Huntsman CORP quarterly report, Q2 FY2019

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Huntsman Corporation — Form 10-Q Summary

Period note: The supplied filing is for the quarter ended June 30, 2020, not 2019 Q2. Figures are in U.S. dollars; financial statements cover Huntsman Corporation and its principal operating subsidiary, Huntsman International LLC.

Business context and reporting period

Huntsman is a global differentiated-chemicals manufacturer operating in Polyurethanes, Performance Products, Advanced Materials and Textile Effects. The Chemical Intermediates Businesses were sold to Indorama in January 2020 and are presented as discontinued operations; prior periods were recast accordingly.

Financial performance and liquidity

  • Second quarter: Revenue was $1.247 billion, down 30% from $1.784 billion. Gross profit was $162 million versus $373 million; gross margin was approximately 13.0%, down from 20.9%. Operating loss was $69 million versus operating income of $152 million. Net loss attributable to Huntsman Corporation was $62 million, or $0.28 per diluted share, compared with net income of $110 million, or $0.47 per diluted share. Adjusted EBITDA was $54 million versus $245 million.
  • First half: Revenue was $2.840 billion, down 18%. Operating loss was $15 million versus income of $267 million; continuing-operations loss attributable to Huntsman was $139 million versus income of $171 million. Net income attributable to Huntsman was $643 million, or $2.90 per diluted share, primarily reflecting discontinued-operations income that included the sale gain. Adjusted EBITDA was $219 million versus $449 million; adjusted net income was $35 million versus $193 million.
  • Segment adjusted EBITDA, Q2: Polyurethanes $31 million (down 80%); Performance Products $29 million (down 31%); Advanced Materials $30 million (down 45%); Textile Effects a loss of $4 million versus income of $28 million.
  • Cash flow: First-half cash from continuing operating activities was $45 million, versus $177 million. Free cash flow from continuing operations was negative $71 million versus positive $59 million. Total operating cash flow was $5 million versus $273 million, including discontinued operations. Investing activities included $1.915 billion of sale proceeds and $652 million for acquisitions; capital expenditures were $116 million.
  • Balance sheet at June 30: Cash and cash equivalents were $1.254 billion, total debt $2.177 billion (including $650 million current), and total equity $3.324 billion. Cash plus unused revolving-credit and receivables-program capacity was $2.566 billion. The $1.2 billion revolving facility had no borrowings outstanding; the company reported compliance with debt covenants.
  • Working capital: $1.077 billion, down $772 million from year-end after adjusting for acquisitions, with the comparison affected by the sale of businesses held for sale at year-end. The current-debt balance rose largely because $499 million of 2021 Senior Notes became current.

Material changes and unusual items

  • COVID-19-related demand declines materially reduced Q2 revenue and margins. Management said demand improved during the quarter in most core markets but remained well below the prior year; manufacturing continued without significant supply interruptions as of June 30.
  • The January sale of Chemical Intermediates Businesses generated a reported $748 million after-tax gain in the first half. Huntsman received $1.915 billion in proceeds and expected to pay approximately $365 million of additional sale-related taxes in the second half of 2020.
  • Huntsman acquired Icynene-Lapolla for $353 million in February and CVC Thermoset Specialties for $306 million in May, funding both from available liquidity. Acquisition accounting allocations were preliminary. CVC was integrated into Advanced Materials and Icynene-Lapolla into Polyurethanes.
  • The Venator investment fair-value adjustment was a $106 million loss in the first half, versus a $58 million gain in the prior-year period. This noncash, market-sensitive item affected reported continuing results.
  • Q2 restructuring, impairment and plant-closing costs were $19 million; first-half costs were $22 million. A July-approved Polyurethanes footprint plan was expected to incur a further $23 million to $31 million through 2021.
  • Share repurchases were suspended after Q1 to preserve liquidity; $96 million was spent on repurchases during Q1. The quarterly dividend remained $0.1625 per share.

Outlook, risks and contingencies

  • For Q3 2020, management expected Polyurethanes adjusted EBITDA to decline about 30% year over year; Performance Products EBITDA to be lower year over year but relatively flat sequentially; and Advanced Materials EBITDA to be lower year over year and sequentially. Textile Effects was expected to generate positive adjusted EBITDA. Management cited improving trends in some automotive, China, spray-foam, amines and maleic-anhydride markets, with aerospace weakness and depressed volumes continuing.
  • Management forecast 2020 capital expenditures of approximately $225 million to $235 million, after reducing discretionary spending and deferring part of the Geismar MDI splitter project. It expected an adjusted effective tax rate of about 20% for 2020 and a forward adjusted rate of 22% to 24%.
  • Management said cash, operating cash generation and available facilities should cover anticipated COVID-19 effects for the foreseeable future, but warned that the pandemic’s duration and economic effects were uncertain and adverse impacts could continue.
  • Near-term funding items include the $499 million 2021 Senior Notes, the $103 million term loan due September 2020, and expected pension contributions of approximately $41 million in the second half. Management intended to renew, repay or extend most short-term facilities within 12 months.
  • Environmental liabilities accrued were $4 million. Huntsman noted potential remediation exposure beyond recorded reserves could not be estimated; it was unable to reasonably estimate potential liability at the North Maybe Canyon Mine site. It reported no material developments in previously disclosed legal proceedings and did not expect other disclosed matters to materially affect financial condition, results or liquidity.

Most important facts for investors to verify

  • Whether COVID-19 market recovery and segment trends matched the Q3 outlook, especially Polyurethanes margins and Textile Effects volumes.
  • Cash conversion and free cash flow in subsequent periods, alongside the expected $365 million sale-related tax payment and planned capital and pension spending.
  • Refinancing or repayment of the 2020 term loan and 2021 Senior Notes, and continued covenant compliance.
  • Final purchase-price allocations, integration costs and realized synergies from the Icynene-Lapolla and CVC acquisitions.
  • Whether further COVID-19 effects trigger goodwill or long-lived-asset impairments, and whether environmental or other contingencies exceed recorded amounts.
  • The contribution of the Chemical Intermediates sale gain and Venator fair-value movements when assessing recurring earnings; first-half reported net income was not representative of continuing operating performance.