Business context and reporting period
This is Huntsman Corporation and Huntsman International LLC’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015, not 2014 as specified in the request metadata. Huntsman is a global chemicals manufacturer operating in Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. Huntsman International is the wholly owned principal operating subsidiary. Amounts below are in U.S. dollars; financial results primarily refer to Huntsman Corporation unless noted.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2,740 million | $2,988 million | $5,329 million | $5,743 million |
| Gross profit | $549 million | $505 million | $999 million | $955 million |
| Operating income | $146 million | $216 million | $223 million | $366 million |
| Net income attributable to Huntsman Corporation | $29 million | $119 million | $34 million | $173 million |
| GAAP diluted EPS | $0.12 | $0.48 | $0.14 | $0.71 |
| Adjusted EBITDA | $385 million | $363 million | $670 million | $692 million |
| Adjusted net income | $155 million | $145 million | $253 million | $250 million |
Gross margin was approximately 20.0% in Q2 2015 versus 16.9% a year earlier; operating margin was approximately 5.3% versus 7.2%. For the first half, gross margin was approximately 18.7% versus 16.6%, while operating margin was approximately 4.2% versus 6.4%. Adjusted measures are non-GAAP and should be considered alongside GAAP results.
- Q2 revenue declined 8% year over year; first-half revenue declined 7%. Management cited lower sales volumes across segments, lower local-currency selling prices in most segments, and adverse foreign-exchange translation.
- Q2 gross profit improved despite lower sales, reflecting higher gross margins in Performance Products, Advanced Materials, and Pigments and Additives. Operating income and GAAP earnings fell substantially, chiefly amid higher restructuring and impairment charges and debt-extinguishment losses.
- Six-month operating cash flow was $181 million, versus cash usage of $17 million in 2014. Investing cash outflow was $233 million, including $296 million of capital expenditures; financing cash outflow was $202 million. Cash and equivalents ended at $599 million, down from $860 million at year-end 2014.
- At June 30, current assets were $4.595 billion and current liabilities $2.122 billion; reported working capital was $2.473 billion. Total debt excluding affiliate debt was $5.047 billion, compared with $5.200 billion at year-end; Huntsman Corporation separately reported $7 million of affiliate notes payable. Huntsman International reported $902 million of affiliate notes payable, including $100 million current.
- Reported combined liquidity was $1.418 billion: $608 million cash and restricted cash, $609 million revolving-facility availability, and $201 million A/R-program availability. The $625 million revolving facility had no borrowings outstanding, though letters of credit and guarantees were outstanding.
Material changes and segment results
- Pigments and Additives revenue rose to $592 million in Q2 from $340 million, primarily reflecting the Rockwood acquisition completed in October 2014. Its segment EBITDA was a loss of $64 million, versus income of $12 million, amid weak titanium dioxide conditions and substantial restructuring charges.
- Polyurethanes Q2 revenue fell 24% and segment EBITDA fell to $134 million from $186 million. The Port Neches PO/MTBE maintenance outage and delayed restart reduced estimated EBITDA by about $35 million in Q2 and $95 million in the first half (the segment discussion separately estimates about $30 million and $90 million, respectively).
- Performance Products Q2 segment EBITDA rose 17% to $137 million, supported by stronger margins in amines and upstream intermediates. Advanced Materials and Textile Effects EBITDA were slightly lower in Q2, although both improved for the first half.
- Company-wide restructuring, impairment, and plant-closing costs were $114 million in Q2 and $207 million in the first half, compared with $13 million and $52 million, respectively, in 2014. The Calais, France titanium dioxide capacity plan included $73 million of accelerated depreciation in the first half.
- Huntsman issued €300 million of 4.25% senior notes due 2025 and used proceeds to redeem $289 million principal of 8.625% subordinated notes. It recorded a $20 million Q2 and $23 million first-half loss on early debt extinguishment. Approximately $195 million principal of those subordinated notes remained; management said it intended to redeem them when permitted.
Outlook, risks, and contingencies
- Management expected 2015 capital expenditures, net of reimbursements, of approximately $625 million and a full-year adjusted effective tax rate of about 30%. It anticipated approximately $45 million of additional pension and postretirement contributions in the remainder of 2015 and up to approximately $65 million of additional restructuring and plant-closing costs.
- Management cited expected Pigments and Additives integration synergies of approximately $140 million and approximately $35 million of annual savings from the Calais capacity rationalization, with savings expected by mid-2016. It also noted weak titanium dioxide conditions, currency headwinds, slower Chinese demand in some markets, and benefits expected from growth projects.
- The filing reports a customer product-delivery claim with current asserted claims of approximately €113 million ($126 million); Huntsman estimated possible loss from zero to that amount, made no accrual, and stated it believed insurance would cover liability above $10 million, subject to uncertainty.
- Huntsman disclosed pending titanium dioxide antitrust opt-out and indirect-purchaser litigation. It had made no accrual because it could not reasonably estimate a loss range. The opt-out trial was scheduled for February 2016.
- Environmental exposures include accrued environmental liabilities of $56 million. The company noted possible additional costs, including at sites where indemnities may not fully protect it. It also could not estimate potential penalties or injunctive relief related to alleged Port Neches flaring violations.
- Management said it believed the company was in compliance with material debt covenants. A covenant breach or A/R-program performance failure could restrict borrowing or trigger repayment and cross-default consequences. Certain foreign cash is subject to legal or partner restrictions; cash repatriated as dividends could incur U.S. taxes.
Important facts for investors to verify
- Confirm the intended filing period: the supplied filing is for Q2 2015, not Q2 2014.
- Assess whether the Port Neches restart disruption and currency effects are temporary, and compare reported versus adjusted earnings and cash generation.
- Track Pigments and Additives performance, Rockwood integration, restructuring cash costs, and delivery of the stated savings and synergies.
- Review debt maturities, the proposed Term Loan B maturity extension, remaining subordinated-note redemption, covenant headroom, and actual available liquidity.
- Monitor outcomes and potential financial exposure from the product-delivery claim, antitrust litigation, and environmental matters; estimates and insurance or indemnity recoveries remain uncertain.