Huntsman Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The supplied filing is for 2017 Q2, not 2016 Q2. Amounts are in U.S. dollars; financial statements are unaudited. Huntsman Corporation and its wholly owned operating subsidiary, Huntsman International LLC, report substantially the same business results.
Business context
Huntsman is a global chemicals manufacturer operating five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. The company was pursuing a proposed merger with Clariant and a separation of Pigments and Additives into Venator.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2.616 billion | $2.544 billion | $5.085 billion | $4.899 billion |
| Gross profit | $521 million | $457 million | $987 million | $873 million |
| Operating income | $275 million | $176 million | $437 million | $314 million |
| Net income attributable to Huntsman Corporation | $167 million | $87 million | $243 million | $143 million |
| Diluted earnings per share | $0.69 | $0.36 | $1.00 | $0.60 |
| Adjusted EBITDA | $413 million | $325 million | $742 million | $599 million |
| Operating cash flow | Not separately provided | Not separately provided | $394 million | $443 million |
Q2 gross margin was approximately 19.9% versus 18.0% a year earlier; operating margin was approximately 10.5% versus 6.9%. Six-month adjusted EBITDA increased 24% year over year. Adjusted EBITDA and adjusted net income are non-GAAP measures as defined by the company.
- Cash flow and investment: First-half investing cash outflow was $83 million, including $147 million of capital expenditures; financing cash outflow was $224 million. Reported free cash flow was $333 million versus $269 million in 2016, using the company’s stated non-GAAP definition.
- Liquidity: Cash and cash equivalents were $509 million at June 30, up from $414 million at year-end 2016; restricted cash was $11 million. Huntsman reported $1.293 billion of combined cash and unused borrowing capacity, including $633 million available under its revolver and $140 million under receivables programs.
- Debt: Debt excluding affiliate notes was $4.116 billion, compared with $4.195 billion at year-end. Current debt was $44 million. The revolver had no borrowings outstanding; approximately $17 million of letters of credit and guarantees were outstanding. A $100 million early term-loan repayment was made in April, with another $100 million repayment disclosed as made July 26, after quarter-end.
- Dividends: Quarterly dividend was $0.125 per share. The company paid $60 million in common-stock dividends in the first half.
Material changes versus prior year
- Q2 revenue rose 3%; first-half revenue rose 4%, principally from higher selling prices in Polyurethanes, Performance Products, and Pigments and Additives.
- Q2 net income attributable to Huntsman rose $80 million, and first-half net income rose $100 million. Higher gross profit, lower operating expenses, and improved segment results contributed.
- Pigments and Additives adjusted EBITDA increased sharply, to $114 million in Q2 from $31 million, and $183 million for the half from $46 million. Higher TiO2 prices and restructuring savings were key factors; Pori insurance proceeds also affected reported results.
- Performance Products EBITDA improved, while Advanced Materials EBITDA declined. Polyurethanes Q2 EBITDA was lower year over year; first-half EBITDA was higher.
- Operating cash flow fell $49 million in the first half, mainly due to an unfavorable working-capital comparison, including increased receivables and inventory.
Outlook, significant events, and risks
- Management cited strong demand in key MDI markets, improving amines margins, positive specialty-business volume trends, and year-over-year growth above GDP in Textile Effects. It also flagged weak MTBE margins, lower upstream-intermediate margins, and planned third-quarter maintenance in Performance Products.
- For Pigments and Additives, management expected a favorable TiO2 pricing environment and aimed to capture one-half to three-quarters of announced third-quarter 2017 price increases. The Pori facility was expected to restart in phases: about 40% capacity in Q2 2018 and full capacity around year-end 2018.
- Management expected 2017 capital expenditures of approximately $380 million, net of reimbursements; a full-year adjusted effective tax rate of 20%–25%; and a long-term adjusted effective tax rate of 25%–28%.
- Pori fire: The January 2017 fire left the Finland TiO2 site not fully operational. First-half charges included $32 million for asset and inventory write-offs and $15 million for cleanup, offset in part by $84 million of recorded insurance recoveries. Huntsman reported $46 million of insurance proceeds received for costs not yet incurred as deferred income. Further insurer payments and repair costs remained relevant.
- Transactions: The proposed merger with Clariant, announced May 21, 2017, had an approximate $20 billion enterprise value and targeted completion near year-end, subject to shareholder and regulatory approvals and other conditions. Huntsman incurred $6 million in merger costs in the first half. The Venator separation was expected in Q3 2017; anticipated one-time separation costs were approximately $85 million, excluding financing and IPO costs. Venator expected up to $750 million of new debt.
- Contingencies: A customer product-delivery claim was estimated at up to €113 million (approximately $128 million); no accrual was recorded, and the company stated its possible loss range was €0–€113 million. Environmental liabilities accrued were $35 million. The company also disclosed an unresolved Port Neches flaring matter and other legal proceedings.
- Merger-related risk: Closing depended on multiple approvals and conditions. The filing described potential disruption, integration and synergy risks, possible transaction litigation, and potential termination fees of $60 million or $210 million in specified circumstances.
Important facts for investors to verify
- Whether the Clariant merger and Venator separation were completed, on what terms, and how they affected Huntsman’s continuing business, debt, and share ownership.
- How much of the Pori insurance claim was ultimately collected, the timing and cost of repairs, and the site’s actual operating capacity and lost-profit recovery.
- Whether working-capital investment, operating cash generation, and reported free cash flow remained sustainable after the first-half period.
- Debt levels and available liquidity after the disclosed term-loan repayments, Venator financing, and required debt repayment associated with the separation.
- Resolution or changes in the customer claim, environmental obligations, and other disclosed legal and regulatory matters.
- Whether the company achieved its stated 2017 capital-spending, tax-rate, pricing, and segment-performance expectations.