Huntsman Corporation — Q1 2014 Form 10-Q
Period note: The filing covers the quarter ended March 31, 2014, compared with Q1 2013; it is not a Q1 2013 filing. Huntsman Corporation and its wholly owned principal operating subsidiary, Huntsman International LLC, report the same core business results, with some differences in capital structure and presentation. Huntsman is a global chemicals manufacturer with five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. Figures below are in U.S. dollars unless noted.
Financial performance and position
- Revenue: $2.755 billion, up 2% from $2.702 billion. Gross profit rose 29% to $450 million; gross margin was approximately 16.3%, compared with 12.9%.
- Profit: Operating income was $150 million versus $50 million. Net income attributable to Huntsman Corporation was $54 million, or $0.22 per diluted share, compared with a $24 million loss, or $0.10 per share. Continuing-operations income attributable to Huntsman was $61 million versus a $22 million loss. Income tax expense was $36 million, versus a $20 million benefit in the prior-year quarter.
- EBITDA: Reported EBITDA was $261 million versus $112 million. Adjusted EBITDA, a non-GAAP measure, was $329 million versus $220 million; adjusted net income was $105 million versus $46 million. Management’s adjustments include restructuring costs, pension actuarial-loss amortization and other specified items.
- Cash flow: Operating cash flow was negative $67 million, compared with negative $74 million. Investing cash flow was negative $104 million, including $107 million of capital expenditures. Financing cash flow was negative $71 million. Cash and cash equivalents fell $243 million during the quarter to $277 million.
- Liquidity: Management reported $902 million of combined cash and unused borrowing capacity at March 31: $286 million cash and restricted cash, $383 million available under the revolving facility and $233 million available under receivables programs. Working capital was $2.013 billion, up $13 million from year-end.
- Debt: Debt excluding affiliate obligations was $3.891 billion, down from $3.910 billion at December 31, 2013; $270 million was current and $3.621 billion long term. Huntsman International separately reported $812 million in affiliate notes payable, including $100 million current. The revolving facility had no borrowings and approximately $17 million of letters of credit and bank guarantees outstanding.
- Margins and segment results: Segment EBITDA improved in Performance Products ($92 million versus $49 million), Advanced Materials ($41 million versus $3 million), Textile Effects ($8 million versus negative $27 million) and Pigments ($13 million versus $3 million). Polyurethanes declined to $158 million from $167 million. Corporate and other improved to a $44 million loss from an $80 million loss.
- Dividend: The company paid $30 million in common dividends, or $0.125 per share, matching the prior-year quarter.
Material changes versus Q1 2013
- Revenue increased $53 million, while lower cost of goods sold helped lift gross profit by $101 million. Management attributed the improvement to higher margins across all segments except Polyurethanes.
- Performance Products benefited from improved volumes and pricing and the absence of the prior-year period’s estimated $55 million impact from scheduled maintenance; results were partly offset by higher restructuring costs.
- Advanced Materials and Textile Effects reported substantially stronger segment EBITDA, reflecting improved margins and benefits from restructuring, despite lower Advanced Materials revenue.
- Operating results also benefited from the absence of the prior-year $35 million loss on early extinguishment of debt. Interest expense declined by $3 million.
- Working-capital use weighed on cash generation: receivables and inventories increased, with inventory levels raised ahead of planned second-quarter maintenance outages and in response to higher benzene costs.
Outlook, management commentary and notable risks
- Outlook: Management said Performance Products and MDI Polyurethanes remained core earnings drivers and expressed confidence in sustained long-term growth. It expected approximately $500 million of 2014 capital expenditures, excluding the planned Rockwood acquisition, and a full-year 2014 adjusted effective tax rate of approximately 35% (excluding that acquisition); the stated long-term effective tax rate was approximately 30%.
- Segment factors: Management cited strong U.S. and Asian MDI demand, improving amines volumes and margins, and improving Pigments volumes and selling prices. Risks or offsets included high Polyurethanes raw-material costs, a weak base liquid resin epoxy market, higher Textile Effects raw-material costs and a planned second-quarter Performance Products maintenance outage expected to reduce EBITDA by approximately $15 million.
- Acquisition: Huntsman planned to acquire Rockwood’s Performance Additives and Titanium Dioxide businesses for approximately $1.05 billion in cash, subject to adjustments, and assume certain unfunded pension liabilities estimated at $225 million as of June 30, 2013. Regulatory approvals and closing conditions remained outstanding. Financing commitments included a $1.2 billion term loan and a $200 million revolving-facility increase; commitments were due to expire September 17, 2014.
- Restructuring: Cost-reduction programs were expected to generate approximately $240 million of savings through early 2015. The company reported $123 million of accrued restructuring costs from continuing operations and expected up to approximately $33 million of additional restructuring and plant-closing costs. After quarter-end, Huntsman announced an agreement to sell its European commodity surfactants business to Wilmar and an intention to cease production at its Patrica, Italy facility by October 2014; the sale remained subject to closing conditions.
- Debt and liquidity risks: Arabian Amines, a consolidated 50%-owned joint venture, had $166 million outstanding and was not in compliance with certain financial covenants. Lenders had agreed to modifications, and Huntsman said discussions continued; the debt was classified as current. Huntsman stated that this noncompliance did not affect its other debt obligations. The company also identified covenant, receivables-program termination, refinancing and restrictions on transfers of cash from certain subsidiaries as liquidity risks.
- Contingencies: A customer product-delivery claim was then approximately €113 million; Huntsman estimated its possible loss range at €0–€113 million, with insurance believed to cover liability above $10 million, and recorded no accrual. The company disclosed unresolved titanium-dioxide antitrust claims for which it could not estimate a loss range and recorded no accrual. It also described asbestos matters, environmental remediation obligations and an EPA/DOJ matter concerning alleged flare-related violations at its Port Neches facility; potential outcomes for several matters could not be reliably estimated.
- Other unusual items: Restructuring, impairment and plant-closing costs were $39 million, versus $44 million. The company recorded $6 million of long-lived-asset impairment charges. It expected an additional $108 million of pension and postretirement contributions during the remainder of 2014, after contributing $28 million in the quarter.
Important facts for investors to verify
- Confirm progress, regulatory status, financing and final pension-liability assumptions for the Rockwood acquisition.
- Track whether the reported margin and adjusted EBITDA improvements persist, particularly in Polyurethanes and the restructuring-affected segments; review management’s non-GAAP reconciliations.
- Assess working-capital needs, cash conversion, planned $500 million capital spending, pension contributions and the effect of scheduled maintenance on liquidity.
- Monitor Arabian Amines’ covenant resolution and current-classified debt, as well as Huntsman’s compliance with its own financing and receivables-program covenants.
- Follow the Wilmar transaction and Patrica closure, and evaluate potential restructuring costs and realization of the stated savings.
- Review developments in the product-delivery claim, titanium-dioxide antitrust matters, environmental obligations and Port Neches enforcement matter, including whether estimates or accruals change.