Huntsman Corporation — Form 10-Q summary
Period: Quarter and nine months ended September 30, 2013. The request metadata says “2012 Q3,” but the filing itself is for 2013 Q3.
Scope: The filing covers Huntsman Corporation and its wholly owned operating subsidiary, Huntsman International LLC. Unless noted, financial amounts below are in U.S. dollars and millions; results are unaudited.
Business context and reporting period
Huntsman is a global chemical manufacturer operating in Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. Its products serve a broad range of industrial and consumer markets.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2,842 | $2,741 | $8,374 | $8,568 |
| Gross profit | $507 | $537 | $1,307 | $1,614 |
| Operating income | $198 | $235 | $389 | $770 |
| Net income attributable to Huntsman Corporation | $64 | $116 | $87 | $403 |
| Adjusted EBITDA | $376 | $411 | $900 | $1,194 |
| Diluted EPS | $0.26 | $0.48 | $0.36 | $1.68 |
Q3 gross margin was approximately 17.8%, versus 19.6% a year earlier; operating margin was approximately 7.0%, versus 8.6%. Nine-month gross margin was approximately 15.6%, versus 18.8%, and operating margin was approximately 4.6%, versus 9.0%. GAAP results include restructuring charges and other items; management’s adjusted measures exclude specified items and are supplemental, non-GAAP measures.
- Q3 change: Revenue rose 4%, but gross profit fell 6%, operating income fell 16%, and Huntsman Corporation net income fell 45%. Management attributed the gross-profit decline mainly to lower margins in Polyurethanes and Pigments. Lower interest expense partly offset operating pressure; higher tax expense reduced earnings.
- Nine-month change: Revenue declined 2%, while gross profit fell 19%, operating income 49%, net income 78%, and adjusted EBITDA 25%. Lower margins across most segments, higher restructuring costs and a $35 million debt-extinguishment loss weighed on results.
- Cash flow: Operating cash flow was $388 million for the first nine months, down from $556 million. Investing used $388 million, including $295 million of capital expenditures and $66 million for the Oxid acquisition. Financing provided $12 million, versus $378 million used in the prior-year period. Cash and cash equivalents ended at $397 million, up from $387 million at year-end 2012.
- Balance sheet and liquidity: At September 30, cash and restricted cash totaled $406 million; current assets were $4,126 million and current liabilities $2,097 million, a current ratio of approximately 2.0. Debt excluding affiliate debt was $3,869 million, up from $3,702 million at year-end 2012; $295 million was current. Reported available liquidity was $1,005 million, comprising $406 million of cash and restricted cash, $382 million of revolving-facility availability and $217 million under receivables programs.
- Dividends: Huntsman paid $0.125 per share in each of the first three quarters of 2013, versus $0.10 per share per quarter in 2012.
Segments and material changes
- Q3: Polyurethanes revenue increased 6% to $1,306 million and EBITDA was $203 million, unchanged. Performance Products revenue increased 4% to $779 million, while EBITDA was $106 million, slightly lower. Advanced Materials revenue declined 6% to $309 million, but EBITDA rose to $33 million from $24 million. Textile Effects revenue increased 9% to $198 million; EBITDA remained negative, improving to $(18) million from $(22) million. Pigments revenue declined 3% to $310 million and EBITDA fell to $27 million from $69 million, chiefly due to lower selling prices and margins amid high industry inventories.
- Nine months: Pigments EBITDA fell to $55 million from $346 million, the largest segment decline. Textile Effects EBITDA worsened to $(54) million from $(37) million. Polyurethanes, Performance Products and Advanced Materials EBITDA also declined year over year. Management cited, among other factors, the Rotterdam MDI outage, scheduled Port Neches maintenance, weaker demand and competition in parts of Advanced Materials, and restructuring and transition costs.
- Restructuring, impairment and plant-closing costs were $110 million for the first nine months, versus $52 million in 2012. Huntsman reported approximately $100 million of annualized EBITDA benefit from restructuring through Q3 and expected its cost-reduction programs to yield approximately $240 million of savings through mid-2014.
Outlook, financing, risks and unusual items
- Management expected 2013 capital expenditures of approximately $450 million, net of reimbursements, and full-year adjusted and unadjusted effective tax rates of approximately 36% and 50%, respectively. Its stated long-term effective tax-rate expectation was 30%–35%.
- Management described U.S. and Asian MDI demand as strong and European demand as modest; it expected Q4 2013 PO/MTBE adjusted EBITDA below Q4 2012. It cited a U.S. Gulf Coast raw-material advantage for Performance Products, pressure in European surfactants, strong aerospace demand but a weak base-liquid-resin epoxy market in Advanced Materials, and improving Pigments contribution margins.
- Huntsman agreed to acquire Rockwood’s Performance Additives and Titanium Dioxide businesses for approximately $1.1 billion cash and assumption of about $225 million in unfunded pension liabilities. Closing, subject to approvals and customary conditions, was expected in the first half of 2014. An October 2013 credit amendment permitted a $1.2 billion term loan and a possible revolving-facility increase; Huntsman had financing commitments and intended to use the term-loan proceeds for the acquisition.
- Huntsman completed the Oxid specialty urethane polyols acquisition in August 2013 for approximately $76 million, including $66 million cash and $10 million contingent consideration. Management said it was accretive to Polyurethanes earnings.
- Arabian Amines, a consolidated 50%-owned joint venture, had $175 million outstanding and was not in compliance with payment and other loan obligations. Huntsman said it did not guarantee those loans, was discussing a resolution with lenders, and classified the amounts as current. Huntsman stated it believed it was otherwise in compliance with material debt covenants.
- Material contingencies include a titanium-dioxide direct-purchaser antitrust settlement, fully accrued but awaiting final approval, and separate indirect-purchaser litigation for which no accrual was recorded. A customer product-delivery claim had a stated possible loss range of €0–€113 million, with no accrual; Huntsman said insurance may cover liability above $10 million. Environmental liabilities were accrued at $29 million, including $25 million for an Australian site; the filing says additional exposure could not be estimated. The company also disclosed asbestos claims and an EPA/DOJ matter concerning alleged Port Neches flaring violations for which potential penalties or injunctive relief could not be estimated.
- Key operating risks include chemical-market demand and pricing, raw-material and energy costs, foreign-exchange movements, environmental and regulatory requirements, restructuring execution, working-capital volatility, and the ability to maintain access to debt and receivables facilities. Management said foreign-currency exposures were not fully hedged.
Important facts for investors to verify
- Whether the Rockwood acquisition closed on the expected timetable, its final purchase and pension-liability terms, and the resulting funding and leverage.
- Whether restructuring savings materialized as projected and whether the major segment pressures—especially Pigments and Textile Effects—improved.
- The resolution and repayment status of Arabian Amines’ noncompliant loans, and any resulting effect on consolidated liquidity or debt classification.
- Subsequent operating cash flow, capital spending, working-capital needs and available borrowing capacity, including any constraints on foreign cash.
- Updates to the product-delivery claim, antitrust matters and environmental proceedings, including any changes in accruals, insurance recovery or estimated exposure.