HUN

Huntsman Corporation 10-Q Summary: Q1 2008

Business Context and Reporting Period

This Quarterly Report on Form 10-Q covers the period ended March 31, 2008, for Huntsman Corporation and its principal operating subsidiary, Huntsman International LLC. Huntsman is a global manufacturer of differentiated chemical products operating in four primary segments: Polyurethanes, Materials and Effects, Performance Products, and Pigments. The company is currently under a pending merger agreement with Hexion Specialty Chemicals, Inc., approved by stockholders in October 2007, with a termination date extended to July 4, 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 13% to $2.54 billion, driven by higher average selling prices across all segments and increased volumes in the Polyurethanes segment. This was partially offset by lower volumes in Performance Products and Materials and Effects.
• Profitability Decline: Net income dropped 84% to $7.3 million. Operating income fell 37% to $86.1 million. Gross profit decreased 6% due to rising raw material and energy costs outpacing price increases in several segments.
• Expense Increases: Operating expenses rose 14%, primarily due to a $9.2 million increase in foreign exchange losses, higher R&D costs, and increased corporate IT expenses.
• Merger Costs: The company incurred $5.2 million in expenses associated with the pending Hexion merger, including professional fees and board bonuses.
• Discontinued Operations: Loss from discontinued operations improved (decreased) by 66% to $1.1 million, reflecting the sale of the U.S. Base Chemicals and North American Polymers businesses in late 2007.

Outlook, Risks, and Contingencies

• Pending Merger: The acquisition by Hexion at $28.00 per share remains subject to regulatory approvals (FTC, European Commission). The termination date was extended to July 4, 2008. If the deal fails, Huntsman could owe Hexion a $325 million termination fee.
• Liquidity and Capital Needs: Management anticipates liquidity pressure in Q2 2008 due to seasonal working capital needs, a $36 million turnaround at the Port Neches facility, and a $43.5 million equity contribution to a joint venture in Saudi Arabia. Total 2008 capital expenditure guidance is approximately $440 million.
• Legal and Environmental: Significant contingencies include ongoing MTBE groundwater contamination litigation, antitrust suits regarding polyols pricing, and insurance disputes related to the 2006 Port Arthur plant fire. The company has accrued $7.2 million for environmental liabilities but notes potential for material costs if indemnities fail.
• Segment Performance: While Polyurethanes EBITDA grew 11%, EBITDA in Materials and Effects, Performance Products, and Pigments declined significantly (32%, 26%, and 56% respectively) due to margin compression from input costs.

Investor Verification Checklist

• Merger Status: Verify the current status of regulatory approvals for the Hexion merger and the likelihood of closing before the July 4, 2008 deadline.
• Working Capital Trends: Monitor inventory levels and accounts receivable, as inventory increased by $195.8 million ($13%) quarter-over-quarter, impacting cash flow.
• Debt Covenants: Confirm continued compliance with financial covenants in the Senior Credit Facilities, particularly given the increase in current portion of long-term debt to $234.0 million.
• Insurance Recoveries: Track the resolution of the Port Arthur fire insurance claim, where $137.1 million in deferred gains remains pending final settlement.
• Raw Material Costs: Assess the sustainability of margin recovery given the volatility in energy and raw material prices impacting the Performance Products and Pigments segments.