Business context and reporting period
Period clarification: The request identifies 2016 Q3, but the supplied filing is Huntsman Corporation and Huntsman International LLC’s Form 10-Q for the quarter ended September 30, 2017. Comparisons below are against the three and nine months ended September 30, 2016. Unless noted otherwise, dollar amounts are in millions.
Huntsman is a global differentiated chemicals manufacturer operating Polyurethanes, Performance Products, Advanced Materials and Textile Effects. In August 2017, it separated its Titanium Dioxide and Performance Additives (P&A) business through an IPO of Venator shares, retained approximately 75% ownership, and began reporting P&A as discontinued operations. Continuing-operations figures below therefore exclude P&A.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2,169 | $1,831 | $6,155 | $5,614 |
| Gross profit | $474 | $356 | $1,303 | $1,170 |
| Operating income | $223 | $101 | $595 | $450 |
| Adjusted EBITDA | $340 | $234 | $899 | $787 |
| Income from continuing operations | $116 | $40 | $353 | $232 |
| Net income attributable to Huntsman Corporation | $147 | $55 | $390 | $198 |
| Diluted EPS | $0.60 | $0.23 | $1.60 | $0.83 |
- Q3 gross margin was approximately 21.9% versus 19.4%; operating margin was approximately 10.3% versus 5.5%. These percentages are calculated from reported figures.
- Q3 discontinued operations contributed $63 million of after-tax income, compared with $24 million; nine-month discontinued operations contributed $101 million versus a $12 million loss. Thus, total net income growth reflects both continuing operations and discontinued operations.
- Cash flow: Nine-month operating cash flow from continuing operations was $538 million, down from $736 million. Management-defined free cash flow was $404 million versus $523 million. Capital expenditures were $159 million versus $214 million. The company attributed lower operating cash flow primarily to a $274 million unfavorable working-capital variance.
- Debt and liquidity: September 30 debt excluding affiliate notes was $2,874 million, down from $4,172 million at year-end 2016. Huntsman International also reported $817 million of notes payable to its parent. Reported cash and restricted cash were $451 million; management reported $1,211 million of combined cash and unused borrowing capacity, including $642 million under the revolving facility and $118 million under receivables programs. The company said it was in compliance with material debt covenants.
- Working capital was $2,677 million versus $1,777 million at year-end; the increase includes a substantial rise in assets and liabilities classified as held for sale related to Venator.
- The quarterly dividend remained $0.125 per share.
Material changes versus the prior comparable period
- Q3 revenue rose 18%, primarily on higher average selling prices across most segments and higher sales volumes in most segments. Nine-month revenue rose 10%.
- Polyurethanes was the largest earnings-growth contributor: Q3 segment adjusted EBITDA increased to $245 million from $137 million, supported by stronger MDI margins. Performance Products Q3 adjusted EBITDA fell to $63 million from $70 million; Advanced Materials was $56 million versus $55 million, and Textile Effects was $19 million versus $17 million.
- Q3 operating income more than doubled, while nine-month operating income increased 32%. Restructuring and plant-closing costs declined to $1 million in Q3 from $38 million, and to $13 million year to date from $56 million.
- Interest expense decreased as debt was repaid, but the company recorded a $35 million Q3 loss on early debt extinguishment ($36 million year to date).
- Huntsman prepaid $1,207 million of term loans in August, funded in part by $732 million received from Venator and $475 million of IPO proceeds. It made a further $100 million prepayment in October 2017.
Outlook, management commentary, risks and unusual items
- Outlook: Management expected Q4 2017 to be seasonally weaker for Polyurethanes, but anticipated solid MDI demand and margins and said 2018 should benefit from new projects. It cited weak MTBE margins. Performance Products was expected to improve year over year and sequentially despite planned Port Neches EO/EG maintenance, estimated to reduce Q4 EBITDA by $15 million. Advanced Materials expected stronger Q4 EBITDA than Q4 2016, while wind-market demand remained soft. Textile Effects expected sustainable-solutions volume growth at twice GDP.
- Management forecast approximately $290 million of 2017 capital expenditures, net of reimbursements; an adjusted effective tax rate near 24% for Q4 2017 and approximately 25%–28% for 2018. It expected an additional approximately $17 million of pension and postretirement contributions during the remainder of 2017.
- Huntsman and Clariant mutually terminated their merger agreement on October 26, 2017, after the quarter. No termination fee was payable under the termination agreement; each party generally bears its own costs. Huntsman reported $18 million of merger costs through September and estimated approximately $30 million through termination.
- Huntsman intended to monetize its retained Venator shares and use net proceeds first to repay debt. The filing classified Venator-related assets of $2,745 million and liabilities of $1,633 million as held for sale, based on the expectation that the remaining interest would be sold and proceeds collected within one year.
- Hurricane-related production outages reduced estimated Q3 EBITDA by approximately $15 million in Polyurethanes and $35 million in Performance Products. The company also included $13 million of plant-incident remediation costs among Q3 adjusted EBITDA reconciliation items.
- Contingencies: A customer product-delivery claim was then approximately €113 million (about $132 million). Huntsman estimated a possible loss range of €0–€113 million, made no accrual, and believed insurance would cover liability above $10 million; it cautioned that ultimate liability and costs were uncertain. Environmental liabilities accrued totaled $22 million, including approximately $15 million for West Footscray remediation; additional environmental losses could not be estimated.
- Other exposures include foreign-exchange, interest-rate and commodity-price movements, debt covenant and receivables-program termination risks, and potential future environmental compliance and remediation costs. The filing reported effective disclosure controls as of September 30, 2017.
Important facts for investors to verify
- Confirm the intended period: the provided filing is for Q3 2017, not Q3 2016.
- Assess continuing-operations performance separately from discontinued operations, Venator’s retained ownership and the held-for-sale classification.
- Reconcile debt reduction and liquidity, including the Venator-related funding, the October $100 million prepayment, affiliate notes, and actual availability under borrowing facilities.
- Track the expected Venator share monetization, timing and proceeds, and any effects on debt and taxes.
- Monitor segment conditions, especially MDI margins, MTBE, the planned EO/EG outage, hurricane-related effects and the stated Q4 and 2018 outlook.
- Review developments in the product-delivery claim, environmental remediation obligations and other legal proceedings; the filing does not establish the ultimate outcomes.