Huntsman Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended June 30, 2016, not 2015 Q2 as indicated in the request metadata. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise. Huntsman International LLC is the wholly owned principal operating company, and the filing presents both registrants.
Business context and reporting period
Huntsman is a global chemical manufacturer operating through five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to 2015.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2,544 | $2,740 | $4,899 | $5,329 |
| Gross profit | $457 | $549 | $873 | $999 |
| Operating income | $176 | $146 | $314 | $223 |
| Net income attributable to Huntsman Corporation | $87 | $29 | $143 | $34 |
| Adjusted EBITDA | $325 | $385 | $599 | $670 |
| Operating cash flow | Not separately stated | Not separately stated | $443 | $181 |
- Q2 gross margin was approximately 18.0%, versus 20.0% a year earlier; operating margin was approximately 6.9%, versus 5.3%.
- Q2 basic and diluted earnings per share were $0.37 and $0.36, respectively, compared with $0.12 each in Q2 2015. The quarterly dividend was $0.125 per share.
- First-half capital expenditures were $189, down from $296. Company-defined free cash flow was $269, compared with a $55 use of cash in the prior-year period.
- Cash and cash equivalents were $373 at June 30, up from $257 at year-end 2015; restricted cash was $10. Working capital was $2,102, up $185 from year-end.
- Reported debt excluding affiliate debt was $4,749, versus $4,795 at year-end 2015. Huntsman International reported total debt of $5,546 including $797 of notes payable to affiliates. The filing reported $1,213 of combined cash and unused borrowing capacity: $383 cash and restricted cash, $634 revolver availability, and $196 A/R-program availability.
Changes versus the prior comparable period
- Q2 revenue fell 7%; first-half revenue fell 8%. Management attributed the declines mainly to lower selling prices across segments and, for the first half, lower Advanced Materials volumes.
- Despite lower revenue and gross profit, reported operating income and net income increased. Restructuring and plant-closing costs fell to $29 in Q2 from $114, and to $42 in the first half from $207. Prior-year debt-redemption losses also made comparisons more favorable.
- Adjusted EBITDA declined 16% in Q2 and 11% in the first half, highlighting weaker underlying performance despite higher reported net income. Q2 segment results included Polyurethanes $171 (up from $159), Performance Products $86 (down from $141), Advanced Materials $58 (flat), Textile Effects $24 (up from $23), and Pigments and Additives $31 (down from $35).
- First-half operating cash flow improved substantially, reflecting higher operating income and a favorable working-capital variance. Inventory declined $170 from year-end; receivables increased $97.
Outlook, management commentary, risks and unusual items
- Management targeted more than $350 of free cash flow for full-year 2016, approximately $450 of capital expenditures, a 25%–30% adjusted effective tax rate for 2016, and approximately 30% over the long term. These are forward-looking estimates, not guarantees.
- Strategic priorities were cash generation, growth in margins and earnings in differentiated downstream businesses, and separation of the titanium dioxide business. Huntsman was exploring a potential Pigments and Additives spin-off, subject to market conditions and board approval.
- Management cited expected MDI demand growth and continued downstream differentiation; low MTBE margins; Performance Products optimization and growth projects; strong aerospace demand; seasonal moderation in Textile Effects in Q3; and expected TiO2 price increases alongside second-half seasonality.
- On April 1, Huntsman International issued a $550 term loan due 2023 to refinance existing loans and extended its $650 revolver’s stated maturity to 2021. The company said it was in compliance with material debt covenants. A $100 repayment of a term loan was made on July 22, after quarter-end.
- On July 29, a subsidiary agreed to terms for a proposed sale of European surfactant facilities and related assets to Innospec for $225 enterprise value, subject to closing conditions, approvals, and working-capital adjustments. The transaction was not completed as of the filing.
- Key risks include chemical-market pricing and demand, foreign-exchange exposure, debt covenant and receivables-facility termination risks, and environmental and regulatory obligations. The filing added uncertainty around Brexit and the proposed EU classification of titanium dioxide as potentially carcinogenic by inhalation.
- Contingencies include an indirect-purchaser TiO2 antitrust case for which Huntsman had made no accrual and could not estimate a loss range; a product-delivery claim with current customer claims of about €113 million, for which the company estimated a possible loss range of €0–€113 million and made no accrual; and environmental matters, including $38 of accrued environmental liabilities. The company noted additional losses could exceed recorded reserves.
Most important facts for investors to verify
- Whether adjusted EBITDA and segment margins stabilize, particularly in Performance Products and Pigments and Additives, given the decline in adjusted EBITDA despite higher GAAP net income.
- Whether the company achieves its more-than-$350 full-year free-cash-flow target while funding planned capital spending, pension contributions, dividends, and debt service.
- Debt maturities, covenant headroom, and actual availability under the revolver and receivables programs, including restrictions on cash held outside the U.S.
- Completion terms and net proceeds of the proposed $225 European surfactants asset sale, and progress on the potential Pigments and Additives separation.
- Developments in the TiO2 litigation, product-delivery claim, environmental remediation, and potential regulatory treatment of titanium dioxide.
- Effects of price, volume, raw-material-cost, currency, and Brexit-related changes on segment performance and cash generation.