UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2005 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 001-32427
HUNTSMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
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42-1648585 |
(State
or other jurisdiction of |
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(I.R.S.
Employer |
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 ý NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý
On November 14, 2005, 220,451,484 shares of common stock of the registrant were outstanding.
HUNTSMAN CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Millions, Except Share Amounts)
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September 30, |
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December 31, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
200.1 |
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$ |
243.5 |
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Restricted cash |
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8.9 |
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Accounts and notes receivables (net of allowance for doubtful accounts of $38.0 and $25.8, respectively) |
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1,403.2 |
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1,586.0 |
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Accounts receivable from affiliates |
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4.5 |
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12.1 |
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Inventories, net |
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1,335.2 |
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1,253.9 |
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Prepaid expenses |
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64.4 |
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45.0 |
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Deferred income taxes |
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12.0 |
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11.9 |
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Other current assets |
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44.1 |
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24.9 |
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Total current assets |
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3,063.5 |
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3,186.2 |
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Property, plant and equipment, net |
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4,693.2 |
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5,150.9 |
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Investment in unconsolidated affiliates |
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175.6 |
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170.9 |
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Intangible assets, net |
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214.2 |
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245.6 |
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Goodwill |
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3.3 |
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3.3 |
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Deferred income taxes |
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66.7 |
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34.5 |
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Notes receivable from affiliates |
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5.2 |
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23.6 |
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Other noncurrent assets |
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565.9 |
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608.5 |
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Total assets |
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$ |
8,787.6 |
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$ |
9,423.5 |
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LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
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Current liabilities: |
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Accounts payable, including overdraft of $17.3 and nil, respectively |
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$ |
999.6 |
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$ |
970.3 |
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Accounts payable to affiliates |
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8.1 |
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30.6 |
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Accrued liabilities |
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669.6 |
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779.0 |
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Deferred income taxes |
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14.0 |
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10.8 |
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Current portion of long-term debt |
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43.9 |
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37.5 |
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Total current liabilities |
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1,735.2 |
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1,828.2 |
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Long-term debt |
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4,396.8 |
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6,221.1 |
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Long-term debt to affiliate |
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40.9 |
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Deferred income taxes |
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265.6 |
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217.9 |
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Other noncurrent liabilities |
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733.7 |
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757.1 |
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Total liabilities |
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7,131.3 |
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9,065.2 |
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Minority interests in common stock of consolidated subsidiaries |
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45.1 |
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36.8 |
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Warrants issued by consolidated subsidiary |
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128.7 |
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Redeemable preferred members interest |
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574.8 |
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Commitments and contingencies (Notes 11 and 12) |
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Stockholders equity (deficit): |
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Common stock $0.01 par value, 1,200,000,000 shares authorized, 221,200,997 issued and 220,451,484 outstanding |
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2.2 |
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Preferred members interest |
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195.7 |
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Mandatory convertible preferred stock $0.01 par value, 100,000,000 shares authorized, 5,750,000 issued and outstanding |
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287.5 |
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Additional paid-in capital |
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2,776.0 |
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712.5 |
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Unearned stock-based compensation |
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(13.7 |
) |
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Accumulated deficit |
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(1,444.8 |
) |
(1,471.2 |
) |
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Accumulated other comprehensive income |
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4.0 |
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181.0 |
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Total stockholders equity (deficit) |
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1,611.2 |
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(382.0 |
) |
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Total liabilities and stockholders equity (deficit) |
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$ |
8,787.6 |
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$ |
9,423.5 |
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See accompanying notes to unaudited condensed consolidated financial statements.
1
HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In Millions, Except Per Share Amounts)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenues: |
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Trade sales |
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$ |
3,114.4 |
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$ |
2,921.0 |
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$ |
9,691.5 |
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$ |
8,275.5 |
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Related party sales |
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7.4 |
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13.8 |
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119.1 |
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34.1 |
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Total revenues |
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3,121.8 |
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2,934.8 |
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9,810.6 |
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8,309.6 |
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Cost of goods sold |
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2,729.2 |
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2,566.8 |
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8,319.4 |
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7,327.9 |
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Gross profit |
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392.6 |
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368.0 |
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1,491.2 |
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981.7 |
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Operating Expenses: |
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Selling, general and administrative |
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166.6 |
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150.8 |
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498.9 |
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481.0 |
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Research and development |
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22.1 |
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22.4 |
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72.0 |
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71.5 |
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Other operating expense (income) |
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6.1 |
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(14.3 |
) |
56.1 |
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5.9 |
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Restructuring, impairment and plant closing costs |
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71.3 |
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43.2 |
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100.5 |
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202.4 |
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Total operating expenses |
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266.1 |
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202.1 |
|
727.5 |
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760.8 |
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Operating income |
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126.5 |
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165.9 |
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763.7 |
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220.9 |
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Interest expense, net |
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(101.1 |
) |
(154.6 |
) |
(341.8 |
) |
(459.5 |
) |
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Loss on accounts receivable securitization program |
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(3.3 |
) |
(3.7 |
) |
(8.9 |
) |
(10.2 |
) |
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Equity in income (loss) of investment in unconsolidated affiliates |
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1.9 |
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(0.1 |
) |
7.0 |
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3.0 |
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Other (expense) income |
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(43.9 |
) |
3.1 |
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(279.7 |
) |
(0.8 |
) |
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(Loss) income from continuing operations before income taxes and minority interest |
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(19.9 |
) |
10.6 |
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140.3 |
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(246.6 |
) |
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Income tax (expense) benefit |
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(7.7 |
) |
36.1 |
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(68.8 |
) |
25.7 |
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(Loss) income from continuing operations before minority interest |
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(27.6 |
) |
46.7 |
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71.5 |
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(220.9 |
) |
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Minority interest in subsidiaries income |
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(1.6 |
) |
(0.2 |
) |
(1.5 |
) |
(1.1 |
) |
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(Loss) income from continuing operations |
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(29.2 |
) |
46.5 |
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70.0 |
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(222.0 |
) |
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Loss from discontinued operations (including loss on disposal of $36.4 in 2005), net of tax |
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(0.6 |
) |
(2.8 |
) |
(43.6 |
) |
(4.5 |
) |
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Net (loss) income |
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(29.8 |
) |
43.7 |
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26.4 |
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(226.5 |
) |
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Preferred stock dividends |
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|
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(21.9 |
) |
(43.1 |
) |
(65.8 |
) |
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Net (loss) income available to common stockholders |
|
$ |
(29.8 |
) |
$ |
21.8 |
|
$ |
(16.7 |
) |
$ |
(292.3 |
) |
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|
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Net (loss) income |
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$ |
(29.8 |
) |
$ |
43.7 |
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$ |
26.4 |
|
$ |
(226.5 |
) |
Other comprehensive (loss) income |
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(25.4 |
) |
8.9 |
|
(177.0 |
) |
(12.0 |
) |
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Comprehensive (loss) income |
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$ |
(55.2 |
) |
$ |
52.6 |
|
$ |
(150.6 |
) |
$ |
(238.5 |
) |
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Basic and diluted (loss) income per share: |
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|
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(Loss) income from continuing operations |
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$ |
(0.13 |
) |
$ |
0.11 |
|
$ |
0.12 |
|
$ |
(1.31 |
) |
Loss from discontinued operations, net of tax |
|
(0.01 |
) |
(0.01 |
) |
(0.20 |
) |
(0.02 |
) |
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Net (loss) income |
|
$ |
(0.14 |
) |
$ |
0.10 |
|
$ |
(0.08 |
) |
$ |
(1.33 |
) |
Weighted average shares |
|
220.5 |
|
220.5 |
|
220.5 |
|
220.5 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
2
HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
(UNAUDITED)
(In Millions, Except Share Amounts)
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Shares |
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Common |
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Mandatory convertible preferred stock |
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Common |
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Preferred |
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Mandatory |
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Additional |
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Unearned |
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Accumulated |
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Accumulated
other |
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Total |
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Balance, January 1, 2005 |
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$ |
|
|
$ |
195.7 |
|
$ |
|
|
$ |
712.5 |
|
$ |
|
|
$ |
(1,471.2 |
) |
$ |
181.0 |
|
$ |
(382.0 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.4 |
|
|
|
26.4 |
|
||||||||
Other comprehensive loss |
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|
|
|
|
|
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|
|
|
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(177.0 |
) |
(177.0 |
) |
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Issuance of common stock and mandatory convertible preferred stock |
|
55,681,819 |
|
5,750,000 |
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0.6 |
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|
|
287.5 |
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1,201.0 |
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|
|
|
|
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1,489.1 |
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Issuance of nonvested stock awards |
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16.9 |
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(16.9 |
) |
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Recognition of stock-based compensation |
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3.2 |
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3.2 |
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6.4 |
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Exchange of previous common and preferred members interest and warrants for common stock |
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164,769,665 |
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|
1.6 |
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(195.7 |
) |
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|
885.5 |
|
|
|
|
|
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|
691.4 |
|
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Dividends declared on mandatory convertible preferred stock |
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|
|
|
|
|
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|
|
|
|
(43.1 |
) |
|
|
|
|
|
|
(43.1 |
) |
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Balance, September 30, 2005 |
|
220,451,484 |
|
5,750,000 |
|
$ |
2.2 |
|
$ |
|
|
$ |
287.5 |
|
$ |
2,776.0 |
|
$ |
(13.7 |
) |
$ |
(1,444.8 |
) |
$ |
4.0 |
|
$ |
1,611.2 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)
|
|
Nine Months Ended September 30, |
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|
|
2005 |
|
2004 |
|
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Operating Activities: |
|
|
|
|
|
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Net income (loss) |
|
$ |
26.4 |
|
$ |
(226.5 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
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Equity in income of investment in unconsolidated affiliates |
|
(7.0 |
) |
(3.0 |
) |
||
Depreciation and amortization |
|
372.9 |
|
410.3 |
|
||
Noncash restructuring, impairment and plant closing costs |
|
46.3 |
|
109.0 |
|
||
Provision for losses on accounts receivable |
|
12.2 |
|
2.1 |
|
||
Loss on disposal of assets |
|
3.3 |
|
1.3 |
|
||
Loss on early extinguishment of debt |
|
276.4 |
|
1.9 |
|
||
Loss on disposal of discontinued operations |
|
36.4 |
|
|
|
||
Noncash interest expense |
|
46.0 |
|
118.0 |
|
||
Deferred income taxes |
|
67.8 |
|
(55.8 |
) |
||
Net unrealized loss (gain) on foreign currency transactions |
|
53.7 |
|
(26.1 |
) |
||
Other |
|
(10.0 |
) |
|
|
||
Minority interest in subsidiaries income |
|
1.5 |
|
1.1 |
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Accounts and notes receivable |
|
212.0 |
|
(231.8 |
) |
||
Change in receivables sold, net |
|
(79.7 |
) |
(64.9 |
) |
||
Inventories |
|
(109.9 |
) |
(97.7 |
) |
||
Prepaid expenses |
|
26.5 |
|
12.2 |
|
||
Other current assets |
|
(1.2 |
) |
16.9 |
|
||
Other noncurrent assets |
|
(6.9 |
) |
(39.8 |
) |
||
Accounts payable |
|
(72.6 |
) |
104.3 |
|
||
Accrued liabilities |
|
(115.0 |
) |
(2.2 |
) |
||
Other noncurrent liabilities |
|
(25.7 |
) |
26.6 |
|
||
Net cash provided by operating activities |
|
753.4 |
|
55.9 |
|
||
Investing Activities: |
|
|
|
|
|
||
Capital expenditures |
|
(202.0 |
) |
(145.0 |
) |
||
Proceeds from sale of assets |
|
5.1 |
|
3.3 |
|
||
Investment in unconsolidated affiliates |
|
(8.0 |
) |
(11.8 |
) |
||
Acquisition of minority interests |
|
|
|
(7.3 |
) |
||
Net cash received from unconsolidated affiliates |
|
5.1 |
|
10.1 |
|
||
Net investment in government securities, resticted as to use |
|
(33.7 |
) |
|
|
||
Advances to unconsolidated affiliates |
|
|
|
(2.4 |
) |
||
Change in restricted cash |
|
8.9 |
|
(7.6 |
) |
||
Net cash used in investing activities |
|
(224.6 |
) |
(160.7 |
) |
||
Financing Activities: |
|
|
|
|
|
||
Principal payments on notes payable |
|
(26.1 |
) |
|
|
||
Net (repayment) borrowings under revolving loan facilities |
|
(117.1 |
) |
70.8 |
|
||
Net repayments of overdraft and other short-term debt |
|
17.3 |
|
(7.5 |
) |
||
Proceeds from long-term debt |
|
1,873.1 |
|
1,827.5 |
|
||
Repayment of long-term debt and notes payable |
|
(3,685.1 |
) |
(1,739.8 |
) |
||
Debt issuance costs |
|
(15.8 |
) |
(25.5 |
) |
||
Cost of early extinguishment of debt |
|
(109.0 |
) |
|
|
||
Other |
|
11.2 |
|
2.7 |
|
||
Dividend paid to preferred stockholders |
|
(7.2 |
) |
|
|
||
Net proceeds from issuance of common and preferred stock |
|
1,489.1 |
|
|
|
||
Net cash (used in) provided by financing activities |
|
(569.6 |
) |
128.2 |
|
||
Effect of exchange rate changes on cash |
|
(2.6 |
) |
(0.2 |
) |
||
(Decrease) increase in cash and cash equivalents |
|
(43.4 |
) |
23.2 |
|
||
Cash and cash equivalents at beginning of period |
|
243.5 |
|
197.8 |
|
||
Cash and cash equivalents at end of period |
|
$ |
200.1 |
|
$ |
221.0 |
|
Supplemental cash flow information: |
|
|
|
|
|
||
Cash paid for interest |
|
$ |
368.5 |
|
$ |
372.1 |
|
Cash paid for income taxes |
|
$ |
19.6 |
|
$ |
22.5 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
HUNTSMAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
Certain Definitions
Company, our, us or we may be used to refer to Huntsman Corporation and, unless the context otherwise requires, its subsidiaries and predecessors. Any references to the Company, we, us or our as of a date prior to October 19, 2004 (the date of our formation) are to Huntsman Holdings, LLC and its subsidiaries (including their respective predecessors). In this report, HIH refers to Huntsman International Holdings LLC (our 100% owned subsidiary that merged into HI on August 16, 2005) and, unless the context otherwise requires, its subsidiaries, HI refers to Huntsman International LLC (our 100% owned subsidiary) and, unless the context otherwise requires, its subsidiaries, AdMat refers to Huntsman Advanced Materials LLC (our 90.3% owned indirect subsidiary) and, unless the context otherwise requires, its subsidiaries, HLLC or Huntsman LLC refers to Huntsman LLC (our 100% owned subsidiary that merged into HI on August 16, 2005), HMP refers to HMP Equity Holdings Corporation (our 100% owned subsidiary that merged into us on March 17, 2005), Vantico refers to Vantico Group S.A. (a 100% owned subsidiary of AdMat) and, unless the context otherwise requires, its subsidiaries, Huntsman Family Holdings refers to Huntsman Family Holdings LLC (an owner with MatlinPatterson of HMP Equity Trust), and MatlinPatterson refers to MatlinPatterson Global Opportunities Partners L.P., MatlinPatterson Global Opportunities Partners (Bermuda) L.P. and MatlinPatterson Global Opportunities Partners B, L.P. (collectively, an owner with Huntsman Family Holdings of HMP Equity Trust).
Description of Business
We are among the worlds largest global manufacturers of differentiated and commodity chemical products. We manufacture a broad range of chemical products and formulations, which we market in more than 100 countries to a diversified group of consumer and industrial customers. Our products are used in a wide range of applications, including those in the adhesives, aerospace, automotive, construction products, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining and synthetic fiber industries. We are a leading global producer in many of our key product lines, including MDI, amines, surfactants, epoxy-based polymer formulations, maleic anhydride and titanium dioxide.
Company
We were formed in 2004 to hold, among other things, the equity interests of HI, AdMat and Huntsman LLC. The transfer to us of the net assets of HI, AdMat and Huntsman LLC was between entities under common control and recorded at historical carrying value. Our condensed consolidated financial statements presented herein reflect the financial position, results of operations and cash flows as if HI, AdMat, Huntsman LLC and our Company were combined for all periods presented.
On February 16, 2005, we completed an initial public offering of 55,681,819 shares of our common stock sold by us and 13,579,546 shares of our common stock sold by a selling stockholder, in each case at a price to the public of $23 per share, and 5,750,000 shares of our 5% mandatory convertible preferred stock sold by us at a price to the public of $50 per share. Each share of preferred stock will be convertible into between approximately 1.77 and approximately 2.17 shares of our common stock, subject to anti-dilution adjustments, depending upon the trading price of our common stock prior to the third anniversary of our initial public offering. This will result in between approximately 10.2 million and approximately 12.5 million additional shares of our common stock outstanding upon conversion. See Note 18Net Income (Loss) per Share.
The net proceeds to us from our initial public offering of common and preferred stock were approximately $1,500 million, substantially all of which has been used to repay outstanding indebtedness of certain of our subsidiaries as follows:
On February 16, 2005, we used $41.6 million of net proceeds from the offering to redeem in full the subordinated note due Horizon Ventures LLC, an affiliated entity.
On February 28, 2005, we used $1,216.7 million of net proceeds from the offering, along with $35.0 million in available cash, to redeem
5
all of the outstanding 15% senior secured discount notes due 2008 of HMP (the HMP Senior Discount Notes);
$452.3 million of the outstanding 13.375% senior discount notes due 2009 of HIH (the HIH Senior Discount Notes); and
$159.4 million of the outstanding 11.625% senior secured notes due 2010 of Huntsman LLC.
On February 28, 2005, we contributed to HIH the HIH Senior Subordinated Discount Notes due 2009 at an accreted value of $422.8 million.
On March 14, 2005, we used $151.7 million of net cash proceeds from the offering to redeem the remaining outstanding HIH Senior Discount Notes, $78.0 million of the outstanding 11.5% senior notes due 2012 of Huntsman LLC (the 2012 Senior Fixed Rate Notes) and to pay $7.8 million to HMP warrant holders for a consent fee. On March 17, 2005, we used $26.8 million of the net cash proceeds from the offering to redeem an additional $24.0 million of the 2012 Senior Fixed Rate Notes.
In connection with the completion of our initial public offering, we consummated a reorganization transaction (the Reorganization Transaction.) In the Reorganization Transaction, our predecessor, Huntsman Holdings, LLC, became our wholly owned subsidiary, and the existing beneficial holders of the common and preferred members interests of Huntsman Holdings, LLC received shares of our common stock in exchange for their interests.
In connection with our initial public offering and as part of the Reorganization Transaction, we exercised our rights to require that all the warrants to purchase common stock of HMP (the HMP Warrants) be exchanged for newly issued shares of our common stock. Under the terms of the HMP Warrants, an aggregate of approximately 16.8 million shares of our common stock was issued in exchange for the outstanding HMP Warrants.
HMP Equity Trust holds approximately 59% of our common stock. Jon M. Huntsman and Peter R. Huntsman control the voting of the shares of our common stock held by HMP Equity Trust. However, the shares of our common stock held by HMP Equity Trust will not be voted in favor of certain fundamental corporate actions without the consent of MatlinPatterson, through its representatives David J. Matlin or Christopher R. Pechock, and Jon M. Huntsman and Peter R. Huntsman have agreed to cause all of the shares of our common stock held by HMP Equity Trust to be voted in favor of the election to our board of directors of two nominees designated by MatlinPatterson.
Recent Developments
U.S. Gulf Coast Storms and PO/MTBE Restart
Following Hurricane Katrina, we announced that none of our manufacturing facilities sustained serious structural damage and that all of our impacted facilities were up and operating with minimal disruption.
On September 22, 2005, prior to Hurricane Rita, we announced that we had suspended operations at our Gulf Coast facilities in Port Arthur, Port Neches, Conroe, Freeport, Chocolate Bayou and Dayton, Texas and in Lake Charles, Louisiana. Shortly after Hurricane Rita, we announced that our facilities at Conroe, Freeport, Chocolate Bayou and Dayton, Texas commenced operations and, on October 10, 2005, announced that our titanium dioxide facility at Lake Charles, Louisiana and our butadiene plant at Port Neches, Texas restarted.
On October 13, 2005, we announced that our major propylene oxide/MTBE unit in Port Neches, Texas (the PO/MTBE Unit) restarted. Unrelated to the hurricanes, on August 25, 2005, the PO/MTBE Unit was temporarily shut down for unscheduled maintenance and repairs. We completed the maintenance and repair work prior to Hurricane Rita, but suspended the restart in response to the hurricane.
On October 23, 2005, we restarted our smaller olefins unit at Port Neches, Texas, allowing us to resume full production of our surfactants and amines products. On November 4, 2005, we restarted our larger olefins unit at Port Arthur, Texas. All of our principal operating units are now in operation.
6
Certain of our products were temporarily negatively impacted by restrictions on the availability of certain raw materials as well as logistics and transportation limitations. In addition, certain of our suppliers and customers in the Gulf Coast region sustained damage to their operations, which temporarily impacted their ability to deliver and purchase products.
The U.S. Gulf Coast storms, on top of an already high cost raw material environment, have generally resulted in increases in the cost of energy and many of our key feedstocks. In response to higher raw material and energy costs and because of improving market conditions, we have recently announced price increases in many of our products.
These events negatively affected our results of operations for the three months ended September 30, 2005 and likely will have a negative effect on our operations in the fourth quarter of 2005.
Merger of Huntsman LLC and HIH with and into HI
On August 16, 2005, Huntsman LLC and HIH merged with and into HI (the Merger). HI is, and each of Huntsman LLC and HIH was, a direct or indirect wholly owned subsidiary of our Company. We effected the Merger to simplify our consolidated groups financing and public reporting structure, to reduce our cost of financing and to facilitate other organizational efficiencies. As a result of the Merger, HI succeeded to the assets, rights and obligations of Huntsman LLC. In particular, HI entered into supplemental indentures under which it assumed the obligations of Huntsman LLC under its outstanding 11.625% senior secured notes due 2010 ($296 million outstanding principal amount), the 2012 Senior Fixed Rate Notes ($198 million outstanding principal amount) and senior floating rate notes due 2011 ($100 million outstanding principal amount) (collectively, the Former HLLC Notes). HIs subsidiaries that previously guaranteed its outstanding debt securities have provided guarantees of the Former HLLC Notes, and all subsidiaries of Huntsman LLC that guaranteed the Former HLLC Notes prior to the Merger executed supplemental indentures to guarantee all of HIs outstanding debt securities.
New Credit Facilities
On August 16, 2005, effective upon completion of the Merger, HI repaid its existing secured credit facilities (the Former HI Credit Facilities), Huntsman LLCs secured credit facilities (the Former HLLC Credit Facilities) and a subordinated note with an aggregate principal amount of $106.6 million (the Huntsman Specialty Subordinated Note) with available cash on hand and the proceeds of facilities under a new senior secured credit agreement (the New Credit Facilities), consisting of (i) a $650 million revolving credit facility (the Revolving Facility) (of which $143 million was drawn upon completion of the Merger), (ii) a $1,730 million term loan (the Dollar Term Facility), and (iii) a 100 million (approximately $123.5 million) term loan (the Euro Term Facility). In addition, immediately prior to the Merger, Huntsman LLC funded the redemption of its outstanding 9.5% senior subordinated notes due 2007 and its senior subordinated floating rate notes due 2007, which together had an aggregate outstanding principal amount of approximately $59 million. The redemption of such notes was completed on September 1, 2005. In connection with the Merger and related financing, HI temporarily (through March 31, 2006) increased the capacity of its accounts receivable securitization program (the A/R Securitization Program) by $50 million to approximately $375 million U.S. dollar equivalents. All of the initial borrowings under the Revolving Facility were repaid a few days later with proceeds provided under the expanded A/R Securitization Program.
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of our wholly-owned and majority-owned subsidiaries and any variable interest entities for which we are the primary beneficiary. All intercompany accounts and transactions have been eliminated.
Interim Financial Statements
Our unaudited interim condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP or U.S. GAAP) and in managements opinion, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. Results for interim periods are not necessarily indicative of those to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.
7
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the condensed consolidated financial statements for prior periods have been reclassified to conform with the current presentation.
2. Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities. FIN 46 addresses the requirements for business enterprises to consolidate related entities, for which they do not have controlling interests through voting or other rights, if they are determined to be the primary beneficiary as a result of variable economic interests. Transfers to a qualifying special purpose entity are not subject to this interpretation. In December 2003, the FASB issued a replacement of FIN 46 (FIN 46R) to clarify certain complexities. We were required to adopt this financial interpretation on January 1, 2005. The adoption of the standard required us to consolidate our Rubicon LLC joint venture. Rubicon LLC manufactures products, including aniline and DPA, for us and our joint venture partner. Rubicon LLC borrows funds from us and a joint venture partner to finance capital requirements and receives reimbursement of costs incurred to operate its facilities.
In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costsan amendment of ARB No. 43. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs, and wasted material to be recognized as current-period charges. It also requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The requirements of the standard will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are reviewing SFAS No. 151 to determine the statements impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assetsan amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. We adopted SFAS No. 153 for nonmonetary exchanges occurring after June 30, 2005.
In December 2004, the FASB issued SFAS No. 123R, Share Based Payment. SFAS No. 123R requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which the employee is required to provide services in exchange for the award. This standard eliminates the alternative to use the intrinsic value method of accounting for share-based payments as previously provided in APB Opinion No. 25, Accounting for Stock Issued to Employees. We adopted SFAS No. 123R effective January 1, 2005, and have applied this standard prospectively to share-based awards issued to our employees in connection with our initial public offering. We did not have share-based awards prior to the awards issued in connection with our initial public offering.
In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations. FIN 47 clarifies the term conditional asset retirement obligation used in SFAS No. 143, Accounting for Asset Retirement Obligations, and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of December 2005. We are reviewing FIN 47 to determine its impact on our consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change or unless specific transition provisions are proscribed in the accounting pronouncements. SFAS No. 154 does not change the accounting guidance for reporting a correction of an error in previously issued financial
8
statements or a change in accounting estimate. SFAS No. 154 is effective for accounting changes and error corrections made after December 31, 2005. We will apply this standard prospectively.
In September 2005, the Emerging Issues Task Force (EITF) reached a consensus on issue 04-13, Accounting for Purchase and Sales of Inventory with the Same Counterparty, that requires companies to recognize an exchange of finished goods for raw materials or work-in-process within the same line of business at fair value. All other exchanges of inventory should be reflected at the recorded amount. This consensus is effective for transactions completed after March 31, 2006. We are evaluating the impact of this consensus to determine its impact on our results of operations.
3. Inventories
Inventories consisted of the following (dollars in millions):
|
|
September 30, |
|
December 31, |
|
||
|
|
|
|
|
|
||
Raw materials and supplies |
|
$ |
410.6 |
|
$ |
332.0 |
|
Work in progress |
|
81.4 |
|
91.5 |
|
||
Finished goods |
|
963.9 |
|
922.8 |
|
||
Total |
|
1,455.9 |
|
1,346.3 |
|
||
|
|
|
|
|
|
||
LIFO reserves |
|
(120.7 |
) |
(92.0 |
) |
||
Lower of cost or market reserves |
|
|
|
(0.4 |
) |
||
Inventories, net |
|
$ |
1,335.2 |
|
$ |
1,253.9 |
|
As of September 30, 2005 and December 31, 2004, approximately 57% and 56%, respectively, of inventories were recorded using the last-in, first-out cost method.
In the normal course of operations, we exchange raw materials with other companies. No gains or losses are recognized on these exchanges, and the net open exchange positions are valued at our cost. The amount included in inventory under open exchange agreements payable by us at September 30, 2005 was $4.8 million (13.3 million pounds of feedstock and products). The amount included in inventory under open exchange agreements payable by us at December 31, 2004 was $5.3 million (8.7 million pounds of feedstock and products).
4. Restructuring, Impairment and Plant Closing Costs
As of September 30, 2005 and December 31, 2004, accrued restructuring, impairment and plant closing costs by type of cost and initiative consisted of the following (dollars in millions):
9
|
|
Workforce |
|
Demolition and |
|
Non-cancelable |
|
Other |
|
Total(2) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Accrued liabilities as of December 31, 2004 |
|
$ |
122.0 |
|
$ |
8.4 |
|
$ |
5.1 |
|
$ |
17.6 |
|
$ |
153.1 |
|
2005 charges for 2003 initiatives |
|
7.9 |
|
|
|
2.5 |
|
|
|
10.4 |
|
|||||
2005 charges for 2004 initiatives |
|
28.3 |
|
0.1 |
|
|
|
10.9 |
|
39.3 |
|
|||||
2005 charges for 2005 initiatives |
|
5.3 |
|
|
|
|
|
1.6 |
|
6.9 |
|
|||||
Reversals of reserves no longer required |
|
(1.0 |
) |
|
|
(0.9 |
) |
(0.5 |
) |
(2.4 |
) |
|||||
Partial reversal of AdMat Transaction opening balance sheet accrual |
|
(3.7 |
) |
(0.8 |
) |
|
|
(0.8 |
) |
(5.3 |
) |
|||||
2005 payments for 2003 initiatives |
|
(20.0 |
) |
(0.2 |
) |
(0.1 |
) |
(1.1 |
) |
(21.4 |
) |
|||||
2005 payments for 2004 initiatives |
|
(70.1 |
) |
(0.7 |
) |
(0.8 |
) |
(6.0 |
) |
(77.6 |
) |
|||||
2005 payments for 2005 initiatives |
|
(0.9 |
) |
|
|
|
|
(0.1 |
) |
(1.0 |
) |
|||||
Foreign currency effect on reserve balance |
|
(10.0 |
) |
(0.1 |
) |
(0.3 |
) |
(2.2 |
) |
(12.6 |
) |
|||||
Accrued liabilities as of September 30, 2005 |
|
$ |
57.8 |
|
$ |
6.7 |
|
$ |
5.5 |
|
$ |
19.4 |
|
$ |
89.4 |
|
(1) Substantially all of the positions terminated in connection with the restructuring programs were terminated under ongoing termination benefit arrangements. Accordingly, the related liabilities were accrued as a one-time charge to earnings in accordance with SFAS No. 112, Employers Accounting for Postemployment Benefits.
(2) Accrued liabilities by initiatives were as follows (dollars in millions):
|
|
September 30, |
|
December 31, |
|
||
|
|
|
|
|
|
||
2001 initiatives |
|
$ |
2.8 |
|
$ |
2.8 |
|
2003 initiatives |
|
33.8 |
|
44.8 |
|
||
2004 initiatives |
|
53.2 |
|
99.2 |
|
||
2005 initiatives |
|
5.9 |
|
|
|
||
Foreign currency effect on reserve balance |
|
(6.3 |
) |
6.3 |
|
||
Total |
|
$ |
89.4 |
|
$ |
153.1 |
|
Details with respect to our reserves for restructuring, impairment and plant closing costs are provided below by segment and initiative (dollars in millions):
10
|
|
Polyurethanes |
|
Advanced |
|
Performance |
|
Pigments |
|
Polymers |
|
Base |
|
Total |
|
|||||||
Accrued liabilities as of December 31, 2004 |
|
$ |
19.0 |
|
$ |
33.0 |
|
$ |
58.2 |
|
$ |
22.0 |
|
$ |
5.8 |
|
$ |
15.1 |
|
$ |
153.1 |
|
2005 charges for 2003 initiatives |
|
3.7 |
|
|
|
|
|
6.7 |
|
|
|
|
|
10.4 |
|
|||||||
2005 charges for 2004 initiatives |
|
2.2 |
|
0.4 |
|
4.9 |
|
18.9 |
|
4.1 |
|
8.8 |
|
39.3 |
|
|||||||
2005 charges for 2005 initiatives |
|
|
|
|
|
1.7 |
|
2.7 |
|
|
|
2.5 |
|
6.9 |
|
|||||||
Reversals of reserves no longer required |
|
|
|
(1.0 |
) |
|
|
(1.4 |
) |
|
|
|
|
(2.4 |
) |
|||||||
Partial reversal of Admat Transaction opening balance sheet accrual |
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
(5.3 |
) |
|||||||
2005 payments for 2003 initiatives |
|
(4.6 |
) |
(8.6 |
) |
(0.8 |
) |
(7.4 |
) |
|
|
|
|
(21.4 |
) |
|||||||
2005 payments for 2004 initiatives |
|
(5.3 |
) |
(6.7 |
) |
(26.6 |
) |
(18.2 |
) |
(6.3 |
) |
(14.5 |
) |
(77.6 |
) |
|||||||
2005 payments for 2005 initiatives |
|
|
|
|
|
(0.1 |
) |
(0.9 |
) |
|
|
|
|
(1.0 |
) |
|||||||
Foreign currency effect on reserve balance |
|
(1.5 |
) |
(1.7 |
) |
(6.3 |
) |
(2.1 |
) |
(0.5 |
) |
(0.5 |
) |
(12.6 |
) |
|||||||
Accrued liabilities as of September 30, 2005 |
|
$ |
13.5 |
|
$ |
10.1 |
|
$ |
31.0 |
|
$ |
20.3 |
|
$ |
3.1 |
|
$ |
11.4 |
|
$ |
89.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Current portion of restructuring reserve |
|
$ |
5.2 |
|
$ |
7.0 |
|
$ |
21.3 |
|
$ |
17.6 |
|
$ |
0.7 |
|
$ |
9.9 |
|
$ |
61.7 |
|
Long-term portion of restructuring reserve |
|
8.3 |
|
3.1 |
|
9.7 |
|
2.7 |
|
2.4 |
|
1.5 |
|
27.7 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Estimated additional future charges for current restructuring projects: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Estimated additional charges within one year |
|
$ |
0.6 |
|
$ |
3.0 |
|
$ |
2.0 |
|
$ |
9.0 |
|
$ |
|
|
$ |
6.6 |
|
$ |
21.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Estimated additional charges beyond one year |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
As of September 30, 2005 and December 31, 2004, we had reserves for restructuring, impairment and plant closing costs of $89.4 million and $153.1 million, respectively. During the nine months ended September 30, 2005, we recorded additional net charges of $100.5 million (consisting of $54.2 million payable in cash and $46.3 million of non-cash charges) for workforce reductions, demolition and decommissioning and other restructuring costs associated with closure or curtailment of activities at our smaller, less efficient manufacturing facilities and for an impairment of long-lived assets. During the nine months ended September 30, 2005, we made cash payments against these reserves of $100.0 million.
As of December 31, 2004, our Polyurethanes segment reserve consisted of $19.0 million related to various restructuring programs, including the closure of our West Deptford, New Jersey site (as announced in 2004), restructuring initiatives at the Rozenburg, Netherlands site (as announced in 2003), workforce reductions throughout our Polyurethanes segment (as announced in 2003), and the closure of our Shepton Mallet, U.K. site (as announced in 2002). During the nine months ended September 30, 2005, our Polyurethanes segment recorded restructuring charges of $5.9 million related to these initiatives, all of which is payable in cash. In addition, during the nine months ended September 30, 2005, our Polyurethanes segment made cash payments of $9.9 million. These restructuring initiatives are expected to result in additional restructuring charges of approximately $0.6 million. During the nine months ended September 30, 2004, our Polyurethanes segment recorded restructuring charges of $32.8 million.
As of December 31, 2004, in our Advanced Materials segment, accrued restructuring and plant closing costs consisted of $33.0 million related to the restructuring programs implemented in association with the acquisition of our Advanced Materials business (the AdMat Transaction), the realignment and simplification of the commercial and technical organization and the closure of our Kaohsiung, Taiwan production facility. During the second quarter of 2005, we assessed the remaining restructuring reserves established in association with the AdMat Transaction and other 2004 initiatives and concluded that $5.3 million and $1.0 million, respectively, were no longer necessary. Accordingly, we reversed these restructuring reserves during the second quarter of 2005. The AdMat Transaction reserve reversal was recorded as a reduction to property, plant and equipment in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. The reversal of the restructuring reserve for the other 2004 initiatives was recorded as a credit to earnings. Also during 2005, we recorded restructuring and plant closing charges of $0.4 million for relocation and other costs and made cash payments of $15.3 million. During the fourth quarter of 2005, our Advanced Materials segment expects to initiate additional restructuring activities to consolidate its European research and development organizations and expects to incur additional restructuring and plant closing costs of approximately $3 million.
As of December 31, 2004, our Performance Products segment reserve consisted of $58.2 million related to various restructuring programs across our European surfactants business, including the closure of substantially all of our Whitehaven, U.K. surfactants facility, as well as the closure of our Guelph, Ontario, St. Louis, Missouri and Austin, Texas facilities.
11
During the nine months ended September 30, 2005, our Performance Products segment recorded restructuring charges of $6.6 million, all of which is payable in cash, of which $4.9 million related to 2004 activities. The additional $1.7 million relates mainly to manpower reductions in Performance Products as part of the realignment of our Jefferson County, Texas operations announced on August 30, 2005. Our Performance Products segment made cash payments of $27.5 million during the nine months ended September 30, 2005. These restructuring initiatives are expected to result in additional restructuring charges of approximately $2 million. During the nine months ended September 30, 2004, our Performance Products segment recorded restructuring charges of $41.2 million.
As of December 31, 2004, our Pigments segment reserve consisted of $22.0 million related to its global workforce reductions announced in 2003 and the reduction of its titanium dioxide (TiO2) production capacity announced in 2004. In July 2005, our Pigments and Base Chemicals segments announced that they would establish a single U.K. headquarters in Teesside, U.K. This will result in the closure of our Pigments segments Billingham, U.K. headquarters and the creation of a new support center for both businesses. During the nine months ended September 30, 2005, our Pigments segment recorded restructuring charges of $26.9 million related to these restructuring initiatives, all of which was payable in cash, and made cash payments of $26.5 million. These restructuring initiatives are expected to result in additional restructuring charges of approximately $9 million through 2006. During the nine months ended September 30, 2004, our Pigments segment recorded restructuring charges of $111.7 million.
As of December 31, 2004, our Polymers segment reserve consisted of $5.8 million related primarily to the closure of our phenol manufacturing unit in Australia and restructuring initiatives at Odessa, Texas. During the nine months ended September 30, 2005, our Polymers segment recorded restructuring charges of $51.3 million, $4.1 million of which is payable in cash, and made cash payments of $6.3 million. During the third quarter of 2005, we concluded that the long-lived assets of our Australian styrenics business were impaired as a result of disappointing performance and the lack of anticipated strengthening of the styrenics market. Accordingly, our Polymers segment recorded an impairment charge of $46.6 million during the third quarter of 2005 related to the Australian styrenics assets. The fair value of the Australian styrenics assets was determined based on estimated market prices. During the nine months ended September 30, 2004, our Polymers segment recorded restructuring charges of $7.6 million.
As of December 31, 2004, our Base Chemicals segment reserve consisted of $15.1 million related primarily to workforce reductions arising from the announced change in work shift schedules and in the engineering and support functions at our Wilton and North Tees, U.K. facilities. In July 2005, our Pigments and Base Chemicals segments announced that they would establish a single U.K. headquarters in Teesside, U.K. In August 2005, our Base Chemicals segment announced the restructuring of its Jefferson County, Texas operations. During the nine months ended September 30, 2005, our Base Chemicals segment recorded restructuring charges of $11.3 million related to these initiatives, all of which was payable in cash, and made cash payments of $14.5 million. These restructuring initiatives are expected to result in additional restructuring charges of approximately $7 million through 2006. During the nine months ended September 30, 2004, our Base Chemicals segment recorded restructuring charges of $9.1 million.
12
5. Debt
Outstanding debt consisted of the following (dollars in millions):
|
|
September 30, |
|
December 31, |
|
||
New Credit Facilities: |
|
|
|
|
|
||
Term Loan B |
|
$ |
1,800.5 |
|
$ |
|
|
Former HI Credit Facilities: |
|
|
|
|
|
||
Term Loan B |
|
|
|
1,314.1 |
|
||
Former HLLC Credit Facilities: |
|
|
|
|
|
||
Term Loan B |
|
|
|
715.0 |
|
||
Revolving Facility |
|
|
|
125.0 |
|
||
2010 Secured Notes |
|
293.5 |
|
451.1 |
|
||
2009 Senior Notes |
|
455.0 |
|
456.0 |
|
||
2011 Senior Floating Rate Notes |
|
100.0 |
|
100.0 |
|
||
2012 Senior Fixed Rate Notes |
|
198.0 |
|
300.0 |
|
||
Subordinated Notes |
|
1,154.6 |
|
1,242.0 |
|
||
HLLC Subordinated Notes |
|
|
|
59.3 |
|
||
Huntsman Specialty Subordinated Note |
|
|
|
101.2 |
|
||
HIH Senior Discount Notes |
|
|
|
494.7 |
|
||
HIH Senior Subordinated Discount Notes |
|
|
|
413.7 |
|
||
Australian Credit Facilities |
|
65.7 |
|
59.2 |
|
||
Consolidated Chinese Splitting JV debt |
|
30.6 |
|
10.4 |
|
||
Subordinated note - affiliate |
|
|
|
40.9 |
|
||
Other |
|
64.3 |
|
58.7 |
|
||
Total debt |
|
4,162.2 |
|
5,941.3 |
|
||
|
|
|
|
|
|
||
AdMat: |
|
|
|
|
|
||
AdMat Senior Secured Notes |
|
274.7 |
|
348.6 |
|
||
Other |
|
3.8 |
|
1.8 |
|
||
Total AdMat debt |
|
278.5 |
|
350.4 |
|
||
|
|
|
|
|
|
||
HMP: |
|
|
|
|
|
||
HMP Senior Discount Notes |
|
|
|
411.9 |
|
||
Total HMP debt |
|
|
|
411.9 |
|
||
|
|
|
|
|
|
||
Fair Value adjustment of HIH debt |
|
|
|
9.6 |
|
||
|
|
|
|
|
|
||
Elimination of HIH Senior Subordinated Discount Notes (owned by HMP) |
|
|
|
(413.7 |
) |
||
Total debt |
|
$ |
4,440.7 |
|
$ |
6,299.5 |
|
|
|
|
|
|
|
||
Current portion |
|
43.9 |
|
37.5 |
|
||
Long-term portion - excluding affiliate |
|
4,396.8 |
|
6,221.1 |
|
||
|
|
|
|
|
|
||
Long-term portion - affiliate |
|
|
|
40.9 |
|
||
|
|
|
|
|
|
||
Total debt |
|
$ |
4,440.7 |
|
$ |
6,299.5 |
|
Subsidiary Debt
With the exception of our guarantee of certain debt of our Consolidated Chinese Splitting JV (as defined below) discussed in Other Debt below, we have no direct debt or guarantee obligations. All our debt has been incurred by our subsidiaries, and such debt is non-recourse to us and we have no contractual obligation to fund our subsidiaries respective operations. HI and AdMat, our two principal operating subsidiaries, are separately financed and their respective debt is non-recourse to each other. The following is a discussion of the debt of our subsidiaries.
13
Credit Facilities
On August 16, 2005, effective upon the completion of the Merger, HI repaid the Former HI Credit Facilities, the Former HLLC Credit Facilities and the Huntsman Specialty Subordinated Note with available cash and with the proceeds of HIs New Credit Facilities.
HIs New Credit Facilities consist of (i) the $650 million Revolving Facility (of which $143 million was drawn upon completion of the Merger), (ii) the $1,730 million Dollar Term Facility (of which $1,683.5 million remains outstanding after HI made a voluntary prepayment of $46.5 million on September 19, 2005), and (iii) the 100 million (approximately $123.5 million) Euro Term Facility (of which 97.3 million remains outstanding after HI made a voluntary prepayment of 2.7 million on September 19, 2005). All of the initial borrowings under the Revolving Facility were repaid a few days later with proceeds received under HIs A/R Securitization Program. The Dollar Term Loan and the Euro Term Loan each require amortization payments of 1% annually.
Borrowings under the Revolving Facility currently bear interest at LIBOR plus 1.75% and mature in 2010. The Dollar Term Facility also bears interest at LIBOR plus 1.75% and matures in 2012. The Euro Term Facility bears interest at LIBOR plus 2.00% and matures in 2012. As of September 30, 2005, the weighted average interest rate on the New Credit Facilities was 5.4%, excluding the impact of interest rate hedges. As of September 30, 2005, HI had $22.2 million in U.S. dollar equivalents of letters of credit issued and outstanding under the Revolving Facility.
HIs obligations under the New Credit Facilities are guaranteed by substantially all of its domestic subsidiaries and certain of its foreign subsidiaries (the HI Guarantors), and are secured by a first priority lien (generally shared with the holders of the 2010 Secured Notes (as defined below)) on substantially all of HIs domestic property, plant and equipment, the stock of all of HIs material domestic subsidiaries and certain foreign subsidiaries, and pledges of intercompany notes between HIs various subsidiaries.
The credit agreements governing the New Credit Facilities contain financial covenants typical for these types of agreements, including a minimum interest coverage ratio, a maximum debt-to-EBITDA ratio and a limit on capital expenditures. The credit agreements also contain customary restrictions on HIs ability to incur liens, incur additional debt, merge or sell assets, pay dividends, prepay other indebtedness, make investments or engage in transactions with affiliates, and other customary restrictions and default provisions. Under the credit agreements, the maturity of the New Credit Facilities will accelerate if HI does not repay all but $100 million of any of HIs outstanding debt securities at least three months prior to the maturity of those securities.
Prior to entering into the agreements governing the New Credit Facilities on August 16, 2005, the Former HI Credit Facilities consisted of a revolving loan facility of up to $375 million and a term loan B facility which consisted of a $1,082.5 million term portion and a 41.6 million term portion. The Former HLLC Credit Facilities consisted of a $350 million revolving credit facility and a $665 million term loan B facility.
AdMat has a revolving credit facility (the AdMat Revolving Credit Facility) that provides up to $60 million of borrowings and is secured by a first lien on substantially all of AdMats assets and those of certain of its subsidiaries. The collateral includes substantially all real property and equipment relating to AdMats manufacturing plants located at Bergkamen, Germany; Monthey, Switzerland; McIntosh, Alabama; and Duxford, U.K. The collateral also includes intercompany notes of certain of AdMats subsidiaries, and certain other assets, principally including inventory and accounts receivable. AdMats obligations under the AdMat Revolving Credit Facility have been guaranteed by all of its U.S. subsidiaries and certain of its non-U.S. subsidiaries (collectively, the AdMat Guarantors). The agent for the lenders under the AdMat Revolving Credit Facility and the trustee under the indenture governing the AdMat Senior Secured Notes (as defined below) are parties to an intercreditor agreement (the AdMat Intercreditor Agreement).
On June 17, 2005, AdMat amended the AdMat Revolving Credit Facility. This amendment included, among other things, the extension of the facilitys maturity date from June 30, 2007 to July 15, 2007, the reduction in interest rate margins and the elimination of pledges of capital stock in subsidiaries as collateral under the facility. Interest rates, at AdMats option, are based upon either a eurocurrency rate (LIBOR) or a base rate (prime), plus an applicable spread. The applicable spreads vary based on a pricing grid. In the case of the eurocurrency-based loans, spreads range from 1.25% to 1.5% per annum, depending on whether specified conditions have been satisfied, and, in the case of base rate loans, from 0.25% to 0.5% per annum. As of September 30, 2005, AdMat had no amounts drawn on the AdMat Revolving Credit Facility and had
14
approximately $2.6 million of letters of credit issued and outstanding under the AdMat Revolving Credit Facility. The AdMat Revolving Credit Facility allows AdMat to issue up to $20 million in letters of credit; however, the $60 million revolving credit facility is reduced dollar-for-dollar by any letters of credit outstanding. There are no scheduled debt amortization payments on the AdMat Revolving Credit Facility until its maturity date.
The agreement governing the AdMat Revolving Credit Facility contains customary financial covenants; covenants relating to the incurrence of debt, the purchase and sale of assets, limitations on investments and affiliate transactions; change in control provisions; events of default provisions; and acceleration provisions.
Secured Notes
On August 16, 2005, in connection with the Merger, HI entered into supplemental indentures under which it assumed the obligations of Huntsman LLC under its outstanding 11.625% senior secured notes due 2010 (the 2010 Secured Notes). For more information, see Note 1. GeneralRecent DevelopmentsMerger of Huntsman LLC and HIH with and into HI. As of September 30, 2005, HI had outstanding $296.0 million aggregate principal amount ($455.4 million original aggregate principal amount) of the 2010 Secured Notes, which are redeemable after October 15, 2007 at 105.813% of the principal amount thereof, declining ratably to par on and after October 15, 2009. In connection with our initial public offering of common and preferred stock, proceeds were used to redeem $159.4 million of aggregate principal amount of the 2010 Secured Notes. Interest on the 2010 Secured Notes is payable semiannually in April and October of each year. The 2010 Secured Notes are secured by a first priority lien on all collateral securing the New Credit Facilities as described above (other than capital stock of HIs subsidiaries), shared equally with the lenders on the New Credit Facilities, subject to certain intercreditor arrangements. The 2010 Secured Notes are guaranteed by the HI Guarantors.
The 2010 Secured Notes contain covenants relating to the incurrence of debt and limitations on distributions, asset sales and affiliate transactions, among other things. The indentures governing the 2010 Secured Notes also contain change of control provisions requiring us to offer to repurchase the notes upon a change of control.
As of September 30, 2005, AdMat had outstanding $250 million fixed rate notes due 2010 (the AdMat Fixed Rate Notes) and $25 million floating rate notes due 2008 ($100 million original aggregate principal amount) (the AdMat Floating Rate Notes, and, collectively with the AdMat Fixed Rate Notes, the AdMat Senior Secured Notes). The $250 million AdMat Fixed Rate Notes bear a per annum fixed rate of interest of 11%, and the AdMat Floating Rate Notes bear interest at a rate per annum equal to LIBOR plus 8.0%, subject to a floor with respect to LIBOR of 2.0%. As of September 30, 2005, the interest rate on the AdMat Floating Rate Notes was approximately 11.8%. Interest on the AdMat Floating Rate Notes resets semiannually. The AdMat Floating Rate Notes were issued with an original issue discount of 2.0%. The discount is being amortized to interest expense over the term of the AdMat Floating Rate Notes. Interest is payable on the AdMat Senior Secured Notes semiannually on January 15 and July 15 of each year.
The AdMat Senior Secured Notes are secured by a second lien, subject to the AdMat Intercreditor Agreement, on substantially all of the assets that secure the AdMat Revolving Credit Facility. The AdMat Senior Secured Notes effectively rank senior in right of payment to all existing and future obligations of AdMat that are unsecured or secured by liens on the collateral junior to the liens securing the AdMat Senior Secured Notes. The AdMat Senior Secured Notes are guaranteed on a senior basis by the AdMat Guarantors and are also supported by liens on substantially all of the assets of the AdMat Guarantors.
The AdMat Fixed Rate Notes are redeemable on or after July 15, 2007 at AdMats option at a price declining ratably from 105.5% to 100.0% of par value by the year 2009. At any time prior to July 15, 2007 for the AdMat Fixed Rate Notes, AdMat may redeem all or part of such notes at 100% of their principal amount, plus a make whole premium, as defined in the indenture. In addition, at any time prior to July 15, 2006 for the AdMat Fixed Rate Notes, AdMat may redeem up to 35% of the original aggregate principal amount of such notes at a redemption price of 111% of the principal thereof with the net cash proceeds of one or more qualified equity offerings, subject to certain conditions and limitations. The AdMat Floating Rate Notes are currently redeemable at AdMats option at a price declining ratably from 105.0% to 100.0% of par value by the year 2007. During the third quarter of 2005, AdMat completed the partial redemption of $75 million in aggregate principal amount of AdMat Floating Rate Notes and paid call premiums in the amount of approximately $3.8 million. There are no scheduled debt amortization payments on the AdMat Senior Secured Notes until their maturity date.
The indenture governing the AdMat Senior Secured Notes contains covenants relating to the incurrence of debt and limitations on distributions, asset sales and affiliate transactions, among other things. The indenture also contains a change of control provision requiring AdMat to offer to repurchase the AdMat Senior Secured Notes upon a change of control.
15
Senior Notes
As of September 30, 2005, we had outstanding $450.0 million aggregate principal amount 9.875% senior notes due 2009 that were issued at a premium (the 2009 Senior Notes). The 2009 Senior Notes are unsecured obligations. Interest on the 2009 Senior Notes is payable semiannually in March and September and these notes are redeemable after March 1, 2006 at 104.937% of the original aggregate principal amount thereof, declining ratably to par on and after March 1, 2008.
In connection with the Merger, on August 16, 2005, HI entered into supplemental indentures under which it assumed the obligations of Huntsman LLC under its 11.5% senior notes due 2012 (the 2012 Senior Fixed Rate Notes) and its senior floating rate notes due 2011 (the 2011 Senior Floating Rate Notes). For more information, see Note 1. GeneralRecent DevelopmentsMerger of Huntsman LLC and HIH with and into HI. As of September 30, 2005, HI had outstanding $198.0 million ($300 million original aggregate principal amount) of 2012 Senior Fixed Rate Notes and $100.0 million of 2011 Senior Floating Rate Notes. In connection with our initial public offering of common and preferred stock, proceeds were used to repay $102.0 million of aggregate principal amount of the 2012 Senior Fixed Rate Notes. Interest on the 2012 Senior Fixed Rate Notes is payable semiannually in January and July of each year. Interest on the 2011 Senior Floating Rate Notes is at LIBOR plus 7.25 % (10.85% as of September 30, 2005) and is payable quarterly in January, April, July and October of each year. The 2012 Senior Fixed Rate Notes are redeemable after July 15, 2008 at 105.75% of the principal amount thereof, declining ratably to par on and after July 15, 2010. The 2011 Senior Floating Rate Notes are redeemable after July 15, 2006 at 104.0% of the principal amount thereof, declining ratably to par on and after July 15, 2008. At any time prior to July 15, 2007, HI may redeem up to 40% of the original aggregate principal amount of the 2012 Senior Fixed Rate Notes at a redemption price of 111.5% with proceeds of a qualified equity offering. At any time prior to July 15, 2006, we may redeem up to 40% of the original aggregate principal amount of the 2011 Senior Floating Rate Notes with the proceeds of a qualified equity offering at a redemption price equal to the par value plus LIBOR plus 7.25%. The 2009 Senior Notes, the 2011 Senior Floating Rate Notes and the 2012 Senior Fixed Rate Notes are guaranteed by the HI Guarantors.
The indentures governing the 2009 Senior Notes, the 2012 Senior Fixed Rate Notes and the 2011 Senior Floating Rate Notes contain covenants relating to the incurrence of debt and limitations on distributions, asset sales and affiliate transactions, among other things. The indentures governing these notes also contain change of control provisions requiring us to offer to repurchase the notes upon a change of control.
Subordinated Notes
As of September 30, 2005, HI had outstanding $175 million 7.375% senior 2015 subordinated notes and 135 million ($162.3 million) 7.5% senior 2015 subordinated notes (collectively, the 2015 Subordinated Notes). The $175 million and 135 million 2015 Subordinated Notes are redeemable on or after January 1, 2010 at 103.688% and 103.750%, respectively, of the principal amount thereof, declining ratably to par on and after January 1, 2013. In addition, at any time prior to January 1, 2008, HI may redeem up to 40% of the original aggregate principal amount of the $175 million and 135 million 2015 Subordinated Notes at redemption prices of 107.375% and 107.5%, plus accrued and unpaid interest, respectively, with the proceeds of a qualified equity offering.
As of September 30, 2005, HI also had outstanding $366.1 million ($600 million original aggregate principal amount) and 372.0 million ($447.1 million) (450 million original aggregate principal amount) 10.125% senior subordinated notes due 2009 (the 2009 Subordinated Notes and, together with the 2015 Subordinated Notes, the Subordinated Notes). The 2009 Subordinated Notes are redeemable at 103.375% of the principal amount thereof, which declines ratably to par on and after July 1, 2007.
As of September 30, 2005, HI had outstanding a combined total of $541.1 million and 507.0 million ($609.4 million U.S. dollar equivalents) Subordinated Notes, plus $4.1 million of unamortized premium. The Subordinated Notes are unsecured and are guaranteed by the HI Guarantors. Interest on the Subordinated Notes is payable semiannually in January and July of each year.
The Subordinated Notes contain covenants relating to the incurrence of debt and limitations on distributions, asset sales and affiliate transactions, among other things. The indentures governing these notes also contain change of control provisions requiring us to offer to repurchase the notes upon a change of control.
Immediately prior to the Merger, Huntsman LLC funded the redemption of its outstanding 9.5% senior subordinated notes due 2007 and its senior subordinated floating rate notes due 2007, which together had an aggregate outstanding
16
principal amount of approximately $59 million (the HLLC Subordinated Notes). Such redemption was completed on September 1, 2005.
On August 16, 2005, in connection with the Merger, HI repaid, in full, the Huntsman Specialty Subordinated Note which had an aggregate principal amount of $106.6 million.
Senior Discount Notes
On June 30, 1999, HIH issued senior discount notes (HIH Senior Discount Notes) and senior subordinated discount notes (the HIH Senior Subordinated Discount Notes and, collectively with the HIH Senior Discount Notes, the HIH Discount Notes) to Imperial Chemical Industries PLC (ICI) with initial stated values of $242.7 million and $265.3 million, respectively. The HIH Discount Notes were due December 31, 2009.
Interest on the HIH Senior Discount Notes accrued at 13.375% per annum and was paid in kind. The HIH Senior Discount Notes were redeemable after July 1, 2004 at 106.688% of the principal amount thereof, declining ratably to par on and after July 1, 2007. As a result of our initial public offering, during the first quarter of 2005, HIH redeemed approximately $505.6 million of accreted value and paid call premiums of approximately $33.8 million. In order to make this redemption, HIH received contributions from us resulting from proceeds of our initial public offering in the amount of $504.4 million and received $35.0 million in dividends from HI.
The HIH Senior Subordinated Discount Notes accrued interest at a reset rate of 13.125% that was reset as of September 30, 2004 in accordance with the terms of the indenture. The HIH Senior Subordinated Discount Notes were held by HMP. On February 28, 2005, HMP contributed the HIH Senior Subordinated Discount Notes at an accreted value of $422.8 million to HIH in exchange for equity in HIH.
On May 9, 2003, HMP issued units consisting of the HMP Senior Discount Notes with an accreted value of $423.5 million and the HMP Warrants. On February 28, 2005, we used proceeds from our initial public offering of common and preferred stock to redeem in full the HMP Senior Discount Notes at an accreted value of $550.0 million, plus a redemption premium of $41.3 million.
Other Debt
HI maintains a $25 million multicurrency overdraft facility used for the working capital needs for HIs European subsidiaries (the European Overdraft Facility). As of September 30, 2005 and December 31, 2004, there were $17.3 million in U.S. dollar equivalents and nil net borrowings outstanding under the European Overdraft Facility, respectively.
Huntsman Polyurethanes Shanghai Ltd., one of our Chinese MDI joint ventures and our consolidated affiliate (our Consolidated Chinese Splitting JV), has obtained secured loans for the construction of MDI production facilities near Shanghai, China. This debt consists of various committed loans in the aggregate amount of approximately $117 million. As of September 30, 2005, our Consolidated Chinese Splitting JV had $15 million outstanding in U.S. dollar borrowings and 126 million in RMB borrowings ($15 million) under these facilities. As of September 30, 2005, the interest rate was approximately 5.0% for U.S. dollar borrowings and 5.5% for RMB borrowings. The loans are secured by substantially all the assets of the Consolidated Chinese Splitting JV and will be repaid in 16 semiannual installments beginning no later than June 30, 2007. The financing is non-recourse to HI, but is guaranteed during the construction phase by affiliates of the Consolidated Chinese Splitting JV, including us as successor to Huntsman Holdings LLC. We have guaranteed 70% of any amount due and unpaid by the Consolidated Chinese Splitting JV under the loans described above (except for the VAT Facility, which is not guaranteed). Our guarantees remain in effect until the Consolidated Chinese Splitting JV has (i) commenced production of at least 70% of capacity for at least 30 days, and (ii) achieved a debt service cost ratio of at least 1.5:1. Our Chinese MDI joint ventures are unrestricted subsidiaries under the New Credit Facilities and under the indentures governing our outstanding notes.
Our Australian subsidiaries maintain credit facilities that had an aggregate outstanding balance of A$87.0 million ($65.7 million) as of September 30, 2005. These facilities are non-recourse to us.
We finance certain of our insurance premiums. As of September 30, 2005, we had $27.6 million in insurance premium financing, all of which is due in the next 12 months.
17
On February 16, 2005, Huntsman LLC paid in full a 15% note payable to an affiliated entity in the amount of $41.6 million.
Compliance with Covenants
Our management believes that we are in compliance with the covenants contained in the agreements governing the New Credit Facilities, the AdMat Credit Facilities, the A/R Securitization Program and the indentures governing our notes.
Maturities
The scheduled maturities of our debt by year as of September 30, 2005, were as follows (dollars in millions):
Year ending December 31: |
|
|
|
|
|
Remainder of 2005 |
|
$ |
19.7 |
|
|
2006 |
|
34.1 |
|
||
2007 |
|
81.1 |
|
||
2008 |
|
45.4 |
|
||
2009 |
|
1,293.2 |
|
||
Later years |
|
2,967.2 |
|
||
|
|
|
|
||
Total |
|
$ |
4,440.7 |
|
In connection with the repayment of indebtedness, we recorded a loss on early extinguishment of debt in the three and nine months ended September 30, 2005 of $41.4 million and $276.4 million, respectively.
6. Derivative Instruments and Hedging Activities
We are exposed to market risks, such as changes in interest rates, foreign exchange rates, and commodity pricing risks. From time to time we enter into transactions, including transactions involving derivative instruments, to manage exposures. We manage interest rate exposure through a program designed to reduce the impact of fluctuations in variable interest rates and to meet the requirements of certain financing agreements.
Interest Rate Hedging
Through our borrowing activities, we are exposed to interest rate risk. Such risk arises due to the structure of our 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 September 30, 2005 and December 31, 2004, we had entered into various types of interest rate contracts to manage our exposure to interest rate risk on our variable rate LIBOR-based long-term debt as indicated below (dollars in millions):
|
|
September 30, 2005 |
|
December 31, 2004 |
|
||
|
|
|
|
|
|
||
Notional amount |
|
$ |
183.5 |
|
$ |
184.3 |
|
Fair value |
|
(0.2 |
) |
(3.2 |
) |
||
Weighted average pay rate |
|
4.43 |
% |
4.44 |
% |
||
Maturing |
|
2005-2007 |
|
2005-2007 |
|
||
We purchase interest rate swaps to reduce the impact of changes in interest rates on our floating-rate long-term debt. Under interest rate swaps, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount.
18
Interest rate contracts with a fair value loss of $0.2 million and $3.2 million were recorded as a component of other noncurrent liabilities as of September 30, 2005 and December 31, 2004, respectively. The fair value of cash flow hedges and interest rate contracts not designated as hedges were as follows (dollars in millions):
|
|
September 30, |
|
December 31, |
|
||
|
|
|
|
|
|
||
Cash flow hedges |
|
$ |
(0.4 |
) |
$ |
(2.0 |
) |
Interest rate contracts |
|
0.2 |
|
(1.2 |
) |
||
The changes in the fair values of cash flow hedges and interest rate contracts not designated as hedges resulted in increases (decreases) as follows (dollars in millions):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
$ |
0.2 |
|
$ |
0.9 |
|
$ |
0.8 |
|
$ |
0.5 |
|
Other comprehensive income |
|
(0.5 |
) |
(1.2 |
) |
(2.4 |
) |
(4.0 |
) |
||||
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
$ |
(1.9 |
) |
$ |
0.6 |
|
$ |
(1.3 |
) |
$ |
(0.9 |
) |
We are exposed to credit losses in the event of nonperformance by a counterparty to the derivative financial instruments. We anticipate, however, that the counterparties will be able to fully satisfy obligations under the contracts. Market risk arises from changes in interest rates.
Commodity Price Hedging
As of September 30, 2005 there were no cash flow commodity price hedging contracts recorded in other current assets, accrued liabilities or other comprehensive income. As of December 31, 2004 there was $0.1 million included in other current assets and accrued liabilities relating to cash flow commodity price hedging contracts.
As of September 30, 2005 there were no commodity price hedging contracts designated as fair value hedges included in the balance sheet. As of December 31,2004 commodity price hedging contracts designated as fair value hedges are included in the balance sheet as $1.5 million increase in other current assets and $1.8 million decrease in inventory.
Commodity price contracts not designated as hedges as defined by SFAS No. 133 are reflected in the balance sheet as $3.5 million in other current assets and $2.3 million in accrued liabilities as of September 30, 2005, and as $5.6 million in other current assets and $1.8 million in accrued liabilities as of December 31, 2004.
During the three months ended September 30, 2005 and the three months ended September 30, 2004, we recorded a decrease of $1.1 million and of $0.8 million respectively, in cost of goods sold related to net gains and losses from settled contracts, net gains and losses in fair value price hedges, and the change in fair value on commodity price hedges not designated as hedges as defined in SFAS No. 133.
During the nine months ended September 30, 2005 and the nine months ended September 30, 2004, we recorded an increase of $10.2 million and of $2.5 million, respectively, in cost of goods sold related to net gains and losses from settled contracts, net gains and losses in fair value price hedges, and the change in fair value on commodity price hedges not designated as hedges as defined in SFAS No. 133.
Foreign Currency Rate Hedging
We may enter 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
19
value. As of September 30, 2005 and December 31, 2004 and for the nine months ended September 30, 2005 and 2004, the change in fair value and realized gains (losses) of outstanding foreign currency rate hedging contracts was not material.
Net Investment Hedging
As of September 30, 2005, excluding the cross-currency interest rate swap discussed in the following paragraph, we have designated 332.3 million of our euro-denominated debt as a hedge of our net investment in foreign operations. Currency effects on net investment hedges for the three months ended September 30, 2005 and 2004 produced a gain of $3.2 million and a loss of $9.4 million, respectively, and for the nine months ended September 30, 2005 and 2004, respectively, a gain of $49.0 million and a gain of $9.6 million in other comprehensive loss (foreign currency translation adjustments). As of September 30, 2005 and December 31, 2004, we recorded a cumulative net loss in accumulated other comprehensive income (loss) of approximately $139.5 million and $188.5 million, respectively, related to these hedges.
HI has outstanding a cross-currency interest rate swap that requires it to pay euros and receive U.S. dollars at the maturity date of January 1, 2010. The U.S. dollar notional amount is $175 million and bears interest at a fixed rate of approximately 7.4%, payable semiannually on January 1 and July 1. The euro notional amount is approximately 132 million and bears interest at a blended fixed rate of approximately 6.6%, payable semiannually on January 1 and July 1. We have designated this cross-currency swap as a hedge of our net investment in euro-denominated operations.
On June 1, 2005, AdMat entered into a cross-currency interest rate swap. The cross-currency swap requires AdMat to pay euros and receive U.S. dollars on the maturity date of July 15, 2007. The U.S. dollar notional amount is $31.3 million and bears interest at a fixed rate of 11.0%, payable semiannually on January 15 and July 15. The euro notional amount is 25.0 million and bears interest at a fixed rate of approximately 9.4%, payable semiannually on January 15 and July 15. As of September 30, 2005, the swap was not designated as a hedge for reporting purposes and was recorded at fair value. As of September 30, 2005, an asset of $1.0 million was recorded in other noncurrent assets, with a corresponding decrease in other operating expenses for the nine months ended September 30, 2005.
7. Securitization of Accounts Receivable
Under our A/R Securitization Program, we grant an undivided interest in certain of our trade receivables to a qualified off-balance sheet entity (the Receivables Trust) at a discount. This undivided interest serves as security for the issuance of commercial paper and medium-term notes by the Receivables Trust.
As of September 30, 2005 and December 31, 2004, the Receivables Trust had approximately $193.8 million and $208.4 million, respectively, in U.S. dollar equivalents in medium-term notes outstanding and approximately $94.3 million in U.S. dollar equivalents and nil, respectively in commercial paper outstanding. The medium-term notes have a scheduled maturity date of September 15, 2006 with the scheduled amortization period commencing June 30, 2005. Our commercial paper facility has a maturity date of June 30, 2007 and provides for the issuance of both euro- and U.S. dollar-denominated commercial paper up to a U.S. dollar equivalent of $125 million. In connection with the Merger and the related financing, we temporarily (through March 31, 2006) increased our commercial paper facility from $125 million to $175 million.
As of September 30, 2005 and December 31, 2004, our retained interest in receivables (including servicing assets) subject to the program was approximately $217.5 million and $327.6 million, respectively. The value of the retained interest is subject to credit and interest rate risk. For the nine months ended September 30, 2005 and 2004, new sales of accounts receivable sold into the program totaled approximately $4,245.3 million and $3,669.1 million, respectively, and cash collections from receivables sold into the program that were reinvested totaled $4,238.3 million and $3,635.5 million, respectively. Servicing fees received during the nine months ended September 30, 2005 and 2004 were approximately $4.6 million and $4.0 million, respectively.
We incur losses on the A/R Securitization Program for the discount on receivables sold into the program and fees and expenses associated with the program. We also retain responsibility for the economic gains and losses on forward contracts mandated by the terms of the program to hedge the currency exposures on the collateral supporting the off-balance sheet debt issued. Gains and losses on forward contracts included as a component of the loss on the A/R Securitization Program were nil and a loss of $1.0 million for the nine months ended September 30, 2005 and 2004, respectively. As of each of September 30, 2005 and December 31, 2004, the fair value of the open forward currency contracts was nil.
The key economic assumptions used in valuing the residual interest are presented below:
20
|
|
September 30, 2005 |
|
Weighted average life (in months) |
|
Approx. 1.5 |
|
Credit losses (annual rate) |
|
Less than 1% |
|
Discount rate (weighted average life) |
|
Less than 1% |
|
A 10% and 20% adverse change in any of the key economic assumptions would not have a material impact on the fair value of the retained interest. Total receivables over 60 days past due as of September 30, 2005 and December 31, 2004 were $14.9 million and $12.1 million, respectively.
8. Employee Benefit Plans
Components of the net periodic benefit costs for the three and nine months ended September 30, 2005 and 2004 were as follows (dollars in millions):
|
|
Defined Benefit Plans |
|
Other Postretirement |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Service cost |
|
$ |
19.5 |
|
$ |
15.5 |
|
$ |
1.2 |
|
$ |
0.9 |
|
Interest cost |
|
32.0 |
|
27.7 |
|
2.0 |
|
1.9 |
|
||||
Expected return on assets |
|
(36.1 |
) |
(28.0 |
) |
|
|
|
|
||||
Amortization of transition obligation |
|
0.7 |
|
0.4 |
|
|
|
|
|
||||
Amortization of prior service cost |
|
(1.0 |
) |
0.4 |
|
(0.5 |
) |
(0.4 |
) |
||||
Amortization of actuarial loss |
|
8.8 |
|
5.8 |
|
0.9 |
|
0.8 |
|
||||
Net periodic benefit cost |
|
$ |
23.9 |
|
$ |
21.8 |
|
$ |
3.6 |
|
$ |
3.2 |
|
|
|
Defined Benefit Plans |
|
Other Postretirement |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Service cost |
|
$ |
58.7 |
|
$ |
46.7 |
|
$ |
2.8 |
|
$ |
2.6 |
|
Interest cost |
|
93.8 |
|
83.1 |
|
5.8 |
|
5.6 |
|
||||
Expected return on assets |
|
(102.9 |
) |
(83.9 |
) |
|
|
|
|
||||
Amortization of transition obligation |
|
1.3 |
|
1.2 |
|
|
|
|
|
||||
Amortization of prior service cost |
|
(4.0 |
) |
1.1 |
|
(1.5 |
) |
(1.2 |
) |
||||
Amortization of actuarial loss |
|
23.8 |
|
17.1 |
|
2.7 |
|
2.5 |
|
||||
Net periodic benefit cost |
|
$ |
70.7 |
|
$ |
65.3 |
|
$ |
9.8 |
|
$ |
9.5 |
|
During the nine months ended September 30, 2005 and 2004, we made contributions to our pension plans of $44.7 million and $25.8 million, respectively.
During the fourth quarter of 2005, we expect to accelerate the date for actuarial measurement of our pension and postretirement benefit obligations from December 31 to November 30. We believe the one-month acceleration of the measurement date is a preferred change as it improves internal control procedures by allowing more time to review the completeness and accuracy of the actuarial benefit obligation measurements. The effect of the change in measurement date on the respective obligations and assets of the plans is not expected to have a material cumulative effect on annual expense or accrued benefit costs.
9. Dividends on Mandatory Convertible Preferred Stock
In connection with the initial public offering of our 5% mandatory convertible preferred stock on February 16, 2005, we declared all dividends that will be payable on such preferred stock from the issuance through the mandatory conversion date,
21
which is February 16, 2008. Accordingly, we recorded dividends payable of $43.1 million and a corresponding charge to net income available to common stockholders during the nine months ended September 30, 2005. We expect to pay dividends in cash on February 16, May 16, August 16 and November 16 of each year prior to February 16, 2008. Under certain circumstances, we may not be allowed to pay dividends in cash. If this were to occur, any unpaid dividend would be payable in shares of common stock on February 16, 2008.
10. Other Comprehensive (Loss) Income
The components of other comprehensive (loss) income were as follows (dollars in millions):
|
|
Accumulated
other comprehensive |
|
Other
comprehensive (loss) |
|
Other
comprehensive (loss) |
|
||||||||||||
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|||||||||||||
|
|
September 30, |
|
December 31, |
|
September 30, |
|
September 30, |
|
||||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||||
Foreign currency translation adjustments, net of deferred tax of $14.0 and $18.3 as of September 30, 2005 and December 31, 2004, respectively |
|
$ |
104.9 |
|
$ |
304.0 |
|
$ |
(26.8 |
) |
$ |
9.0 |
|
$ |
(199.1 |
) |
$ |
(20.6 |
) |
Unrealized gain (loss) on nonqualified plan investments |
|
0.8 |
|
0.9 |
|
|
|
(0.1 |
) |
(0.1 |
) |
|
|
||||||
Unrealized gain (loss) on derivative instruments |
|
18.3 |
|
(5.2 |
) |
2.1 |
|
1.1 |
|
23.5 |
|
8.9 |
|
||||||
Unrealized gain (loss) on securities |
|
0.7 |
|
2.0 |
|
(0.7 |
) |
(1.1 |
) |
(1.3 |
) |
(0.3 |
) |
||||||
Minimum pension liability, net of deferred tax benefit of $20.5 and $14.2 as of September 30, 2005 and December 31, 2004, respectively |
|
(122.1 |
) |
(117.1 |
) |
|
|
|
|
(5.0 |
) |
|
|
||||||
Minimum pension liability of unconsolidated affiliates |
|
1.4 |
|
(3.6 |
) |
|
|
|
|
5.0 |
|
|
|
||||||
Total |
|
$ |
4.0 |
|
$ |
181.0 |
|
$ |
(25.4 |
) |
$ |
8.9 |
|
$ |
(177.0 |
) |
$ |
(12.0 |
) |
Items of other comprehensive (loss) income of our Company and our consolidated affiliates have been recorded net of tax, with the exception of the foreign currency translation adjustments related to subsidiaries with earnings permanently reinvested. The tax effect is determined based upon the jurisdiction where the income or loss was recognized and is net of valuation allowances that have been recorded.
11. Commitments and Contingencies
Legal Matters
Certain claims have been filed against us relating to discoloration of unplasticized polyvinyl chloride products allegedly caused by our titanium dioxide (Discoloration Claims). Substantially all of the titanium dioxide that is the subject of these claims was manufactured prior to our acquisition of our titanium dioxide business from ICI in 1999. Net of amounts we have received from insurers and pursuant to contracts of indemnity, we have paid approximately $15.8 million in costs and settlement amounts for Discoloration Claims as of September 30, 2005.
The following table presents information about the number of Discoloration Claims for the period indicated. Claims include all claims for which service has been received by us, and each such claim represents a plaintiff who is pursuing a claim against us.
|
|
Nine months ended |
|
Claims filed during period |
|
0 |
|
Claims resolved during period |
|
1 |
|
Claims unresolved at end of period |
|
2 |
|
During the nine months ended September 30, 2005, we settled a claim for approximately $0.9 million, all of which is indemnified and for which we have been reimbursed. The two Discoloration Claims unresolved as of September 30, 2005 asserted aggregate damages of approximately $63.8 million. A liability has been accrued for these claims. Based on our understanding of the merits of these claims and our rights under contracts of indemnity and insurance, we do not believe that the net impact on our financial condition, results of operations or liquidity will be material.
While additional Discoloration Claims may be made in the future, we cannot reasonably estimate the amount of loss related to such claims. Although we may incur additional costs as a result of future claims (including settlement costs), based
22
on our history with Discoloration Claims to date, the fact that substantially all of the titanium dioxide that has been the subject of these Discoloration Claims was manufactured and sold more than five years ago, and the fact that we have rights under contract to indemnity, including from ICI, we do not believe that any unasserted possible Discoloration Claims, if any, will have a material impact on our financial condition, results of operations, or liquidity. Based on this conclusion and our inability to reasonably estimate our expected costs with respect to these unasserted possible claims, we have made no accruals in our financial statements as of September 30, 2005 for costs associated with unasserted possible Discoloration Claims, if any.
Certain insurers have denied coverage with respect to certain Discoloration Claims. We brought suit against these insurers to recover the amounts we believe are due to us. The court found in favor of the insurers. That decision was appealed to the Court of Appeal, which also found in favor of the insurers. We do not intend to apply for leave to appeal to the House of Lords. We do not believe that the net impact on our financial condition, results of operations or liquidity of our inability to recover these amounts will be material.
Vantico concluded that certain of the products of its former Electronics division may have infringed patents owned by Taiyo and it entered into a license agreement in October 2001 with Taiyo to obtain the right to use the Taiyo patents. This license agreement required payment of approximately $4.2 million in back royalties and agreement to pay periodic royalties for future use. We believe that Ciba Specialty Chemicals Holdings Inc. (Ciba) is liable under the indemnity provisions of certain agreements in connection with the leveraged buy-out transaction in 2000 involving Ciba and Vantico for certain payments made under the license agreement and related costs and expenses, and we initiated an arbitration proceeding against Ciba. In July 2004, we entered into a settlement agreement with Ciba with respect to this matter. In general, the settlement agreement provided that Ciba would pay us $11.1 million in 2004. We received additional consideration in the form of modifications to certain operating agreements between us and Ciba. In August 2004, we received payment of the $11.1 million settlement.
We have been a party to various lawsuits brought by persons alleging personal injuries and/or property damage based upon alleged exposure to toxic air emissions. For example, since June 2003, a number of lawsuits have been filed in state district court in Jefferson County, Texas against several local chemical plants and refineries, including our subsidiary, Huntsman Petrochemical Corporation. Generally, these lawsuits have alleged that the refineries and chemical plants located in the vicinity of the plaintiffs homes discharged chemicals into the air that interfere with use and enjoyment of property and cause health problems and/or property damages. None of these lawsuits have included the amount of damages being sought. The following table presents information about the number of claims asserting damages based upon alleged exposure to toxic air emissions for the period indicated. Claims include all claims for which service has been received by us, and each such claim represents a plaintiff who is pursuing a claim against us.
|
|
Nine Months Ended |
|
Claims filed during period |
|
2,104 |
|
Claims resolved during period |
|
2,988 |
|
Claims unresolved at end of period |
|
0 |
|
All claims filed as of September 30, 2005 have been resolved through dismissal and/or settlement.
In addition, we have been named as a premises defendant in a number of asbestos exposure cases, typically a claim by a non-employee of exposure to asbestos while at a facility. These cases typically involve multiple plaintiffs bringing actions against multiple defendants, and the complaint does not indicate which plaintiffs are making claims against which defendants, where or how the alleged injuries occurred, or what injuries each plaintiff claims. These facts, which are central to any estimate of probable loss, can be learned only through discovery.
Where the alleged exposure occurred prior to our ownership or operation of the relevant premises, the prior owners and operators generally have contractually agreed to retain liability for, and to indemnify us against, asbestos exposure claims. This indemnification is not subject to any time or dollar amount limitations. Upon service of a complaint in one of these cases, we tender it to the prior owner or operator. None of the complaints in these cases state the amount of damages being sought. The prior owner or operator accepts responsibility for the conduct of the defense of the cases and payment of any amounts due to the claimants. In our ten-year experience with tendering these cases, we have not made any payment with respect to any tendered asbestos cases. We believe that the prior owners or operators have the intention and ability to continue to honor their indemnities, although we cannot assure you that they will continue to do so or that we will not be liable for these cases if they do not.
23
The following table presents for the period indicated certain information about cases for which service has been received that we have tendered to the prior owner or operator, all of which have been accepted.
|
|
Nine Months Ended |
|
Tendered during period |
|
107 |
|
Resolved during period |
|
67 |
|
Unresolved at end of period |
|
438 |
|
We have never made any payments with respect to these cases. As of September 30, 2005, we had an accrued liability of $12.5 million relating to these cases and a corresponding receivable of $12.5 million relating to our indemnity protection with respect to these cases. We cannot assure you that our liability will not exceed our accruals or that our liability associated with these cases would not be material to our financial condition, results of operations or liquidity.
Certain cases in which we are a premises defendant are not subject to indemnification by prior owners or operators. The following table presents for the period indicated certain information about these cases. Cases include all cases for which service has been received by us.
|
|
Nine Months Ended |
|
Filed during period |
|
47 |
|
Resolved during period |
|
8 |
|
Unresolved at end of period |
|
68 |
|
We paid gross settlement costs for asbestos exposure cases that are not subject to indemnification of approximately $20,000 during the nine months ended September 30, 2005.
As of September 30, 2005, we had an accrued liability of $1.2 million relating to these cases. We cannot assure you that our liability will not exceed our accruals or that our liability associated with these cases would not be material to our financial condition, results of operations or liquidity.
We are a party to various other proceedings instituted by private plaintiffs, governmental authorities, and others arising under provisions of applicable laws, including various environmental, products liability and other laws. Except as otherwise disclosed in this report, we do not believe that the outcome of any of these matters will have a material adverse effect on our financial condition, results of operations or liquidity. See Note 12Environmental, Health and Safety Matters.
Guarantee
In 2003, HI entered into two related joint venture agreements to build MDI production facilities near Shanghai, China. HIs Unconsolidated Chinese Manufacturing JV with BASF AG and three Chinese chemical companies will build three plants to manufacture MNB, aniline and crude MDI. HI effectively owns 35% of the Unconsolidated Chinese Manufacturing JV. HIs Consolidated Chinese Splitting JV with Shanghai Chlor-Alkali Chemical Company, Ltd. will build a plant to manufacture pure MDI, polymeric MDI and MDI variants. HI owns 70% of the Consolidated Chinese Splitting JV.
In connection with the formation of the Consolidated Chinese Splitting JV and the procurement of financing for the Consolidated Chinese Splitting JV, we have guaranteed the construction loans of the Consolidated Chinese Splitting JV during the construction period. The Consolidated Chinese Splitting JV is our consolidated subsidiary. See Note 5Debt. If the Consolidated Chinese Splitting JV were to default on its payments during the construction period, we would be required to make payments to the banks and ownership of the constructed assets would revert to us. The maximum potential amount of future payments that we could be required to make under this guarantee is approximately $80 million.
The Unconsolidated Chinese Manufacturing JV is not our consolidated subsidiary. The Unconsolidated Chinese Manufacturing JV obtained various committed loans in the aggregate amount of approximately $224 million in U.S. dollar equivalents. As of September 30, 2005, there were $55.0 million outstanding in U.S. dollar borrowings and 500 million in outstanding RMB ($61.8 million) borrowings under these facilities. The interest rate on these facilities is LIBOR plus 0.48% for U.S. dollar borrowings and 90% of the Peoples Bank of China rate for RMB borrowings. The loans are secured by substantially
24
all the assets of the Unconsolidated Chinese Manufacturing JV and will be paid in 16 semiannual installments, beginning no later than June 30, 2007. We unconditionally guarantee 35% of any amounts due and unpaid by the Unconsolidated Chinese Manufacturing JV under the loans described above (except for a VAT facility of approximately $1.5 million which is not guaranteed). We have calculated the fair value of the guarantee in accordance with FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other, and we have determined the fair value to be insignificant. The MDI production facility is expected to be operational in 2006 and the construction period guarantee is expected to terminate within one year thereafter. Our guarantee remains in effect until the Unconsolidated Chinese Manufacturing JV has commenced production of at least 70% of capacity for at least 30 days and achieved a debt service coverage ratio of at least 1:1.
12. Environmental, Health and Safety Matters
General
We are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, 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, we are subject to frequent environmental inspections and monitoring and occasional investigations by governmental enforcement authorities. In addition, our production facilities require operating permits that are subject to renewal, modification and, in certain circumstances, revocation. Actual or alleged violations of environmental laws or permit requirements could result in restrictions or prohibitions on plant operations, substantial civil or criminal sanctions, as well as, under some environmental laws, the assessment of strict liability and/or joint and several liability. Moreover, changes in environmental regulations could inhibit or interrupt our operations, or require us to modify our facilities or operations. Accordingly, environmental or regulatory matters may cause us to incur significant unanticipated losses, costs or liabilities.
Environmental, Health and Safety Systems
We are committed to achieving and maintaining compliance with all applicable environmental, health and safety (EHS) legal requirements, and we have developed policies and management systems that are intended to identify the multitude of EHS legal requirements applicable to our operations, enhance compliance with applicable legal requirements, ensure the safety of our employees, contractors, community neighbors and customers and minimize the production and emission of wastes and other pollutants. Although EHS legal requirements are constantly changing and are frequently difficult to comply with, these EHS management systems are designed to assist us in our compliance goals while also fostering efficiency and improvement and minimizing overall risk to us.
EHS Capital Expenditures
We may incur future costs for capital improvements and general compliance under EHS laws, including costs to acquire, maintain and repair pollution control equipment. For the nine months ended September 30, 2005 and 2004, our capital expenditures for EHS matters totaled $24.2 million and $36.9 million, respectively. Since capital expenditures for these matters are subject to evolving regulatory requirements and depend, in part, on the timing, promulgation and enforcement of specific requirements, we cannot provide assurance that our recent expenditures will be indicative of future amounts required under EHS laws.
Governmental Enforcement Proceedings
On occasion, we receive notices of violation, enforcement and other complaints from regulatory agencies alleging non-compliance with applicable EHS law. By way of example, we are aware of the individual matters set out below, which we believe to be the most significant presently pending matters and unasserted claims. Although we may incur costs or penalties in connection with the governmental proceedings discussed below, based on currently available information and our past experience, we believe that the ultimate resolution of these matters will not have a material impact on our results of operations, financial position or liquidity.
In May 2003, the State of Texas settled an air enforcement case with us relating to our Port Arthur plant. Under the settlement, we are required to pay a civil penalty of $7.5 million over more than four years, undertake environmental monitoring projects totaling about $1.5 million in costs, and pay $0.4 million in attorneys fees to the Texas Attorney General. As of September 30, 2005, we have paid $3.5 million toward the penalty and $0.4 million for the attorneys fees. The monitoring projects are underway and on schedule. We do not anticipate that this settlement will have a material adverse
25
effect on our results of operations, financial position or liquidity.
Beginning in the third quarter of 2004 and extending through August 2005, we have received approximately eight separate notifications from the Texas Commission on Environmental Quality (TCEQ) for alleged violations related to air emissions at our Port Neches or our Port Arthur plant. These alleged violations primarily relate to specific upset emissions, emissions from cooling towers, or flare operations occurring at particular times and at particular operating units during 2004 and 2005. These notices of violation appear to be part of a larger enforcement initiative by the TCEQ regional office focused on upset emissions at chemical and refining industry plants located within the Beaumont/Port Arthur region. TCEQ has made individual proposals to us to resolve five of the notices of alleged violation for approximately $0.1 million each. TCEQ has also made a proposal to resolve one of the remaining notices, addressing upset emissions at Port Neches, for $0.2 million. TCEQ has not made a penalty proposal for two other notices. Final resolution of these matters is subject to negotiation between us and TCEQ. We do not believe that the resolution of these matters will result in the imposition of costs material to our results of operations, financial position or liquidity.
By letter dated September 13, 2005, the Tamil Nadu Pollution Control Board (the TNPCB) issued an Order in follow-up to a Show Cause notice dated June 30, 2005, requiring a manufacturing facility of Petro Araldite Private Limited, a subsidiary of Huntsman Advanced Materials in Chennai, India, to close for one week and to submit an action plan and timeline to reduce chemical oxygen demand in its wastewater effluent. The facility complied with the order and has submitted an action plan to the TNPCB, which has been accepted pending installation of assets to remedy the issue. If the TNPCB believes the plan is insufficient, it has the power to take further enforcement action, including shutting down the facility for a longer period or permanently, initiating criminal sanctions or imposing fines. We do not believe that the resolution of this matter will have a material impact on our results of operations, financial position or liquidity.
See Note 11 Commitments and ContingenciesLegal Matters for a discussion of environmental lawsuits brought by private party plaintiffs.
Remediation Liabilities
We have incurred, and we may in the future incur, liability to investigate and clean up waste or contamination at our current or former facilities or facilities operated by third parties at which we may have disposed of waste or other materials. Similarly, we may incur costs for the cleanup of wastes that were disposed of prior to the purchase of our businesses. Under some circumstances, the scope of our liability may extend to damages to natural resources. Specifically, under the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), and similar state laws, a current or former owner or operator of real property may be liable for remediation costs regardless of whether the release or disposal of hazardous substances was in compliance with law at the time it occurred, and a current owner or operator may be liable regardless of whether it owned or operated the facility at the time of the release. In addition, under the U.S. Resource Conservation and Recovery Act of 1976, as amended (RCRA), and similar state laws, we may be required to remediate contamination originating from our properties as a condition to our hazardous waste permit. For example, our Odessa, Port Arthur, and Port Neches facilities in Texas are the subject of ongoing remediation requirements under RCRA authority. In many cases, our potential liability arising from historical contamination is based on operations and other events occurring prior to our ownership of the relevant facility. In these situations, we frequently obtained an indemnity agreement from the prior owner addressing remediation liabilities arising from preclosing conditions. We have successfully exercised our rights under these contractual covenants for a number of sites, and where applicable, mitigated our ultimate remediation liability. We cannot assure you, however, that all of such matters will be subject to indemnity or that our existing indemnities will be sufficient to cover our liabilities for such matters.
Some of our manufacturing sites have an extended history of industrial chemical manufacturing and use, including on-site waste disposal. We are aware of soil, groundwater and surface water contamination from past operations at some of our sites, and we may find contamination at other sites in the future. For example, we are aware that there is significant contamination, largely related to a landfill and lagoons, at our McIntosh, Alabama plant site. Further, soil and groundwater contamination have been identified at our plants in Duxford, U.K. and Monthey, Switzerland. Pursuant to certain agreements with respect to these Advanced Materials sites, we expect that Ciba will have primary financial responsibility for such matters, although we may be required to contribute to the costs of remediation in certain instances, and we believe that Ciba has the intention and ability to honor these agreements. Based on available information and the indemnification rights we believe are likely to be available, we believe that the costs to investigate and remediate known contamination will not have a material adverse effect on our financial condition, results of operations or cash flows, and therefore we have made no accrual for such liabilities as of September 30, 2005. However, if such indemnities are unavailable or do not fully cover the costs of investigation and remediation or we are required to contribute to such costs, and if such costs are material, then such expenditures may have a material adverse effect on our financial condition, results of operations or cash flows. At the current time, we are unable to estimate the full cost, exclusive of indemnification benefits, to remediate known contamination sites.
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We have been notified by third parties of claims against us or our subsidiaries for cleanup liabilities at approximately 12 former facilities and other third party sites, including but not limited to sites listed under CERCLA. Based on current information and past experience at other CERCLA sites, we do not expect any of these third party claims to result in a material liability to us.
One of these sites, the North Maybe Canyon CERCLA site, includes an abandoned phosphorous mine located in a U.S. National Forest in Idaho. The North Maybe Canyon mine may have been operated by one of our predecessors for approximately two out of the eight years (1964 to 1972) during which it held mining leases in the area. In 2004, we received from the Forest Service a notice of potential liability for the mine under CERCLA. According to information from the U.S. government, North Maybe Canyon was actively mined for a total of about 20 years. The current owner, NuWest Industries, Inc., a subsidiary of Agrium, Inc., operated the mine for at least six of those years. Under an administrative order with the Forest Service and other governmental agencies, NuWest is currently undertaking an investigation of the site, with a specific focus on the release of selenium contaminated surface water into streams in the area. By letter dated May 27, 2005, the Forest Service put us (as well as NuWest and Wells Cargo, Inc.) on notice that it is demanding payment of its incurred costs in the amount of $0.1 million. The letter also indicated that the Forest Service wishes to initiate negotiations on a response action at the site with the objective of putting a Consent Decree in place obligating NuWest, Wells Cargo and us to conduct and fund that action. We are currently investigating the factual issues concerning anticipated allocation and response action issues. We have initiated contact with the Forest Service and the other potentially responsible persons (PRPs) to determine whether to pursue negotiations. We do not currently have sufficient information to estimate actual remediation costs or our actual liability, if any, for investigation and cleanup of the North Maybe Canyon site.
Environmental Reserves
We have established financial reserves relating to anticipated environmental cleanup obligations, site reclamation and closure costs and known penalties. Liabilities are recorded when potential liabilities are either known or considered probable and can be reasonably estimated. Our liability estimates are based upon available facts, existing technology and past experience. On a consolidated basis, we have accrued approximately $27 million and $35 million for environmental liabilities as of September 30, 2005 and December 31, 2004, respectively. Of these amounts, approximately $7.5 million and $8 million are classified as accrued liabilities on our consolidated balance sheets as of September 30, 2005 and December 31, 2004, respectively, and approximately $19.5 million and $27 million are classified as other noncurrent liabilities on our consolidated balance sheets as of September 30, 2005 and December 31, 2004, respectively. In certain cases, our remediation liabilities are payable over periods of up to 30 years. We may incur losses for environmental remediation in excess of the amounts accrued; however, we are not able to estimate the amount or range of such potential excess.
Regulatory Developments
Under the European Union (EU) Integrated Pollution Prevention and Control Directive (IPPC), EU member governments are to adopt rules and implement a cross media (air, water and waste) environmental permitting program for individual facilities. While the EU countries are at varying stages in their respective implementation of the IPPC permit program, we have submitted all necessary IPPC permit applications required to date, and in some cases received completed permits from the applicable government agency. We expect to submit all other IPPC applications and related documents on a timely basis as the various countries implement the IPPC permit program. Although we do not know with certainty what each IPPC permit will require, we believe, based upon our experience with the permits received to date, that the costs of compliance with the IPPC permit program will not be material to our results of operations, financial position or liquidity.
In October 2003, the European Commission adopted a proposal for a new EU regulatory framework for chemicals. Under this proposed new system called REACH (Registration, Evaluation and Authorization of Chemicals), companies that manufacture or import more than one ton of a chemical substance per year would be required to register such manufacture or
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import in a central database. The REACH initiative, as proposed, would require risk assessment of chemicals, preparations (e.g., soaps and paints) and articles (e.g., consumer products) before those materials could be manufactured or imported into EU countries. Where warranted by a risk assessment, hazardous substances would require authorizations for their use. This regulation could impose risk control strategies that would require capital expenditures by us. As proposed, REACH would take effect in three primary stages over the eleven years following the final effective date (assuming final approval). The impacts of REACH on the chemical industry and on us are unclear at this time because the parameters of the program are still being actively debated.
MTBE Developments
We produce MTBE, an oxygenate that is blended with gasoline to reduce vehicle air emissions and to enhance the octane rating of gasoline. Existing or future litigation or legislative initiatives restricting the use of MTBE in gasoline may subject us or our products to environmental liability or materially adversely affect our sales and costs. The use of MTBE is controversial in the U.S. and elsewhere and may be substantially curtailed or eliminated in the future by legislation or regulatory action. For example, about 16 states, including California, New York and Connecticut, have adopted rules that prohibit or restrict the use of MTBE in gasoline sold in those states. The 16 states account for a substantial portion of the pre-ban U.S. MTBE market. Additional phase-outs or other future regulation of MTBE may result in a significant reduction in demand for our MTBE, a material loss in revenues or material increase in compliance costs or expenditures.
We currently market approximately 95% of our MTBE to customers located in the U.S. for use as a gasoline additive. If the use of MTBE in gasoline in the U.S. is further curtailed or eliminated in the future, although we can make no assurances, we believe that we will be able to export MTBE to Europe, Asia or South America, although this may produce a lower level of cash flow than the sale of MTBE in the U.S. We may also elect to use all or a portion of our precursor TBA to produce saleable products other than MTBE. If we opt to produce products other than MTBE, necessary modifications to our facilities will require us to make significant capital expenditures and the sale of such other products may produce a lower level of cash flow than the sale of MTBE. In addition, the Energy Policy Act of 2005 was signed into law in August 2005. The new law will likely have an adverse impact on our MTBE business in the U.S., since it mandates increased use of renewable fuels and eliminates the oxygenate requirement for reformulated gasoline established by the 1990 Clean Air Act Amendments. Although the extent of the potential impact of the new law is still unclear, a significant loss in demand for our MTBE could result in a material loss in revenues or material costs or expenditures.
A number of lawsuits have been filed, primarily against gasoline manufacturers, marketers and distributors, by persons seeking to recover damages allegedly arising from the presence of MTBE in groundwater. While we have not been named as a defendant in any litigation concerning the environmental effects of MTBE, we cannot provide assurances that we will not be involved in any such litigation or that such litigation will not have a material adverse effect on our business, results of operations and financial condition.
13. Other Operating Expense (Income)
Other operating expense (income) consisted of the following (dollars in millions):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Foreign exchange (gains) losses |
|
$ |
(3.0 |
) |
$ |
(19.3 |
) |
$ |
35.6 |
|
$ |
(23.6 |
) |
Legal and contract settlements, net |
|
|
|
(11.0 |
) |
|
|
6.1 |
|
||||
Bad debts |
|
6.0 |
|
1.6 |
|
12.2 |
|
9.5 |
|
||||
Other, net |
|
3.1 |
|
14.4 |
|
8.3 |
|
13.9 |
|
||||
Total other operating expense (income) |
|
$ |
6.1 |
|
$ |
(14.3 |
) |
$ |
56.1 |
|
$ |
5.9 |