UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

 

 (Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2007

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from         to         

 


 

Commission
File Number

 

Exact Name of Registrant as Specified in its
Charter, Principal Office Address and
Telephone Number

 

State of Incorporation

 

I.R.S. Employer Identification
No.

001-32427

 

Huntsman Corporation

 

Delaware

 

42-1648585

 

 

500 Huntsman Way

 

 

 

 

 

 

Salt Lake City, Utah 84108

 

 

 

 

 

 

(801) 584-5700

 

 

 

 

 

 

 

 

 

 

 

333-85141

 

Huntsman International LLC

 

Delaware

 

87-0630358

 

 

500 Huntsman Way

 

 

 

 

 

 

Salt Lake City, Utah 84108

 

 

 

 

 

 

(801) 584-5700

 

 

 

 

 

 

 

 

 

 

 


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Huntsman Corporation

YES x

NO o

Huntsman International LLC

YES x

NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Huntsman Corporation

Large accelerated filer x

Accelerated filer o

Non-accelerated filer  o

Huntsman International LLC

Large accelerated filer o

Accelerated filer o

Non-accelerated filer  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Huntsman Corporation

YES o

NO x

Huntsman International LLC

YES o

NO x


On May 1, 2007, 221,901,565 shares of common stock of Huntsman Corporation were outstanding and 2,728 units of membership interests of Huntsman International LLC (“Huntsman International”) were outstanding. There is no established trading market for Huntsman International’s units of membership interests. All of Huntsman International’s units of membership interests are held by Huntsman Corporation.


This Quarterly Report on Form 10-Q presents information for two registrants: Huntsman Corporation and Huntsman International. Huntsman International is a wholly owned subsidiary of Huntsman Corporation and is the principal operating company of Huntsman Corporation. The information reflected in this Quarterly Report on Form 10-Q is equally applicable to both Huntsman Corporation and Huntsman International, except where otherwise indicated. Huntsman International meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and, to the extent applicable, is therefore filing this form with a reduced disclosure format.

 

 




HUNTSMAN CORPORATION AND SUBSIDIARIES
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2007

TABLE OF CONTENTS

PART I

 

FINANCIAL INFORMATION

 

 

 

ITEM 1.

 

Financial Statements:

 

 

 

 

 

Huntsman Corporation and Subsidiaries:

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

Huntsman International LLC and Subsidiaries:

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

Huntsman Corporation and Subsidiaries and Huntsman International LLC and Subsidiaries:

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

ITEM 4.

 

Controls and Procedures

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

ITEM 1.

 

Legal Proceedings

 

 

 

ITEM 1A.

 

Risk Factors

 

 

 

ITEM 6.

 

Exhibits

 

 

 

 

 




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Millions, Except Share and Per Share Amounts)

 

 

March 31, 
2007 

 

December 31,
2006 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

143.5

 

$

263.2

 

Accounts receivable (net of allowance for doubtful accounts of $40.2 and $39.0, respectively)

 

1,385.1

 

1,243.2

 

Accounts receivable from affiliates

 

15.7

 

14.1

 

Inventories, net

 

1,581.8

 

1,520.1

 

Prepaid expenses

 

46.2

 

55.7

 

Deferred income taxes

 

62.9

 

64.6

 

Other current assets

 

170.5

 

175.7

 

Total current assets

 

3,405.7

 

3,336.6

 

 

 

 

 

 

 

Property, plant and equipment, net

 

4,106.7

 

4,059.4

 

Investment in unconsolidated affiliates

 

212.7

 

201.0

 

Intangible assets, net

 

186.2

 

187.6

 

Goodwill

 

91.7

 

90.2

 

Deferred income taxes

 

208.3

 

190.4

 

Other noncurrent assets

 

402.1

 

379.7

 

Total assets

 

$

8,613.4

 

$

8,444.9

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,104.5

 

$

1,006.2

 

Accounts payable to affiliates

 

12.4

 

12.0

 

Accrued liabilities

 

821.6

 

857.6

 

Deferred income taxes

 

8.1

 

9.4

 

Current portion of long-term debt

 

178.8

 

187.9

 

Total current liabilities

 

2,125.4

 

2,073.1

 

 

 

 

 

 

 

Long-term debt

 

3,516.0

 

3,457.4

 

Deferred income taxes

 

193.5

 

192.6

 

Other noncurrent liabilities

 

963.8

 

955.8

 

Total liabilities

 

6,798.7

 

6,678.9

 

 

 

 

 

 

 

Minority interests in common stock of consolidated subsidiaries

 

30.3

 

29.4

 

 

 

 

 

 

 

Commitments and contingencies (Notes 13 and 14)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock $0.01 par value, 1,200,000,000 shares authorized, 221,901,565 and 221,549,461 issued and 220,934,763 and 220,652,429 outstanding in 2007 and 2006, respectively

 

2.2

 

2.2

 

Mandatory convertible preferred stock $0.01 par value, 100,000,000 shares authorized, 5,750,000 issued and outstanding

 

287.5

 

287.5

 

Additional paid-in capital

 

2,810.5

 

2,798.4

 

Unearned stock-based compensation

 

(19.2

)

(12.5

)

Accumulated deficit

 

(1,255.4

)

(1,277.6

)

Accumulated other comprehensive loss

 

(41.2

)

(61.4

)

Total stockholders’ equity

 

1,784.4

 

1,736.6

 

Total liabilities and stockholders’ equity

 

$

8,613.4

 

$

8,444.9

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

1




HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
(Dollars In Millions)

 

 

 

Three months ended March 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Trade sales, services and fees

 

$

2,629.3

 

$

2,641.9

 

Related party sales

 

18.0

 

14.8

 

Total revenues

 

2,647.3

 

2,656.7

 

Cost of goods sold

 

2,240.0

 

2,262.9

 

 

 

 

 

 

 

Gross profit

 

407.3

 

393.8

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

219.0

 

167.6

 

Research and development

 

33.3

 

27.3

 

Other operating expense

 

5.9

 

0.5

 

Restructuring, impairment and plant closing costs

 

12.2

 

7.7

 

Total expenses

 

270.4

 

203.1

 

Operating income

 

136.9

 

190.7

 

 

 

 

 

 

 

Interest expense, net

 

(73.8

)

(86.8

)

Loss on accounts receivable securitization program

 

(5.4

)

(2.3

)

Equity in income of investment in unconsolidated affiliates

 

2.2

 

0.7

 

Loss on early extinguishment of debt

 

(1.4

)

 

Other income (expense)

 

0.5

 

(0.3

)

 

 

 

 

 

 

Income from continuing operations before income taxes and minority interest

 

59.0

 

102.0

 

Income tax expense

 

(13.0

)

(15.5

)

Minority interest in subsidiaries’ income

 

(0.4

)

(0.4

)

Income from continuing operations

 

45.6

 

86.1

 

Loss from discontinued operations, net of tax

 

(1.4

)

(17.1

)

Income before extraordinary gain

 

44.2

 

69.0

 

Extraordinary gain on the acquisition of a business, net of tax of nil

 

2.4

 

 

Net income

 

$

46.6

 

$

69.0

 

 

 

 

 

 

 

Net income

 

$

46.6

 

$

69.0

 

Other comprehensive income

 

20.2

 

31.0

 

Comprehensive income

 

$

66.8

 

$

100.0

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

(continued)

2




HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
(Continued)
(In Millions, Except Per Share Amounts)

 

 

 

Three months ended March 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Basic income (loss) per share:

 

 

 

 

 

Income from continuing operations

 

$

0.21

 

$

0.39

 

Loss from discontinued operations, net of tax

 

(0.01

)

(0.08

)

Extraordinary gain on the acquisition of a business, net of tax

 

0.01

 

 

Net income

 

$

0.21

 

$

0.31

 

Weighted average shares

 

220.8

 

220.6

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

 

 

 

 

Income from continuing operations

 

$

0.20

 

$

0.37

 

Loss from discontinued operations, net of tax

 

(0.01

)

(0.07

)

Extraordinary gain on the acquisition of a business, net of tax

 

0.01

 

 

Net income

 

$

0.20

 

$

0.30

 

Weighted average shares

 

233.4

 

233.1

 

 

 

 

 

 

 

Dividends paid per share

 

$

0.10

 

$

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

3




HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)

 

 

Three months ended March 31,

 

 

 

2007

 

2006

 

Operating Activities:

 

 

 

 

 

Net income

 

$

46.6

 

$

69.0

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Extraordinary gain on the acquisiton of business, net of tax

 

(2.4

)

 

Equity in income of unconsolidated affiliates

 

(2.2

)

(0.7

)

Depreciation and amortization

 

109.2

 

117.0

 

Provision for losses on accounts receivable

 

2.7

 

2.2

 

Loss (gain) on disposal of assets

 

(3.2

)

(0.2

)

Loss on early extinguishment of debt

 

1.4

 

 

Noncash interest expense (income)

 

1.0

 

(1.7

)

Noncash restructuring, impairment and plant closing costs

 

5.8

 

2.0

 

Deferred income taxes

 

4.2

 

7.3

 

Net unrealized (gain) loss on foreign currency transactions

 

(4.8

)

6.7

 

Stock-based compensation

 

5.3

 

3.5

 

Minority interest in subsidiaries’ income

 

0.4

 

0.4

 

Other, net

 

3.2

 

(1.3

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts and notes receivable

 

(103.1

)

69.4

 

Inventories, net

 

(59.9

)

(12.7

)

Prepaid expenses

 

10.3

 

6.6

 

Other current assets

 

5.0

 

46.9

 

Other noncurrent assets

 

(21.7

)

10.5

 

Accounts payable

 

46.1

 

(71.2

)

Accrued liabilities

 

(68.0

)

(156.6

)

Other noncurrent liabilities

 

(6.7

)

(16.8

)

Net cash (used in) provided by operating activities

 

(30.8

)

80.3

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Capital expenditures

 

(105.2

)

(104.1

)

Proceeds from sale of assets

 

15.8

 

8.5

 

Investment in unconsolidated affiliates, net

 

(13.0

)

(17.1

)

Proceeds from government securities, restricted as to use

 

3.6

 

3.6

 

Other, net

 

(0.4

)

 

Net cash used in investing activities

 

(99.2

)

(109.1

)

 

See accompanying notes to condensed consolidated financial statements (unaudited).

(continued)

4




HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
(Dollars in Millions)

 

 

Three months ended March 31,

 

 

 

2007

 

2006

 

Financing Activities:

 

 

 

 

 

Net borrowings under revolving loan facilities

 

$

93.7

 

$

34.0

 

Net borrowings from overdraft facilities and other short-term debt

 

12.3

 

8.1

 

Repayments of long-term debt

 

(225.9

)

(0.8

)

Proceeds from long-term debt

 

169.0

 

2.5

 

Repayments on notes payable

 

(18.4

)

(11.4

)

Proceeds from notes payable

 

4.7

 

 

Dividends paid to common shareholders

 

(22.1

)

 

Dividends paid to preferred stockholders

 

(3.6

)

(3.6

)

Call premiums related to early extinguishment of debt

 

(1.2

)

 

Debt issuance costs paid

 

(1.7

)

 

Contribution from minority shareholder

 

 

6.2

 

Other, net

 

(0.1

)

2.0

 

Net cash provided by financing activities

 

6.7

 

37.0

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

3.6

 

(0.7

)

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(119.7

)

7.5

 

Cash and cash equivalents at beginning of period

 

263.2

 

142.8

 

Cash and cash equivalents at end of period

 

$

143.5

 

$

150.3

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

69.8

 

$

123.2

 

Cash paid for income taxes

 

11.8

 

5.0

 

 

During the three months ended March 31, 2007, we incurred capital expenditures of $131.1 million, of which $105.2 million was paid in cash and $25.9 million was included in accounts payable at March 31, 2007.

See accompanying notes to condensed consolidated financial statements (unaudited).

5




HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Millions)

 

 

March 31, 
2007 

 

December 31,
2006  

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

143.5

 

$

246.0

 

Accounts receivable (net of allowance for doubtful accounts of $40.2 and $39.0, respectively)

 

1,385.1

 

1,243.3

 

Accounts receivable from affiliates

 

29.1

 

19.5

 

Inventories, net

 

1,581.8

 

1,520.1

 

Prepaid expenses

 

43.6

 

55.7

 

Deferred income taxes

 

68.9

 

70.7

 

Other current assets

 

156.4

 

161.6

 

Total current assets

 

3,408.4

 

3,316.9

 

 

 

 

 

 

 

Property, plant and equipment, net

 

3,882.7

 

3,829.5

 

Investment in unconsolidated affiliates

 

212.7

 

201.0

 

Intangible assets, net

 

191.0

 

192.6

 

Goodwill

 

91.7

 

90.2

 

Deferred income taxes

 

206.6

 

188.7

 

Other noncurrent assets

 

402.1

 

376.6

 

Total assets

 

$

8,395.2

 

$

8,195.5

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,104.5

 

$

1,006.2

 

Accounts payable to affiliates

 

17.7

 

16.7

 

Accrued liabilities

 

805.8

 

841.7

 

Deferred income taxes

 

8.1

 

9.4

 

Current portion of long-term debt

 

176.4

 

187.9

 

Total current liabilities

 

2,112.5

 

2,061.9

 

 

 

 

 

 

 

Long-term debt

 

3,516.0

 

3,457.4

 

Deferred income taxes

 

174.9

 

161.6

 

Other noncurrent liabilities

 

963.8

 

952.1

 

Total liabilities

 

6,767.2

 

6,633.0

 

 

 

 

 

 

 

Minority interests in common stock of consolidated subsidiaries

 

30.3

 

29.4

 

 

 

 

 

 

 

Commitments and contingencies (Notes 13 and 14)

 

 

 

 

 

 

 

 

 

 

 

Members’ equity:

 

 

 

 

 

Members’ equity, 2,728 units issued and outstanding

 

2,817.0

 

2,811.8

 

Accumulated deficit

 

(1,114.0

)

(1,150.4

)

Accumulated other comprehensive loss

 

(105.3

)

(128.3

)

Total members’ equity

 

1,597.7

 

1,533.1

 

Total liabilities and members’ equity

 

$

8,395.2

 

$

8,195.5

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

6




HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in Millions)

 

 

 

Three months ended March 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Trade sales, services and fees

 

$

2,629.3

 

$

2,641.9

 

Related party sales

 

18.0

 

14.8

 

Total revenues

 

2,647.3

 

2,656.7

 

Cost of goods sold

 

2,238.5

 

2,258.9

 

 

 

 

 

 

 

Gross profit

 

408.8

 

397.8

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

219.0

 

166.8

 

Research and development

 

33.3

 

27.3

 

Other operating expense

 

5.9

 

0.5

 

Restructuring, impairment and plant closing costs

 

12.2

 

7.7

 

Total expenses

 

270.4

 

202.3

 

Operating income

 

138.4

 

195.5

 

 

 

 

 

 

 

Interest expense, net

 

(74.2

)

(88.0

)

Loss on accounts receivable securitization program

 

(5.4

)

(2.3

)

Equity in income of investment in unconsolidated affiliates

 

2.2

 

0.7

 

Loss on early extinguishment of debt

 

(1.8

)

 

Other income (expense)

 

0.5

 

(0.3

)

 

 

 

 

 

 

Income from continuing operations before income taxes and minority interest

 

59.7

 

105.6

 

Income tax expense

 

(24.2

)

(20.8

)

Minority interest in subsidiaries’ income

 

(0.4

)

(0.4

)

Income from continuing operations

 

35.1

 

84.4

 

Loss from discontinued operations, net of tax

 

(1.4

)

(17.1

)

Income before extraordinary gain

 

33.7

 

67.3

 

Extraordinary gain on the acquisition of a business, net of tax of nil

 

2.4

 

 

Net income

 

$

36.1

 

$

67.3

 

 

 

 

 

 

 

Net income

 

$

36.1

 

$

67.3

 

Other comprehensive income

 

23.0

 

34.3

 

Comprehensive income

 

$

59.1

 

$

101.6

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

7




HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)

 

 

 

Three months ended March 31,

 

 

 

2007

 

2006

 

Operating Activities:

 

 

 

 

 

Net income

 

$

36.1

 

$

67.3

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Extraordinary gain on acquisition of a business, net of tax

 

(2.4

)

 

Equity in income of unconsolidated affiliates

 

(2.2

)

(0.7

)

Depreciation and amortization

 

103.5

 

110.2

 

Provision for losses on accounts receivable

 

2.7

 

2.2

 

Loss (gain) on disposal of assets

 

(3.2

)

(0.2

)

Loss on early extinguishment of debt

 

1.8

 

 

Noncash interest expense (income)

 

1.1

 

(0.7

)

Noncash restructuring, impairment and plant closing costs

 

5.8

 

2.0

 

Deferred income taxes

 

15.4

 

12.7

 

Net unrealized (gain) loss on foreign currency transactions

 

(4.8

)

6.7

 

Noncash compensation

 

5.3

 

3.5

 

Minority interest in subsidiaries’ income

 

0.4

 

0.4

 

Other, net

 

(1.5

)

(1.1

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts and notes receivable

 

(103.1

)

69.4

 

Inventories, net

 

(59.9

)

(12.7

)

Prepaid expenses

 

12.9

 

6.1

 

Other current assets

 

5.0

 

46.9

 

Other noncurrent assets

 

(25.2

)

2.0

 

Accounts payable

 

46.1

 

(71.2

)

Accrued liabilities

 

(68.0

)

(157.3

)

Other noncurrent liabilities

 

0.9

 

(9.6

)

Net cash (used in) provided by operating activities

 

(33.3

)

75.9

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Capital expenditures

 

(105.2

)

(104.1

)

Proceeds from sale of assets

 

15.8

 

8.5

 

Investment in unconsolidated affiliates, net

 

(13.0

)

(17.1

)

Other, net

 

(0.4

)

 

Net cash used in investing activities

 

(102.8

)

(112.7

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Net borrowings under revolving loan facilities

 

93.7

 

34.0

 

Net borrowings from overdraft facilities and other short-term debt

 

12.3

 

8.1

 

Repayments of long-term debt

 

(225.9

)

(0.8

)

Proceeds from long-term debt

 

169.0

 

2.5

 

Repayments on notes payable

 

(18.4

)

(10.4

)

Proceeds from notes payable

 

2.3

 

 

Call premiums related to early extinguishment of debt

 

(1.2

)

 

Debt issuance costs paid

 

(1.7

)

 

Contribution from minority shareholder

 

 

6.2

 

Other, net

 

(0.1

)

2.0

 

Net cash provided by financing activities

 

30.0

 

41.6

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

3.6

 

(0.7

)

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(102.5

)

4.1

 

Cash and cash equivalents at beginning of period

 

246.0

 

132.5

 

Cash and cash equivalents at end of period

 

$

143.5

 

$

136.6

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

70.1

 

$

123.5

 

Cash paid for income taxes

 

11.8

 

5.0

 

 

During the three months ended March 31, 2007, we incurred capital expenditures of $131.1 million, of which $105.2 million was paid in cash and $25.9 million was included in amounts payable at March 31, 2007.

See accompanying notes to condensed consolidated financial statements (unaudited).

8




HUNTSMAN CORPORATION AND SUBSIDIARIES
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.             GENERAL

Certain Definitions

“Company,” “our,” “us,” or “we” may be used to refer to Huntsman Corporation and, unless the context otherwise requires, its subsidiaries and predecessors. Any references to our “Company,” “we,” “us” or “our” as of a date prior to October 19, 2004 (the date of our formation) are to Huntsman Holdings, LLC and its subsidiaries (including their respective predecessors). In this report, “Huntsman International” refers to Huntsman International LLC (our 100% owned subsidiary) and, unless the context otherwise requires, its subsidiaries; “Huntsman Advanced Materials” refers to Huntsman Advanced Materials Holdings LLC (our 100% owned indirect subsidiary, the membership interests of which we contributed to Huntsman International on December 20, 2005) and, unless the context otherwise requires, its subsidiaries; “HPS” refers to Huntsman Polyurethanes Shanghai Ltd. (our consolidated splitting joint venture with Shanghai Chlor-Alkali Chemical Company, Ltd); “SLIC” refers to Shanghai Liengheng Isocyanate Investment BV (our unconsolidated manufacturing joint venture with BASF AG and three Chinese chemical companies); “HMP Equity Trust” refers to HMP Equity Trust (the holder of approximately 59% of our common stock); and “MatlinPatterson” refers to MatlinPatterson Global Opportunities Partners L.P., MatlinPatterson Global Opportunities Partners (Bermuda) L.P. and MatlinPatterson Global Opportunities Partners B, L.P. (collectively, an owner of HMP Equity Trust).

In this report, we may use, without definition, the common names of competitors or other industry participants. We may also use the common names or abbreviations for certain chemicals or products.

Description of Business

We are among the world’s largest global manufacturers of differentiated chemical products; we also manufacture inorganic and commodity chemical products. Our products comprise a broad range of chemicals and formulations, which we market in more than 100 countries to a diversified group of consumer and industrial customers. Our products are used in a wide range of applications, including those in the adhesives, aerospace, automotive, construction products, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals and dye industries. We are a leading global producer in many of our key product lines, including MDI products, amines, surfactants, epoxy-based polymer formulations, textile chemicals, dyes, maleic anhydride and titanium dioxide.

Company

Our Company was formed in 2004 to hold the Huntsman businesses. Jon M. Huntsman founded the predecessor to our Company in the early 1970s as a small packaging company. Since then, we have grown through a series of significant acquisitions and now own a global portfolio of differentiated, inorganic and commodity businesses.

Huntsman International was formed in 1999 in connection with the acquisition of ICI’s polyurethane chemicals, selected petrochemicals and titanium dioxide businesses and BP’s 20% ownership interest in an olefins facility located at Wilton, U.K. and certain related assets.

9




Huntsman Corporation and Huntsman International Financial Statements

Except where otherwise indicated, these notes relate to the condensed consolidated financial statements (unaudited) for each of our Company and Huntsman International. The differences between our financial statements and Huntsman International’s financial statements relate primarily to the following:

·                    purchase accounting recorded at our Company for the step-acquisition of Huntsman International in May 2003; and

·                    the different capital structures.

Principles of Consolidation

Our condensed consolidated financial statements (unaudited) and Huntsman International’s condensed consolidated financial statements (unaudited) include the accounts of our wholly-owned and majority-owned subsidiaries and any variable interest entities for which we are the primary beneficiary. All intercompany accounts and transactions have been eliminated, except for intercompany sales between discontinued and continuing operations.

Interim Financial Statements

Our interim condensed consolidated financial statements (unaudited) and Huntsman International’s interim condensed consolidated financial statements (unaudited) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) and in management’s opinion, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. Results for interim periods are not necessarily indicative of those to be expected for the full year. These condensed consolidated financial statements (unaudited) should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2006 for our Company and Huntsman International.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the condensed consolidated financial statements (unaudited) for prior periods have been reclassified to conform with the current presentation. The most significant of these reclassifications was to reclassify the results of operations of our European base chemicals and polymers business to discontinued operations. See “Note 3. Discontinued Operations.”

2.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

We adopted Emerging Issues Task Force (“EITF”) Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, on January 1, 2007. This pronouncement concludes that an employee’s right to a compensated absence under a sabbatical or other similar benefit arrangement accumulates; therefore, such benefits should be accrued over the required service period. The adoption of this pronouncement did not have a significant impact on our consolidated financial statements.

We adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, by prescribing a recognition threshold and measurement attribute for the financial statement recognition and

10




measurement of a tax position taken or expected to be taken in a tax return. We recorded a credit of $0.3 million to accumulated deficit as of January 1, 2007 for the cumulative effect of a change in accounting principle. See “Note 17. Income Taxes.”

We adopted EITF Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation), on January 1, 2007. This pronouncement concludes that the presentation of taxes within its scope is an accounting policy decision that should be disclosed. If the taxes are reported on a gross basis, companies are required to disclose the amounts of those taxes if such amounts are deemed significant. We present taxes within the scope of this issue on a net basis.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are reviewing SFAS No. 157 to determine the statement’s impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). Effective for fiscal years ending after December 15, 2008, SFAS No. 158 will require us to measure the funded status of a plan as of the date of our year-end statement of financial position. As of the end of 2008, we will be required to measure the funded status of our plans as of December 31. We currently use a November 30 measurement date for our plans.

We adopted FASB Staff Position (“FSP”) No. AUG AIR-1, Accounting for Planned Major Maintenance Activities, on January 1, 2007. This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities. The adoption of this FSP did not have a significant impact on our consolidated financial statements.

We adopted FSP EITF 00-19-2, Accounting for Registration Payment Arrangements, on January 1, 2007. This FSP requires that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with SFAS No. 5, Accounting for Contingencies. In November 2006 and March 2007, we completed offerings of subordinated notes which contain registration payment arrangements. See “Note 7. Debt.” We have evaluated the impact of this FSP as it relates to our note offerings, and the adoption of this FSP did not have a significant impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value, with changes in fair value reflected in earnings. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We are evaluating SFAS No. 159 to determine the statement’s impact on our consolidated financial statements.

3.             DISCONTINUED OPERATIONS

European Base Chemicals and Polymers Business

On December 29, 2006, we completed the sale of the outstanding equity interests of Huntsman Petrochemicals (UK) Limited for an aggregate purchase price of $685 million in cash plus the assumption by the purchaser of approximately $126 million in unfunded pension liabilities (the “U.K. Petrochemicals Disposition”). The final sales price is subject to agreement by SABIC on adjustments relating to working capital, investment in the LDPE plant currently under construction in Wilton, U.K. and unfunded pension liabilities. The transaction did not include our Teesside, U.K.-based Pigments operations or the Wilton, U.K.-based aniline and nitrobenzene operations of our Polyurethanes segment. We used the net proceeds from the transaction to legally defease the remaining $250 million

11




outstanding principal amount of our 9.875% senior notes due 2009 and to repay $400 million of the debt under our Senior Credit Facilities.

During the three months ended March 31, 2007, we recorded an additional pretax loss on disposal of $1.6 million related primarily to working capital adjustments.

The results of operations of our European base chemicals and polymers business for current and prior periods have been classified as discontinued operations in our financial statements in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

The following results of our European base chemicals and polymers business have been presented as discontinued operations in the accompanying condensed consolidated statements of operations (unaudited) (dollars in millions):

 

 

Three months ended March 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Revenues

 

$

 

$

531.8

 

Costs and expenses

 

 

(555.5

)

Loss on disposal

 

(1.6

)

 

Operating loss

 

(1.6

)

(23.7

)

Income tax benefit

 

0.6

 

7.1

 

Loss from discontinued operations, net of tax

 

$

(1.0

)

$

(16.6

)

 

In connection with the U.K. Petrochemicals Disposition, we agreed to make payments to SABIC of approximately £18 million (approximately $35 million) related to the transfer of pension plan assets and liabilities. We accrued this liability in 2006 in connection with the sale transaction and expect to fund the obligation in the second quarter of 2007. Also, we expect to incur a non-cash pension settlement loss of approximately $16 million during 2007. We have provided an adequate provision relating to these adjustments and expect to resolve the working capital adjustments in the second quarter of 2007. The European base chemicals and polymers business is reported in our Base Chemicals operating segment in the accompanying condensed consolidated financial statements (unaudited).

In connection with the sale, we agreed to indemnify the buyer with respect to any losses resulting from any environmental liability related to the pre-sale operations of the assets sold. These indemnities have various payment thresholds and time limits depending on the site and type of claim. Generally, we are not required to pay under these indemnification obligations until claims against us exceed £0.1 million, individually, or £1.0 million, in the aggregate. We also agreed to indemnify the buyer with respect to certain tax liabilities. Our maximum exposure generally will not exceed $600 million in the aggregate. We believe that there is a remote likelihood that we will be required to pay any significant amounts under the indemnity provision.

TDI Business

On July 6, 2005, we sold our TDI business. The sale involved the transfer of our TDI customer list and sales contracts. We discontinued the use of our remaining TDI assets. TDI has been accounted for as a discontinued operation under SFAS No. 144. Accordingly, the following results of TDI have been presented as discontinued operations in the accompanying condensed consolidated statements of operations (unaudited) (dollars in millions):

 

 

Three months ended March 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Revenues

 

$

 

$

 

Costs and expenses

 

(0.4

)

(0.5

)

Operating loss

 

(0.4

)

(0.5

)

Income tax benefit

 

 

 

Loss from discontinued operations, net of tax

 

$

(0.4

)

$

(0.5

)

 

12




We expect to incur final costs of $0.6 million related to the TDI transaction in the second quarter of 2007. The TDI business EBITDA is reported in our Polyurethanes segment.

4.             BUSINESS DISPOSITIONS AND COMBINATIONS

Agreement to Sell U.S. Base Chemicals and Polymers Business

On February 15, 2007, we entered into an agreement pursuant to which Flint Hills Resources, a wholly owned subsidiary of Koch, will acquire our U.S. base chemicals and polymers business assets for approximately $456 million in cash, plus the value of inventory (approximately $248 million at March 31, 2007) on the date of closing (the “Pending U.S. Petrochemicals Disposition”). We will retain other elements of working capital, including accounts receivable, accounts payable and certain accrued liabilities, which will be liquidated for cash in the ordinary course of business. Subject to customary regulatory approvals and other closing conditions, the transaction is expected to close by the fourth quarter of 2007, following the restart of our Port Arthur, Texas, olefins manufacturing facility. For more information, see “Note 16. Casualty Losses and Insurance Recoveries—Port Arthur, Texas Plant Fire.” In the event that the Port Arthur, Texas olefins manufacturing facility is not operating at a specified performance level by August 15, 2007, Flint Hills Resources has the option to close on its purchase of the U.S. polymers business separate from the purchase of the U.S. base chemicals business (the “Polymers Purchase Option”). If Flint Hills Resources exercises the Polymers Purchase Option, the U.S. polymers business purchase price will be $150 million, plus the value of associated inventory, and we will amend the asset purchase agreement to facilitate the separate closing of the U.S. base chemicals business for the remaining $306 million of sales price, plus the value of associated inventory. We currently expect that the Port Arthur, Texas olefins manufacturing facility may not achieve the specified performance level by August 15, 2007.

We expect to incur a pretax loss in connection with the Pending U.S. Petrochemicals Disposition of approximately $270 million, related primarily to the polymers assets. As of March 31, 2007, these assets were classified as held and used in accordance with SFAS No. 144 because these assets were not immediately available for sale in their present condition due to the required repair and restart of the Port Arthur, Texas facility. We tested these assets for recoverability using expected future cash flows, including the expected proceeds from the Port Arthur fire insurance recovery, and concluded that the expected future cash flows were in excess of the carrying value of the business expected to be sold. Therefore, we did not recognize an impairment charge as of March 31, 2007. We will continue to assess these assets for recoverability during 2007 through the sale date. As the date of sale completion nears and insurance proceeds are received, future cash flows associated with these assets will diminish. At some point in 2007, we expect that future cash flows will no longer be sufficient to recover the carrying value of the business to be sold, which will continue to increase as we rebuild the plant, and we will recognize an impairment charge.

The pending transaction includes our olefins and polymers manufacturing assets located at five U.S. sites: Port Arthur, Odessa and Longview, Texas; Peru, Illinois; and Marysville, Michigan. These plants employ about 900 associates. The captive ethylene unit at our retained Port Neches, Texas site which is part of our Performance Products segment operations is not included in the sale. This asset, along with a long-term post-closing arrangement for the supply of ethylene and propylene from Flint Hills Resources to us, will continue to provide feedstock for our downstream derivative units.

 

13




Sale of Australian Polyester Resins Assets

On January 4, 2007, we completed the sale of our Australian polyester resins assets to Nuplex for A$9.6 million ($7.5 million) in cash, plus the value of inventory at the sale date, for a total transaction value of A$20.3 million ($15.8 million), subject to post-closing adjustments. During the three months ended March 31, 2007, we recognized a pretax gain on the sale of these assets of $4.1 million. The transaction further includes additional consideration to be received over a three year period upon achieving certain associated earnings targets. The sale includes our Australian polyesters, vinylesters and gelcoats manufacturing assets. In connection with the sale agreement, we also entered into a tolling agreement with Nuplex pursuant to which we will continue to manufacture product using the Australian polyester resins assets. Nuplex will own the assets located on our site. The tolling agreement expires January 2009.

The results of operations of these assets were not classified as a discontinued operation under applicable accounting rules because we expect significant continuing cash flows from the Australian polyester resins assets through the tolling arrangement with Nuplex.

Sale of U.S. Butadiene and MTBE Business

On June 27, 2006, we sold the assets comprising our U.S. butadiene and MTBE business operated by our Base Chemicals segment. The total sales price was $274.0 million, of which $204.0 million was paid to us during 2006. The additional $70.0 million will be payable to us after the restart of our Port Arthur, Texas olefins unit that was damaged in a fire (see “Note 16. Casualty Losses and Insurance Recoveries—Port Arthur, Texas Plant Fire”) and the related resumption of crude butadiene supply; provided that we achieve certain intermediate steps toward restarting the plant and the restart occurs within 30 months of this sale. We expect to recognize an additional pretax gain of approximately $69 million upon completion of the conditions referenced above.

The results of operations of this business were not classified as a discontinued operation under applicable accounting rules because of the expected continuing cash flows from the MTBE business we continue to operate in our Polyurethanes segment.

In connection with the sale, we indemnified the buyer with respect to any losses resulting from (i) the breach of representations and warranties contained in the asset purchase agreement, (ii) pre-sale liabilities related to the pre-sale operations of the assets sold not assumed by the buyer, and (iii) environmental liability related to the pre-sale operations of the assets sold. We are not required to pay under these indemnification obligations until claims against us exceed $5 million. Upon exceeding this $5 million threshold, we generally are obligated to provide indemnification for any losses in excess of $5 million, up to a limit of $137.5 million. We believe that there is a remote likelihood that we will be required to pay any significant amounts under the indemnity provision. As a result, we have estimated that the fair value of this indemnity at the date of the closing of the sale is minimal, and accordingly, no amounts have been recorded.

Textile Effects Acquisition

On June 30, 2006, we acquired Ciba’s textile effects business for $172.1 million (CHF 215 million) in cash (the “Textile Effects Acquisition”). This purchase price was subject to finalization of post-closing working capital adjustments, which are currently recorded as a receivable to us of $26.9 million, and we expect receipt of this amount during the second quarter of 2007. The operating results of the textile effects business have been consolidated with our operating results beginning on July 1, 2006 and are reported with our advanced materials operations as part of our Materials and Effects segment.

We have accounted for the Textile Effects Acquisition using the purchase method in accordance with SFAS No. 141, Business Combinations. As such, we analyzed the fair value of tangible and intangible assets acquired and liabilities assumed, and we determined the excess of fair value of net assets acquired over cost. Because the fair value of the acquired assets and liabilities assumed exceeded the acquisition price, the valuation of the long-lived assets acquired was reduced to zero in accordance with SFAS No. 141. Accordingly, no basis was assigned to property,

14




plant and equipment or any other non-current assets and the remaining excess was recorded as an extraordinary gain, net of taxes (which were not applicable because the gain was recorded in purchase accounting). The preliminary allocation of the purchase price to the assets and liabilities acquired is summarized as follows (dollars in millions):

Acquisition cost:

 

 

 

Acquisition payment, exclusive of post-closing working capital adjustment

 

$

172.1

 

Post-closing working capital adjustment

 

(26.9

)

Direct costs of acquisition

 

12.9

 

Total acquisition costs

 

158.1

 

Fair value of assets acquired and liabilities assumed:

 

 

 

Cash

 

7.7

 

Accounts receivable

 

254.6

 

Inventories

 

233.6

 

Prepaid expenses and other current assets

 

12.6

 

Deferred taxes

 

1.9

 

Accounts payable

 

(95.8

)

Accrued liabilities

 

(35.1

)

Short-term debt

 

(5.0

)

Noncurrent liabilities

 

(158.1

)

Total fair value of net assets acquired

 

216.4

 

Extraordinary gain on the acquisition of a business—excess of fair value of net assets acquired over cost

 

$

58.3

 

 

During the three months ended March 31, 2007, we adjusted the preliminary purchase price allocation and in April 2007, we finalized the post-closing working capital adjustments, resulting in our recording an additional extraordinary gain on the acquisition of $2.4 million in the first quarter of 2007. This purchase price allocation is preliminary pending finalization of the determination of the fair value of assets acquired and liabilities assumed, including final valuation of working capital acquired, finalization of restructuring plans, estimates of asset retirement obligations and determination of related deferred taxes. We are assessing and formulating plans to exit certain activities of the textile effects business and expect to involuntarily terminate the employment of, or relocate, certain textile effects employees. We estimate that we will eliminate up to 650 positions and will create approximately 300 new positions, globally. These plans include the exit of various manufacturing, sales and administrative activities throughout the business through 2009. This preliminary purchase price allocation includes recorded liabilities for workforce reductions, non-cancelable lease termination costs, demolition and decommissioning and other restructuring costs of $65.4 million, $3.4 million, $1.5 million and $5.6 million, respectively. We have not yet finalized plans to exit certain business activities and may record additional liabilities for workforce reductions or other restructuring costs as these plans are finalized. We expect that it is reasonably possible that material changes to the allocation could occur. Any changes to our purchase price allocation will be recorded as an adjustment to the extraordinary gain in the second quarter of 2007.

15




The following tables reflect our and Huntsman International’s results of operations on an unaudited pro forma basis as if the Textile Effects Acquisition had been completed at the beginning of the three months ended March 31, 2006, presented utilizing historical results for each entity (dollars in millions, except per share amounts):

Huntsman Corporation

 

 

Three months 
ended
March 31, 2006

 

Revenues

 

$

2,901.4

 

Income before extraordinary gain

 

75.5

 

Net income

 

133.8

 

Basic income per share

 

0.61

 

Diluted income per share

 

0.57

 

 

Huntsman International

 

 

Three months
ended
March 31, 2006 

 

Revenues

 

$

2,901.4

 

Income before extraordinary gain

 

73.8

 

Net income

 

132.1

 

 

Our pro forma net income and the pro forma net income of Huntsman International reflect an extraordinary gain on the Textile Effects Acquisition of $58.3 million for the three months ended March 31, 2006.

5.            INVENTORIES

Inventories consisted of the following (dollars in millions):

 

 

March 31, 2007

 

December 31, 2006

 

Raw materials and supplies

 

$

296.0

 

$

320.1

 

Work in progress

 

116.6

 

109.8

 

Finished goods

 

1,271.5

 

1,204.3

 

Total

 

1,684.1

 

1,634.2

 

LIFO reserves

 

(102.3

)

(114.1

)

Net

 

$

1,581.8

 

$

1,520.1

 

 

As of March 31, 2007 and December 31, 2006, approximately 16% and 18%, respectively, of inventories were recorded using the last-in, first-out cost method.

In the normal course of operations, we at times exchange raw materials and finished goods with other companies for similar inventories for the purpose of reducing transportation costs. The net open exchange positions are valued at our cost. The amount included in inventory under open exchange agreements payable by us at March 31, 2007 was $9.8 million (28.8 million pounds of feedstock and products). The amount included in inventory under open exchange agreements receivable by us at December 31, 2006 was $9.7 million (30.9 million pounds of feedstock and products).

16




6.             RESTRUCTURING, IMPAIRMENT AND PLANT CLOSING COSTS

As of March 31, 2007 and December 31, 2006, accrued restructuring costs by type of cost and initiative consisted of the following (dollars in millions):

 

 

 

Workforce
reductions(1) 

 

Demolition and
decommissioning

 

Non-cancelable
lease costs 

 

Other
restructuring
costs 

 

Total(2) 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities as of December 31, 2006

 

$

76.4

 

$

0.3

 

$

8.7

 

$

16.7

 

$

102.1

 

2007 charges for 2004 initiatives

 

0.4

 

 

 

0.1

 

0.5

 

2007 charges for 2005 initiatives

 

0.2

 

 

 

 

0.2

 

2007 charges for 2007 initiatives

 

1.0

 

 

 

 

5.9

 

6.9

 

Reversal of reserves no longer required

 

(1.2

)

 

 

 

(1.2

)

2007 payments for 2003 initiatives

 

(0.8

)

 

(0.1

)

(0.1

)

(1.0

)

2007 payments for 2004 initiatives

 

(1.9

)

(0.1

)

(0.1

)

(0.1

)

(2.2

)

2007 payments for 2005 initiatives

 

(1.8

)

 

 

 

(1.8

)

2007 payments for 2006 initiatives

 

(3.1

)

 

 

 

(3.1

)

2007 payments for 2007 initiatives

 

 

 

 

 

 

(5.9

)

(5.9

)

Foreign currency effect on reserve balance

 

1.1

 

 

0.5

 

(0.9

)

0.7

 

Accrued liabilities as of March 31, 2007

 

$

70.3

 

$

0.2

 

$

9.0

 

$

15.7

 

$

95.2

 


(1)                                 With the exception of liabilities recorded in connection with business combinations, accrued liabilities classified as workforce reductions consist primarily of restructuring programs involving ongoing termination benefit arrangements and restructuring programs involving special termination benefits. Accordingly, the related liabilities were accrued as a one-time charge to earnings in accordance with SFAS No. 112, Employers’ Accounting for Postemployment Benefits, and with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, respectively. The remaining accrued liabilities related to these charges of $6.6 million represent workforce reductions to be paid by the end of 2011. Liabilities for workforce reductions recorded in connection with business combinations were accrued in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, and are expected to be paid through 2009. Of the total workforce reduction reserves of $70.3 million, $62.6 million relates to 627 positions that have not been terminated as of March 31, 2007.

(2)           Accrued liabilities by initiatives were as follows (dollars in millions):

 

March 31, 
2007 

 

December 31,
2006 

 

 

 

 

 

 

 

2001 initiatives

 

$

1.4

 

$

1.4

 

2003 initiatives

 

14.8

 

15.8

 

2004 initiatives

 

9.5

 

12.2

 

2005 initiatives

 

0.6

 

1.4

 

2006 initiatives

 

72.1

 

76.2

 

2007 initiatives

 

1.0

 

 

Foreign currency effect on reserve balance

 

(4.2

)

(4.9

)

Total

 

$

95.2

 

$

102.1

 

 

17




Details with respect to our restructuring reserves are provided below by segment and initiative (dollars in millions):

 

 

Polyurethanes 

 

Materials and 
Effects 

 

Performance
Products 

 

Pigments 

 

Polymers 

 

Base
Chemicals 

 

Total 

 

Accrued liabilities as of December 31, 2006

 

$

6.6

 

$

78.5

 

$

7.4

 

$

7.9

 

$

 

$

1.7

 

$

102.1

 

2007 charges for 2004 initiatives

 

 

 

0.1

 

0.4

 

 

 

0.5

 

2007 charges for 2005 initiatives

 

 

 

 

0.2

 

 

 

0.2

 

2007 charges for 2007 initiatives

 

 

5.9

 

 

 

1.0

 

 

6.9

 

Reversal of reserves no longer required

 

 

(0.1

)

 

(1.1

)

 

 

(1.2

)

2007 payments for 2003 initiatives

 

(0.6

)

(0.1

)

 

(0.3

)

 

 

(1.0

)

2007 payments for 2004 initiatives

 

(0.1

)

 

(1.3

)

(0.8

)

 

 

(2.2

)

2007 payments for 2005 initiatives

 

(0.1

)

 

(1.1

)

 

 

(0.6

)

(1.8

)

2007 payments for 2006 initiatives

 

 

(3.1

)

 

 

 

 

(3.1

)

2007 payments for 2007 initiatives

 

 

(5.9

)

 

 

 

 

(5.9

)

Foreign currency effect on reserve balance

 

0.1

 

0.5

 

 

 

 

0.1

 

0.7

 

Accrued liabilities as of March 31, 2007

 

$

5.9

 

$

75.7

 

$

5.1

 

$

6.3

 

$

1.0

 

$

1.2

 

$

95.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of restructuring reserve

 

$

2.3

 

$

29.4

 

$

3.9

 

$

2.9

 

$

1.0

 

$

1.2

 

$

40.7

 

Long-term portion of restructuring reserve

 

3.6

 

46.3

 

1.2

 

3.4

 

 

 

54.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated additional future charges for current restructuring projects:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated additional charges within one year

 

$

 

$

0.1

 

$

 

$

3.0

 

$

 

$

 

$

3.1

 

Estimated additional charges beyond one year

 

 

0.1

 

 

3.8

 

 

 

3.9

 

 

Details with respect to cash and non-cash restructuring charges by initiative are provided below (dollars in millions):

Cash Charges:

 

 

 

2007 charges for 2004 initiatives

 

$

0.5

 

2007 charges for 2005 initiatives

 

0.2

 

2007 charges for 2007 initiatives

 

6.9

 

Reversal of reserves no longer required

 

(1.2

)

Non-cash charges

 

5.8

 

Total 2007 Restructuring and Plant Closing Costs

 

$

12.2

 

 

During the three months ended March 31, 2007, our Materials and Effects segment recorded restructuring charges of $5.9 million primarily related to supply chain integration processes and redundant service contracts for information technology services.

During the three months ended March 31, 2007, our Polymers segment recorded a non-cash impairment charge of $5.8 million related to capital expenditures and turnaround costs associated with our Australian styrenics business that was previously impaired. The long-lived assets in this business were determined to be impaired in accordance with SFAS No. 144 and an impairment charge was recorded in 2005. Capital expenditures and turnaround costs in this business, which are necessary to maintain operations, are also considered to be impaired immediately after they are incurred.

18




7.             DEBT

Outstanding debt consisted of the following (dollars in millions):

Huntsman Corporation

 

 

March 31,
2007 

 

December 31,
2006 

 

 

 

 

 

 

 

Senior Credit Facilities:

 

 

 

 

 

Revolving Facility

 

$

109.0

 

$

 

Term Loans

 

1,637.6

 

1,711.2

 

Secured Notes

 

294.1

 

294.0

 

Senior Notes

 

198.0

 

198.0

 

Subordinated Notes

 

1,241.2

 

1,228.3

 

Australian Credit Facilities

 

47.9

 

61.4

 

HPS (China) debt

 

107.8

 

90.3

 

Other

 

59.2

 

62.1

 

Total debt

 

$

3,694.8

 

$

3,645.3

 

 

 

 

 

 

 

Current portion

 

$

178.8

 

$

187.9

 

Long-term portion

 

3,516.0

 

3,457.4

 

Total debt

 

$

3,694.8

 

$

3,645.3

 

 

Huntsman International

 

 

March 31,
2007 

 

December 31,
2006  

 

 

 

 

 

 

 

Senior Credit Facilities:

 

 

 

 

 

Revolving Facility

 

$

109.0

 

$

 

Term Loans

 

1,637.6

 

1,711.2

 

Secured Notes

 

294.1

 

294.0

 

Senior Notes

 

198.0

 

198.0

 

Subordinated Notes

 

1,241.2

 

1,228.3

 

Australian Credit Facilities

 

47.9

 

61.4

 

HPS (China) debt

 

107.8

 

90.3

 

Other

 

56.8

 

62.1

 

Total debt

 

$

3,692.4

 

$

3,645.3

 

 

 

 

 

 

 

Current portion

 

$

176.4

 

$

187.9

 

Long-term portion

 

3,516.0

 

3,457.4

 

Total debt

 

$

3,692.4

 

$

3,645.3

 

 

Transactions  Affecting our Senior Credit Facilities

As of March 31, 2007, our senior secured credit facilities (“Senior Credit Facilities”) consisted of (i) a $650 million revolving facility (the “Revolving Facility”), (ii) a $1,543.4 million term loan B facility (the “Dollar Term Loan”), and (iii) a €70.7 million ($94.2 million) euro term loan B facility (the “Euro Term Loan”). As of March 31, 2007, there were $109.0 million borrowings outstanding under our Revolving Facility, and we had $45.5 million in U.S. dollar equivalents of letters of credit and bank guarantees issued and outstanding under our Revolving Facility.

We have recently completed the following transactions relating to our Senior Credit Facilities:

·                  On January 16, 2007, we made a voluntary repayment of $75.0 million U.S. dollar equivalents on our term loans with available liquidity.

19




·                  On April 19, 2007, we entered into an amendment to our Senior Credit Facilities (the “Amendment”). Pursuant to the Amendment, the maturity of the Dollar Term Loan was extended to April 2014 and the loan amount was increased to $1,640.0 million. We used the increased amount to repay, in full, the Euro Term Loan.

As of March 31, 2007, borrowings under the Revolving Facility and Dollar Term Loan bore interest at LIBOR plus 1.75%. The Amendment made no changes to the applicable interest rate of the Revolving Facility. However, pursuant to the Amendment, the applicable interest rate of the Dollar Term Loan is currently set at LIBOR plus 1.75%, subject to a reduction to LIBOR plus 1.50% upon achieving certain secured leverage ratio thresholds defined in the Amendment. The Amendment contains one financial covenant, which is applicable only to the Revolving Facility, and this covenant is only in effect when loans or letters of credit are outstanding under the Revolving Facility. The Amendment, among other things, also increases the restricted payments basket for certain types of payments, and, subject to certain conditions, increases our capacity for additional term loan borrowings. The Amendment provides for continuing customary restrictions and limitations on our ability to incur liens, incur additional debt, merge or sell assets, make certain restricted payments, prepay other indebtedness, make investments or engage in transactions with affiliates, and it contains other customary default provisions.

Other Transactions Affecting our Debt

We have also completed the following other transactions relating to our debt:

·                  On or about February 28, 2007, we completed a direct private placement of $147.0 million in aggregate principal amount of dollar denominated 7.875% senior subordinated notes due November 15, 2014. These notes were issued at a premium of 104% of principal amount for a yield of 7.01% and were issued under the same indenture and are of the same series as an original placement of dollar denominated notes issued by us in November 2006. We used the net proceeds of $151.7 million to redeem all (approximately €114 million) of our remaining outstanding euro denominated 10.125% senior subordinated notes due 2009, which were called for redemption on March 27, 2007 at a call price of 101.688% plus accrued interest.

·                  Our Australian subsidiaries, which maintain credit facilities that are non-recourse to us, received commitment letters from their existing credit facility provider with respect to the renewal of the existing facilities on substantially the same terms. The commitment letters are binding, subject to customary provisions for final documentation, legal due diligence and other customary matters. Under the terms of the newly committed facilities, interest will be charged at a rate of the Australian index rate plus a margin of 2.4%, and the maturity will be extended for three years to approximately May 2010. The aggregate outstanding balance as of March 31, 2007 under the Australian facilities is A$59.3 million ($47.9 million, of which $3.6 million is classified as current portion of long term debt).

Compliance with Covenants

Our management believes that we are in compliance with the covenants contained in the agreements governing the Senior Credit Facilities, the A/R Securitization Program (as defined in “Note 9. Securitization of Accounts Receivable”) and the indentures governing our notes.

8.             DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As of March 31, 2007 and December 31, 2006, and for the three months ended March 31, 2007 and 2006, the fair value, change in fair value, and realized gains or losses of outstanding hedging contracts were not significant.

We may enter into foreign currency derivative instruments to minimize the short-term impact of movements in foreign currency rates. As of March 31, 2007 and December 31, 2006, and for the three months ended March 31,

20




2007 and 2006, the fair value and realized gains (losses) of outstanding foreign currency rate hedging contracts were not significant.

In conjunction with our first quarter 2007 redemption of the remaining 10.125% euro denominated subordinated notes due 2009 discussed in “Note 7. Debt” above, and in an effort to maintain approximately the same amount of euro denominated debt exposure, on March 27, 2007 we entered into a cross currency rate interest rate swap pursuant to which we have agreed to swap $152.6 million of LIBOR floating rate debt payments for €115.9 million of EURIBOR floating rate debt payments. On maturity, August 15, 2012, we are required to pay principal of €115.9 million and will receive principal of $152.6 million. During the life of this swap, we will receive floating rate interest (LIBOR) in dollars and we will pay floating rate interest (EURIBOR) in euros. The fair value of this swap was a $2.2 million liability as of March 31, 2007. This swap is currently not designated as a hedge for financial reporting purposes.

In conjunction with the Amendment as discussed in “Note 7. Debt” above, and in an effort to maintain approximately the same amount of euro denominated debt exposure, on April 19, 2007 we entered into a cross currency rate interest rate swap pursuant to which we have agreed to swap $95.8 million of LIBOR floating rate debt payments for €70.7 million of EURIBOR floating rate debt payments. On maturity, April 19, 2010, we are required to pay principal of €70.7 million and will receive principal of $95.8 million. During the life of this swap, we will receive floating rate interest (LIBOR) in dollars and we will pay floating rate interest (EURIBOR) in euros. This swap was designated as a hedge of a net investment for financial reporting purposes.

From time to time, we review our non-U.S. dollar denominated debt and swaps to determine the appropriate amounts designated as hedges. As of March 31, 2007, we have designated approximately €421 million of debt as a net investment hedge. As of March 31, 2007, we had approximately €1,097 million in net euro assets.

9.             SECURITIZATION OF ACCOUNTS RECEIVABLE

Under our accounts receivable securitization program (“A/R Securitization Program”), we grant an undivided interest in certain of our trade receivables to a qualified off-balance sheet entity (the “Receivables Trust”) at a discount. This undivided interest serves as security for the issuance by the Receivables Trust of commercial paper. The A/R Securitization Program currently provides for financing through a commercial paper conduit program (in both U.S. dollars and euros). The A/R Securitization Program consists of a commercial paper conduit program with a committed amount of approximately $500 million U.S. dollar equivalents and it terminates in the second quarter of 2009. Interest costs to the Receivables Trust are LIBOR and/or EURIBOR, as applicable, plus 60 basis points per annum based upon a pricing grid (which is dependent upon our credit rating). Transfers of accounts receivable to the Receivables Trust are accounted for as sales.

As of March 31, 2007, the Receivables Trust had $456.7 million in U.S. dollar equivalents (comprised of $230.0 million and approximately €170 million ($226.7 million)) in commercial paper outstanding and availability under the program was $489.3 million in U.S. dollar equivalents. As a result of the Pending U.S. Petrochemicals Disposition (see “Note 4. Business Dispositions and Combinations”), we anticipate that our capacity under the A/R Securitization Program will decrease by approximately $100 million to $150 million.

10.          EMPLOYEE BENEFIT PLANS

Components of the net periodic benefit costs for the three months ended March 31, 2007 and 2006 were as follows (dollars in millions):

21




Huntsman Corporation

 

 

Defined Benefit Plans
Three Months Ended
March 31,

 

Other Postretirement Benefit
Plans
Three Months Ended
March 31,

 

 

 

2007 

 

2006 

 

2007 

 

2006 

 

Service cost

 

$

20.8

 

$

20.3

 

$

1.1

 

$

1.1

 

Interest cost

 

34.1

 

31.7

 

2.4

 

2.3

 

Expected return on assets

 

(43.6

)

(37.1

)

 

 

Amortization of transition obligation

 

0.5

 

0.4

 

 

 

Amortization of prior service cost

 

(1.7

)

(1.7

)

(0.7

)

(0.7

)

Amortization of actuarial loss

 

3.2

 

4.5

 

0.9

 

0.8

 

Settlement loss

 

 

0.4

 

 

 

Net periodic benefit cost

 

13.3

 

18.5

 

3.7

 

3.5

 

Less amounts included in discontinued operations

 

 

(3.9

)

 

 

Net periodic benefit cost from continuing operations

 

$

13.3

 

$

14.6

 

$

3.7

 

$

3.5

 

 

Huntsman International

 

 

Defined Benefit Plans
Three Months Ended
March 31,

 

Other Postretirement Benefit
Plans
Three Months Ended
March 31,

 

 

 

2007 

 

2006 

 

2007 

 

2006 

 

Service cost

 

$

20.8

 

$

20.3

 

$

1.1

 

$

1.1

 

Interest cost

 

34.1

 

31.7

 

2.4

 

2.3

 

Expected return on assets

 

(43.6

)

(37.1

)

 

 

Amortization of transition obligation

 

0.5

 

0.4

 

 

 

Amortization of prior service cost

 

(1.7

)

(1.7

)

(0.7

)

(0.7

)

Amortization of actuarial loss

 

4.9

 

6.9

 

0.9

 

0.8

 

Settlement loss

 

 

0.4

 

 

 

Net periodic benefit cost

 

15.0

 

20.9

 

3.7

 

3.5

 

Less amounts included in discontinued operations

 

 

(4.4

)

 

 

Net periodic benefit cost from continuing operations

 

$

15.0

 

$

16.5

 

$

3.7

 

$

3.5

 

 

We expect to incur a non-cash pension settlement loss of approximately $16 million during 2007 in connection with the U.K. Petrochemicals Disposition and a curtailment gain of approximately $19 million related to the Pending U.S. Petrochemicals Disposition.

During the three months ended March 31, 2007 and 2006, we made contributions to our pension plans of $60.3 million and $20.6 million, respectively. During the remainder of 2007, we expect to contribute an additional $125.8 million to our pension plans.

11.          DIVIDENDS

5% Mandatory Convertible Preferred Stock

In connection with the initial public offering of our 5% mandatory convertible preferred stock on February 16, 2005, we declared all dividends that will be payable on such preferred stock from the issuance through the mandatory conversion date, which is February 16, 2008. Accordingly, we recorded dividends payable of

22




$43.1 million and a corresponding charge to net income available to common stockholders during the first quarter of 2005. As of March 31, 2007, we had $14.1 million invested in government securities that are restricted for satisfaction of our dividend payment obligations through the mandatory conversion date. We expect to pay dividends in cash on May 16, August 16 and November 16, 2007 and on February 16, 2008. Under certain circumstances, we may not be allowed to pay dividends in cash. If this were to occur, any unpaid dividend would be payable in shares of common stock on February 16, 2008 based on the market value of common stock at that time.

Common Stock

On March 30, 2007, we paid a cash dividend of $22.1 million, or $0.10 per share, to common stockholders of record as of March 15, 2007.

12.          OTHER COMPREHENSIVE INCOME (LOSS)

The components of other comprehensive income (loss) were as follows (dollars in millions):

Huntsman Corporation

 

 

Accumulated other 
comprehensive income (loss) 

 

Other comprehensive
income (loss) 

 

 

 

 

 

Three Months Ended 

 

 

 

March 31, 2007 

 

December 31, 2006 

 

March 31, 2007 

 

March 31, 2006 

 

Foreign currency translation adjustments, net of tax of $28.5 million and $31.8 million as of March 31, 2007 and December 31, 2006, respectively

 

$

245.8

 

$

228.3

 

$

17.5

 

$

27.7

 

 

 

 

 

 

 

 

 

 

 

Pension related adjustments, net of tax of $64.8 and $63.8 as of March 31, 2007 and December 31, 2006, respectively

 

(301.9

)

(304.1

)

2.2

 

2.5

 

Other comprehensive income of unconsolidated affiliates

 

7.3

 

7.3

 

 

 

Other, net of tax of $0.2 million and nil as of March 31, 2007 and December 31, 2006, respectively

 

7.6

 

7.1

 

0.5

 

0.8

 

Total

 

$

(41.2

)

$

(61.4

)

$

20.2

 

$

31.0

 

 

Huntsman International

 

 

Accumulated other 
comprehensive income (loss)

 

Other comprehensive
income (loss)

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,
2007 

 

December 31,
2006 

 

March 31,
2007 

 

March 31,
2006 

 

Foreign currency translation adjustments, net of tax of $3.5 million and $0.2 million as of March 31, 2007 and December 31, 2006, respectively

 

$

285.6

 

$

266.9

 

$

18.7

 

$

30.9

 

 

 

 

 

 

 

 

 

 

 

Pension related adjustments, net of tax of $101.4 and $101.6 as of March 31, 2007 and December 31, 2006, respectively

 

(400.3

)

(404.1

)

3.8

 

2.5

 

Other comprehensive income of unconsolidated affiliates

 

7.3

 

7.3

 

 

 

Other, net of tax of $0.2 million and nil as of March 31, 2007 and December 31, 2006, respectively

 

2.1

 

1.6

 

0.5

 

0.9

 

Total

 

$

(105.3

)

$

(128.3

)

$

23.0

 

$

34.3

 

 

Items of other comprehensive income (loss) of our Company and our unconsolidated affiliates have been recorded net of tax, with the exception of the foreign currency translation adjustments related to subsidiaries with earnings permanently reinvested. The tax effect is determined based upon the jurisdiction where the income or loss was recognized and is net of valuation allowances that have been recorded.

13.          COMMITMENTS AND CONTINGENCIES

Legal Matters

Discoloration Claims

Certain claims have been filed against us relating to discoloration of unplasticized polyvinyl chloride products allegedly caused by our titanium dioxide. Substantially all of the titanium dioxide that is the subject of these claims was manufactured prior to our acquisition of our titanium dioxide business from ICI in 1999. Net of amounts we have received from insurers and pursuant to contracts of indemnity, we have paid an aggregate of approximately $16 million in costs and settlement amounts for Discoloration Claims through March 31, 2007.

 

23




The following table presents information about the number of Discoloration Claims for the periods indicated. Claims include all claims for which service has been received by us, and each such claim represents a plaintiff who is pursuing a claim against us.

 

 

Three Months Ended
March 31, 2007

 

Three Months Ended
March 31, 2006

 

Claims unresolved at beginning of period

 

2