Huntsman Corporation 10-Q Summary: Period Ended September 30, 2006
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended September 30, 2006, for Huntsman Corporation and its principal operating subsidiary, Huntsman International LLC. Huntsman is a global manufacturer of differentiated and commodity chemical products, organized into six segments: Polyurethanes, Materials and Effects, Performance Products, Pigments, Polymers, and Base Chemicals. The company is actively executing a strategy to divest commodity businesses and expand its differentiated portfolio.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 2006) | Value ($ Millions) |
|---|---|
| Total Revenues | 8,087.7 |
| Net Income | 248.6 |
| Net Income Available to Common Stockholders | 248.6 |
| Operating Income | 652.4 |
| EBITDA | 893.1 |
| Net Cash Provided by Operating Activities | 610.9 |
| Total Debt (Outstanding) | 4,325.9 |
| Cash and Cash Equivalents | 245.8 |
| Working Capital | 1,529.4 |
Note: Gross margin for the nine months ended September 30, 2006, was approximately 14.8% ($1,194.0 million gross profit on $8,087.7 million revenue).
Material Changes vs. Prior Period
- Net Income: Net income increased significantly to $248.6 million for the nine months ended September 30, 2006, compared to $30.4 million in the same period in 2005. This improvement was driven by a $261.9 million decrease in losses on early extinguishment of debt and a $57.7 million extraordinary gain from the Textile Effects Acquisition.
- Revenues: Total revenues decreased slightly by 0.4% to $8,087.7 million, primarily due to lower sales volumes in Polyurethanes, Performance Products, Polymers, and Base Chemicals, partially offset by the Textile Effects Acquisition.
- Discontinued Operations: The company recorded a loss from discontinued operations of $158.3 million, primarily due to the impairment of the European base chemicals and polymers business pending sale to SABIC.
- Restructuring Costs: Restructuring, impairment, and plant closing costs decreased to $20.0 million from $91.6 million in the prior year period.
Guidance, Outlook, and Risks
Outlook and Strategy: Management expects differentiated products to comprise more than 70% of revenues following the completion of announced divestitures. The company intends to reduce net debt to below $3.5 billion. Strong demand is anticipated for differentiated products in 2007, with potential margin expansion if raw material and energy prices remain lower.
Recent Developments:
- Divestitures: Agreed to sell European base chemicals and polymers business to SABIC for approximately $700 million plus assumption of pension liabilities. Sold U.S. butadiene and MTBE business for approximately $274 million.
- Acquisitions: Acquired the global textile effects business of Ciba Specialty Chemicals Inc. for approximately $172.1 million, resulting in an extraordinary gain due to the fair value of net assets exceeding the purchase price.
- Debt Refinancing: Completed a new subordinated notes offering in November 2006 (post-period) to refinance higher-cost 2009 subordinated notes.
Risks and Contingencies:
- Port Arthur Fire: A major fire at the Port Arthur, Texas facility in April 2006 caused significant disruption to olefins production. The company estimates $130 million in repair costs and expects to restart late in Q2 2007. Insurance claims are being filed for property damage and business interruption.
- MTBE Market: Legislative and regulatory actions restricting MTBE use in gasoline continue to impact sales volumes and margins in the Polyurethanes segment.
- Legal Proceedings: Ongoing antitrust litigation regarding price-fixing in MDI, TDI, and polyether polyols industries; asbestos litigation (mostly indemnified); and environmental enforcement actions.
Investor Verification Checklist
- Insurance Recoveries: Verify the status and expected timing of insurance proceeds related to the Port Arthur fire, specifically the $31.4 million receivable recorded and the estimated $142.3 million in lost profits.
- European Sale Closing: Confirm the closing of the SABIC transaction for the European base chemicals and polymers business and the final purchase price adjustments.
- Debt Refinancing Impact: Assess the impact of the November 2006 subordinated notes offering on future interest expense and the expected $12 million loss on early extinguishment of debt in Q4 2006.
- Textile Effects Integration: Monitor the integration of the Ciba textile effects business and the realization of projected synergies versus the $150 million capital expenditure plan over three years.
- Working Capital Trends: Review the impact of the Port Arthur outage and the sale of the U.S. butadiene/MTBE business on future working capital requirements and cash flow generation.