HUNTSMAN INTERNATIONAL HOLDINGS LLC - 10-Q Quarterly Report

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TABLE OF CONTENTS

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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 333-88057

HUNTSMAN INTERNATIONAL HOLDINGS LLC
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		87-0630359 (I.R.S. Employer Identification No.
500 Huntsman Way Salt Lake City, Utah 84108 (801) 584-5700 (Address of principal executive offices and telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: 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 ý NO o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES o NO ý

On August 14, 2003, 1,000 member equity units of Huntsman International Holdings LLC were outstanding. There is no established trading market for Registrant's units of membership interest. All of Registrant's units of membership interest are held by affiliates.

HUNTSMAN INTERNATIONAL HOLDINGS LLC
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2003

TABLE OF CONTENTS


PART I		FINANCIAL INFORMATION
	ITEM 1.	Financial Statements
		Consolidated Balance Sheets (unaudited)
		Consolidated Statements of Operations and Comprehensive Loss (unaudited)
		Consolidated Statement of Equity (unaudited)
		Consolidated Statements of Cash Flows (unaudited)
		Notes to 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 6.	Exhibits and Reports on Form 8-K

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in Millions)

			June 30, 2003			December 31, 2002
ASSETS
Current assets:
	Cash and cash equivalents		$	86.4		$	75.4
	Accounts and notes receivable (net of allowance for doubtful accounts of $18.3 and $14.5, respectively)			542.7			467.9
	Inventories			625.7			561.3
	Prepaid expenses			17.2			22.0
	Deferred income taxes			31.2			31.2
	Other current assets			76.1			75.4

		Total current assets		1,379.3			1,233.2
Property, plant and equipment, net				3,119.3			3,071.1
Investment in unconsolidated affiliates				139.6			133.9
Intangible assets, net				254.0			266.4
Other noncurrent assets				353.9			339.5

		Total assets	$	5,246.1		$	5,044.1

LIABILITIES AND EQUITY
Current liabilities:
	Accounts payable (includes overdraft facility of $21.5 as of June 30, 2003)		$	345.4		$	314.8
	Accrued liabilities			553.3			523.8
	Current portion of long-term debt			1.3			43.9
	Other current liabilities			25.6			29.6

		Total current liabilities		925.6			912.1
Long-term debt				3,664.8			3,420.6
Deferred income taxes				218.4			215.1
Other noncurrent liabilities				155.7			158.4

		Total liabilities		4,964.5			4,706.2

Minority interests				2.8			—

Commitments and contingencies (Notes 15 and 16)
Equity:
	Member's equity, 1,000 units			565.5			565.5
	Retained earnings			(215.0	)		(80.2	)
	Accumulated other comprehensive loss			(71.7	)		(147.4	)

		Total equity		278.8			337.9

		Total liabilities and equity	$	5,246.1		$	5,044.1

See accompanying notes to consolidated financial statements.

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(Dollars in Millions)

			Three Months Ended June 30, 2003			Three Months Ended June 30, 2002			Six Months Ended June 30, 2003			Six Months Ended June 30, 2002
Revenues:
	Trade sales and services		$	1,238.6		$	1,084.4		$	2,435.8		$	2,006.0
	Related party sales			68.8			90.6			169.3			166.9

		Total revenues		1,307.4			1,175.0			2,605.1			2,172.9
Cost of goods sold				1,153.0			1,017.4			2,315.3			1,889.8

Gross profit				154.4			157.6			289.8			283.1
Expenses:
	Selling, general and administrative			91.4			81.7			179.5			159.4
	Research and development			12.4			13.7			24.6			26.0
	Other operating income			(8.2	)		(23.2	)		(7.7	)		(15.6	)
	Restructuring, plant closing costs and asset impairment charges			21.5			—			38.6			—

		Total expenses		117.1			72.2			235.0			169.8

Operating income				37.3			85.4			54.8			113.3
Interest expense				(88.7	)		(82.3	)		(178.5	)		(158.2	)
Interest income				—			0.3			0.6			0.5
Gain (loss) on sale of accounts receivable				(8.5	)		3.5			(18.1	)		(0.1	)
Other expense				(0.1	)		(0.4	)		(2.3	)		—

Income (loss) before income taxes				(60.0	)		6.5			(143.5	)		(44.5	)
Income tax benefit (expense)				0.8			(0.2	)		8.7			20.2
Minority interests in subsidiaries' income				—			1.0			—			0.2

Net income (loss)				(59.2	)		7.3			(134.8	)		(24.1	)
Other comprehensive income				70.6			103.5			75.7			82.6

Comprehensive income (loss)			$	11.4		$	110.8		$	(59.1	)	$	58.5

See accompanying notes to consolidated financial statements.

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

(Dollars in Millions)

	Member's Equity
	Member's Equity						Accumulated Other Comprehensive Loss
	Shares/ Units	Amount		Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance, January 1, 2003	1,000	$	565.5	$	(80.2	)	$	(147.4	)	$	337.9
Net loss			—		(134.8	)		—			(134.8	)
Other comprehensive income			—		—			75.7			75.7

Balance, June 30, 2003	1,000	$	565.5	$	(215.0	)	$	(71.7	)	$	278.8

See accompanying notes to consolidated financial statements.

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Millions)

		Six Months Ended June 30, 2003			Six Months Ended June 30, 2002
Cash Flows From Operating Activities:
Net income (loss)		$	(134.8	)	$	(24.1	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in earnings of investment in unconsolidated affiliates			(0.1	)		(0.1	)
Depreciation and amortization			137.7			118.9
Noncash restructuring, plant closing, and asset impairment charges			11.4			—
Noncash interest expense			58.0			49.9
Deferred income taxes			(12.2	)		(26.7	)
Gain on foreign currency transactions			(18.7	)		(24.5	)
Minority interests in subsidiaries			—			(0.2	)
Changes in operating assets and liabilities:
	Accounts and notes receivable		(20.5	)		(55.5	)
	Inventories		(36.5	)		67.3
	Prepaid expenses		5.6			(2.1	)
	Other current assets		(20.8	)		(0.3	)
	Other noncurrent assets		(5.6	)		4.2
	Accounts payable		0.9			33.3
	Accrued liabilities		5.1			(56.3	)
	Other current liabilities		(4.7	)		(3.6	)
	Other noncurrent liabilities		(12.8	)		0.3

Net cash (used in) provided by operating activities			(48.0	)		80.2

Investing Activities:
Acquisitions of minority interest			—			(9.0	)
Capital expenditures			(54.0	)		(94.8	)
Net cash received from unconsolidated affiliates			0.7			2.2
Advances to unconsolidated affiliates			(1.5	)		(1.6	)

Net cash used in investing activities			(54.8	)		(103.2	)

Financing Activities:
	Net borrowings under revolving loan facilities		138.2			121.1
	Issuance of senior notes		157.9			300.0
	Repayment of long-term debt		(195.3	)		(410.5	)
	Shares issued to minorities for cash		2.8			—
	Debt issuance costs		—			(10.3	)

	Net cash provided by financing activities		103.6			0.3

Effect of exchange rate changes on cash			10.2			5.1

Increase (decrease) in cash and cash equivalents			11.0			(17.6	)
Cash and cash equivalents at beginning of period			75.4			83.9

Cash and cash equivalents at end of period		$	86.4		$	66.3

Supplemental cash flow information:
	Cash paid for interest		104.1			103.3
	Cash paid for income taxes		7.9			3.8

See accompanying notes to consolidated financial statements.

HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. General

Description of Business

Huntsman International Holdings LLC and its subsidiaries (collectively, the "Company") are global manufacturers and marketers of differentiated and commodity chemicals. The Company is a Delaware limited liability company and its membership interests are owned 100%, directly and indirectly, by HMP Equity Holdings Corporation ("HMP").

HMP is a Delaware corporation and is owned 100% by Huntsman Group Inc., a Delaware corporation. Huntsman Group Inc. is owned 100% by Huntsman Holdings, LLC ("Huntsman Holdings"), a Delaware limited liability company. The voting membership interests of Huntsman Holdings are owned by the Huntsman family, MatlinPatterson Global Opportunities Partners, L.P. ("GOP"), Consolidated Press (Finance) Limited ("CPH") and certain members of the Company's senior management. In addition, Huntsman Holdings has issued certain non-voting preferred units to Huntsman Holdings Preferred Member LLC, which, in turn, is owned by GOP (indirectly), CPH, the Huntsman Cancer Foundation, certain members of the Company's senior management and certain members of the Huntsman family. The Huntsman family has board and operational control of the Company.

Huntsman International LLC, a Delaware limited liability company ("HI"), is the Company's direct, wholly-owned operating subsidiary. The Company operates through four principal operating segments: Polyurethanes, Performance Products, Pigments and Base Chemicals.

Interim Financial Statements

The accompanying consolidated financial statements of the Company are unaudited. However, in management's opinion, 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 shown, have been made. Results for interim periods are not necessarily indicative of those to be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

2. Recently Adopted Financial Accounting Standards

In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred by capitalizing it as part of the carrying amount of the long-lived assets. As required by SFAS No. 143, the Company adopted this new accounting standard on January 1, 2003. The Company believes this statement's impact will not be significant; however, standard-setters continue to debate the statement's applicability to assets where the timing of any ultimate obligation is indefinite.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Other Technical Corrections." In addition to amending or rescinding pronouncements to make various technical corrections, clarify meanings or describe applicability, SFAS No. 145 precludes companies from recording gains or losses from extinguishment of

debt as an extraordinary item. The Company was required to adopt this statement as of January 1, 2003. The adoption of SFAS No. 145 did not have a material effect on the Company's consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities." SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. The Company adopted this pronouncement in the first quarter of 2003. The adoption of SFAS No. 146 on January 1, 2003 did not have a material effect on the Company's consolidated financial statements.

In January 2003, the FASB issued Financial Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others." FIN No. 45 requires recognition of a liability for the obligation undertaken upon issuing a guarantee. This liability would be recorded at the inception date of the guarantee and would be measured at fair value. The disclosure provisions of the interpretation are effective for the financial statements as of December 31, 2002. The liability recognition provisions apply prospectively to any guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 did not have a material effect on the Company's consolidated financial statements.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 addresses the requirements for business enterprises to consolidate related entities, for which they do not have controlling interests through voting or other rights, if they are determined to be the primary beneficiary as a result of variable economic interests. FIN No. 46 provides guidance for determining the primary beneficiary for entities with multiple economic entities with multiple economic interests. Transfers to a qualifying special purpose entity are not subject to this interpretation. FIN No. 46 is effective at the time of investment for interests obtained in a variable economic entity after January 31, 2003. The adoption of FIN No. 46 is not expected to have a material impact on the Company's consolidated earnings, financial position, or cash flows.

In May 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments and hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, with this guidance applied prospectively. This statement had no impact on the Company's results of operations or financial position at June 30, 2003 and the Company does not expect this statement to have a material impact on its consolidated financial statements.

3. Inventories

Inventories as of June 30, 2003 and December 31, 2002 consisted of the following (dollars in millions):

	June 30 2003		December 31, 2002
Raw materials and supplies	$	142.1	$	149.6
Work in progress		17.9		25.9
Finished goods		465.7		385.8

Total	$	625.7	$	561.3

4. Property, Plant and Equipment

The cost and accumulated depreciation of property, plant and equipment are as follows (dollars in millions):

	June 30 2003			December 31, 2002
Land	$	45.1		$	42.9
Buildings		184.0			157.7
Plant and equipment		3,599.8			3,446.3
Construction in progress		202.6			172.7

Total		4,031.5			3,819.6
Less accumulated depreciation		(912.2	)		(748.5	)

Net	$	3,119.3		$	3,071.1

5. Investments in Unconsolidated Affiliates

The Company's ownership percentage and investments in unconsolidated affiliates, primarily manufacturing joint ventures, are as follows (in millions):

	June 30, 2003		December 31, 2002
Louisiana Pigment Company, L.P. (50%)	$	130.7	$	131.4
Rubicon, Inc. (50%)		1.4		1.3
BASF Huntsman Shanghai Isocyanate Investment BV (50%)		6.1		—
Others		1.4		1.2

Total	$	139.6	$	133.9

6. Intangible Assets

The gross carrying amount and accumulated amortization of intangible assets as of June 30, 2003 were as follows (dollars in millions):

	June 30, 2003						December 31, 2002
	Carrying Amount		Accumulated Amortization		Net		Carrying Amount		Accumulated Amortization		Net
Patents, trademarks, and technology	$	314.6	$	101.8	$	212.8	$	312.3	$	89.9	$	222.4
Non-compete agreements		49.4		34.7		14.7		49.1		30.9		18.2
Other intangibles		30.6		4.1		26.5		28.9		3.1		25.8

Total	$	394.6	$	140.6	$	254.0	$	390.3	$	123.9	$	266.4

7. Other Noncurrent Assets

Other noncurrent assets consist of the following (in millions):

	June 30, 2003		December 31, 2002
Prepaid pension assets	$	156.4	$	146.2
Debt issuance costs		59.0		60.7
Capitalized turnaround expense		49.2		48.3
Receivables from affiliates		16.5		18.6
Spare parts inventory		52.4		46.2
Other noncurrent assets		20.4		19.5

Total	$	353.9	$	339.5

8. Accrued Liabilities

Accrued liabilities consist of the following (in millions):

	June 30, 2003		December 31, 2002
Raw materials and services	$	202.0	$	217.7
Interest		78.8		61.3
Taxes (income, property and VAT)		40.4		41.4
Payroll, severance and related costs		82.6		67.4
Volume and rebates accruals		44.8		52.5
Restructuring and plant closing costs		22.9		7.1
Other miscellaneous accruals		81.8		76.4

Total	$	553.3	$	523.8

9. Other Noncurrent Liabilities

Other noncurrent liabilities consist of the following (in millions):

	June 30, 2003		December 31, 2002
Pension liabilities	$	89.0	$	82.3
Other postretirement benefits		11.8		10.8
Environmental accruals		9.0		19.3
Payable to affiliate		38.3		37.9
Other noncurrent liabilities		7.6		8.1

Total	$	155.7	$	158.4

10. Restructuring, Plant Closing and Asset Impairment Charges

As of December 31, 2002, the Company had a reserve for restructuring and plant closing costs related to the closure of the Polyurethanes Shepton Mallet, U.K. manufacturing facility of $7.1 million recorded in accrued liabilities. The entire amount was related to workforce reductions. During the first half of 2003, the Company made cash payments of $3.4 million relating to this charge.

On March 11, 2003, the Company announced that, in its Polyurethanes segment, it is integrating its global flexible products division into its global derivatives division, and it recorded a charge of $17.1 million in the first quarter 2003. In June 2003, the Polyurethanes segment announced a further restructuring at its Rozenburg, Netherlands site. This charge represents severance costs and is estimated to total approximately $10.4 million, which will be recorded through December 2005. During the three months ended June 30, 2003, $1.4 million was recorded as a restructuring charge. These Polyurethanes