Huntsman Corporation 10-Q Summary: Period Ended September 30, 2009
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended September 30, 2009, for Huntsman Corporation and its principal operating subsidiary, Huntsman International LLC. Huntsman is a global manufacturer of differentiated organic and inorganic chemical products operating in five segments: Polyurethanes, Advanced Materials, Textile Effects, Performance Products, and Pigments. The company has divested its former Polymers and Base Chemicals operations, which are reported as discontinued operations.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $2,108 | $5,667 |
| Net (Loss) Income (Huntsman Corp) | $(68) | $48 |
| Operating Income (Loss) | $25 | $(130) |
| EBITDA | $107 | $1,011 |
| Net Cash Provided by Operating Activities | N/A | $907 |
| Cash and Cash Equivalents (Sep 30, 2009) | $1,619 | $1,619 |
| Total Debt (Sep 30, 2009) | $4,231 | $4,231 |
| Working Capital | $2,467 | $2,467 |
Note: Gross margin for the nine months ended September 30, 2009, was approximately 12.7% ($719 million gross profit / $5,667 million revenue).
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 23% in the third quarter and 31% for the nine-month period compared to 2008, driven by lower average selling prices and reduced sales volumes across all segments due to the global economic slowdown.
- Restructuring Costs: Restructuring, impairment, and plant closing costs surged to $62 million in Q3 and $139 million for the nine months ended September 30, 2009, compared to $3 million and $8 million, respectively, in the prior year periods. Significant charges relate to the closure of the Australian styrenics facility and the Grimsby, U.K. titanium dioxide plant.
- One-Time Litigation Gain: The nine-month net income of $48 million was significantly boosted by an $835 million pre-tax gain (resulting in $868 million total gain recognition) associated with the Texas Bank Litigation Settlement Agreement. Without this item, the company would have reported a substantial operating loss.
- Debt Restructuring: The company redeemed $494 million of senior notes in July and August 2009, incurring a $21 million loss on early extinguishment. Concurrently, the company issued $600 million in 2016 Senior Notes and secured a $500 million Term Loan C as part of the litigation settlement.
- Liquidity Improvement: Cash and cash equivalents increased by $962 million year-to-date, primarily due to litigation settlement proceeds and improved working capital management (inventory reduction of $387 million).
Guidance, Outlook, and Risks
- Outlook: Management reports improved demand in all divisions during Q3 2009 and remains cautiously optimistic about the economic recovery. The company is executing a cost reduction program targeting $150 million in annual savings, including a 10% reduction in full-time employees.
- Tronox Acquisition: Huntsman entered into a "stalking horse" agreement to acquire certain assets of Tronox Incorporated for approximately $415 million. The transaction is subject to bankruptcy court approval and an auction process. Approximately 50% of the purchase price is intended to be financed with debt.
- Plant Closures: The company announced the closure of its West Footscray, Australia, styrenics facility, with operations ceasing by year-end 2009. Estimated closure costs are $55 million in 2009 and an additional $15 million in 2010, including $30 million for environmental remediation.
- Legal and Environmental Risks: Significant contingencies include ongoing antitrust litigation regarding polyether polyol products, MTBE groundwater contamination claims, and asbestos exposure cases. The company is also engaged in binding arbitration regarding insurance recoveries for the 2006 Port Arthur plant fire, with an additional $242 million claimed.
- Accounting Changes: New accounting guidance (SFAS No. 166/167) adopted in 2010 may require the company's accounts receivable securitization programs to be accounted for as secured borrowings rather than sales, potentially impacting the balance sheet presentation.
Key Facts for Investor Verification
- Sustainability of Earnings: Verify the extent to which the reported nine-month net income of $48 million is driven by the non-recurring $835 million litigation gain versus core operating performance.
- Tronox Transaction Status: Monitor the bankruptcy court auction process for Tronox assets, as the deal is subject to higher bids and regulatory approval.
- Debt Covenants: Confirm continued compliance with the Senior Credit Facilities' Leverage Covenant, which was waived and amended in April 2009 to allow a maximum ratio of 5.00 to 1.00.
- Environmental Liabilities: Assess the potential for the $30 million preliminary environmental remediation estimate for the Australian facility to increase materially.
- Insurance Recovery: Track the outcome of the binding arbitration regarding the Port Arthur fire claim, where $242 million remains unpaid.