Huntsman Corporation — Form 10-Q Summary
Period clarification: The request identifies 2013 Q2, but the supplied filing is for the quarter ended June 30, 2014, with comparisons to 2013. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Huntsman International LLC is Huntsman Corporation’s wholly owned principal operating subsidiary, and the filing presents both registrants.
Business context and reporting period
Huntsman manufactures differentiated organic and inorganic chemicals for global consumer and industrial markets. It reports five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments. The interim financial statements are unaudited; management states that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $2,988 | $2,830 | $5,743 | $5,532 |
| Gross profit | $505 | $451 | $955 | $800 |
| Operating income | $216 | $141 | $366 | $191 |
| Net income attributable to Huntsman Corporation | $119 | $47 | $173 | $23 |
| Diluted earnings per share | $0.48 | $0.19 | $0.71 | $0.10 |
| EBITDA | $327 | $249 | $588 | $361 |
| Adjusted EBITDA | $363 | $304 | $692 | $524 |
Q2 gross margin was approximately 16.9% versus 15.9% a year earlier; operating margin was approximately 7.2% versus 5.0%. For the first half, gross margin was approximately 16.6% versus 14.5%, and operating margin approximately 6.4% versus 3.5%. Adjusted EBITDA and adjusted net income are non-GAAP measures; Huntsman reported adjusted net income of $145 million for Q2 and $250 million for the first half, compared with $94 million and $140 million, respectively, in 2013.
- Cash flow: First-half operating cash flow was negative $17 million, compared with negative $2 million in 2013. Investing cash outflow was $202 million, including $214 million of capital expenditures. Financing provided $103 million, versus $27 million used in the prior-year period. Cash and cash equivalents fell to $403 million from $520 million at year-end 2013.
- Liquidity: Working capital was $2.304 billion, up $304 million from year-end, largely reflecting higher receivables and inventory. Management reported $1.072 billion of combined cash and unused borrowing capacity at June 30: $412 million cash and restricted cash, $383 million revolving-facility availability, and $277 million accounts-receivable-program availability.
- Debt: Debt excluding affiliate obligations was $4.066 billion, up from $3.910 billion at year-end; Huntsman Corporation’s reported total including noncurrent affiliate debt was $4.071 billion. Current debt was $257 million and long-term debt $3.809 billion. Huntsman International separately reported $812 million of affiliate notes payable, including a $100 million current portion.
- Dividends: Huntsman paid $0.125 per share each quarter, or $0.25 per share for the first half.
Material changes versus the comparable period
- Q2 revenue rose 6%, while first-half revenue rose 4%. Management attributed growth mainly to higher selling prices and, in several segments, higher sales volumes.
- Profitability improved substantially: Q2 operating income increased 53% and first-half operating income increased 92%. Lower restructuring costs and improved margins contributed. First-half 2013 results also included a $35 million loss on early debt extinguishment, absent in 2014.
- First-half segment EBITDA increased to $588 million from $361 million. Advanced Materials EBITDA was $91 million versus $27 million; Performance Products was $209 million versus $154 million; Textile Effects improved to $22 million from a $36 million loss. Pigments EBITDA declined to $25 million from $28 million.
- Q2 segment trends were mixed: Polyurethanes EBITDA rose to $186 million from $163 million, Performance Products to $117 million from $105 million, and Advanced Materials to $50 million from $24 million. Textile Effects turned positive at $14 million versus a $9 million loss; Pigments fell to $12 million from $25 million.
- Operating cash flow remained negative and weakened year over year, as working-capital investment—particularly receivables and inventories—absorbed cash. Capital expenditures rose to $214 million from $181 million.
Outlook, management commentary, risks, and unusual items
- Outlook: Management described strong earnings growth, growing demand for MDI and amines, and improving selling prices across many products. It said the company was positioned for accelerated growth over the next two to three years. These are management expectations, not quantified earnings guidance.
- Segment outlook: Management cited strong MDI demand in the U.S. and Asia, improving amines volumes and margins, a strong aerospace market, and expected benefits from European surfactants restructuring in 2015. Risks or offsets included high benzene costs, weak base-liquid-resin epoxy demand, a seasonal European slowdown in Q3, and environmental regulation-driven raw-material costs.
- Spending and taxes: Expected 2014 capital expenditures were approximately $500 million, excluding the proposed Rockwood acquisition. Management expected a full-year adjusted effective tax rate in the low thirties, excluding that acquisition, and a long-term adjusted rate of approximately 30%.
- Acquisition: Huntsman planned to acquire Rockwood’s Performance Additives and Titanium Dioxide businesses for approximately $1.05 billion in cash, subject to adjustments, and assume estimated unfunded pension liabilities of $225 million. Regulatory approval remained pending; management expected European Commission approval by the end of Q3 2014 and had extended the purchase agreement to the end of October. Financing commitments included a proposed $1.2 billion term loan and a $200 million revolving-facility increase; the company was seeking to extend the financing commitments.
- Restructuring and unusual items: Huntsman completed the sale of its European commodity surfactants business to Wilmar on June 25, recognizing a $2 million gain, and planned to cease production at its Patrica, Italy facility by October 2014. First-half restructuring, impairment, and plant-closing costs were $52 million versus $73 million. Management expected approximately $240 million of cost savings from restructuring programs through early 2015 and anticipated up to approximately $39 million of additional restructuring and plant-closing costs.
- Operational issue: A Port Neches, Texas manufacturing disruption reduced Polyurethanes EBITDA by approximately $10 million.
- Debt and covenant risk: The company said it was in compliance with covenants on its material debt, but Arabian Amines, a consolidated 50%-owned joint venture, was not compliant with certain financial covenants on $166 million of borrowing commitments. Those borrowings were classified as current; management said lenders had agreed to modifications and it expected to resolve the issue. The company’s revolving facility covenant and receivables-program metrics also present potential liquidity and cross-default risks.
- Contingencies: Disclosed matters included asbestos claims (including an approximately $10 million accrued liability with a corresponding indemnity receivable), unresolved titanium-dioxide antitrust claims with no accrual and no estimable loss range, and a customer product-delivery claim with a stated possible loss range of €0–€113 million and no accrual. Environmental liabilities accrued were $28 million; the company could not estimate potential excess losses. A Port Neches flaring enforcement matter had unresolved potential penalties or injunctive relief.
- Other risks: Exposure includes volatile raw-material and commodity costs, foreign exchange and interest rates, environmental and greenhouse-gas regulation, pension funding, and restrictions on moving some foreign-subsidiary cash. Management stated disclosure controls were effective as of June 30, 2014, with no material quarterly change to internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing period: the supplied document is Q2 2014, not Q2 2013.
- Track conversion of higher reported earnings and EBITDA into operating cash flow, especially receivables, inventories, and planned capital spending.
- Verify the Rockwood transaction’s regulatory approval, financing extension, final purchase terms, and pension-liability assumption.
- Monitor Arabian Amines covenant remediation and the classification or refinancing of its current debt.
- Assess the scale, timing, and execution of restructuring savings and planned facility closures against expected additional costs.
- Follow outcomes and potential exposure from the product-delivery, antitrust, asbestos, environmental, and Port Neches flaring matters.