================================================================================
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 September 30, 2001
OR
[_] 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 333-85141
HUNTSMAN INTERNATIONAL LLC
(Exact name of registrant as specified in its charter)
Delaware 87-0630358
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Huntsman Way
Salt Lake City, Utah 84108
(801) 584-5700
(Address of principal executive offices and telephone number)
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 X No
----- -----
On November 14, 2001, 1,000 member equity units of Huntsman International LLC
were outstanding.
================================================================================
HUNTSMAN INTERNATIONAL LLC
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION............................................................................. 2
Item 1. Financial Statements........................................................................ 2
Consolidated Balance Sheets................................................................. 2
Consolidated Statements of Operations and Comprehensive Income (Loss)....................... 3
Consolidated Statements of Equity........................................................... 4
Consolidated Statements of Cash Flows....................................................... 5
Notes to Consolidated Financial Statements.................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 28
PART II - OTHER INFORMATION................................................................................ 29
Item 3. Defaults Upon Senior Securities............................................................. 29
Item 6. Exhibits and Reports on Form 8-K............................................................ 30
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in Millions)
- --------------------------------------------------------------------------------
September 30, 2001 December 31, 2000
-------------------- -------------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 42.7 $ 66.1
Accounts and notes receivable (net of
allowance for doubtful accounts of
$14.6 and $10.6, respectively) 590.7 553.9
Inventories 505.8 496.4
Prepaid expenses 15.8 15.2
Deferred income taxes 0.9 0.9
Other current assets 60.6 69.6
-------------------- -------------------
Total current assets 1,216.5 1,202.1
Property, plant and equipment, net 2,879.7 2,703.9
Investment in unconsolidated affiliates 151.5 156.7
Intangible assets, net 457.3 434.7
Other noncurrent assets 289.5 318.0
-------------------- -------------------
Total assets $ 4,994.5 $ 4,815.4
==================== ===================
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable $ 296.3 $ 313.3
Accrued liabilities 486.8 517.0
Current portion of long-term debt 1,550.2 7.5
Other current liabilities 67.2 32.4
-------------------- -------------------
Total current liabilities 2,400.5 870.2
Long-term debt 1,026.4 2,343.0
Deferred income taxes 276.2 332.1
Other noncurrent liabilities 134.3 131.8
-------------------- -------------------
Total liabilities 3,837.4 3,677.1
-------------------- -------------------
Minority interests 9.5 9.6
-------------------- -------------------
Equity:
Member's equity, 1,000 units 1,026.1 1,026.1
Retained earnings 288.2 223.3
Accumulated other comprehensive loss (166.7) (120.7)
-------------------- -------------------
Total equity 1,147.6 1,128.7
-------------------- -------------------
Total liabilities and equity $ 4,994.5 $ 4,815.4
==================== ===================
See accompanying notes to consolidated financial statements
2
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
- ---------------------------------------------------------------------
(UNAUDITED) (Dollars in Millions)
- ---------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
-------------- -------------- --------------- ---------------
Revenues:
Trade sales and services $ 1,043.6 $ 999.5 $ 3,250.6 $ 2,956.8
Related party sales 85.5 126.7 301.6 358.7
Tolling fees 4.3 10.7 16.9 31.0
------------- -------------- --------------- ---------------
Total revenues 1,133.4 1,136.9 3,569.1 3,346.5
Cost of goods sold 993.8 941.5 3,092.9 2,764.0
------------- -------------- --------------- ---------------
Gross profit 139.6 195.4 476.2 582.5
Expenses:
Selling, general and administrative 78.3 73.0 232.7 205.2
Research and development 15.2 15.2 47.1 44.9
------------- -------------- --------------- ---------------
Total expenses 93.5 88.2 279.8 250.1
------------- -------------- --------------- ---------------
Operating income 46.1 107.2 196.4 332.4
Interest expense, net 58.1 56.0 172.3 165.0
Loss on sale of accounts receivable 2.1 -- 7.5 --
Other (income) expense 1.1 0.7 (4.4) 2.4
------------- -------------- --------------- ---------------
Income (loss) before income taxes (15.2) 50.5 21.0 165.0
Income tax expense (benefit) (50.2) 8.7 (47.0) 21.6
Minority interests in subsidiaries 0.6 0.8 1.6 2.1
------------- -------------- --------------- ---------------
Income before accounting change 34.4 41.0 66.4 141.3
Cumulative effect of accounting change -- -- (1.5) --
------------- -------------- --------------- ---------------
Net income 34.4 41.0 64.9 141.3
Other comprehensive income (loss) -
Foreign currency translation
adjustments 64.8 (74.1) (26.7) (156.1)
Cumulative effect of accounting change -- -- (1.1) --
Net unrealized loss on derivative
instruments (7.5) -- (18.2) --
------------- -------------- --------------- ---------------
Comprehensive income (loss) $ 91.7 $ (33.1) $ 18.9 $ (14.8)
============= ============== =============== ===============
See accompanying notes to consolidated financial statements
3
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) (Dollars in Millions)
- --------------------------------------------------------------------------------
Accumulated
Other
Member's Equity Retained Comprehensive
---------------
Units Amount Earnings Loss Total
----------- ----------- ---------- --------------- -------------
Balance, January 1, 2001 1,000 $ 1,026.1 $ 223.3 $ (120.7) $ 1,128.7
Net income 64.9 64.9
Other comprehensive loss (46.0) (46.0)
----------- ----------- ---------- --------------- -------------
Balance, September 30, 2001 1,000 $ 1,026.1 $ 288.2 $ (166.7) $ 1,147.6
=========== =========== ========== =============== =============
See accompanying notes to consolidated financial statements
4
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in Millions)
- --------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, 2001 September 30, 2000
-------------------- --------------------
Cash flows from operating activities:
Net income $ 64.9 $ 141.3
Adjustments to reconcile net income to net cash
from operating activities:
Equity in earnings of investment in
unconsolidated affiliates (0.1) (0.2)
Minority interests in subsidiaries 1.6 2.1
Gain on foreign currency transactions (5.8) (4.8)
Depreciation and amortization 177.5 160.0
Deferred income taxes (64.1) 5.0
Changes in operating assets and liabilities -
net of effects of acquisitions:
Accounts and notes receivables 43.3 (41.5)
Inventories 23.4 (72.0)
Prepaid expenses (0.4) (2.4)
Other current assets 19.3 (10.4)
Accounts payable (89.4) 21.1
Accrued liabilities (35.6) 9.3
Other current liabilities 33.2 (2.6)
Other noncurrent assets 20.8 (27.7)
Other noncurrent liabilities (1.1) 19.0
-------------------- --------------------
Net cash provided by operating activities 187.5 196.2
-------------------- --------------------
Investing activities:
Acquisition of businesses (209.5) (146.9)
Capital expenditures (198.7) (125.4)
Cash received from unconsolidated affiliates 5.7 7.5
Advances to unconsolidated affiliates (2.2) (9.0)
-------------------- --------------------
Net cash used in investing activities (404.7) (273.8)
-------------------- --------------------
Financing activities:
Borrowings under credit facilities 6.4 100.0
Repayments of credit facilities (18.2) (38.1)
Issuance of senior subordinated notes 233.2 --
Cash distributions to parent -- (8.0)
Debt issuance costs (5.3) --
-------------------- --------------------
Net cash provided by financing activities 216.1 53.9
-------------------- --------------------
Effect of exchange rate changes on cash (22.3) (12.1)
-------------------- --------------------
Decrease in cash and cash equivalents (23.4) (35.8)
Cash and cash equivalents at beginning of period 66.1 138.9
-------------------- --------------------
Cash and cash equivalents at end of period $ 42.7 $ 103.1
==================== ====================
See accompanying notes to consolidated financial statements
5
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Huntsman International LLC ("Huntsman International" or the "Company") is a
global manufacturer and marketer of specialty and commodity chemicals through
three principal businesses: Specialty Chemicals, Petrochemicals and Titanium
Dioxide ("Tioxide"). The Company is a wholly-owned subsidiary of Huntsman
International Holdings LLC ("Holdings").
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, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include its
majority-owned subsidiaries. Intercompany transactions and balances are
eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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 2000 amounts have been reclassified to conform to the 2001
presentation.
3. INVENTORIES
Inventories consist of the following (dollars in millions):
September 30, 2001 December 31, 2000
-------------------- -------------------
Raw materials $ 125.9 $ 149.5
Work in progress 22.5 22.8
Finished goods 336.4 302.5
-------------------- -------------------
Subtotal 484.8 474.8
Materials and supplies 21.0 21.6
-------------------- -------------------
Net $ 505.8 $ 496.4
==================== ===================
6
4. DEBT
As of September 30, 2001, the Company was not in compliance with one of the
financial covenants contained in its senior secured credit facilities (the
"Credit Facilities"). As a result, the Company currently cannot borrow
additional amounts under, or otherwise have access to, the Credit Facilities.
Management is pursuing waivers under and amendments to the Credit Facilities
which, among other things, would modify the financial covenants. Although there
can be no assurance that such waivers and amendments will be obtained, the
Company believes that it will obtain the necessary waivers and amendments.
Unless and until such amendments and waivers are obtained, the lenders could
pursue certain remedies under the Credit Facilities, including (i) accelerating
the debt due under the Credit Facilities, (ii) foreclosing on the pledge of the
Company's equity, and (iii) requiring Holdings to fulfill its obligations under
its guarantee. As a result, the Company has reclassified the outstanding
borrowings under the Credit Facilities to current portion of long-term debt.
5. DERIVATIVES AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivative instruments as assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative instrument depends on the use of the
instrument.
The Company is exposed to market risks, such as changes in interest rates,
currency exchange rates and commodity pricing. The Company enters into
transactions, including transactions involving derivative instruments, to manage
these risks. The overall risk management philosophy of the Company is to manage
the downside risks of these activities. Primary goals of the Company's risk
management activities include: (1) reducing the impact of fluctuations in
variable interest rates and meeting the requirements of certain credit
agreements; (2) reducing the short-term impact from certain movements in foreign
exchange rates on earnings; (3) reducing the variability in the purchase price
of certain feedstocks; and (4) hedging the net investments position in euro
functional currency entities.
Interest Rate Hedging
Through the Company's borrowing activities, it is exposed to interest rate
risk. Such risk arises due to the structure of the Company's debt portfolio,
including the duration of the portfolio and the mix of fixed and floating
interest rates. The Company manages interest rate risk by managing the mix and
rate characteristics of various interest bearing liabilities and by entering
into interest rate swaps, collars and options.
As of September 30, 2001, the Company maintained interest rate swaps and
collars with a fair value of approximately $15.7 million which have been
designated as cash flow hedges of variable rate debt obligations. These amounts
are recorded as other current liabilities in the accompanying balance sheet. For
the nine months ended September 30, 2001, the effective portion of unrealized
losses of approximately $16.7 million were recorded as a component of other
comprehensive income, with the ineffective portion of approximately $1.0 million
recorded as additional interest income in the accompanying statement of
operations.
For the nine months ended September 30, 2001, swaps and collars not
designated as hedges are also recorded at fair value on the balance sheet and
resulted in an increase in interest expense and other current liabilities of
approximately $9.1 million in the accompanying financial statements.
Foreign Currency Rate Hedging
The Company enters into foreign currency derivative instruments to minimize
the short-term impact of movements in foreign currency rates. These contracts
are not designated as hedges for financial reporting purposes and are recorded
at fair value. As of September 30, 2001, the Company maintained forward
contracts with a fair value of $0.3 million. These amounts are recorded as other
current liabilities in the accompanying balance sheet.
7
Commodity Price Hedging
Because feedstocks used by the Company are subject to price volatility, the
Company uses commodity futures and swaps to manage the risk associated with
certain of these feedstocks. These instruments are designated as cash flow
hedges of future inventory purchases, fair value hedges of inventory currently
held and trading activities. The mark-to-market gains and losses of qualifying
cash flow hedges are recorded as a component of other comprehensive income. The
mark-to-market gains and losses of non-qualifying, excluded and ineffective
portions of hedges are recorded in cost of goods sold in the accompanying
statements of operations. For the nine months ended September 30, 2001,
contracts designated as cash flow hedges had a fair value of approximately $0.1
million recorded as other current assets and approximately $2.8 million recorded
as other current liabilities in the accompanying balance sheet. Contracts
designated as fair value hedges had a fair value of approximately $2.1 million
recorded as other current assets. Contracts not designated as hedges had a fair
value of approximately $1.5 million recorded as other current assets and $3.1
million recorded as other current liabilities. The net impact of $1.6 million
was recorded as a reduction of cost of goods sold in the accompanying statements
of operations.
Net Investment Hedging
The Company hedges its net investment position in euro functional currency
entities. To accomplish this, a portion of the Company's debt is euro
denominated and designated as a hedge of net investments. For the nine months
ended September 30, 2001, these hedges produced a net loss in other
comprehensive income (foreign currency translation adjustments) of approximately
$2.5 million. As of September 30, 2001, the ending balance was a net gain of
approximately $43.5 million.
6. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments for materials and supplies
entered into in the ordinary course of business. These agreements extend from
three to ten years and the purchase price is generally based on market prices
subject to certain minimum price provisions.
The Company is involved in litigation from time to time in the ordinary
course of its business. In management's opinion, after consideration of
indemnification arrangements, none of such litigation is material to the
Company's financial condition or results of operations.
7. ENVIRONMENTAL MATTERS
The Company's business of manufacturing and distributing chemical products
and its related production of by-products and wastes, entails risk of adverse
environmental effects. The Company is subject to extensive federal, state, local
and foreign laws, regulations, rules and ordinances relating to pollution, the
protection of the environment and the generation, storage, handling,
transportation, treatment, disposal and remediation of hazardous substances and
waste materials. In the ordinary course of business, the Company is subject to
frequent environmental inspections and monitoring by governmental enforcement
authorities. The Company may incur substantial costs, including fines, damages
and criminal or civil sanctions, or experience interruptions in its operations
for actual or alleged violations arising under environmental laws. In addition,
production facilities require operating permits that are subject to renewal,
modification and, in some circumstances, revocation. Violations of permit
requirements can also result in restrictions or prohibitions on plant
operations, substantial fines and civil or criminal sanctions. Changes in
regulations regarding the generation, handling, transportation, use and disposal
of hazardous substances could inhibit or interrupt the Company's operations and
have a material adverse effect on its business. From time to time, these
operations may result in violations under environmental laws, including spills
or other releases of hazardous substances into the environment. In the event of
a catastrophic incident, the Company could incur material costs as a result of
addressing and implementing measures to prevent such incidents. Given the nature
of the Company's business, there can
8
be no assurance that violations of environmental laws will not result in the
imposition of restrictions on the Company's operating activities, substantial
fines, penalties, damages or other costs. In addition, potentially significant
expenditures could be necessary in order to comply with existing or future
environmental laws. In management's opinion, after consideration of
indemnification arrangements, there are currently no environmental matters which
are material to the Company's financial condition or results of operations.
MTBE Developments
Denmark has recently proposed to the European Union ("EU") that a directive
be issued, taking effect in 2005, allowing individual EU countries to ban the
use of MTBE. Currently no other EU member countries have joined Denmark's
proposal. Independent of its EU proposal, Denmark has entered into a voluntary
agreement with refiners that will significantly reduce the sale of MTBE in
Denmark. The agreement calls for refiners to cease using MTBE in 92- and
95-octane gasoline by May 1, 2002; however, MTBE will still be an additive in a
limited amount of 98-octane gasoline sold in 100 selected service stations in
Denmark.
In the United States, the state of New York has proposed a ban on the sale
of MTBE in New York. The Oxygenated Fuel Association ("OFA"), an organization
representing MTBE producers, challenged the proposed ban in federal court in New
York. In a motion for summary judgment, OFA asserted that the state of New York
was precluded by the doctrine of federal preemption from banning MTBE sales in
the state because of the federal oxygenate requirement under the federal Clean
Air Act. The court, however, rejected OFA's motion. Although this ruling was
based on the court's determination that there are factual issues precluding
summary judgment, the ruling tends to provide some support for the theory that
an individual state can act unilaterally to preclude the sale of MTBE within its
jurisdiction. Several states have promulgated such bans, which are scheduled to
take effect variously over the next several years. OFA will continue to pursue
the New York case, as well as a similar case in California. Pending
Congressional action to ban the sale of MTBE in the future, and the pendency of
the United States Environmental Protection Agency's administrative process to
ban the manufacture and sale of the chemical in the United States, also remain.
North Tees
The U.K. Environmental Agency ("EA") issued an Enforcement Notice on March
30, 2001, following an investigation into an alleged leak of a mixture
consisting of approximately 60% benzene into the River Tees, allegedly following
a dewatering procedure at the Company's North Tees site. The Company has
complied with this Enforcement Notice. The Company's discussions with the EA and
EA investigations into the incident are continuing; if the EA finds the Company
legally responsible, the Company could face legal action and possible penalties.
Management does not believe that, even if such action is initiated and the
Company is ultimately found to be legally responsible, the probable penalties
would be material to the financial position or results of operations of the
Company.
8. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company derives its revenues, earnings and cash flows from the
manufacture and sale of a wide variety of specialty and commodity chemical
products. The Company has three reportable operating segments: Specialty
Chemicals, Petrochemicals and Tioxide.
The major products of each reportable operating segment are as follows:
Segment Products
---------------------------------------------------------------------------
Specialty Chemicals MDI, TDI, TPU, polyols, aniline, PO, TBA, MTBE,
ethyleneamines and surfactants
Petrochemicals Ethylene, propylene, benzene, cyclohexane and
paraxylene
Tioxide TiO2
9
Sales between segments are generally recognized at external market prices.
For the nine months ended September 30, 2001 and 2000, sales to Imperial
Chemical Industries PLC ("ICI") and its affiliates accounted for approximately
7% and 8%, respectively, of consolidated revenues.
The net sales, operating income and EBITDA for each of the Company's
reportable operating segments are as follows (dollars in millions):
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------- ----------------- ---------------- ----------------
Net sales:
Specialty Chemicals $ 631.1 $ 549.1 $ 1,936.7 $ 1,589.3
Petrochemicals 306.9 371.9 1,028.4 1,093.2
Tioxide 220.6 243.3 679.0 740.5
Sales between segments,
Petrochemicals sales to
Specialty Chemicals (25.2) (27.4) (75.0) (76.5)
----------------- ----------------- ---------------- ----------------
Total $ 1,133.4 $ 1,136.9 $ 3,569.1 $ 3,346.5
================= ================= ================ ================
Operating income:
Specialty Chemicals $ 50.0 $ 44.3 $ 125.0 $ 173.3
Petrochemicals (15.6) 13.9 (5.9) 35.3
Tioxide 11.7 49.0 77.3 123.8
----------------- ----------------- ---------------- ----------------
Total $ 46.1 $ 107.2 $ 196.4 $ 332.4
================= ================= ================ ================
EBITDA (1):
Specialty Chemicals $ 84.5 $ 76.8 $ 235.0 $ 265.1
Petrochemicals (4.7) 24.5 24.5 69.3
Tioxide 23.8 57.9 111.3 155.6
----------------- ----------------- ---------------- ----------------
Total EBITDA 103.6 159.2 370.8 490.0
Depreciation & amortization (60.7) (52.7) (177.5) (160.0)
Interest expense, net (58.1) (56.0) (172.3) (165.0)
----------------- ----------------- ---------------- ----------------
Income (loss) before income taxes $ (15.2) $ 50.5 $ 21.0 $ 165.0
================= ================= ================ ================
(1) EBITDA is defined as earnings from continuing operations before interest
expense, depreciation and amortization, and taxes.
9. RECENT EVENTS
Proposed Investment by Bain and Blackstone
In July 2001, Huntsman Corporation, Huntsman Specialty Chemicals
Corporation ("HSCC") and Holdings entered into letter agreements with Bain
Capital, L.L.C. ("Bain") and Blackstone Capital Partners III Merchant Banking
Fund, L.P. ("Blackstone") relating to a proposed investment by Bain and
Blackstone. Those letter agreements have expired. There can be no assurance that
any new proposal will be made or, if so, that any transaction would be pursued
or consummated. In addition, there can be no assurance as to the terms of any
such transaction.
Restricted Payments
Because of the restrictions contained in the indentures governing the
outstanding high-yield notes of Holdings and the senior subordinated notes of
the Company, the Company is presently unable to make any "restricted payments,"
including (i) any dividends, distributions or other payments to holders of its
equity interests or (ii) payments to purchase, redeem or otherwise acquire or
retire for value any of its equity interests, subject to certain exceptions
contained in such indentures.
Sale by ICI Alta of Holdings' Equity Interests
Pursuant to the Membership Interest Option Agreement, dated November 2,
2000, as amended (the "Option Agreement"), between ICI, ICI Alta Inc. ("ICI
Alta") and HSCC, on October 30, 2001 ICI Alta exercised its put right requiring
HSCC or its nominee to purchase ICI Alta's 30% equity stake in Holdings. On
November 2, 2001, ICI Alta and HSCC agreed to extend the timetable for the
completion of ICI Alta's put option arrangements under the Option Agreement to
allow time for completion of a new agreement.
10
The proposed new agreement would replace ICI Alta's existing put arrangements
and would provide a new arrangement for the acquisition of ICI Alta's equity
stake in Holdings. The negotiations are at an advanced stage and the parties are
negotiating the remaining open issues; however, there can be no assurance that
the parties will reach an agreement.
Recently Issued Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." The statements will change the accounting for business
combinations and goodwill in two significant ways. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method will be
prohibited. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of that statement, which for the Company will be January 1, 2002.
The Company is currently evaluating the effects of adopting these
pronouncements.
In August 2001, the FASB issued 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 will
adopt this new accounting standard on January 1, 2003. The Company is currently
evaluating the effects of adopting this pronouncement.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement establishes a
single accounting model for the impairment or disposal of long-lived assets. As
required by SFAS No. 144, the Company will adopt this new accounting standard on
January 1, 2002. The Company is currently evaluating the effects of adopting
this pronouncement.
10. SUBSEQUENT EVENT
The Company has announced the first phase of a cost reduction program which
includes the closure of its Shepton Mallet facility in 2002. The program also
includes reductions in force of approximately 200 employees at Shepton Mallet
and other locations during the fourth quarter of 2001 and during the first half
of 2002. The implementation of the first phase of this program will result in a
charge of approximately $25 million in the fourth quarter of 2001, with further
charges of approximately $13 million expected in 2002.
11. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
The following consolidating condensed financial statements present, in
separate columns, financial information for: Huntsman International (on a parent
only basis), with its investment in subsidiaries recorded under the equity
method; the guarantors, under the June 30, 1999 Indenture, on a combined, or
where appropriate, consolidated basis, with its investment in the non-guarantors
recorded under the equity method; and the non-guarantors on a consolidated
basis. Additional columns present eliminating adjustments and consolidated
totals as of September 30, 2001 and December 31, 2000 and for the three and nine
months ended September 30, 2001 and 2000. There are no contractual restrictions
limiting transfers of cash from guarantor and non-guarantor subsidiaries to
Huntsman International. The combined guarantors are wholly-owned subsidiaries of
Huntsman International and have fully and unconditionally guaranteed the senior
subordinated notes on a joint and several basis. The Company has not presented
separate financial statements and other disclosures concerning the combined
guarantors because management has determined that such information is not
material to investors.
11
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2001 (UNAUDITED) (Dollars in Millions)
- --------------------------------------------------------------------------------
Parent Only Consolidated
Huntsman Non- Huntsman
International Guarantors Guarantors Eliminations International
------------- ---------- ---------- ------------ -------------
ASSETS
------
Current assets:
Cash and cash equivalents $ -- $ 0.1 $ 42.6 $ -- $ 42.7
Accounts and notes
receivable, net 71.4 103.3 543.1 (127.1) 590.7
Inventories 46.8 64.3 394.7 -- 505.8
Other current assets 69.6 114.7 71.1 (178.1) 77.3
---------- ---------- ---------- ---------- ----------
Total current assets 187.8 282.4 1,051.5 (305.2) 1,216.5
Property, plant and equipment,
net 590.7 362.3 1,926.7 -- 2,879.7
Investment in unconsolidated
affiliates 2,843.7 975.7 1.5 (3,669.4) 151.5
Other noncurrent assets 422.0 1,272.2 302.5 (1,249.9) 746.8
---------- ---------- ---------- ---------- ----------
Total assets $ 4,044.2 $ 2,892.6 $ 3,282.2 $ (5,224.5) $ 4,994.5
========== ========== ========== ========== ==========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable and
accrued liabilities $ 131.0 $ 108.5 $ 698.8 $ (155.2) $ 783.1
Current portion of long-term
debt 1,539.4 -- 10.8 -- 1,550.2
Other current liabilities 121.9 19.4 75.9 (150.0) 67.2
---------- ---------- ---------- ---------- ----------
Total current 1,792.3 127.9 785.5 (305.2) 2,400.5
liabilities
Long-term debt 1,047.7 -- 1,228.6 (1,249.9) 1,026.4
Other noncurrent liabilities 56.6 3.8 350.1 -- 410.5
---------- ---------- ---------- ---------- ----------
Total liabilities 2,896.6 131.7 2,364.2 (1,555.1) 3,837.4
---------- ---------- ---------- ---------- ----------
Minority interests -- -- 9.5 -- 9.5
---------- ---------- ---------- ---------- ----------
Equity:
Member's equity, 1,000 units 1,026.1 -- -- -- 1,026.1
Subsidiary equity -- 2,356.0 750.1 (3,106.1) --
Retained earnings 288.2 602.5 224.3 (826.8) 288.2
Accumulated other
comprehensive loss (166.7) (197.6) (65.9) 263.5 (166.7)
---------- ---------- ---------- ---------- ----------
Total equity 1,147.6 2,760.9 908.5 (3,669.4) 1,147.6
---------- ---------- ---------- ---------- ----------
Total liabilities and equity $ 4,044.2 $ 2,892.6 $ 3,282.2 $ (5,224.5) $ 4,994.5
========== ========== ========== ========== ==========
12
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 31, 2000 (UNAUDITED) (Dollars in Millions)
- --------------------------------------------------------------------------------
Parent Only Consolidated
Huntsman Non- Huntsman
International Guarantors Guarantors Eliminations International
-------------- ------------ ------------- --------------- --------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 5.7 $ -- $ 60.4 $ -- $ 66.1
Accounts and notes
receivable, net 71.8 66.2 509.1 (93.2) 553.9
Inventories 61.9 63.3 371.2 -- 496.4
Other current assets 37.8 88.7 88.3 (129.1) 85.7
------------- ----------- ----------- ------------ -------------
Total current assets 177.2 218.2 1,029.0 (222.3) 1,202.1
Property, plant and equipment,
net 592.3 358.2 1,753.4 -- 2,703.9
Investment in unconsolidated
affiliates 2,631.2 842.1 1.2 (3,317.8) 156.7
Other noncurrent assets 415.8 1,254.1 313.0 (1,230.2) 752.7
------------- ----------- ----------- ------------ -------------
Total assets $ 3,816.5 $ 2,672.6 $ 3,096.6 $ (4,770.3) $ 4,815.4
============= =========== =========== ============ =============
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable and
accrued liabilities $ 189.4 $ 114.5 $ 653.9 $ (127.5) $ 830.3
Current portion of long-term
debt 0.2 -- 7.3 -- 7.5
Other current liabilities 73.4 30.0 23.8 (94.8) 32.4
------------- ----------- ----------- ------------ -------------
Total current 263.0 144.5 685.0 (222.3) 870.2
liabilities
Long-term debt 2,368.1 -- 1,205.1 (1,230.2) 2,343.0
Other noncurrent liabilities 56.7 4.0 403.2 -- 463.9
------------- ----------- ----------- ------------ -------------
Total liabilities 2,687.8 148.5 2,293.3 (1,452.5) 3,677.1
------------- ----------- ----------- ------------ -------------
Minority interests -- -- 9.6 -- 9.6
------------- ----------- ----------- ------------ -------------
Equity:
Member's equity, 1,000 units 1,026.1 -- -- -- 1,026.1
Subsidiary equity -- 2,331.4 726.6 (3,058.0) --
Retained earnings 223.3 361.7 123.9 (485.6) 223.3
Accumulated other
comprehensive loss (120.7) (169.0) (56.8) 225.8 (120.7)
------------- ----------- ----------- ------------ -------------
Total equity 1,128.7 2,524.1 793.7 (3,317.8) 1,128.7
------------- ----------- ----------- ------------ -------------
Total liabilities and equity $ 3,816.5 $ 2,672.6 $ 3,096.6 $ (4,770.3) $ 4,815.4
============= =========== =========== ============ =============
13
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
- ----------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (Dollars in Millions)
- ----------------------------------------------------------------------
Parent Only Consolidated
Huntsman Non- Huntsman
International Guarantors Guarantors Eliminations International
--------------- ------------- ------------- --------------- --------------
Revenues:
Trade sales and services $ 150.5 $ 167.4 $ 725.7 $ -- $ 1,043.6
Related party sales 37.8 28.5 98.3 (79.1) 85.5
Tolling fees -- 4.1 0.2 -- 4.3
--------------- ------------- ------------- --------------- --------------
Total revenue 188.3 200.0 824.2 (79.1) 1,133.4
Cost of goods sold 132.7 177.8 762.4 (79.1) 993.8
--------------- ------------- ------------- --------------- --------------
Gross profit 55.6 22.2 61.8 -- 139.6
Expenses:
Selling, general and
administrative 38.0 (5.7) 46.0 -- 78.3
Research and development 12.5 0.8 1.9 -- 15.2
--------------- ------------- ------------- --------------- --------------
Total expenses 50.5 (4.9) 47.9 -- 93.5
--------------- ------------- ------------- --------------- --------------
Operating income 5.1 27.1 13.9 -- 46.1
Interest expense (income), net 59.0 (25.5) 24.6 -- 58.1
Loss on sale of accounts
receivable 0.8 1.0 0.3 -- 2.1
Equity in earnings of
unconsolidated affiliates 89.3 37.7 -- (127.0) --
Other expense 0.2 -- 0.9 -- 1.1
--------------- ------------- ------------- --------------- --------------
Income (loss) before income
taxes 34.4 89.3 (11.9) (127.0) (15.2)
Income tax benefit -- -- (50.2) -- (50.2)
Minority interests in subsidiaries -- -- 0.6 -- 0.6
--------------- ------------- ------------- --------------- --------------
Net income before accounting
change 34.4 89.3 37.7 (127.0) 34.4
Cumulative effect of accounting
change -- -- -- -- --
--------------- ------------- ------------- --------------- --------------
Net income 34.4 89.3 37.7 (127.0) 34.4
Other comprehensive income 57.3 114.2 44.4 (158.6) 57.3
--------------- ------------- ------------- --------------- --------------
Comprehensive income $ 91.7 $ 203.5 $ 82.1 $ (285.6) $ 91.7
=============== ============= ============= =============== ==============
14
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
- -----------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) (Dollars in Millions)
- -----------------------------------------------------------------------
Parent Only Consolidated
Huntsman Non- Huntsman
International Guarantors Guarantors Eliminations International
--------------- ------------- ------------- --------------- --------------
Revenues:
Trade sales and services $ 276.9 $ 48.0 $ 674.6 $ -- $ 999.5
Related party sales 54.9 12.7 131.1 (72.0) 126.7
Tolling fees 10.7 -- -- -- 10.7
--------------- ------------- ------------- --------------- --------------
Total revenue 342.5 60.7 805.7 (72.0) 1,136.9
Cost of goods sold 278.0 51.8 683.7 (72.0) 941.5
--------------- ------------- ------------- --------------- --------------
Gross profit 64.5 8.9 122.0 -- 195.4
Expenses:
Selling, general and
administrative 24.3 1.4 47.3 -- 73.0
Research and development 11.8 -- 3.4 -- 15.2
--------------- ------------- ------------- --------------- --------------
Total expenses 36.1 1.4 50.7 -- 88.2
--------------- ------------- ------------- --------------- --------------
Operating income 28.4 7.5 71.3 -- 107.2
Interest expense (income), net 59.4 (32.6) 29.2 -- 56.0
Loss on sale of accounts
receivable -- -- -- -- --
Equity in earnings of
unconsolidated affiliates 71.1 31.0 -- (102.1) --
Other expense (income) (0.9) -- 1.6 -- 0.7
--------------- ------------- ------------- --------------- --------------
Income before income taxes 41.0 71.1 40.5 (102.1) 50.5
Income tax expense -- -- 8.7 -- 8.7
Minority interests in subsidiaries -- -- 0.8 -- 0.8
--------------- ------------- ------------- --------------- --------------
Net income 41.0 71.1 31.0 (102.1) 41.0
Other comprehensive loss (74.1) (108.2) (30.2) 138.4 (74.1)
--------------- ------------- ------------- --------------- --------------
Comprehensive income (loss) $ (33.1) $ (37.1) $ 0.8 $ 36.3 $ (33.1)
=============== ============= ============= =============== ==============
15
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
- ----------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (Dollars in Millions)
- ----------------------------------------------------------------------
Parent Only Consolidated
Huntsman Non- Huntsman
International Guarantors Guarantors Eliminations International
-------------- ------------- ------------- --------------- --------------
Revenues:
Trade sales and services $ 465.8 $ 517.7 $ 2,267.1 $ -- $ 3,250.6
Related party sales 124.8 111.7 310.2 245.1) 301.6
Tolling fees -- 16.5 0.4 -- 16.9
------------ ---------- ---------- --------- ------------
Total revenue 590.6 645.9 2,577.7 (245.1) 3,569.1
Cost of goods sold 453.2 568.3 2,316.5 (245.1) 3,092.9
------------ ---------- ---------- --------- ------------
Gross profit 137.4 77.6 261.2 -- 476.2
Expenses:
Selling, general and
administrative 93.0 10.4 129.3 -- 232.7
Research and development 39.7 2.9 4.5 -- 47.1
------------ ---------- ---------- --------- ------------
Total expenses 132.7 13.3 133.8 -- 279.8
------------ ---------- ---------- --------- ------------
Operating income 4.7 64.3 127.4 -- 196.4
Interest expense (income), net 177.3 (79.9) 74.9 -- 172.3
Loss on sale of accounts
receivable 1.9 3.8 1.8 -- 7.5
Equity in earnings of
unconsolidated affiliates 240.9 100.4 -- (341.2) 0.1
Other expense (income) -- -- (4.3) -- (4.3)
------------ ---------- ---------- --------- ------------
Income before income taxes 66.4 240.8 55.0 (341.2) 21.0
Income tax benefit -- -- (47.0) -- (47.0)
Minority interests in subsidiaries -- -- 1.6 -- 1.6
------------ ---------- ---------- --------- ------------
Net income before accounting
change 66.4 240.8 100.4 (341.2) 66.4
Cumulative effect of accounting
change (1.5) -- -- -- (1.5)
------------ ---------- ---------- --------- ------------
Net income 64.9 240.8 100.4 (341.2) 64.9
Other comprehensive loss (46.0) (28.6) (9.1) 37.7 (46.0)
------------ ---------- ---------- --------- ------------
Comprehensive income $ 18.9 $ 212.2 $ 91.3 $ (303.5) $ 18.9
============ ========== ========== ========= ============
16
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
- ----------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) (Dollars in Millions)
- ----------------------------------------------------------------------
Parent Only Consolidated
Huntsman Non- Huntsman
International Guarantors Guarantors Eliminations International
--------------- ------------- ------------- -------------- ---------------
Revenues:
Trade sales and services $ 816.8 $ 145.8 $ 1,994.2 $ -- $ 2,956.8
Related party sales 142.5 33.5 370.7 (188.0) 358.7
Tolling fees 31.0 -- -- -- 31.0
------------- ----------- ----------- ------------ -------------
Total revenue 990.3 179.3 2,364.9 (188.0) 3,346.5
Cost of goods sold 772.2 150.1 2,029.7 (188.0) 2,764.0
------------- ------------ ----------- ------------ -------------
Gross profit 218.1 29.2 335.2 -- 582.5
Expenses:
Selling, general and
administrative 84.4 8.8 112.0 -- 205.2
Research and development 33.8 -- 11.1 -- 44.9
------------- ----------- ----------- ------------ -------------
Total expenses 118.2 8.8 123.1 -- 250.1
------------- ----------- ----------- ------------ -------------
Operating income 99.9 20.4 212.1 -- 332.4
Interest expense (income), net 170.8 (97.1) 91.3 -- 165.0
Loss on sale of accounts
receivable -- -- -- -- --
Equity in earnings of
unconsolidated affiliates 211.2 93.7 -- (304.9) --
Other expense (income) (1.0) -- 3.4 -- 2.4
------------- ----------- ----------- ------------- -------------
Income before income taxes 141.3 211.2 117.4 (304.9) 165.0
Income tax expense -- -- 21.6 -- 21.6
Minority interests in
subsidiaries -- -- 2.1 -- 2.1
------------- ----------- ----------- ------------- -------------
Net income 141.3 211.2 93.7 (304.9) 141.3
Other comprehensive loss (156.1) (214.4) (60.2) 274.6 (156.1)
------------- ----------- ----------- ------------- -------------
Comprehensive income (loss) $ (14.8) $ (3.2) $ 33.5 $ (30.3) $ (14.8)
============= =========== =========== ============= =============
17
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
- -----------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (Dollars in Millions)
- --------------------------------------------------------------------------------
Parent Only Consolidated
Huntsman Non- Huntsman
International Guarantors Guarantors Eliminations International
--------------- ------------- ------------ -------------- ---------------
Net cash provided by (used in)
operating activities $ (120.3) $ 127.4 $ 180.4 $ -- $ 187.5
------------- ----------- ----------- ------------ -------------
Investing activities:
Acquisition of businesses -- (29.1) (180.4) -- (209.5)
Capital expenditures (25.4) (2.7) (170.6) -- (198.7)
Cash received from
unconsolidated affiliates -- 5.7 -- -- 5.7
Advances to unconsolidated
affiliates (2.2) -- -- -- (2.2)
------------- ----------- ----------- ------------ -------------
Net cash used in investing
activities (27.6) (26.1) (351.0) -- (404.7)
------------- ----------- ----------- ------------ -------------
Financing activities:
Borrowings under credit facilities -- -- 6.4 -- 6.4
Repayments of credit facilities (18.2) -- -- -- (18.2)
Issuance of senior subordinated
notes 233.2 -- -- -- 233.2
Debt issuance costs (5.3) -- -- -- (5.3)
Cash contributions by parent -- 706.2 2,540.4 (3,246.6) --
Cash distributions from
subsidiaries 3,146.7 -- -- (3,146.7) --
Cash distributions to parent -- (661.6) (2,485.1) 3,146.7 --
Cash distributions to
subsidiaries (3,195.5) (51.1) -- 3,246.6 --
Intercompany advances - net of
repayments (5.5) (91.3) 96.8 -- --
------------- ----------- ----------- ------------ -------------
Net cash provided by (used in)
financing activities 155.4 (97.8) 158.5 -- 216.1
------------- ----------- ----------- ------------ -------------
Effect of exchange rate changes
on cash (13.2) (3.4) (5.7) -- (22.3)
------------- ----------- ----------- ------------ -------------
Increase (decrease) in cash and
cash equivalents (5.7) 0.1 (17.8) -- (23.4)
Cash and cash equivalents at
beginning of period 5.7 -- 60.4 -- 66.1
------------- ----------- ----------- ------------ -------------
Cash and cash equivalents at
end of period $ -- $ 0.1 $ 42.6 $ -- $ 42.7
============= =========== =========== ============ =============
18
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
- -----------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) (Dollars in Millions)
- --------------------------------------------------------------------------------
Parent Only Consolidated
Huntsman Non- Huntsman
International Guarantors Guarantors Eliminations International
--------------- ------------ ------------ -------------- ---------------
Net cash provided by (used in)
operating activities $ (44.2) $ 110.7 $ 129.7 $ -- $ 196.2
------------- ----------- ----------- ------------ -------------
Investing activities:
Acquisition of other businesses (132.9) -- (14.0) -- (146.9)
Capital expenditures (28.3) (0.8) (96.3) -- (125.4)
Cash received from
unconsolidated affiliates -- 7.5 -- -- 7.5
Advances to unconsolidated
affiliates (9.0) -- -- -- (9.0)
------------- ----------- ----------- ------------ -------------
Net cash provided by (used in)
investing activities (170.2) 6.7 (110.3) -- (273.8)
------------- ----------- ----------- ------------ -------------
Financing activities:
Borrowings under credit facilities 100.0 -- -- -- 100.0
Repayment of credit facilities (35.7) -- (2.4) -- (38.1)
Cash contributions by parent -- 203.5 19.2 (222.7) --
Cash distributions from subsidiaries 222.1 -- -- (222.1) --
Cash distributions to parent (8.0) (222.1) -- 222.1 (8.0)
Cash distributions to subsidiaries (203.5) (19.2) -- 222.7 --
Intercompany advances - net of
repayments 134.1 (79.8) (54.3) -- --
------------- ----------- ----------- ------------ -------------
Net cash provided by (used in)
financing activities 209.0 (117.6) (37.5) -- 53.9
------------- ----------- ----------- ------------ -------------
Effect of exchange rate changes
on cash -- -- (12.1) -- (12.1)
------------- ----------- ----------- ------------ -------------
Decrease in cash and cash
equivalents (5.4) (0.2) (30.2) -- (35.8)
Cash and cash equivalents at
beginning of period 9.0 0.2 129.7 -- 138.9
------------- ----------- ----------- ------------ -------------
Cash and cash equivalents at
end of period $ 3.6 $ -- $ 99.5 $ -- $ 103.1
============= =========== =========== ============ =============
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Huntsman International LLC ("Huntsman International" or the "Company") is a
global manufacturer and marketer of specialty and commodity chemicals through
three principal businesses: specialty chemicals, petrochemicals, and titanium
dioxide. The Company is a wholly-owned subsidiary of Huntsman International
Holdings LLC ("Holdings"). The Company's global specialty chemicals business
produces and markets propylene oxide, which is commonly referred to in the
chemicals industry as "PO," and a complete line of polyurethane chemicals,
including methylene diphenyl diisocyanate, commonly referred to in the chemicals
industry as "MDI"; toluene diisocyanate, commonly referred to in the chemicals
industry as "TDI"; polyols; thermoplastic polyurethane, commonly referred to in
the chemicals industry as "TPU"; ethyleneamines; surfactants; polyurethane
systems and aniline, with an emphasis on MDI-based products. Customers of the
Company use polyurethane products in a wide variety of polyurethane
applications, including automotive interiors, refrigeration and appliance
insulation, construction products, footwear, furniture cushioning and adhesives.
PO is used in a variety of applications, the largest of which is the production
of polyols sold into the polyurethane chemicals market. Surfactants and
surfactant intermediates are used primarily in consumer detergents, toiletries,
baby shampoos and personal care products, as well as for a wide range of
industrial end-uses. The Company's petrochemicals business produces olefins and
aromatics at its integrated facilities in northern England. Olefins and
aromatics are the key building blocks for the petrochemical industry and are
used in plastics, synthetic fibers, packaging materials and a wide variety of
other applications. The Company's titanium dioxide business operates under the
trade name "Tioxide." Titanium dioxide is a white pigment used to impart
whiteness, brightness and opacity to products such as paints, plastics, paper,
printing inks, synthetic fibers and ceramics.
Recent Events
Proposed Investment by Bain and Blackstone
In July 2001, Huntsman Corporation, Huntsman Specialty Chemicals
Corporation ("HSCC") and Holdings entered into letter agreements with Bain
Capital, L.L.C. ("Bain") and Blackstone Capital Partners III Merchant Banking
Fund, L.P. ("Blackstone") relating to a proposed investment by Bain and
Blackstone. Those letter agreements have expired. There can be no assurance that
any new proposal will be made or, if so, that any transaction would be pursued
or consummated. In addition, there can be no assurance as to the terms of any
such transaction.
Restricted Payments
Because of the restrictions contained in the indentures governing the
outstanding high-yield notes of Holdings and the senior subordinated notes of
the Company, the Company is presently unable to make any "restricted payments,"
including (i) any dividends, distributions or other payments to holders of its
equity interests or (ii) payments to purchase, redeem or otherwise acquire or
retire for value any of its equity interests, subject to certain exceptions
contained in such indentures.
Sale by ICI Alta of Holdings' Equity Interests
Pursuant to the Membership Interest Option Agreement, dated November 2,
2000, as amended (the "Option Agreement"), between Imperial Chemicals Industries
PLC ("ICI"), ICI Alta Inc. ("ICI Alta") and HSCC, on October 30, 2001 ICI Alta
exercised its put right requiring HSCC or its nominee to purchase ICI Alta's 30%
equity stake in Holdings. On November 2, 2001, ICI Alta and HSCC agreed to
extend the timetable for the completion of ICI Alta's put option arrangements
under the Option Agreement to allow time for completion of a new agreement. The
proposed new agreement would replace ICI Alta's existing put arrangements and
would provide a new arrangement for the acquisition of ICI Alta's equity stake
in Holdings. The negotiations are at an advanced stage and the parties are
negotiating the remaining open issues; however, there can be no assurance that
the parties will reach an agreement.
MTBE Developments
Denmark has recently proposed to the European Union ("EU") that a directive
be issued, taking effect in 2005, allowing individual EU countries to ban the
use of MTBE. Currently no other EU member countries have joined Denmark's
proposal. Independent of its EU proposal, Denmark has entered into a voluntary
agreement with refiners that will significantly reduce the sale of MTBE in
Denmark. The agreement calls for refiners to cease using MTBE in 92- and
95-octane gasoline by May 1, 2002;
20
however, MTBE will still be an additive in a limited amount of 98-octane
gasoline sold in 100 selected service stations in Denmark.
In the United States, the state of New York has proposed a ban on the sale
of MTBE in New York. The Oxygenated Fuel Association ("OFA"), an organization
representing MTBE producers, challenged the proposed ban in federal court in New
York. In a motion for summary judgment, OFA asserted that the state of New York
was precluded by the doctrine of federal preemption from banning MTBE sales in
the state because of the federal oxygenate requirement under the federal Clean
Air Act. The court, however, rejected OFA's motion. Although this ruling was
based on the court's determination that there are factual issues precluding
summary judgment, the ruling tends to provide some support for the theory that
an individual state can act unilaterally to preclude the sale of MTBE within its
jurisdiction. Several states have promulgated such bans, which are scheduled to
take effect variously over the next several years. OFA will continue to pursue
the New York case, as well as a similar case in California. Pending
Congressional action to ban the sale of MTBE in the future, and the pendency of
the United States Environmental Protection Agency's administrative process to
ban the manufacture and sale of the chemical in the United States, also remain.
North Tees
The U.K. Environmental Agency ("EA") issued an Enforcement Notice on March
30, 2001, following an investigation into an alleged leak of a mixture
consisting of approximately 60% benzene into the River Tees, allegedly following
a dewatering procedure at the Company's North Tees site. The Company has
complied with this Enforcement Notice. The Company's discussions with EA and EA
investigations into the incident are continuing; if the EA finds the Company
legally responsible, the Company could face legal action and possible penalties.
Management does not believe that, even if such action is initiated and the
Company is ultimately found to be legally responsible, the probable penalties
would be material to the financial position or results of operations of the
Company.
Recently Issued Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." The statements will change the accounting for business
combinations and goodwill in two significant ways. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method will be
prohibited. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of that statement, which for the Company will be January 1, 2002.
The Company is currently evaluating the effects of adopting these
pronouncements.
In August 2001, the FASB issued 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 will
adopt this new accounting standard on January 1, 2003. The Company is currently
evaluating the effects of adopting this pronouncement.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement establishes a
single accounting model for the impairment or disposal of long-lived assets. As
required by SFAS No. 144, the Company will adopt this new accounting standard on
January 1, 2002. The Company is currently evaluating the effects of adopting
this pronouncement.
Subsequent Event
The Company has announced the first phase of a cost reduction program which
includes the closure of its Shepton Mallet facility in 2002. The program also
includes reductions in force of approximately 200 employees at Shepton Mallet
and other locations during the fourth quarter of 2001 and during the first half
of 2002. The implementation of the first phase of this program will result in a
charge of approximately $25 million in the fourth quarter of 2001, with further
charges of approximately $13 million expected in 2002.
21
Three and Nine Months Ended September 30, 2001 Compared to Three and Nine Months
Ended September 30, 2000 (unaudited) (in millions).
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Specialty Chemicals sales $ 631 $ 549 $ 1,937 $ 1,589
Petrochemicals sales 282 345 953 1,017
Tioxide sales 220 243 679 740
--------- --------- --------- ---------
Total revenues 1,133 1,137 3,569 3,346
Cost of goods sold 993 942 3,093 2,764
--------- --------- --------- ---------
Gross profit 140 195 476 582
Expenses of selling, general,
administrative, research and
development 94 88 280 250
--------- --------- --------- ---------
Operating income 46 107 196 332
Interest expense, net 58 56 172 165
Loss on sale of accounts receivable 2 -- 7 --
Other (income) expense 1 1 (4) 2
--------- --------- --------- ---------
Income (loss) before income taxes and
minority interest (15) 50 21 165
Income tax expense (benefit) (50) 8 (47) 22
Minority interests in subsidiaries 1 1 2 2
--------- --------- --------- ---------
Net income before accounting change 34 41 66 141
Cumulative effect of accounting
change -- -- (1) --
--------- --------- --------- ---------
Net income $ 34 $ 41 $ 65 $ 141
========= ========= ========= =========
Depreciation and amortization $ 61 $ 53 $ 178 $ 160
========= ========= ========= =========
EBITDA (1) $ 104 $ 159 $ 371 $ 490
Loss on sale of accounts receivable (2) 2 -- 7 --
--------- --------- --------- ---------
Adjusted EBITDA $ 106 $ 159 $ 378 $ 490
========= ========= ========= =========
(1) EBITDA is defined as earnings from continuing operations before interest
expense, depreciation and amortization, and taxes. EBITDA is included in
this report because it is a basis on which the Company assesses its
financial performance and debt service capabilities, and because certain
covenants in the Company's borrowing arrangements are tied to similar
measures. However, EBITDA should not be considered in isolation or viewed
as a substitute for cash flow from operations, net income or other measures
of performance as defined by accounting principles generally accepted in
the United States ("US GAAP") or as a measure of a company's profitability
or liquidity. While EBITDA is frequently used by securities analysts,
lenders and others in their evaluation of companies, EBITDA as used herein
is not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
(2) For purposes of the Company's senior credit facility covenants, loss on
sale of accounts receivable related to the securitization program is
excluded from the computation of EBITDA.
Results of Operations
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Revenues
Revenues for the three months ended September 30, 2001 remained relatively
unchanged at $1,133 million compared to $1,137 million during the same period in
2000. The slight decrease in revenues resulted from decreases in sales in both
the petrochemicals and tioxide segments, which were offset by an increase in
sales in the Company's specialty chemicals segment. Sales in the specialty
chemicals segment benefited from the acquisition of the TPU, ethyleneamines and
surfactants businesses.
Specialty Chemicals - The Company's specialty chemicals sales, excluding
-------------------
the effect of non-comparable acquisitions, decreased by $46 million, or 8%, for
the three months ended September 30, 2001 as compared to the same period in
2000. Total specialty chemicals sales increased by $82 million, or 15%, for the
three months ended September 30, 2001 as compared to the same period in 2000.
Total
22
MDI sales volumes decreased by 9% from the 2000 period. Recovery in the Asian
economies led to an increase in sales volumes of 2% in that region, while in
Europe, sales volumes fell by 1%. In the Americas, sales volumes decreased by
18% from the prior year due to weaker demand resulting from economic slowdown.
Polyol sales volumes grew by 10% with the increase attributable to increased
sales volumes in Asia, Europe and the Americas. Higher polyols sales volumes
were partially offset by a 1% decrease in average selling prices compared to the
same period in 2000. Decreased average selling prices were largely the result of
the weakening in the value of the euro versus the U.S. dollar. PO sales revenue
decreased by 2%, resulting from a 22% decrease in average selling price which
was partially offset by a 25% increase in sales volumes. MTBE sales revenue fell
by 20% due to a 22% decrease in average selling price for MTBE. The decrease in
average selling price for MTBE is primarily attributable to reduced demand for
MTBE in reformulated gasoline. Non-comparable sales from TPU, ethyleneamines and
surfactants were $128 million. Ethyleneamines and surfactants were not present
in the comparable period in 2000. TPU is included beginning September of 2000.
Petrochemicals - The Company's petrochemicals sales decreased by $63
--------------
million, or 18%, for the three months ended September 30, 2001 as compared to
the same period in 2000. Sales volumes of ethylene fell by 14% while sales
volumes of propylene decreased by 9%. The reduction in sales was due to material
on exchange with other producers to be returned during the Company's 2002
scheduled turnaround. In aromatics, sales volumes of benzene rose by 53%, while
sales volumes of cyclohexane fell by 3% due to production limitations.
Paraxylene sales fell by 30% due to lower shipments to a significant customer
that underwent a plant overhaul in September. Ethylene, propylene, benzene and
cyclohexane average selling prices were 18%, 29%, 40% and 37% lower,
respectively, primarily due to weaker demand and oversupply in the market.
Tioxide - The Company's tioxide sales decreased $23 million, or 9%, for the
-------
three months ended September 30, 2001 as compared to the same period in 2000.
Sales volumes decreased by 2% compared to the 2000 period due to weakening of
demand, particularly in the European market. Average selling prices decreased by
7% with the weakness of the euro against the U.S. dollar contributing to the
decline.
Gross Profit
Gross profit for the three months ended September 30, 2001 decreased by $55
million, or 28%, to $140 million from $195 million in 2000.
Specialty Chemicals - Gross profit on MDI and polyols increased 7% and 10%,
-------------------
respectively. Lower volumes were more than offset by decreased raw material
costs. Lower average selling prices for MTBE and PO were partly offset by a
significant decrease in the cost of the key PO/MTBE raw materials including
isobutane, propylene, methanol and by lower energy costs. Non-comparable gross
profit from TPU, ethyleneamines and surfactants was $16 million. Ethyleneamines
and surfactants were not present in the comparable period in 2000. TPU is
included beginning September of 2000.
Petrochemicals - Petrochemicals gross profit decreased by 131% as lower
--------------
average selling prices more than offset recent decreases in the price of the
main raw material, naphtha. Gross profit was also reduced by the effect of lower
feedstock prices rolling through to inventory valuations.
Tioxide - Gross profit decreased by 51% for the period as lower revenues
-------
and increased raw material and utility costs more than offset cost reductions
from the Company's on-going manufacturing excellence program.
Selling, General and Administrative Expenses (including Research and
Development Expenses)
Selling, general and administrative expenses (including research and
development expenses) ("SG&A (including R&D)") in the three months ended
September 30, 2001 increased by $6 million, or 7%, to $94 million from $88
million in 2000.
23
Specialty Chemicals - SG&A (including R&D) in 2001 increased by 9% largely
-------------------
due to the SG&A expenses associated with businesses acquired since September 30,
2000.
Petrochemicals - SG&A (including R&D) in 2001 decreased 38% primarily due
--------------
to foreign currency exchange gains.
Tioxide - SG&A (including R&D) in 2001 increased by 36% primarily due to
-------
foreign currency exchange losses.
Interest Expense
Net interest expense in the three months ended September 30, 2001 remained
relatively unchanged compared to the same period in 2000.
Other Expense
Other expense in the three months ended September 30, 2001 remained
relatively unchanged compared to the same period in 2000.
Income Taxes
Income taxes in the three months ended September 30, 2001 decreased by $58
million, to a benefit of $50 million from an expense of $8 million in the same
period in 2000. The effective income tax rate decreased from the 2000 period due
to a change in the mix of income (loss) earned in the U.S. versus international
locations.
Net Income
Net income in the three months ended September 30, 2001 decreased by $7
million to $34 million from $41 million during 2000 as a result of the factors
discussed above.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September
30, 2000
Revenues
Revenues for the nine months ended September 30, 2001 increased by $223
million, or 7%, to $3,569 million from $3,346 million during the same period in
2000. The increase in revenues resulted from decreases in sales in both the
petrochemicals and tioxide segments, which were more than offset by an increase
in sales in the Company's specialty chemicals segment. Sales in the specialty
chemicals segment benefited from the acquisition of the TPU, ethyleneamines,
surfactants and performance chemicals businesses.
Specialty Chemicals - The Company's specialty chemicals sales, excluding
-------------------
non-comparable acquisitions, were relatively unchanged compared to the same
period in 2000. Total specialty chemicals sales increased by $348 million, or
22%, for the nine months ended September 30, 2001, as compared to the same
period in 2000. Total MDI sales volumes remained relatively unchanged compared
to the 2000 period. A strong recovery in the Asian economies led to an increase
in sales volumes of 34% in that region, while in Europe, sales volumes grew by
6%. In the Americas, sales volumes decreased by 14% from the prior year period
due to weaker demand resulting from economic slowdown. Polyol sales volumes grew
by 6% with the increase attributable to increased sales in all three regions.
These gains were offset by a 2% decrease in the average selling price for
polyols compared to the same period in 2000, a substantial portion of which was
due to a weakening in the value of the euro versus the U.S. dollar. PO sales
revenues were relatively unchanged compared to the 2000 period. MTBE sales
revenue increased by 1% due to a 2% increase in volumes, which was partially
offset by a 1% decrease in the average selling price for MTBE. Non-comparative
sales from TPU, ethyleneamines, surfactants and performance chemicals were $354
million. Ethyleneamines and surfactants were not present in the
24
comparable period in 2000. TPU is included beginning September of 2000 and
performance chemicals are included beginning July of 2000.
Petrochemicals - The Company's petrochemicals sales decreased by $64
--------------
million, or 6%, for the nine months ended September 30, 2001, as compared to the
same period in 2000. Sales volumes of ethylene fell by 10% while sales volumes
of propylene decreased by 3%. Ethylene production increased by 2% but the
reduction in sales was due to material on exchange with other producers to be
returned during the Company's 2002 scheduled turnaround. In aromatics, sales
volumes of benzene rose by 32% while sales volumes of cyclohexane and paraxylene
fell by 16% and 7%, respectively. Ethylene and propylene average selling prices
were 9% and 15% lower, respectively. Benzene and cyclohexane average selling
prices were 9% and 10% lower, respectively. Paraxylene average selling price
increased by 4%.
Tioxide - The Company's tioxide sales decreased by $61 million, or 8%, for
-------
the nine months ended September 30, 2001, as compared to the same period in
2000. Sales volumes decreased by 6% compared to the 2000 period due to weakening
of demand, particularly in the European and American markets. Average selling
prices decreased by 3% as higher local currency selling prices were more than
offset by the weakness of the euro against the U.S. dollar.
Gross Profit
Gross profit for the nine months ended September 30, 2001 decreased by $106
million, or 18%, to $476 million from $582 million in 2000.
Specialty Chemicals - Gross profit on MDI and polyols decreased 8% and 10%,
-------------------
respectively. While polyols benefited from increased sales volumes, this benefit
was more than offset by higher raw material and energy costs and lower selling
prices. Gross profit for PO/MTBE decreased due to lower volumes and average
selling prices combined with an increase in the cost of key PO/MTBE raw
materials including isobutane and methanol, and an increase in energy costs.
Non-comparative gross profit from TPU, ethyleneamines, surfactants and
performance chemicals was $45 million. Ethyleneamines and surfactants were not
present in the comparable period in 2000. TPU is included beginning September of
2000 and performance chemicals are included beginning July of 2000.
Petrochemicals - Petrochemicals gross profit decreased by 74% due to lower
--------------
average selling prices discussed above. The price of the main raw material,
naphtha, has decreased 8%, with the entire decrease occurring in the third
quarter of 2001. This decrease was more than offset by lower average selling
prices for petrochemical products. The weakness of the euro against the U.S.
dollar has also contributed to the decrease in gross profit.
Tioxide - Gross profit decreased by 26% for the period as cost reductions
-------
from the Company's on-going manufacturing excellence program were more than
offset by lower revenues and increased raw material and utility costs.
Selling, General and Administrative Expenses (including Research and
Development Expenses)
SG&A (including R&D) in the nine months ended September 30, 2001 increased
by $30 million, or 12%, to $280 million from $250 million in 2000.
Specialty Chemicals - SG&A (including R&D) in 2001 increased by 20% largely
-------------------
due to the SG&A expenses associated with businesses acquired since September 30,
2000.
Petrochemicals - SG&A (including R&D) in 2001 decreased by 19% primarily
--------------
due to foreign currency exchange gains.
Tioxide - SG&A (including R&D) in 2001 remained relatively unchanged
-------
compared to the 2000 period.
25
Interest Expense
Net interest expense in the nine months ended September 30, 2001 increased
by $7 million, or 4% to $172 million from $165 million in 2000. The increase was
primarily due to the decreased fair value of the Company's interest rate
derivative contracts.
Other Income/Expense
Other income in the nine months ended September 30, 2001 increased by $6
million to income of $4 million from an expense of $2 million in the 2000
period, principally as a result of the sale of the Company's interest in Nippon
Polyurethane Industry Co. Limited.
Income taxes
Income taxes in the nine months ended September 30, 2001 decreased by $69
million to a benefit of $47 million from expense of $22 million in the same
period in 2000. The effective income tax rate decreased from the 2000 period due
to a change in the mix of income (loss) earned in the U.S. versus international
locations.
Net income
Net income in the 2001 period decreased by $76 million to $65 million from
$141 million during 2000 as a result of the factors discussed above.
Changes in Financial Condition
As of September 30, 2001, the Company's working capital (excluding current
portion of long-term debt) increased by approximately $26.8 million to $366.2
million from $339.4 million at December 31, 2000. Approximately $64 million of
the increase was attributable to acquisitions completed during the nine months
ended September 30, 2001. This increase was partially offset by a reduction in
cash of approximately $23 million. As of September 30, 2001, the Company's
working capital (including current portion of long-term debt) decreased by
$1,515.9 million from $331.9 million at December 31, 2000 to a negative $1,184.0
million. The decrease in working capital was the result of the reclassification
of the Company's outstanding borrowings under its senior secured credit
facilities to current portion of long-term debt.
Liquidity and Capital Resources
Cash
Net cash provided by operating activities for the nine months ended
September 30, 2001 was $187.5 million, as compared to net cash provided by
operating activities of $196.2 million in the same period in 2000. The decrease
in cash provided was attributable to lower net income partially offset by a net
decrease in working capital, excluding acquisitions, during the 2001 period as
compared to the 2000 period.
Net cash used in investing activities for the nine months ended September
30, 2001 was $404.7 million, as compared to $273.8 million for the same period
in 2000. The increase in cash used was attributable to increased capital
expenditures and increased spending on acquisitions during the 2001 period.
Net cash provided by financing activities for the nine months ended
September 30, 2001 was $216.1 million, as compared to net cash provided by
financing activities of $53.9 million for the same period in 2000. During the
2001 period, the Company issued (euro)250 million of additional senior
subordinated notes which were used, together with cash flows from operations, to
fund acquisitions, capital expenditures and a portion of net working capital
investment.
26
Capital Expenditures
Capital expenditures for the nine months ended September 30, 2001 were
$198.7 million, an increase of $73.3 million as compared to the same period in
2000. The increase was primarily attributable to spending associated with the
ongoing expansion of the Company's Greatham, UK titanium dioxide plant. The
Company expects to spend approximately $50 to $75 million during the balance of
2001 on capital projects.
Debt
As of September 30, 2001, the Company had $20 million of outstanding
borrowings under its $400 million revolving credit facility and had
approximately $42.7 million in cash balances. The Company also maintains $80
million of short-term overdraft facilities, of which $48 million was available
on September 30, 2001.
As of September 30, 2001, the Company had outstanding variable rate
borrowings of approximately $1,323 million and (euro)236 million. For the nine
months ended September 30, 2001, the weighted average interest rate of these
borrowings was 8.07% and 6.92%, respectively. These rates do not consider the
effects of interest rate hedging activities.
Holdings has guaranteed, on a senior basis, the Company's obligations under
its senior secured credit facilities (the "Credit Facilities"). Holdings has
also pledged 100% of the Company's membership interests as collateral for its
obligations under the Credit Facilities.
The Company is not in compliance with one of the financial covenants
contained in the Credit Facilities. As a result, the Company currently cannot
borrow additional amounts under, or otherwise have access to, the Credit
Facilities. The Company is pursuing waivers under and amendments to the Credit
Facilities which, among other things, would modify the financial covenants.
Although there can be no assurance that such waivers and amendments will be
obtained, the Company believes that it will obtain the necessary waivers and
amendments. Unless and until such waivers and amendments are obtained, the
Company's lenders could pursue certain remedies under the Credit Facilities,
including (i) accelerating the debt thereunder, (ii) foreclosing on Holdings'
pledge of the Company's equity, and (iii) requiring Holdings to fulfill its
obligations under its guarantee. As a result, the Company has reclassified its
borrowings under the Credit Facilities to current portion of long-term debt.
Acceleration of the debt under the Credit Facilities would result in an
"event of default" under the indentures governing the Company's outstanding
senior subordinated notes (collectively, the "Indentures"), which could result
in an acceleration of the obligations thereunder by the trustee or the holders
of at least 25% in aggregate principal amount of the then outstanding notes.
A foreclosure on the Company's pledged equity by the lenders under the
Credit Facilities would constitute a "change of control" under the Indentures.
If a "change of control" occurs, each holder of such notes would have the right
(the "change of control put right") to require the Company to purchase all the
notes held by such holder at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, as of the date of
purchase.
A "change of control" could also be triggered by certain events affecting
Huntsman Corporation. As of September 30, 2001, Huntsman Corporation had
approximately $1.4 billion of outstanding borrowings under certain senior
secured credit facilities (the "HC Credit Facilities"). As collateral for its
obligations under the HC Credit Facilities, Huntsman Corporation has pledged its
80.1% equity ownership interest in Huntsman Specialty Chemicals Holdings Corp.
("HSCHC") to its lenders. HSCHC owns 100% of HSCC, which directly owns 60% of
the membership interests of Holdings.
Huntsman Corporation is not in compliance with certain financial covenants
contained in the HC Credit Facilities and is seeking an agreement from its
lenders that would provide for waivers, amendments and forbearance with respect
to the HC Credit Facilities (the "Amendment Agreement"). Unless and until an
Amendment Agreement is obtained, or until the lenders' rights are stayed,
Huntsman Corporation's lenders could pursue certain remedies under the HC Credit
Facilities, including accelerating the debt due under the HC Credit Facilities.
Although Huntsman Corporation believes that it will obtain an acceptable
Amendment Agreement, there can be no assurance that such an agreement will be
obtained.
Huntsman Corporation, Deutsche Banc Alex, Brown, Inc and Bankers Trust
Company are currently negotiating a commitment letter pursuant to which a
wholly-owned subsidiary of Huntsman Corporation would be provided with a new
accounts receivable facility of not less than $80 million (the "New AR
Facility"). Proceeds from the New AR Facility would be used, among other things,
to provide liquidity to Huntsman Corporation and certain of its affiliates (not
including the Company or its subsidiaries). The commitment to provide the New AR
Facility is subject to certain conditions, including, but not limited to, the
execution and delivery of the Amendment Agreement and the completion of
satisfactory final documentation relating to the New AR Facility. Huntsman
Corporation believes that it will obtain the New AR Facility; however, there can
be no assurance as to the amount or terms of the New AR Facility or that the New
AR Facility will be obtained.
27
A foreclosure on the HSCHC stock pledged by Huntsman Corporation to
its lenders would constitute a "change of control" under the Indentures and
under the Credit Facilities. The occurrence of such "change of control" would
(i) entitle each holder of outstanding senior subordinated notes to exercise its
change of control put right and (ii) be an event of default under the Credit
Facilities which could result in an acceleration of the debt thereunder by the
lenders. Under such circumstances there can be no assurance that the Company
would have sufficient funds to purchase such notes.
HSCHC, HSCC, Holdings and the Company have not guaranteed or provided any
other credit support to the obligations of Huntsman Corporation under the HC
Credit Facilities or under Huntsman Corporation's outstanding high-yield notes
(the "HC Notes"). Neither any events of default under the HC Credit Facilities
or the HC Notes nor the exercise of any remedy by the lenders thereunder will
not cause any cross-defaults or cross-accelerations under (i) the outstanding
high-yield notes of Holdings, (ii) the Indentures or (iii) the Credit
Facilities, except insofar as foreclosure on the stock of HSCHC would constitute
a "change of control" as described in the preceding paragraph.
In early October 2001, Huntsman Corporation engaged Dresdner Kleinwort
Wasserstein, Inc. as its financial advisor and investment banker to assist
Huntsman Corporation and certain of its domestic subsidiaries in identifying and
exploring strategic alternatives, including developing out of court or court
sanctioned financial restructuring plans.
The Company's outstanding senior subordinated notes are subordinated in
right of payment to all of its existing and future senior debt, including the
Credit Facilities. Therefore, the Company's obligations to the lenders under the
Credit Facilities would have to be fully satisfied before it can satisfy any
change of control put right of, or make any payment to, the holders of its
senior subordinated notes. As noted above, there can be no assurance that the
Company would have sufficient funds to repay or purchase its outstanding senior
subordinated notes.
Conversion to Euros
On January 1, 1999, eleven European countries established fixed conversion
rates between their existing sovereign currencies ("legacy currencies") and
adopted the euro as their common legal currency. The euro and the legacy
currencies are each legal tender for transactions now. Beginning January 1,
2002, the participating countries will issue euro-denominated bills and coins.
By July 1, 2002 each country will withdraw its sovereign currency and
transactions thereafter will be conducted solely in euros. The Company currently
believes that the conversion to the euro will not have a material effect on the
Company's operations, financial condition or liquidity.
Cautionary Statement for Forward Looking Information
Certain information set forth in this report contains "forward-looking
statements" within the meaning of federal securities laws. Forward-looking
statements include statements concerning the Company's plans, objectives, goals,
strategies, future events, future revenues or performance, capital expenditures,
financing needs, plans or intentions relating to acquisitions and other
information that is not historical information. In some cases, forward-looking
statements can be identified by terminology such as "believes," "expects,"
"may," "will," "should," or "anticipates," or the negative of such terms or
other comparable terminology, or by discussions of strategy. The Company may
also make additional forward-looking statements from time to time. All such
subsequent forward-looking statements, whether written or oral, by the Company
or on its behalf, are also expressly qualified by these cautionary statements.
All forward-looking statements, including without limitation, management's
examination of historical operating trends, are based upon management's current
expectations and various assumptions. Management's expectations, beliefs and
projections are expressed in good faith and it believes there is a reasonable
basis for them, but, there can be no assurance that management's expectations,
beliefs and projections will result or be achieved. All forward-looking
statements apply only as of the date made. Except as required by law, the
Company undertakes no obligation to publicly update or revise forward-looking
statements which may be made to reflect events or circumstances after the date
made or to reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk, including changes in interest rates,
currency exchange rates and certain commodity prices. The Company's exposure to
foreign currency market risk is limited since sales prices are typically
denominated in euros or U.S. dollars. To the extent the Company has material
foreign currency exposure on known transactions, hedges are put in place monthly
to mitigate such market risk. The Company's exposure to changing commodity
prices is also limited (on an annual basis) since the majority of raw materials
are acquired at posted or market related prices, and sales prices for finished
products are generally at market related prices which are set on a quarterly
basis in line with industry practice. To manage the volatility relating to these
exposures, the Company enters into various
28
derivative transactions. The Company holds and issues derivative financial
instruments for economic hedging purposes only.
The Company's cash flows and earnings are subject to fluctuations due to
exchange rate variation. Short-term exposures to changing foreign currency
exchange rates at certain foreign subsidiaries are managed through financial
market transactions, principally through the purchase of forward foreign
exchange contracts (with maturities of six months or less) with various
financial institutions, to reflect the currency denomination of its cash flows.
The Company does not hedge its currency exposures in a manner that would
entirely eliminate the effect of changes in exchange rates on its cash flows and
earnings. As of September 30, 2001, the Company had outstanding foreign exchange
forward contracts with third party banks of approximately $15 million.
Predominantly, the Company's hedging activity is to sell forward the majority of
its surplus non-U.S. dollar receivables for U.S. dollars. Using sensitivity
analysis, the foreign exchange loss due to these derivative instruments from an
assumed 10% unfavorable change in year-end rates, when considering the effects
of the underlying hedged firm commitment, is not material.
Under the terms of the Company's senior secured credit facilities, the
Company is required to hedge a significant portion of its floating rate debt. As
of September 30, 2001, the Company had entered into approximately $646 million
notional amount of interest rate swap, cap and collar transactions, which have
terms ranging from approximately nine months to thirty-nine months. The majority
of these transactions hedge against movements in U.S. dollar interest rates. The
U.S. dollar swap transactions obligate the Company to pay fixed amounts ranging
from approximately 5.75% to approximately 7.0%. The U.S. dollar collar
transactions carry floors ranging from 5.0% to 6.25% and caps ranging from 6.6%
to 7.5%. The Company has also entered into a euro-denominated swap transaction
that obligates it to pay a fixed rate of approximately 4.3%. The Company does
not hedge its interest rate exposure in a manner that would entirely eliminate
the effects of changes in market interest rates on its cash flow and earnings.
Assuming a 1% (100 basis point) increase in U.S. dollar interest rates, the
effect on the annual interest expense would be an increase of approximately
$15.2 million. This increase would be reduced by approximately $2.8 million as a
result of the effects of the interest rate swap, cap and collar transactions
described above.
In order to reduce the Company's overall raw material costs, the
petrochemical business enters into various commodity contracts to hedge its
purchase of commodity products. The Company does not hedge its commodity
exposure in a manner that would entirely eliminate the effects of changes in
commodity prices on its cash flows and earnings. At September 30, 2001, the
Company had forward purchase and sales contracts for 170,000 and 50,000 tonnes
(naphtha and other hydrocarbons), respectively, which do not qualify for hedge
accounting. Assuming a 10% increase or a 10% decrease in the price per tonnes of
naphtha, the change would result in gains or losses of approximately $3 million,
respectively.
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
As of September 30, 2001, the Company was in default under one financial
covenant specified in the documents governing its senior secured credit
facilities (the "Credit Facilities"). Specifically, the Credit Facilities
require the Company to maintain a Leverage Ratio (as defined in the Credit
Facilities) equal to or less than 4.75x as of September 30, 2001. The Company
failed to comply with this covenant as a result of the issues and developments
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" above.
The Company is currently pursuing waivers under, and amendments to, the
Credit Facilities which, among other things, would modify the financial
covenants. There can be no assurance that such waivers and amendments will be
obtained. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Liquidity and Capital Resources--Debt." Unless and until
such waivers and amendments are obtained,
29
the Company's lenders could pursue certain remedies under the Credit Facilities
including accelerating the debt due under the Credit Facilities. As a result,
the Company has reclassified the outstanding borrowings under the Credit
Facilities to current portion of long-term debt.
Item 6. Exhibits and Reports on Form 8-K
(a) The Company filed no reports on Form 8-K for the quarter ended
September 30, 2001.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUNTSMAN INTERNATIONAL LLC
/s/ J. Kimo Esplin
--------------------------------------------
J. Kimo Esplin
Executive Vice President and
Chief Financial Officer
(Authorized Signatory and Principal
Financial and Accounting Officer)
Date: November 19, 2001
31