Huntsman Corporation — Form 10-Q Summary
Period clarification: The request metadata identifies 2015 Q3, but the filing provided is for the quarter ended September 30, 2016, with comparisons to 2015. This summary covers the filing’s actual reporting period. Figures are in U.S. dollars; financial amounts are in millions unless noted. Huntsman International LLC is the wholly owned principal operating subsidiary and is also a registrant.
Business context and reporting period
Huntsman is a global chemicals manufacturer operating through Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. Its products serve a broad range of industrial and consumer end markets. The filing reports unaudited results for the three and nine months ended September 30, 2016.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2,363 | $2,638 | $7,262 | $7,967 |
| Gross profit | $398 | $473 | $1,271 | $1,472 |
| Operating income | $118 | $169 | $432 | $392 |
| Net income attributable to Huntsman Corporation | $55 | $55 | $198 | $89 |
| Adjusted EBITDA | $272 | $311 | $871 | $981 |
| Operating cash flow | Not separately provided | Not separately provided | $848 | $387 |
| Capital expenditures | Not separately provided | Not separately provided | $290 | $454 |
- Gross margin was approximately 16.8% in Q3 2016 versus 17.9% in Q3 2015; operating margin was approximately 5.0% versus 6.4%. These percentages are calculated from reported figures.
- Q3 diluted EPS was $0.23 versus $0.22. Nine-month diluted EPS was $0.83 versus $0.36. Nine-month adjusted net income was $305 versus $368; adjusted diluted EPS was $1.28 versus $1.49.
- Nine-month free cash flow, as defined by management and excluding M&A and disposition activity, was $569 versus a use of $1 in 2015. The filing attributes stronger operating cash flow in part to favorable working-capital movements, including inventory reductions.
- At September 30, cash and cash equivalents were $439; restricted cash was $11. Working capital was $1,994, compared with $1,917 at year-end 2015.
- Debt excluding affiliate debt was $4,556, down from $4,795 at December 31, 2015; Huntsman Corporation separately reported $1 of noncurrent affiliate notes payable. Huntsman International reported additional affiliate notes payable of $797. Its debt excluding affiliate debt was also $4,556.
- Reported available liquidity was $1,247: $450 of cash and restricted cash, $633 available under the Revolving Facility, and $164 available under receivables programs. There were no Revolving Facility borrowings; approximately $17 of letters of credit and guarantees were outstanding under it.
- Quarterly dividends were $0.125 per share. Interest expense was $52 in Q3 and $152 for the nine months.
Changes versus prior comparable periods
- Q3 revenue declined 10% year over year, primarily due to lower selling prices across segments and lower volumes in Polyurethanes, Performance Products, and Advanced Materials. Gross profit fell 16%, while adjusted EBITDA decreased 13% to $272.
- Despite lower Q3 operating income, Huntsman Corporation’s attributable net income was unchanged at $55, helped by a much lower income tax burden than in Q3 2015.
- For the first nine months, revenue fell 9% and gross profit fell 14%, but attributable net income rose to $198 from $89. Lower restructuring charges ($87 versus $221), lower debt-extinguishment losses ($3 versus $31), lower operating expenses, and lower tax expense contributed to the increase. Adjusted EBITDA declined 11%.
- Segment adjusted EBITDA in Q3 decreased in Polyurethanes ($137 versus $168) and Performance Products ($70 versus $122), was nearly flat in Advanced Materials ($55 versus $56), and increased in Textile Effects ($17 versus $10) and Pigments and Additives ($38 versus $5). Performance Products was the largest nine-month EBITDA decline, at $248 versus $384.
- Management reported Q3 production-outage impacts of approximately $15 in Polyurethanes and $10 in Performance Products. Nine-month Polyurethanes EBITDA benefited from approximately $90 of prior-year planned-outage comparison.
Outlook, management commentary, and material risks
- Management’s 2016 priorities were to generate more than $350 of free cash flow, grow margins and earnings in core downstream differentiated businesses, and separate the titanium dioxide business. It reported $569 of nine-month free cash flow under its definition and cited debt prepayments of $200 during the period.
- Management expected capital expenditures of approximately $450 in 2016 and $400 in 2017. It projected adjusted effective tax rates of approximately 25%–30% for 2016 and 2017, and approximately 30% long term, with U.S. earnings mix and MTBE results affecting variability.
- Management anticipated seasonal demand slowdowns in Q4 2016 in several segments, while citing MDI demand growth, improving MDI margins, increasing titanium dioxide selling prices, and continued improvement in Advanced Materials and Textile Effects. It also identified low MTBE margins, production outages, softer demand in China and oilfield applications, and competitive pricing as headwinds.
- The planned U.S. tax-free spin-off of Pigments and Additives and Textile Effects was targeted for the first half of 2017, subject to market conditions and multiple approvals and other conditions. SpinCo filed an initial Form 10 on October 28, 2016. Management expected spin-off-related costs and anticipated SpinCo financing, a cash distribution to Huntsman International, and assumption of certain debt by SpinCo.
- Huntsman agreed to sell European surfactant facilities to Innospec for an enterprise value of $225, subject to working-capital and other adjustments and closing conditions. Closing was expected by the end of Q4 2016; proceeds were intended for debt repayment. The business’s assets and liabilities were classified as held for sale.
- Management disclosed that the Augusta, Georgia iron oxide pigments facility was commissioning below expected specifications and quantities, with substantially lower expected production capacity than originally anticipated.
- Key contingencies include indirect-purchaser titanium dioxide antitrust litigation, for which no loss estimate or accrual was recorded; a customer product-delivery claim with a stated possible loss range of €0–€113 (approximately $0–$127), also without accrual; and environmental remediation exposures. Environmental liabilities accrued were $37, with potential excess losses not estimable. The Port Neches flaring matter’s potential penalty or relief was also not estimable.
- Debt covenant or receivables-program breaches could restrict liquidity or trigger repayment obligations. The filing states that the company believed it was in compliance with material debt covenants. Foreign exchange, interest-rate, commodity, production, and environmental risks remain relevant.
Most important facts for investors to verify
- Confirm the correct reporting period: the supplied filing is Q3 2016, not Q3 2015.
- Assess whether the $848 of operating cash flow and $569 of management-defined free cash flow are sustainable, given the contribution of working-capital movements.
- Track Performance Products margins and the effect of production outages, competitive conditions, and demand trends on adjusted EBITDA.
- Verify completion terms and net proceeds of the Innospec sale, and the timing, financing, tax treatment, costs, and debt allocation of the proposed spin-off.
- Monitor the Augusta facility’s operating performance, the disclosed legal and environmental contingencies, and liquidity and covenant headroom.