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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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 333-85141
HUNTSMAN INTERNATIONAL LLC
(Exact name of registrant as specified in its charter)
Delaware |
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87-0630358 |
(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, 1,443 units of membership interest of the registrant were outstanding. There is no established trading market for the registrants units of membership interest. All of the registrants units of membership interest are held by an affiliate.
The registrant meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this form with a reduced disclosure format.
HUNTSMAN INTERNATIONAL LLC
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Millions)
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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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$ |
137.3 |
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$ |
149.7 |
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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 $30.0 and $18.4, respectively) |
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1,194.4 |
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1,351.0 |
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Accounts receivable from affiliates |
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11.9 |
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9.8 |
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Inventories, net |
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1,140.7 |
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1,074.4 |
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Prepaid expenses |
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60.8 |
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45.8 |
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Deferred income taxes |
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10.9 |
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10.9 |
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Other current assets |
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21.0 |
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11.5 |
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Total current assets |
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2,577.0 |
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2,662.0 |
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Property, plant and equipment, net |
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4,052.3 |
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4,435.6 |
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Investment in unconsolidated affiliates |
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174.5 |
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170.9 |
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Intangible assets, net |
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220.4 |
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252.4 |
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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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30.2 |
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8.2 |
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Receivables 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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600.9 |
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661.6 |
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Total assets |
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$ |
7,663.8 |
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$ |
8,217.6 |
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LIABILITIES AND MEMBERS EQUITY (DEFICIT) |
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Current liabilities: |
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Accounts payable, including overdraft of $17.3 and nil, respectively |
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$ |
918.2 |
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$ |
882.9 |
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Accounts payable to affiliates |
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14.0 |
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30.3 |
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Accrued liabilities |
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582.8 |
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672.9 |
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Deferred income taxes |
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7.8 |
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8.2 |
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Current portion of long-term debt |
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40.2 |
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35.8 |
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Total current liabilities |
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1,563.0 |
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1,630.1 |
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Long-term debt |
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4,122.0 |
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5,450.9 |
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Long-term debt to affiliates |
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454.6 |
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Deferred income taxes |
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208.6 |
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180.2 |
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Other noncurrent liabilities |
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558.2 |
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570.1 |
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Total liabilities |
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6,451.8 |
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8,285.9 |
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Minority interests |
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18.5 |
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8.8 |
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Commitments and contingencies (Notes 10 and 11) |
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Members equity (deficit): |
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Members equity, 1,443 and 1,000 units, respectively |
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2,581.7 |
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1,321.3 |
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Accumulated deficit |
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(1,368.9 |
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(1,548.5 |
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Accumulated other comprehensive (loss) income |
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(19.3 |
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150.1 |
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Total members equity (deficit) |
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1,193.5 |
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(77.1 |
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Total liabilities and members equity (deficit) |
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$ |
7,663.8 |
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$ |
8,217.6 |
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See accompanying notes to unaudited condensed consolidated financial statements.
1
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(Dollars in Millions)
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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, services and fees |
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$ |
2,807.9 |
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$ |
2,626.9 |
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$ |
8,782.3 |
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$ |
7,409.1 |
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Related party sales |
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30.6 |
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15.9 |
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126.7 |
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40.2 |
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Total revenues |
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2,838.5 |
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2,642.8 |
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8,909.0 |
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7,449.3 |
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Cost of goods sold |
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2,511.5 |
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2,334.0 |
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7,624.4 |
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6,645.0 |
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Gross profit |
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327.0 |
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308.8 |
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1,284.6 |
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804.3 |
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Expenses: |
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Selling, general and administrative |
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132.8 |
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117.2 |
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392.5 |
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369.5 |
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Research and development |
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13.5 |
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13.9 |
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46.5 |
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46.3 |
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Other operating expense |
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4.7 |
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8.4 |
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32.7 |
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22.8 |
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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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101.1 |
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202.4 |
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Total expenses |
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222.3 |
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182.7 |
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572.8 |
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641.0 |
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Operating income |
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104.7 |
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126.1 |
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711.8 |
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163.3 |
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Interest expense, net |
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(92.2 |
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(138.0 |
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(307.9 |
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(415.5 |
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Loss on accounts receivable securitization program |
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(3.3 |
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(3.7 |
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(8.9 |
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(10.2 |
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Equity in income of investment in unconsolidated affiliates |
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1.9 |
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1.3 |
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7.0 |
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3.0 |
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Other (expense) income |
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(40.9 |
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3.1 |
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(118.5 |
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(0.8 |
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(Loss) income from continuing operations before income taxes and minority interest |
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(29.8 |
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(11.2 |
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283.5 |
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(260.2 |
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Income tax (expense) benefit |
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(3.1 |
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56.7 |
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(59.8 |
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49.2 |
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Minority interest |
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(0.4 |
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(0.5 |
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(Loss) income from continuing operations |
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(33.3 |
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45.5 |
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223.2 |
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(211.0 |
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Loss from discontinued operations (including |
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loss on disposal of $36.4 in 2005), net of tax |
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(0.6 |
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(2.8 |
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(43.6 |
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(4.5 |
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Net (loss) income |
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(33.9 |
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42.7 |
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179.6 |
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(215.5 |
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Other comprehensive (loss) income |
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(24.7 |
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9.5 |
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(169.4 |
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(0.9 |
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Comprehensive (loss) income |
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$ |
(58.6 |
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$ |
52.2 |
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$ |
10.2 |
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$ |
(216.4 |
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See accompanying notes to unaudited condensed consolidated financial statements.
2
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS EQUITY (DEFICIT) (UNAUDITED)
(Dollars in Millions)
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Members equity |
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Accumulated |
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Accumulated other |
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Units |
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Amount |
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deficit |
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income (loss) |
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Total |
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Balance, December 31, 2004 |
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1,000 |
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$ |
1,321.3 |
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$ |
(1,548.5 |
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$ |
150.1 |
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$ |
(77.1 |
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Net income |
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179.6 |
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179.6 |
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Other comprehensive loss |
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(169.4 |
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(169.4 |
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Contribution from parent |
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443 |
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1,260.4 |
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1,260.4 |
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Balance, September 30, 2005 |
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1,443 |
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$ |
2,581.7 |
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$ |
(1,368.9 |
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$ |
(19.3 |
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$ |
1,193.5 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)
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Nine Months Ended September 30, |
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2005 |
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2004 |
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Operating Activities: |
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Net income (loss) |
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$ |
179.6 |
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$ |
(215.5 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Equity in income of unconsolidated affiliates |
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(7.0 |
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(3.0 |
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Depreciation and amortization |
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317.3 |
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335.8 |
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Provision for losses on accounts receivable |
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10.1 |
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2.1 |
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Loss on disposal of assets |
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3.0 |
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2.0 |
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Loss on early extinguishment of debt |
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114.5 |
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1.9 |
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Non-cash interest expense |
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37.9 |
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103.7 |
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Non-cash restructuring, impairment and plant closing costs |
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46.3 |
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109.0 |
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Deferred income taxes |
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58.8 |
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(73.6 |
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Unrealized loss (gain) on foreign currency transactions |
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38.8 |
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(20.4 |
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Loss on disposal of discontinued operations |
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36.4 |
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Changes in operating assets and liabilities: |
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Accounts and notes receivable |
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206.8 |
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(198.4 |
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Change in receivables sold, net |
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(79.7 |
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(64.9 |
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Inventories |
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(83.5 |
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(63.4 |
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Prepaid expenses |
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24.4 |
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12.9 |
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Other current assets |
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(2.3 |
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45.6 |
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Other noncurrent assets |
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(10.4 |
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(25.6 |
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Accounts payable |
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(80.5 |
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99.4 |
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Accrued liabilities |
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(93.3 |
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(1.9 |
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Other noncurrent liabilities |
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(2.7 |
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17.4 |
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Net cash provided by operating activities |
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714.5 |
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63.1 |
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Investing Activities: |
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Capital expenditures |
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(186.5 |
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(137.7 |
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Investment in unconsolidated affiliates |
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(8.0 |
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(11.8 |
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Proceeds from sale of assets |
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5.1 |
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0.1 |
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Net cash received from unconsolidated affiliates |
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5.1 |
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7.3 |
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Change in restricted cash |
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8.9 |
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(7.5 |
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Net cash used in investing activities |
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(175.4 |
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(149.6 |
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Financing Activities: |
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Net (repayment) borrowings under revolving loan facilities |
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(117.1 |
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70.8 |
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Repayment of long-term debt |
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(3,060.5 |
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(1,729.3 |
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Proceeds from long-term debt |
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1,873.1 |
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1,827.5 |
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Payments on notes payable |
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(24.0 |
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(8.6 |
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Net borrowings (repayments) of overdraft facility |
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17.3 |
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(7.5 |
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Contribution from minority shareholder |
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3.6 |
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2.7 |
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Debt issuance costs paid |
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(15.4 |
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(25.5 |
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Cost of early extinguishment of debt |
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(64.1 |
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Contribution from parent |
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837.6 |
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Net cash (used in) provided by financing activities |
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(549.5 |
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130.1 |
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Effect of exchange rate changes on cash |
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(2.0 |
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0.1 |
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(Decrease) increase in cash and cash equivalents |
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(12.4 |
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43.7 |
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Cash and cash equivalents at beginning of period |
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149.7 |
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117.3 |
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Cash and cash equivalents at end of period |
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$ |
137.3 |
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$ |
161.0 |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
328.5 |
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$ |
332.3 |
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Cash paid for income taxes |
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$ |
14.1 |
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$ |
20.1 |
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Supplemental non-cash investing and financing information:
On February 28, 2005, HMP Equity Holdings Corporation contributed the HIH Senior Subordinated Discount Notes at an accreted value of $422.8 million to us in exchange for equity.
See accompanying notes to unaudited condensed consolidated financial statements.
4
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
Certain Definitions
For convenience in this report, the terms Company, our, us or we may be used to refer to Huntsman International LLC and, unless the context otherwise requires, its subsidiaries. In this report, HIH refers to Huntsman International Holdings LLC and, unless the context otherwise requires, its subsidiaries. Huntsman LLC or HLLC refers to Huntsman LLC and, unless the context otherwise requires, its subsidiaries, Huntsman Corporation refers to Huntsman Corporation and its predecessors, and, unless the context otherwise requires, their subsidiaries, AdMat refers to Huntsman Advanced Materials LLC and, unless the context otherwise requires, its subsidiaries, and ICI refers to Imperial Chemical Industries PLC, an unrelated third-party and, unless the context otherwise requires, its subsidiaries.
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 are marketed globally to a diversified group of consumer and industrial customers. We are a leading global producer in many of our key product lines, including MDI, amines, surfactants, maleic anhydride and titanium dioxide. We operate manufacturing facilities located around the world. We manage our business through five operating and reporting segments: Polyurethanes, Performance Products, Pigments, Polymers and Base Chemicals.
Company
We are a Delaware limited liability company and all of our membership interests are owned directly or indirectly by Huntsman Corporation.
On February 16, 2005, Huntsman Corporation, our parent corporation, completed an initial public offerings of (i) 55,681,819 shares of its common stock sold by Huntsman Corporation and 13,579,546 shares of its common stock sold by a selling stockholder, in each case at a price to the public of $23 per share, and (ii) 5,750,000 shares of its 5% Mandatory Convertible Preferred Stock sold by Huntsman Corporation at a price to the public of $50 per share. Net proceeds to Huntsman Corporation from the offering were approximately $1,500 million, substantially all of which has been used to repay outstanding indebtedness of certain of Huntsman Corporations subsidiaries, including HMP Equity Holdings Corporation, Huntsman LLC and HIH. In connection with the offering, Huntsman Corporation and certain affiliates engaged in a series of reorganization transactions. In connection with these reorganization transactions, Huntsman LLCs ownership of HIH was reduced to 42% effective February 16, 2005 from 60% as of December 31, 2004. For financial reporting purposes, this was considered a reorganization of entities under common control.
On August 16, 2005, Huntsman LLC and HIH merged with and into our Company (the Merger), with our Company continuing in existence as the surviving entity. Prior to the Merger, all of our membership interests were owned by HIH, and HIH was owned 58% by Huntsman Corporation and 42% by Huntsman LLC. As a result of the Merger, all of our membership interests are now owned directly or indirectly by Huntsman Corporation. Our financial statements give effect to the Merger, which has been accounted for as an exchange of shares between entities under common control in a manner similar to a pooling of interests. As such, the results of operations of HIH have been combined with our results of operations since our inception and the results of operations of Huntsman LLC have been combined with our results of operations since May 2003, the date we and Huntsman LLC came under common control. All prior periods have been restated to reflect our accounting for the Merger in a manner similar to a pooling of interests.
5
Recent Developments
U.S. Gulf Coast Storms and PO/MTBE Restart
Following Hurricane Katrina, Huntsman Corporation, our parent, 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, Huntsman Corporation 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, Huntsman Corporation 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, Huntsman Corporation 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.
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 in certain markets, 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 with Huntsman LLC and HIH
As noted in the Company section above, on August 16, 2005, Huntsman LLC and HIH merged with and into our Company. We are, and each of Huntsman LLC and HIH was, a direct or indirect wholly owned subsidiary of Huntsman Corporation. Huntsman Corporation effected the Merger to simplify the consolidated groups financing and public reporting structure, to reduce its cost of financing and to facilitate other organizational efficiencies. As a result of the Merger, we succeeded to the assets, rights and obligations of Huntsman LLC. In particular, we entered into supplemental indentures under which we assumed the obligations of Huntsman LLC under its outstanding 11.625% senior secured notes due 2010 ($296 million outstanding principal amount), 11.5% senior notes due 2012 ($198 million outstanding principal amount) and senior floating rate notes due 2011 ($100 million outstanding principal amount) (collectively, the Former HLLC Notes). Our subsidiaries that previously guaranteed our 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 our outstanding debt securities.
We did not pay any consideration for the equity of Huntsman LLC or HIH in connection with the Merger other than the issuance of additional membership interests to Huntsman Corporation in exchange for its ownership interest in Huntsman LLC and HIH.
New Credit Facilities
On August 16, 2005, effective upon completion of the Merger, we repaid our 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
6
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, we temporarily (through March 31, 2006) increased the capacity of our 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 unaudited interim 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, and in conjunction with the audited consolidated historical and unaudited pro forma financial data included in our current report on Form 8-K/A filed on October 14, 2005.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
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 for us and our joint venture partner, including aniline and DPA. 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
7
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 Huntsman Corporations initial public offering. In connection with Huntsman Corporations initial public offering of common stock on February 16, 2005, certain of our employees received Huntsman Corporation stock options and restricted stock. Accordingly, we were allocated share-based compensation expense of $2.5 million and $5.9 million during the three and nine months ended September 30, 2005, respectively. We did not have share-based awards prior to the awards issued in connection with Huntsman Corporations 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 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 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 |
|
$ |
369.2 |
|
$ |
297.3 |
|
Work in progress |
|
55.4 |
|
62.1 |
|
||
Finished goods |
|
825.6 |
|
796.4 |
|
||
Total |
|
1,250.2 |
|
1,155.8 |
|
||
|
|
|
|
|
|
||
LIFO reserves |
|
(109.5 |
) |
(81.0 |
) |
||
Lower of cost or market reserves |
|
|
|
(0.4 |
) |
||
|
|
|
|
|
|
||
Inventories, net |
|
$ |
1,140.7 |
|
$ |
1,074.4 |
|
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 receivable by us at September 30, 2005 was $4.8 million (13.3 million pounds of feedstock and products). The amount included in inventory under
8
open exchange agreements receivable 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):
|
|
Workforce |
|
Demolition and |
|
Non-cancelable |
|
Other |
|
Total (2) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Accrued liabilities as of December 31, 2004 |
|
$ |
93.9 |
|
$ |
7.3 |
|
$ |
5.1 |
|
$ |
13.8 |
|
$ |
120.1 |
|
2005 charges for 2003 initiatives |
|
7.9 |
|
|
|
2.5 |
|
|
|
10.4 |
|
|||||
2005 charges for 2004 initiatives |
|
28.3 |
|
0.1 |
|
|
|
10.5 |
|
38.9 |
|
|||||
2005 charges for 2005 initiatives |
|
5.3 |
|
|
|
|
|
1.6 |
|
6.9 |
|
|||||
Reversal of reserves no longer required |
|
|
|
|
|
(0.9 |
) |
(0.5 |
) |
(1.4 |
) |
|||||
2005 payments for 2003 initiatives |
|
(12.7 |
) |
|
|
(0.1 |
) |
|
|
(12.8 |
) |
|||||
2005 payments for 2004 initiatives |
|
(63.8 |
) |
(0.7 |
) |
(0.8 |
) |
(5.6 |
) |
(70.9 |
) |
|||||
2005 payments for 2005 initiatives |
|
(0.9 |
) |
|
|
|
|
(0.1 |
) |
(1.0 |
) |
|||||
Foreign currency effect on reserve balance |
|
(8.8 |
) |
(0.1 |
) |
(0.3 |
) |
(1.7 |
) |
(10.9 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Accrued liabilities as of September 30, 2005 |
|
$ |
49.2 |
|
$ |
6.6 |
|
$ |
5.5 |
|
$ |
18.0 |
|
$ |
79.3 |
|
(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 |
|
20.3 |
|
22.6 |
|
||
2004 initiatives |
|
56.8 |
|
90.3 |
|
||
2005 initiatives |
|
5.9 |
|
|
|
||
Foreign currency effect on reserve balance |
|
(6.5 |
) |
4.4 |
|
||
Total |
|
$ |
79.3 |
|
$ |
120.1 |
|
Details with respect to our reserves for restructuring, impairment and plant closing costs are provided below by segment and initiative (dollars in millions):
9
|
|
Polyurethanes |
|
Performance |
|
Pigments |
|
Polymers |
|
Base |
|
Total |
|
||||||
Accrued liabilities as of December 31, 2004 |
|
$ |
19.0 |
|
$ |
58.2 |
|
$ |
22.0 |
|
$ |
5.8 |
|
$ |
15.1 |
|
$ |
120.1 |
|
2005 charges for 2003 initiatives |
|
3.7 |
|
|
|
6.7 |
|
|
|
|
|
10.4 |
|
||||||
2005 charges for 2004 initiatives |
|
2.2 |
|
4.9 |
|
18.9 |
|
4.1 |
|
8.8 |
|
38.9 |
|
||||||
2005 charges for 2005 initiatives |
|
|
|
1.7 |
|
2.7 |
|
|
|
2.5 |
|
6.9 |
|
||||||
Reversal of reserves no longer required |
|
|
|
|
|
(1.4 |
) |
|
|
|
|
(1.4 |
) |
||||||
2005 payments for 2003 initiatives |
|
(4.6 |
) |
(0.8 |
) |
(7.4 |
) |
|
|
|
|
(12.8 |
) |
||||||
2005 payments for 2004 initiatives |
|
(5.3 |
) |
(26.6 |
) |
(18.2 |
) |
(6.3 |
) |
(14.5 |
) |
(70.9 |
) |
||||||
2005 payments for 2005 initiatives |
|
|
|
(0.1 |
) |
(0.9 |
) |
|
|
|
|
(1.0 |
) |
||||||
Foreign currency effect on reserve balance |
|
(1.5 |
) |
(6.3 |
) |
(2.1 |
) |
(0.5 |
) |
(0.5 |
) |
(10.9 |
) |
||||||
Accrued liabilities as of September 30, 2005 |
|
$ |
13.5 |
|
$ |
31.0 |
|
$ |
20.3 |
|
$ |
3.1 |
|
$ |
11.4 |
|
$ |
79.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Current portion of restructuring reserve |
|
$ |
5.2 |
|
$ |
21.3 |
|
$ |
17.6 |
|
$ |
0.7 |
|
$ |
9.9 |
|
$ |
54.7 |
|
Long term portion of restructuring reserve |
|
8.3 |
|
9.7 |
|
2.7 |
|
2.4 |
|
1.5 |
|
24.6 |
|
||||||
Estimated additional future charges for current restructuring projects: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Estimated additional charges within one year |
|
$ |
0.6 |
|
$ |
2.0 |
|
$ |
9.0 |
|
$ |
|
|
$ |
6.6 |
|
$ |
18.2 |
|
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 $79.3 million and $120.1 million, respectively. During the nine months ended September 30, 2005, we recorded additional net charges of $101.1 million (consisting of $54.8 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 $84.7 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, 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. 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
10
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 our 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.
11
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 |
|
|
|
|
|
|
|
||
Current portion |
|
40.2 |
|
35.8 |
|
||
Long-term portion - excluding affiliate |
|
4,122.0 |
|
5,450.9 |
|
||
|
|
|
|
|
|
||
Long-term portion - affiliate |
|
|
|
454.6 |
|
||
|
|
|
|
|
|
||
Total debt |
|
$ |
4,162.2 |
|
$ |
5,941.3 |
|
Credit Facilities
On August 16, 2005, effective upon the completion of the Merger, we 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 our New Credit Facilities.
Our 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 a voluntary prepayment of $46.5 million was made on September 19, 2005), and (iii) the 100 million (approximately $123.5 million) Euro Term Facility (of which 97.3 million remains outstanding after a voluntary prepayment of 2.7 million was made on September 19, 2005). All of the initial borrowings under the Revolving Facility were repaid a few days later with proceeds received under our 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, we had $22.2 million in U.S. dollar equivalents of letters of credit issued and outstanding under the Revolving Facility.
Our obligations under the New Credit Facilities are guaranteed by substantially all of our domestic subsidiaries and certain foreign subsidiaries (the HI Guarantors), and are secured by a first priority lien (generally shared with the holders of our
12
2010 Secured Notes (as defined below)) on substantially all of our domestic property, plant and equipment, the stock of all of our material domestic subsidiaries and certain foreign subsidiaries, and pledges of intercompany notes between our 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 our 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 we do not repay all but $100 million of any of our 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.
Secured Notes
On August 16, 2005, in connection with the Merger, we entered into supplemental indentures under which we 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 with Huntsman LLC and HIH. As of September 30, 2005, we 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 the initial public offering of common and preferred stock of our parent, Huntsman Corporation, 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 our subsidiaries), shared equally with the lenders on the New Credit Facilities, subject to certain intercreditor arrangements.
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 these notes also contain change of control provisions requiring us to offer to repurchase the notes upon a change of control.
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 and interest is payable semiannually in March and September. The 2009 Senior 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, we entered into supplemental indentures under which we 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 Developments Merger with Huntsman LLC and HIH. As of September 30, 2005, we 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 the initial public offering of common and preferred stock of our parent, Huntsman Corporation, proceeds were used to redeem $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, we 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
13
redemption price equal to the par value plus LIBOR plus 7.25%. The 2009 Senior Note, the 2011 Senior Floating Rate Notes and the 2012 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, we 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, we 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, we 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, we 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 (the HLLC Senior Subordinated Notes), which together had an aggregate outstanding principal amount of approximately $59 million. Such redemption was completed on September 1, 2005.
On August 16, 2005, in connection with the Merger, we repaid in full the Huntsman Specialty Subordinated Note which had an aggregate principal amount of $106.6 million.
HIH 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 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 Huntsman Corporations 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 Huntsman Corporation resulting from proceeds of its initial public offering in the amount of $504.4 million and received $35.0 million in dividends from us.
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 Equity
14
Holdings Corporation. On February 28, 2005, HMP Equity Holdings Corporation contributed the HIH Senior Subordinated Discount Notes at an accreted value of $422.8 million to HIH in exchange for equity in HIH.
Other Debt
We maintain a $25 million multicurrency overdraft facility used for the working capital needs for our 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 us, but is guaranteed during the construction phase by affiliates of our Consolidated Chinese Splitting JV, including Huntsman Corporation. 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 (the Australian 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 $26.1 million in insurance premium financing, all of which is due in the next 12 months.
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 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 ended December 31: |
|
|
|
|
|
Remainder of 2005 |
|
$ |
17.0 |
|
|
2006 |
|
33.1 |
|
||
2007 |
|
81.1 |
|
||
2008 |
|
20.7 |
|
||
2009 |
|
1,293.2 |
|
||
Later Years |
|
2,717.1 |
|
||
|
|
|
|
||
Total |
|
$ |
4,162.2 |
|
In connection with the repayment of indebtedness, we recorded a loss on early extinguishment of debt of $38.5 million and $114.5 million in the three and nine months ended September 30, 2005, 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 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.
15
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 |
|
||
|
|
|
|
|
|
||
Pay fixed swaps |
|
|
|
|
|
||
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.
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.
16
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 a $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 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.
We have outstanding a cross-currency interest rate swap that requires us 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.
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.
17
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:
|
|
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):
|
|
|
|
|
|
Other Postretirement |
|
||||||
|
|
Defined Benefit Plans |
|
Benefit Plans |
|
||||||||
|
|
Three months ended |
|
Three months ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Service cost |
|
$ |
17.7 |
|
$ |
13.5 |
|
$ |
0.9 |
|
$ |
0.8 |
|
Interest cost |
|
29.5 |
|
24.3 |
|
1.9 |
|
1.7 |
|
||||
Expected return on assets |
|
(32.8 |
) |
(24.6 |
) |
|
|
|
|
||||
Amortization of transition obligation |
|
0.7 |
|
0.4 |
|
|
|
|
|
||||
Amortization of prior service cost |
|
(0.9 |
) |
0.4 |
|
(0.4 |
) |
(0.4 |
) |
||||
Amortization of actuarial cost |
|
8.2 |
|
5.7 |
|
0.9 |
|
0.9 |
|
||||
Net periodic benefit cost |
|
$ |
22.4 |
|
$ |
19.7 |
|
$ |
3.3 |
|
$ |
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
||||||
|
|
Defined Benefit Plans |
|
Benefit Plans |
|
||||||||
|
|
Nine months ended |
|
Nine months ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Service cost |
|
$ |
50.7 |
|
$ |
40.5 |
|
$ |
2.3 |
|
$ |
2.3 |
|
Interest cost |
|
83.1 |
|
72.9 |
|
5.3 |
|
5.1 |
|
||||
Expected return on assets |
|
(91.6 |
) |
(73.8 |
) |
|
|
|
|
||||
Amortization of transition obligation |
|
1.3 |
|
1.2 |
|
|
|
|
|
||||
Amortization of prior service cost |
|
(2.3 |
) |
1.1 |
|
(1.4 |
) |
(1.2 |
) |
||||
Amortization of actuarial cost |
|
23.0 |
|
17.1 |
|
2.7 |
|
2.6 |
|
||||
Net periodic benefit cost |
|
$ |
64.2 |
|
$ |
59.0 |
|
$ |
8.9 |
|
$ |
8.8 |
|
18
During the nine months ended September 30, 2005 and 2004, we made contributions to our pension plans of $30.5 million and $19.9 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. Other Comprehensive (Loss) Income
The components of other comprehensive (loss) income were as follows (dollars in millions):
|
|
Accumulated other comprehensive |
|
Other comprehensive (loss) income |
|
||||||||||||||
|
|
|
|
|
|
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 $4.3 and nil as of September 30, 2005 and December 31, 2004, respectively |
|
$ |
99.9 |
|
$ |
295.6 |
|
$ |
(26.5 |
) |
$ |
9.3 |
|
$ |
(195.7 |
) |
$ |
(9.5 |
) |
Unrealized gain (loss) on nonqualified plan investments |
|
0.9 |
|
0.9 |
|
0.1 |
|
(0.1 |
) |
|
|
|
|
||||||
Unrealized gain (loss) on derivative instruments |
|
13.0 |
|
(10.5 |
) |
2.1 |
|
2.2 |
|
23.5 |
|
10.0 |
|
||||||
Minimum pension liability, net of deferred tax of $35.6 and $29.3 as of September 30, 2005 and December 31, 2004, respectively |
|
(140.3 |
) |
(135.3 |
) |
|
|
|
|
(5.0 |
) |
|
|
||||||
Minimum pension liability of unconsolidated affiliate |
|
(0.8 |
) |
(8.8 |
) |
|
|
|
|
8.0 |
|
|
|
||||||
Unrealized gain (loss) on securities |
|
0.7 |
|
0.1 |
|
0.4 |
|
(0.2 |
) |
0.6 |
|
(0.3 |
) |
||||||
Other comprehensive income (loss) of unconsolidated affiliates |
|
7.3 |
|
8.1 |
|
(0.8 |
) |
(1.7 |
) |
(0.8 |
) |
(1.1 |
) |
||||||
Total |
|
$ |
(19.3 |
) |
$ |
150.1 |
|
$ |
(24.7 |
) |
$ |
9.5 |
|
$ |
(169.4 |
) |
$ |
(0.9 |
) |
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.
10. 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.
19
|
|
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 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.
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
20
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.
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 11Environmental, Health and Safety Matters.
11. 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
21
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 $23.5 million and $36.1 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 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.
See Note 10 Commitments and Contingencies Legal 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
22
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.
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
23
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 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.
12. Other Operating Expense
Other operating expense consisted of the following (dollars in millions):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Foreign exchange (gains) losses |
|
$ |
(4.1 |
) |
$ |
(7.3 |
) |
$ |
12.4 |
|
$ |
(16.1 |
) |
Legal and contract settlements, net |
|
|
|
|
|
|
|
14.9 |
|
||||
Bad debt |
|
6.0 |
|
1.6 |
|
10.1 |
|
9.5 |
|
||||
Other, net |
|
2.8 |
|
14.1 |
|
10.2 |
|
14.5 |
|
||||
Total other operating expense |
|
$ |
4.7 |
|
$ |
8.4 |
|
$ |
32.7 |
|
$ |
22.8 |
|
24
13. Other (Expense) Income
Other (expense) income consisted of the following (dollars in millions):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
(Loss) gain on early extinguishment of debt |
|
$ |
(38.5 |
) |
$ |
2.3 |
|
$ |
(114.5 |
) |
$ |
(1.9 |
) |
Other, net |
|
(2.4 |
) |
0.8 |
|
(4.0 |
) |
1.1 |
|
||||
Total other (expense) income |
|
$ |
(40.9 |
) |
$ |
3.1 |
|
$ |
(118.5 |
) |
$ |
(0.8 |
) |
14. Income Taxes
Income tax expense was $3.1 million and $59.8 million for the three and nine months ended September 30, 2005, respectively, and income tax benefit was $56.7 million and $49.2 million for the same periods in 2004, respectively. Excluding the impact for early extinguishment of debt of $38.5 million and $114.5 million and excluding the impact of the impairment of Australia styrenics assets of $46.6 million, which were not benefited for tax purposes because of valuation allowances on deferred tax assets, our effective income tax rates would have been 6% and 13% for the three and nine months ended September 30, 2005, respectively.
Our tax obligations are affected by the mix of income and losses in the tax jurisdictions in which we operate. We use the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. We evaluate deferred tax assets to determine whether it is more likely than not that they will be realized. Valuation allowances have been established against certain of the non-U.S. net deferred tax assets due to the uncertainty of realization. Valuation allowances are reviewed each period on a tax jurisdiction by tax jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax asset in future years.
Prior to August 16, 2005, we were was treated as a partnership for U.S. tax purposes and, therefore, were generally not subject to U.S. income tax, but rather such income was taxed directly to our owners. On August 16, 2005, Huntsman LLC and HIH merged with and into our company, and we made an election to be taxed as a corporation and are subject to U.S. income tax from that date forward. Income tax expense reflects the activity of Huntsman LLC, HIH and our company for the three and nine months ended September 30, 2005 and 2004.
15. Discontinued Operations
On July 6, 2005, we sold our toluene di-isocyanate (TDI) business to BASF. The sale involved the transfer of our TDI customer list and sales contracts. We further agreed to discontinue the use of our remaining TDI assets, including our Geismar, Louisiana TDI manufacturing equipment. TDI has been accounted for as a discontinued operation under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, the following results of TDI have been presented as discontinued operations in the accompanying unaudited condensed consolidated statement of operations (dollars in millions):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Revenues |
|
$ |
1.0 |
|
$ |
11.9 |
|
$ |
24.4 |
|
$ |
48.1 |
|
Costs and expenses |
|
(1.6 |
) |
(14.7 |
) |
(31.6 |
) |
(52.6 |
) |
||||
Loss on disposal |
|
|
|
|
|
(36.4 |
) |
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating loss |
|
(0.6 |
) |
(2.8 |
) |
(43.6 |
) |
(4.5 |
) |
||||
Income tax expense |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Loss from discontinued operations, net of tax |
|
$ |
(0.6 |
) |
$ |
(2.8 |
) |
$ |
(43.6 |
) |
$ |
(4.5 |
) |
The loss on disposal of $36.4 million for the nine months ended September 30, 2005 includes an impairment of long-lived assets. We expect to incur approximately $2 million of additional costs related to the TDI transaction by the end of the second quarter of 2006. The TDI business is reported in our Polyurethanes operating segment.
25
16. Operating Segment Information
We derive our revenues, earnings and cash flows from the manufacture and sale of a wide variety of differentiated and commodity chemical products. We have five reportable operating segments: Polyurethanes, Performance Products, Pigments, Polymers and Base Chemicals. Sales between segments are generally recognized at external market prices and are eliminated in consolidation.
The major products of each reportable operating segment are as follows:
Segment |
|
Products |
Polyurethanes |
|
MDI, TPU, polyols, aniline, PO and MTBE |
Performance Products |
|
Amines, surfactants, linear alkylbenzene, maleic anhydride, other performance chemicals, glycols, and technology licenses |
Pigments |
|
Titanium dioxide (TiO2) |
Polymers |
|
Ethylene (produced at the Odessa, Texas facilities primarily for internal use), polyethylene, polypropylene, expandable polystyrene, styrene and other polymers |
Base Chemicals |
|
Olefins (primarily ethylene and propylene), butadiene, MTBE, benzene, cyclohexane and paraxylene |
We use EBITDA to measure the financial performance of our global business units and for reporting the results of our operating segments. This measure includes all operating items relating to the businesses. The EBITDA of operating segments excludes items that principally apply to our company as a whole. The revenues and EBITDA for each of our reportable operating segments are as follows (dollars in millions):
|
|
Three months ended September |
|
Nine months ended September |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Net Sales: |
|
|
|
|
|
|
|
|
|
||||
Polyurethanes |
|
$ |
835.3 |
|
$ |
732.0 |
|
$ |
2,609.9 |
|
$ |
2,069.3 |
|
Performance Products |
|
462.4 |
|
493.7 |
|
1,517.4 |
|
1,399.7 |
|
||||
Pigments |
|
256.6 |
|
261.6 |
|
787.5 |
|
794.7 |
|
||||
Polymers |
|
427.6 |
|
380.9 |
|
1,249.3 |
|
1,019.6 |
|
||||
Base Chemicals |
|
1,046.5 |
|
985.5 |
|
3,344.4 |
|
2,755.8 |
|
||||
Eliminations |
|
(189.9 |
) |
(210.9 |
) |
(599.5 |
) |
(589.8 |
) |
||||
Total |
|
$ |
2,838.5 |
|
$ |
2,642.8 |
|
$ |
8,909.0 |
|
$ |
7,449.3 |
|
|
|
|
|
|
|
|
|
|
|
||||
Segment EBITDA (1): |
|
|
|
|
|
|
|
|
|
||||
Polyurethanes |
|
$ |
193.7 |
|
$ |
97.9 |
|
$ |
535.0 |
|
$ |
270.7 |
|
Performance Products |
|
25.5 |
|
31.5 |
|
158.0 |
|
82.9 |
|
||||
Pigments |
|
22.6 |
|
22.2 |
|
86.5 |
|
(53.6 |
) |
||||
Polymers |
|
(5.8 |
) |
26.5 |
|
71.6 |
|
45.6 |
|
||||
Base Chemicals |
|
8.9 |
|
70.3 |
|
252.0 |
|
204.8 |
|
||||
Corporate and other (2) |
|
(78.3 |
) |
(13.1 |
) |
(238.5 |
) |
(63.8 |
) |
||||
Total |
|
$ |
166.6 |
|
$ |
235.3 |
|
$ |
864.6 |
|
$ |
486.6 |
|
|
|
|
|
|
|
|
|
|
|
||||
Segment EBITDA (1) |
|
$ |
166.6 |
|
$ |
235.3 |
|
$ |
864.6 |
|
$ |
486.6 |
|
Interest expense, net |
|
(92.2 |
) |
(138.0 |
) |
(307.9 |
) |
(415.5 |
) |
||||
Income tax (expense) benefit |
|
(3.1 |
) |
56.7 |
|
(59.8 |
) |
49.2 |
|
||||
Depreciation and amortization |
|
(105.2 |
) |
(111.3 |
) |
(317.3 |
) |
(335.8 |
) |
||||
Net (loss) income |
|
$ |
(33.9 |
) |
$ |
42.7 |
|
$ |
179.6 |
|
$ |
(215.5 |
) |
(1) Segment EBITDA is defined as net income (loss) before interest, depreciation and amortization and income taxes.
(2) Corporate and other includes unallocated corporate overhead, loss on sale of accounts receivable, foreign exchange gains or losses and other non-operating income (expense).
26
17. Condensed Consolidating Financial Statements
The following unaudited condensed consolidating financial statements present, in separate columns, financial information for the following: Huntsman International LLC (on a parent only basis), with our investment in subsidiaries recorded under the equity method; the guarantors of our debt on a combined, and where appropriate, consolidated basis; and non-guarantor subsidiaries on a combined, and where appropriate, consolidated basis. Additional columns present eliminating adjustments and consolidated totals as of September 30, 2005 and December 31, 2004 and for the three and nine months ended September 30, 2005 and 2004. There are no contractual restrictions limiting transfers of cash from our guarantors to us. Each of our guarantors is 100% owned by us and has fully and unconditionally guaranteed our notes on a joint and several basis.
27
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 30, 2005
(Dollars in Millions)
|
|
Parent Company |
|
Guarantors |
|
Non-guarantors |
|
Eliminations |
|
Consolidated |
|
|||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current assets: |
|
|
|
|