Huntsman Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2011, compared with the quarter ended March 31, 2010. This differs from the request metadata specifying 2010 Q1. Huntsman International LLC, the wholly owned principal operating subsidiary, is also a registrant in this filing.
Business context and reporting period
Huntsman manufactures differentiated organic and inorganic chemicals globally. Its five segments are Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. The interim financial statements are unaudited; management says interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $2.679 billion | $2.094 billion |
| Gross profit | $460 million | $281 million |
| Operating income | $162 million | $22 million |
| Continuing operations income (loss) | $80 million | $(159) million |
| Net income (loss) attributable to Huntsman Corporation | $62 million | $(172) million |
| Diluted earnings (loss) per share | $0.26 | $(0.73) |
| Operating cash flow | $(124) million | $(408) million |
| Capital expenditures | $60 million | $37 million |
- Gross margin was approximately 17.2%, versus 13.4%; operating margin was approximately 6.0%, versus 1.1%.
- Adjusted EBITDA, a non-GAAP measure, was $302 million, up from $123 million. GAAP EBITDA was $239 million versus $(55) million; these measures include different adjustments and should not be treated as substitutes for GAAP earnings.
- Cash and cash equivalents were $632 million at March 31, down from $966 million at December 31, 2010. Total assets were $9.040 billion and total equity was $2.008 billion.
- Debt excluding affiliate debt was $4.057 billion, down from $4.146 billion at year-end; an additional $4 million was payable to affiliates. The current portion of debt was $200 million, versus $519 million at year-end, substantially reflecting debt reclassification after the April receivables-facility amendments.
- Management reported $1.168 billion of combined cash and unused borrowing capacity: $639 million cash and restricted cash, $273 million revolver availability and $256 million A/R Program availability.
Material changes versus prior comparable period
- Revenue increased 28%, reflecting higher selling prices and higher volumes in most segments. Management attributed the overall increase principally to pricing and volume gains.
- Gross profit increased 64%. Segment EBITDA improved in Polyurethanes ($114 million versus $52 million), Performance Products ($115 million versus $60 million), Advanced Materials ($39 million versus $33 million) and Pigments ($84 million versus $28 million). Textile Effects recorded an $11 million EBITDA loss, compared with breakeven.
- Operating cash outflow improved from $408 million to $124 million, but working capital remained a significant use of cash: receivables and inventories increased, partly offset by higher payables. Management cited a $290 million increase in net operating assets.
- Q1 2011 included a $3 million debt-extinguishment loss, compared with $155 million in Q1 2010. Higher legal-claim expenses weighed on results; the filing identifies $34 million of legal settlements in the adjusted EBITDA reconciliation.
Outlook, financing, risks and unusual items
- Management said global demand was strong, selling prices had risen sequentially across businesses and capacity utilization continued to improve. It expected these trends to continue in Q2 and intended to raise prices to recover margins amid higher raw-material and energy costs. No quantified earnings or revenue guidance was provided.
- In March, Huntsman International extended $650 million of Term Loan B principal to a stated April 2017 maturity, with a 1 percentage-point higher interest margin on that tranche. The extension has conditions tied to refinancing or liquidity for 5.50% senior notes due 2016. In April, A/R Programs were extended to April 2014 and their margins reduced.
- The company expected approximately $350 million of 2011 capital expenditures and approximately $100 million of additional pension and postretirement contributions during the remainder of 2011. It expected about $60 million of legal-related cash expenditures over several years.
- After quarter-end, Huntsman acquired Laffans Petrochemicals’ chemical business in India for approximately $23 million, funded with cash and local financing. It also expected to begin consolidating its Sasol-Huntsman joint venture in Q2, including approximately $96 million of existing debt, with no cash impact from that consolidation.
- Risks include antitrust litigation involving urethane products and titanium dioxide; asbestos claims; environmental remediation and regulatory costs; and an ongoing matter involving alleged environmental, sales-record and payment irregularities at an Indian joint venture. The company said it could not estimate potential penalties or remediation costs in the India matter. It also disclosed currency, interest-rate and commodity exposure and covenant risks that could restrict access to credit facilities if triggered.
- Other notable items: Q1 included a $1 million extraordinary gain on acquisition of a business and a $14 million after-tax loss from discontinued operations. Environmental liabilities were accrued at $41 million. Management reported compliance with material debt covenants as of the filing.
Important facts for investors to verify
- Confirm the period: the filing covers Q1 2011, not Q1 2010.
- Review the quality and sustainability of the earnings rebound, including pricing, sales volumes, raw-material and energy costs, legal expenses, and the distinction between GAAP and adjusted results.
- Assess cash conversion and working-capital requirements given negative operating cash flow and higher receivables and inventory.
- Check debt maturities, refinancing conditions, A/R Program availability, covenant headroom and the intended renewal of short-term facilities.
- Track outcomes and potential financial exposure from antitrust, asbestos, environmental and India-related matters, as several exposures are not reliably quantifiable in the filing.