UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

 (Mark One)

 

x

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

 

For the quarterly period ended June 30, 2007

 

OR

 

o

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

 

For the transition period from         to         

 


Commission
File Number

 

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

 

State of Incorporation

 

I.R.S. Employer
Identification No.

001-32427

 

Huntsman Corporation

 

Delaware

 

42-1648585

 

 

500 Huntsman Way

 

 

 

 

 

 

Salt Lake City, Utah 84108

 

 

 

 

 

 

(801) 584-5700

 

 

 

 

 

 

 

 

 

 

 

333-85141

 

Huntsman International LLC

 

Delaware

 

87-0630358

 

 

500 Huntsman Way

 

 

 

 

 

 

Salt Lake City, Utah 84108

 

 

 

 

 

 

(801) 584-5700

 

 

 

 

 


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

Huntsman Corporation

 

YES x

 

NO o

Huntsman International LLC

 

YES x

 

NO o

 

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

Huntsman Corporation

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer  o

Huntsman International LLC

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer  x

 

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

Huntsman Corporation

 

YES o

 

NO x

Huntsman International LLC

 

YES o

 

NO x


On August 3, 2007, 222,005,083 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 established 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”). Huntsman International is a wholly owned subsidiary of Huntsman Corporation and is the principal operating company of Huntsman Corporation. The information reflected in this Quarterly Report on Form 10-Q is equally applicable to both Huntsman Corporation and Huntsman International, except where otherwise indicated. Huntsman International meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and, to the extent applicable, is therefore filing this form with a reduced disclosure format.

 




 

 

HUNTSMAN CORPORATION AND SUBSIDIARIES

HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD

ENDED JUNE 30, 2007

 

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements:

 

 

 

 

 

Huntsman Corporation and Subsidiaries:

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

Huntsman International LLC and Subsidiaries:

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

Huntsman Corporation and Subsidiaries and Huntsman International LLC and Subsidiaries:

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

ITEM 2.

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

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

ITEM 4.

Controls and Procedures

 

PART II

OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

 

ITEM 1A.

Risk Factors

 

ITEM 4.

Submission of Matters to a Vote of Security Holders

 

ITEM 5.

Other Information

 

ITEM 6.

Exhibits

 

 

 




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Millions, Except Share and Per Share Amounts)

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

167.5

 

$

263.2

 

Accounts and notes receivables (net of allowance for doubtful accounts of $43.6 and $39.0, respectively)

 

1,439.3

 

1,243.2

 

Accounts receivable from affiliates

 

17.5

 

14.1

 

Inventories, net

 

1,348.0

 

1,520.1

 

Prepaid expenses

 

31.0

 

55.7

 

Deferred income taxes

 

68.0

 

64.6

 

Other current assets

 

128.2

 

175.7

 

Current assets held for sale

 

175.8

 

 

Total current assets

 

3,375.3

 

3,336.6

 

 

 

 

 

 

 

Property, plant and equipment, net

 

3,825.1

 

4,059.4

 

Investment in unconsolidated affiliates

 

215.9

 

201.0

 

Intangible assets, net

 

175.6

 

187.6

 

Goodwill

 

92.4

 

90.2

 

Deferred income taxes

 

245.2

 

190.4

 

Other noncurrent assets

 

398.5

 

379.7

 

Noncurrent assets held for sale

 

187.2

 

 

Total assets

 

$

8,515.2

 

$

8,444.9

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,083.9

 

$

1,006.2

 

Accounts payable to affiliates

 

12.5

 

12.0

 

Accrued liabilities

 

802.9

 

857.6

 

Deferred income taxes

 

19.3

 

9.4

 

Current portion of long-term debt

 

258.8

 

187.9

 

Current liabilities held for sale

 

10.1

 

 

Total current liabilities

 

2,187.5

 

2,073.1

 

 

 

 

 

 

 

Long-term debt

 

3,524.6

 

3,457.4

 

Deferred income taxes

 

101.6

 

192.6

 

Other noncurrent liabilities

 

942.9

 

955.8

 

Noncurrent liabilities held for sale

 

4.7

 

 

Total liabilities

 

6,761.3

 

6,678.9

 

 

 

 

 

 

 

Minority interests in common stock of consolidated subsidiaries

 

23.9

 

29.4

 

 

 

 

 

 

 

Commitments and contingencies (Notes 14 and 15)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock $0.01 par value, 1,200,000,000 shares authorized, 222,003,528 and 221,549,461 issued and 221,025,680 and 220,652,429 outstanding in 2007 and 2006, respectively

 

2.2

 

2.2

 

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

 

287.5

 

287.5

 

Additional paid-in capital

 

2,823.9

 

2,798.4

 

Unearned stock-based compensation

 

(16.6

)

(12.5

)

Accumulated deficit

 

(1,348.5

)

(1,277.6

)

Accumulated other comprehensive loss

 

(18.5

)

(61.4

)

Total stockholders’ equity

 

1,730.0

 

1,736.6

 

Total liabilities and stockholders’ equity

 

$

8,515.2

 

$

8,444.9

 

 

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

1




HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(In Millions, Except Per Share Amounts)

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues:

 

 

 

 

 

 

 

 

 

Trade sales, services and fees

 

$

2,499.3

 

$

2,360.2

 

$

4,768.2

 

$

4,637.7

 

Related party sales

 

18.3

 

28.8

 

36.3

 

50.3

 

Total revenues

 

2,517.6

 

2,389.0

 

4,804.5

 

4,688.0

 

Cost of goods sold

 

2,137.9

 

1,993.6

 

4,032.8

 

3,934.7

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

379.7

 

395.4

 

771.7

 

753.3

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

220.1

 

171.7

 

429.6

 

332.5

 

Research and development

 

36.2

 

26.1

 

69.5

 

53.3

 

Other operating expense (income)

 

1.4

 

(95.0

)

5.3

 

(94.3

)

Restructuring, impairment and plant closing costs

 

13.2

 

8.8

 

24.4

 

17.1

 

Total expenses

 

270.9

 

111.6

 

528.8

 

308.6

 

Operating income

 

108.8

 

283.8

 

242.9

 

444.7

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(70.0

)

(94.6

)

(143.8

)

(181.4

)

Loss on accounts receivable securitization program

 

(4.7

)

(3.6

)

(9.0

)

(5.9

)

Equity in income of investment in unconsolidated affiliates

 

5.1

 

1.4

 

7.3

 

2.1

 

Other (expense) income

 

(1.3

)

0.6

 

(2.1

)

0.1

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes and minority interest

 

37.9

 

187.6

 

95.3

 

259.6

 

Income tax benefit (expense)

 

8.0

 

(17.4

)

(4.4

)

(32.3

)

Minority interest in subsidiaries’ loss (income)

 

11.1

 

(0.3

)

10.7

 

(0.7

)

Income from continuing operations

 

57.0

 

169.9

 

101.6

 

226.6

 

(Loss) income from discontinued operations, net of tax

 

(119.0

)

42.5

 

(119.4

)

54.8

 

(Loss) income before extraordinary (loss) gain

 

(62.0

)

212.4

 

(17.8

)

281.4

 

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

 

(8.9

)

50.5

 

(6.5

)

50.5

 

Net (loss) income

 

$

(70.9

)

$

262.9

 

$

(24.3

)

$

331.9

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(70.9

)

$

262.9

 

$

(24.3

)

$

331.9

 

Other comprehensive income

 

22.7

 

49.3

 

42.9

 

80.3

 

Comprehensive (loss) income

 

$

(48.2

)

$

312.2

 

$

18.6

 

$

412.2

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.26

 

$

0.77

 

$

0.46

 

$

1.03

 

(Loss) income from discontinued operations, net of tax

 

(0.54

)

0.19

 

(0.54

)

0.25

 

Extraordinary (loss) gain on the acquisition of a business, net of tax

 

(0.04

)

0.23

 

(0.03

)

0.22

 

Net (loss) income

 

$

(0.32

)

$

1.19

 

$

(0.11

)

$

1.50

 

Weighted average shares

 

220.9

 

220.6

 

220.9

 

220.6

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.24

 

$

0.73

 

$

0.44

 

$

0.97

 

(Loss) income from discontinued operations, net of tax

 

(0.50

)

0.18

 

(0.51

)

0.24

 

Extraordinary (loss) gain on the acquisition of a business, net of tax

 

(0.04

)

0.22

 

(0.03

)

0.21

 

Net (loss) income

 

$

(0.30

)

$

1.13

 

$

(0.10

)

$

1.42

 

Weighted average shares

 

233.5

 

233.2

 

233.5

 

233.1

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.10

 

$

 

$

0.20

 

$

 

 

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

2




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

(Dollars in Millions)

 

 

Six months ended June 30,

 

 

 

2007

 

2006

 

Operating Activities:

 

 

 

 

 

Net (loss) income

 

$

(24.3

)

$

331.9

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Extraordinary loss (gain) on the acquisiton of business, net of tax

 

6.5

 

(50.5

)

Equity in income of investment in unconsolidated affiliates

 

(7.3

)

(2.1

)

Depreciation and amortization

 

217.0

 

234.5

 

Provision for losses on accounts receivable

 

4.4

 

2.2

 

Gain on disposal of assets

 

(1.6

)

(92.4

)

Loss on early extinguishment of debt

 

1.8

 

 

Noncash interest expense

 

2.0

 

2.1

 

Noncash restructuring, impairment and plant closing costs

 

11.7

 

12.3

 

Impairment loss on pending disposal of discontinued operations

 

240.0

 

 

Deferred income taxes

 

(88.6

)

18.4

 

Net unrealized (gain) loss on foreign currency transactions

 

(7.5

)

26.9

 

Stock-based compensation

 

11.9

 

8.2

 

Minority interest in subsidiaries’ (loss) income

 

(10.7

)

0.7

 

Other, net

 

9.8

 

(9.1

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts and notes receivable

 

(185.0

)

63.3

 

Inventories, net

 

29.9

 

23.1

 

Prepaid expenses

 

26.2

 

1.3

 

Other current assets

 

42.0

 

38.6

 

Other noncurrent assets

 

(64.2

)

(41.7

)

Accounts payable

 

12.9

 

(81.8

)

Accrued liabilities

 

(170.9

)

(140.7

)

Other noncurrent liabilities

 

29.3

 

(21.7

)

Net cash provided by operating activities

 

85.3

 

323.5

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Capital expenditures

 

(282.8

)

(211.3

)

Acquisition of business, net of cash acquired and post-closing adjustments

 

26.9

 

(136.0

)

Proceeds from sale of assets

 

15.8

 

201.1

 

Investment in unconsolidated affiliates, net

 

(16.7

)

(14.4

)

Proceeds from government securities, restricted as to use

 

7.2

 

7.2

 

Change in restricted cash

 

 

(32.9

)

Other, net

 

(0.5

)

 

Net cash used in investing activities

 

(250.1

)

(186.3

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Net borrowings (repayments) under revolving loan facilities

 

205.0

 

(1.9

)

Net repayments from overdraft facilities and other short-term debt

 

(0.2

)

(6.2

)

Repayments of long-term debt

 

(317.5

)

(69.5

)

Proceeds from long-term debt

 

266.1

 

22.9

 

Repayments on notes payable

 

(39.1

)

(22.3

)

Proceeds from notes payable

 

7.2

 

 

Dividends paid to common stockholders

 

(44.2

)

 

Dividends paid to preferred stockholders

 

(7.2

)

(7.2

)

Contribution from minority shareholder

 

 

6.2

 

Call premiums related to early extinguishment of debt

 

(1.2

)

 

Debt issuance costs paid

 

(4.2

)

 

Other, net

 

(0.8

)

 

Net cash provided by (used in) financing activities

 

63.9

 

(78.0

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

5.2

 

(1.9

)

(Decrease) increase in cash and cash equivalents

 

(95.7

)

57.3

 

Cash and cash equivalents at beginning of period

 

263.2

 

142.8

 

Cash and cash equivalents at end of period

 

$

167.5

 

$

200.1

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

151.2

 

$

182.9

 

Cash paid for income taxes

 

33.8

 

12.4

 

Change in capital expenditures included in accounts payable

 

27.0

 

 

 

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

3




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

(Dollars in Millions)

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

167.5

 

$

246.0

 

Accounts and notes receivables (net of allowance for doubtful accounts of $43.6 and $39.0, respectively)

 

1,439.3

 

1,243.3

 

Accounts receivable from affiliates

 

52.6

 

19.5

 

Inventories, net

 

1,348.0

 

1,520.1

 

Prepaid expenses

 

29.2

 

55.7

 

Deferred income taxes

 

74.1

 

70.7

 

Other current assets

 

115.6

 

161.6

 

Current assets held for sale

 

175.8

 

 

Total current assets

 

3,402.1

 

3,316.9

 

 

 

 

 

 

 

Property, plant and equipment, net

 

3,607.0

 

3,829.5

 

Investment in unconsolidated affiliates

 

215.9

 

201.0

 

Intangible assets, net

 

180.2

 

192.6

 

Goodwill

 

92.4

 

90.2

 

Deferred income taxes

 

243.6

 

188.7

 

Other noncurrent assets

 

398.5

 

376.6

 

Noncurrent assets held for sale

 

187.2

 

 

Total assets

 

$

8,326.9

 

$

8,195.5

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,083.9

 

$

1,006.2

 

Accounts payable to affiliates

 

17.8

 

16.7

 

Accrued liabilities

 

790.4

 

841.7

 

Deferred income taxes

 

19.3

 

9.4

 

Current portion of long-term debt

 

257.2

 

187.9

 

Current liabilities held for sale

 

10.1

 

 

Total current liabilities

 

2,178.7

 

2,061.9

 

 

 

 

 

 

 

Long-term debt

 

3,524.6

 

3,457.4

 

Deferred income taxes

 

109.1

 

161.6

 

Other noncurrent liabilities

 

942.4

 

952.1

 

Noncurrent liabilities held for sale

 

4.7

 

 

Total liabilities

 

6,759.5

 

6,633.0

 

 

 

 

 

 

 

Minority interests in common stock of consolidated subsidiaries

 

23.9

 

29.4

 

 

 

 

 

 

 

Commitments and contingencies (Notes 14 and 15)

 

 

 

 

 

 

 

 

 

 

 

Members’ equity:

 

 

 

 

 

Members’ equity, 2,728 units issued and outstanding

 

2,831.3

 

2,811.8

 

Accumulated deficit

 

(1,204.8

)

(1,150.4

)

Accumulated other comprehensive loss

 

(83.0

)

(128.3

)

Total members’ equity

 

1,543.5

 

1,533.1

 

Total liabilities and members’ equity

 

$

8,326.9

 

$

8,195.5

 

 

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

4




HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(Dollars in Millions)

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues:

 

 

 

 

 

 

 

 

 

Trade sales, services and fees

 

$

2,499.3

 

$

2,360.2

 

$

4,768.2

 

$

4,637.7

 

Related party sales

 

18.3

 

28.8

 

36.3

 

50.3

 

Total revenues

 

2,517.6

 

2,389.0

 

4,804.5

 

4,688.0

 

Cost of goods sold

 

2,131.3

 

1,990.3

 

4,024.7

 

3,927.4

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

386.3

 

398.7

 

779.8

 

760.6

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

219.9

 

171.0

 

429.4

 

331.0

 

Research and development

 

36.2

 

26.1

 

69.5

 

53.3

 

Other operating expense (income)

 

1.4

 

(95.0

)

5.3

 

(94.3

)

Restructuring, impairment and plant closing costs

 

13.2

 

8.8

 

24.4

 

17.1

 

Total expenses

 

270.7

 

110.9

 

528.6

 

307.1

 

Operating income

 

115.6

 

287.8

 

251.2

 

453.5

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(70.1

)

(95.7

)

(144.4

)

(183.7

)

Loss on accounts receivable securitization program

 

(4.7

)

(3.6

)

(9.0

)

(5.9

)

Equity in income of investment in unconsolidated affiliates

 

5.1

 

1.4

 

7.3

 

2.1

 

Other (expense) income

 

(1.3

)

0.6

 

(2.6

)

0.1

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes and minority interest

 

44.6

 

190.5

 

102.5

 

266.1

 

Income tax expense

 

(18.6

)

(58.2

)

(42.1

)

(78.4

)

Minority interest in subsidiaries’ loss (income)

 

11.1

 

(0.3

)

10.7

 

(0.7

)

Income from continuing operations

 

37.1

 

132.0

 

71.1

 

187.0

 

(Loss) income from discontinued operations, net of tax

 

(119.0

)

42.5

 

(119.4

)

54.8

 

(Loss) income before extraordinary (loss) gain

 

(81.9

)

174.5

 

(48.3

)

241.8

 

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

 

(8.9

)

46.1

 

(6.5

)

46.1

 

Net (loss) income

 

$

(90.8

)

$

220.6

 

$

(54.8

)

$

287.9

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(90.8

)

$

220.6

 

$

(54.8

)

$

287.9

 

Other comprehensive income

 

22.3

 

57.2

 

45.3

 

91.5

 

Comprehensive (loss) income

 

$

(68.5

)

$

277.8

 

$

(9.5

)

$

379.4

 

 

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

5




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

(Dollars in Millions)

 

 

Six months ended June 30,

 

 

 

2007

 

2006

 

Operating Activities:

 

 

 

 

 

Net (loss) income

 

$

(54.8

)

$

287.9

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Extraordinary loss (gain) on acqusition of a business, net of tax

 

6.5

 

(46.1

)

Equity in income of investment in unconsolidated affiliates

 

(7.3

)

(2.1

)

Depreciation and amortization

 

205.6

 

220.9

 

Provision for losses on accounts receivable

 

4.4

 

2.2

 

Gain on disposal of assets

 

(1.6

)

(92.4

)

Loss on early extinguishment of debt

 

2.2

 

 

Noncash interest expense

 

2.3

 

4.1

 

Noncash restructuring, impairment and plant closing costs

 

11.7

 

12.3

 

Impairment loss on pending disposal of discontinued operations

 

240.0

 

 

Deferred income taxes

 

(50.9

)

64.5

 

Net unrealized (gain) loss on foreign currency transactions

 

(7.5

)

26.9

 

Noncash compensation

 

11.9

 

8.2

 

Minority interest in subsidiaries’ (loss) income

 

(10.7

)

0.7

 

Other, net

 

(18.8

)

(6.7

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts and notes receivable

 

(185.0

)

63.3

 

Inventories, net

 

29.9

 

23.1

 

Prepaid expenses

 

27.8

 

(0.1

)

Other current assets

 

40.5

 

38.6

 

Other noncurrent assets

 

(67.7

)

(53.4

)

Accounts payable

 

12.9

 

(81.8

)

Accrued liabilities

 

(167.5

)

(141.3

)

Other noncurrent liabilities

 

36.1

 

(10.7

)

Net cash provided by operating activities

 

60.0

 

318.1

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Capital expenditures

 

(282.8

)

(211.3

)

Acquisition of business, net of cash acquired and post-closing adjustments

 

26.9

 

(136.0

)

Proceeds from sale of assets

 

15.8

 

201.1

 

Investment in unconsolidated affiliates, net

 

(16.7

)

(14.4

)

Change in restricted cash

 

 

(32.9

)

Other, net

 

(0.5

)

 

Net cash used in investing activities

 

(257.3

)

(193.5

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Net borrowings (repayments) under revolving loan facilities

 

205.0

 

(1.9

)

Net repayments from overdraft facilities and other short-term debt

 

(0.2

)

(6.2

)

Repayments of long-term debt

 

(317.5

)

(69.5

)

Proceeds from long-term debt

 

266.1

 

22.9

 

Repayments on notes payable

 

(38.1

)

(20.5

)

Proceeds from notes payable

 

4.5

 

 

Call premiums related to early extinguishment of debt

 

(1.2

)

 

Debt issuance costs paid

 

(4.2

)

 

Contribution from minority shareholder

 

 

6.2

 

Other, net

 

(0.8

)

 

Net cash provided by (used in) financing activities

 

113.6

 

(69.0

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

5.2

 

(1.9

)

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(78.5

)

53.7

 

Cash and cash equivalents at beginning of period

 

246.0

 

132.5

 

Cash and cash equivalents at end of period

 

$

167.5

 

$

186.2

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

151.8

 

$

183.3

 

Cash paid for income taxes

 

33.8

 

12.4

 

Change in capital expenditures included in accounts payable

 

27.0

 

 

 

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

6




 

HUNTSMAN CORPORATION AND SUBSIDIARIES

HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.             GENERAL

CERTAIN DEFINITIONS

“Company,” “our,” “us,” or “we” may be used to refer to Huntsman Corporation and, unless the context otherwise requires, its subsidiaries and predecessors. Any references to our “Company,” “we,” “us” or “our” as of a date prior to October 19, 2004 (the date of our formation) are to Huntsman Holdings, LLC and its subsidiaries (including their respective predecessors). In this report, “Huntsman International” refers to Huntsman International LLC (our 100% owned subsidiary) and, unless the context otherwise requires, its subsidiaries; “Huntsman Advanced Materials” refers to Huntsman Advanced Materials Holdings LLC (our 100% owned indirect subsidiary, the membership interests of which we contributed to Huntsman International on December 20, 2005) and, unless the context otherwise requires, its subsidiaries; “HPS” refers to Huntsman Polyurethanes Shanghai Ltd. (our consolidated splitting joint venture with Shanghai Chlor-Alkali Chemical Company, Ltd); “SLIC” refers to Shanghai Liengheng Isocyanate Investment BV (our unconsolidated manufacturing joint venture with BASF AG and three Chinese chemical companies); “HMP Equity Trust” refers to HMP Equity Trust (the holder of approximately 47% of our common stock as of June 30, 2007 and approximately 22% as of August 7, 2007), and “MatlinPatterson” refers to MatlinPatterson Global Opportunities Partners L.P., MatlinPatterson Global Opportunities Partners (Bermuda) L.P. and MatlinPatterson Global Opportunities Partners B, L.P. (collectively, an owner of HMP Equity Trust).

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

DESCRIPTION OF BUSINESS

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

COMPANY

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

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

7




PENDING SALE OF OUR COMPANY

On July 12, 2007, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Hexion Specialty Chemicals, Inc., an entity owned by an affiliate of Apollo Management L.P. ("Hexion"), and Nimbus Merger Sub Inc., a wholly-owned subsidiary of Hexion ("Merger Sub"), under which Hexion has agreed to acquire all of the issued and outstanding shares of our common stock pursuant to a merger under Delaware law. Under the terms of the Merger Agreement, Merger Sub will be merged with and into our company, with our company continuing as the surviving corporation and as a wholly-owned subsidiary of Hexion (the "Merger").

If the Merger is completed, each share of our common stock that our stockholders own at the effective time of the Merger (unless the stockholder properly exercises appraisal rights under Delaware law) will be cancelled and converted into the right to receive, without interest, $28.00 in cash, plus, if the Merger is not consummated by April 5, 2008 (the "Adjustment Date"), an amount in cash equal to the excess, if any, of $0.006137 per day for each day after the Adjustment Date through and including the date on which the Merger is effected over any cash dividends or distributions declared, made or paid from and after the Adjustment Date through and including the date on which the Merger is effected (the "Merger Consideration"), less any applicable withholding taxes. After the Merger is completed, any shares of our common stock owned by our stockholders immediately prior to the effective time of the Merger and converted in the Merger will thereafter represent only the right to receive the Merger Consideration (or the right to the fair value of such shares if appraisal is properly demanded and perfected) and they will no longer have any rights as a stockholder.

Prior to entering into the Merger Agreement, we terminated an Agreement and Plan of Merger (the "Basell Agreement") dated as of June 26, 2007 with Basell AF ("Basell") and paid Basell the $200 million termination fee required under the terms of the Basell Agreement. One-half of the termination fee was funded by Hexion and we could be required to pay Hexion such amount under certain circumstances in connection with a termination of the Merger Agreement. The closing price of our common stock on June 25, 2007, the last trading day prior to announcement of the execution of the Basell Agreement on June 26, 2007, was $18.90 per share.

After receiving a buyout offer from a prominent private equity fund on May 15, 2007, our board of directors formed a transaction committee comprised solely of independent directors and authorized management to engage a financial advisor to assist in conducting an appropriate process for the board of directors to evaluate and respond to the buyout offer. We engaged Merrill, Lynch & Co. ("Merrill Lynch") and invited them to contact a select list of parties that were likely to have an interest in an acquisition of our company. During the following two weeks, Merrill Lynch contacted numerous parties regarding a potential sale of our Company. Ultimately we received three written proposals, including from Apollo Management L.P., on behalf of Hexion, and from Basell. On June 25, 2007, after significant negotiations with Apollo and Basell, we entered into the Basell Agreement providing for the acquisition of all outstanding shares of our common stock at a price of $25.25 per share and made a public announcement setting forth the principal terms of the Basell Agreement. On June 29, 2007, Apollo delivered a letter to our board of directors offering to enter into a merger agreement providing for the acquisition of all outstanding shares of our common stock at a price of $27.25 per share. On July 12, 2007, more than a week after public announcement of the new offer by Apollo, we terminated the Basell Agreement, entered into the Merger Agreement with Hexion and publicly announced the principal terms of the Merger Agreement, including the acquisition price of $28.00 per share of our common stock. Since our announcement of the proposed sale of the Company to Basell more than a month ago, we have not received any competing proposals from any parties other than the offer from Hexion which we accepted and announced on July 12, 2007. Under the terms of the Merger Agreement with Hexion we are not permitted to, among other things and subject to certain specified exceptions where our board of directors makes certain determinations, (i) initiate, solicit or knowingly encourage or facilitate any inquiries, proposals or offers that constitute, or could reasonably be expected to lead to, a competing proposal, (ii) enter into, participate or engage in discussions or negotiations with third parties regarding any inquiries, proposals or offers that constitute, or could reasonably be expected to lead to, a competing proposal, or (iii) furnish or provide any non-public information to any third parties with respect to, any inquiries, proposals or offers that constitute, or could reasonably be expected to lead to, a competing proposal.

8




Consummation of the Merger is not subject to a financing condition, but is subject to various other conditions. We and Hexion are required to complete the Merger unless certain specified conditions are not satisfied or waived. These conditions include, among others (i) adoption of the Merger Agreement by the holders of a majority of our outstanding shares of common stock, (ii) receipt of certain regulatory approvals or expiration of required waiting periods under U.S. and other competition laws, and (iii) no material adverse effect occurring with respect to us or our business prior to the effective time of the Merger. There can be no assurance the conditions to consummation of the Merger will be satisfied or waived. For a complete list of the conditions that must be satisfied or waived prior to the effective time of the Merger, please review the Merger Agreement filed as an exhibit to our Current Report on Form 8-K on July 13, 2007.

For the purposes of the Merger Agreement, a "material adverse effect" with respect to us means any occurrence, condition, change, event or effect that is materially adverse to the financial condition, business, or results of operations of our Company and its subsidiaries, taken as a whole, subject to certain specified exceptions relating to or resulting from:

·      changes in general economic or financial market conditions or in the chemical industry generally (including changes in commodity prices, general market prices and regulatory changes affecting the chemical industry generally), except and only to the extent that such change has had a disproportionate effect on the Company and its subsidiaries compared to other persons engaged in the chemical industry;

·      the outbreak or escalation of hostilities involving the United States, the declaration by the United States of war or the occurrence of any natural disasters and acts of terrorism, except in the event, and only to the extent, of any damage or destruction to or loss of our physical properties;

·      the announcement or pendency of the Merger;

·      any change in GAAP, or in the interpretation thereof, or any change in law, or in the interpretation thereof;

·      compliance by us with the terms of the Merger Agreement or actions permitted by the Merger Agreement (or otherwise consented to by Hexion) or effectuating Hexion's debt financing; or

·      any divestiture action taken to ensure regulatory clearance.

The Merger Agreement provides that Hexion will have up to nine months (and an additional three months at Hexion's election), plus under certain circumstances a further 90-day extension, to close the Merger. The Merger Agreement generally can be terminated by either party if the Merger is not consummated within that time. We cannot predict the exact timing of the effective time of the Merger or whether the Merger will be consummated because it is subject to certain conditions which are not within our control, such as expiration of waiting periods or grants of approvals under competition laws in certain jurisdictions, including the United States and the European Union. We do not expect the Merger to occur prior to the end of the 2007 calendar year.

The Merger Agreement also contains certain termination rights, including if our board of directors or a committee thereof changes its recommendation to our stockholders in connection with a superior proposal (as defined in the Merger Agreement), and provides for break-up fees in various circumstances. Pursuant to the Merger Agreement, we have agreed to pay Hexion a fee of $225 million plus an amount equal to $100 million (the "Reimbursement Amount"), representing the portion of the $200 million termination fee paid to Basell that was funded by Hexion, if we or Hexion terminates the Merger Agreement in certain circumstances, including where (i) our board of directors or the transaction committee thereof has withdrawn, modified or changed, in any manner that is adverse to Hexion, its approval or recommendation that holders of our common stock approve and adopt the Merger Agreement and the Merger; (ii) a tender or exchange offer that would constitute a competing proposal (as defined in the Merger Agreement) is commenced and our board of directors or the transaction committee thereof fails to recommend against acceptance of such tender or exchange offer within 10 business days; or (iii) we, our board of directors or the transaction committee thereof has approved or recommended any competing proposal or approves any agreement relating to any competing proposal (other than a permitted confidentiality agreement).

9




We have also agreed that if either we or Hexion terminates the Merger Agreement after failure of our common stockholders to adopt the Merger Agreement and, within 12 months after the date of the stockholders' meeting, we enter into a definitive agreement with respect to or consummate a competing proposal, then we have agreed to pay Hexion at the closing or other consummation of such competing proposal:

·      the Reimbursement Amount if, at the time of the meeting, less than 50.1% of the total issued and outstanding voting power of our common stock is contractually committed to vote in favor of the adoption of the Merger Agreement; or

·      a fee of $225 million plus the Reimbursement Amount if, at the time of the meeting, there existed a publicly announced bona fide competing proposal that was not withdrawn at least five business days prior to the date of the meeting.

Hexion has agreed in the Merger Agreement to pay us a fee of $325 million if:

·      (i) either we or Hexion terminate the Merger Agreement because a governmental agency has issued a final non-appealable order, decree, ruling or injunction or taken any other action permanently restraining, enjoining or otherwise prohibiting the consummation of the Merger or any law or regulation is adopted that makes consummation of the Merger illegal or otherwise prohibited and (ii) at the same time there exists an order, decision, judgment, decree, ruling, injunction (preliminary or permanent), or any law, rule, regulation or other action is established preliminarily or permanently restraining, enjoining or prohibiting the consummation of the Merger (each event in clause (ii) being an "Antitrust Prohibition");

·      either we or Hexion terminate the Merger Agreement because the Merger has not been consummated by the termination date and the condition to consummation of the Merger related to the receipt of regulatory approvals has not been met or there exists an Antitrust Prohibition;

·      we terminate the Merger Agreement due to a breach by Hexion or Merger Sub of their covenants related to making filings and seeking and obtaining approval of regulatory authorities or their covenants related to obtaining the required financing; or

·      we terminate the Merger Agreement because Hexion fails to consummate the Merger when all of the conditions to its obligations to close have been satisfied or waived (except those conditions that, by their nature, can only be satisfied at closing) and the Merger has not been consummated on or prior to the termination date.

We and Hexion have agreed that the non-terminating party will pay to the terminating party the Reimbursement Amount if the Merger Agreement is terminated by either party as a result of a willful or intentional breach by the other party. In addition, no termination of the Merger Agreement will relieve any party from liability for damages for a knowing and intentional breach of any covenant under the Merger Agreement.

In connection with the execution of the Merger Agreement, Hexion entered into separate voting agreements (the "Voting Agreements") with certain stockholders, including MatlinPatterson, the Huntsman family and the Fidelity Charitable Gift Fund, who at the time of signing collectively owned approximately 57% of our outstanding common stock. Pursuant to the terms of the Voting Agreements, the stockholders that are a party thereto have agreed to vote the shares of common stock that they hold as of the record date in favor of the adoption of the Merger Agreement and against any competing proposal. The Voting Agreement binding MatlinPatterson requires it to retain in HMP Equity Trust at least 19,870,000 shares (or 9.0% of our outstanding common stock) through the closing of the Merger. Such 19,870,000 shares, however, may be sold if we agree that certain criteria are satisfied or if the new owner grants all voting rights with respect to the purchased shares to HMP Equity Trust or to Jon M. Huntsman. At present, HMP Equity Trust continues to hold such 19,870,000 shares. However, on August 6, 2007, MatlinPatterson sold 56,979,062 shares. Accordingly, less than a majority of our shares of outstanding common stock are subject to the Voting Agreements.

10




HUNTSMAN CORPORATION AND HUNTSMAN INTERNATIONAL FINANCIAL STATEMENTS

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

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

·                    the different capital structures.

PRINCIPLES OF CONSOLIDATION

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

INTERIM FINANCIAL STATEMENTS

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

USE OF ESTIMATES

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

RECLASSIFICATIONS

Certain amounts in the condensed consolidated financial statements (unaudited) for prior periods have been reclassified to conform with the current presentation.  The most significant of these reclassifications was to reclassify the results of operations from our North American polymers business and our European base chemical and polymers businesses to discontinued operations.  See “Note 3. Discontinued Operations.”  In addition, beginning in the second quarter of 2007, our Australian styrenics business was transferred from our Polymers segment to Corporate and other.  All segment information for prior periods has been restated to reflect this transfer.

2.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

11




We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,  Accounting for Income Taxes,  by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recorded a credit of $0.3 million to accumulated deficit as of January 1, 2007 for the cumulative effect of a change in accounting principle. See “Note 18. Income Taxes.”

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

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

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). Effective for December 31, 2008, SFAS No. 158 will require us to measure the funded status of our plans as of  December 31. We currently use a November 30 measurement date for our plans.

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

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

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

In May 2007, the FASB issued FSP FIN 48-1, Definition of “Settlement” in FASB Interpretation No. 48, to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.  Our initial adoption of FIN 48 was consistent with the provisions of this FSP; therefore, this pronouncement did not have an impact on our consolidated financial statements.

In June 2007, the FASB issued EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.  EITF Issue No. 06-11 requires companies to recognize a realized tax benefit from dividends charged to retained earnings on affected securities as a credit to additional paid-in capital which should be included in the pool of excess tax benefits available to absorb tax deficiencies from share-based payment awards.  EITF Issue No. 06-11 will be applied prospectively to income tax benefits of dividends on share-based payment awards that are declared in fiscal years beginning after September 15, 2007.  We are evaluating EITF Issue No. 06-11

12




to determine the impact on our consolidated financial statements.

3.                                      DISCONTINUED OPERATIONS

NORTH AMERICAN POLYMERS BUSINESS

On February 15, 2007, we entered into an agreement (the “Original Agreement”) pursuant to which Flint Hills Resources (“FHR”), a wholly owned subsidiary of Koch, agreed to acquire our North American base chemicals and polymers business assets for approximately $456 million in cash, plus the value of inventory on the date of closing. We will retain other elements of working capital, including accounts receivable, accounts payable and certain accrued liabilities, which will be liquidated for cash in the ordinary course of business.  On June 22, 2007, we entered into an Amended and Restated Asset Purchase Agreement (the “Amended and Restated Agreement”) with FHR that amends certain terms of the Original Agreement to, among other things, provide for the closing of the sale of our North American polymers business assets on August 1, 2007 for $150.0 million plus the value of associated inventory on an average actual cost basis (the “North American Polymers Disposition”). We received total consideration for the North American Polymers Disposition of approximately $348 million, which is subject to post-closing adjustments. The net proceeds from the North American Polymers Disposition were used to repay debt.

The Amended and Restated Agreement also provides for the separate closing of our U.S. base chemicals business for the remaining $306.0 million of sales price plus the value of associated inventory on an average actual cost basis (approximately $60 million at June 30, 2007), following the re-start of our Port Arthur, Texas olefins manufacturing facility, which is expected to occur during the fourth quarter of 2007 (the “Pending U.S. Base Chemicals Disposition” and together with the North American Polymers Disposition, the “Pending U.S. Petrochemical Disposition”). For more information, see “Note 4. Business Dispositions and Combinations—Agreement to Sell U.S. Base Chemicals Business” and “Note 17. Casualty Losses and Insurance Recoveries—Port Arthur, Texas Plant Fire.”

The Pending U.S. Petrochemical Disposition includes our olefins and polymers manufacturing assets located at five U.S. sites: Port Arthur, Odessa and Longview, Texas; Peru, Illinois; and Marysville, Michigan. These plants employ about 900 associates. Pursuant to the Amended and Restated Agreement, we also shut down our Mansonville, Quebec expandable polystyrene manufacturing facility in June 2007.  The captive ethylene unit at our retained Port Neches, Texas site of our Performance Products segment operations is not included in the sale. This asset, along with a long-term post-closing arrangement for the supply of ethylene and propylene from FHR to us, will continue to provide feedstock for our downstream derivative units.

As of June 22, 2007, the North American polymers business was classified as held for sale and its results of operations for current and prior periods have been classified as discontinued operations in our financial statements in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  We recorded a pretax impairment charge of $240.0 million during the three months ended June 30, 2007 related to the North American Polymers Disposition.

The following major classes of assets and liabilities of our North American polymers business are presented as held for sale in the accompanying June 30, 2007 condensed consolidated balance sheet (unaudited) (dollars in millions):

13




 

ASSETS

 

 

 

Inventories, net

 

$

175.3

 

Other current assets

 

0.5

 

Property, plant and equipment net

 

143.9

 

Other noncurrent assets

 

43.3

 

Total assets

 

363.0

 

LIABILITIES

 

 

 

Accrued liabilities

 

10.1

 

Other noncurrent liabilities

 

4.7

 

Total liabilities

 

14.8

 

NET ASSETS

 

$

348.2

 

 

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

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

385.6

 

$

356.0

 

$

746.0

 

$

713.7

 

Costs and expenses

 

(377.5

)

(332.2

)

(736.3

)

(659.9

)

Impairment loss on pending disposal

 

(240.0

)

 

(240.0

)

 

Operating (loss) income

 

(231.9

)

23.8

 

(230.3

)

53.8

 

Income tax benefit (expense)

 

75.9

 

(0.5

)

75.9

 

(1.1

)

(Loss) income from discontinued operations, net of tax

 

$

(156.0

)

$

23.3

 

$

(154.4

)

$

52.7

 

 

The impairment loss on the pending disposal in 2007 represents the impairment of long-lived assets resulting from the write-down of the North American polymers business to the purchase price less cost to sell. The actual loss on disposal will differ from this amount as we finalize transaction-related costs.  Furthermore, to the extent that we incur additional capital expenditures in our North American polymers business, we will record an additional impairment loss.  In addition, we expect to incur a pension curtailment gain of approximately $14 million during the third quarter of 2007.

In connection with the sale, we agreed to indemnify the buyer with respect to any losses resulting from (i) the breach of representations and warranties contained in the asset purchase agreement, (ii) any pre-sale liabilities related to the assets sold not assumed by FHR, and (iii) any unknown environmental liability related to the pre-sale operations of the assets sold.   We are not required to pay under these indemnification obligations until claims against us, on a cumulative basis, exceed $10 million.  Upon exceeding this $10 million threshold, we generally are obligated to provide indemnification for any losses up to a limit of $150 million.  We believe that there is a remote likelihood that we will be required to pay any significant amounts under the indemnity provision.  As a result, we have estimated that the fair value of this indemnity at the date of the closing of the sale will be minimal.

The EBITDA of the North American polymers business is reported in our Polymers operating segment in the accompanying condensed consolidated financial statements (unaudited).

EUROPEAN BASE CHEMICALS AND POLYMERS BUSINESS

On December 29, 2006, we completed the sale of the outstanding equity interests of Huntsman Petrochemicals (UK) Limited for an aggregate purchase price of $685 million in cash plus the assumption by the purchaser of approximately $126 million in unfunded pension liabilities (the “U.K. Petrochemicals Disposition”). The

14




final sales price is subject to agreement by SABIC on adjustments relating to working capital, investment in the LDPE plant currently under construction in Wilton, U.K. and unfunded pension liabilities. The transaction did not include our Teeside, U.K.-based Pigments operations or the Wilton, U.K.-based aniline and nitrobenzene operations of our Polyurethanes segment.

In connection with the U.K. Petrochemical Disposition, we agreed to make payments to SABIC of up to £18 million (approximately $36 million) related to the transfer of pension plan assets and liabilities and we accrued this liability in 2006 in connection with the sale transaction.  During the three months ended June 30, 2007, the valuation of the related pension assets and liabilities was refined and we now expect to make payments to SABIC of approximately £0.5 million (approximately $1 million) and have adjusted the accrual accordingly.  Therefore, during the three months ended June 30, 2007, we recorded a pretax gain related to the U.K. Petrochemicals Disposition of $37.2 million resulting primarily from the reversal of this pension funding accrual. Finalization of the required payment to SABIC is expected during the third quarter of 2007, at which time we expect to fund the obligation.

The final sales price of the U.K. Petrochemical Disposition is also subject to adjustments relating to working capital and investment in the LDPE plant under construction in Wilton U.K. We have accrued a liability relating to these adjustments of $14.5 million and expect to finalize these adjustments and fund this obligation in the third quarter of 2007. Also, based on our 2006 pension valuation, we and Huntsman International expect to incur a non-cash pension settlement loss of approximately $18 million and $28 million, respectively, during the last half of 2007.

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

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

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

598.0

 

$

 

$

1,129.8

 

Costs and expenses

 

 

(572.1

)

 

(1,127.6

)

Post-closing adjustments to loss on disposal

 

37.2

 

 

35.6

 

 

Operating income

 

37.2

 

25.9

 

35.6

 

2.2

 

Income tax (expense) benefit

 

 

(6.4

)

 

0.7

 

Income from discontinued operations, net of tax

 

$

37.2

 

$

19.5

 

$

35.6

 

$

2.9

 

 

The EBITDA of our former European base chemicals business is reported in our Base Chemicals operating segment in the accompanying condensed consolidated financial statements (unaudited).

In connection with the sale, we agreed to indemnify the buyer with respect to any losses resulting from any environmental liability related to the pre-sale operations of the assets sold. These indemnities have various payment thresholds and time limits depending on the site and type of claim. Generally, we are not required to pay under these indemnification obligations until claims against us exceed £0.1 million (approximately $0.2 million) individually or £1.0 million (approximately $2.0 million), in the aggregate. We also agreed to indemnify the buyer with respect to certain tax liabilities. Our maximum exposure generally shall not exceed $600 million in the aggregate. We believe that there is a remote likelihood that we will be required to pay any significant amounts under the indemnity provision.

15




TDI BUSINESS

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

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

$

(0.6

)

$

(0.3

)

$

(1.0

)

$

(0.8

)

Operating loss

 

(0.6

)

(0.3

)

(1.0

)

(0.8

)

Income tax benefit

 

0.4

 

 

0.4

 

 

Loss from discontinued operations, net of tax

 

$

(0.2

)

$

(0.3

)

$

(0.6

)

$

(0.8

)

 

4.             BUSINESS DISPOSITIONS AND COMBINATIONS

AGREEMENT TO SELL U.S. BASE CHEMICALS BUSINESS

The Amended and Restated Agreement provides, among other things, for the separate closing of our U.S. base chemicals business for $306 million of sales price plus the value of associated inventory on an average actual cost basis (approximately $60 million at June 30, 2007), following the re-start of our Port Arthur, Texas olefins manufacturing facility which is expected to occur during the fourth quarter of 2007. For more information, see “Note 3. Discontinued Operations—North American Polymers Business” and “Note 17. Casualty Losses and Insurance Recoveries—Port Arthur, Texas Plant Fire.”  As of June 30, 2007, these assets were classified as held and used in accordance with SFAS No. 144 because these assets were not immediately available for sale in their present condition due to the required repair and restart of the Port Arthur, Texas facility. We tested these assets for recoverability using expected future cash flows, including the expected proceeds from the Port Arthur fire insurance recovery, and concluded that the expected future cash flows were in excess of the carrying value of the business expected to be sold. Therefore, we did not recognize an impairment charge as of June 30, 2007. We will continue to assess these assets for recoverability during 2007 through the sale date. Upon the restart of the Port Arthur facility, we expect that the carrying value of the business to be sold, which will increase as we rebuild the plant, will exceed the sales price and we will recognize a loss on disposal.

SALE OF AUSTRALIAN POLYESTER RESINS ASSETS

On January 4, 2007, we completed the sale of our Australian polyester resins assets to Nuplex for A$9.6 million ($7.5 million) in cash, plus the value of inventory at the sale date, for a total transaction value of A$20.3 million ($15.8 million). During the six months ended June 30, 2007, we recognized a pretax gain on the sale of these assets of $4.1 million. The transaction further includes additional consideration to be received over a three year period upon achieving certain associated earnings targets. The sale includes our Australian polyesters, vinylesters and gelcoats manufacturing assets. In connection with the sale agreement, we also entered into a tolling agreement with Nuplex pursuant to which we will continue to manufacture product using the Australian polyester resins assets. Nuplex will own the assets located on our site. The tolling agreement expires January 2009.

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

16




SALE OF U.S. BUTADIENE AND MTBE BUSINESS

On June 27, 2006, we sold the assets comprising our U.S. butadiene and MTBE business operated by our Base Chemicals segment. The total sales price was $274.0 million, of which $204.0 million was paid to us during 2006. The additional $70.0 million will be payable to us after the restart of our Port Arthur, Texas olefins unit that was damaged in a fire (see “Note 17. Casualty Losses and Insurance Recoveries—Port Arthur, Texas Plant Fire”) and the related resumption of crude butadiene supply; provided that we achieve certain intermediate steps toward restarting the plant and the restart occurs within 30 months of this sale. We expect to recognize an additional pre-tax gain of approximately $69 million upon completion of the conditions referenced above.

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

In connection with the sale, we indemnified the buyer with respect to any losses resulting from (i) the breach of representations and warranties contained in the asset purchase agreement, (ii) pre-sale liabilities related to the pre-sale operations of the assets sold not assumed by the buyer, and (iii) environmental liability related to the pre-sale operations of the assets sold. We are not required to pay under these indemnification obligations until claims against us exceed $5 million. Upon exceeding this $5 million threshold, we generally are obligated to provide indemnification for any losses in excess of $5 million, up to a limit of $137.5 million. We believe that there is a remote likelihood that we will be required to pay any significant amounts under the indemnity provision.

TEXTILE EFFECTS ACQUISITION

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

We have accounted for the Textile Effects Acquisition using the purchase method in accordance with SFAS No. 141, Business Combinations. As such, we analyzed the fair value of tangible and intangible assets acquired and liabilities assumed, and we determined the excess of fair value of net assets acquired over cost. Because the fair value of the acquired assets and liabilities assumed exceeded the acquisition price, the valuation of the long-lived assets acquired was reduced to zero in accordance with SFAS No. 141. Accordingly, no basis was assigned to property, plant and equipment or any other non-current non-financial assets and the remaining excess was recorded as an extraordinary gain, net of taxes (which were not applicable because the gain was recorded in purchase accounting). The final allocation of the purchase price to the assets and liabilities acquired is summarized as follows (dollars in millions):

17




 

Acquisition cost:

 

 

 

Acquisition payment, exclusive of post-closing working capital adjustment

 

$172.1

 

Post-closing working capital adjustment

 

(26.9

)

Direct costs of acquisition

 

13.0

 

Total acquisition costs

 

158.2

 

Fair value of assets acquired and liabilities assumed:

 

 

 

Cash

 

7.7

 

Accounts receivable

 

255.1

 

Inventories

 

233.4

 

Prepaid expenses and other current assets

 

13.1

 

Noncurrent assets

 

2.2

 

Deferred taxes

 

2.1

 

Accounts payable

 

(94.1

)

Accrued liabilities

 

(35.1

)

Short-term debt

 

(5.0

)

Noncurrent liabilities

 

(171.8

)

Total fair value of net assets acquired

 

207.6

 

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

 

$49.4

 

 

During 2006, we recorded an extraordinary gain on the acquisition of $55.9 million based on the preliminary purchase price allocation.  During the three and six months ended June 30, 2007, we adjusted the preliminary purchase price allocation for, among other things, the finalization of restructuring plans, estimates of asset retirement obligations, the determination of related deferred taxes and finalization of the post-closing working capital adjustments, resulting in a reduction to the extraordinary gain on the acquisition of $8.9 million and $6.5 million, respectively.

We plan to exit certain activities of the textile effects business and expect to involuntarily terminate the employment of, or relocate, certain textile effects employees. We estimate that we will eliminate 785 positions and will create approximately 300 new positions, globally. These plans include the exit of various manufacturing, sales and administrative activities throughout the business through 2009. This purchase price allocation includes recorded liabilities for workforce reductions and other business exit costs of $81.1 million and $11.2 million, respectively.

PENDING METROCHEM ACQUISITION

On June 29, 2007, we signed an agreement to acquire the Baroda division of Metrochem Industries Ltd for $46.5 million in cash.  The division to be acquired by us is a textile dyes and intermediates manufacturer based in Baroda, India. The transaction, which is subject to regulatory approvals, is expected to close in January 2008.

5.            INVENTORIES

Inventories consisted of the following (dollars in millions):

18




 

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Raw materials and supplies

 

$

273.7

 

$

320.1

 

Work in progress

 

90.2

 

109.8

 

Finished goods

 

1,072.2

 

1,204.3

 

Total

 

1,436.1

 

1,634.2

 

LIFO reserves

 

(88.1

)

(114.1

)

 

 

 

 

 

 

Net

 

$

1,348.0

 

$

1,520.1

 

 

As of June 30, 2007 and December 31, 2006, approximately 13% and 18%, respectively, of inventories were recorded using the last-in, first-out cost method.

In the normal course of operations, we at times exchange raw materials and finished goods with other companies for similar inventories for the purpose of reducing transportation costs.   The net open exchange positions are valued at our cost. The amount included in inventory under open exchange agreements payable by us at June 30, 2007 was $2.5 million (4.9 million pounds of feedstock and products). The amount included in inventory under open exchange agreements receivable by us at December 31, 2006 was $9.7 million (30.9 million pounds of feedstock and products).

6.             RESTRUCTURING, IMPAIRMENT AND PLANT CLOSING COSTS

As of June 30, 2007 and December 31, 2006, accrued restructuring costs by type of cost and initiative consisted of the following (dollars in millions):

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Workforce

 

Demolition and

 

Non-cancelable

 

restructuring

 

 

 

 

 

reductions(1)

 

decommissioning

 

lease costs

 

costs

 

Total(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities as of December 31, 2006

 

$

76.4

 

$

0.3

 

$

8.7

 

$

16.7

 

$

102.1

 

Adjustment to Textile Effects opening balance sheet accrual

 

14.0

 

2.2

 

(2.1

)

4.5

 

18.6

 

2007 charges for 2004 initiatives

 

0.8

 

 

0.1

 

0.1

 

1.0

 

2007 charges for 2005 initiatives

 

0.2

 

 

 

 

0.2

 

2007 charges for 2007 initiatives

 

0.8

 

 

 

13.7

 

14.5

 

Reversal of reserves no longer required

 

(1.8

)

 

(1.2

)

 

(3.0

)

2007 payments for 2003 initiatives

 

(1.8

)

 

(0.4

)

(0.1

)

(2.3

)

2007 payments for 2004 initiatives

 

(2.7

)

(0.3

)

(0.3

)

(0.1

)

(3.4

)

2007 payments for 2005 initiatives

 

(2.9

)

 

 

 

(2.9

)

2007 payments for 2006 initiatives

 

(5.6

)

 

 

(0.5

)

(6.1

)

2007 payments for 2007 initiatives

 

 

 

 

(13.7

)

(13.7

)

Net activity of discontinued operations

 

1.1

 

 

 

 

1.1

 

Foreign currency effect on reserve balance

 

1.0

 

 

 

(0.8

)

0.2

 

Accrued liabilities as of June 30, 2007

 

$

79.5

 

$

2.2

 

$

4.8

 

$

19.8

 

$

106.3

 


(1)                                 With the exception of liabilities recorded in connection with business combinations, accrued liabilities classified as workforce reductions consist primarily of restructuring programs involving ongoing termination benefit arrangements and restructuring programs involving special termination benefits. Accordingly, the related liabilities were accrued as a one-time charge to earnings in accordance with SFAS No. 112, Employers’ Accounting for Postemployment Benefits and with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, respectively. The remaining accrued liabilities related to these charges of $2.7 million represent workforce reductions to be paid by the end of 2011. Liabilities for workforce reductions recorded in connection with business combinations were accrued in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, and are expected to be paid through 2009. The total workforce reduction

19




reserves of $79.5 million relate to 710 positions that have not been terminated as of June 30, 2007.

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

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

2001 initiatives

 

$

1.4

 

$

1.4

 

2003 initiatives

 

12.6

 

15.8

 

2004 initiatives

 

7.8

 

12.2

 

2005 initiatives

 

 

1.4

 

2006 initiatives

 

87.6

 

76.2

 

2007 initiatives

 

1.6

 

 

Foreign currency effect on reserve balance

 

(4.7

)

(4.9

)

Total

 

$

106.3

 

$

102.1

 

 

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

 

 

 

 

Materials and

 

Performance

 

 

 

 

 

Base

 

 

 

 

 

Polyurethanes

 

Effects

 

Products

 

Pigments

 

Polymers

 

Chemicals

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities as of December 31, 2006

 

$

6.6

 

$

78.5

 

$

7.4

 

$

7.9

 

$

 

$

1.7

 

$

102.1

 

Adjustment to Textile Effects opening balance sheet accrual

 

 

18.6

 

 

 

 

 

18.6

 

2007 charges for 2004 initiatives

 

 

 

0.4

 

0.6

 

 

 

1.0

 

2007 charges for 2005 initiatives

 

 

 

 

0.2

 

 

 

0.2

 

2007 charges for 2007 initiatives

 

 

14.5

 

 

 

 

 

14.5

 

Reversal of reserves no longer required

 

 

(0.1

)

 

(2.9

)

 

 

(3.0

)

2007 payments for 2003 initiatives

 

(1.2

)

(0.2

)

 

(0.9

)

 

 

(2.3

)

2007 payments for 2004 initiatives

 

(0.2

)

 

(1.9

)

(1.3

)

 

 

(3.4

)

2007 payments for 2005 initiatives

 

(0.1

)

(0.1

)

(1.6

)

 

 

(1.1

)

(2.9

)

2007 payments for 2006 initiatives

 

 

(6.1

)

 

 

 

 

(6.1

)

2007 payments for 2007 initiatives

 

 

(13.7

)

 

 

 

 

(13.7

)

Net activity of discontinued operations

 

 

 

 

 

1.1

 

 

1.1

 

Foreign currency effect on reserve balance

 

0.2

 

 

 

 

 

 

0.2

 

Accrued liabilities as of June 30, 2007

 

$

5.3

 

$

91.4

 

$

4.3

 

$

3.6

 

$

1.1

 

$

0.6

 

$

106.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of restructuring reserve

 

$

2.1

 

$

58.9

 

$

3.1

 

$

2.5

 

$

1.1

 

$

0.6

 

$

68.3

 

Long-term portion of restructuring reserve

 

3.2

 

32.5

 

1.2

 

1.1

 

 

 

38.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated additional future charges for current restructuring projects:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated additional charges within one year

 

$

 

$

1.3

 

$

 

$

1.9

 

$

 

$

 

$

3.2

 

Estimated additional charges beyond one year

 

 

 

 

3.9

 

 

 

3.9

 

 

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

Cash charges:

 

 

 

2007 charges for 2004 initiatives

 

$

1.0

 

2007 charges for 2005 initiatives