Huntsman Corporation — Form 10-Q Summary
Period discrepancy: The request metadata says 2016 Q1, but the supplied filing is for the quarter ended March 31, 2017, with comparison to Q1 2016. The figures below describe the filing provided. Huntsman International LLC is Huntsman Corporation’s wholly owned principal operating subsidiary; amounts are consolidated and in U.S. dollars unless noted.
Business context and reporting period
Huntsman is a global chemicals manufacturer operating five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. Its products serve a broad range of industrial and consumer markets. The filing is an unaudited quarterly report.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 or prior period |
|---|---|---|
| Revenue | $2.469 billion | $2.355 billion; up 5% |
| Gross profit / margin | $466 million / 18.9% | $416 million / 17.7% |
| Operating income / margin | $162 million / 6.6% | $138 million / 5.9% |
| Net income attributable to Huntsman Corporation | $76 million; $0.32 basic and $0.31 diluted EPS | $56 million; $0.24 basic and diluted EPS |
| Adjusted EBITDA | $329 million | $274 million; up 20% |
| Operating cash flow | $93 million | $88 million |
| Capital expenditures | $74 million | $99 million |
| Cash and restricted cash | $469 million | $425 million at Dec. 31, 2016 |
| Total debt, excluding affiliate debt | $4.222 billion | $4.195 billion at Dec. 31, 2016 |
| Working capital | $1.980 billion | $1.777 billion at Dec. 31, 2016 |
Net cash used in investing activities was $24 million, including $54 million in Pori fire insurance proceeds; net cash used in financing was $31 million. Management-reported free cash flow was $82 million, versus cash use of $13 million in Q1 2016. Its non-GAAP calculation excludes acquisition/disposition activity and includes non-recurring separation costs; the 2017 result also benefited from the insurance proceeds. The quarterly dividend was $0.125 per share.
Material changes versus Q1 2016
- Revenue increased 5%, mainly on higher selling prices in Polyurethanes, Performance Products, and Pigments and Additives, and higher Textile Effects volumes. Gross profit rose 12%.
- Adjusted EBITDA increased to $329 million from $274 million. Pigments and Additives EBITDA rose to $69 million from $15 million, while Polyurethanes increased to $144 million from $131 million. Performance Products declined to $84 million from $92 million; Advanced Materials declined to $54 million from $60 million.
- Reported net income attributable to Huntsman Corporation rose $20 million. Restructuring, impairment, and plant-closing costs increased to $36 million from $13 million; $9 million of business-separation expense was also recorded.
- Inventory increased $142 million from year-end, which management attributed primarily to seasonal volume and higher raw-material costs. Working capital increased $203 million.
Outlook, management commentary, risks, and unusual items
- Outlook: Management cited favorable MDI supply and demand, improving overall Performance Products margins, stable aerospace demand and improving price/mix in Advanced Materials, above-GDP growth in Textile Effects, and higher TiO2 selling prices. Planned maintenance was expected at Rotterdam in the first half and in ethylene oxide in the second half of 2017.
- Spending and tax: 2017 capital expenditures were projected at approximately $380 million, net of reimbursements. Management expected a full-year 2017 adjusted effective tax rate of 25%–30% and a long-term rate of approximately 30%. It expected about $90 million of prior-year tax refunds in Q2 2017.
- Pigments and Additives separation: Huntsman intended to pursue an IPO, while retaining the option of a tax-free spin depending on market conditions; separation was targeted for summer 2017. Management expected about $40 million of additional separation expense and approximately $100 million of total 2017 non-recurring separation costs.
- Pori fire: The January 2017 fire left the Finnish TiO2 facility not fully operational. The company recorded a $32 million asset and inventory loss, $4 million of cleanup costs, and $32 million of insurance-recovery income; $22 million of received proceeds was deferred for costs not yet incurred. Management expected phased restarts—about 20% capacity in Q2 2017, 40% in Q2 2018, and full capacity near year-end 2018. Insurance has a $500 million limit, subject to a $15 million property-damage deductible and a 60-day business-interruption deductible.
- Restructuring and facilities: Huntsman announced closure of the remaining Calais, France TiO2 operations, recording $22 million of related Q1 charges and expecting approximately $41 million of additional charges through 2021. It also reported other restructuring initiatives and expected additional charges in certain programs. A separate Augusta, Georgia iron-oxide-pigment facility was performing below expected specifications and capacity; Huntsman filed suit alleging fraud and breach of contract against Rockwood and others.
- Liquidity and debt: At March 31, 2017, management reported $1.292 billion of cash and unused borrowing capacity, including $634 million available under the revolving facility and $189 million under receivables programs. The revolving facility had no borrowings outstanding. On April 25, after quarter-end, Huntsman prepaid $100 million of term loan debt. Receivables facilities were amended April 21 to extend scheduled termination to April 2020; the European facility’s maximum availability was reduced from €225 million to €150 million.
- Contingencies: A customer product-delivery claim was estimated at €113 million (about $122 million); Huntsman estimated possible loss at €0–€113 million, made no accrual, and said insurance may cover liability above $10 million. An indirect-purchaser TiO2 antitrust matter remained under settlement discussions; the company did not expect the remaining TiO2 antitrust claims to be material in aggregate. Environmental liabilities accrued were $35 million; potential excess remediation costs could not be estimated. The filing also describes an unresolved Port Neches flaring matter and other proceedings.
- Management said it believed the company was in compliance with material debt covenants. It cautioned that covenant breaches or receivables-program performance failures could restrict liquidity or trigger debt repayment. Foreign-exchange, interest-rate, commodity, operational, regulatory, and market risks remain relevant; forward-looking statements are subject to the risks described in the filing and its 2016 Form 10-K.
Most important facts an investor should verify
- Confirm the intended reporting period: the supplied filing is Q1 2017, not Q1 2016.
- Track Pori repair progress, insurance advances and recoveries, production capacity, and the resulting TiO2 volumes and earnings effects.
- Verify the timing, financing, separation costs, and debt/cash distribution associated with the proposed Pigments and Additives IPO or spin.
- Monitor cash conversion and working-capital needs, particularly inventory growth, planned capital spending, pension contributions, and the impact of insurance receipts on reported free cash flow.
- Assess debt maturities, facility availability after the receivables amendments, covenant headroom, and the effect of the post-quarter $100 million prepayment.
- Follow restructuring charges and expected savings, including the Calais closure and the underperforming Augusta facility and related litigation.
- Reassess the product-delivery claim, environmental exposures, and outstanding legal proceedings as new estimates or outcomes become available.