Huntsman Corporation — 2016 Form 10-K
Period note: The supplied filing is the annual report for the fiscal year ended December 31, 2016, filed February 15, 2017. It is not a 2015 Q4 filing, as indicated in the request metadata. Financial figures below are consolidated Huntsman Corporation amounts unless stated otherwise; dollars are in millions except per-share data.
Business context and reporting period
Huntsman is a global chemicals manufacturer operating through five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. Its products serve industrial and consumer markets worldwide. Huntsman International LLC, a wholly owned subsidiary, is the principal operating company.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $9,657 | $10,299 |
| Gross profit / gross margin | $1,678 / 17.4% | $1,848 / 17.9% |
| Operating income / operating margin | $647 / 6.7% | $405 / 3.9% |
| Net income attributable to Huntsman Corporation | $326 | $93 |
| Diluted earnings per share | $1.36 | $0.38 |
| Adjusted EBITDA | $1,127 | $1,221 |
| Cash provided by operating activities | $1,088 | $575 |
| Capital expenditures | $421 | $663 |
| Free cash flow, as defined by management | $686 | $(30) |
| Cash and cash equivalents at year-end | $414 | $257 |
| Total debt at year-end | $4,196 | $4,796 |
Year-end working capital was $1,777, down from $1,917. Management reported combined cash and unused borrowing capacity of $1,208, including $628 available under the revolving facility and $155 under receivables programs. Debt to total capitalization was approximately 74%; about $2.2 billion of borrowings were variable-rate. A 1 percentage-point rise in interest rates would increase annual interest expense by approximately $22, before hedges or other offsets.
Material changes versus prior comparable period
- Revenue fell 6%, primarily from lower average selling prices across all segments and lower volumes in Performance Products and Advanced Materials. Gross profit decreased 9%.
- Adjusted EBITDA declined 8%. Performance Products EBITDA fell 31%, while Pigments and Additives increased to $130 from $61, supported by restructuring savings. Advanced Materials and Textile Effects EBITDA also improved modestly.
- Reported operating income and net income increased despite weaker revenue and adjusted EBITDA. Results included a $98 pretax gain on the European surfactants sale; restructuring costs fell to $81 from $302, while the sale gain was recorded in other operating income.
- Operating cash flow rose to $1,088, helped by improved operating results and a favorable $473 change in operating assets and liabilities versus 2015. Capital spending declined by $242.
- Total debt declined by $600. Huntsman refinanced term loans, extending $829 of maturities from 2021 to 2023, and repaid $260 on its 2015 Extended Term Loan B on December 30, partly using sale proceeds.
Outlook, management commentary, risks, and unusual items
- Management expected 2017 capital expenditures of approximately $400 and pension and postretirement contributions of approximately $116. It expected a 2017 adjusted effective tax rate slightly below its approximately 30% long-term rate; the 2016 adjusted rate was 22%.
- Segment outlook included improving MDI demand, but low MTBE margins and planned Rotterdam maintenance; recovery signs in amines and maleic anhydride, though margins remained below historical norms; and a strong aerospace market supporting Advanced Materials. Huntsman also expected increasing TiO2 selling prices.
- The proposed Pigments and Additives spin-off, Venator Materials Corporation, was targeted for Q2 2017 and remained conditional on regulatory, tax, financing, and other requirements. Huntsman said it would retain Textile Effects. It expected approximately $100 of 2017 nonrecurring spin-off costs and approximately $56 of additional separation expenses.
- After year-end, a January 30, 2017 fire took the Pori, Finland TiO2 facility offline. Its 130,000-metric-ton capacity equals about 15% of Huntsman’s TiO2 capacity. The outage duration and potential spin-off impact were unknown. Insurance deductibles were $15 for physical damage and 60 days for business interruption; an initial approximately $52 insurance payment was received in February 2017.
- Huntsman reported commissioning problems at its Augusta, Georgia iron-oxide facility, with expected capacity substantially below initial expectations. It filed suit against Rockwood, Albemarle, and former Rockwood executives alleging fraud and breach of contract.
- Material exposures include cyclical chemical and TiO2 markets, raw-material and currency volatility, production interruptions, substantial debt and variable-rate interest exposure, underfunded benefit plans, environmental and regulatory obligations, and unresolved litigation. The filing identifies a product-delivery claim with possible losses of €0–€113, with no accrual; the company says it believes losses above $10 are insured. Indirect-purchaser TiO2 antitrust claims and other legal matters also remain.
- The filing states that the company was in compliance with material debt covenants and that its financial statements and internal controls received unqualified audit opinions.
Most important facts for investors to verify
- Confirm the reporting period: this is FY 2016, not 2015 Q4; review the separate quarterly results for quarter-specific performance.
- Assess how much of 2016 earnings improvement reflects the one-time surfactants-sale gain and reduced restructuring charges versus underlying operations.
- Track the Pori outage, insurance recoveries, TiO2 pricing, and any effect on the Venator separation schedule and financing.
- Review debt maturities, covenant headroom, refinancing terms, variable-rate exposure, and liquidity after planned capital spending, pension contributions, dividends, and spin-off costs.
- Monitor the Augusta litigation and facility performance, the product-delivery claim, antitrust proceedings, and environmental obligations for changes in estimated exposure.
- Evaluate whether projected segment recovery, restructuring savings, and the 2017 tax-rate outlook are achieved.