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 March 31, 2020
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 April 22, 2020, 220,533,935 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 MARCH 31, 2020
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
6
Condensed Consolidated Statements of Equity
7
Condensed Consolidated Statements of Cash Flows
8
Huntsman International LLC and Subsidiaries:
10
11
12
13
14
Huntsman Corporation and Subsidiaries and Huntsman International LLC and Subsidiaries:
Notes to Condensed Consolidated Financial Statements
16
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
50
ITEM 4.
Controls and Procedures
51
PART II
OTHER INFORMATION
52
Legal Proceedings
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
53
ITEM 6.
Exhibits
54
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; projected impact of COVID-19 on our operations and future financial results; 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, 2019.
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Per Share Amounts)
March 31,
December 31,
2020
2019
ASSETS
Current assets:
Cash and cash equivalents(a)
$
1,594
525
Accounts and notes receivable (net of allowance for doubtful accounts of $22 and $19, respectively), ($252 and $221 pledged as collateral, respectively)(a)
1,013
940
Accounts receivable from affiliates
Inventories(a)
1,008
914
Other current assets(a)
145
155
Current assets held for sale
—
1,208
Total current assets
3,774
3,755
Property, plant and equipment, net(a)
2,357
2,383
Investment in unconsolidated affiliates
426
535
Intangible assets, net(a)
351
197
Goodwill
396
276
Deferred income taxes
287
292
Notes receivable from affiliate
34
Operating lease right-of-use assets
380
Other noncurrent assets(a)
453
452
Total assets
8,458
8,320
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable(a)
825
765
Accounts payable to affiliates
31
57
Accrued liabilities(a)
739
420
Current portion of debt(a)
134
212
Current operating lease liabilities(a)
45
42
Current liabilities held for sale
512
Total current liabilities
1,774
2,008
Long-term debt(a)
2,049
2,177
29
Noncurrent operating lease liabilities(a)
365
384
Other noncurrent liabilities(a)
833
898
Total liabilities
5,075
5,496
Commitments and contingencies (Notes 14 and 15)
Equity
Huntsman Corporation stockholders’ equity:
Common stock $0.01 par value, 1,200,000,000 shares authorized, 258,124,697 and 257,405,496 shares issued and 219,647,609 and 224,295,868 shares outstanding, respectively
Additional paid-in capital
4,034
4,008
Treasury stock, 38,477,091 and 33,112,572 shares, respectively
(731)
(635)
Unearned stock-based compensation
(30)
(17)
Retained earnings
1,350
690
Accumulated other comprehensive loss
(1,383)
(1,362)
Total Huntsman Corporation stockholders’ equity
3,243
2,687
Noncontrolling interests in subsidiaries
140
137
Total equity
3,383
2,824
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
ended
Revenues:
Trade sales, services and fees, net
1,549
1,640
Related party sales
44
Total revenues
1,593
1,669
Cost of goods sold
1,296
1,310
Gross profit
297
359
Operating expenses:
Selling, general and administrative
199
207
Research and development
36
Restructuring, impairment and plant closing costs
1
Other operating expenses, net
Total operating expenses
243
244
Operating income
115
Interest expense, net
(18)
Equity in income of investment in unconsolidated affiliates
Fair value adjustments to Venator investment
(110)
76
Loss on early extinguishment of debt
(23)
Other income, net
(Loss) income from continuing operations before income taxes
(62)
153
Income tax expense
(7)
(45)
(Loss) income from continuing operations
(69)
108
Income from discontinued operations, net of tax
777
23
Net income
708
131
Net income attributable to noncontrolling interests
(3)
(12)
Net income attributable to Huntsman Corporation
705
119
Basic income per share:
(Loss) income from continuing operations attributable to Huntsman Corporation common stockholders
(0.32)
0.41
Income from discontinued operations attributable to Huntsman Corporation common stockholders, net of tax
3.48
0.10
Net income attributable to Huntsman Corporation common stockholders
3.16
0.51
Weighted average shares
223.2
233.1
Diluted income per share:
235.1
Amounts attributable to Huntsman Corporation common stockholders:
(72)
96
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
Other comprehensive (loss) income, net of tax:
Foreign currency translations adjustments
(73)
Pension and other postretirement benefits adjustments
Other comprehensive (loss) income, net of tax
(21)
Comprehensive income
687
185
Comprehensive income attributable to noncontrolling interests
(14)
Comprehensive income attributable to Huntsman Corporation
684
171
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In Millions, Except Share Amounts)
Huntsman Corporation Stockholders' Equity
Accumulated
Shares
Additional
Unearned
other
Noncontrolling
common
Common
paid-in
Treasury
stock-based
Retained
comprehensive
interests in
Total
stock
capital
compensation
earnings
loss
subsidiaries
equity
Balance, January 1, 2020
224,295,868
Other comprehensive loss
Issuance of nonvested stock awards
18
Vesting of stock awards
943,026
Recognition of stock-based compensation
Repurchase and cancellation of stock awards
(283,975)
(6)
Stock options exercised
57,209
(2)
Treasury stock repurchased
(5,364,519)
(96)
Dividends declared on common stock ($0.1625 per share)
(37)
Balance, March 31, 2020
219,647,609
Balance, January 1, 2019
232,994,172
3,984
(427)
(16)
(1,316)
229
2,749
Other comprehensive income
1,619,502
(483,053)
78,054
(1,525,767)
(34)
(39)
Balance, March 31, 2019
232,682,908
4,010
(461)
(28)
360
(1,264)
2,863
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities:
Less: Income from discontinued operations, net of tax
(777)
Adjustments to reconcile (loss) income from continuing operations to net cash used in operating activities from continuing operations:
(10)
Unrealized losses (gains) on fair value adjustments to Venator investment
110
(76)
Depreciation and amortization
67
Stock-based compensation
Taxes paid on sale of business
Other, net
Changes in operating assets and liabilities:
Accounts and notes receivable
(15)
Inventories
(92)
(82)
Prepaid expenses
(4)
Other current assets
22
Other noncurrent assets
(26)
Accounts payable
61
Accrued liabilities
(44)
(43)
Other noncurrent liabilities
(54)
(25)
Net cash used in operating activities from continuing operations
(40)
Net cash (used in) provided by operating activities from discontinued operations
(35)
9
Net cash used in operating activities
(75)
(31)
Investing Activities:
Capital expenditures
(61)
Cash received from sale of business
1,915
Acquisition of a business, net of cash acquired
(346)
Cash received from forward swap contract related to the sale of investment in Venator
Reimbursements of capital expenditures
Net cash provided by (used in) investing activities from continuing operations
1,511
Net cash used in investing activities from discontinued operations
(9)
Net cash provided by (used in) investing activities
(Continued)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Financing Activities:
Net (repayments) borrowings on revolving loan facilities
(158)
211
Repayments of long-term debt
(652)
Proceeds from issuance of long-term debt
742
Repayments of notes payable
(32)
Debt issuance costs paid
Dividends paid to noncontrolling interests
Dividends paid to common stockholders
Proceeds from issuance of common stock
Repurchase of common stock
(33)
Costs of early extinguishment of debt
(1)
Net cash (used in) provided by financing activities
(354)
183
Effect of exchange rate changes on cash
(13)
Increase in cash, cash equivalents and restricted cash
1,069
104
Cash, cash equivalents and restricted cash at beginning of period
340
Cash, cash equivalents and restricted cash at end of period
444
Supplemental cash flow information:
Cash paid for interest
26
Cash paid for income taxes
As of March 31, 2020 and 2019, the amount of capital expenditures in accounts payable was $59 million and $50 million, respectively.
48
410
151
161
3,814
4,158
8,498
8,723
33
143
736
417
Notes payable to affiliates
100
1,773
2,191
280
829
890
5,070
5,951
Huntsman International LLC members’ equity:
Members’ equity, 2,728 units issued and outstanding
3,681
3,675
979
312
(1,372)
(1,352)
Total Huntsman International LLC members’ equity
3,288
2,635
3,428
2,772
205
241
242
56
117
(20)
(63)
149
(70)
105
707
128
Net income attributable to Huntsman International LLC
704
116
Foreign currency translations adjustment
41
182
Comprehensive income attributable to Huntsman International LLC
168
(In Millions, Except Unit Amounts)
Huntsman International LLC Members
Members'
Accumulated other
(accumulated
Units
Amount
deficit)
2,728
Dividends paid to parent
Contribution from parent
3,658
(91)
(1,308)
2,488
3,665
(1,256)
2,640
Noncash compensation
21
59
(42)
(77)
Decrease (increase) in receivable from affiliate
279
1,790
Repayments of notes payable to affiliate
(380)
(36)
Other
(631)
195
103
443
As of March 31, 2020 and 2019, the amount of capital expenditures in accounts payable was $59 million and $50 million, respectively. During the three months ended March 31, 2020 and 2019, Huntsman Corporation contributed $6 million and $7 million, respectively, related to stock-based compensation for continuing operations.
15
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, 2019 for our Company and Huntsman International.
Description of Businesses
We are a global manufacturer of differentiated organic chemical products. 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, durable and non-durable consumer products, digital inks, electronics, insulation 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, maleic anhydride, epoxy-based polymer formulations, textile chemicals and dyes.
We currently 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
Prior periods have been recasted to record the results of operations of our chemical intermediates businesses, which includes PO/MTBE, and our surfactants businesses (collectively, our “Chemical Intermediates Businesses”) as discontinued operations. See “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses.”
Recent Developments
Sale of Chemical Intermediates Businesses
On January 3, 2020, we completed the sale of our Chemical Intermediates Businesses to Indorama Ventures Holdings L.P. (“Indorama”) in a transaction valued at approximately $2 billion, comprising a cash purchase price of approximately $1.93 billion, which includes estimated adjustments to the purchase price for working capital, plus the transfer of approximately $72 million in net underfunded pension and other post-employment benefit liabilities. See “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses.”
Acquisition of Icynene-Lapolla
On February 20, 2020, we completed our acquisition of Icynene-Lapolla, a leading North American manufacturer and distributor of spray polyurethane foam insulation systems for residential and commercial applications (“Icynene-Lapolla Acquisition”). Huntsman acquired the business from an affiliate of FFL Partners, LLC, for $353 million, subject to customary closing adjustments, in an all-cash transaction funded from available liquidity. The acquired business is being integrated into our Polyurethanes segment. See “Note 3. Business Combinations and Acquisitions—Acquisition of Icynene-Lapolla.”
Acquisition of CVC Thermoset Specialties
On March 15, 2020, we entered into an agreement with Emerald Performance Materials LLC, which is majority owned by affiliates of American Securities LLC, to acquire CVC Thermoset Specialties, a North American specialty chemical manufacturer serving the industrial composites, adhesives and coatings markets. CVC Thermoset Specialties operates two manufacturing facilities located in Akron, Ohio and Maple Shade, New Jersey. Under the terms of the agreement, we agreed to pay $300 million, subject to customary closing adjustments, in an all-cash transaction, which we expect to fund from available liquidity. The transaction is expected to close around midyear of 2020. The acquired business is expected to be integrated into our Advanced Materials segment.
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 2020
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to
17
inform credit loss estimates. On January 1, 2020, we adopted the amendments in this ASU and the initial adoption of these amendments did not 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). On January 1, 2020, we adopted the amendments in this ASU and the initial adoption of these amendments did not have a significant impact on our condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. On March 12, 2020, we adopted the amendments in this ASU and the initial adoption of these amendments did not have a significant impact on our condensed consolidated financial statements.
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.
3. BUSINESS COMBINATIONS AND ACQUISITIONS
As discussed in “Note 1. General—Recent Developments—Acquisition of Icynene-Lapolla,” we completed the Icynene-Lapolla Acquisition on February 20, 2020. Transaction costs charged to expense related to this acquisition were approximately $10 million for the three months ended March 31, 2020 and were recorded in other operating expenses, net in our condensed consolidated statements of operations.
We have accounted for the Icynene-Lapolla 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 Icynene-Lapolla Acquisition in Q1 2020
353
Cash
Accounts receivable
Prepaid expenses and other current assets
Property, plant and equipment, net
Intangible assets
165
130
Total fair value of net assets acquired
The acquisition cost allocation is preliminary pending final determination of the fair value of assets acquired and liabilities assumed, including final valuation of property, plant and equipment, intangible assets, leases and deferred taxes. Intangible assets acquired included in this preliminary allocation consist primarily of trademarks, trade secrets and customer relationships. The applicable amortization periods are still being assessed. For purposes of this preliminary allocation of fair value, we have assigned any excess of the acquisition cost over the estimated preliminary fair value to goodwill. The estimated goodwill recognized is attributable primarily to projected future profitable growth, penetration into downstream markets, and synergies. We expect that none of the estimated goodwill arising from the acquisition will be deductible for income tax purposes. It is possible that material changes to this preliminary purchase price allocation could occur.
The acquired business had revenues and net loss of $27 million and $6 million, respectively, for the period from the date of acquisition to March 31, 2020.
If this acquisition were to have occurred on January 1, 2019, the following estimated pro forma revenues, net income, net income attributable to Huntsman Corporation and Huntsman International would have been reported (dollars in millions):
Pro Forma (Unaudited)
ended March 31,
Revenues
1,623
1,725
129
701
703
126
Net income attributable to Huntsman International
700
114
19
4. DISCONTINUED OPERATIONS AND BUSINESS DISPOSITIONS
As discussed in “Note 1. General—Recent Developments—Sale of Chemical Intermediates Businesses,” we completed the sale of our Chemical Intermediates Businesses to Indorama. In connection with this sale, we recognized a net after-tax gain of $758 million in the first quarter of 2020. The final purchase price is subject to customary post-closing adjustments. During the first quarter of 2020, we received proceeds from the sale of $1.915 billion, and we expect to pay income taxes of approximately $375 million during 2020. Certain amounts for prior periods have similarly been retrospectively reflected for all periods presented. In connection with this sale, we entered into long-term supply agreements with Indorama for certain raw materials at market prices supplied by the Chemical Intermediates Businesses.
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:
720
69
Total assets held for sale(1)
Carrying amounts of major classes of liabilities held for sale:
152
Current operating lease liabilities
20
135
Noncurrent operating lease liabilities
Total noncurrent liabilities
Total liabilities held for sale(1)
The following table reconciles major line items constituting pretax income of discontinued operations to after-tax income of discontinued operations as presented in our condensed consolidated statements of operations (dollars in millions):
Major line items constituting pretax income of discontinued operations:
403
364
Gain on sale of the Chemical Intermediates Businesses
990
Insurance proceeds
28
Other expense items, net
Income from discontinued operations before income taxes
1,015
(238)
(5)
Net income attributable to discontinued operations
Separation and Deconsolidation of Venator
In August 2017, we separated our Titanium Dioxide and Performance Additives business (the “P&A Business”) and conducted an initial public offering of ordinary shares of Venator Materials PLC (“Venator”), formerly a wholly-owned subsidiary of Huntsman. Following a series of public offerings and sales of Venator ordinary shares, beginning in December 2018, our ownership in Venator decreased to approximately 49%, and we began accounting for our remaining interest in Venator as an equity method investment using the fair value option. For the three months ended March 31, 2020 and 2019, we recorded a loss $110 million and a gain of $75 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.
Summarized financial information of Venator for the three months ended March 31, 2020 and 2019 is as follows (in millions):
532
562
Income (loss) from continuing operations
Net income (loss)
Net income (loss) attributable to Venator
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
175
Work in progress
49
Finished goods
815
718
1,041
942
LIFO reserves
Net inventories
For March 31, 2020 and December 31, 2019, approximately 8% and 9%, 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:
During the first quarter of 2020, there were no changes in our variable interest entities.
Sasol-Huntsman was our 50%-owned joint venture with Sasol that owned and operated a maleic anhydride facility in Moers, Germany. On September 30, 2019, we acquired the 50% noncontrolling interest that we did not own in Sasol-Huntsman. As such, as of September 30, 2019, Sasol-Huntsman was no longer accounted for as a variable interest entity.
Creditors of these entities have no recourse to our general credit. See “Note 7. Debt—Direct and Subsidiary Debt.” As the primary beneficiary of these variable interest entities at March 31, 2020, 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 March 31, 2020 and our consolidated balance sheet as of December 31, 2019 (dollars in millions):
Current assets
55
178
180
139
132
30
419
408
Current liabilities
159
Long-term debt
85
87
282
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 months ended March 31, 2020 and 2019 are as follows (dollars in millions):
2020(1)
Income from continuing operations before income taxes
Net cash provided by operating activities
7. DEBT
Outstanding debt, net of debt issuance costs, consisted of the following (dollars in millions):
Senior Credit Facilities:
Revolving facility
40
Amounts outstanding under A/R programs
167
Term loan
101
Senior notes
1,950
1,963
Variable interest entities
58
65
Total debt
2,183
2,389
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
2,769
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. For both March 31, 2020 and December 31, 2019, the amount of debt issuance costs directly reducing the debt liability was $11 million. We record the amortization of debt issuance costs as interest expense.
Revolving Credit Facility
As of March 31, 2020, our $1.2 billion senior unsecured revolving credit facility (“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%
2023
Term Loan Credit Facility
On September 24, 2019, Huntsman International entered into a 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 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. accounts receivable securitization program (“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.
In December 2019, we entered into amendments to our EU A/R program (the “European Amendment”) and our U.S. A/R Program (the “U.S. Amendment”). The European Amendment allowed the removal of pledged obligors related to the Chemical Intermediates Businesses sold to Indorama. The U.S. Amendment allowed the removal of pledged obligors related to the Chemical Intermediates Businesses sold to Indorama as well as reduced the maximum funding capacity from $250 million to $150 million upon completion of the sale on January 3, 2020.
Information regarding our A/R Programs as of March 31, 2020 was as follows (monetary amounts in millions):
Maximum Funding
Availability(1)
U.S. A/R Program
April 2022
150
Applicable rate plus 0.90%
EU A/R Program
€
Applicable rate plus 1.30%
(or approximately $110)
(or approximately $55)
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As of March 31, 2020 and December 31, 2019, $252 million and $221 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 in the first quarter of 2019.
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
During the quarter ended March 31, 2020, our loan of $380 million to our subsidiary Huntsman International was repaid to us in full.
Compliance with Covenants
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.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to market risks, such as changes in interest rates, foreign exchange rates and commodity prices. 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.
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 March 31, 2020, we had approximately $173 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 was designated as a cash flow hedge and the effective portion of the changes in the fair value of the swap was recorded in other comprehensive income. In November 2019, we terminated this swap and paid $1 million to our counterparties.
We review our non-U.S. dollar denominated debt and derivative instruments to determine the appropriate amounts designated as hedges. As of March 31, 2020, we have designated approximately €465 million (approximately $511 million) of euro-denominated debt as a hedge of our net investment. For both the three months ended March 31,
25
2020 and March 31, 2019, the amount recognized on the hedge of our net investment was a gain of $8 million and was recorded in other comprehensive income in 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.
9. FAIR VALUE
The fair values of financial instruments were as follows (dollars in millions):
March 31, 2020
December 31, 2019
Estimated
Fair Value
Non-qualified employee benefit plan investments
Long-term debt (including current portion)
(2,183)
(2,125)
(2,389)
(2,544)
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 (Level 1). See “Note 4. Discontinued Operations and Business Dispositions—Separation and Deconsolidation of Venator.” The fair values of our non-qualified employee benefit plan investments are obtained through market observable pricing using prevailing market prices (Level 1). The estimated fair values of our long-term debt are based on quoted market prices for the identical liability when traded in an active market (Level 1).
The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2020 and December 31, 2019. 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 March 31, 2020, and current estimates of fair value may differ significantly from the amounts presented herein.
During the three months ended March 31, 2020, 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.
10. 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 March 31, 2020 (dollars in millions):
Polyurethanes
Performance Products
Advanced Materials
Textile Effects
Corporate and Eliminations
Primary Geographic Markets(1)
U.S. and Canada
370
63
572
Europe
245
74
32
451
Asia Pacific
70
428
Rest of world
142
888
(8)
Major Product Groupings
MDI urethanes
Differentiated
Specialty
Non-specialty
Textile chemicals, dyes and digital inks
Eliminations
Geographic information for revenues is based upon countries into which product is sold.
The following tables disaggregate our revenue from continuing operations by major source for the three months ended March 31, 2019 (dollars in millions):
336
73
(19)
542
270
93
121
520
237
459
81
148
924
300
272
189
230
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
27
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.
11. EMPLOYEE BENEFIT PLANS
Components of the net periodic benefit costs from continuing operations for the three months ended March 31, 2020 and 2019 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
During both of the three months ended March 31, 2020 and 2019, we made contributions to our pension and other postretirement benefit plans of $20 million. During the remainder of 2020, we expect to contribute an additional amount of approximately $67 million to these plans.
12. 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 three months ended March 31, 2020, we repurchased 5,364,519 shares of our common stock for approximately $96 million,
excluding commissions, under the repurchase program. Subsequent to the end of the first quarter of 2020, we elected to temporarily suspend share repurchases under our existing share repurchase program in order to enhance our liquidity position in response to COVID-19.
Dividends on Common Stock
During the quarters ended March 31, 2020 and March 31, 2019, we paid dividends of $37 million and $39 million, respectively, or $0.1625 per share each, to common stockholders.
13. 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, 2020
(369)
(1,031)
(1,388)
Other comprehensive (loss) income before reclassifications, gross
(67)
(59)
Tax benefit
Amounts reclassified from accumulated other comprehensive loss, gross(c)
Tax expense
Net current-period other comprehensive (loss) income
Ending balance, March 31, 2020
(442)
(979)
(1,409)
Beginning balance, January 1, 2019
(371)
(994)
Other comprehensive income before reclassifications, gross
Net current-period other comprehensive income
Ending balance, March 31, 2019
(329)
(982)
(1,298)
(a)
Amounts are net of tax of $69 and $71 as of March 31, 2019 and January 1, 2019, respectively.
(b)
Amounts are net of tax of $132 and $135 as of March 31, 2019 and January 1, 2019, respectively.
(c)
See table below for details about these reclassifications.
Three months ended March 31,
Amounts reclassified
Affected line item in
from accumulated
the statement
where net income
Details about Accumulated Other
comprehensive loss
is presented
Comprehensive Loss Components(a):
Amortization of pension and other postretirement benefits:
Prior service credit
Settlement loss
Actuarial loss
(b)(d)
Total before tax
Total reclassifications for the period
Net of tax
Foreigncurrencytranslationadjustment(a)
Pensionand otherpostretirementbenefitsadjustments(b)
Othercomprehensiveincome ofunconsolidatedaffiliates
Amountsattributable tononcontrollinginterests
Amountsattributable toHuntsmanInternational
(374)
(1,012)
(1,378)
(447)
(959)
(1,398)
(376)
(977)
(1,344)
(335)
(964)
(1,290)
14. COMMITMENTS AND CONTINGENCIES
Legal Matters
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.
15. 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 the three months ended March 31, 2020 and 2019, our capital expenditures for EHS matters totaled $6 million and $7 million, respectively. 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 $4 million for environmental liabilities as of both March 31, 2020 and December 31, 2019. Of these amounts, $1 million was classified as accrued liabilities in our condensed consolidated balance sheets as of both March 31, 2020 and December 31, 2019, and $3 million was classified as other noncurrent liabilities in our condensed consolidated balance sheets as of both March 31, 2020 and December 31, 2019. 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 Canyon 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. During the first quarter of 2020, there have been no significant developments, and, at this time, we are unable to reasonably estimate our potential liabilities at this site.
16. STOCK-BASED COMPENSATION PLANS
As of March 31, 2020, we had approximately 7 million shares remaining under the stock-based compensation plans 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 stock-based compensation plans 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 $1 million and $5 million for the three months ended March 31, 2020 and 2019, 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
3.0
%
2.9
Expected volatility
53.1
54.0
Risk-free interest rate
1.5
2.5
Expected life of stock options granted during the period
5.9
years
A summary of stock option activity under the stock-based compensation plans as of March 31, 2020 and changes during the three 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, 2020
5,025
19.08
Granted
750
21.54
Exercised
(154)
12.55
Forfeited
26.33
Outstanding at March 31, 2020
5,613
19.57
6.4
Exercisable at March 31, 2020
4,141
18.31
5.4
The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2020 was $8.27 per option. As of March 31, 2020, there was $12 million of total unrecognized compensation cost related to nonvested stock option arrangements granted under the stock-based compensation plans. That cost is expected to be recognized over a weighted-average period of approximately 2.2 years.
The total intrinsic value of stock options exercised during each of the three months ended March 31, 2020 and 2019 was approximately $1 million, respectively. Cash received from stock options exercised during the three months ended March 31, 2020 and 2019 was approximately nil and $1 million, respectively. The cash tax benefit from stock options exercised during each of the three months ended March 31, 2020 and 2019 was approximately nil.
Nonvested Shares
Nonvested shares granted under the stock-based compensation plans 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 three months ended March 31, 2020 and 2019, the weighted-average expected volatility rate was 34.0% and 34.6%, respectively, and the weighted average risk-free interest rate was 1.4% and 2.5%, respectively. For the performance share unit awards granted in the three months ended March 31, 2020 and 2019, 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 March 31, 2020 and changes during the three months then ended is presented below:
Equity Awards
Liability Awards
Grant-Date
Nonvested at January 1, 2020
24.61
427
24.80
822
21.97
Vested
(561)
(1)(2)
25.21
(216)
24.66
25.26
25.63
Nonvested at March 31, 2020
1,899
23.29
23.12
As of March 31, 2020, there was $34 million of total unrecognized compensation cost related to nonvested share compensation arrangements granted under the stock-based compensation plans. That cost is expected to be recognized over a weighted-average period of approximately 2.3 years. The value of share awards that vested during each of the three months ended March 31, 2020 and 2019 was $23 million.
17. 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.
During the three months ended March 31, 2020 and 2019, there was no tax benefit or expense recognized in connection with the loss of $110 million and gain of $76 million, respectively, on fair value adjustments to our Venator investment, recorded as part of non-operating income from continuing operations. As of December 31, 2019, we have recognized the portion of our Venator investment tax basis in excess of book that we ultimately expect to be able to utilize; therefore, no incremental tax benefit has been recognized on the year-to-date fair value loss. As a significant, unusual, non-operating item, this amount was treated discretely and excluded from the annual effective tax rate calculation for interim reporting.
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 three months ended March 31, 2019.
We recorded income tax expense from continuing operations of $7 million and $45 million for the three months ended March 31, 2020 and 2019, 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. The decrease in pretax income, as well as the one-time reduction in our Switzerland net deferred tax assets related to the 2019 tax rate change, resulted in lower income tax expense during the first quarter of 2020 as compared to the same period of 2019.
Huntsman International recorded income tax expense from continuing operations of $7 million and $44 million for the three months ended March 31, 2020 and 2019, 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. The decrease in pretax income, as well as the one-time reduction in our Switzerland net deferred tax assets related to the 2019 tax rate change, resulted in lower income tax expense during the first quarter of 2020 as compared to the same period of 2019.
18. 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:
Denominator:
Weighted average shares outstanding
Dilutive shares:
Stock-based awards
2.0
Total weighted average shares outstanding, including dilutive shares
Additional stock-based awards of 5.6 million and 3.1 million weighted average equivalent shares of stock were outstanding during the three months ended March 31, 2020 and 2019, respectively. However, these stock-based awards were not included in the computation of diluted earnings per share for the three months ended March 31, 2020 and 2019 because the effect would be anti-dilutive.
19. 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.”
35
The major products of each reportable operating segment are as follows:
Segment
Products
MDI, polyols, PG, TPU and aniline
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
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):
84
124
Corporate and other(2)
204
Reconciliation of adjusted EBITDA to net income:
Interest expense, net—continuing operations
Income tax expense—continuing operations
Income tax expense—discontinued operations
Depreciation and amortization—continuing operations
Depreciation and amortization—discontinued operations
Other adjustments:
Business acquisition and integration expenses and purchase accounting inventory adjustments
EBITDA from discontinued operations(3)
Certain legal settlements and related expenses
Gain on sale of businesses/assets
Certain nonrecurring information technology project implementation costs
Amortization of pension and postretirement actuarial losses
Restructuring, impairment and plant closing and transition costs
Huntsman International:
(38)
166
206
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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, 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 three months ended March 31, 2020 and 2019 were $1,593 million and $1,669 million, respectively.
On January 3, 2020, we completed the sale of our Chemical Intermediates Businesses to Indorama in a transaction valued at approximately $2 billion, comprising a cash purchase price of approximately $1.93 billion, which includes estimated adjustments to the purchase price for working capital, plus the transfer of approximately $72 million in net underfunded pension and other post-employment benefit liabilities. See “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses” to our condensed consolidated financial statements.
Icynene-Lapolla Acquisition
On February 20, 2020, we completed the Icynene-Lapolla Acquisition for $353 million, subject to customary closing adjustments, in an all-cash transaction funded from available liquidity. The acquired business is being integrated into our Polyurethanes segment. See “Note 3. Business Combinations and Acquisitions” to our condensed consolidated financial statements.
On March 15, 2020, we entered into an agreement with Emerald Performance Materials LLC, which is majority owned by affiliates of American Securities LLC, to acquire CVC Thermoset Specialties, a North American specialty chemical manufacturer serving the industrial composites, adhesives and coatings markets. CVC Thermoset Specialties operates two manufacturing facilities located in Akron, Ohio and Maple Shade, New Jersey. Under the terms of the agreement, we agreed to pay $300 million, subject to customary closing adjustments, in an all-cash transaction funded from available liquidity. The transaction is expected to close around midyear of 2020. The acquired business is expected to be integrated into our Advanced Materials segment.
Impacts of COVID-19 Pandemic
The recent outbreak of the novel coronavirus COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies, softening demand for our products, and certain interruptions to our operations and supply chain. The COVID-19 pandemic has had a moderate adverse impact on our financial performance for the first quarter of 2020 and is having a significant impact so far in the second quarter of 2020. We believe the adverse impact of the COVID-19 pandemic will continue for the remainder of fiscal year 2020. For example, in the first quarter of 2020, we began to see the impacts of COVID-19 on our markets and operations, including softening demand, deteriorating margins across certain product lines, and logistical pressures in certain parts of our supply chain. The extent to which the COVID-19 pandemic will impact our business, including demand for our products, our operations, and results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity, and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our customers, suppliers, and vendors and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. Therefore, we cannot reasonably estimate the
impact at this time. The risks to our business are more fully described in “Part II. Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.
Outlook
We expect the following factors to impact our operating segments:
Polyurethanes:
Performance Products:
Advanced Materials:
Textile Effects:
During 2020, we expect to spend between approximately $225 million to $235 million on capital expenditures for continuing operations. We have deferred a portion of capital spending on a new MDI splitter in Geismar, Louisiana for six months leaving roughly $40 million of capital spend in 2020 with the remaining spend of approximately $120 million in 2021 and 2022.
We expect our forward adjusted effective tax rate will be approximately 22% to 24%. For further information, see “—Non-GAAP Financial Measures” and “Note 17. 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.
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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
(5)%
(1)%
(17)%
Operating expenses
240
200%
(53)%
(40)%
(80)%
NM
(100)%
100%
(84)%
440%
Reconciliation of net income to adjusted EBITDA:
(75)%
Interest expense, net from continuing operations
Income tax expense from continuing operations
Income tax expense from discontinued operations
238
Depreciation and amortization of continuing operations
Depreciation and amortization of discontinued operations
EBITDA from discontinued operations(1)
(1,015)
(51)
Restructuring, impairment and plant closing and transition costs(2)
Adjusted EBITDA(3)
(19)%
Capital expenditures from continuing operations
(52)%
(43)%
125%
452%
Three months ended
March 31, 2019
Gross
Tax and other(4)
Net
Reconciliation of net income to adjusted net income
Income from discontinued operations(1)(5)
Significant activities related to deferred tax assets and liabilities(6)
Adjusted net income(3)
Weighted average shares-basic
Weighted average shares-diluted
Basic net income attributable to Huntsman Corporation per share:
Income from discontinued operations
Diluted net income attributable to Huntsman Corporation per share:
Other non-GAAP measures:
Diluted adjusted net income per share(3)
0.29
0.36
Free cash flow from continuing operations(3)
(101)
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 and purchase accounting inventory adjustments; (b) EBITDA from discontinued operations; (c) fair value adjustments to Venator investment; (d) loss on early extinguishment of debt; (e) certain legal settlements and related expenses (income); (f) loss (gain) on sale of businesses/assets; (g) certain nonrecurring information technology project implementation costs; (h) amortization of pension and postretirement actuarial losses; and (i) 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: (a) business acquisition and integration expenses and purchase accounting inventory adjustments; (b) loss (income) from discontinued operations; (c) fair value adjustments to Venator investment; (d) loss on early extinguishment of debt; (e) certain legal settlements and related (income) expenses; (f) loss (gain) on sale of businesses/assets; (g) certain nonrecurring information technology project implementation costs; (h) amortization of pension and postretirement actuarial losses; (i) significant activities related to deferred tax assets and liabilities; and (j) restructuring, impairment and plant closing and transition costs (credits). Basic adjusted net income per share excludes
43
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.
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. We have historically defined free cash flow as cash flows provided by operating activities and used in investing activities, excluding acquisition/disposition activities and including non-recurring separation costs. Starting with the quarter ended March 31, 2020, we updated our definition of free cash flow to a presentation more consistent with today’s market standard of net cash provided by operating activities less capital expenditures. Using our updated definition, our free cash flow for the years ended December 31, 2019, 2018 and 2017 were $382 million, $453 million and $438 million, respectively. 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.
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 March 31, 2020 Compared with Three Months Ended March 31, 2019
As discussed in “Note 4. Discontinued Operations and Business Dispositions—Sale of Chemical Intermediates Businesses” 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. The decrease of $168 million attributable to Huntsman Corporation and the decrease of $166 million in net income attributable to Huntsman International from continuing operations, respectively, was the result of the following items:
Segment Analysis
Favorable
(Dollars in millions)
(Unfavorable)
(4)%
(3)%
(11)%
Segment adjusted EBITDA(1)
(32)%
29%
(9)%
Corporate and other
(13)%
(16)%
Three months ended March 31, 2020 vs 2019
Average Selling Price(1)
Local
Foreign Currency
Mix &
Sales
Currency
Translation Impact
Volumes(2)
Period-Over-Period (Decrease) Increase
(6)%
4%
1%
(2)%
Three months ended March 31, 2020 vs December 31, 2019
(10)%
2%
3%
The decrease in revenues in our Polyurethanes segment for the three months ended March 31, 2020 compared to the same period of 2019 was due to lower MDI average selling prices and modestly lower overall polyurethanes sales volumes. MDI average selling prices decreased primarily due to a decline in component MDI selling prices in China and Europe. Overall polyurethanes sales volumes decreased slightly primarily due to decreased demand across most major markets, partially offset by modest growth in MDI sales volumes. 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 March 31, 2020 compared to the same period of 2019 was due to lower average selling prices and lower sales volumes. Average selling prices decreased primarily due to lower raw material costs. Sales volumes decreased primarily due to weakened market conditions in our maleic anhydride business, partially offset by higher sales volumes in our amines business. The increase in segment adjusted EBITDA was primarily due to higher margins in our performance amines business and lower fixed costs.
The decrease in revenues in our Advanced Materials segment for the three months ended March 31, 2020 compared to the same period in 2019 was due to lower sales volumes and lower average selling prices. Sales volumes decreased across most markets, particularly commodity, industrial and aerospace, primarily due to economic slowdown and customer destocking. 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, partially offset by lower fixed costs.
The decrease in revenues in our Textile Effects segment for the three months ended March 31, 2020 compared to the same period of 2019 was due to lower average selling prices, partially offset by higher sales volumes. Average selling prices decreased as a result of competitive market pressures and the impact of a stronger U.S. dollar against major international currencies. Sales volumes increased mainly in Europe and Asia. The decrease in segment adjusted EBITDA was primarily due to lower sales revenues, partially offset by lower raw material costs and lower fixed costs.
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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 March 31, 2020, adjusted EBITDA from Corporate and other for Huntsman Corporation decreased by $5 million to a loss of $45 million from a loss of $40 million for the same period of 2019. For the three months ended March 31, 2020, adjusted EBITDA from Corporate and other for Huntsman International decreased by $6 million to a loss of $44 million from a loss of $38 million for the same period of 2019. The decrease in adjusted EBITDA from Corporate and other resulted primarily from a charge from a LIFO inventory reserve adjustment and an increase in corporate overhead costs, partially offset by 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 Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019
Net cash used in operating activities from continuing operations for both the three months ended March 31, 2020 and 2019 was $40 million. Although net cash used in operating activities from continuing operations was the same during the three months ended March 31, 2020 compared with the same period in 2019, the decrease in operating income as described in “—Results of Operations” above was offset by a $20 million favorable variance in operating assets and liabilities for the three months ended March 31, 2020 as compared with the same period of 2019.
Net cash provided by (used in) investing activities from continuing operations for the three months ended March 31, 2020 and 2019 was $1,511 million and $(45) million, respectively. During both the three months ended March 31, 2020 and 2019, we paid $61 million for capital expenditures. During the three months ended March 31, 2020, we received $1.9 billion for the sale of our Chemical Intermediates Businesses and paid $346 million for the acquisition of a business, net of cash acquired. During the three months ended March 31, 2019, 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) provided by financing activities for the three months ended March 31, 2020 and 2019 was $(354) million and $183 million, respectively. The increase in net cash used in financing activities was primarily due to repayments on our 2018 Revolving Credit Facility in the first quarter of 2020 and an increase in repurchases of common stock in the first quarter of 2020.
Free cash flow from continuing operations for both the three months ended March 31, 2020 and 2019 was a use of cash of $101 million.
47
Changes in Financial Condition
The following information summarizes our working capital position (dollars in millions):
Less
Increase
Acquisition(1)
Subtotal
(Decrease)
Cash and cash equivalents
1,587
1,062
202%
Accounts and notes receivable, net
1,027
(41)
986
953
972
6%
144
(11)
(7)%
Current assets held for sale(2)
(1,208)
(85)
3,689
(66)
856
843
729
309
74%
Current portion of debt
(78)
(37)%
7%
Current liabilities held for sale(2)
(512)
1,751
(257)
Working capital
2,000
1,938
1,747
191
11%
Our working capital increased by $191 million as a result of the net impact of the following significant changes:
See “Note 7. Debt—Direct and Subsidiary Debt” to our condensed consolidated financial statements.
See “Note 7. Debt—Direct and Subsidiary Debt—Debt Issuance Costs” to our condensed consolidated financial statements.
See “Note 7. Debt—Direct and Subsidiary Debt—Revolving Credit Facility” to our condensed consolidated financial statements.
See “Note 7. Debt—Direct and Subsidiary Debt—Term Loan Credit Facility” to our condensed consolidated financial statements.
See “Note 7. Debt—Direct and Subsidiary Debt—A/R Programs” to our condensed consolidated financial statements.
See “Note 7. Debt—Direct and Subsidiary Debt—Notes” to our condensed consolidated financial statements.
See “Note 7. Debt—Direct and Subsidiary Debt—Note Payable from Huntsman International to Huntsman Corporation” to our condensed consolidated financial statements.
See “Note 7. 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 March 31, 2020, we had $2,930 million of combined cash and unused borrowing capacity, consisting of $1,594 million in cash, $1,193 million in availability under our 2018 Revolving Credit Facility and $143 million in availability under our A/R Programs. We believe our existing cash balances, together with funds generated from operations and amounts available under our credit facility, will allow us to manage the anticipated impact of COVID-19 on our business operations for the foreseeable future. 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 March 31, 2020, we had $134 million classified as current portion of debt, including $101 million on our 2019 Term Loan, debt at our variable interest entities of $32 million and certain other short-term facilities and scheduled amortization payments totaling $1 million. We intend to renew, repay or extend the majority of these short-term facilities in the next twelve months.
As of March 31, 2020, we had approximately $330 million of cash and cash equivalents, including restricted cash, held by our foreign subsidiaries, including our variable interest entities. 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, 2019.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, such as changes in interest rates, foreign exchange rates and commodity prices. 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. See “Note 8. Derivative Instruments and Hedging Activities” 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 March 31, 2020. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of March 31, 2020, 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 March 31, 2020 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, 2019.
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, 2019. In addition to the risk factors noted in the Annual Report on Form 10-K, the following risk factor is applicable to us.
Our results of operations and financial conditions have been and, we believe, will in the future be adversely impacted by the COVID-19 pandemic, and the duration and extent to which it will impact our results of operations and financial conditions remains uncertain.
The recent outbreak of the coronavirus disease (COVID-19) has spread from China to many other countries, including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures and other measures.
The COVID-19 outbreak is a widespread public health crisis that is adversely affecting the economies and financial markets of many countries. The resulting economic downturn could adversely affect demand for our products and contribute to volatile supply and demand conditions affecting prices and volumes in the markets for our products. In particular, demand for our products depends in part on certain cyclical industries, including housing and construction, which have historically been disproportionally impacted by downturns in the economy. In the first quarter 2020, we began to see the impacts of COVID-19 on our markets and operations, including softening demand and deteriorating margins across certain product lines. These effects have intensified so far in the second quarter of 2020. Our customers may also be directly impacted by business curtailments or weak market conditions and may not be willing or able to complete fulfillment of their orders. In addition, declines in the performance or financial condition of our customers could expose us to additional credit risks.
We are a company operating in a “critical infrastructure” industry, as defined by the U.S. Department of Homeland Security. Consistent with federal and international guidelines and with state and local orders to date, we currently have largely continued to operate across our footprint. Notwithstanding our continued operations, COVID-19 has begun to have, and may have, further negative impact on our operations, supply chain, and transportation networks, which is expected to compress our margins and cash flows. The progression of COVID-19’s impact could also negatively impact our business or results of operations through the temporary idling of our manufacturing facilities or those of our customers and/or suppliers, disrupting the in-flow of raw materials, limiting our ability to produce our products and delaying or preventing deliveries to our customers, among others. The impact of COVID-19 outbreak has also begun to cause delays in our capital projects, including our decision to delay a portion of our discretionary spending on the new MDI splitter in Geismar, Louisiana to 2022. The extent of such delays and other effects of COVID-19 on our capital projects, certain of which are outside of our control, is unknown, but they may impact or delay the timing of anticipated benefits on such capital projects.
Additionally, a significant portion of our employees (including those located at our corporate headquarters in The Woodlands, Texas) are currently working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. While we expect this matter to negatively impact our results of operations, cash flows and financial position, the current level of uncertainty over the economic and
operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. Any of these events could amplify the other risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and could materially adversely affect our business, financial condition, results of operations and/or stock price.
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 March 31, 2020.
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)
January
344,223
20.63
336,478
509,000,000
February
2,375,802
19.28
2,160,000
468,000,000
March
2,868,041
16.54
420,000,000
5,588,066
17.95
5,364,519
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
10.1
Huntsman Executive Severance Plan (as amended and restated effective February 19, 2020)
8-K
February 19, 2020
10.2
Second Amended and Restated Severance Agreement dated February 19, 2020, between Huntsman Corporation and Peter R. Huntsman
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: May 1, 2020
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)