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HUNTSMAN INTERNATIONAL LLC FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 TABLE OF CONTENTS
UNITED STATES
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 September 30, 2004 |
|
OR |
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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Commission file number 333-85141
HUNTSMAN INTERNATIONAL LLC
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
87-0630358 (IRS Employer Identification No.) |
|
500 Huntsman Way Salt Lake City, Utah 84108 (801) 584-5700 (Address of principal executive offices and telephone number) |
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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 November 15, 2004, 1,000 units of membership interest of the registrant were outstanding. There is no established trading market for the registrant's units of membership interest. All of the registrant's units of membership interest are held by an affiliate.
HUNTSMAN INTERNATIONAL LLC
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
2
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| |
September 30, 2004 |
December 31, 2003 |
||||||
|---|---|---|---|---|---|---|---|---|
| |
(Dollars in Millions) |
|||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 147.7 | $ | 97.8 | ||||
| Trade receivables (net of allowance for doubtful accounts of $10.0 and $13.4, respectively) | 691.1 | 538.5 | ||||||
| Accounts receivable—affiliates | 21.4 | 25.9 | ||||||
| Inventories | 648.8 | 596.9 | ||||||
| Prepaid expenses | 26.0 | 23.6 | ||||||
| Deferred income taxes | — | 3.0 | ||||||
| Other current assets | 41.1 | 83.6 | ||||||
| Total current assets | 1,576.1 | 1,369.3 | ||||||
Property, plant and equipment, net |
3,043.7 |
3,256.2 |
||||||
| Investment in unconsolidated affiliates | 146.0 | 138.7 | ||||||
| Intangible assets, net | 256.2 | 283.4 | ||||||
| Other noncurrent assets | 443.5 | 445.1 | ||||||
| Total assets | $ | 5,465.5 | $ | 5,492.7 | ||||
LIABILITIES AND MEMBER'S EQUITY |
||||||||
Current liabilities: |
||||||||
| Trade payables (including overdraft facilities of nil and $7.5, respectively) | $ | 484.8 | $ | 483.6 | ||||
| Accounts payable—affiliates | 92.6 | 77.7 | ||||||
| Accrued liabilities | 354.0 | 387.7 | ||||||
| Current portion of long-term debt | 23.1 | 1.8 | ||||||
| Total current liabilities | 954.5 | 950.8 | ||||||
Long-term debt |
2,997.8 |
2,925.3 |
||||||
| Deferred income taxes | 169.3 | 234.8 | ||||||
| Other noncurrent liabilities | 232.4 | 224.5 | ||||||
| Total liabilities | 4,354.0 | 4,335.4 | ||||||
| Minority interests | 6.1 | 3.6 | ||||||
Commitments and contingencies (Notes 15 and 17) |
||||||||
| Member's equity: | ||||||||
| Member's equity, 1,000 units | 1,026.1 | 1,026.1 | ||||||
| Retained earnings | 9.1 | 55.6 | ||||||
| Accumulated other comprehensive income | 70.2 | 72.0 | ||||||
| Total member's equity | 1,105.4 | 1,153.7 | ||||||
| Total liabilities and member's equity | $ | 5,465.5 | $ | 5,492.7 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| |
Three Months Ended Sept. 30, 2004 |
Three Months Ended Sept. 30, 2003 |
Nine Months Ended Sept. 30, 2004 |
Nine Months Ended Sept. 30, 2003 |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
(As Restated, see Note 19) |
|
(As Restated, see Note 19) |
|||||||||||
| |
(Dollars in Millions) |
||||||||||||||
| Revenues: | |||||||||||||||
| Trade sales | $ | 1,602.2 | $ | 1,245.1 | $ | 4,601.1 | $ | 3,779.4 | |||||||
| Related party sales | 38.2 | 19.9 | 142.1 | 69.4 | |||||||||||
| Tolling fees | 11.2 | 10.7 | 30.2 | 32.0 | |||||||||||
| Total revenues | 1,651.6 | 1,275.7 | 4,773.4 | 3,880.8 | |||||||||||
| Cost of goods sold | 1,424.9 | 1,136.3 | 4,167.2 | 3,445.6 | |||||||||||
| Gross profit | 226.7 | 139.4 | 606.2 | 435.2 | |||||||||||
Expenses: |
|||||||||||||||
| Selling, general and administrative | 83.9 | 90.5 | 269.7 | 276.0 | |||||||||||
| Research and development | 9.8 | 12.6 | 30.8 | 37.2 | |||||||||||
| Other operating expense (income) | 11.8 | (0.9 | ) | 31.4 | (41.3 | ) | |||||||||
| Restructuring, plant closing costs and impairments | 37.9 | 4.8 | 171.5 | 43.4 | |||||||||||
| Total expenses | 143.4 | 107.0 | 503.4 | 315.3 | |||||||||||
| Operating income | 83.3 | 32.4 | 102.8 | 119.9 | |||||||||||
Interest expense, net |
(60.5 |
) |
(61.4 |
) |
(192.4 |
) |
(189.1 |
) |
|||||||
| Loss on accounts receivable securitization program | (3.7 | ) | (3.4 | ) | (10.2 | ) | (23.9 | ) | |||||||
| Other income (expense) | — | 1.1 | (0.2 | ) | (1.2 | ) | |||||||||
| Income (loss) before income taxes | 19.1 | (31.3 | ) | (100.0 | ) | (94.3 | ) | ||||||||
| Income tax benefit | 61.8 | 5.3 | 53.5 | 14.0 | |||||||||||
| Net income (loss) | 80.9 | (26.0 | ) | (46.5 | ) | (80.3 | ) | ||||||||
Other comprehensive income (loss) |
11.9 |
18.6 |
(1.8 |
) |
94.3 |
||||||||||
| Comprehensive income (loss) | $ | 92.8 | $ | (7.4 | ) | $ | (48.3 | ) | $ | 14.0 | |||||
See accompanying notes to unaudited consolidated financial statements.
4
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBER'S EQUITY (UNAUDITED)
| |
Member's Equity |
Retained Earnings (Accumulated Deficit) |
Accumulated Other Comprehensive Income (Loss) |
|
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Units |
Amount |
Total |
||||||||||||
| |
(Dollars in Millions) |
||||||||||||||
| Balance, January 1, 2004 | 1,000 | $ | 1,026.1 | $ | 55.6 | $ | 72.0 | $ | 1,153.7 | ||||||
Net loss |
— |
— |
(46.5 |
) |
— |
(46.5 |
) |
||||||||
| Other comprehensive loss | — | — | — | (1.8 | ) | (1.8 | ) | ||||||||
| Balance, September 30, 2004 | 1,000 | $ | 1,026.1 | $ | 9.1 | $ | 70.2 | $ | 1,105.4 | ||||||
See accompanying notes to unaudited consolidated financial statements.
5
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| |
Nine Months Ended September 30, 2004 |
Nine Months Ended September 30, 2003 |
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|---|---|---|---|---|---|---|---|---|
| |
|
(As Restated, see Note 19) |
||||||
| |
(Dollars in Millions) |
|||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (46.5 | ) | $ | (80.3 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization | 236.5 | 205.4 | ||||||
| Provision on loss for accounts receivable | 2.5 | 3.1 | ||||||
| Noncash restructuring, plant closing and asset impairment charges | 89.1 | 11.4 | ||||||
| Write-off of plant and equipment | — | 3.0 | ||||||
| Noncash interest expense | 13.3 | 11.9 | ||||||
| Deferred income taxes | (71.1 | ) | (22.6 | ) | ||||
| Unrealized gain on foreign currency transactions | (20.5 | ) | (40.5 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
| Accounts receivable | (79.0 | ) | (33.7 | ) | ||||
| Change in receivables sold, net | (64.9 | ) | 19.9 | |||||
| Inventories | (54.9 | ) | (4.5 | ) | ||||
| Prepaid expenses | (2.5 | ) | (12.5 | ) | ||||
| Other current assets | 46.1 | (16.4 | ) | |||||
| Other noncurrent assets | (3.1 | ) | (1.2 | ) | ||||
| Accounts payable | 31.6 | (46.6 | ) | |||||
| Accrued liabilities | (14.4 | ) | (45.5 | ) | ||||
| Other current liabilites | (6.6 | ) | (1.5 | ) | ||||
| Other noncurrent liabilities | 3.4 | (7.5 | ) | |||||
| Net cash provided by (used in) operating activities | 59.0 | (58.1 | ) | |||||
Investing activities: |
||||||||
| Capital expenditures | (91.6 | ) | (95.7 | ) | ||||
| Investment in unconsolidated affiliate | (11.8 | ) | (6.1 | ) | ||||
| Net cash received from unconsolidated affiliates | 9.1 | 2.1 | ||||||
| Advances to unconsolidated affiliates | (1.8 | ) | (2.2 | ) | ||||
| Net cash used in investing activities | (96.1 | ) | (101.9 | ) | ||||
Financing activities: |
||||||||
| Net (repayments) borrowings under revolving loan facilities | (22.0 | ) | 132.0 | |||||
| Issuance of senior notes | — | 157.9 | ||||||
| Proceeds from long-term debt | 1,369.6 | — | ||||||
| Repayment of long-term debt | (1,243.4 | ) | (125.9 | ) | ||||
| Capital contributions by minority shareholders | 2.7 | 2.8 | ||||||
| Repayment under overdraft facility | (7.5 | ) | — | |||||
| Debt issuance costs | (13.5 | ) | (4.3 | ) | ||||
| Net cash provided by financing activities | 85.9 | 162.5 | ||||||
| Effect of exchange rate changes on cash | 1.1 | 3.2 | ||||||
| Increase in cash and cash equivalents | 49.9 | 5.7 | ||||||
| Cash and cash equivalents at beginning of period | 97.8 | 75.4 | ||||||
| Cash and cash equivalents at end of period | $ | 147.7 | $ | 81.1 | ||||
Supplemental cash flow information: |
||||||||
| Cash paid for interest | $ | 225.3 | $ | 204.5 | ||||
| Cash paid for income taxes | $ | 7.9 | $ | 10.3 | ||||
See accompanying notes to unaudited consolidated financial statements.
6
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
Description of Business
Huntsman International LLC (the "Company," including its subsidiaries, unless the context otherwise requires) is a global manufacturer and marketer of differentiated and commodity chemicals. The Company manages its business through four segments: Polyurethanes, Performance Products, Pigments and Base Chemicals. The Company manufactures its products at facilities located in North America, Europe, Asia and Africa and sells its products throughout the world.
Company
The Company is a wholly-owned subsidiary of Huntsman International Holdings LLC ("HIH"). All of the membership interests of HIH are owned directly and indirectly by HMP Equity Holdings Corporation ("HMP"). HMP is 100% owned by Huntsman Group Inc., subject to warrants which, if exercised, would entitle the holders thereof to acquire up to 12% of the common equity of HMP. Huntsman Group Inc. is 100% owned by Huntsman Holdings, LLC ("Huntsman Holdings"). The voting membership interests of Huntsman Holdings are owned by the Huntsman family, MatlinPatterson Global Opportunities Partners, L.P. ("MatlinPatterson"), Consolidated Press (Finance) Limited ("Consolidated Press") and certain members of 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 MatlinPatterson (indirectly), Consolidated Press, the Huntsman Cancer Foundation, certain members of senior management and certain members of the Huntsman family. Huntsman Holdings has also issued certain non-voting preferred units to the Huntsman family, MatlinPatterson, and Consolidated Press that track the performance of an affiliate, Huntsman Advanced Materials LLC. Huntsman Advanced Materials LLC's results of operations are not included in these consolidated financial statements. The Huntsman family has board and operational control of the Company.
Proposed Initial Public Offering of Parent Company
On September 13, 2004, the Company's ultimate parent announced a proposed initial public offering of common stock. A registration statement relating to the proposed offering is expected to be filed during the fourth quarter of 2004.
Interim Financial Statements
The unaudited interim consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States of America ("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 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, 2003.
7
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 consolidated financial statements for prior periods have been reclassified to conform with the current presentation.
2. Recently Issued Financial Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities." FIN 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. Transfers to a qualifying special purpose entity are not subject to this interpretation. In December 2003, the FASB issued a complete replacement of FIN 46 (FIN 46R) to clarify certain complexities. The Company is required to adopt this financial interpretation on January 1, 2005. The adoption of the standard may require the consolidation of the Company's Rubicon Inc. joint venture; however, the consolidation of the joint venture would not be significant to the financial statements.
3. Inventories
Inventories as of September 30, 2004 and December 31, 2003 consisted of the following:
| |
September 30, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| |
(Dollars in Millions) |
|||||
| Raw materials and supplies | $ | 156.4 | $ | 180.2 | ||
| Work in progress | 23.6 | 18.0 | ||||
| Finished goods | 468.8 | 398.7 | ||||
| Total | 648.8 | 596.9 | ||||
In the normal course of operations, the Company exchanges raw materials with other companies. No gains or losses are recognized on these exchanges, and the net open exchange positions are valued at the Company's cost. The amount included in inventory under open exchange agreements receivable by the Company at September 30, 2004 was $0.5 million (2.4 million pounds of feedstock and products), which represented the amount to be received by the Company under open exchange agreements. The amount deducted from inventory under open exchange agreements owed by the Company at December 31, 2003 was $6.6 million (18.7 million pounds of feedstock and products), which represented the amount payable by the Company under open exchange agreements.
8
4. Property, Plant and Equipment
The cost and accumulated depreciation of property, plant and equipment are as follows:
| |
September 30, 2004 |
December 31, 2003 |
|||||
|---|---|---|---|---|---|---|---|
| |
(Dollars in Millions) |
||||||
| Land | $ | 53.0 | $ | 49.4 | |||
| Buildings | 199.4 | 201.0 | |||||
| Plant and equipment | 3,913.9 | 3,938.9 | |||||
| Construction in progress | 161.7 | 156.1 | |||||
| Total | 4,328.0 | 4,345.4 | |||||
| Less accumulated depreciation | (1,284.3 | ) | (1,089.2 | ) | |||
| Net | $ | 3,043.7 | $ | 3,256.2 | |||
Property, plant and equipment includes gross assets acquired under capital leases of $19.5 million and $19.0 million at September 30, 2004 and December 31, 2003, respectively; related amounts included in accumulated depreciation were $7.2 million and $5.3 million at September 30, 2004 and December 31, 2003, respectively.
5. Investments in Unconsolidated Affiliates
The Company's ownership percentage and investments in unconsolidated affiliates, primarily manufacturing joint ventures, are as follows:
| |
September 30, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| |
(Dollars in Millions) |
|||||
| Louisiana Pigment Company, L.P. (50%) | $ | 121.3 | $ | 130.4 | ||
| BASF Huntsman Shanghai Isocyanate Investment BV (50%) | 17.9 | 6.1 | ||||
| Rubicon, Inc. (50%) | 5.6 | 1.0 | ||||
| Others | 1.2 | 1.2 | ||||
| Total | $ | 146.0 | $ | 138.7 | ||
As noted, the Company owns 50% of BASF Huntsman Shanghai Isocyanate Investment BV. BASF Huntsman Shanghai Isocyanate Investment BV owns a 70% interest in a manufacturing joint venture, thus giving the Company an indirect 35% interest in the manufacturing joint venture.
6. Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets were as follows:
| |
September 30, 2004 |
December 31, 2003 |
||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Carrying Amount |
Accumulated Amortization |
Net |
Carrying Amount |
Accumulated Amortization |
Net |
||||||||||||
| |
(Dollars in Millions) |
|||||||||||||||||
| Patents, trademarks, and technology | $ | 385.5 | $ | 136.4 | $ | 249.1 | $ | 389.2 | $ | 116.9 | $ | 272.3 | ||||||
| Non-compete agreements | 49.6 | 42.5 | 7.1 | 49.6 | 38.5 | 11.1 | ||||||||||||
| Total | $ | 435.1 | $ | 178.9 | $ | 256.2 | $ | 438.8 | $ | 155.4 | $ | 283.4 | ||||||
9
Amortization expense for intangible assets for the three and nine month periods ended September 30, 2004 and 2003 was $6.6 million and $20.4 million, respectively, and $7.6 million and $24.4 million, respectively. Estimated future amortization expense for intangible assets through December 31, 2008 is $25.5 million annually in 2004, 2005 and 2006 and $23.5 million annually through 2008.
7. Other Noncurrent Assets
Other noncurrent assets consist of the following:
| |
September 30, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| |
(Dollars in Millions) |
|||||
| Prepaid pension assets | $ | 242.5 | $ | 235.1 | ||
| Debt issuance costs | 56.1 | 54.4 | ||||
| Capitalized turnaround expense | 59.6 | 52.6 | ||||
| Receivables from affiliates | 17.4 | 13.5 | ||||
| Spare parts inventory | 49.7 | 55.6 | ||||
| Other noncurrent assets | 18.2 | 33.9 | ||||
| Total | $ | 443.5 | $ | 445.1 | ||
8. Accrued Liabilities
Accrued liabilities consist of the following:
| |
September 30, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| |
(Dollars in Millions) |
|||||
| Payroll and related costs | $ | 78.7 | $ | 77.1 | ||
| Interest | 36.2 | 78.5 | ||||
| Volume and rebates accruals | 57.6 | 64.8 | ||||
| Income tax payable | 23.8 | 35.5 | ||||
| Taxes (property and VAT) | 31.8 | 32.0 | ||||
| Restructuring and plant closing costs | 78.7 | 22.5 | ||||
| Interest and commodity hedging accruals | 2.0 | 10.8 | ||||
| Environmental accruals | 5.1 | 5.7 | ||||
| Other miscellaneous accruals | 40.1 | 60.8 | ||||
| Total | $ | 354.0 | $ | 387.7 | ||
9. Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following:
| |
September 30, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| |
(Dollars in Millions) |
|||||
| Pension liabilites | $ | 167.1 | $ | 149.0 | ||
| Other postretirement benefits | 10.8 | 11.8 | ||||
| Environmental accruals | ||||||