================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 August 14, 2001, 1,000 member equity units of Huntsman International LLC were outstanding. ================================================================================ HUNTSMAN INTERNATIONAL LLC FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 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 (Loss) Income................................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 6. Exhibits and Reports on Form 8-K............................29 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in Millions) - --------------------------------------------------------------------------------
June 30, 2001 December 31, 2000 --------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 67.3 $ 66.1 Accounts and notes receivable (net of allowance for doubtful accounts of $14.0 and $10.6, respectively) 636.0 553.9 Inventories 538.0 496.4 Prepaid expenses 25.1 15.2 Deferred income taxes 0.9 0.9 Other current assets 58.9 69.6 --------------- --------------- Total current assets 1,326.2 1,202.1 Property, plant and equipment, net 2,744.9 2,703.9 Investment in unconsolidated affiliates 152.3 156.7 Intangible assets, net 455.0 434.7 Other noncurrent assets 267.9 318.0 --------------- --------------- Total assets $ 4,946.3 $ 4,815.4 =============== =============== LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 322.2 $ 313.3 Accrued liabilities 537.1 517.0 Current portion of long-term debt 66.2 7.5 Other current liabilities 35.6 32.4 --------------- --------------- Total current liabilities 961.1 870.2 Long-term debt: 2,479.6 2,343.0 Deferred income taxes 309.1 332.1 Other noncurrent liabilities 130.6 131.8 --------------- --------------- Total liabilities 3,880.4 3,677.1 --------------- --------------- Minority interests 10.0 9.6 --------------- --------------- Equity: Member's equity, 1,000 units 1,026.1 1,026.1 Retained earnings 253.8 223.3 Accumulated other comprehensive loss (224.0) (120.7) --------------- --------------- Total equity 1,055.9 1,128.7 --------------- --------------- Total liabilities and equity $ 4,946.3 $ 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 Six Months Six Months Ended Ended Ended Ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------- ------------- ------------- ------------- Revenues: Trade sales and services $ 1,164.5 $ 1,025.6 $ 2,207.0 $ 1,957.3 Related party sales 110.6 121.0 216.1 232.0 Tolling fees 9.0 8.1 12.6 20.3 ------------ ------------ ------------ ------------ Total revenues 1,284.1 1,154.7 2,435.7 2,209.6 Cost of goods sold 1,113.5 948.9 2,099.1 1,822.5 ------------ ------------ ------------ ------------ Gross profit 170.6 205.8 336.6 387.1 Expenses: Selling, general and administrative 73.6 58.1 154.4 126.1 Research and development 15.5 17.9 31.9 35.8 ------------ ------------ ------------ ------------ Total expenses 89.1 76.0 186.3 161.9 ------------ ------------ ------------ ------------ Operating income 81.5 129.8 150.3 225.2 Interest expense, net 54.6 54.7 114.2 109.0 Loss on sale of accounts receivable 3.2 -- 5.4 -- Other (income) expense 0.9 1.3 (5.5) 1.7 ------------ ------------ ------------ ------------ Income before income taxes 22.8 73.8 36.2 114.5 Income tax expense 0.5 9.0 3.2 12.9 Minority interests in subsidiaries 0.3 0.8 1.0 1.3 ------------ ------------ ------------ ------------ Income before accounting change 22.0 64.0 32.0 100.3 Cumulative effect of accounting change -- -- (1.5) -- ------------ ------------ ------------ ------------ Net income 22.0 64.0 30.5 100.3 Other comprehensive loss - Foreign currency translation adjustments (31.2) (37.1) (91.5) (82.0) Cumulative effect of accounting change -- -- (1.1) -- Net unrealized loss on derivative instruments (3.0) -- (10.7) -- ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (12.2) $ 26.9 $ (72.8) $ 18.3 ============ ============ ============ ============
See accompanying notes to consolidated financial statements 3 HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) (Dollars in Millions) - --------------------------------------------------------------------------------
Accumulated Member's Equity Other -------------------------- 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 30.5 30.5 Other comprehensive loss (103.3) (103.3) -------- ---------- --------- -------------- ----------- Balance, June 30, 2001 1,000 $ 1,026.1 $ 253.8 $ (224.0) $ 1,055.9 ======== ========== ========= ============== ===========
See accompanying notes to consolidated financial statements 4 HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in Millions) - --------------------------------------------------------------------------------
Six Months Six Months Ended Ended June 30, 2001 June 30, 2000 ------------- ------------- Cash flows from operating activities: Net income $ 30.5 $ 100.3 Adjustments to reconcile net income to net cash from operating activities: Equity in earnings of investment in unconsolidated affiliates (0.1) (0.1) Minority interests in subsidiaries 1.0 1.3 (Gain) loss on foreign currency transactions (2.2) 1.7 Depreciation and amortization 116.8 107.3 Deferred income taxes (11.7) 3.3 Changes in operating assets and liabilities-- net of effects of acquisitions: Accounts and notes receivables (23.8) (43.6) Inventories (29.6) (13.6) Prepaid expenses (10.1) (0.5) Other current assets (1.4) (6.1) Accounts payable (40.1) 2.3 Accrued liabilities 37.9 40.5 Other current liabilities 7.1 (36.7) Other noncurrent assets 24.5 (20.4) Other noncurrent liabilities (0.5) (4.1) ------------ ------------ Net cash provided by operating activities 98.3 131.6 ------------ ------------ Investing activities: Acquisition of businesses (209.5) (26.8) Capital expenditures (113.4) (73.8) Cash received from unconsolidated affiliates 4.9 5.2 Advances to unconsolidated affiliates (1.3) (8.5) ------------ ------------ Net cash used in investing activities (319.3) (103.9) ------------ ------------ Financing activities: Borrowings under senior credit facilities 5.4 -- Repayments of senior credit facilities -- (36.9) Issuance of senior subordinated notes 233.2 -- Debt issuance costs (4.6) -- ------------ ------------ Net cash provided by (used in) financing activities 234.0 (36.9) ------------ ------------ Effect of exchange rate changes on cash (11.8) (7.5) ------------ ------------ Increase (decrease) in cash and cash equivalents 1.2 (16.7) Cash and cash equivalents at beginning of period 66.1 138.9 ------------ ------------ Cash and cash equivalents at end of period $ 67.3 $ 122.2 ============ ============
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 condensed 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):
June 30, 2001 December 31, 2000 ------------- ----------------- Raw materials $ 152.7 $ 149.5 Work in progress 17.4 22.8 Finished goods 345.6 302.5 ------------ ------------ Subtotal 515.7 474.8 Materials and supplies 22.3 21.6 ------------ ------------ Net $ 538.0 $ 496.4 ============ ============
4. LONG-TERM DEBT On May 2, 2001, Huntsman International completed an offering of its 10-1/8% Senior Subordinated Notes due 2009, resulting in net proceeds of approximately (euro)52.0 million, including (euro)1.7 million of interest accrued from January 1, 2001 paid by the purchasers. The terms of these notes are substantially similar to the terms of the Company's outstanding senior subordinated notes. 6 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. As a result, the Company enters into transactions including 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. Actions taken to reduce interest rate risk include managing the mix and rate characteristics of various interest bearing liabilities as well as entering into interest rate swaps, collars and options. As of June 30, 2001, the Company maintained interest rate swaps and collars with a fair value of approximately $8.5 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 six months ended June 30, 2001, the effective portion of unrealized losses of approximately $8.1 million were recorded as a component of other comprehensive income, with the ineffective portion of approximately $0.4 million recorded as additional interest expense in the accompanying statement of operations. For the six months ended June 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 $4.5 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 June 30, 2001, the Company maintained forward contracts with a fair value of $0.4 million. These amounts are recorded as other current assets in the accompanying balance sheet. Commodity Price Hedging Because feedstocks used by the Company are subject to price volatility, the Company uses commodity futures and swaps to reduce 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 statement of operations. For the six months ended June 30, 2000, contracts designated 7 as cash flow hedges had a fair value of approximately $3.8 million. These amounts are recorded as other current liabilities in the accompanying balance sheet. Contracts designated as fair value hedges were not material to the accompanying financial statements for the periods presented. Contracts not designated as hedges had a fair value of approximately $4.0 million recorded as other current assets and $2.1 million recorded as other current liabilities. The net impact of $1.9 million was recorded as a reduction of cost of goods sold in the accompanying statement 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. Currency effects of these hedges produced a net gain in other comprehensive income (foreign currency translation adjustments) of approximately $44.3 million for the quarter ended June 30, 2001, with an ending net balance of approximately $90.3 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 to 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 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 supported Denmark officials on the issue. Denmark has entered into a voluntary 8 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; MTBE will still be an additive in a limited amount of 98-octane gasoline sold in 100 selected service stations in the country. In the U.S., a federal court in New York has denied plaintiffs' motion for summary judgment in a case brought by the Oxygenated Fuel Association ("OFA"), an organization representing MTBE producers. In the motion, 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. Although this ruling was based on the court's view 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 MTBE from being sold 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 aforementioned New York case, as well as a similar case in California. The possibility of Congressional action to ban the sale of MTBE in the future, and the pendency of EPA's administrative process to ban the manufacture and sale of the chemical in the United States, 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 benzene heartcut 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 EA investigations into the incident are continuing and 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 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
Sales between segments are generally recognized at external market prices. For the six months ended June 30, 2001 and 2000, sales to Imperial Chemical Industries PLC ("ICI") and its affiliates accounted for approximately 7% and 8%, respectively, of consolidated revenues. 9
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------- ------------- ------------- ------------- Net sales: Specialty Chemicals $ 724.7 $ 549.0 $ 1,305.6 $ 1,040.2 Petrochemicals 353.9 376.0 721.5 721.3 Tioxide 230.4 255.7 458.4 497.2 Sales between segments, Petrochemicals sales to Specialty Chemicals (24.9) (26.0) (49.8) (49.1) ------------- ------------- ------------- ------------- Total $ 1,284.1 $ 1,154.7 $ 2,435.7 $ 2,209.6 ============= ============= ============= ============= Operating income: Specialty Chemicals $ 53.2 $ 67.1 $ 75.0 $ 129.0 Petrochemicals (4.2) 21.7 9.7 21.4 Tioxide 32.5 41.0 65.6 74.8 ------------- ------------- ------------- ------------- Total $ 81.5 $ 129.8 $ 150.3 $ 225.2 ============= ============= ============= ============= EBITDA (1): Specialty Chemicals $ 86.9 $ 97.2 $ 150.5 $ 188.3 Petrochemicals 6.1 33.5 29.2 44.8 Tioxide 42.9 51.8 87.5 97.7 ------------- ------------- ------------- ------------- Total EBITDA 135.9 182.5 267.2 330.8 Depreciation & amortization (58.5) (54.0) (116.8) (107.3) Interest expense, net (54.6) (54.7) (114.2) (109.0) ------------- ------------- ------------- ------------- Income before income taxes $ 22.8 $ 73.8 $ 36.2 $ 114.5 ============= ============= ============= =============
(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 Huntsman Corporation and certain of its subsidiaries have 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 in a newly-formed Huntsman affiliate (the "Proposed Transaction"). The letter agreements contemplate, among other things, that Bain and Blackstone would invest up to $555 million in the Huntsman affiliate which would become the majority owner of Huntsman International Holdings. If the parties complete the Proposed Transaction, a substantial portion of the proceeds received from Bain, Blackstone and our Company is intended to be used to finance the purchase of the membership interests of Huntsman International Holdings that are held by ICI and by other minority interest holders. After the Proposed Transaction, Huntsman Corporation, Huntsman Corporation affiliates and members of the Huntsman family collectively would have a majority indirect interest in Huntsman International Holdings. The consummation of the Proposed Transaction is subject to certain conditions, including the execution of definitive agreements and the completion by Bain and Blackstone of due diligence to their satisfaction. The letter agreements supersede the February 2001 letter agreement between Bain and Huntsman Corporation. There can be no assurance that such definitive agreements will be entered into or that the transactions contemplated under such agreements will be consummated. Issuance of (euro)50 Million Senior Subordinated Notes On May 2, 2001, Huntsman International completed an offering of its 10-1/8% Senior Subordinated Notes due 2009, resulting in net proceeds of approximately (euro)52 million. The terms of these notes are substantially similar to the terms of the Company's previously outstanding senior subordinated notes. 10 Acquisition of Surfactants Business Effective April 1, 2001 and pursuant to the terms of a definitive agreement dated February 27, 2001, the Company completed its planned purchase of the European surfactants business of Albright & Wilson, a subsidiary of Rhodia, S.A., for an aggregate purchase price of approximately (euro)205 million. Albright & Wilson's surfactants business participates in the anionic surfactants and non-ionic surfactants markets. Recently Issued Accounting Pronouncements On July 20, 2001, the Financial Accounting Standards Board 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. 10. 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 June 30, 2001 and December 31, 2000 and for the three months ended June 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 BALANCE SHEETS JUNE 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 $ -- $ 67.2 $ -- $ 67.3 Accounts and notes receivable, net 71.8 96.0 574.7 (106.5) 636.0 Inventories 52.4 84.1 401.5 -- 538.0 Other current assets 47.0 82.8 71.7 (116.6) 84.9 ------------ ------------ ------------ ------------ ------------ Total current assets 171.3 262.9 1,115.1 (223.1) 1,326.2 Property, plant and equipment, net 587.3 368.4 1,789.2 -- 2,744.9 Investment in unconsolidated affiliates 2,717.1 894.5 1.4 (3,460.7) 152.3 Other noncurrent assets 431.0 1,223.0 269.5 (1,200.6) 722.9 ------------ ------------ ------------ ------------ ------------ Total assets $ 3,906.7 $ 2,748.8 $ 3,175.2 $ (4,884.4) $ 4,946.3 ============ ============ ============ ============ ============ LIABILITIES AND EQUITY Current liabilities: Accounts payable and accrued liabilities $ 155.2 $ 121.5 $ 716.4 $ (133.8) $ 859.3 Current portion of long-term debt 56.2 -- 10.0 -- 66.2 Other current liabilities 80.6 9.3 35.0 (89.3) 35.6 ------------ ------------ ------------ ------------ ------------ Total current 292.0 130.8 761.4 (223.1) 961.1 liabilities Long-term debt 2,502.6 -- 1,177.6 (1,200.6) 2,479.6 Other current liabilities 56.2 4.2 379.3 -- 439.7 ------------ ------------ ------------ ------------ ------------ Total liabilities 2,850.8 135.0 2,318.3 (1,423.7) 3,880.4 ------------ ------------ ------------ ------------ ------------ Minority interests -- -- 10.0 -- 10.0 ------------ ------------ ------------ ------------ ------------ Equity: Member's equity, 1,000 units 1,026.1 -- -- -- 1,026.1 Subsidiary equity -- 2,412.4 770.6 (3,183.0) -- Retained earnings 253.8 513.2 186.6 (699.8) 253.8 Accumulated other comprehensive loss (224.0) (311.8) (110.3) 422.1 (224.0) ------------ ------------ ------------ ------------ ------------ Total equity 1,055.9 2,613.8 846.9 (3,460.7) 1,055.9 ------------ ------------ ------------ ------------ ------------ Total liabilities and equity $ 3,906.7 $ 2,748.8 $ 3,175.2 $ (4,884.4) $ 4,946.3 ============ ============ ============ ============ ============
12 HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES CONSOLIDATING 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 liabilities 263.0 144.5 685.0 (222.3) 870.2 Long-term debt 2,368.1 -- 1,205.1 (1,230.2) 2,343.0 Other current 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 JUNE 30, 2001 (UNAUDITED) (Dollars in Millions) - --------------------------------------------------------------------------------
Parent Only Consolidated Huntsman Non- Huntsman International Guarantors Guarantors Eliminations International ------------- ------------ ------------ ------------ ------------- Revenues: Trade sales and services $ 160.2 $ 193.3 $ 811.0 $ -- $ 1,164.5 Related party sales 39.1 44.9 101.9 (75.3) 110.6 Tolling fees -- 8.8 0.2 -- 9.0 ------------ ------------ ------------ ------------ ------------ Total revenue 199.3 247.0 913.1 (75.3) 1,284.1 Cost of goods sold 153.7 206.0 829.1 (75.3) 1,113.5 ------------ ------------ ------------ ------------ ------------ Gross profit 45.6 41.0 84.0 -- 170.6 Expenses: Selling, general and administrative 29.0 6.9 37.7 -- 73.6 Research and development 11.0 1.0 3.5 -- 15.5 ------------ ------------ ------------ ------------ ------------ Total expenses 40.0 7.9 41.2 -- 89.1 ------------ ------------ ------------ ------------ ------------ Operating income 5.6 33.1 42.8 -- 81.5 Interest expense (income), net 56.8 (27.7) 25.5 -- 54.6 Loss on sale of accounts receivable 0.8 1.3 1.1 -- 3.2 Equity in earnings of unconsolidated affiliates 74.0 14.5 -- (88.5) -- Other expense -- -- 0.9 -- 0.9 ------------ ------------ ------------ ------------ ------------ Income before income taxes 22.0 74.0 15.3 (88.5) 22.8 Income tax expense -- -- 0.5 -- 0.5 Minority interests in subsidiaries -- -- 0.3 -- 0.3 ------------ ------------ ------------ ------------ ------------ Net income before accounting change 22.0 74.0 14.5 (88.5) 22.0 Cumulative effect of accounting change -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net income 22.0 74.0 14.5 (88.5) 22.0 Other comprehensive loss (34.2) (60.3) (26.5) 86.8 (34.2) ------------ ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (12.2) $ 13.7 $ (12.0) $ (1.7) $ (12.2) ============ ============ ============ ============ ============
14 HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME THREE MONTHS ENDED JUNE 30, 2000 (UNAUDITED) (Dollars in Millions) - --------------------------------------------------------------------------------
Parent Only Consolidated Huntsman Non- Huntsman International Guarantors Guarantors Eliminations International ------------- ------------ ------------ ------------ ------------- Revenues: Trade sales and services $ 294.9 $ 51.2 $ 679.5 $ -- $ 1,025.6 Related party sales 47.0 11.8 121.0 (58.8) 121.0 Tolling fees 8.1 -- -- -- 8.1 ------------ ------------ ------------ ------------ ------------ Total revenue 350.0 63.0 800.5 (58.8) 1,154.7 Cost of goods sold 270.8 51.0 685.9 (58.8) 948.9 ------------ ------------ ------------ ------------ ------------ Gross profit 79.2 12.0 114.6 -- 205.8 Expenses: Selling, general and administrative 25.8 4.8 27.5 -- 58.1 Research and development 15.0 -- 2.9 -- 17.9 ------------ ------------ ------------ ------------ ------------ Total expenses 40.8 4.8 30.4 -- 76.0 ------------ ------------ ------------ ------------ ------------ Operating income 38.4 7.2 84.2 -- 129.8 Interest expense (income), net 56.1 (32.7) 31.3 -- 54.7 Loss on sale of accounts receivable -- -- -- -- -- Equity in earnings of unconsolidated affiliates 81.7 41.8 -- (123.4) 0.1 Other expense -- -- 1.4 -- 1.4 ------------ ------------ ------------ ------------ ------------ Income before income taxes 64.0 81.7 51.5 (123.4) 73.8 Income tax expense -- -- 9.0 -- 9.0 Minority interests in subsidiaries -- -- 0.8 -- 0.8 ------------ ------------ ------------ ------------ ------------ Net income 64.0 81.7 41.7 (123.4) 64.0 Other comprehensive loss (37.1) (37.2) (8.4) 45.6 (37.1) ------------ ------------ ------------ ------------ ------------ Comprehensive income $ 26.9 $ 44.5 $ 33.3 $ (77.8) $ 26.9 ============ ============ ============ ============ ============
15 HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) (Dollars in Millions) - --------------------------------------------------------------------------------
Parent Only Consolidated Huntsman Non- Huntsman International Guarantors Guarantors Eliminations International ------------- ------------ ------------ ------------ ------------- Revenues: Trade sales and services $ 315.3 $ 350.3 $ 1,541.4 $ -- $ 2,207.0 Related party sales 87.0 83.2 211.9 (166.0) 216.1 Tolling fees -- 12.4 0.2 -- 12.6 ------------ ------------ ------------ ------------ ------------ Total revenue 402.3 445.9 1,753.5 (166.0) 2,435.7 Cost of goods sold 320.5 390.5 1,554.1 (166.0) 2,099.1 ------------ ------------ ------------ ------------ ------------ Gross profit 81.8 55.4 199.4 -- 336.6 Expenses: Selling, general and administrative 55.0 16.1 83.3 -- 154.4 Research and development 27.2 2.1 2.6 -- 31.9 ------------ ------------ ------------ ------------ ------------ Total expenses 82.2 18.2 85.9 -- 186.3 ------------ ------------ ------------ ------------ ------------ Operating income (0.4) 37.2 113.5 -- 150.3 Interest expense (income), net 118.3 (54.4) 50.3 -- 114.2 Loss on sale of accounts receivable 1.1 2.8 1.5 -- 5.4 Equity in earnings of unconsolidated affiliates 151.6 62.7 -- (214.2) 0.1 Other expense (income) (0.2) -- (5.2) -- (5.4) ------------ ------------ ------------ ------------ ------------ Income before income taxes 32.0 151.5 66.9 (214.2) 36.2 Income tax expense -- -- 3.2 -- 3.2 Minority interests in subsidiaries -- -- 1.0 -- 1.0 ------------ ------------ ------------ ------------ ------------ Net income before accounting change 32.0 151.5 62.7 (214.2) 32.0 Cumulative effect of accounting change (1.5) -- -- -- (1.5) ------------ ------------ ------------ ------------ ------------ Net income 30.5 151.5 62.7 (214.2) 30.5 Other comprehensive loss (103.3) (142.8) (53.5) 196.3 (103.3) ------------ ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (72.8) $ 8.7 $ 9.2 $ (17.9) $ (72.8) ============ ============ ============ ============ ============
16 HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) (Dollars in Millions) - --------------------------------------------------------------------------------
Parent Only Consolidated Huntsman Non- Huntsman International Guarantors Guarantors Eliminations International ------------- ------------ ------------ ------------ ------------- Revenues: Trade sales and services $ 539.9 $ 97.8 $ 1,319.6 $ -- $ 1,957.3 Related party sales 87.6 20.8 239.6 (116.0) 232.0 Tolling fees 20.3 -- -- -- 20.3 ------------ ------------ ------------ ------------ ------------ Total revenue 647.8 118.6 1,559.2 (116.0) 2,209.6 Cost of goods sold 494.2 98.3 1,346.0 (116.0) 1,822.5 ------------ ------------ ------------ ------------ ------------ Gross profit 153.6 20.3 213.2 -- 387.1 Expenses: Selling, general and administrative 54.0 7.4 64.7 -- 126.1 Research and development 28.1 -- 7.7 -- 35.8 ------------ ------------ ------------ ------------ ------------ Total expenses 82.1 7.4 72.4 -- 161.9 ------------ ------------ ------------ ------------ ------------ Operating income 71.5 12.9 140.8 -- 225.2 Interest expense (income), net 111.4 (64.5) 62.1 -- 109.0 Loss on sale of accounts receivable -- -- -- -- -- Equity in earnings of unconsolidated affiliates 140.2 62.8 -- (202.9) 0.1 Other expense -- -- 1.8 -- 1.8 ------------ ------------ ------------ ------------ ------------ Income before income taxes 100.3 140.2 76.9 (202.9) 114.5 Income tax expense -- -- 12.9 -- 12.9 Minority interests in subsidiaries -- -- 1.3 -- 1.3 ------------ ------------ ------------ ------------ ------------ Net income 100.3 140.2 62.7 (202.9) 100.3 Other comprehensive loss (82.0) (106.2) (30.0) 136.2 (82.0) ------------ ------------ ------------ ------------ ------------ Comprehensive income $ 18.3 $ 34.0 $ 32.7 $ (66.7) $ 18.3 ============ ============ ============ ============ ============
17 HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW SIX MONTHS ENDED JUNE 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 $ (90.8) $ 79.1 $ 110.0 $ -- $ 98.3 ------------ ------------ ------------ ------------ ------------ Investing activities: Acquisition of businesses -- (29.1) (180.4) -- (209.5) Capital expenditures (12.3) (2.2) (98.9) -- (113.4) Cash received from unconsolidated affiliates 4.9 -- -- -- 4.9 Advances to unconsolidated affiliates (1.3) -- -- -- (1.3) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities (8.7) (31.3) (279.3) -- (319.3) ------------ ------------ ------------ ------------ ------------ Financing activities: Borrowings under senior credit facilities 1.5 -- 3.9 -- 5.4 Issuance of senior subordinated notes 233.2 -- -- -- 233.2 Debt issuance costs (4.6) -- -- -- (4.6) Cash contributions by parent -- 585.9 1,783.5 (2,369.4) -- Cash distributions from subsidiaries 2,192.5 -- -- (2,192.5) -- Cash distributions to parent -- (484.9) (1,707.6) 2,192.5 -- Cash distributions to subsidiaries (2,318.2) (51.2) -- 2,369.4 -- Intercompany advances - net of repayments (1.7) (93.4) 95.1 -- -- ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 102.7 (43.6) 174.9 -- 234.0 ------------ ------------ ------------ ------------ ------------ Effect of exchange rate changes on cash (8.8) (4.2) 1.2 -- (11.8) ------------ ------------ ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents (5.6) -- 6.8 -- 1.2 Cash and cash equivalents at beginning of period 5.7 -- 60.4 -- 66.1 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ 0.1 $ -- $ 67.2 $ -- $ 67.3 ============ ============ ============ ============ ============
18 HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW SIX MONTHS ENDED JUNE 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 $ (40.8) $ 68.2 $ 104.2 $ -- $ 131.6 ------------ ------------ ------------ ------------ ------------ Investing activities: Acquisition of other businesses (12.8) -- (14.0) -- (26.8) Cash expenditures (16.8) (0.2) (56.8) -- (73.8) Cash received from unconsolidated affiliates -- 5.2 -- -- 5.2 Advances to unconsolidated affiliates (8.5) -- -- -- (8.5) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities (38.1) 5.0 (70.8) -- (103.9) ------------ ------------ ------------ ------------ ------------ Financing activities: Repayment of senior credit facilities (35.7) -- (1.2) -- (36.9) Cash contributions by parent -- 97.8 5.1 (102.9) -- Cash distributions from subsidiaries 156.4 -- -- (156.4) -- Cash distributions to parent -- (156.4) -- 156.4 -- Cash distributions to subsidiaries (97.8) (5.1) -- 102.9 -- Intercompany advances - net of repayments 55.9 (9.7) (46.2) -- -- ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 78.8 (73.4) (42.3) -- (36.9) ------------ ------------ ------------ ------------ ------------ Effect of exchange rate changes on cash -- -- (7.5) -- (7.5) ------------ ------------ ------------ ------------ ------------ Decrease in cash and cash equivalents (0.1) (0.2) (16.4) -- (16.7) Cash and cash equivalents at beginning of period 9.0 0.2 129.7 -- 138.9 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ 8.9 $ -- $ 113.3 $ -- $ 122.2 ============ ============ ============ ============ ============
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'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. 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 Huntsman Corporation and certain of its subsidiaries have 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 in a newly-formed Huntsman affiliate (the "Proposed Transaction"). The letter agreements contemplate, among other things, that Bain and Blackstone would invest up to $555 million in the Huntsman affiliate which would become the majority owner of Huntsman International Holdings. If the parties complete the Proposed Transaction, a substantial portion of the proceeds received from Bain, Blackstone and our Company is intended to be used to finance the purchase of the membership interests of Huntsman International Holdings that are held by ICI and by other minority interest holders. After the Proposed Transaction, Huntsman Corporation, Huntsman Corporation affiliates and members of the Huntsman family collectively would have a majority indirect interest in Huntsman International Holdings. The consummation of the Proposed Transaction is subject to certain conditions, including the execution of definitive agreements and the completion by Bain and Blackstone of due diligence to their satisfaction. The letter agreements supersede the February 2001 letter agreement between Bain and Huntsman Corporation. There can be no assurance that such definitive agreements will be entered into or that the transactions contemplated under such agreements will be consummated. Change in Accounts Receivable Securitization Funding On June 22, 2001, Huntsman International Asset-Backed Securities Ltd. issued $85 million and (euro)90.5 million in floating rate Series 2001-1 notes due 2007. Huntsman International Asset-Backed Securities Ltd. is a special-purpose, bankruptcy-remote unconsolidated entity which was created to facilitate the ongoing securitization of certain of the Company's trade accounts receivable. Net proceeds from the issue were used to reduce commercial paper outstanding under the existing securitization arranged by JPMorgan Chase. 20 Issuance of (euro)50 Million Senior Subordinated Notes On May 2, 2001, Huntsman International completed an offering of its 10-1/8% Senior Subordinated Notes due 2009, resulting in net proceeds of approximately (euro)52.0 million, including (euro)1.7 million of interest accrued from January 1, 2001 paid by the purchasers. The terms of these notes are substantially similar to the terms of its outstanding senior subordinated notes. Acquisition of Surfactants Business Effective April 1, 2001 and pursuant to the terms of a definitive agreement dated February 27, 2001, the Company completed its planned purchase of the European surfactants business of Albright & Wilson, a subsidiary of Rhodia, S.A., for an aggregate purchase price of approximately (euro)205 million. This acquired surfactants business manufactures, develops and markets a wide range of surfactants and surfactant intermediates used primarily in consumer detergents, toiletries, baby shampoos and personal care products. The business is also a major producer of surfactants and specialty products for industrial uses including leather and textile treatment, foundry and construction, agriculture, polymers and coatings. The business includes seven manufacturing facilities: one in the U.K., and two sites in each of Italy, France and Spain. 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 supported Denmark officials on the issue. 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; MTBE will still be an additive in a limited amount of 98-octane gasoline sold in 100 selected service stations in the country. In the U.S., a federal court in New York has denied plaintiffs' motion for summary judgment in a case brought by the Oxygenated Fuel Association ("OFA"), an organization representing MTBE producers. In the motion, 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. Although this ruling was based on the court's view 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 MTBE from being sold 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 aforementioned New York case, as well as a similar case in California. The possibility of Congressional action to ban the sale of MTBE in the future, and the pendency of EPA's administrative process to ban the manufacture and sale of the chemical in the United States, 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 benzene heartcut 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 EA investigations into the incident are continuing and 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. 21 Recently Issued Accounting Pronouncements On July 20, 2001, the Financial Accounting Standards Board 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. 22 Three and Six Months Ended June 30, 2001 Compared to Three and Six Months Ended June 30, 2000 (unaudited) (in millions).
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 --------------- --------------- --------------- --------------- Specialty Chemicals sales $ 725 $ 549 $ 1,305 $ 1,040 Petrochemicals sales 329 350 672 673 Tioxide sales 230 256 458 497 --------------- --------------- --------------- --------------- Total revenues 1,284 1,155 2,435 2,210 Cost of goods sold 1,113 949 2,099 1,823 --------------- --------------- --------------- --------------- Gross profit 171 206 336 387 Expenses of selling, general, administrative, research and development 89 76 186 162 --------------- --------------- --------------- --------------- Operating income 82 130 150 225 Interest expense, net 55 55 114 109 Loss on sale of accounts receivable 3 -- 5 -- Other (income) expense 1 1 (5) 1 --------------- --------------- --------------- --------------- Net income before income taxes and minority interest 23 74 36 115 Income tax expense 1 9 3 13 Minority interests in subsidiaries -- 1 1 2 --------------- --------------- --------------- --------------- Net income before accounting change 22 64 32 100 Cumulative effect of accounting change -- -- 1 -- --------------- --------------- --------------- --------------- Net income $ 22 $ 64 $ 31 $ 100 =============== =============== =============== =============== Depreciation and amortization $ 58 $ 54 $ 117 $ 107 =============== =============== =============== =============== EBITDA (1) $ 136 $ 183 $ 267 $ 331 Loss on sale of accounts receivable(2) 3 -- 5 -- --------------- --------------- --------------- --------------- Adjusted EBITDA $ 139 $ 183 $ 272 $ 331 =============== =============== =============== ===============
(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 we assess our financial performance and debt service capabilities, and because certain covenants in our 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 June 30, 2001 Compared to Three Months Ended June 30, 2000 Revenues Revenues for the three months ended June 30, 2001 increased by $129 million, or 11%, to $1,284 million from $1,155 million during the same period in 2000. Specialty Chemicals - Total MDI sales volumes increased by 1% from the 2000 ------------------- period. A strong recovery in the Asian economies led to an increase in sales volumes of 37% in that region, while in Europe, sales volumes grew by 9%. In the Americas, sales volumes decreased by 15% from the prior year due to weaker demand resulting from economic slowdown. Polyol sales volumes grew by 3% with the increase attributable to the Asian region. This gain was partially offset by a 3% decrease in average selling prices for polyols compared to the same period in 2000, a substantial portion which was due to a weakening in the value of the euro versus the U.S. dollar. PO sales revenue was relatively unchanged 23 with a 4% increase in sales volumes which offset a 4% decrease in average selling price. MTBE sales revenue grew by 3% due to a 5% increase in average selling price for MTBE. The increase in average selling price for MTBE is primarily attributable to reduced supply of MTBE and the continued strong demand for MTBE in reformulated gasoline. Sales of TPU, ethyleneamines, surfactants and performance chemicals products purchased from Huntsman Corporation were $166 million. These products were not present in the comparable period in 2000. Petrochemicals - Sales volumes of ethylene fell by 7% while sales volumes -------------- of propylene decreased by 2%. Ethylene production increased by 4% but the reduction in sales was due to material on exchange with another producer to be returned during our 2002 scheduled turnaround. In aromatics, sales volumes of benzene and paraxylene rose by 31% and 1%, respectively, while sales volumes of cyclohexane fell by 26% due to production limitations. Ethylene, propylene, benzene and cyclohexane average selling prices were 11%, 19%, 5% and 5% lower, respectively, primarily due to weaker supply/demand fundamentals. Tioxide - Sales volumes decreased by 8% 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 three months ended June 30, 2001 decreased by $35 million, or 17%, to $171 million from $206 million in 2000. Specialty Chemicals - Gross profit on MDI and polyols decreased 11% and ------------------- 15%, respectively. While MDI and polyols benefited from increased sales volumes, this benefit was more than offset by higher natural gas, energy costs and lower selling prices. Improved average selling prices for MTBE were more than offset by a significant increase in the cost of our key PO/MTBE raw materials including isobutane, methanol and higher energy costs. Gross profit from TPU, ethyleneamines, surfactants and performance chemicals was $20 million. These products were not present in the comparable period in 2000. Petrochemicals - Petrochemicals gross profit decreased by 87% due to lower -------------- average selling prices discussed above and the higher prices of our main raw material, naphtha. Tioxide - Gross profit decreased by 22% for the period as lower revenues ------- and increased raw material and utility costs more than offset cost reductions from our 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 June 30, 2001 increased by $13 million, or 17%, to $89 million from $76 million in 2000. Specialty Chemicals - SG&A (including R&D) in 2001 increased by 30% largely ------------------- due to the SG&A expenses associated with businesses acquired since June 30, 2000. Petrochemicals - SG&A (including R&D) in 2001 was relatively unchanged as -------------- compared to 2000. Tioxide - SG&A (including R&D) in 2001 decreased by 17% primarily due to ------- restructuring activities, including personnel reductions within selling organizations in Europe, Asia Pacific and the U.S. 24 Interest Expense Net interest expense in the three months ended June 30, 2001 remained relatively unchanged compared to the same period in 2000. Other Expense Other expense in the three months ended June 30, 2001 remained relatively unchanged compared to the same period in 2000. Income Taxes Income taxes in the three months ended June 30, 2001 decreased by $8 million, to $1 million from $9 million in 2000. The effective income tax rate decreased from the 2000 period because a greater proportion of income was earned inside the U.S. and was not subject to income tax. Net Income Net income in the three months ended June 30, 2001 decreased by $42 million to $22 million from $64 million during 2000 as a result of the factors discussed above. Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000. Revenues. Revenues for the six months ended June 30, 2001 increased by $225 million, or 10%, to $2,435 million from $2,210 million during the same period in 2000. Specialty Chemicals -Total MDI sales volumes increased by 5% from the 2000 ------------------- period. A strong recovery in the Asian economies led to an increase in sales volumes of 51% in that region, while in Europe, sales volumes grew by 10%. In the Americas, sales volumes decreased by 11% from the prior year due to weaker demand resulting from economic slowdown. Polyol sales volumes grew by 5% with the increase attributable to the Asian region. These gains were partially offset by a 2% decrease in average selling prices for MDI and a 3% decrease in average selling prices for polyols compared to the same period in 2000, a substantial portion which was due to a weakening in the value of the euro versus the U.S. dollar. PO sales revenue decreased 13% due to a 9% decrease in sales volumes and a 5% decrease in average selling price. MTBE sales revenue grew by 9% due to a 14% increase in average selling price for MTBE. The increase in average selling price for MTBE is primarily attributable to reduced supply of MTBE and the continued strong demand for MTBE in reformulated gasoline. Sales of TPU, ethyleneamines, surfactants and performance chemicals products purchased from Huntsman Corporation were $226 million. These products were not present in the comparable period in 2000. Petrochemicals - Sales volumes of ethylene fell by 8% while sales volumes -------------- of propylene was relatively unchanged. Ethylene production increased by 5% but the reduction in sales was due to material on exchange with another producer to be returned during our 2002 scheduled turnaround. In aromatics, sales volumes of benzene rose by 21% while sales volumes of cyclohexane and paraxylene fell by 9% and 2% respectively. Ethylene and propylene average selling prices were 5% and 4%, lower, respectively. Benzene, cyclohexane and paraxylene average selling prices were 3%, 2% and 5% higher, respectively. Average selling prices for all products rose reflecting increases in feedstock prices since June 30, 2000. Tioxide - Sales volumes decreased by 7% compared to the 2000 period due to ------- weakening of demand, particularly in the American market. Average selling prices decreased by 1% as higher local currency selling prices were more than offset by the weakness of the euro against the U.S. dollar. 25 Gross Profit Gross profit for the six months ended June 30, 2001 decreased by $51 million, or 13%, to $336 million from $387 million in 2000. Specialty Chemicals - Gross profit on MDI and polyols decreased 11% and ------------------- 14%, respectively. While MDI and polyols benefited from increased sales volumes, this benefit was more than offset by higher raw material, energy costs and lower selling prices. The price of benzene increased by 4% in the European market compared to the 2000 period. Improved average selling prices for MTBE were more than offset by a significant increase in the cost of key PO/MTBE raw materials including isobutane, methanol and higher energy costs. Gross profit from TPU, ethyleneamines, surfactants and performance chemicals was $29 million. These products were not present in the comparable period in 2000. Petrochemicals - Petrochemicals gross profit decreased by 29% due to lower -------------- average selling prices of ethylene and propylene. The weakness of the euro against the U.S. dollar has also contributed to the decrease. Tioxide - Gross profit decreased by 12% for the period as cost reductions ------- from our 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 six months ended June 30, 2001 increased by $24 million, or 15%, to $186 million from $162 million in 2000. Specialty Chemicals - SG&A (including R&D) in 2001 increased by 27% largely ------------------- due to the SG&A expenses associated with businesses acquired since June 30, 2000. Petrochemicals - SG&A (including R&D) in 2001 was relatively unchanged as -------------- compared to 2000. Tioxide - SG&A (including R&D) in 2001 decreased by 12% primarily due to ------- restructuring activities, including personnel reductions within selling organizations in Europe, Asia Pacific and the U.S. Interest Expense Net interest expense in the three months ended June 30, 2001 increased by $5 million, or 5% to $114 million from $109 million in 2000. The increase was due to the decreased fair value of the Company's interest rate derivative contracts. Other Income/Expense Other income increased by $6 million to $5 million income from $1 million expense in 2000, principally as a result of the Company's interest in Nippon Polyurethane Industry Co. Limited being sold. Income taxes Income taxes in 2001 decreased by $10 million, to $3 million from $13 million in 2000. The effective income tax rate in 2001 decreased from the 2000 period because a greater proportion of income was earned inside the U.S. and was not subject to income tax. Net income Net income in 2001 decreased by $69 million to $31 million from $100 million during 2000 as a result of the factors discussed above. 26 Changes in Financial Condition As of June 30, 2001, the Company's working capital (excluding current portion of long-term debt) increased by approximately $92 million to $431 million from $339 million at December 31, 2000. Approximately $54 million of the increase was attributable to acquisitions completed during the six months ended June 30, 2001. The balance of the increase was substantially due to lower levels of accounts payable and accrued liabilities partially offset by reductions in accounts receivable. Liquidity and Capital Resources Net cash provided by operating activities for the six months ended June 30, 2001 was $98.3 million, as compared to net cash provided by operating activities of $131.6 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 during the 2001 period as compared to 2000. Net cash used in investing activities for the six months ended June 30, 2001 was $319.3 million, as compared to $103.9 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. See "Acquisition of Surfactants Business." Net cash provided by financing activities for the six months ended June 30, 2001 was $234.0 million, as compared to net cash used in financing activities of $36.9 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. Capital expenditures for the six months ended June 30, 2001 were $113.4 million, an increase of $39.6 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 $140.0 to $170.0 million during the balance of 2001 on capital projects. As of June 30, 2001 the Company had $43.2 million of outstanding borrowings under our $400 million revolving credit facility and had approximately $67.3 million in cash balances. We also maintain $80 million of short-term overdraft facilities, of which $69.1 million was available on June 30, 2001. We anticipate that borrowings under the credit facilities and cash flow from operations will be sufficient for us to make required payments of principal and interest on our debt when due, as well as to fund capital expenditures. As of June 30, 2001, the Company had outstanding variable rate borrowings of approximately $1,318, (euro)236 million and (pound)20 million. For the six months ended June 30, 2001, the weighted average interest rate of these borrowings was 8.84%, 6.91% and 7.48%, respectively. On May 2, 2001, the Company completed an offering of its 10-1/8% Senior Subordinated Notes due 2009, resulting in net proceeds of approximately (euro)52.0 million, including (euro)1.7 million of interest accrued from January 1, 2001 paid by the purchasers. The terms of these notes are substantially similar to the terms of its outstanding senior subordinated notes. 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. 27 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 our 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. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements, including without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. Except as required by law, we undertake 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 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 June 30, 2001, the Company had outstanding foreign exchange forward contracts with third party banks of approximately $24 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 June 30, 2001, the Company had entered into approximately $642 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 5.80% to approximately 7.00%. The U.S. dollar collar transactions carry floors ranging from 5.00% to 6.25% and caps ranging from 6.60% to 7.50%. The Company has also entered into a euro-denominated swap transaction that obligates it to pay a fixed rate of approximately 4.30%. The Company does not hedge its interest rate exposure in a manner 28 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 $15.0 million. This increase would be reduced by approximately $3.0 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 June 30, 2001, the Company had forward purchase and sales contracts for 50,000 and 190,000 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 $3.2 million, respectively. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed with this report: 10.1 Purchase Agreement dated July 9, 2001 between Tioxide Europe Limited and Imperial Chemical Industries PLC. (b) The Company filed no reports on Form 8-K for the quarter ended June 30, 2001. 29 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/ L. Russell Healy ------------------------------------------ L. RUSSELL HEALY Senior Vice President and Finance Director (Authorized Signatory and Principal Financial and Accounting Officer) Date: August 14, 2001 30 INDEX TO EXHIBITS Exhibits 10.1 Purchase Agreement dated July 9, 2001 between Tioxide Europe Limited and Imperial Chemical Industires PLC. 31