HUN

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2006, for Huntsman Corporation and its principal operating subsidiary, Huntsman International LLC. Huntsman is a global manufacturer of differentiated, inorganic, and commodity chemical products, organized into six segments: Polyurethanes, Materials and Effects, Performance Products, Pigments, Polymers, and Base Chemicals. The company operates approximately 75 facilities in 24 countries and employs roughly 15,000 associates.

Key corporate developments during the period included the acquisition of Ciba's global textile effects business (June 2006), the sale of the U.S. butadiene and MTBE business (June 2006), and the sale of the European base chemicals and polymers business to SABIC (December 2006). In February 2007, the company announced an agreement to sell its U.S. base chemicals and polymers business to Flint Hills Resources.

Key Financial Metrics (Year Ended Dec 31, 2006)

Note: Net income includes an extraordinary gain of $55.9 million from the Textile Effects Acquisition and a loss from discontinued operations of $219.7 million.

Material Changes vs. Prior Period

• Profitability Turnaround: The company returned to profitability with $229.8 million in net income, compared to a net loss of $34.6 million in 2005. This improvement was driven by a significant reduction in restructuring costs ($20.0 million vs. $114.1 million in 2005) and a decrease in losses on early extinguishment of debt ($27.1 million vs. $322.5 million in 2005).
• Revenue Stability: Total revenues remained relatively flat, decreasing slightly by 0.5% to $10.6 billion. This was due to lower volumes in Performance Products, Pigments, Polymers, and Base Chemicals, offset by higher volumes in Polyurethanes and Materials and Effects (driven by the Textile Effects acquisition) and increased selling prices across most segments.
• Segment Performance:
  • Base Chemicals: EBITDA collapsed by 95% to $11.9 million, primarily due to a major fire at the Port Arthur, Texas facility in April 2006, which caused significant lost sales volumes and lower margins.
  • Performance Products: EBITDA increased 26% to $207.8 million, driven by profitable growth in specialties and lower restructuring costs.
  • Materials and Effects: Revenues surged 46% due to the Textile Effects acquisition, though EBITDA remained flat at $153.2 million due to higher manufacturing costs and operating expenses.
• Debt Reduction: Total debt decreased by approximately $812 million to $3.6 billion, aided by proceeds from asset sales (European base chemicals and U.S. butadiene/MTBE) and operating cash flows.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates higher earnings in the differentiated segments (Polyurethanes, Materials and Effects, Performance Products) for the first quarter of 2007 and the full year 2007 compared to 2006, citing improved demand and selling prices alongside lower interest expense. The outlook for the Pigments segment is "guardedly optimistic" pending the spring paint season.
• Unusual Items:
  • Port Arthur Fire: A major fire in April 2006 damaged the olefins manufacturing plant. The facility was expected to restart in Q3 2007. The company estimated a $166 million negative impact on 2006 EBITDA from lost volumes and damage.
  • Discontinued Operations: The sale of the European base chemicals and polymers business resulted in a $301.8 million loss on disposal included in discontinued operations.
  • Extraordinary Gain: A $55.9 million gain was recorded from the Textile Effects Acquisition, representing the fair value of net assets acquired in excess of the purchase price.
• Risks and Contingencies:
  • Internal Control Weakness: The company disclosed a material weakness in internal controls related to the accounting for complex, non-routine transactions, specifically regarding the impairment calculation for the European base chemicals sale. This led to a restatement of Q3 2006 results.
  • MTBE Litigation: The company faces potential environmental liability and litigation regarding MTBE, a gasoline additive, though no accruals were made for unasserted claims.
  • Raw Material Volatility: Profitability remains sensitive to the cyclical and volatile prices of crude oil and natural gas-based feedstocks.

Key Facts for Investor Verification

• Internal Control Restatement: Verify the details of the $99 million impairment charge restatement related to the European base chemicals sale and the status of remediation efforts for the identified material weakness in internal controls.
• Port Arthur Restart: Monitor the timeline and cost for the restart of the Port Arthur, Texas olefins facility, as delays could further impact the Base Chemicals segment and the pending sale to Flint Hills Resources.
• Pending U.S. Petrochemicals Sale: Confirm the closing of the $761 million sale of the U.S. base chemicals and polymers business to Flint Hills Resources, which is contingent on the Port Arthur restart and regulatory approvals.
• Debt Refinancing: Track the execution of the refinancing of the remaining 2009 Subordinated Notes with new 2014 notes, intended to reduce annual interest expense by approximately $5 million.
• Dividend Initiation: Note the initiation of a quarterly cash dividend of $0.10 per share, payable March 30, 2007, marking the first dividend in the company's history.