Huntsman CORP quarterly report, Q2 FY2009

Business context and reporting period

Huntsman Corporation and its wholly owned operating subsidiary, Huntsman International LLC, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The filing covers five chemical businesses: Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. The supplied metadata says “2009 Q2,” but the filing itself reports 2010 Q2, with 2009 comparatives.

Key financial metrics

Amounts are in U.S. dollars; millions unless otherwise stated. Figures below are primarily for Huntsman Corporation unless noted.

• Revenue rose 27% in Q2 and 26% year to date, primarily on higher selling prices and volumes. Q2 operating margin was approximately 5.4%, versus a loss in the prior-year quarter.
• Huntsman International reported Q2 net income of $117 million versus a $129 million loss in Q2 2009; for the six months it reported $91 million income versus a $410 million loss.
• Six-month capital expenditures were $78 million. Cash and cash equivalents were $766 million at June 30, down from $1.745 billion at year-end 2009. Working capital was $2.188 billion, down $141 million.
• June 30 debt excluding affiliate balances was $3.867 billion, compared with $4.212 billion at year-end. The Corporation reported total debt of $3.871 billion including affiliate debt; Huntsman International reported $4.406 billion including affiliate notes. Current debt was $168 million for the Corporation.
• Reported liquidity was $1.185 billion: $773 million cash and restricted cash, $196 million available under the revolving facility, and $216 million available under receivables programs. No revolving-facility borrowings were outstanding; $29 million of letters of credit and guarantees were issued.

Material changes versus the prior comparable period

• Operating performance recovered: higher volume and pricing lifted sales and gross profit across most segments, while restructuring charges fell to $17 million in Q2 and $20 million for the first half, from $62 million and $76 million, respectively.
• Prior-year results included a large, nonrecurring gain from the Texas Bank Litigation settlement—$844 million in Q2 and $837 million for the first half—so the sharp decrease in Corporation net income and EBITDA does not indicate a comparable deterioration in underlying operations.
• Q2 2010 discontinued-operations income included a $110 million pretax gain from final settlement of the 2006 Port Arthur fire insurance claim. The proceeds were used to prepay secured debt.
• Six-month operating cash flow turned negative, principally reflecting working-capital use and the absence of the prior-year settlement cash proceeds. Adoption of accounting guidance also put receivables-program balances on balance sheet, increasing reported receivables and cash used by $254 million.
• Debt actions included issuing $350 million of 8.625% subordinated notes due 2020, redeeming portions of euro-denominated notes, repurchasing $250 million principal of convertible notes for approximately $382 million, and prepaying term loans. Huntsman Corporation recognized $162 million of first-half early-extinguishment losses, including the convertible-note repurchase loss.

Outlook, management commentary and risks

• Management cited strong underlying demand growth in Q2 and expected continued, but slower, growth than in the first half. It noted seasonal third-quarter softness, particularly from lower European demand in August; North America and Europe represented about two-thirds of sales, with comparatively modest growth. Idle capacity remained in several products.
• Management expected 2010 capital expenditures of $225–$250 million, funded from available cash and operating cash flow, and approximately $47 million of additional pension and postretirement contributions in the second half.
• Management stated that it believed the company was in compliance with material debt covenants. The revolving-facility leverage covenant caps senior secured leverage at 3.75 to 1 when applicable; covenant failure could restrict liquidity or trigger default. Management also said most $168 million of current debt was intended to be renewed, repaid or extended, without assurance.
• Material contingencies include an ongoing investigation of the Indian joint venture Petro Araldite concerning alleged waste-disposal, reporting, sales-channel and payment issues. Huntsman notified Indian regulators, the SEC and DOJ and said the investigation was incomplete; penalties, remediation costs and operational effects could not be estimated.
• Antitrust cases include alleged price-fixing involving urethane products and a 2010 titanium-dioxide class action. The company had not accrued for these claims because loss could not be estimated, but stated losses could be material. Asbestos matters, environmental remediation obligations and regulatory exposures also remain; environmental liabilities accrued were $40 million.
• Other unusual items include a $15 million nonrecurring equity-income credit related to the Sasol-Huntsman joint venture and a planned consolidation of that investment into Huntsman’s accounts in Q3 2010. A planned maintenance outage reduced first-half Polyurethanes EBITDA by an estimated $40 million.
• After quarter-end, Huntsman announced a definitive agreement to acquire an Indian amines and surfactants business for approximately $21 million, subject to conditions, with expected completion in the first half of 2011. Management expected it to be immediately accretive.

Investor verification priorities

• Separate recurring operating improvement from the prior-year litigation gain and the 2010 fire-insurance recovery, early debt-extinguishment charges and joint-venture credit.
• Assess whether the recovery in volumes, pricing and segment margins can continue, especially given management’s slower-growth and seasonal outlook and remaining idle capacity.
• Reconcile negative first-half operating cash flow with working-capital movements, receivables-program accounting and cash availability; monitor liquidity and refinancing of current maturities.
• Review debt maturities, interest costs, covenant headroom and the consequences of the debt refinancing and repayment transactions.
• Monitor the India investigation and unaccrued antitrust, environmental and other legal exposures for developments that could affect earnings, cash flow or operations.