Huntsman Corporation 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended September 30, 2008, for Huntsman Corporation and its principal operating subsidiary, Huntsman International LLC. Huntsman is a global manufacturer of differentiated organic and inorganic chemical products operating in six segments: Polyurethanes, Materials and Effects, Performance Products, Pigments, Polymers, and Base Chemicals. The company is currently engaged in a contentious merger agreement with Hexion Specialty Chemicals, Inc., which has not yet closed as of the filing date.
Key Financial Metrics (Nine Months Ended Sept 30, 2008)
| Metric | 2008 (9 Months) | 2007 (9 Months) |
|---|---|---|
| Total Revenues | $8,166.6 million | $7,146.9 million |
| Net Income (Loss) | $10.8 million | $(174.3) million |
| Operating Income | $283.8 million | $383.2 million |
| Gross Profit | $1,099.2 million | $1,179.3 million |
| EBITDA | $544.7 million | $272.5 million |
| Net Cash from Operating Activities | $46.3 million | $43.3 million |
| Total Debt | $3,958.0 million | $3,568.8 million |
| Cash and Cash Equivalents | $107.2 million | $154.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 14% year-over-year, driven primarily by higher average selling prices across all segments and increased sales volumes in the Polyurethanes segment. This was partially offset by lower volumes in Materials and Effects, Performance Products, and Pigments.
- Profitability: Despite revenue growth, gross profit decreased 7% due to sharply higher raw material and energy costs. Operating income declined 26% to $283.8 million.
- Merger Expenses: A significant driver of the improvement in net income compared to the prior year was the reduction in merger-related expenses. Expenses associated with the Merger dropped to $34.8 million in 2008 from $205.0 million in 2007 (which included a $200 million termination fee for a previous agreement with Basell).
- Discontinued Operations: The company recorded a net income of $4.6 million from discontinued operations in 2008, compared to a loss of $141.4 million in 2007. The 2007 loss was heavily impacted by a $228.9 million loss on the disposal of the North American polymers business.
- Debt and Liquidity: Total debt increased by approximately $389 million, primarily due to increased borrowings under the Revolving Facility to fund working capital. Working capital decreased by $277.3 million, driven by a $46.8 million decrease in cash and increases in accounts receivable and inventory.
Guidance, Outlook, and Risks
Merger Status and Litigation: The most critical factor affecting the company's outlook is the pending merger with Hexion. On October 28, 2008, the merger failed to close because the lenders (Credit Suisse and Deutsche Bank) refused to fund the transaction, citing that the solvency opinion provided did not meet the conditions of the Commitment Letter. Hexion has sued the lenders to enforce the commitment. Conversely, Huntsman is pursuing multi-billion dollar actions against Hexion and Apollo Management for tortious interference and breach of contract. A Delaware court ruled in September 2008 that Huntsman did not suffer a material adverse effect and that Hexion breached covenants, but the court could not order specific performance of the merger.
Capital Expenditures: The company expects to spend between $440 million and $450 million on capital projects in 2008. Significant spending includes the maleic anhydride expansion in Louisiana and the titanium dioxide facility expansion in the U.K.
Risks and Contingencies:
- Merger Failure: If the merger is not consummated, the company faces uncertainty regarding its capital structure, potential stock price decline, and the ability to recover damages from Hexion.
- Legal Proceedings: Significant litigation includes the Hexion/Apollo disputes, antitrust suits regarding MDI/TDI pricing, MTBE groundwater contamination claims, and asbestos exposure cases.
- Insurance Claims: The company is awaiting final settlement of insurance claims related to the April 2006 fire at its Port Arthur, Texas facility. While $325 million has been received in advances, an additional $275 million is claimed but disputed by reinsurers.
- Market Conditions: The company faces risks from the global credit crisis, which may hinder refinancing efforts, and cyclical economic downturns affecting demand for chemical products.
Key Facts for Investor Verification
- Merger Financing Status: Verify the current status of the litigation between Hexion and the lenders (Credit Suisse/Deutsche Bank) regarding the $325 million termination fee and the commitment letter funding.
- Insurance Recovery: Monitor the resolution of the Port Arthur fire insurance litigation, as the final settlement could significantly impact cash flows and earnings.
- Liquidity Position: Assess the company's ability to service its debt ($3.96 billion total) given the $107.2 million cash balance and the reliance on the Revolving Facility ($353.7 million drawn).
- Raw Material Costs: Track the impact of rising energy and raw material costs on gross margins, which have compressed despite price increases passed to customers.
- Antitrust Exposure: Review developments in the multidistrict antitrust litigation regarding price-fixing in the polyurethanes industry, as potential fines or damages could be material.