Huntsman CORP quarterly report, Q1 FY2017

Full document

Business context and reporting period

Filing-period discrepancy: The request identifies 2017 Q1, but the supplied filing is Huntsman Corporation and Huntsman International LLC’s unaudited Form 10-Q for the quarter ended March 31, 2018. Comparisons below are to Q1 2017. Amounts are in U.S. dollars; financial figures are in millions except per-share data.

Huntsman is a global manufacturer of differentiated chemicals, operating four continuing reportable segments: Polyurethanes, Performance Products, Advanced Materials and Textile Effects. The former Titanium Dioxide and Performance Additives (P&A) business, Venator, is reported as discontinued operations. Huntsman held approximately 53% of Venator at March 31, 2018 and intended to monetize its remaining stake.

Financial performance and position

  • Revenue: $2,295, up 19% from $1,932. Management attributed the increase to higher selling prices in most segments and higher volumes in all but Advanced Materials.
  • Profitability: Gross profit was $540 versus $390; gross margin was approximately 23.5% versus 20.2%. Operating income was $296 versus $162, with operating margin of approximately 12.9% versus 8.4%. Income from continuing operations was $236 versus $99.
  • Net income and EPS: Net income was $350, including $114 from discontinued operations, compared with $92, including a $7 discontinued-operations loss, in Q1 2017. Net income attributable to Huntsman Corporation was $274 versus $76; diluted EPS was $1.11 versus $0.31. Continuing-operations diluted EPS was $0.65 versus $0.34.
  • Adjusted EBITDA: $405 versus $260, up 56% (non-GAAP measure). Polyurethanes contributed $261 versus $144; Performance Products $102 versus $84; Advanced Materials $59 versus $54; Textile Effects $26 versus $21; corporate and other was a $43 loss in both periods.
  • Cash flow: Continuing-operations operating cash flow was $111 versus $70; capital expenditures were $55 versus $51. Management-defined free cash flow was $56 versus $23. Total operating cash flow, including discontinued operations, was $163 versus $93.
  • Liquidity and debt: At March 31, cash and restricted cash totaled $453. Huntsman reported $1,249 of cash and unused borrowing capacity: $641 under the revolving facility and $155 under receivables programs, in addition to cash. Debt was $2,334, including $36 current; the revolving facility had no borrowings outstanding at quarter-end. The filing states Huntsman was in compliance with material debt covenants.
  • Balance sheet: Working capital was $3,102 versus $2,714 at year-end 2017. Current assets and liabilities included $3,060 and $1,721, respectively, classified as held for sale, principally related to Venator.
  • Margins and segment trends: Polyurethanes’ adjusted EBITDA rose on stronger MDI and MTBE margins. Performance Products improved on higher volumes and margins. Advanced Materials benefited from specialty volumes and lower fixed costs, partly offset by raw-material costs and weaker wind-market volumes. Textile Effects improved on volume, lower fixed costs and one-time credits.

Changes, outlook and risks

  • Huntsman adopted new revenue-recognition guidance on January 1, 2018; initial adoption had no material financial-statement impact. Other accounting changes included equity-investment fair-value changes being recognized in earnings and revised presentation of pension-cost components.
  • Outlook: Management expected favorable supply-and-demand conditions and differentiated downstream growth in Polyurethanes, while noting a short-term margin spike was expected to ease and MTBE margins remained depressed versus historical conditions. Performance Products trends were positive in amines, surfactants and maleic anhydride, with some upstream margin pressure. Planned Port Neches maintenance was expected to reduce Q2 2018 EBITDA by approximately $15. Advanced Materials specialty business was expected to grow year over year; Textile Effects demand for sustainable solutions was expected to remain solid, with raw-material inflation partly offset by price increases.
  • Management expected approximately $325 of 2018 capital expenditures and a long-term adjusted effective tax rate of 23%–25%; its 2018 estimate was 20%–22% before potential valuation-allowance releases. It estimated possible 2018 releases of approximately $20 in the U.K. and $100 in Switzerland, subject to profitability and tax limitations.
  • On April 23, 2018, after quarter-end, Huntsman acquired Demilec for approximately $350, funded with $275 borrowed under the revolving facility and $75 under the U.S. receivables program. Management planned to use cash, future free cash flow or Venator proceeds to reduce those borrowings. This transaction is not reflected in March 31 debt.
  • Huntsman authorized an additional $400 share-repurchase program in February. It repurchased approximately $51 of shares during Q1 and a further approximately $52 through April 19. The quarterly dividend increased to $0.1625 per share from $0.125.
  • Key exposures: The filing identifies interest-rate, foreign-exchange and commodity-price risks; foreign-exchange movements are not fully hedged. Other risks include working-capital volatility, debt covenant and receivables-program termination provisions, and extensive environmental regulation. Environmental liabilities accrued were $20; the filing says remediation costs could exceed accruals but does not estimate the potential excess. Certain former-facility and third-party cleanup claims, ongoing site remediation, and a mine-site matter remain. Huntsman also described pending litigation and disputed bank indemnification demands; outcomes and potential exposure are not clearly quantified in the supplied text.
  • Unusual items included $114 of discontinued-operations income, primarily associated with Venator’s improved margins, and $7 of certain legal and other settlement-related expenses in the adjusted EBITDA reconciliation. A $9 Luxembourg deferred-tax valuation allowance was released in Q1. Management noted the accounting for U.S. tax reform remained incomplete.

Most important facts for investors to verify

  1. Confirm the intended filing period: the supplied document covers Q1 2018, not Q1 2017.
  2. Assess how much reported earnings growth came from continuing operations versus Venator and other discontinued operations, and whether the Venator monetization proceeds and timing support debt reduction.
  3. Verify post-acquisition leverage and liquidity after the $350 Demilec purchase and associated $350 of borrowings, as well as the expected repayment plan.
  4. Review assumptions behind 2018 capital spending, tax-rate guidance and the estimated U.K. and Swiss valuation-allowance releases.
  5. Track Q2 Port Neches maintenance impact, expected moderation in Polyurethanes margins, and raw-material and foreign-exchange pressures.
  6. Evaluate the environmental and legal exposures, debt covenants, and availability and performance conditions of the receivables programs.