Huntsman Corporation — 2014 Form 10-K Summary
Reporting-period note: The request identifies “2013 Q4,” but the supplied filing is Huntsman Corporation and Huntsman International’s annual report for the fiscal year ended December 31, 2014. It includes quarterly data for 2014 and 2013.
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. Huntsman International LLC is its wholly owned principal operating company. The 2014 results include the Rockwood Performance Additives and Titanium Dioxide businesses from their October 1, 2014 acquisition.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $11.578 billion | $11.079 billion |
| Gross profit / gross margin | $1.919 billion / 16.6% | $1.753 billion / 15.8% |
| Operating income / operating margin | $633 million / 5.5% | $510 million / 4.6% |
| Net income attributable to Huntsman Corporation | $323 million | $128 million |
| Diluted earnings per share | $1.31 | $0.53 |
| Adjusted EBITDA (non-GAAP) | $1.340 billion | $1.213 billion |
| Cash provided by operating activities | $760 million | $708 million |
| Capital expenditures | $601 million | $471 million |
Operating cash flow less capital expenditures was approximately $159 million in 2014, versus $237 million in 2013; this simple calculation does not include other investing items. 2014 net income included a $94 million discrete tax benefit from the release of valuation allowances related to foreign tax credits. Adjusted net income, a non-GAAP measure, was $478 million versus $390 million.
At year-end, total debt was $5.206 billion, up from $3.916 billion; the filing reports debt to total capitalization of approximately 73%. Cash and restricted cash totaled $870 million. Combined cash and unused borrowing capacity was $1.601 billion, including $609 million available under the revolving facility and $122 million under receivables programs. The current portion of debt was $267 million. Huntsman paid $121 million in common dividends in 2014, or $0.50 per share.
Material changes versus the prior comparable period
- Revenue increased 5%; management attributed the rise principally to higher selling prices in Performance Products, Advanced Materials and Textile Effects, and higher volumes in Polyurethanes and Pigments and Additives.
- Gross profit rose 9% and operating income rose 24%. Net income attributable to Huntsman increased to $323 million from $128 million; the tax-credit benefit materially affected the comparison.
- Segment EBITDA improved in Performance Products ($440 million versus $372 million), Advanced Materials ($182 million versus $86 million), and Textile Effects ($28 million versus a $78 million loss). Polyurethanes declined to $669 million from $696 million; Pigments and Additives swung to a $59 million loss from $79 million of EBITDA, including acquisition, integration and restructuring impacts.
- Cash from operations rose $52 million, while capital spending increased $130 million. Investing cash outflow rose to $1.606 billion, largely reflecting the Rockwood acquisition; financing provided $1.197 billion, primarily from increased borrowing.
- Debt increased by approximately $1.290 billion year over year, principally to finance Rockwood. The company issued $400 million of 5.125% senior notes due 2022 and used proceeds in part to redeem $350 million of higher-coupon subordinated notes.
Outlook, management commentary, risks and unusual items
- Management expected profitability in its differentiated businesses to improve during 2015 and cited expected improvement in free cash flow over the following years. It also cited foreign-exchange movements and lower oil prices as near-term headwinds.
- For 2015, management forecast capital expenditures of approximately $625 million, an adjusted effective tax rate in the low 30% range, and approximately $101 million of pension and postretirement plan contributions. These are forecasts, not reported results.
- A planned approximately 60-day Port Neches PO/MTBE maintenance outage in the first half of 2015 was expected to reduce EBITDA by about $60 million; approximately $90 million of maintenance costs were expected to be capitalized and amortized over roughly five years.
- The Rockwood acquisition cost approximately $1.04 billion in cash, with assumed pension obligations; the preliminary allocation was subject to final valuation. Management targeted more than $130 million in annual Pigments and Additives restructuring savings by mid-2016, alongside a workforce reduction of about 900 positions. A further TiO2 capacity reduction of approximately 100,000 metric tons at Calais was announced in February 2015, with expected annual savings of about $35 million by mid-2016.
- 2014 restructuring, impairment and plant-closing costs were $158 million. Environmental liabilities accrued were $60 million, including $17 million recorded for acquired Rockwood businesses. Huntsman stated that possible environmental costs beyond recorded reserves could not be estimated.
- Material contingencies include ongoing TiO2 antitrust litigation for which no loss estimate or accrual was recorded; a product-delivery claim with a stated possible-loss range of €0–€113 million, also without accrual; and alleged Port Neches flaring violations for which potential penalties and relief could not be estimated. The company also reported a $158 million loan balance at its consolidated Arabian Amines joint venture that was not in compliance with certain lender obligations; discussions with lenders were ongoing.
- Key business risks include chemical-industry cyclicality, raw-material and energy-price volatility, currency exposure, production interruptions, integration and restructuring execution, environmental regulation, pension funding, and substantial debt. A 1% interest-rate increase was estimated to add approximately $29 million in annual interest expense before hedging or offsets.
Most important facts for investors to verify
- How much 2014 earnings growth reflects recurring operations versus the $94 million tax-credit benefit and other adjustments; compare GAAP results with the company’s non-GAAP reconciliations.
- Whether Rockwood integration and the Pigments and Additives cost program deliver the stated savings, and how much additional restructuring expense and cash outlay will be required.
- Debt reduction, refinancing needs and liquidity after the acquisition; particularly monitor the 2017 maturities and Arabian Amines’ covenant noncompliance.
- Performance and cash-flow effects of the 2015 PO/MTBE outage, capital spending and pension contributions.
- Developments in the unaccrued litigation and environmental matters, including any change to exposure, insurance recovery or indemnification.