Huntsman Corporation — Form 10-Q Summary
Period: The filing covers the quarter and nine months ended September 30, 2018, and was signed October 30, 2018. The request metadata says “2017 Q3,” but the filing itself is for 2018 Q3. Huntsman International LLC, Huntsman Corporation’s wholly owned principal operating subsidiary, is also a registrant. Unless indicated otherwise, financial amounts below are Huntsman Corporation consolidated amounts and dollars are in millions.
Business context and results
Huntsman manufactures differentiated and commodity chemical products and reports four continuing segments: Polyurethanes, Performance Products, Advanced Materials and Textile Effects. Venator, formerly the Titanium Dioxide and Performance Additives business, is reported as discontinued operations and held for sale. Results for 2017 are presented on the same discontinued-operations basis.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,444 | $2,169 | $7,143 | $6,155 |
| Gross profit | $524 | $472 | $1,619 | $1,298 |
| Gross margin | 21.4% | 21.8% | 22.7% | 21.1% |
| Operating income | $267 | $221 | $862 | $590 |
| Operating margin | 10.9% | 10.2% | 12.1% | 9.6% |
| Income from continuing operations | $229 | $116 | $754 | $353 |
| Net income (loss) | $(8) | $179 | $965 | $454 |
| Net income (loss) attributable to Huntsman Corporation | $(11) | $147 | $677 | $390 |
| Basic EPS attributable to Huntsman Corporation | $(0.05) | $0.62 | $2.83 | $1.64 |
| Adjusted EBITDA | $374 | $340 | $1,194 | $899 |
Cash flow, debt and liquidity
- For the first nine months, operating cash flow from continuing operations was $634, versus $538 in 2017. Cash flow from all operations, including discontinued operations, was $934, versus $743.
- Continuing-operations capital expenditures were $180, compared with $159. Management-defined free cash flow from continuing operations was $456, versus $404; the company cautions that free cash flow is a non-GAAP measure and is not necessarily fully available for discretionary spending.
- At September 30, cash and cash equivalents were $446. Reported debt was $2,477, including $200 current and $2,277 long-term. The balance sheet separately classifies $744 of long-term debt within liabilities held for sale.
- Huntsman reported $1,529 of cash and unused borrowing capacity: $446 cash and restricted cash, $1,016 available under its $1.2 billion revolving credit facility and $67 available under receivables programs. The new revolver matures in May 2023; $175 was drawn at quarter-end.
- Working capital was $2,915, up $201 from December 2017 as reported, or up $163 after excluding acquisition effects. Inventory and receivables increased, while current debt rose $160, primarily because of acquisition-related revolver borrowings expected to be repaid within 12 months.
Material changes and management commentary
- Q3 revenue rose 13%; management attributed growth to higher selling prices across segments and higher volumes in all segments except Textile Effects. Gross profit increased 11% and operating income 21% year over year.
- For the first nine months, revenue rose 16%, gross profit 25%, operating income 46% and adjusted EBITDA 33%. Management cited higher prices and volumes, improved margins, lower interest expense following prior-year term-loan repayments, and increased income from the Sinopec PO/MTBE joint venture.
- Q3 continuing-operations earnings improved, but the company reported a consolidated net loss because discontinued operations included a $270 after-tax valuation allowance to reduce its retained Venator investment to estimated fair value less costs to sell. Q3 discontinued operations recorded a $237 net loss after tax, versus $63 income a year earlier.
- Huntsman acquired Demilec, a North American spray polyurethane foam business, on April 23, 2018 for a net $353 in cash. It was integrated into Polyurethanes; its results since acquisition included $85 revenue and $3 net income. The purchase-price allocation remains preliminary.
- At September 30, Huntsman retained approximately 53% of Venator and said it was actively marketing the stake at a reasonable price. Proceeds were expected to support debt repayment, acquisitions, share repurchases and other corporate purposes.
- Segment adjusted EBITDA in Q3: Polyurethanes $247 (up 1%), Performance Products $93 (up 48%), Advanced Materials $56 (flat), Textile Effects $25 (up 32%). Performance Products benefited from pricing, volumes and comparison with prior-year hurricane outages; Polyurethanes faced lower component MDI margins; Textile Effects was affected by China supply constraints and lower volumes.
Outlook, risks and unusual items
- Management expected 2018 capital expenditures of $300–$320 and an adjusted effective tax rate of 19%–21%; its stated long-term adjusted effective tax rate was approximately 23%–25%. These are management estimates, not guarantees.
- Outlook called for stable downstream margins and differentiated growth in Polyurethanes, but noted seasonality, customer destocking, lower component polymeric MDI margins and breakeven MTBE margins. Other stated factors included Performance Products derivative growth and seasonality; Advanced Materials specialty growth and destocking; and Textile Effects specialty growth, China raw-material disruption and price increases intended to offset raw-material headwinds.
- Management expected approximately $23 of additional pension and postretirement contributions during the remainder of 2018. It also estimated cash taxes related to Venator dispositions of approximately $185 in total, with $35 paid in 2017, $15 in 2018 and the remaining $135 spread over seven years.
- Interest-rate, foreign-exchange and commodity-price exposures remain. The company had $138 notional of forward foreign-currency contracts and stated that it does not fully hedge currency exposures. The revolver has a leverage covenant; receivables programs have performance tests that, if breached, could trigger termination, repayment and a related revolver default. Huntsman said it was in compliance with material debt covenants.
- Environmental remediation obligations and other legal proceedings remain. Environmental reserves were $6 at quarter-end; the company said additional remediation losses could exceed accruals but could not estimate the potential excess. A North Maybe Canyon Mine liability could not be reasonably estimated. Huntsman also described ongoing arbitration in its Rockwood dispute related to technology used at a Venator facility, and disputed bank indemnification demands in litigation involving former shareholders.
- Other notable items included a new $1.2 billion unsecured revolver, $175 of share repurchases in the first nine months, and an increase in the quarterly dividend from $0.125 to $0.1625 per share. The filing says disclosure controls were effective as of September 30, 2018.
Important facts for investors to verify
- Confirm the period: the supplied metadata says 2017 Q3, but this filing reports Q3 2018.
- Review the basis and valuation assumptions for the $270 after-tax Venator write-down, the expected timing and proceeds of the planned stake sale, and related tax consequences.
- Reconcile continuing-operations earnings and cash generation with discontinued operations, held-for-sale assets and liabilities, and Huntsman’s reported total debt and liquidity figures.
- Assess the Demilec acquisition’s final purchase-price allocation, integration costs and contribution to segment performance.
- Monitor working-capital needs, current debt repayment, revolver and receivables-program availability, covenant compliance, capital spending and planned pension contributions.
- Consider the sensitivity of guidance to chemical pricing and margins, customer destocking, China supply constraints, foreign exchange, raw-material costs, tax developments and environmental or legal outcomes.