Huntsman Corporation — Form 10-Q Summary
Period discrepancy: The request metadata identifies 2011 Q3, but the supplied filing is for the quarter and nine months ended September 30, 2012, compared with 2011. Huntsman International LLC, the wholly owned principal operating company, is also included.
Business context and reporting period
Huntsman is a global chemicals manufacturer operating five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. Financial figures below are in millions of dollars unless noted. The interim statements are unaudited.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2,741 | $2,976 | $8,568 | $8,589 |
| Gross profit | $537 | $490 | $1,614 | $1,451 |
| Operating income | $235 | $77 | $770 | $459 |
| Net income attributable to Huntsman Corporation | $116 | $(34) | $403 | $142 |
| Diluted earnings per share | $0.48 | $(0.14) | $1.68 | $0.59 |
| EBITDA | $341 | $204 | $1,083 | $766 |
| Adjusted EBITDA | $401 | $346 | $1,163 | $971 |
Q3 gross margin was approximately 19.6%, versus 16.5% a year earlier; operating margin was approximately 8.6%, versus 2.6%. Nine-month net cash from operations was $556 million, compared with $25 million; investing cash outflow was $299 million and financing cash outflow was $378 million. Operating cash flow benefited from improved operating income and a $225 million favorable year-over-year variance in operating assets and liabilities.
At September 30, cash and cash equivalents were $435 million, restricted cash $9 million, and working capital $2,337 million. Total debt excluding affiliate debt was $3,680 million, down from $3,942 million at year-end 2011; current debt was $130 million. Huntsman reported total available liquidity of $1,038 million, including cash and restricted cash, $381 million of revolver availability and $213 million under receivables programs. The $400 million revolver had no borrowings outstanding; approximately $19 million of letters of credit and guarantees were outstanding.
Changes versus prior period
- Q3 revenue fell 8%, but gross profit rose 10% and operating income more than tripled. The company moved from a Q3 2011 net loss to Q3 2012 net income.
- Nine-month revenue was nearly flat, while operating income rose 68% and attributable net income rose 184%. Lower restructuring charges, improved margins in Polyurethanes, and lower interest expense contributed to the improvement.
- Restructuring, impairment and plant-closing costs fell to $47 million in Q3 and $52 million for nine months, from $155 million and $171 million, respectively, in 2011.
- Segment performance was mixed. Q3 EBITDA rose in Polyurethanes ($203 million versus $136 million), Performance Products ($107 million versus $97 million), Advanced Materials ($24 million versus $2 million), and Textile Effects (loss of $22 million versus loss of $157 million); Pigments declined to $69 million from $161 million. For nine months, Polyurethanes EBITDA increased to $544 million from $392 million, while Performance Products declined to $282 million from $325 million and Pigments to $346 million from $357 million.
- Cash declined by $119 million from year-end despite higher operating cash generation, reflecting investing and financing outflows, including debt repayments, capital spending and dividends.
Outlook, commentary and notable items
- Management expected near-term earnings pressure in Pigments from soft demand and higher raw-material costs, partly offset by expected improvements in other segments. It anticipated MDI margin improvement over time as utilization tightened and restructuring benefits lowered the cost base in 2013.
- Management forecast 2012 capital expenditures of $425–$450 million and a long-term effective tax rate of approximately 30%–35%. Cost-reduction programs across four segments were expected to deliver approximately $190 million of savings through Q3 2013; the Polyurethanes program alone targeted about $75 million in annualized fixed-cost reductions by that time.
- Near-term factors included seasonal demand declines, higher raw-material costs in Polyurethanes, planned Performance Products maintenance in Q1 2013, weak Chinese wind-energy demand for Advanced Materials, and Pigments demand and contribution-margin pressure. Favorable Pigments ore contracts were due to expire at year-end 2012.
- On July 3, 2012, Huntsman acquired the remaining 55% of a Russian polyurethane systems business for approximately €13 million (about $16 million). Purchase accounting was preliminary; a $4 million noncash loss was recorded on consolidation.
- Subsequent to quarter-end, Huntsman prepaid $50 million of Term Loan B on October 31. On November 2, Huntsman International announced a planned approximately $300 million senior-notes offering due 2020 to help redeem 2016 notes; the company expected an approximately $55 million loss on early extinguishment.
Risks and contingencies
- Debt agreements include covenant and cross-default risks. The revolving-facility leverage covenant, when applicable, limits senior secured net leverage to 3.75:1. A default or receivables-program termination could restrict liquidity or accelerate repayment. Management stated it believed the company was in compliance.
- Legal exposures include a customer product-delivery claim with a stated possible loss range of €0–€113 million (approximately $0–$145 million), for which no accrual was recorded. The filing also describes pending titanium-dioxide antitrust litigation, asbestos claims and an indemnification dispute; some loss ranges could not be estimated.
- Environmental and regulatory exposures include remediation obligations. Environmental liabilities accrued were $35 million; a further $30 million was accrued for remediation at the former West Footscray site. Management cautioned that actual costs could differ, and future environmental, health and safety or greenhouse-gas requirements could increase costs.
- Foreign exchange, interest-rate and commodity-price movements affect results; the company uses hedges but does not eliminate currency exposure. Some foreign cash may be subject to legal restrictions, and dividend repatriation could have adverse tax consequences.
Investor verification priorities
- Confirm the intended reporting year: the supplied filing covers Q3 2012, not Q3 2011.
- Assess the durability of earnings and cash flow improvements, including how much operating cash generation reflects working-capital timing and how much is recurring.
- Track Pigments volumes, raw-material costs and expiring ore contracts, as well as execution and realized savings from restructuring.
- Review debt maturities, refinancing terms and the expected $55 million refinancing-related extinguishment loss, along with covenant and receivables-program headroom.
- Monitor the customer claim, antitrust matters, asbestos and environmental liabilities, and any changes to recorded accruals or possible-loss estimates.