Business context and reporting period
This Form 10-Q covers the quarter and six months ended June 30, 2018; the request metadata says 2017 Q2, but the filing itself is for 2018 Q2. Huntsman is a global differentiated chemicals manufacturer operating in Polyurethanes, Performance Products, Advanced Materials and Textile Effects. Huntsman International LLC is its wholly owned principal operating subsidiary. Unless noted, figures are Huntsman Corporation consolidated and dollars are in millions.
Results from the former Titanium Dioxide and Performance Additives (P&A) business, now Venator, are reported as discontinued operations. Huntsman retained approximately 53% of Venator at quarter-end and classified related assets and liabilities as held for sale.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,404 | $2,054 | $4,699 | $3,986 |
| Gross profit | $555 | $436 | $1,095 | $826 |
| Operating income | $299 | $207 | $595 | $369 |
| Adjusted EBITDA | $415 | $299 | $820 | $559 |
| Income from continuing operations | $289 | $138 | $525 | $237 |
| Income from discontinued operations, net of tax | $334 | $45 | $448 | $38 |
| Net income attributable to Huntsman Corporation | $414 | $167 | $688 | $243 |
| Diluted earnings per share | $1.71 | $0.69 | $2.82 | $1.00 |
| Operating cash flow from continuing operations | Not stated separately for quarter | Not stated separately for quarter | $339 | $277 |
Gross margin was approximately 23.1% in Q2 2018 versus 21.2% in Q2 2017; operating margin was approximately 12.4% versus 10.1%. Q2 adjusted EBITDA margin was approximately 17.3% versus 14.6%. These are calculated from reported figures.
For the six months, total operating cash flow was $640 million, including $301 million from discontinued operations. Investing cash use was $641 million, including the Demilec acquisition; financing provided $64 million. Continuing-operations free cash flow, as defined by management, was $230 million versus $177 million.
At June 30, cash and cash equivalents were $408 million and restricted cash was $1 million. Total debt was $2.566 billion, including $255 million current and $2.311 billion long-term. Working capital was $3.078 billion, including substantial Venator held-for-sale balances. Reported combined liquidity was $1.459 billion: $409 million cash and restricted cash, $966 million available under the revolving facility, and $84 million under receivables programs. Huntsman International separately reports $727 million of notes payable to its parent; this is intercompany debt, not additional consolidated Huntsman Corporation debt.
Quarterly common dividends increased to $0.1625 per share from $0.125 a year earlier. Huntsman repurchased about $138 million of shares in the first half. The board authorized up to an additional $950 million of repurchases, alongside $50 million remaining under the earlier authorization.
Material changes versus the prior comparable periods
- Q2 revenue rose 17%, while operating income increased 44% and adjusted EBITDA increased 39%. Management attributed higher revenue mainly to higher selling prices and sales volumes; gross margins improved across all four segments.
- Polyurethanes was the principal continuing-operations growth driver: Q2 revenue rose 28% and adjusted EBITDA rose 61%, supported by stronger MDI and MTBE margins. Performance Products revenue increased 6%, but adjusted EBITDA fell 8%, partly due to lower volumes and a planned Port Neches maintenance outage.
- Q2 interest expense declined to $29 million from $47 million, primarily following term-loan repayments in the second half of 2017. Income from unconsolidated affiliates rose to $18 million from $3 million, including contribution from the Sinopec PO/MTBE joint venture, which began operations in 2017.
- Reported net income growth was amplified by discontinued operations: Q2 discontinued income was $334 million versus $45 million, reflecting Venator margin improvement and an insurance gain. It should not be treated as equivalent to continuing-business earnings.
- Continuing operating cash flow improved, but cash invested in operating assets and liabilities was a $123 million unfavorable year-over-year variance. Inventories rose, and accrued liabilities declined largely due to payments.
Outlook, commentary, risks and unusual items
- Management expected differentiated growth and stable margins in Polyurethanes, strong MDI supply-demand fundamentals, lower MTBE margins, and a contracting short-term component MDI price spike. It expected continued improvement in Performance Products derivatives and strong glycol conditions; consistent growth in Advanced Materials and Textile Effects, with raw-material cost headwinds.
- Management expected 2018 capital expenditures of approximately $325 million, a 2018 adjusted effective tax rate of 20%–22%, and a long-term adjusted effective tax rate of 23%–25%. These are management estimates, not guarantees.
- Tax items materially affected reported results: Huntsman released $95 million of valuation allowances in Switzerland and the U.K.; a provisional $49 million deemed-repatriation tax adjustment was recorded. Proposed Swiss tax-rate reductions could produce up to $35 million of noncash tax expense if enacted. Tax accounting under the U.S. Tax Reform Act remained incomplete.
- On April 23, Huntsman acquired Demilec for approximately $357 million, funded with borrowings. Demilec contributed $38 million revenue and a $2 million net loss from acquisition through June 30. Purchase-price allocation remained preliminary.
- A new $1.2 billion unsecured revolving facility, maturing May 2023, replaced the former $650 million secured facility. Huntsman had drawn $225 million at quarter-end. The facility has a leverage covenant; receivables programs have performance conditions that could trigger repayment or termination. Management said it was in compliance.
- Huntsman intended to monetize its retained Venator shares and use proceeds for debt repayment, acquisitions, repurchases and other corporate purposes. It estimated cash taxes related to completed Venator dispositions at approximately $185 million, with $135 million expected over the following seven years.
- Risks include potential tariffs and retaliatory trade restrictions affecting customer demand, costs and competition; exposure to foreign-exchange, interest-rate and commodity movements; environmental remediation obligations; and legal proceedings. Environmental liabilities accrued were $7 million, while the company could not estimate potential excess remediation losses. A lawsuit concerning the Augusta, Georgia Venator facility and disputed technology claims remained ongoing.
- Other notable items include a $3 million loss on early debt extinguishment and the first-half foreign-currency translation loss recorded in other comprehensive income. Management cautioned that interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Confirm the filing period: it is Q2 2018, despite the request metadata indicating 2017 Q2.
- Separate continuing operations from Venator and other discontinued operations when assessing earnings, margins and cash generation; verify the sustainability and cash character of Venator’s insurance gain and unusually high discontinued-operations income.
- Track Venator monetization timing, proceeds, tax consequences and the company’s use of proceeds, including its stated support for share repurchases.
- Monitor debt maturities, facility availability, receivables-program conditions and covenant compliance; distinguish consolidated debt from Huntsman International’s intercompany note payable.
- Assess whether segment outlook assumptions, especially MDI pricing, MTBE margins, raw-material costs and maintenance-related volume effects, are borne out.
- Check final Demilec purchase accounting and integration performance, and the effect of tax-law developments and valuation-allowance changes on future earnings and cash taxes.