Huntsman Corporation — Form 10-Q Summary
Period and entity: The filing covers the three months ended March 31, 2013, with comparison to the three months ended March 31, 2012. Huntsman International LLC is Huntsman Corporation’s wholly owned principal operating subsidiary. Although the request metadata says 2012 Q1, the supplied filing is for 2013 Q1.
Business context
Huntsman is a global manufacturer of differentiated organic and inorganic chemicals, operating in Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. Results are unaudited interim results prepared under U.S. GAAP; management cautions that interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $2.702 billion | $2.913 billion |
| Gross profit | $349 million | $550 million |
| Gross margin | 12.9% | 18.9% |
| Operating income | $50 million | $285 million |
| Net income (loss) attributable to Huntsman Corporation | $(24) million; $(0.10) per share | $163 million; $0.69 per share |
| Adjusted EBITDA | $220 million | $407 million |
| Operating cash flow | $(74) million | $190 million |
All amounts are in U.S. dollars. Gross margin percentages are calculated from reported revenue and gross profit. Capital expenditures were $89 million, versus $81 million. Investing cash outflow was $85 million; financing cash inflow was $21 million. Cash and cash equivalents were $247 million at March 31, down from $387 million at year-end 2012; working capital was $1.880 billion, down $58 million.
Total debt excluding affiliate debt was $3.787 billion, compared with $3.702 billion at year-end; the current portion was $298 million. Huntsman reported $832 million of combined cash and unused borrowing capacity, including $256 million cash and restricted cash, $382 million of revolver availability and $194 million of accounts-receivable-program availability. The $400 million revolving facility had no borrowings outstanding; approximately $18 million of letters of credit and guarantees were outstanding.
Material changes versus Q1 2012
- Revenue fell 7%; management attributed the decrease to lower selling prices, particularly in Textile Effects and Pigments, and lower volumes across most segments.
- Gross profit declined $201 million, reflecting lower gross margins in every segment. Operating income fell 82%.
- Adjusted EBITDA declined 46% to $220 million. Reported EBITDA was $112 million, down from $390 million.
- Segment EBITDA weakened substantially in Performance Products ($49 million versus $89 million), Advanced Materials ($3 million versus $31 million), Textile Effects ($(27) million versus $(5) million) and Pigments ($3 million versus $146 million). Polyurethanes was $167 million versus $171 million.
- Operating cash flow swung to an outflow, mainly reflecting weaker operating results and working-capital movements.
Outlook, commentary and notable items
- Management reported meaningful improvement in MDI polyurethane margins and expected the trend to continue as industry fundamentals improved. It expected year-over-year improvement across all segments other than Pigments, supported by the Port Neches restart and cost-reduction efforts.
- Segment outlook: 2013 Adjusted EBITDA was expected to be similar to 2012 for Polyurethanes and Performance Products, better for Advanced Materials, positive for Textile Effects, and below 2012 for Pigments. Pigments was expected to face near-term margin pressure, with improvement in the second half. Polyurethanes also cited a Rotterdam MDI force majeure in Q2.
- Management expected approximately $450 million of 2013 capital expenditures, a 35% adjusted effective tax rate and a 45% unadjusted effective tax rate; its stated long-term effective tax-rate expectation was 30%–35%.
- Scheduled Port Neches maintenance was completed in Q1 and was estimated to reduce Q1 EBITDA by approximately $55 million. The maintenance occurs approximately every four years.
- Q1 included $44 million in restructuring, impairment and plant-closing costs and a $35 million loss on early extinguishment of debt. The debt loss mainly followed redemption of $200 million of 5.50% notes due 2016, funded through issuance of additional 4.875% notes due 2020. A separate $225 million term loan issuance refinanced the remaining $193 million Term Loan B balance.
- Restructuring programs were expected to reduce costs by approximately $220 million by mid-2014. Management expected up to approximately $81 million of additional restructuring and plant-closing costs; the filing reports $115 million of accrued restructuring costs from continuing operations in its liquidity discussion.
- On April 29, 2013, after quarter-end, the U.S. and EU receivables programs were extended to April 2016; the amendments also reduced borrowing margins, and the U.S. program added availability.
- In March, Huntsman acquired a 20% interest in Japan’s Nippon Aqua and entered a 10-year supply agreement.
Risks and contingencies
- Arabian Amines Company, a consolidated 50%-owned joint venture, had $179 million outstanding on loan commitments and was not in compliance with payment and other obligations. Huntsman said it was negotiating with lenders and expected resolution; the amounts were classified as current. Huntsman did not guarantee the commitments.
- Debt and receivables facilities have financial and performance covenants; defaults could restrict liquidity, accelerate repayment or trigger cross-defaults. Management said it believed it was compliant with material debt covenants, apart from the joint venture matter.
- Material unresolved matters include U.S. titanium-dioxide antitrust class actions, with damages sought but no loss accrual because the company could not reasonably estimate potential loss; and a customer product-delivery claim with current asserted claims of approximately €113 million. Huntsman stated possible loss on the delivery matter ranged from €0 to €113 million and recorded no accrual, citing insurance for liability above $10 million.
- Environmental and regulatory exposures include a $29 million remediation accrual for the former West Footscray site, $34 million of total environmental liabilities, and an EPA/DOJ matter alleging Clean Air Act violations at Port Neches flare operations. The company could not estimate potential penalties or injunctive relief for the flare matter.
- Asbestos claims tendered to prior owners had a $10 million accrued liability and a corresponding $10 million indemnity receivable. The filing notes indemnity performance and future liability are not assured.
- Foreign exchange, interest-rate and commodity-price movements remain risks; Huntsman disclosed approximately $229 million notional value of foreign-currency forwards and stated that its hedging does not eliminate currency exposure.
Most important facts for investors to verify
- Whether margins and segment earnings recover as forecast, particularly after Port Neches maintenance and amid the Rotterdam force majeure.
- Whether cash generation can support the $450 million capital-spending plan, pension contributions and restructuring payments while maintaining liquidity.
- Resolution and cash implications of Arabian Amines’ covenant noncompliance and the company’s upcoming current debt maturities.
- Actual delivery-claim exposure, insurance recovery, antitrust developments and potential Port Neches environmental penalties.
- Progress toward the stated $220 million cost-reduction target and whether the expected restructuring charges remain within management’s estimates.