Table of Contents
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
CommissionFile Number
Exact Name of Registrant as Specified in its Charter,Principal Office Address and Telephone Number
State ofIncorporationor Organization
I.R.S. EmployerIdentification No.
001-32427
Huntsman Corporation10003 Woodloch Forest DriveThe Woodlands, Texas 77380(281) 719-6000
Delaware
42-1648585
333-85141
Huntsman International LLC10003 Woodloch Forest DriveThe Woodlands, Texas 77380(281) 719-6000
87-0630358
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Title of each class
Trading Symbol
Name of each exchange on which registered
Huntsman Corporation
Common Stock, par value $0.01 per share
HUN
New York Stock Exchange
Huntsman International LLC
NONE
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.
Yes ☒
No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ⌧
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company ☐
Emerging growth company ☐
Large accelerated filer ◻
Non-accelerated filer ⌧
Emerging Growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ⌧
On October 18, 2019, 225,462,807 shares of common stock of Huntsman Corporation were outstanding and 2,728 units of membership interests of Huntsman International LLC were outstanding. There is no trading market for Huntsman International LLC’s units of membership interests. All of Huntsman International LLC’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 LLC. Huntsman International LLC 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 LLC, except where otherwise indicated. Huntsman International LLC 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 SEPTEMBER 30, 2019
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
4
ITEM 1.
Condensed Consolidated Financial Statements (Unaudited)
Huntsman Corporation and Subsidiaries:
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
5
Condensed Consolidated Statements of Comprehensive Income (Loss)
6
Condensed Consolidated Statements of Equity
7
Condensed Consolidated Statements of Cash Flows
9
Huntsman International LLC and Subsidiaries:
11
12
13
14
16
Huntsman Corporation and Subsidiaries and Huntsman International LLC and Subsidiaries:
Notes to Condensed Consolidated Financial Statements
18
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
48
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
66
ITEM 4.
Controls and Procedures
67
PART II
OTHER INFORMATION
68
Legal Proceedings
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
69
ITEM 6.
Exhibits
70
2
FORWARD-LOOKING STATEMENTS
Certain information set forth in this report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, profit margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other projected financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions, divestitures, business separations, spin-offs, or other distributions, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic and capital markets conditions; the timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. In some cases, forward-looking statements can be identified by terminology such as “believes,” “expects,” “may,” “will,” “should,” “anticipates” or “intends” or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.
All forward-looking statements, including without limitation any projections derived from management’s examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that management’s expectations, beliefs and projections will be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements whether because of new information, future events or otherwise, except as required by securities and other applicable law.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks set forth in “Part II. Item 1A. Risk Factors” below and “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Per Share Amounts)
September 30,
December 31,
2019
2018
ASSETS
Current assets:
Cash and cash equivalents(a)
$
418
340
Accounts and notes receivable (net of allowance for doubtful accounts of $20 and $21, respectively), ($325 and $341 pledged as collateral, respectively)(a)
1,078
1,165
Accounts receivable from affiliates
Inventories(a)
961
1,000
Prepaid expenses
53
58
Other current assets(a)
99
145
Current assets held for sale
1,108
232
Total current assets
3,729
2,958
Property, plant and equipment, net(a)
2,324
2,353
Investment in unconsolidated affiliates
454
526
Intangible assets, net(a)
202
213
Goodwill
274
275
Deferred income taxes
309
324
Notes receivable from affiliate
34
Operating lease right-of-use assets
356
—
Other noncurrent assets(a)
433
393
Noncurrent assets held for sale
877
Total assets
8,115
7,953
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable(a)
715
761
Accounts payable to affiliates
29
32
Accrued liabilities(a)
406
497
Current portion of debt(a)
132
96
Current operating lease liabilities(a)
37
Current liabilities held for sale
586
225
Total current liabilities
1,905
1,611
Long-term debt(a)
2,204
2,224
198
137
Noncurrent operating lease liabilities(a)
349
Other noncurrent liabilities(a)
821
949
Noncurrent liabilities held for sale
283
Total liabilities
5,477
5,204
Commitments and contingencies (Notes 15 and 16)
Equity
Huntsman Corporation stockholders’ equity:
Common stock $0.01 par value, 1,200,000,000 shares authorized, 257,299,669 and 256,006,849 shares issued and 224,690,660 and 232,994,172 shares outstanding, respectively
Additional paid-in capital
4,009
3,984
Treasury stock, 32,609,012 and 23,012,680 shares, respectively
(623)
(427)
Unearned stock-based compensation
(21)
(16)
Retained earnings
424
292
Accumulated other comprehensive loss
(1,310)
(1,316)
Total Huntsman Corporation stockholders’ equity
2,482
2,520
Noncontrolling interests in subsidiaries
156
229
Total equity
2,638
2,749
Total liabilities and equity
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Amounts)
Three months
Nine months
ended
Revenues:
Trade sales, services and fees, net
1,653
1,928
5,044
5,668
Related party sales
40
115
Total revenues
1,687
1,968
5,140
5,783
Cost of goods sold
1,347
1,501
4,068
4,371
Gross profit
467
1,072
1,412
Operating expenses:
Selling, general and administrative
193
203
585
578
Research and development
35
109
108
Restructuring, impairment and plant closing (credits) costs
(43)
(42)
8
Merger costs
1
Other operating expense, net
25
Total operating expenses
188
244
653
721
Operating income
152
223
419
691
Interest expense
(27)
(30)
(86)
Equity in income of investment in unconsolidated affiliates
19
41
45
Fair value adjustments to Venator investment
(148)
(90)
Loss on early extinguishment of debt
(23)
(3)
Other income, net
22
Income from continuing operations before income taxes
277
669
Income tax expense
(113)
(41)
(Loss) income from continuing operations
197
164
628
Income (loss) from discontinued operations, net of tax
(205)
126
337
Net income (loss)
(8)
290
965
Net income attributable to noncontrolling interests
(11)
(31)
(288)
Net income (loss) attributable to Huntsman Corporation
30
259
677
Basic (loss) income per share:
(Loss) income from continuing operations attributable to Huntsman Corporation common stockholders
(0.17)
0.72
0.58
2.35
Income (loss) from discontinued operations attributable to Huntsman Corporation common stockholders, net of tax
0.30
(0.77)
0.54
0.48
Net income (loss) attributable to Huntsman Corporation common stockholders
0.13
(0.05)
1.12
2.83
Weighted average shares
227.4
237.9
230.3
239.1
Diluted (loss) income per share:
2.31
2.79
240.8
232.0
243.0
Amounts attributable to Huntsman Corporation common stockholders:
(38)
173
133
562
(184)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Millions)
Other comprehensive (loss) income, net of tax:
Foreign currency translations adjustments
(40)
(20)
(156)
Pension and other postretirement benefits adjustments
36
61
Other, net
(1)
Other comprehensive (loss) income, net of tax
(25)
15
(103)
Comprehensive income (loss)
(33)
305
862
Comprehensive income attributable to noncontrolling interests
(5)
(2)
(256)
Comprehensive income (loss) attributable to Huntsman Corporation
(35)
280
606
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In Millions, Except Share Amounts)
Huntsman Corporation Stockholders' Equity
Accumulated
Shares
Additional
Unearned
other
Noncontrolling
Common
paid-in
Treasury
stock-based
Retained
comprehensive
interests in
Total
stock
capital
compensation
earnings
loss
subsidiaries
equity
Balance, January 1, 2019
232,994,172
Net income
119
131
Other comprehensive income
52
54
Issuance of nonvested stock awards
Vesting of stock awards
1,619,502
Recognition of stock-based compensation
Repurchase and cancellation of stock awards
(483,053)
(12)
Stock options exercised
78,054
Treasury stock repurchased
(1,525,767)
(34)
Dividends declared on common stock ($0.1625 per share)
(39)
Balance, March 31, 2019
232,682,908
4,010
(461)
(28)
360
(1,264)
243
2,863
110
118
Other comprehensive loss
(7)
(9)
6,701
(1,732)
27,180
(4,014,487)
(81)
Dividends declared to noncontrolling interests
Balance, June 30, 2019
228,700,570
4,013
(542)
(24)
432
(1,271)
209
2,820
Other comprehensive (loss) income
Acquisition of noncontrolling interests, net of tax
(6)
(73)
(79)
11,488
(2,273)
36,953
(4,056,078)
Balance, September 30, 2019
224,690,660
(Continued)
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Continued)
Balance, January 1, 2018
240,213,606
3,889
(150)
(15)
161
(1,268)
751
3,371
Cumulative effect of changes in fair value of equity investments
10
(10)
76
350
80
23
103
(14)
985,493
(253,345)
571,417
(1,685,300)
(51)
Disposition of a portion of Venator
Costs of the secondary offering of Venator
Noncontrolling interest from partial disposal of Venator
27
Dividends paid to noncontrolling interests
(18)
Balance, March 31, 2018
239,831,871
3,939
(201)
(26)
(1,198)
859
3,769
414
623
(132)
(49)
(181)
124,320
(1,533)
1,517,717
(2,947,102)
(87)
(13)
Balance, June 30, 2018
238,525,273
3,977
(22)
724
(1,330)
1,006
4,070
Net (loss) income
17,398
(4,617)
171,356
(1,263,263)
(37)
Accrued and unpaid dividends
Balance, September 30, 2018
237,446,147
3,982
(325)
(19)
671
(1,354)
3,964
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities:
Less: Income from discontinued operations, net of tax
(126)
(337)
Income from continuing operations
Adjustments to reconcile income from continuing operations to net cash provided by operating activities from continuing operations:
(45)
Unrealized losses on fair value adjustments to Venator investment
91
Cash received from return on investment in unconsolidated subsidiary
17
Depreciation and amortization
201
187
Noncash lease expense
(Gain) loss on disposal of businesses/assets, net
Noncash interest expense
Noncash restructuring and impairment charges
64
(135)
Noncash loss on foreign currency transactions
Stock-based compensation
Changes in operating assets and liabilities:
Accounts and notes receivable
Inventories
(158)
Other current assets
26
Other noncurrent assets
Accounts payable
Accrued liabilities
(57)
Other noncurrent liabilities
Net cash provided by operating activities from continuing operations
434
446
Net cash provided by operating activities from discontinued operations
222
488
Net cash provided by operating activities
656
934
Investing Activities:
Capital expenditures
Acquisition of a business, net of cash acquired
(366)
Proceeds from sale of assets
49
Cash received from forward swap contract related to the sale of investment in Venator
Other
Net cash used in investing activities from continuing operations
(111)
(514)
Net cash used in investing activities from discontinued operations
(297)
Net cash used in investing activities
(142)
(811)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Financing Activities:
Net (repayments) borrowings on revolving loan facilities
(104)
265
Repayments of long-term debt
(662)
(59)
Proceeds from issuance of long-term debt
742
Repayments of short-term debt
Borrowings on short-term debt
101
Repayments of notes payable
Borrowings on note payable
Debt issuance costs paid
(4)
Costs of early extinguishment of debt
Dividends paid to common stockholders
(115)
(118)
Cash paid for noncontrolling interest
(100)
Repurchase of common stock
(196)
(175)
Proceeds from issuance of common stock
Proceeds from the secondary offering of Venator
44
Cash paid for expenses of the secondary offering of Venator
Net cash used in financing activities
(431)
(117)
Effect of exchange rate changes on cash
Increase in cash, cash equivalents and restricted cash
78
Cash, cash equivalents and restricted cash from continuing operations at beginning of period
481
Cash, cash equivalents and restricted cash from discontinued operations at beginning of period
238
Cash, cash equivalents and restricted cash at end of period
697
Supplemental cash flow information:
Cash paid for interest
65
114
Cash paid for income taxes
102
As of September 30, 2019 and 2018, the amount of capital expenditures in accounts payable was $48 million and $26 million, respectively. In addition, as of September 30, 2018, the amount of cash interest and cash income taxes included in our supplemental cash flow information related to cash paid for interest and cash paid for income taxes that was paid by Venator after the initial public offering date was $41 million and $28 million, respectively.
417
408
399
51
57
147
4,125
3,340
8,511
8,335
714
112
104
403
494
Notes payable to affiliates
100
2,084
1,780
291
195
135
813
937
5,936
5,847
Huntsman International LLC members’ equity:
Members’ equity, 2,728 units issued and outstanding
3,673
3,658
Retained earnings (accumulated deficit)
47
(91)
(1,301)
(1,308)
Total Huntsman International LLC members’ equity
2,419
2,259
2,575
2,488
1,500
4,368
468
1,415
192
581
575
245
649
720
153
423
695
(36)
(99)
(102)
(Loss) income from continuing operations before income taxes
657
(29)
(110)
194
155
619
38
281
956
Net income (loss) attributable to Huntsman International LLC
250
668
Foreign currency translations adjustment
(157)
62
297
856
Comprehensive income (loss) attributable to Huntsman International LLC
272
600
(In Millions, Except Unit Amounts)
Huntsman International LLC Members
Members'
Accumulated other
(accumulated
Units
Amount
deficit)
2,728
116
128
Dividends paid to parent
Contribution from parent
3,665
(1,256)
2,640
107
3,672
(1,262)
2,676
3,616
(270)
(1,263)
2,834
271
347
82
105
Costs of secondary offering of Venator
3,639
(1,191)
3,279
411
620
(131)
(180)
3,646
344
(1,322)
3,674
3,653
(1,346)
3,604
Unrealized gains on fair value adjustments to Venator investment
184
63
(134)
Noncash compensation
21
(136)
24
(84)
43
646
920
Proceeds from sale of businesses/assets
Increase in receivable from affiliate
(533)
(144)
(830)
Net borrowings on revolving loan facilities
Repayments of notes payable to affiliate
(197)
(154)
(112)
(420)
(83)
77
479
696
As September 30, 2019 and 2018, the amount of capital expenditures in accounts payable was $48 million and $26 million, respectively. During both of the nine months ended September 30, 2019 and 2018, Huntsman Corporation contributed $21 million related to stock-based compensation for continuing operations. In addition, as of September 30, 2018, the amount of cash interest and cash income taxes included in our supplemental cash flow information related to cash paid for interest and cash paid for income taxes that was paid by Venator after the initial public offering date was $41 million and $28 million, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Certain Definitions
For convenience in this report, the terms “Company,” “Huntsman,” “our,” “us” or “we” may be used to refer to Huntsman Corporation and, unless the context otherwise requires, its subsidiaries and predecessors. In this report, “Huntsman International” refers to Huntsman International LLC (our wholly-owned subsidiary).
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.
Interim Financial Statements
Our unaudited interim condensed consolidated financial statements and Huntsman International’s unaudited interim condensed consolidated financial statements 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, comprehensive income, 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 unaudited condensed consolidated financial statements 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, 2018 for our Company and Huntsman International.
Description of Business
We are a global manufacturer of differentiated organic chemical products. Our products comprise a broad range of chemicals and formulations, which we market globally 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, personal care and hygiene, durable and non-durable consumer products, digital inks, electronics, medical, packaging, coatings and construction, power generation, refining, synthetic fiber, textile chemicals and dyes industries. We are a leading global producer in many of our key product lines, including MDI, amines, surfactants, maleic anhydride, epoxy-based polymer formulations, textile chemicals and dyes.
We operate in four segments: Polyurethanes, Performance Products, Advanced Materials and Textile Effects. In August 2017, we separated our Titanium Dioxide and Performance Additives business (the “P&A Business”) through an initial public offering (“IPO”) of ordinary shares of Venator Materials PLC (“Venator”), formerly a wholly-owned subsidiary. Beginning in the third quarter of 2017, we reported the results of operations of Venator as discontinued operations. On December 3, 2018, we sold an additional 4% of Venator ordinary shares which allowed us to immediately deconsolidate Venator and account for our remaining ownership interest in Venator as an equity method investment using the fair value option. For more information, see “Note 4. Discontinued Operations and Business Disposition—Separation and Deconsolidation of Venator.” On August 7, 2019, we entered into an agreement to sell our chemical intermediates businesses, which includes PO/MTBE, and our surfactants businesses (collectively, our “Chemical Intermediates Businesses”), and, beginning in the third quarter of 2019, we reported the results of our Chemical Intermediates Businesses as discontinued operations. For more information, see “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses.” In a series of transactions beginning in 2006, we sold or shut down substantially all of our Australian styrenics operations and our North American polymers and base chemicals operations. We also report the results of operations of these businesses as discontinued operations.
Company
Our Company, a Delaware corporation, was formed in 2004 to hold the Huntsman businesses. Jon M. Huntsman founded the predecessor to our Company in 1970 as a small packaging company. Since then, we have grown through a series of significant acquisitions and now own a global portfolio of businesses.
Currently, we operate all of our businesses through Huntsman International, our wholly-owned subsidiary. Huntsman International is a Delaware limited liability company and was formed in 1999.
Huntsman Corporation and Huntsman International Financial Statements
Except where otherwise indicated, these notes relate to the condensed consolidated financial statements for both our Company and Huntsman International. The differences between our financial statements and Huntsman International’s financial statements relate primarily to the following:
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of our wholly-owned and majority-owned subsidiaries and any variable interest entities for which we are the primary beneficiary. Intercompany accounts and transactions have been eliminated.
Reclassifications
Certain amounts in the condensed consolidated financial statements for prior periods have been recasted for all periods presented to conform with the current presentation. These reclassifications were to record the assets and liabilities of our Chemical Intermediates Businesses as held for sale and its results of operations as discontinued operations. See “—Recent Developments” below as well as “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses.”
Recent Developments
Sale of Chemical Intermediates Businesses
On August 7, 2019, we entered into an agreement with Indorama Ventures Holdings L.P. (“Indorama”) to sell our Chemical Intermediates Businesses, for a purchase price of $2.0 billion in cash plus up to approximately $76 million in net underfunded pension and other post-employment benefit liabilities. The purchase price is subject to certain closing and post-closing working capital and net indebtedness adjustments. We expect this transaction to close in early 2020. For more information, see “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses.”
Acquisition of Remaining Interest in Sasol-Huntsman Joint Venture
On September 30, 2019, we acquired from Sasol, our joint venture partner, the 50% noncontrolling interest that we did not own in the Sasol-Huntsman maleic anhydride joint venture. The joint venture owns a manufacturing facility in Moers, Germany with capacity to produce 230 million pounds of maleic anhydride. We paid Sasol $100 million, which included acquired cash, net of any debt, and is subject to customary post-closing adjustments. The purchase price was funded from a new 364-day term loan facility. See “Note 8. Debt—Direct and Subsidiary Debt—Term Loan Credit Facility.”
Sale of Property in Basel, Switzerland
In September 2011, we initiated a restructuring program in our Textile Effects segment to close its production facilities and business support offices in Basel, Switzerland. In July 2019, we sold the production facilities and business support offices in Basel. Accordingly, during the third quarter of 2019, we received proceeds of $49 million related to this sale and recognized a corresponding gain on disposal of assets of $49 million.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Adopted During 2019
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The amendments in this ASU increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU require lessees to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, providing an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840, and in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, providing an optional transition method allowing entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments in these ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Reporting entities can elect to recognize and measure leases under these amendments at the beginning of the earliest period presented using a modified retrospective approach or otherwise elect the transition method provided under ASU No. 2018-11. On January 1, 2019, we adopted the amendments in these ASUs using the transition method that allowed us to initially apply the new lease standard at the adoption date. The initial adoption of the new lease standard had a material impact on our condensed consolidated balance sheets, but did not have an impact on our condensed consolidated statements of operations. The most significant impact was the recognition of operating lease liabilities and operating lease right-of-use assets. On January 1, 2019, we recognized operating lease liabilities of $495 million and operating lease right-of-use assets of $466 million. As a result of the adoption of these amendments, we revised our accounting policy for leases as detailed in “Note 7. Leases.”
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships as well as the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity’s intended hedging strategies. The amendments in this ASU also include certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Transition requirements and elections should be applied to hedging relationships existing on the date of adoption. For cash flow and net investment hedges, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness, and the amended presentation and disclosure guidance is required only prospectively. We adopted the amendments in this ASU effective January 1, 2019, and the initial adoption of this ASU did not have a significant impact on our condensed consolidated financial statements.
In August 2018, the SEC issued a final rule, SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, that amends certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements or U.S. GAAP. For filings on Form 10-Q, the final
20
rule, amongst other items, extends to interim periods the annual requirement to disclose changes in stockholders’ equity. As amended by the final rule, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for the then current and comparative year-to-date interim periods, with subtotals for each interim period. The final rule became effective on November 5, 2018, that date being 30 days after its publication in the Federal Register. We applied these changes in the presentation of stockholders’ equity beginning in the first quarter of 2019.
Accounting Pronouncements Pending Adoption in Future Periods
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU modify certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant. The amendments in this ASU are effective for fiscal years ending after December 15, 2020 and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. We do not expect the adoption of the amendments in this ASU to have a significant impact on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of this ASU. We do not expect the adoption of the amendments in this ASU to have a significant impact on our condensed consolidated financial statements.
3. BUSINESS COMBINATION AND ACQUISITIONS
Acquisition of Demilec
On April 23, 2018, we acquired 100% of the outstanding equity interests of Demilec (USA) Inc. and Demilec Inc. (collectively, “Demilec”) for approximately $353 million, including working capital adjustments, in an all-cash transaction (“Demilec Acquisition”), which was funded from our previous $650 million senior secured revolving credit facility (the “Prior Credit Facility”) and our U.S. accounts receivable securitization program (“U.S. A/R Program”). Demilec is a leading North American manufacturer and distributor of spray polyurethane foam formulations for residential and commercial applications. The acquired business was integrated into our Polyurethanes segment. Transaction costs charged to expense related to this acquisition were approximately $3 million for the nine months ended September 30, 2018. The Demilec Acquisition was aligned with our stated strategy to grow our downstream polyurethanes business and leverage our global platform to expand Demilec’s portfolio of spray polyurethane foam formulations into international markets.
We have accounted for the Demilec Acquisition using the acquisition method. As such, we analyzed the fair value of tangible and intangible assets acquired and liabilities assumed. The allocation of acquisition cost to the assets acquired and liabilities assumed is summarized as follows (dollars in millions):
Fair value of assets acquired and liabilities assumed:
Cash paid for the Demilec Acquisition in Q2 2018
357
Purchase price adjustment received in Q3 2018
Net acquisition cost
353
Cash
Accounts receivable
31
Prepaid expenses and other current assets
Property, plant and equipment, net
Intangible assets
177
140
Total fair value of net assets acquired
As a result of a preliminary valuation of the assets and liabilities, reallocations were made during 2018 in certain property, plant and equipment, intangible asset, goodwill and deferred tax balances. As a result of the finalization of the valuation of the assets and liabilities, additional reallocations were made in 2019 in certain goodwill, other noncurrent liabilities and deferred tax balances. Intangible assets acquired consist primarily of trademarks, trade secrets and customer relationships, all of which are being amortized over 15 years. We have assigned any excess of the acquisition cost of the fair values to goodwill. During the third quarter of 2018, we received $4 million related to the settlement of certain purchase price adjustments. The goodwill recognized is attributable primarily to projected future profitable growth, penetration into downstream markets and synergies.
If this acquisition were to have occurred on January 1, 2018, the following estimated pro forma revenues, net income, net income attributable to Huntsman Corporation and Huntsman International and income per share for Huntsman Corporation would have been reported (dollars in millions):
Pro Forma (Unaudited)
September 30, 2018
Revenues
5,841
954
Net income attributable to Huntsman Corporation
666
Income per share:
Basic
Diluted
2.74
945
Net income attributable to Huntsman International
On September 30, 2019, we acquired from Sasol, our joint venture partner, the 50% noncontrolling interest that we did not own in the Sasol-Huntsman maleic anhydride joint venture. We paid Sasol $100 million, which included acquired cash, net of any debt, and is subject to customary post-closing adjustments. The purchase price was funded from a new 364-day term loan facility. See “Note 8. Debt—Direct and Subsidiary Debt—Term Loan Credit Facility.” In connection with this acquisition, we recorded an adjustment to additional paid-in capital, net of tax, of $6 million. Prior to acquiring the 50% noncontrolling interest that we did not own, we accounted for Sasol-Huntsman as a variable interest entity. See “Note 6. Variable Interest Entities.”
The effects of changes in our ownership interest in Sasol-Huntsman on the equity attributable to Huntsman Corporation and Huntsman International are as follows (dollars in millions):
Net income attributable to Huntsman Corporation shareholders
Decrease in Huntsman Corporation’s paid-in capital for purchase of 50% interest in Sasol-Huntsman
Net transfers to noncontrolling interest
Change from net income attributable to Huntsman Corporation shareholders and transfers to noncontrolling interest
253
Net income attributable to Huntsman International shareholders
Decrease in Huntsman International’s paid-in capital for purchase of 50% interest in Sasol-Huntsman
Change from net income attributable to Huntsman International shareholders and transfers to noncontrolling interest
4. DISCONTINUED OPERATIONS AND BUSINESS DISPOSITIONS
On August 7, 2019 we entered into an agreement with Indorama to sell our Chemical Intermediates Businesses for a purchase price of $2.0 billion in cash plus up to approximately $76 million in net underfunded pension and other post-employment benefit liabilities. The purchase price is subject to certain closing and post-closing working capital and net indebtedness adjustments. We expect this transaction to close in early 2020. Beginning in the third quarter of 2019, we reported the Chemical Intermediates Businesses as held for sale and reported its results of operations as discontinued operations. Additionally, certain amounts for prior periods have been recasted for all periods presented.
The following table reconciles the carrying amounts of major classes of assets and liabilities of discontinued operations to total assets and liabilities of discontinued operations that are classified as held for sale in our condensed consolidated balance sheets (dollars in millions):
Carrying amounts of major classes of assets held for sale:
73
89
134
690
711
166
Total noncurrent assets
Total assets held for sale(1)
1,109
Carrying amounts of major classes of liabilities held for sale:
142
168
Current operating lease liabilities
171
159
Noncurrent operating lease liabilities
148
124
Total noncurrent liabilities
Total liabilities held for sale(1)
508
The following table reconciles major line items constituting pretax income of discontinued operations to after-tax income (loss) of discontinued operations as presented in our condensed consolidated statements of operations (dollars in millions):
Major line items constituting pretax income of discontinued operations(1):
Trade sales, services and fees, net(2)
400
1,015
1,183
3,156
Cost of goods sold(2)
857
976
2,185
Other expense items, net that are not major
269
Income from discontinued operations before income taxes
93
170
702
Income tax (expense) benefit
(44)
(95)
Valuation allowance
Net income (loss) attributable to discontinued operations
(207)
331
Separation and Deconsolidation of Venator
In August 2017, we separated the P&A Business and conducted an IPO of ordinary shares of Venator, formerly a wholly-owned subsidiary of Huntsman. Additionally, in December 2017, we conducted a secondary offering of Venator ordinary shares. All of such ordinary shares were sold by Huntsman, and Venator did not receive any proceeds from the offerings.
On January 3, 2018, the underwriters purchased an additional 1,948,955 Venator ordinary shares pursuant to their over-allotment option, which reduced Huntsman’s ownership interest in Venator to approximately 53%. Beginning in the third quarter of 2017, we reported the results of operations of Venator as discontinued operations.
On December 3, 2018, we sold an aggregate of 4,334,389, or 4%, of Venator ordinary shares to Bank of America N.A. at a price determined based on the average of the daily volume weighted average price of Venator ordinary shares over an agreed period (the “Forward Swap”). Over this agreed period, we received aggregate proceeds of $19 million, $16 million of which was received in the first quarter of 2019. Following this transaction, we retained approximately 49% ownership in Venator and this transaction allowed us to deconsolidate Venator beginning in December 2018, and thus we began accounting for our remaining interest in Venator as an equity method investment and elected the fair value option to account for our equity method investment in Venator.
Although we intend to monetize our remaining 49% ownership in Venator, our ability to sell our ordinary shares of Venator at a reasonable price is dependent upon the prevailing market value of Venator common stock. The depressed Venator stock price inhibits our ability to sell our remaining shares of Venator at a reasonable price, which could continue for more than twelve months. Therefore, in December 2018, our equity method investment in Venator did not meet the held for sale criteria and our equity method investment in Venator was recorded in continuing operations.
During the first quarter of 2019, we recorded a gain of $1 million to record the Forward Swap at fair value. Additionally, for the three and nine months ended September 30, 2019, we recorded a loss of $148 million and $91 million, respectively, to record our investment in Venator at fair value. These gains and losses were recorded in “Fair value adjustments to Venator investment” on our condensed consolidated statements of operations.
5. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined using LIFO, first-in first-out and average cost methods for different components of inventory. Inventories consisted of the following (dollars in millions):
Raw materials and supplies
191
Work in progress
Finished goods
745
798
994
1,040
LIFO reserves
Net inventories
For September 30, 2019 and December 31, 2018, approximately 8% and 6%, of inventories were recorded using the LIFO cost method, respectively.
6. VARIABLE INTEREST ENTITIES
We evaluate our investments and transactions to identify variable interest entities for which we are the primary beneficiary. We hold a variable interest in the following joint ventures for which we are the primary beneficiary:
Creditors of these entities have no recourse to our general credit. See “Note 8. Debt—Direct and Subsidiary Debt.” As the primary beneficiary of these variable interest entities at September 30, 2019, the joint ventures’ assets, liabilities and results of operations are included in our condensed consolidated financial statements.
The following table summarizes the carrying amount of our variable interest entities’ assets and liabilities included in our condensed consolidated balance sheet as of September 30, 2019 and our consolidated balance sheet as of December 31, 2018 (dollars in millions):
2019(1)
Current assets
92
199
122
136
421
549
Current liabilities
178
Long-term debt
42
88
97
278
The revenues, income from continuing operations before income taxes and net cash provided by operating activities for our variable interest entities for the three and nine months ended September 30, 2019 and 2018 are as follows (dollars in millions):
28
39
95
72
50
7. LEASES
On January 1, 2019, we adopted the new lease standard using the optional transition method provided under ASU No. 2018-11, which allowed us to initially apply the amendments of the new lease standard at the adoption date. Upon adoption of the new lease standard, we elected the package of three practical expedient permitted under the transition guidance within the new lease standard, which among other things, allowed us to carry forward the historical lease classification on existing leases at adoption. In addition, we elected the practical expedient related to land easements, which allowed us to carry forward our accounting treatment for land easements on existing agreements. We also elected the hindsight practical expedient to determine the lease term for existing leases.
The determination of whether a contract is or contains a lease is performed at the lease inception date. Lease right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, using incremental borrowing rates as the implicit rates are not readily determinable for our leases. The incremental borrowing rates are determined on a collateralized basis and vary from lease to lease depending on the country where the leased asset exists and the term of the lease arrangement. We combine lease components with non-lease components and account for them as a single lease component for all classes of underlying assets, except for leases of manufacturing and research facilities and administrative offices. For these assets, non-lease components are separated from lease components and accounted for as normal operating expenses.
We primarily lease manufacturing and research facilities, administrative offices, land, tanks, railcars and equipment. Leases with an initial term of 12 months or less are not recognized on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Our variable lease cost was nil for the both the three and nine months ended September 30, 2019. Our leases have remaining lives from one month to 38 years. Certain lease agreements include one or more options to renew, at our discretion, with renewal terms that can extend the lease term by approximately one year to 30 years or more. Renewal and termination options that we are reasonably certain to exercise have been included in the calculation of the lease right-of-use assets and lease liabilities. None of our lease agreements contain material residual value guarantees or material restrictions or covenants.
The components of operating lease expense, cash flows and supplemental noncash information from continuing operations are as follows (dollars in millions):
September 30, 2019
Operating lease expense:
Total operating lease expense(1)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Supplemental noncash information:
Leased assets obtained in exchange for new operating lease liabilities
387
The weighted-average lease term and discount rate for our operating leases from continuing operations are as follows:
Weighted-average remaining lease term
11 years
Weighted-average discount rate
4.3%
The undiscounted cash flows of operating lease liabilities from continuing operations as of September 30, 2019 are as follows (dollars in millions):
Year ending December 31,
2019 (excluding the nine months ended September 30, 2019)
2020
2021
2022
2023
Thereafter
284
Total lease payments
485
Less imputed interest
386
Future minimum lease payments under operating leases from continuing operations as of December 31, 2018 are as follows (dollars in millions):
33
224
396
As of September 30, 2019, we have additional leases, primarily for leases of manufacturing facilities, that have not yet commenced of approximately $42 million. These leases will commence beginning in 2019 through 2021 with lease terms of up to 20 years.
8. DEBT
Outstanding debt, net of debt issuance costs, consisted of the following (dollars in millions):
Senior Credit Facilities:
Revolving facility
Amounts outstanding under A/R programs
252
Term loan
Senior notes
1,947
1,892
Variable interest entities
86
Total debt
2,336
2,320
Total current portion of debt
Long-term portion of debt
Huntsman International
Total debt, excluding debt to affiliates
Notes payable to affiliates-current
Notes payable to affiliates-noncurrent
2,727
2,908
Direct and Subsidiary Debt
Huntsman Corporation’s direct debt and guarantee obligations consist of a guarantee of certain indebtedness incurred from time to time to finance certain insurance premiums. Substantially all of our other debt, including the facilities described below, has been incurred by our subsidiaries (primarily Huntsman International). Huntsman Corporation is not a guarantor of such subsidiary debt.
Certain of our subsidiaries have third-party debt agreements that contain certain restrictions with regard to dividends, distributions, loans or advances. In certain circumstances, the consent of a third party would be required prior to the transfer of any cash or assets from these subsidiaries to us.
Debt Issuance Costs
We record debt issuance costs related to a debt liability on the balance sheet as a reduction to the face amount of that debt liability. As of September 30, 2019 and December 31, 2018, the amount of debt issuance costs directly reducing the debt liability was $12 million and $8 million, respectively. We record the amortization of debt issuance costs as interest expense.
Revolving Credit Facility
On May 21, 2018, Huntsman International entered into a new $1.2 billion senior unsecured revolving credit facility (the “2018 Revolving Credit Facility”). Borrowings under the 2018 Revolving Credit Facility will bear interest at the rates specified in the credit agreement governing the 2018 Revolving Credit Facility, which will vary based on the type of loan and Huntsman International’s debt ratings. Unless earlier terminated, the 2018 Revolving Credit Facility will mature in May 2023. Huntsman International may increase the 2018 Revolving Credit Facility commitments up to an additional $500 million, subject to the satisfaction of certain conditions.
In connection with entering into the 2018 Revolving Credit Facility, Huntsman International terminated all commitments and repaid all obligations under the Prior Credit Facility. In addition, we recognized a loss on early extinguishment of debt of $3 million. Upon the termination of the Prior Credit Facility, all guarantees of the obligations under the Prior Credit Facility were terminated, and all liens granted under the Prior Credit Facility were released. As of September 30, 2019, our 2018 Revolving Credit Facility was as follows (dollars in millions):
Unamortized
Discounts and
Committed
Principal
Debt Issuance
Carrying
Facility
Outstanding
Costs
Value
Interest Rate(2)
Maturity
2018 Revolving Credit Facility
1,200
USD LIBOR plus 1.50%
Term Loan Credit Facility
On September 24, 2019, Huntsman International entered into a new 364-day term loan facility (the “2019 Term Loan”), pursuant to which Huntsman International borrowed an aggregate principal amount of €92 million (or $101 million equivalent). We used the net proceeds from the 2019 Term Loan to finance our acquisition of the 50% noncontrolling interest that we did not own in the Sasol-Huntsman maleic anhydride joint venture. Borrowings under the 2019 Term Loan will bear interest at an interest rate of EURIBO Rate plus 0.75%, with a EURIBO Rate floor at zero. Unless earlier terminated or prepaid in accordance with the credit agreement governing the 2019 Term Loan, the 2019 Term Loan will mature on September 22, 2020. The 2019 Term Loan is subject to substantially the same terms and conditions as the 2018 Revolving Credit Facility.
A/R Programs
Our U.S. A/R Program and our European accounts receivable securitization program (“EU A/R Program” and collectively with the U.S. A/R Program, “A/R Programs”) are structured so that we transfer certain of our trade receivables to the U.S. special purpose entity (“U.S. SPE”) and the European special purpose entity (“EU SPE”) in transactions intended to be true sales or true contributions. The receivables collateralize debt incurred by the U.S. SPE and the EU SPE.
On April 18, 2019, we entered into amendments to the EU A/R Program (the “European Amendment”) and the U.S. A/R Program (the “U.S. Amendment”). The European Amendment, among other things, extended the scheduled commitment termination date of the loan facility to April 2022, reduced the facility maximum funding availability from €150 million to €100 million and made certain other amendments. The U.S. Amendment, among other things, extended the scheduled commitment termination date of the loan facility to April 2022 and made certain other amendments. Information regarding our A/R Programs as of September 30, 2019 was as follows (monetary amounts in millions):
Maximum Funding
Availability(1)
U.S. A/R Program
April 2022
120
Applicable rate plus 0.90%
EU A/R Program
€
Applicable rate plus 1.30%
(or approximately $109)
(or approximately $77)
As of September 30, 2019 and December 31, 2018, $325 million and $341 million, respectively, of accounts receivable were pledged as collateral under our A/R Programs.
Notes
On March 13, 2019, Huntsman International completed a $750 million offering of its 4.50% senior notes due 2029 (“2029 Senior Notes”). On March 27, 2019, Huntsman International applied the net proceeds of the offering of the 2029 Senior Notes to redeem in full $650 million in aggregate principal amount of its 4.875% senior notes due 2020 (“2020 Senior Notes”) and also paid associated costs and accrued interest of $21 million and $12 million, respectively. In addition, we recognized a loss on early extinguishment of debt of $23 million.
The 2029 Senior Notes bear interest at 4.50% per year, payable semi-annually on May 1 and November 1, and will mature on May 1, 2029. Huntsman International may redeem the 2029 Senior Notes in whole or in part at any time prior to February 1, 2029 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium and accrued and unpaid interest. Huntsman International may redeem the 2029 Senior Notes at any time, in whole or from time to time in part, on or after February 1, 2029 at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest.
Note Payable from Huntsman International to Huntsman Corporation
As of September 30, 2019, we had a loan of $391 million to our subsidiary, Huntsman International (the “Intercompany Note”). The Intercompany Note is unsecured and $100 million of the outstanding amount is classified as current as of September 30, 2019 on Huntsman International’s condensed consolidated balance sheets. As of September 30, 2019, under the terms of the Intercompany Note, Huntsman International promises to pay us interest on the unpaid principal amount at a rate per annum based on the previous monthly average borrowing rate obtained under our U.S. A/R Program, less 10 basis points (provided that the rate shall not exceed an amount that is 25 basis points less than the monthly average borrowing rate obtained for the U.S. LIBOR-based borrowings under our 2018 Revolving Credit Facility).
Compliance with Covenants
Our 2018 Revolving Credit Facility and 2019 Term Loan contain financial covenant regarding the leverage ratio of Huntsman International and its subsidiaries. The 2018 Revolving Credit Facility and 2019 Term Loan also contains other customary covenants and events of default for credit facilities of this type. Upon an event of default that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to the lenders, the obligations under the 2018 Revolving Credit Facility and the 2019 Term Loan may be accelerated.
The agreements governing our A/R Programs also contain certain receivable performance metrics. Any material failure to meet the applicable A/R Programs’ metrics could lead to an early termination event under the A/R Programs, which could require us to cease our use of such facilities, prohibiting us from additional borrowings against our receivables or, at the discretion of the lenders, requiring that we repay the A/R Programs in full. An early termination event under the A/R Programs would also constitute an event of default under our 2018 Revolving Credit Facility, which could require us to pay off the balance of the 2018 Revolving Credit Facility in full and could result in the loss of our 2018 Revolving Credit Facility.
We believe that we are in compliance with the covenants contained in the agreements governing our material debt instruments, including our 2018 Revolving Credit Facility, our 2019 Term Loan, our A/R Programs and our notes.
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to market risks, such as changes in interest rates, foreign exchange rates and commodity pricing risks. From time to time, we enter into transactions, including transactions involving derivative instruments, to manage certain of these exposures. We also hedge our net investment in certain European operations. Changes in the fair value of the hedge in the net investment of certain European operations are recorded as an unrealized currency translation adjustment in accumulated other comprehensive loss.
All derivatives, whether designated as hedging relationships or not, are recorded on our balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged items are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in accumulated other comprehensive loss, to the extent effective, and will be recognized in the income statement when the hedged item affects earnings. To the extent applicable, we perform effectiveness assessments in order to use hedge accounting at each reporting period. For a derivative that does not qualify as a hedge, changes in fair value are recognized in earnings.
Our revenues and expenses are denominated in various foreign currencies, and our cash flows and earnings are thus subject to fluctuations due to exchange rate variations. From time to time, we may enter into foreign currency derivative instruments to minimize the short-term impact of movements in foreign currency rates. Where practicable, we generally net multicurrency cash balances among our subsidiaries to help reduce exposure to foreign currency exchange rates. Certain other exposures may be managed from time to time through financial market transactions, principally
through the purchase of spot or forward foreign exchange contracts (generally with maturities of one year or less). We do not hedge our foreign currency exposures in a manner that would eliminate the effect of changes in exchange rates on our cash flows and earnings. As of September 30, 2019, we had approximately $177 million in notional amount (in U.S. dollar equivalents) outstanding in forward foreign currency contracts.
From time to time, we may purchase interest rate swaps and/or other derivative instruments to reduce the impact of changes in interest rates on our floating-rate exposures. Under interest rate swaps, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. On January 9, 2019, we entered into a six-year $17 million notional value interest rate hedge with a fixed rate of 2.66%. This swap is designated as a cash flow hedge and the effective portion of the changes in the fair value of the swap is recorded in other comprehensive income. The fair value of this hedge on September 30, 2019 was approximately $1 million and was recorded in other noncurrent liabilities on our condensed consolidated balance sheets.
A portion of our debt is denominated in euros. We also finance certain of our non-U.S. subsidiaries with intercompany loans that are, in many cases, denominated in currencies other than the entities’ functional currency. We manage the net foreign currency exposure created by this debt through various means, including cross-currency swaps, the designation of certain intercompany loans as permanent loans because they are not expected to be repaid in the foreseeable future and the designation of certain debt and swaps as net investment hedges.
Foreign currency transaction gains and losses on intercompany loans that are not designated as permanent loans are recorded in earnings. Foreign currency transaction gains and losses on intercompany loans that are designated as permanent loans are recorded in other comprehensive income on our condensed consolidated statements of comprehensive income. From time to time, we review such designation of intercompany loans.
We review our non-U.S. dollar denominated debt and derivative instruments to determine the appropriate amounts designated as hedges. As of September 30, 2019, we have designated approximately €480 million (approximately $525 million) of euro-denominated debt as a hedge of our net investment. For the nine months ended September 30, 2019 and 2018, the amount recognized on the hedge of our net investment was a gain of $23 million and a gain of $16 million, respectively, and was recorded in other comprehensive income on our condensed consolidated statements of comprehensive income.
In connection with the December 3, 2018 sale of Venator ordinary shares to Bank of America N.A., we recorded a forward swap. In February 2019, we settled this forward swap and received $16 million from the counterparty. See “Note 4. Discontinued Operations and Business Dispositions—Separation and Deconsolidation of Venator” and “Note 10. Fair Value.”
10. FAIR VALUE
The fair values of financial instruments were as follows (dollars in millions):
December 31, 2018
Estimated
Fair Value
Non-qualified employee benefit plan investments
Forward swap contract related to the sale of investment in Venator
Interest rate contracts
Long-term debt (including current portion)
(2,336)
(2,504)
(2,320)
(2,403)
The carrying amounts reported in our condensed consolidated balance sheets of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. We elected the fair value option to account for our equity method investment in Venator post deconsolidation. The fair value of our remaining investment in Venator reported in investment in unconsolidated affiliates is obtained through market observable pricing using prevailing market prices. See “Note 4. Discontinued Operations and Business Dispositions—Separation and Deconsolidation of Venator.” The fair values of non-qualified employee benefit plan investments are obtained through market observable pricing using prevailing market prices. The estimated fair values of our long-term debt are based on quoted market prices for the identical liability when traded as an asset in an active market (Level 1).
The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2019 and December 31, 2018. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since September 30, 2019, and current estimates of fair value may differ significantly from the amounts presented herein.
The following assets and liabilities are measured at fair value on a recurring basis (dollars in millions):
Fair Value Amounts Using
Quoted prices
Significant other
Significant
in active markets
observable
unobservable
for identical
inputs
Description
assets (Level 1)
(Level 2)
(Level 3)
Assets:
Equity securities:
Liabilities:
Derivatives:
Forward swap contract related to the sale of investment in Venator(1)
During the nine months ended September 30, 2019, there were no instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3), and there were no gains or losses (realized and unrealized) included in earnings for instruments categorized as Level 3 within the fair value hierarchy.
11. REVENUE RECOGNITION
We generate substantially all of our revenues through sales in the open market and long-term supply agreements. We recognize revenue when control of the promised goods is transferred to our customers. Control of goods usually passes to the customer at the time shipment is made. Revenue is measured as the amount that reflects the consideration that we expect to be entitled to in exchange for those goods. Sales, value add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. We have elected to account for all shipping and handling activities as fulfillment costs. We have also elected to expense commissions when incurred as the amortization period of the commission asset that we would have otherwise recognized is less than one year.
The following tables disaggregate our revenue from continuing operations by major source for the three months ended September 30, 2019 and 2018 (dollars in millions):
Polyurethanes
Performance Products
Advanced Materials
Textile Effects
Corporate and Eliminations
Primary Geographic Markets(1)
U.S. and Canada
362
74
564
Europe
466
Asia Pacific
287
60
520
Rest of world
993
256
179
Major Product Groupings
MDI urethanes
Differentiated
Specialty
Non-specialty
Textile chemicals and dyes and digital inks
Eliminations
71
663
317
543
336
79
605
87
157
1,126
329
279
204
233
46
The following tables disaggregate our revenue from continuing operations by major source for the nine months ended September 30, 2019 and 2018 (dollars in millions):
1,094
404
1,726
802
249
322
1,464
803
1,518
56
2,931
880
583
683
1,065
447
215
1,841
992
342
1,705
944
210
226
370
1,746
267
491
3,268
991
850
631
Upstream
139
Geographic information for revenues is based upon countries into which product is sold.
Substantially all of our revenue is generated through product sales in which revenue is recognized at a point in time. At contract inception, we assess the goods and services, if any, promised in our contracts and identify a performance obligation for each promise to transfer to the customer a good or service that is distinct. In substantially all cases, a contract has a single performance obligation to deliver a promised good to the customer. Revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at shipment. Further, in determining whether control has transferred, we consider if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer.
The amount of consideration we receive and revenue we recognize is based upon the terms stated in the sales contract, which may contain variable consideration such as discounts or rebates. We allocate the transaction price to each distinct product based on their relative standalone selling price. The product price as specified on the purchase order or in the sales contract is considered the standalone selling price as it is an observable input that depicts the price as if sold to a similar customer in similar circumstances. In order to estimate the applicable variable consideration, we use historical and current trend information to estimate the amount of discounts or rebates to which customers are likely to be entitled. Historically, actual discount or rebate adjustments relative to those estimated and included when determining the transaction price have not materially differed. Payment terms vary but are generally less than one year. As our standard payment terms are less than one year, we have elected to not assess whether a contract has a significant
financing component. In the normal course of business, we do not accept product returns unless the item is defective as manufactured. We establish provisions for estimated returns based on an analysis of historical experience.
12. EMPLOYEE BENEFIT PLANS
Components of the net periodic benefit costs from continuing operations for the three and nine months ended September 30, 2019 and 2018 were as follows (dollars in millions):
Other Postretirement
Defined Benefit Plans
Benefit Plans
Service cost
Interest cost
Expected return on assets
Amortization of prior service benefit
Amortization of actuarial loss
Net periodic benefit cost
59
(122)
Settlement loss
During both of the nine months ended September 30, 2019 and 2018, we made contributions to our pension and other postretirement benefit plans of $67 million. During the remainder of 2019, we expect to contribute an additional amount of approximately $10 million to these plans.
13. HUNTSMAN CORPORATION STOCKHOLDERS’ EQUITY
Share Repurchase Program
On February 7, 2018 and on May 3, 2018, our Board of Directors authorized us to repurchase up to an additional $950 million in shares of our common stock in addition to the $50 million remaining under our September 2015 share repurchase authorization. The share repurchase program will be supported by our free cash flow generation. Repurchases may be made through the open market, including through accelerated share repurchase programs, or in privately negotiated transactions, and repurchases may be commenced or suspended from time to time without prior notice. Shares of common stock acquired through the repurchase program are held in treasury at cost. During the nine months ended September 30, 2019, we repurchased 9,596,332 shares of our common stock for approximately $196 million, excluding commissions, under the repurchase program.
Dividends on Common Stock
During each of the quarters ended September 30, 2019 and June 30, 2019 we paid dividends of $38 million, or $0.1625 per share to common stockholders. During each of the quarters ended September 30, 2018, June 30, 2018 and March 31, 2019 and 2018 we paid dividends of $39 million, or $0.1625 per share, to common stockholders.
14. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and changes in accumulated other comprehensive loss by component were as follows (dollars in millions):
Pension and
Foreign
Amounts
currency
postretirement
income of
attributable to
translation
benefits
unconsolidated
noncontrolling
Huntsman
adjustment(a)
adjustments(b)
affiliates
interests
Corporation
Beginning balance, January 1, 2019
(371)
(994)
(1,352)
Other comprehensive loss before reclassifications, gross
Tax benefit
Amounts reclassified from accumulated other comprehensive loss, gross(c)
Tax expense
Net current-period other comprehensive (loss) income
Acquisition of noncontrolling interest
Ending balance, September 30, 2019
(391)
(958)
(1,337)
Beginning balance, January 1, 2018
(249)
(1,189)
(1,411)
143
Revised beginning balance, January 1, 2018
(1,421)
(1,278)
Other comprehensive (loss) income before reclassifications, gross
(155)
(152)
(120)
(71)
Ending balance, September 30, 2018
(405)
(1,128)
(1,524)
(a)
Amounts are net of tax of $66 and $65 as of September 30, 2018 and January 1, 2018, respectively.
(b)
Amounts are net of tax of $171 and $172 as of September 30, 2018 and January 1, 2018, respectively.
(c)
See table below for details about these reclassifications.
Amounts reclassified
from accumulated
comprehensive loss
Affected line item in
the statement
Details about Accumulated Other
where net income
Comprehensive Loss Components(a):
is presented
Amortization of pension and other postretirement benefits:
Prior service credit
Actuarial loss
(b)(c)
Total before tax
Total reclassifications for the period
Net of tax
Foreigncurrencytranslationadjustment(a)
Pensionand otherpostretirementbenefitsadjustments(b)
Othercomprehensiveincome ofunconsolidatedaffiliates
Amountsattributable tononcontrollinginterests
Amountsattributable toHuntsmanInternational
(376)
(977)
(1,344)
(397)
(939)
(1,328)
(252)
(1,174)
(1,406)
(1,416)
(1,273)
(153)
(121)
Tax benefit (expense)
(68)
(409)
(1,112)
(1,516)
15. COMMITMENTS AND CONTINGENCIES
Legal Matters
Indemnification Matters
On July 14, 2014, Deutsche Bank Securities Inc. and Credit Suisse Securities (USA) LLC (the “Banks”) demanded that we indemnify them for claims brought against them by certain other former Company stockholders in litigation filed June 14, 2014 in the United States District Court for the Eastern District of Wisconsin (the “Wisconsin Litigation”). We denied the Banks’ indemnification demand for the Wisconsin Litigation and have made no accrual with respect to this matter. The stockholders in the Wisconsin Litigation made claims for misrepresentation and conspiracy to defraud in connection with the failed acquisition by and merger with Hexion and, additionally, named Apollo Global Management LLC and Apollo Management Holdings, L.P. as defendants. On June 30, 2016, the plaintiffs voluntarily dismissed the Apollo defendants and on December 5, 2016, the court dismissed Deutsche Bank for lack of personal jurisdiction, but denied Credit Suisse’s motion to dismiss. Following discovery, Credit Suisse filed a motion for summary judgment on August 25, 2017; the court granted that motion on September 24, 2019 and dismissed the case with prejudice.
Other Proceedings
We are a party to various other proceedings instituted by private plaintiffs, governmental authorities and others arising under provisions of applicable laws, including various environmental, products liability and other laws. Except as otherwise disclosed in this report, we do not believe that the outcome of any of these matters will have a material effect on our financial condition, results of operations or liquidity.
16. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
EHS Capital Expenditures
We may incur future costs for capital improvements and general compliance under environmental, health and safety (“EHS”) laws, including costs to acquire, maintain and repair pollution control equipment. For both the nine months ended September 30, 2019 and 2018, our capital expenditures for EHS matters totaled $17 million. Because capital expenditures for these matters are subject to evolving regulatory requirements and depend, in part, on the timing, promulgation and enforcement of specific requirements, our capital expenditures for EHS matters have varied
significantly from year to year and we cannot provide assurance that our recent expenditures are indicative of future amounts we may spend related to EHS and other applicable laws.
Environmental Reserves
We have accrued liabilities relating to anticipated environmental cleanup obligations, site reclamation and closure costs and known penalties. Liabilities are recorded when potential liabilities are either known or considered probable and can be reasonably estimated. Our liability estimates are calculated using present value techniques as appropriate and are based upon requirements placed upon us by regulators, available facts, existing technology and past experience. The environmental liabilities do not include amounts recorded as asset retirement obligations. We had accrued $7 million for environmental liabilities as of both September 30, 2019 and December 31, 2018. Of these amounts, $2 million were classified as accrued liabilities in our condensed consolidated balance sheets as of both September 30, 2019 and December 31, 2018, and $5 million were classified as other noncurrent liabilities in our condensed consolidated balance sheets as of both September 30, 2019 and December 31, 2018, respectively. In certain cases, our remediation liabilities may be payable over periods of up to 30 years. We may incur losses for environmental remediation in excess of the amounts accrued; however, we are not able to estimate the amount or range of such potential excess.
Environmental Matters
Under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and similar state laws, a current or former owner or operator of real property in the U.S. may be liable for remediation costs regardless of whether the release or disposal of hazardous substances was in compliance with law at the time it occurred, and a current owner or operator may be liable regardless of whether it owned or operated the facility at the time of the release. Outside the U.S., analogous contaminated property laws, such as those in effect in France and Australia, can hold past owners and/or operators liable for remediation at former facilities. Currently, there are approximately nine former facilities or third-party sites in the U.S. for which we have been notified of potential claims against us for cleanup liabilities, including, but not limited to, sites listed under CERCLA. Based on current information and past experiences at other CERCLA sites, we do not expect these third-party claims to have a material impact on our condensed consolidated financial statements.
Under the Resource Conservation and Recovery Act ("RCRA") in the U.S. and similar state laws, we may be required to remediate contamination originating from our properties as a condition to our hazardous waste permit. Some of our manufacturing sites have an extended history of industrial chemical manufacturing and use, including on-site waste disposal. We are aware of soil, groundwater or surface contamination from past operations at some of our sites, and we may find contamination at other sites in the future. For example, our Port Neches, Texas and Geismar, Louisiana, facilities are the subject of ongoing remediation requirements imposed under RCRA. Similar laws exist in a number of locations in which we currently operate, or previously operated, manufacturing facilities, such as Australia, India, France, Hungary and Italy.
North Maybe Mine Remediation
The North Maybe Canyon Mine site is a CERCLA site and involves a former phosphorous mine near Soda Springs, Idaho, which is believed to have been operated by several companies, including a predecessor company to us. In 2004, the U.S. Forest Service notified us that we are a CERCLA potentially responsible party (“PRP”) for contamination originating from the site. In February 2010, we and Wells Cargo (another PRP) agreed to conduct a Remedial Investigation/Feasibility Study of a portion of the site and are currently engaged in that process. At this time, we are unable to reasonably estimate our potential liabilities at this site.
17. STOCK-BASED COMPENSATION PLANS
On May 5, 2016, our stockholders approved a new Huntsman Corporation 2016 Stock Incentive Plan (the “2016 Stock Incentive Plan”), which reserved 8.2 million shares for issuance. The Huntsman Corporation Stock Incentive Plan, as amended and restated (the “Prior Plan”), remains in effect for outstanding awards granted pursuant to the Prior Plan, but no further awards may be granted under the Prior Plan. Under the 2016 Stock Incentive Plan we may grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, phantom stock, performance share units and other stock-based awards to our employees, directors and consultants and to employees and
consultants of our subsidiaries, provided that incentive stock options may be granted solely to employees. The terms of the grants under both the 2016 Stock Incentive Plan and the Prior Plan are fixed at the grant date. Initially, there were approximately 8.2 million shares available for issuance under the 2016 Stock Incentive Plan. However, the number of shares available for issuance may be adjusted to include any shares surrendered, exchanged, forfeited or settled in cash pursuant to the Prior Plan. As of September 30, 2019, we had approximately 8 million shares remaining under the 2016 Stock Incentive Plan available for grant. Option awards have a maximum contractual term of 10 years and generally must have an exercise price at least equal to the market price of our common stock on the date the option award is granted. Outstanding stock-based awards generally vest annually over a three-year period.
The compensation cost from continuing operations under the 2016 Stock Incentive Plan and the Prior Plan for our Company and Huntsman International were as follows (dollars in millions):
Huntsman Corporation compensation cost
Huntsman International compensation cost
The total income tax benefit recognized in the condensed consolidated statements of operations for us and Huntsman International for stock-based compensation arrangements was $7 million and $17 million for the nine months ended September 30, 2019 and 2018, respectively.
Stock Options
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of our common stock through the grant date. The expected term of options granted was estimated based on the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions noted below represent the weighted average of the assumptions utilized for stock options granted during the periods.
Dividend yield
NA
2.0
%
2.9
1.5
Expected volatility
54.5
54.0
55.2
Risk-free interest rate
2.8
2.5
2.6
Expected life of stock options granted during the period
5.9
years
During the three months ended September 30, 2019, no stock options were granted.
A summary of stock option activity under the 2016 Stock Incentive Plan and the Prior Plan as of September 30, 2019 and changes during the nine months then ended is presented below:
Weighted
Average
Remaining
Aggregate
Exercise
Contractual
Intrinsic
Option Awards
Price
Term
(in thousands)
(years)
(in millions)
Outstanding at January 1, 2019
4,545
17.81
Granted
896
22.66
Exercised
(214)
10.32
Forfeited
(47)
25.24
Outstanding at September 30, 2019
5,180
18.89
6.4
Exercisable at September 30, 2019
3,750
16.72
5.5
The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2019 was $9.27 per option. As of September 30, 2019, there was $10 million of total unrecognized compensation cost related to nonvested stock option arrangements granted under the 2016 Stock Incentive Plan and the Prior Plan. That cost is expected to be recognized over a weighted-average period of approximately 2.0 years.
The total intrinsic value of stock options exercised during the nine months ended September 30, 2019 and 2018 was approximately $2 million and $77 million, respectively. Cash received from stock options exercised during the nine months ended September 30, 2019 and 2018 was approximately $1 million and $17 million, respectively. The cash tax benefit from stock options exercised during the nine months ended September 30, 2019 and 2018 was approximately nil and $17 million, respectively.
Nonvested Shares
Nonvested shares granted under the 2016 Stock Incentive Plan and the Prior Plan consist of restricted stock and performance share unit awards, which are accounted for as equity awards, and phantom stock, which is accounted for as a liability award because it can be settled in either stock or cash.
The fair value of each performance share unit award is estimated using a Monte Carlo simulation model that uses various assumptions, including an expected volatility rate and a risk-free interest rate. For the nine months ended September 30, 2019 and 2018, the weighted-average expected volatility rate was 34.6% and 44.3%, respectively, and the weighted average risk-free interest rate was 2.5% and 2.3%, respectively. For the performance share unit awards granted in the nine months ended September 30, 2019 and 2018, the number of shares earned varies based upon the Company achieving certain performance criteria over a three-year performance period. The performance criteria are total stockholder return of our common stock relative to the total stockholder return of a specified industry peer group for the three-year performance periods.
A summary of the status of our nonvested shares as of September 30, 2019 and changes during the nine months then ended is presented below:
Equity Awards
Liability Awards
Grant-Date
Nonvested at January 1, 2019
1,923
19.08
504
20.66
708
24.60
22.64
Vested
(968)
(1)(2)
13.61
(313)
16.32
26.15
25.17
Nonvested at September 30, 2019
1,647
431
24.81
As of September 30, 2019, there was $26 million of total unrecognized compensation cost related to nonvested share compensation arrangements granted under the 2016 Stock Incentive Plan and the Prior Plan. That cost is expected to be recognized over a weighted-average period of approximately 1.9 years. The value of share awards that vested during the nine months ended September 30, 2019 and 2018 was $24 million each.
18. INCOME TAXES
We use the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. We evaluate deferred tax assets to determine whether it is more likely than not that they will be realized. Valuation allowances are reviewed on an individual tax jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. These conclusions require significant judgment. In evaluating the objective evidence that historical results provide, we consider the cyclicality of our businesses and cumulative income or losses during the applicable period. Cumulative losses incurred over the applicable period limits our ability to consider other subjective evidence such as our projections for the future. Changes in expected future income in applicable jurisdictions could affect the realization of deferred tax assets in those jurisdictions.
Effective January 1, 2019, Switzerland reduced certain cantonal income tax rates resulting in a decrease in our net deferred tax assets and a corresponding noncash income tax expense of $32 million for the nine months ended September 30, 2019.
During the nine months ended September 30, 2019, we recognized a discrete tax benefit of $4 million related to excess tax benefits from share-based compensation.
The $90 million of losses on fair value adjustments to our Venator investment, recorded as part of non-operating income from continuing operations, is not subject to tax under The Netherlands’ statutory participation exemption. As a significant, unusual, non-operating item, it was treated discretely and excluded from the annual effective tax rate calculation for interim reporting.
We recorded income tax expense from continuing operations of $113 million and $41 million for the nine months ended September 30, 2019 and 2018, respectively. Our tax expense is significantly affected by the mix of income and losses in the tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions. Our effective tax rate was 41% for the nine months ended September 30, 2019. The non-cash tax expense related to the change in tax rate in Switzerland and the non-tax benefitted loss from fair value adjustments to our Venator investment resulted in a higher effective tax rate through the first nine months of 2019.
Huntsman International recorded income tax expense from continuing operations of $110 million and $38 million for the nine months ended September 30, 2019 and 2018, respectively. Our tax expense is significantly affected by the mix of income and losses in the tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions. Our effective tax rate was 42% for the nine months ended September 30, 2019. The non-cash tax expense related to the change in tax rate in Switzerland and the non-tax benefitted loss from fair value adjustments to our Venator investment resulted in a higher effective tax rate through the first nine months of 2019.
19. NET INCOME PER SHARE
Basic income per share excludes dilution and is computed by dividing net income attributable to Huntsman Corporation common stockholders by the weighted average number of shares outstanding during the period. Diluted income per share reflects all potential dilutive common shares outstanding during the period and is computed by dividing net income available to Huntsman Corporation common stockholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities.
Basic and diluted income (loss) per share is determined using the following information (in millions):
Numerator:
Basic and diluted (loss) income from continuing operations:
(Loss) income from continuing operations attributable to Huntsman Corporation
Basic and diluted net income (loss):
Denominator:
Weighted average shares outstanding
Dilutive shares:
Stock-based awards
1.7
3.9
Total weighted average shares outstanding, including dilutive shares
Additional stock-based awards of 5.2 million and 0.6 million weighted average equivalent shares of stock were outstanding during the three months ended September 30, 2019 and 2018, respectively, and 3.6 million and 0.9 million weighted average equivalent shares of stock were outstanding during the nine months ended September 30, 2019 and 2018, respectively. However, these stock-based awards were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2019 and 2018 because the effect would be anti-dilutive.
20. OPERATING SEGMENT INFORMATION
We derive our revenues, earnings and cash flows from the manufacture and sale of a wide variety of differentiated and commodity chemical products. We have four operating segments, which are also our reportable segments: Polyurethanes, Performance Products, Advanced Materials and Textile Effects. We have organized our business and derived our operating segments around differences in product lines. Beginning in the third quarter of 2019, we reported the results of our Chemical Intermediates Businesses as discontinued operations in our condensed consolidated financial statements for all periods presented. See “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses.” In addition, in connection with the Venator IPO in August 2017, we separated Venator and, beginning in the third quarter of 2017, we reported the results of operations of Venator as discontinued operations in our condensed consolidated financial statements. On December 3, 2018, we further reduced our remaining investment in Venator by the sale of Venator ordinary shares which allowed us to deconsolidate Venator and account for our remaining interest in Venator as an equity method investment using the fair value option post deconsolidation. See “Note 4. Discontinued Operations and Business Dispositions —Separation and Deconsolidation of Venator.”
The major products of each reportable operating segment are as follows:
Segment
Products
MDI, PO, polyols, PG, TPU, aniline and MTBE
Specialty amines, ethyleneamines, maleic anhydride and technology licenses
Basic liquid and solid epoxy resins; specialty resin compounds; cross-linking, matting and curing agents; epoxy, acrylic and polyurethane-based formulations
Textile chemicals, dyes and digital inks
Sales between segments are generally recognized at external market prices and are eliminated in consolidation. Adjusted EBITDA is presented as a measure of the financial performance of our global business units and for reporting the results of our operating segments. The adjusted EBITDA of our reportable operating segments excludes items that principally apply to our Company as a whole. The revenues and adjusted EBITDA from continuing operations for each of our reportable operating segments are as follows (dollars in millions):
Corporate and eliminations
Huntsman Corporation:
Segment adjusted EBITDA(1):
146
218
426
125
158
Corporate and other(2)
(129)
308
664
Reconciliation of adjusted EBITDA to net income:
Interest expense—continuing operations
Interest expense—discontinued operations
Income tax expense—continuing operations
Income tax (expense) benefit—discontinued operations
Depreciation and amortization—continuing operations
(65)
(62)
(187)
Depreciation and amortization—discontinued operations
(63)
288
Other adjustments:
Business acquisition and integration expenses
EBITDA from discontinued operations
106
(213)
525
Noncontrolling interest of discontinued operations
(222)
Certain legal settlements and related expenses
Certain nonrecurring information technology project implementation costs
Amortization of pension and postretirement actuarial losses
(50)
Plant incident remediation costs
Restructuring, impairment and plant closing and transition credits (costs)
Huntsman International:
(108)
216
957
(60)
(17)
(52)
(2) Corporate and other includes unallocated corporate overhead, unallocated foreign exchange gains and losses, LIFO inventory valuation reserve adjustments, loss on early extinguishment of debt, unallocated restructuring, impairment and plant closing costs, nonoperating income and expense and gains and losses on the disposition of corporate assets.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We operate in four segments: Polyurethanes, Performance Products, Advanced Materials and Textile Effects. Our products comprise a broad range of chemicals and formulations, which we market globally 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, personal care and hygiene, durable and non-durable consumer products, digital inks, electronics, medical, packaging, coatings and construction, power generation, refining, synthetic fiber, textile chemicals and dyes industries. We are a leading global producer in many of our key product lines, including MDI, amines, surfactants, maleic anhydride, epoxy-based polymer formulations, textile chemicals and dyes. Our revenues from continuing operations for the nine months ended September 30, 2019 and 2018 were $5,140 million and $5,783 million, respectively.
Sale of Chemical Intermediates Businesseses
For more information, see “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses” to our condensed consolidated financial statements.
On September 30, 2019, we acquired from Sasol the 50% noncontrolling interest that we did not own in the Sasol-Huntsman maleic anhydride joint venture. The joint venture owns a manufacturing facility in Moers, Germany with capacity to produce 230 million pounds of maleic anhydride. We paid Sasol $100 million, which included acquired cash, net of any debt, and is subject to customary post-closing adjustments. The purchase price was funded from a new 364-day term loan facility. See “Note 8. Debt—Direct and Subsidiary Debt—Term Loan Credit Facility” to our condensed consolidated financial statements.
Outlook
We expect the following factors to impact our operating segments:
Polyurethanes:
Performance Products:
Advanced Materials:
Textile Effects:
In 2019, we expect to spend approximately $270 million on capital expenditures for continuing operations and approximately $70 million for the Chemical Intermediates Businesses reported as discontinued operations.
We expect our forward adjusted effective tax rate will be approximately 22% to 24%. For further information, see “—Non-GAAP Financial Measures” and “Note 18. Income Taxes” to our condensed consolidated financial statements.
Refer to “Forward-Looking Statements” for a discussion of our use of forward-looking statements in this Form 10-Q.
Results of Operations
For each of our Company and Huntsman International, the following tables set forth the condensed consolidated results of operations (dollars in millions, except per share amounts):
Percent
Change
(14)%
(11)%
(10)%
(7)%
(27)%
(24)%
Operating expenses
231
(3)%
(2)%
NM
(100)%
(32)%
(39)%
36%
(9)%
667%
17%
(99)%
(59)%
88%
176%
(74)%
(63)%
(70)%
Reconciliation of net income (loss) to adjusted EBITDA:
267%
(89)%
Interest expense from continuing operations
Interest expense from discontinued operations
Income tax expense from continuing operations
113
Income tax expense (benefit) from discontinued operations
(54)%
Depreciation and amortization of continuing operations
5%
7%
Depreciation and amortization of discontinued operations
(43)%
(6)%
(106)
(229)
(525)
90
Restructuring, impairment and plant closing and transition (credits) costs(2)
Adjusted EBITDA(1)
(30)%
(78)%
268%
Capital expenditures from continuing operations
22%
230
239
(4)%
710
(31)%
(25)%
(41)%
(60)%
93%
189%
(75)%
(71)%
8%
9%
(79)%
406%
Gross
Tax and other(3)
Net
Reconciliation of net income to adjusted net income
(Income) loss from discontinued operations(4)
205
Release of significant income tax valuation allowances
U.S. Tax Reform impact on income tax expense
Adjusted net income(1)
Weighted average shares-basic
Weighted average shares-diluted
Weighted average shares-diluted adjusted
229.0
Basic net income (loss) attributable to Huntsman Corporation per share:
Income (loss) from discontinued operations
Diluted net income (loss) attributable to Huntsman Corporation per share:
Other non-GAAP measures:
Diluted adjusted net income per share(1)
0.41
0.71
Income from discontinued operations(4)
(119)
Impact of Switzerland income tax rate change
552
Basic net income attributable to Huntsman Corporation per share:
Income from discontinued operations
Diluted net income attributable to Huntsman Corporation per share:
1.24
2.27
Capital expenditures from continuing operations, net of reimbursements(5)
(172)
All other investing activities from continuing operations, excluding acquisition and disposition activities
Non-recurring merger costs
Free cash flow from continuing operations(1)
258
300
167
545
NM—Not meaningful
Non-GAAP Financial Measures
Our condensed consolidated financial statements are prepared in accordance with GAAP, which we supplement with certain non-GAAP financial information. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such measures differently. We encourage investors to review our financial statements and the reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in their entirety and not to rely on any single financial measure. These non-GAAP measures exclude the impact of certain expenses that we do not believe are indicative of our core operating results.
Adjusted EBITDA
Our management uses adjusted EBITDA to assess financial performance. Adjusted EBITDA is defined as net income of Huntsman Corporation or Huntsman International, as appropriate, before interest, income tax, depreciation and amortization, net income attributable to noncontrolling interests and certain Corporate and other items, as well as eliminating the following adjustments: (a) business acquisition and integration expenses; (b) purchase accounting inventory adjustments; (c) merger costs; (d) EBITDA from discontinued operations; (e) noncontrolling interest of discontinued operations; (f) fair value adjustments to Venator investment; (g) loss on early extinguishment of debt; (h) certain legal settlements and related expenses (income); (i) certain nonrecurring information technology project implementation costs; (j) gain on sale of businesses/assets; (k) amortization of pension and postretirement actuarial losses; (l) plant incident remediation costs; (m) U.S. Tax Reform Act impact on noncontrolling interest; and (n) restructuring, impairment and plant closing and transition costs (credits). We believe that net income of Huntsman Corporation or Huntsman International, as appropriate, is the performance measure calculated and presented in accordance with U.S. GAAP that is most directly comparable to adjusted EBITDA.
We believe adjusted EBITDA is useful to investors in assessing the businesses’ ongoing financial performance and provides improved comparability between periods through the exclusion of certain items that management believes are not indicative of the businesses’ operational profitability and that may obscure underlying business results and trends. However, this measure should not be considered in isolation or viewed as a substitute for net income of Huntsman Corporation or Huntsman International, as appropriate, or other measures of performance determined in accordance with U.S. GAAP. Moreover, adjusted EBITDA as used herein is not necessarily comparable to other similarly titled measures of other companies due to potential inconsistencies in the methods of calculation. Our management believes this measure is useful to compare general operating performance from period to period and to make certain related management decisions. Adjusted EBITDA is also used by securities analysts, lenders and others in their evaluation of different companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be highly dependent on a company’s capital structure, debt levels and credit ratings. Therefore, the impact of interest expense on earnings can vary significantly among companies. In addition, the tax positions of companies can vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the various jurisdictions in which they operate. As a result, effective tax rates and tax expense can vary considerably among companies. Finally, companies employ productive assets of different ages and utilize different methods of acquiring and depreciating such assets. This can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.
Nevertheless, our management recognizes that there are material limitations associated with the use of adjusted EBITDA in the evaluation of our Company as compared to net income of Huntsman Corporation or Huntsman International, as appropriate, which reflects overall financial performance. For example, we have borrowed money in order to finance our operations and interest expense is a necessary element of our costs and ability to generate revenue. Our management compensates for the limitations of using adjusted EBITDA by using this measure to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business rather than U.S. GAAP results alone.
Adjusted Net Income
Adjusted net income is computed by eliminating the after tax amounts related to the following from net income attributable to Huntsman Corporation or Huntsman International, as appropriate: (a) business acquisition and integration expenses; (b) purchase accounting inventory adjustments; (c) merger costs; (d) loss (income) from discontinued operations; (e) noncontrolling interest of discontinued operations; (f) fair value adjustments to Venator investment; (g) loss on early extinguishment of debt; (h) certain legal settlements and related (income) expenses; (i) certain nonrecurring information technology project implementation costs; (j) gain on sale of assets; (k) amortization of pension and
55
postretirement actuarial losses; (l) plant incident remediation costs; (m) release or establishment of significant income tax valuation allowances; (n) U.S. Tax Reform Act impact on income tax expense; (o) U.S. Tax Reform Act impact on noncontrolling interest; (p) impact of Switzerland income tax rate change; and (q) restructuring, impairment and plant closing and transition costs (credits). Basic adjusted net income per share excludes dilution and is computed by dividing adjusted net income by the weighted average number of shares outstanding during the period. Adjusted diluted net income per share reflects all potential dilutive common shares outstanding during the period and is computed by dividing adjusted net income by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities. Adjusted net income and adjusted net income per share amounts are presented solely as supplemental information.
Capital Expenditures, Net of Reimbursements
Capital expenditures, net of reimbursements, represent cash paid for capital expenditures less payments received as reimbursements from customers and joint venture partners.
Free Cash Flow
Management internally uses a free cash flow measure: (a) to evaluate our liquidity, (b) evaluate strategic investments, (c) plan stock buyback and dividend levels and (d) evaluate our ability to incur and service debt. Free cash flow is not a defined term under U.S. GAAP, and it should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow as cash flows provided by operating activities from continuing operations and used in investing activities from continuing operations, excluding acquisition/disposition activities and including non-recurring separation costs. Free cash flow is typically derived directly from the Company’s consolidated statement of cash flows; however, it may be adjusted for items that affect comparability between periods.
Adjusted Effective Tax Rate
We believe that the effective tax rate of Huntsman Corporation or Huntsman International, as appropriate, is the performance measure calculated and presented in accordance with U.S. GAAP that is most directly comparable to adjusted effective tax rate. We believe our adjusted effective tax rate provides improved comparability between periods through the exclusion of certain items that management believes are not indicative of the businesses’ operational profitability and that may obscure underlying business results and trends. We do not provide reconciliations for adjusted effective tax rate on a forward-looking basis because we are unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing and amount of certain items, such as business acquisition and integration expenses, merger costs, certain legal and other settlements and related costs, gains on sale of business/assets and amortization of pension and postretirement actuarial losses. Each of such adjustments has not yet occurred, is out of our control and/or cannot be reasonably predicted. For the same reasons, we are unable to address the probable significance of the unavailable information.
Three Months Ended September 30, 2019 Compared with Three Months Ended September 30, 2018
As discussed in “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses” and “Note 4. Discontinued Operations and Business Dispositions—Separation and Deconsolidation of Venator” to our condensed consolidated financial statements, the results from continuing operations exclude the results of our Chemical Intermediates and Businesses and the results of our former polymers, base chemicals and Australian styrenics business for all periods presented, as well as the results of Venator for the 2018 period. The decrease of $211 million in net income attributable to both Huntsman Corporation and Huntsman International from continuing operations, respectively, was the result of the following items:
Segment Analysis
(Dollars in millions)
(12)%
(15)%
(8)%
Segment adjusted EBITDA(1)
(33)%
(36)%
Corporate and other
20%
Three months ended September 30, 2019 vs 2018
Average Selling Price(1)
Local
Foreign Currency
Mix &
Sales
Currency
Translation Impact
Volumes(2)
Period-Over-Period (Decrease) Increase
(13)%
2%
1%
(5)%
3%
4%
(1)%
Total Company
Three months ended September 30, 2019 vs June 30, 2019
The decrease in revenues in our Polyurethanes segment for the three months ended September 30, 2019 compared to the same period of 2018 was due to lower MDI average selling prices, partially offset by higher MDI sales volumes. MDI average selling prices decreased primarily due to a decline in component MDI selling prices in China and Europe. MDI sales volumes increased primarily due to the start-up of our new Chinese MDI facility in the third quarter of 2018. The decrease in segment adjusted EBITDA was primarily due to lower MDI margins driven by lower MDI pricing, partially offset by higher MDI sales volumes.
The decrease in revenues in our Performance Products segment for the three months ended September 30, 2019 compared to the same period of 2018 was due to lower average selling prices and lower sales volumes. Average selling prices decreased primarily due to lower raw material costs and weakened market conditions. Sales volumes decreased primarily due to weakened market conditions. The decrease in segment adjusted EBITDA was primarily due to lower sales volumes and lower margins, primarily in our ethyleneamines business, partially offset by higher margins in our specialty amines business.
The decrease in revenues in our Advanced Materials segment for the three months ended September 30, 2019 compared to the same period in 2018 was due to lower sales volumes and lower average selling prices. Sales volumes decreased across most markets primarily due to economic slowdown and customer destocking, particularly in our European region. Average selling prices decreased primarily due to the impact of a stronger U.S. dollar against major international currencies, partially offset by higher local currency selling prices. The decrease in segment adjusted EBITDA was primarily due to lower sales volumes.
The decrease in revenues in our Textile Effects segment for the three months ended September 30, 2019 compared to the same period of 2018 was due to lower sales volumes and lower average selling prices. Sales volumes decreased due to lower demand primarily resulting from market uncertainties surrounding U.S. and China trade. Average selling prices decreased as a result of competitive market pressures and the impact of a stronger U.S. dollar against major international currencies. The decrease in segment adjusted EBITDA was primarily due to lower sales volumes and higher raw material costs, partially offset by lower fixed costs.
Corporate and other includes unallocated corporate overhead, unallocated foreign currency exchange gains and losses, LIFO inventory valuation reserve adjustments, loss on early extinguishment of debt, unallocated restructuring, impairment and plant closing costs, nonoperating income and expense and gains and losses on the disposition of corporate assets. For the three months ended September 30, 2019, adjusted EBITDA from Corporate and other for Huntsman Corporation increased by $9 million to a loss of $36 million from a loss of $45 million for the same period of 2018. For the three months ended September 30, 2019, adjusted EBITDA from Corporate and other for Huntsman International increased by $10 million to a loss of $35 million from a loss of $45 million for the same period of 2018. The increase in adjusted EBITDA from Corporate and other resulted primarily from a benefit from a LIFO inventory reserve adjustment, a decrease in corporate overhead costs and a decrease in unallocated foreign currency exchange loss.
Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018
As discussed in “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses” and “Note 4. Discontinued Operations and Business Dispositions—Separation and Deconsolidation of Venator” to our condensed consolidated financial statements, the results from continuing operations exclude the results of our Chemical Intermediates Businesses and the results of our former polymers, base chemicals and Australian styrenics business for all periods presented, as well as the results of Venator for the 2018 period. The decrease of $429 million in net income attributable to both Huntsman Corporation and Huntsman International from continuing operations, respectively, was the result of the following items:
(21)%
(18)%
13%
14%
Nine months ended September 30, 2019 vs 2018
The decrease in revenues in our Polyurethanes segment for the nine months ended September 30, 2019 compared to the same period of 2018 was due to lower MDI average selling prices, partially offset by higher MDI sales volumes. MDI average selling prices decreased primarily due to a decline in polymeric MDI selling prices in China and Europe. MDI sales volumes increased primarily due to the start-up of our new Chinese MDI facility in 2018. The decrease in segment adjusted EBITDA was primarily due to lower MDI margins driven by lower MDI pricing.
The decrease in revenues in our Performance Products segment for the nine months ended September 30, 2019 compared to the same period of 2018 was due to lower sales volumes and lower average selling prices. Sales volumes decreased primarily due to weakened market conditions. Average selling prices decreased primarily due to lower raw material costs and weakened market conditions. The decrease in segment adjusted EBITDA was primarily due to lower sales volumes and lower margins, primarily in our ethylenamines business, partially offset by higher margins in our specialty amines and maleic anhydride businesses.
The decrease in revenues in our Advanced Materials segment for the nine months ended September 30, 2019, compared to the same period in 2018 was due to lower sales volumes and lower average selling prices. Sales volumes decreased primarily due to lower sales volumes in our power and automotive related markets, partially offset by favorable product mix effect from sales volumes in our aerospace components market. Average selling prices decreased primarily due to the impact of a stronger U.S. dollar against major international currencies, partially offset by higher local currency selling prices. The decrease in segment adjusted EBITDA was primarily due to lower sales volumes, higher raw material and fixed costs and the impact of a stronger U.S. dollar against major international currencies.
The decrease in revenues in our Textile Effects segment for the nine months ended September 30, 2019 compared to the same period of 2018 was due to lower sales volumes, partially offset by higher average selling prices. Sales volumes decreased primarily due to lower demand resulting from market uncertainties surrounding U.S. and China trade. Average selling prices increased in response to higher raw material costs, partially offset by the impact of a stronger U.S. dollar against major international currencies. The decrease in segment adjusted EBITDA was primarily due to lower sales volumes and higher raw materials costs, partially offset by higher average selling prices and lower fixed costs.
Corporate and other includes unallocated corporate overhead, unallocated foreign currency exchange gains and losses, LIFO inventory valuation reserve adjustments, loss on early extinguishment of debt, unallocated restructuring, impairment and plant closing costs, nonoperating income and expense and gains and losses on the disposition of
corporate assets. For the nine months ended September 30, 2019, adjusted EBITDA from Corporate and other for Huntsman Corporation increased by $17 million to a loss of $112 million from a loss of $129 million for the same period of 2018. For the nine months ended September 30, 2019, adjusted EBITDA from Corporate and other for Huntsman International increased by $18 million to a loss of $108 million from a loss of $126 million for the same period of 2018. The increase in adjusted EBITDA from Corporate and other resulted primarily from a benefit from a LIFO inventory reserve adjustment, a decrease in corporate overhead costs and a decrease in unallocated foreign currency exchange loss.
Liquidity and Capital Resources
The following is a discussion of our liquidity and capital resources and does not include separate information with respect to Huntsman International in accordance with General Instructions H(1)(a) and (b) of Form 10-Q.
Cash Flows for the Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018
Net cash provided by operating activities from continuing operations for the nine months ended September 30, 2019 and 2018 was $434 million and $446 million, respectively. The decrease in net cash provided by operating activities from continuing operations during the nine months ended September 30, 2019 compared with the same period in 2018 was primarily attributable to decreased operating income as described in “—Results of Operations” above, partially offset by a $113 million favorable variance in operating assets and liabilities for the nine months ended September 30, 2019 as compared with the same period of 2018.
Net cash used in investing activities from continuing operations for the nine months ended September 30, 2019 and 2018 was $111 million and $514 million, respectively. During the nine months ended September 30, 2019 and 2018, we paid $181 million and $148 million, respectively, for capital expenditures. During the nine months ended September 30, 2018, we paid $366 million for the acquisition of a business, net of cash acquired. During the nine months ended September 30, 2019, we received $49 million in proceeds from the sale of assets in connection with the closure of our Textile Effects facilities in Basel, Switzerland, and we received $16 million in proceeds from the settlement of the December 3, 2018 sale of Venator ordinary shares to Bank of America N.A.
Net cash used in financing activities for the nine months ended September 30, 2019 and 2018 was $431 million and $117 million, respectively. The increase in net cash used in financing activities was primarily due to increased repayments on our 2018 Credit Facility in the 2019 period, the repayment of our 2020 Senior Notes in the first quarter of 2019 and cash paid to acquire the 50% noncontrolling interest that we did not own in the Sasol-Huntsman joint venture. The increase was partially offset by proceeds from the issuance of our 2029 Senior Notes in the first quarter of 2019 and proceeds from the 2019 Term Loan in the third quarter of 2019.
Free cash flow from continuing operations for the nine months ended September 30, 2019 and 2018 were proceeds of cash of $258 million and $300 million, respectively. The reduction in free cash flow was attributable to the changes in cash flows from operating and investing activities from continuing operations, excluding acquisition and disposition activities.
Changes in Financial Condition
The following information summarizes our working capital position (dollars in millions):
Increase
(Decrease)
Cash and cash equivalents
23%
Accounts and notes receivable, net
1,090
(93)
(46)
Current assets held for sale(1)
876
378%
771
26%
744
793
Current portion of debt
38%
Current liabilities held for sale(1)
361
160%
294
18%
Working capital
1,824
477
35%
Our working capital increased by $477 million as a result of the net impact of the following significant changes:
See “Note 8. Debt—Direct and Subsidiary Debt” to our condensed consolidated financial statements.
See “Note 8. Debt—Direct and Subsidiary Debt—Debt Issuance Costs” to our condensed consolidated financial statements.
See “Note 8. Debt—Direct and Subsidiary Debt—Revolving Credit Facility” to our condensed consolidated financial statements.
See “Note 8. Debt—Direct and Subsidiary Debt—Term Loan Credit Facility” to our condensed consolidated financial statements.
See “Note 8. Debt—Direct and Subsidiary Debt—A/R Programs” to our condensed consolidated financial statements.
See “Note 8. Debt—Direct and Subsidiary Debt—Notes” to our condensed consolidated financial statements.
See “Note 8. Debt—Direct and Subsidiary Debt—Note Payable from Huntsman International to Huntsman Corporation” to our condensed consolidated financial statements.
See “Note 8. Debt—Compliance with Covenants” to our condensed consolidated financial statements.
Short-Term and Long-Term Liquidity
We depend upon our cash, 2018 Revolving Credit Facility, A/R Programs and other debt instruments to provide liquidity for our operations and working capital needs. As of September 30, 2019, we had $1,707 million of combined cash and unused borrowing capacity, consisting of $418 million in cash, $1,193 million in availability under our 2018 Revolving Credit Facility and $96 million in availability under our A/R Programs. Our liquidity can be significantly impacted by various factors. The following matters had, or are expected to have, a significant impact on our liquidity:
As of September 30, 2019, we had $132 million classified as current portion of debt, including $101 million on our 2019 Term Loan, debt at our variable interest entities of $30 million and certain other short-term facilities and scheduled amortization payments totaling $1 million. Although we cannot provide assurances, we intend to renew, repay or extend the majority of these short-term facilities in the next twelve months.
As of September 30, 2019, we had approximately $352 million of cash and cash equivalents, including restricted cash, held by our foreign subsidiaries, including our variable interest entities. Additionally, we have material intercompany debt obligations owed to us by our non-U.S. subsidiaries. We intend to use cash held in our foreign subsidiaries to fund our local operations. Nevertheless, we could repatriate cash as dividends and the repatriation of cash as a dividend would generally not be subject to U.S. taxation as a result of the U.S. Tax Reform Act. However, such repatriation may potentially be subject to limited foreign withholding taxes.
Critical Accounting Policies
Our critical accounting policies are presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our revenues and expenses are denominated in various foreign currencies, and our cash flows and earnings are thus subject to fluctuations due to exchange rate variations. From time to time, we may enter into foreign currency derivative instruments to minimize the short-term impact of movements in foreign currency rates. Where practicable, we generally net multicurrency cash balances among our subsidiaries to help reduce exposure to foreign currency exchange rates. Certain other exposures may be managed from time to time through financial market transactions, principally through the purchase of spot or forward foreign exchange contracts (generally with maturities of one year or less). We
do not hedge our foreign currency exposures in a manner that would eliminate the effect of changes in exchange rates on our cash flows and earnings. As of September 30, 2019, we had approximately $177 million in notional amount (in U.S. dollar equivalents) outstanding in forward foreign currency contracts.
In connection with the December 3, 2018 sale of Venator ordinary shares to Bank of America N.A., we recorded a forward swap. In February 2019, we settled this forward swap and received $16 million from the counterparty. See “Note 4. Discontinued Operations and Business Dispositions—Separation and Deconsolidation of Venator” and “Note 10. Fair Value” to our condensed consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of September 30, 2019, our disclosure controls and procedures were effective, in that they ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
No changes to our internal control over financial reporting occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). However, we can only give reasonable assurance that our internal controls over financial reporting will prevent or detect material misstatements on a timely basis. Ineffective internal controls over financial reporting could cause investors to lose confidence in our reported financial information and could result in a lower trading price for our securities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to the legal proceedings referenced in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 1A. RISK FACTORS
For information regarding risk factors, see “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. In addition to the risk factors noted in the Annual Report on Form 10-K, the following risk factor is applicable to us.
The proposed sale of our chemical intermediates and surfactants businesses to Indorama Ventures Holdings L.P. is contingent upon the satisfaction of a number of conditions, will require significant time and attention of our management and may have an adverse effect on us if not completed.
On August 7, 2019, we entered into a definitive agreement to sell our Chemical Intermediates Businesses to Indorama for a purchase price of $2.0 billion in cash plus up to approximately $76 million in net underfunded pension and other post-employment benefit liabilities. Completion of the proposed sale is subject to the satisfaction of various closing conditions, including but not limited to regulatory approvals, such as the approval of the Committee on Foreign Investment in the United States. There can be no assurance that any of such conditions will be satisfied and that the proposed sale will be successfully completed. If we fail to complete the proposed sale, our common stock may experience negative reactions from the financial markets.
In pursuing the proposed sale, our ongoing businesses may be adversely affected, and we may be subject to certain risks and consequences, including, but not limited to, the following:
Any of these factors could have a material adverse effect on our financial condition, results of operations, cash flows and the price of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to shares of our common stock that we repurchased as part of our share repurchase program and shares of restricted stock granted under our 2016 Stock Incentive Plan and our Prior Plan that we withheld upon vesting to satisfy our tax withholding obligations during the months ended September 30, 2019.
Total number of
Approximate dollar
shares purchased
value of shares that
Total number
as part of publicly
may yet be purchased
of shares
price paid
announced plans
under the plans or
purchased
per share
or programs(1)
programs(1)
July
1,190
19.02
1,100
608,000,000
August
2,914,995
19.04
2,913,283
553,000,000
September
1,142,166
22.10
1,141,695
528,000,000
4,058,351
19.90
4,056,078
ITEM 6. EXHIBITS
See the Exhibit Index at the end of this Quarterly Report on Form 10-Q for exhibits filed with this report.
EXHIBIT INDEX
Incorporated by Reference
Exhibit Number
Exhibit Description
Form
Exhibit
Filing Date
2.1
Equity and Asset Purchase Agreement, dated as of August 7, 2019, by and among Huntsman International LLC, Indorama Ventures Holdings L.P. and Indorama Ventures Public Company Limited
8-K
August 12, 2019
31.1
*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL.
Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
Dated: October 25, 2019
HUNTSMAN CORPORATION
HUNTSMAN INTERNATIONAL LLC
By:
/s/ SEAN DOUGLAS
Sean Douglas
Executive Vice President and Chief Financial Officer
and Manager (Principal Financial Officer)
/s/ RANDY W. WRIGHT
Randy W. Wright
Vice President and Controller (Authorized Signatory and
Principal Accounting Officer)