down from $3,942 at year-end 2011; $143 was current and $3,601 long-term. Huntsman Corporation’s reported total debt including affiliate debt was $3,748.
- Working capital was $2,261, up $141 from year-end; current assets were $4,109 and current liabilities $1,848. Management reported $1,098 of combined cash and unused borrowing capacity: $461 cash and restricted cash, $383 available under the revolver and $254 under receivables programs.
- The $400 revolving facility had no borrowings outstanding and approximately $17 of letters of credit and guarantees outstanding. Management said it believed the company was in compliance with material debt covenants.
Material changes and segment trends
- For Q2, revenue declined 1%, while operating income rose 14% and Huntsman-attributable net income increased 9%. Higher gross margins, lower interest expense and reduced restructuring costs supported earnings despite lower revenue.
- For the first half, revenue increased 4%, operating income 40%, and net income attributable to Huntsman Corporation 63%. Increased gross profit and lower operating expenses and interest expense contributed; income tax expense also increased substantially, to $125 from $56.
- Polyurethanes was a principal growth driver: Q2 revenue rose 12% and segment EBITDA rose 20% to $170; first-half revenue rose 14% and EBITDA rose 33% to $341, reflecting stronger MDI demand, volumes and margins.
- Pigments’ first-half EBITDA rose to $277 from $196, despite lower volumes; management cited higher prices and margins. Q2 EBITDA was $131 versus $112.
- Performance Products weakened: Q2 EBITDA fell 24% to $86 and first-half EBITDA fell 23% to $175, reflecting lower margins and volumes, an ethylene oxide facility outage and comparison with a prior-year joint-venture consolidation gain.
- Advanced Materials’ EBITDA declined 21% in both the quarter and first half. Textile Effects remained loss-making, with first-half EBITDA of negative $15. Currency translation reduced reported selling prices in several businesses.
- Other comprehensive income was sharply affected by currency translation: Q2 foreign currency translation adjustments were negative $142, leaving comprehensive income attributable to Huntsman Corporation at only $3 despite $124 net income.
Outlook, risks and unusual items
- Management expected continued pressure in Pigments from softer demand, competition and higher raw-material costs; it also cited near-term margin pressure in Polyurethanes from higher input costs, weak Chinese wind-energy demand for Advanced Materials, and weak near-term consumer confidence for Textile Effects.
- Management expected restructuring benefits above the current run rate to exceed $150 annually when programs were completed by the end of 2013; broader cost-reduction programs were expected to deliver approximately $190 in savings through Q3 2013. A separate Polyurethanes program was expected to reduce annualized fixed costs by approximately $75 by Q3 2013, with about $35 of restructuring expense expected in Q3 2012.
- Expected 2012 capital expenditures were approximately $425. The company expected a long-term effective tax rate of approximately 30%–35% and approximately $70 of additional pension and postretirement contributions during the remainder of 2012.
- Debt amendments extended the revolving facility commitment to 2017, increased its capacity from $300 to $400 and extended $346 of term loans to 2017. In March 2012 the company redeemed €64 (approximately $86) of 7.50% subordinated notes due 2015.
- Material contingencies include a customer product-delivery claim with potential claims up to €153 (approximately $191); Huntsman estimated a possible loss range of €0–€153, stated it believed insurance covered liability above $10, and recorded no accrual. It also disclosed asbestos matters, environmental remediation, pending titanium-dioxide antitrust litigation, and an indemnification demand from two banks related to litigation by former shareholders; loss estimates were unavailable for some matters.
- Environmental liabilities accrued were $34 at June 30, including $30 for remediation at a former Australian facility. The filing warns that environmental regulation, remediation costs, foreign-exchange movements, working-capital needs and debt covenant or receivables-program events could affect liquidity. Management said cash needs were expected to be met, but foreign cash may face legal or tax restrictions.
- On July 3, 2012, after quarter-end, Huntsman acquired the remaining 55% interest in a Russian polyurethane systems business for approximately €13 ($16). The filing also states the SEC and DOJ notified Huntsman in May 2012 that they would not recommend enforcement action in the India investigation.
Investor verification priorities
- Confirm the reporting period: the filing is for Q2 2012, notwithstanding the request metadata’s 2011 Q2 label.
- Assess whether EBITDA and adjusted EBITDA gains are sustainable, particularly the contributions from Polyurethanes and Pigments and the weakness in Performance Products and Textile Effects.
- Review cash conversion and working-capital growth, capital-spending plans, pension contributions, and the availability and restrictions on foreign cash.
- Check debt maturities, refinancing needs, covenant compliance, and continued access to the revolver and receivables programs.
- Track the product-delivery claim, antitrust and indemnification proceedings, environmental remediation exposures, and projected restructuring costs and savings.