Huntsman Corporation — Form 10-Q summary
Period clarification: The supplied filing is for the quarter ended September 30, 2010, not 2009 Q3 as stated in the request metadata. Figures below are in U.S. dollars; financial amounts are in millions unless noted. Huntsman International LLC is the wholly owned principal operating company.
Business context and reporting period
Huntsman is a global chemicals manufacturer operating five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. The filing reports results for the three and nine months ended September 30, 2010, compared with the same periods in 2009. Australian styrenics operations are reported as discontinued operations.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $2,401 | $2,075 | $6,838 | $5,601 |
| Gross profit | $415 | $342 | $1,081 | $724 |
| Gross margin | 17.3% | 16.5% | 15.8% | 12.9% |
| Operating income (loss) | $167 | $85 | $316 | $(64) |
| Net income (loss) attributable to Huntsman Corporation | $55 | $(68) | $(3) | $48 |
| Adjusted EBITDA | $273 | $205 | $653 | $355 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $(350) | $907 |
Q3 operating margin was approximately 7.0%, versus 4.1% in Q3 2009. Nine-month operating margin was approximately 4.6%, versus a negative 1.1%. Huntsman International reported nine-month net income of $149 million, compared with a $451 million net loss in 2009; its results differ from the parent primarily because of parent-level debt and transaction items.
For the nine months, investing cash flow was $(85) million, including $132 million of capital expenditures and $34 million of insurance proceeds treated as capital-spending reimbursement. Financing cash flow was $(314) million. Cash and cash equivalents fell to $1,003 million from $1,745 million at year-end 2009. Working capital was $2,388 million, versus $2,329 million.
At September 30, 2010, total debt excluding affiliate debt was $4,337 million, comprising $384 million current and $3,953 million long-term. Huntsman International also reported $539 million of affiliate notes payable. The company cited $1,471 million of combined cash, restricted cash and available borrowing capacity; this included $256 million available under the revolving facility and $204 million under receivables programs. No revolving-facility borrowings were outstanding, though $34 million of letters of credit and guarantees were issued.
Material changes versus comparable periods
- Q3 revenue rose 16% year over year, with higher prices and volumes across all segments. Nine-month revenue rose 22%; total sales volumes also increased.
- Gross profit increased in Q3 and year to date. Nine-month restructuring charges declined to $24 million from $83 million.
- Q3 adjusted EBITDA increased to $273 million from $205 million. Nine-month adjusted EBITDA increased to $653 million from $355 million. Reported EBITDA is less comparable: 2009 included a large litigation-related gain, while 2010 included substantial debt-extinguishment losses.
- Operating cash flow swung to a $350 million use from $907 million provided in the prior-year period. Management attributed the change to the absence of 2009 settlement proceeds and working-capital outflows; adoption of accounting guidance also brought $254 million of receivables-program financing onto the balance sheet.
- Segment revenue increased year over year in all five businesses. Q3 Polyurethanes EBITDA declined to $102 million from $137 million, while Performance Products, Advanced Materials, Textile Effects and Pigments improved. Nine-month Polyurethanes EBITDA was $224 million, down from $249 million.
Outlook, management commentary, risks and unusual items
- Management said global demand and margins were recovering and expected earnings to improve in the near term, while allowing for typical fourth-quarter seasonality. It cautioned that continuing economic risks could materially affect results. Advanced Materials and Textile Effects volumes remained below 2007 levels; Polyurethanes and Textile Effects had not returned to historical average profitability.
- Management expected 2010 capital expenditures of $200–$225 million, net of reimbursements. It expected an additional $21 million of pension and postretirement contributions in the remainder of 2010, and said most current debt facilities were intended to be renewed, repaid or extended.
- Debt refinancing was significant: Huntsman International issued $350 million of 8.625% subordinated notes due 2021 in September and $350 million of similar notes due 2020 in March, using proceeds to redeem older notes. A further $180 million 2021-note offering was priced after quarter-end, with proceeds intended to redeem remaining 2014 notes. The January repurchase of $250 million convertible notes for about $382 million contributed $146 million to the parent’s nine-month debt-extinguishment loss.
- A $110 million Port Arthur fire-insurance settlement was recognized as a pretax gain in discontinued operations; proceeds were partly used to prepay term debt. Huntsman also recorded an $18 million nonrecurring equity-income correction related to its Sasol-Huntsman joint venture.
- Beginning July 1, Huntsman consolidated Arabian Amines Company (AAC), adding its assets and debt; AAC had $181 million of long-term debt at September 30. Huntsman also agreed to acquire India-based Laffans for an estimated $21 million, subject to conditions and expected to close in the first half of 2011.
- Key contingencies include antitrust litigation involving urethane products and titanium dioxide, asbestos claims, environmental remediation obligations, and an unresolved New South Wales proceeding concerning an ethylene oxide release. The filing says loss estimates for certain litigation and environmental matters cannot be determined. Environmental liabilities accrued were $45 million.
- An internal investigation at Indian joint venture Petro Araldite identified environmental, reporting, product-sale and potential improper-payment issues. Huntsman disclosed the matter to the SEC and DOJ, said it was cooperating, and noted that potential penalties, remediation costs and operational impacts were not yet determinable.
- Management stated it believed the company was in compliance with material debt covenants and had sufficient liquidity. The revolving facility’s leverage covenant is 3.75-to-1 when applicable; a default could restrict access to liquidity and potentially trigger repayment. Disclosure controls were judged effective as of quarter-end.
Important facts for investors to verify
- Confirm the intended reporting period: this document is the 2010 Q3 filing, with 2009 figures shown as comparisons.
- Review cash-flow and working-capital trends, including receivables and inventory growth, and distinguish accounting effects of the receivables programs from underlying cash generation.
- Assess debt maturities, refinancing costs, covenant headroom and the completion and use of proceeds from the post-quarter-end note offering.
- Separate recurring operating performance from unusual items, including debt-extinguishment losses, the insurance settlement, the Sasol-Huntsman correction and the prior-year litigation gain.
- Monitor Polyurethanes margins and the unresolved legal, environmental and Petro Araldite matters, whose potential financial effects are not fully quantified in the filing.