HUN

Huntsman Corporation 10-Q Summary: Period Ended June 30, 2007

Business Context and Reporting Period

This Quarterly Report on Form 10-Q covers the period ended June 30, 2007, for Huntsman Corporation and its principal operating subsidiary, Huntsman International LLC. Huntsman is a global manufacturer of differentiated, inorganic, and commodity chemical products. The reporting period is significantly impacted by a pending sale of the company to Hexion Specialty Chemicals, Inc. (an affiliate of Apollo Management) for $28.00 per share, announced on July 12, 2007. The company also reported the classification of its North American polymers business as discontinued operations following an agreement to sell the assets to Flint Hills Resources.

Key Financial Metrics

Note: Gross margin for the six months ended June 30, 2007, was approximately 16.1% ($771.7 million gross profit on $4,804.5 million revenue).

Material Changes vs. Prior Period

• Net Income Decline: The company reported a net loss of $24.3 million for the six months ended June 30, 2007, compared to net income of $331.9 million in the same period in 2006. This represents a decrease of $356.2 million.
• Discontinued Operations: A significant driver of the loss was a $119.4 million loss from discontinued operations, primarily due to a $240.0 million pretax impairment charge related to the North American polymers business disposition. In the prior year, discontinued operations contributed $54.8 million in income.
• Extraordinary Items: The current period included a $6.5 million extraordinary loss related to the adjustment of the purchase price allocation for the 2006 Textile Effects Acquisition. The prior year included a $50.5 million extraordinary gain from the same acquisition.
• Revenue Growth: Total revenues increased by 2.5% to $4,804.5 million, driven by higher volumes and prices in Polyurethanes, Materials and Effects, and Pigments segments, partially offset by lower volumes in Base Chemicals due to the Port Arthur plant fire and asset sales.
• EBITDA Decline: Consolidated EBITDA decreased by 66% to $264.6 million from $780.5 million in the prior year, largely due to the impairment charges and the absence of the prior year's extraordinary gain.

Guidance, Outlook, and Risks

• Pending Merger: The company is in the process of being acquired by Hexion for $28.00 per share. The transaction is subject to regulatory approvals and shareholder vote. If the merger fails, the company may face significant termination fees (up to $325 million payable to Hexion under certain circumstances) and a potential decline in stock price.
• Asset Dispositions: The company expects to close the sale of its North American polymers business in August 2007. It anticipates a further pretax loss of $150 million to $175 million upon the sale of its U.S. Base Chemicals business, contingent on the restart of the Port Arthur facility.
• Port Arthur Fire: Operations at the Port Arthur, Texas olefins plant remain shut down following a fire in April 2006. The company expects to restart operations in the fourth quarter of 2007. Capital expenditures for the rebuild are estimated at $218 million for 2007.
• Liquidity: Total liquidity (cash plus unused borrowing capacity) decreased to $581.4 million as of June 30, 2007, from $887.7 million at year-end 2006, due to capital spending and working capital increases.
• Legal and Environmental: The company faces ongoing litigation regarding MTBE groundwater contamination and antitrust matters. It also has environmental remediation liabilities, though management does not expect these to be material.

Investor Verification Checklist

• Merger Completion: Verify the status of regulatory approvals and the shareholder vote required to consummate the Hexion merger.
• Impairment Charges: Confirm the final accounting treatment and cash impact of the $240 million impairment on the North American polymers business.
• Port Arthur Restart: Monitor the timeline for the restart of the Port Arthur olefins facility, as this is a condition for the sale of the U.S. Base Chemicals business and affects future revenue.
• Termination Fees: Assess the risk of paying the $200 million fee to Basell (already paid) and potential future fees to Hexion if the merger is terminated.
• Working Capital Trends: Review the $199.5 million increase in accounts receivable and its impact on future cash flow.