UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

 

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to

 

 

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.

Huntsman Corporation	YES x	NO o
Huntsman International LLC	YES x	NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Huntsman Corporation	Large accelerated filer x	Accelerated filer o	Non-accelerated filer  o
Huntsman International LLC	Large accelerated filer o	Accelerated filer o	Non-accelerated filer  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Huntsman Corporation	YES o	NO x
Huntsman International LLC	YES o	NO x

On May 1, 2007, 221,901,565 shares of common stock of Huntsman Corporation were outstanding and 2,728 units of membership interests of Huntsman International LLC (“Huntsman International”) were outstanding. There is no established trading market for Huntsman International’s units of membership interests. All of Huntsman International’s units of membership interests are held by Huntsman Corporation.

This Quarterly Report on Form 10-Q presents information for two registrants: Huntsman Corporation and Huntsman International. Huntsman International is a wholly owned subsidiary of Huntsman Corporation and is the principal operating company of Huntsman Corporation. The information reflected in this Quarterly Report on Form 10-Q is equally applicable to both Huntsman Corporation and Huntsman International, except where otherwise indicated. Huntsman International meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and, to the extent applicable, is therefore filing this form with a reduced disclosure format.

 

HUNTSMAN CORPORATION AND SUBSIDIARIES
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2007

TABLE OF CONTENTS

PART I		FINANCIAL INFORMATION
ITEM 1.		Financial Statements:
		Huntsman Corporation and Subsidiaries:
		Condensed Consolidated Balance Sheets (Unaudited)
		Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
		Condensed Consolidated Statements of Cash Flows (Unaudited)
		Huntsman International LLC and Subsidiaries:
		Condensed Consolidated Balance Sheets (Unaudited)
		Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
		Condensed Consolidated Statements of Cash Flows (Unaudited)
		Huntsman Corporation and Subsidiaries and Huntsman International LLC and Subsidiaries:
		Notes to Condensed Consolidated Financial Statements (Unaudited)
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk
ITEM 4.		Controls and Procedures
PART II		OTHER INFORMATION
ITEM 1.		Legal Proceedings
ITEM 1A.		Risk Factors
ITEM 6.		Exhibits

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Millions, Except Share and Per Share Amounts)

		March 31,  2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents		$	143.5		$	263.2
Accounts receivable (net of allowance for doubtful accounts of $40.2 and $39.0, respectively)		1,385.1			1,243.2
Accounts receivable from affiliates		15.7			14.1
Inventories, net		1,581.8			1,520.1
Prepaid expenses		46.2			55.7
Deferred income taxes		62.9			64.6
Other current assets		170.5			175.7
Total current assets		3,405.7			3,336.6
Property, plant and equipment, net		4,106.7			4,059.4
Investment in unconsolidated affiliates		212.7			201.0
Intangible assets, net		186.2			187.6
Goodwill		91.7			90.2
Deferred income taxes		208.3			190.4
Other noncurrent assets		402.1			379.7
Total assets		$	8,613.4		$	8,444.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,104.5		$	1,006.2
Accounts payable to affiliates		12.4			12.0
Accrued liabilities		821.6			857.6
Deferred income taxes		8.1			9.4
Current portion of long-term debt		178.8			187.9
Total current liabilities		2,125.4			2,073.1
Long-term debt		3,516.0			3,457.4
Deferred income taxes		193.5			192.6
Other noncurrent liabilities		963.8			955.8
Total liabilities		6,798.7			6,678.9
Minority interests in common stock of consolidated subsidiaries		30.3			29.4
Commitments and contingencies (Notes 13 and 14)
Stockholders’ equity:
Common stock $0.01 par value, 1,200,000,000 shares authorized, 221,901,565 and 221,549,461 issued and 220,934,763 and 220,652,429 outstanding in 2007 and 2006, respectively		2.2			2.2
Mandatory convertible preferred stock $0.01 par value, 100,000,000 shares authorized, 5,750,000 issued and outstanding		287.5			287.5
Additional paid-in capital		2,810.5			2,798.4
Unearned stock-based compensation		(19.2		)	(12.5		)
Accumulated deficit		(1,255.4		)	(1,277.6		)
Accumulated other comprehensive loss		(41.2		)	(61.4		)
Total stockholders’ equity		1,784.4			1,736.6
Total liabilities and stockholders’ equity		$	8,613.4		$	8,444.9

 

See accompanying notes to condensed consolidated financial statements (unaudited).

1

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HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
(Dollars In Millions)

 

		Three months ended March 31,
		2007			2006
Revenues:
Trade sales, services and fees		$	2,629.3		$	2,641.9
Related party sales		18.0			14.8
Total revenues		2,647.3			2,656.7
Cost of goods sold		2,240.0			2,262.9
Gross profit		407.3			393.8
Operating expenses:
Selling, general and administrative		219.0			167.6
Research and development		33.3			27.3
Other operating expense		5.9			0.5
Restructuring, impairment and plant closing costs		12.2			7.7
Total expenses		270.4			203.1
Operating income		136.9			190.7
Interest expense, net		(73.8		)	(86.8		)
Loss on accounts receivable securitization program		(5.4		)	(2.3		)
Equity in income of investment in unconsolidated affiliates		2.2			0.7
Loss on early extinguishment of debt		(1.4		)	—
Other income (expense)		0.5			(0.3		)
Income from continuing operations before income taxes and minority interest		59.0			102.0
Income tax expense		(13.0		)	(15.5		)
Minority interest in subsidiaries’ income		(0.4		)	(0.4		)
Income from continuing operations		45.6			86.1
Loss from discontinued operations, net of tax		(1.4		)	(17.1		)
Income before extraordinary gain		44.2			69.0
Extraordinary gain on the acquisition of a business, net of tax of nil		2.4			—
Net income		$	46.6		$	69.0
Net income		$	46.6		$	69.0
Other comprehensive income		20.2			31.0
Comprehensive income		$	66.8		$	100.0

 

See accompanying notes to condensed consolidated financial statements (unaudited).

(continued)

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HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
(Continued)
(In Millions, Except Per Share Amounts)

 

		Three months ended March 31,
		2007			2006
Basic income (loss) per share:
Income from continuing operations		$	0.21		$	0.39
Loss from discontinued operations, net of tax		(0.01		)	(0.08		)
Extraordinary gain on the acquisition of a business, net of tax		0.01			—
Net income		$	0.21		$	0.31
Weighted average shares		220.8			220.6
Diluted income (loss) per share:
Income from continuing operations		$	0.20		$	0.37
Loss from discontinued operations, net of tax		(0.01		)	(0.07		)
Extraordinary gain on the acquisition of a business, net of tax		0.01			—
Net income		$	0.20		$	0.30
Weighted average shares		233.4			233.1
Dividends paid per share		$	0.10		$	—

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

3

HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)

		Three months ended March 31,
		2007			2006
Operating Activities:
Net income		$	46.6		$	69.0
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary gain on the acquisiton of business, net of tax		(2.4		)	—
Equity in income of unconsolidated affiliates		(2.2		)	(0.7		)
Depreciation and amortization		109.2			117.0
Provision for losses on accounts receivable		2.7			2.2
Loss (gain) on disposal of assets		(3.2		)	(0.2		)
Loss on early extinguishment of debt		1.4			—
Noncash interest expense (income)		1.0			(1.7		)
Noncash restructuring, impairment and plant closing costs		5.8			2.0
Deferred income taxes		4.2			7.3
Net unrealized (gain) loss on foreign currency transactions		(4.8		)	6.7
Stock-based compensation		5.3			3.5
Minority interest in subsidiaries’ income		0.4			0.4
Other, net		3.2			(1.3		)
Changes in operating assets and liabilities:
Accounts and notes receivable		(103.1		)	69.4
Inventories, net		(59.9		)	(12.7		)
Prepaid expenses		10.3			6.6
Other current assets		5.0			46.9
Other noncurrent assets		(21.7		)	10.5
Accounts payable		46.1			(71.2		)
Accrued liabilities		(68.0		)	(156.6		)
Other noncurrent liabilities		(6.7		)	(16.8		)
Net cash (used in) provided by operating activities		(30.8		)	80.3
Investing Activities:
Capital expenditures		(105.2		)	(104.1		)
Proceeds from sale of assets		15.8			8.5
Investment in unconsolidated affiliates, net		(13.0		)	(17.1		)
Proceeds from government securities, restricted as to use		3.6			3.6
Other, net		(0.4		)	—
Net cash used in investing activities		(99.2		)	(109.1		)

 

See accompanying notes to condensed consolidated financial statements (unaudited).

(continued)

4

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HUNTSMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
(Dollars in Millions)

		Three months ended March 31,
		2007			2006
Financing Activities:
Net borrowings under revolving loan facilities		$	93.7		$	34.0
Net borrowings from overdraft facilities and other short-term debt		12.3			8.1
Repayments of long-term debt		(225.9		)	(0.8		)
Proceeds from long-term debt		169.0			2.5
Repayments on notes payable		(18.4		)	(11.4		)
Proceeds from notes payable		4.7			—
Dividends paid to common shareholders		(22.1		)	—
Dividends paid to preferred stockholders		(3.6		)	(3.6		)
Call premiums related to early extinguishment of debt		(1.2		)	—
Debt issuance costs paid		(1.7		)	—
Contribution from minority shareholder		—			6.2
Other, net		(0.1		)	2.0
Net cash provided by financing activities		6.7			37.0
Effect of exchange rate changes on cash		3.6			(0.7		)
(Decrease) increase in cash and cash equivalents		(119.7		)	7.5
Cash and cash equivalents at beginning of period		263.2			142.8
Cash and cash equivalents at end of period		$	143.5		$	150.3
Supplemental cash flow information:
Cash paid for interest		$	69.8		$	123.2
Cash paid for income taxes		11.8			5.0

 

During the three months ended March 31, 2007, we incurred capital expenditures of $131.1 million, of which $105.2 million was paid in cash and $25.9 million was included in accounts payable at March 31, 2007.

See accompanying notes to condensed consolidated financial statements (unaudited).

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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Millions)

		March 31,  2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents		$	143.5		$	246.0
Accounts receivable (net of allowance for doubtful accounts of $40.2 and $39.0, respectively)		1,385.1			1,243.3
Accounts receivable from affiliates		29.1			19.5
Inventories, net		1,581.8			1,520.1
Prepaid expenses		43.6			55.7
Deferred income taxes		68.9			70.7
Other current assets		156.4			161.6
Total current assets		3,408.4			3,316.9
Property, plant and equipment, net		3,882.7			3,829.5
Investment in unconsolidated affiliates		212.7			201.0
Intangible assets, net		191.0			192.6
Goodwill		91.7			90.2
Deferred income taxes		206.6			188.7
Other noncurrent assets		402.1			376.6
Total assets		$	8,395.2		$	8,195.5
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable		$	1,104.5		$	1,006.2
Accounts payable to affiliates		17.7			16.7
Accrued liabilities		805.8			841.7
Deferred income taxes		8.1			9.4
Current portion of long-term debt		176.4			187.9
Total current liabilities		2,112.5			2,061.9
Long-term debt		3,516.0			3,457.4
Deferred income taxes		174.9			161.6
Other noncurrent liabilities		963.8			952.1
Total liabilities		6,767.2			6,633.0
Minority interests in common stock of consolidated subsidiaries		30.3			29.4
Commitments and contingencies (Notes 13 and 14)
Members’ equity:
Members’ equity, 2,728 units issued and outstanding		2,817.0			2,811.8
Accumulated deficit		(1,114.0		)	(1,150.4		)
Accumulated other comprehensive loss		(105.3		)	(128.3		)
Total members’ equity		1,597.7			1,533.1
Total liabilities and members’ equity		$	8,395.2		$	8,195.5

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

6

HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in Millions)

 

		Three months ended March 31,
		2007			2006
Revenues:
Trade sales, services and fees		$	2,629.3		$	2,641.9
Related party sales		18.0			14.8
Total revenues		2,647.3			2,656.7
Cost of goods sold		2,238.5			2,258.9
Gross profit		408.8			397.8
Operating expenses:
Selling, general and administrative		219.0			166.8
Research and development		33.3			27.3
Other operating expense		5.9			0.5
Restructuring, impairment and plant closing costs		12.2			7.7
Total expenses		270.4			202.3
Operating income		138.4			195.5
Interest expense, net		(74.2		)	(88.0		)
Loss on accounts receivable securitization program		(5.4		)	(2.3		)
Equity in income of investment in unconsolidated affiliates		2.2			0.7
Loss on early extinguishment of debt		(1.8		)	—
Other income (expense)		0.5			(0.3		)
Income from continuing operations before income taxes and minority interest		59.7			105.6
Income tax expense		(24.2		)	(20.8		)
Minority interest in subsidiaries’ income		(0.4		)	(0.4		)
Income from continuing operations		35.1			84.4
Loss from discontinued operations, net of tax		(1.4		)	(17.1		)
Income before extraordinary gain		33.7			67.3
Extraordinary gain on the acquisition of a business, net of tax of nil		2.4			—
Net income		$	36.1		$	67.3
Net income		$	36.1		$	67.3
Other comprehensive income		23.0			34.3
Comprehensive income		$	59.1		$	101.6

 

See accompanying notes to condensed consolidated financial statements (unaudited).

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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)

 

		Three months ended March 31,
		2007			2006
Operating Activities:
Net income		$	36.1		$	67.3
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary gain on acquisition of a business, net of tax		(2.4		)	—
Equity in income of unconsolidated affiliates		(2.2		)	(0.7		)
Depreciation and amortization		103.5			110.2
Provision for losses on accounts receivable		2.7			2.2
Loss (gain) on disposal of assets		(3.2		)	(0.2		)
Loss on early extinguishment of debt		1.8			—
Noncash interest expense (income)		1.1			(0.7		)
Noncash restructuring, impairment and plant closing costs		5.8			2.0
Deferred income taxes		15.4			12.7
Net unrealized (gain) loss on foreign currency transactions		(4.8		)	6.7
Noncash compensation		5.3			3.5
Minority interest in subsidiaries’ income		0.4			0.4
Other, net		(1.5		)	(1.1		)
Changes in operating assets and liabilities:
Accounts and notes receivable		(103.1		)	69.4
Inventories, net		(59.9		)	(12.7		)
Prepaid expenses		12.9			6.1
Other current assets		5.0			46.9
Other noncurrent assets		(25.2		)	2.0
Accounts payable		46.1			(71.2		)
Accrued liabilities		(68.0		)	(157.3		)
Other noncurrent liabilities		0.9			(9.6		)
Net cash (used in) provided by operating activities		(33.3		)	75.9
Investing Activities:
Capital expenditures		(105.2		)	(104.1		)
Proceeds from sale of assets		15.8			8.5
Investment in unconsolidated affiliates, net		(13.0		)	(17.1		)
Other, net		(0.4		)	—
Net cash used in investing activities		(102.8		)	(112.7		)
Financing Activities:
Net borrowings under revolving loan facilities		93.7			34.0
Net borrowings from overdraft facilities and other short-term debt		12.3			8.1
Repayments of long-term debt		(225.9		)	(0.8		)
Proceeds from long-term debt		169.0			2.5
Repayments on notes payable		(18.4		)	(10.4		)
Proceeds from notes payable		2.3			—
Call premiums related to early extinguishment of debt		(1.2		)	—
Debt issuance costs paid		(1.7		)	—
Contribution from minority shareholder		—			6.2
Other, net		(0.1		)	2.0
Net cash provided by financing activities		30.0			41.6
Effect of exchange rate changes on cash		3.6			(0.7		)
(Decrease) increase in cash and cash equivalents		(102.5		)	4.1
Cash and cash equivalents at beginning of period		246.0			132.5
Cash and cash equivalents at end of period		$	143.5		$	136.6
Supplemental cash flow information:
Cash paid for interest		$	70.1		$	123.5
Cash paid for income taxes		11.8			5.0

 

During the three months ended March 31, 2007, we incurred capital expenditures of $131.1 million, of which $105.2 million was paid in cash and $25.9 million was included in amounts payable at March 31, 2007.

See accompanying notes to condensed consolidated financial statements (unaudited).

8

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HUNTSMAN CORPORATION AND SUBSIDIARIES
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.             GENERAL

Certain Definitions

“Company,” “our,” “us,” or “we” may be used to refer to Huntsman Corporation and, unless the context otherwise requires, its subsidiaries and predecessors. Any references to our “Company,” “we,” “us” or “our” as of a date prior to October 19, 2004 (the date of our formation) are to Huntsman Holdings, LLC and its subsidiaries (including their respective predecessors). In this report, “Huntsman International” refers to Huntsman International LLC (our 100% owned subsidiary) and, unless the context otherwise requires, its subsidiaries; “Huntsman Advanced Materials” refers to Huntsman Advanced Materials Holdings LLC (our 100% owned indirect subsidiary, the membership interests of which we contributed to Huntsman International on December 20, 2005) and, unless the context otherwise requires, its subsidiaries; “HPS” refers to Huntsman Polyurethanes Shanghai Ltd. (our consolidated splitting joint venture with Shanghai Chlor-Alkali Chemical Company, Ltd); “SLIC” refers to Shanghai Liengheng Isocyanate Investment BV (our unconsolidated manufacturing joint venture with BASF AG and three Chinese chemical companies); “HMP Equity Trust” refers to HMP Equity Trust (the holder of approximately 59% of our common stock); and “MatlinPatterson” refers to MatlinPatterson Global Opportunities Partners L.P., MatlinPatterson Global Opportunities Partners (Bermuda) L.P. and MatlinPatterson Global Opportunities Partners B, L.P. (collectively, an owner of HMP Equity Trust).

In this report, we may use, without definition, the common names of competitors or other industry participants. We may also use the common names or abbreviations for certain chemicals or products.

Description of Business

We are among the world’s largest global manufacturers of differentiated chemical products; we also manufacture inorganic and commodity chemical products. Our products comprise a broad range of chemicals and formulations, which we market in more than 100 countries to a diversified group of consumer and industrial customers. Our products are used in a wide range of applications, including those in the adhesives, aerospace, automotive, construction products, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals and dye industries. We are a leading global producer in many of our key product lines, including MDI products, amines, surfactants, epoxy-based polymer formulations, textile chemicals, dyes, maleic anhydride and titanium dioxide.

Company

Our Company was formed in 2004 to hold the Huntsman businesses. Jon M. Huntsman founded the predecessor to our Company in the early 1970s as a small packaging company. Since then, we have grown through a series of significant acquisitions and now own a global portfolio of differentiated, inorganic and commodity businesses.

Huntsman International was formed in 1999 in connection with the acquisition of ICI’s polyurethane chemicals, selected petrochemicals and titanium dioxide businesses and BP’s 20% ownership interest in an olefins facility located at Wilton, U.K. and certain related assets.

9

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Huntsman Corporation and Huntsman International Financial Statements

Except where otherwise indicated, these notes relate to the condensed consolidated financial statements (unaudited) for each of our Company and Huntsman International. The differences between our financial statements and Huntsman International’s financial statements relate primarily to the following:

·                    purchase accounting recorded at our Company for the step-acquisition of Huntsman International in May 2003; and

·                    the different capital structures.

Principles of Consolidation

Our condensed consolidated financial statements (unaudited) and Huntsman International’s condensed consolidated financial statements (unaudited) 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, except for intercompany sales between discontinued and continuing operations.

Interim Financial Statements

Our interim condensed consolidated financial statements (unaudited) and Huntsman International’s interim condensed consolidated financial statements (unaudited) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) and in management’s opinion, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. Results for interim periods are not necessarily indicative of those to be expected for the full year. These condensed consolidated financial statements (unaudited) should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2006 for our Company and Huntsman International.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the condensed consolidated financial statements (unaudited) for prior periods have been reclassified to conform with the current presentation. The most significant of these reclassifications was to reclassify the results of operations of our European base chemicals and polymers business to discontinued operations. See “Note 3. Discontinued Operations.”

2.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

We adopted Emerging Issues Task Force (“EITF”) Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, on January 1, 2007. This pronouncement concludes that an employee’s right to a compensated absence under a sabbatical or other similar benefit arrangement accumulates; therefore, such benefits should be accrued over the required service period. The adoption of this pronouncement did not have a significant impact on our consolidated financial statements.

We adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, by prescribing a recognition threshold and measurement attribute for the financial statement recognition and

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measurement of a tax position taken or expected to be taken in a tax return. We recorded a credit of $0.3 million to accumulated deficit as of January 1, 2007 for the cumulative effect of a change in accounting principle. See “Note 17. Income Taxes.”

We adopted EITF Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation), on January 1, 2007. This pronouncement concludes that the presentation of taxes within its scope is an accounting policy decision that should be disclosed. If the taxes are reported on a gross basis, companies are required to disclose the amounts of those taxes if such amounts are deemed significant. We present taxes within the scope of this issue on a net basis.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are reviewing SFAS No. 157 to determine the statement’s impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). Effective for fiscal years ending after December 15, 2008, SFAS No. 158 will require us to measure the funded status of a plan as of the date of our year-end statement of financial position. As of the end of 2008, we will be required to measure the funded status of our plans as of December 31. We currently use a November 30 measurement date for our plans.

We adopted FASB Staff Position (“FSP”) No. AUG AIR-1, Accounting for Planned Major Maintenance Activities, on January 1, 2007. This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities. The adoption of this FSP did not have a significant impact on our consolidated financial statements.

We adopted FSP EITF 00-19-2, Accounting for Registration Payment Arrangements, on January 1, 2007. This FSP requires that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with SFAS No. 5, Accounting for Contingencies. In November 2006 and March 2007, we completed offerings of subordinated notes which contain registration payment arrangements. See “Note 7. Debt.” We have evaluated the impact of this FSP as it relates to our note offerings, and the adoption of this FSP did not have a significant impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value, with changes in fair value reflected in earnings. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We are evaluating SFAS No. 159 to determine the statement’s impact on our consolidated financial statements.

3.             DISCONTINUED OPERATIONS

European Base Chemicals and Polymers Business

On December 29, 2006, we completed the sale of the outstanding equity interests of Huntsman Petrochemicals (UK) Limited for an aggregate purchase price of $685 million in cash plus the assumption by the purchaser of approximately $126 million in unfunded pension liabilities (the “U.K. Petrochemicals Disposition”). The final sales price is subject to agreement by SABIC on adjustments relating to working capital, investment in the LDPE plant currently under construction in Wilton, U.K. and unfunded pension liabilities. The transaction did not include our Teesside, U.K.-based Pigments operations or the Wilton, U.K.-based aniline and nitrobenzene operations of our Polyurethanes segment. We used the net proceeds from the transaction to legally defease the remaining $250 million

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outstanding principal amount of our 9.875% senior notes due 2009 and to repay $400 million of the debt under our Senior Credit Facilities.

During the three months ended March 31, 2007, we recorded an additional pretax loss on disposal of $1.6 million related primarily to working capital adjustments.

The results of operations of our European base chemicals and polymers business for current and prior periods have been classified as discontinued operations in our financial statements in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

The following results of our European base chemicals and polymers business have been presented as discontinued operations in the accompanying condensed consolidated statements of operations (unaudited) (dollars in millions):

		Three months ended March 31,
		2007			2006
Revenues		$	—		$	531.8
Costs and expenses		—			(555.5		)
Loss on disposal		(1.6		)	—
Operating loss		(1.6		)	(23.7		)
Income tax benefit		0.6			7.1
Loss from discontinued operations, net of tax		$	(1.0	)	$	(16.6	)

 

In connection with the U.K. Petrochemicals Disposition, we agreed to make payments to SABIC of approximately £18 million (approximately $35 million) related to the transfer of pension plan assets and liabilities. We accrued this liability in 2006 in connection with the sale transaction and expect to fund the obligation in the second quarter of 2007. Also, we expect to incur a non-cash pension settlement loss of approximately $16 million during 2007. We have provided an adequate provision relating to these adjustments and expect to resolve the working capital adjustments in the second quarter of 2007. The European base chemicals and polymers business is reported in our Base Chemicals operating segment in the accompanying condensed consolidated financial statements (unaudited).

In connection with the sale, we agreed to indemnify the buyer with respect to any losses resulting from any environmental liability related to the pre-sale operations of the assets sold. These indemnities have various payment thresholds and time limits depending on the site and type of claim. Generally, we are not required to pay under these indemnification obligations until claims against us exceed £0.1 million, individually, or £1.0 million, in the aggregate. We also agreed to indemnify the buyer with respect to certain tax liabilities. Our maximum exposure generally will not exceed $600 million in the aggregate. We believe that there is a remote likelihood that we will be required to pay any significant amounts under the indemnity provision.

TDI Business

On July 6, 2005, we sold our TDI business. The sale involved the transfer of our TDI customer list and sales contracts. We discontinued the use of our remaining TDI assets. TDI has been accounted for as a discontinued operation under SFAS No. 144. Accordingly, the following results of TDI have been presented as discontinued operations in the accompanying condensed consolidated statements of operations (unaudited) (dollars in millions):

		Three months ended March 31,
		2007			2006
Revenues		$	—		$	—
Costs and expenses		(0.4		)	(0.5		)
Operating loss		(0.4		)	(0.5		)
Income tax benefit		—			—
Loss from discontinued operations, net of tax		$	(0.4	)	$	(0.5	)

 

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We expect to incur final costs of $0.6 million related to the TDI transaction in the second quarter of 2007. The TDI business EBITDA is reported in our Polyurethanes segment.

4.             BUSINESS DISPOSITIONS AND COMBINATIONS

Agreement to Sell U.S. Base Chemicals and Polymers Business

On February 15, 2007, we entered into an agreement pursuant to which Flint Hills Resources, a wholly owned subsidiary of Koch, will acquire our U.S. base chemicals and polymers business assets for approximately $456 million in cash, plus the value of inventory (approximately $248 million at March 31, 2007) on the date of closing (the “Pending U.S. Petrochemicals Disposition”). We will retain other elements of working capital, including accounts receivable, accounts payable and certain accrued liabilities, which will be liquidated for cash in the ordinary course of business. Subject to customary regulatory approvals and other closing conditions, the transaction is expected to close by the fourth quarter of 2007, following the restart of our Port Arthur, Texas, olefins manufacturing facility. For more information, see “Note 16. Casualty Losses and Insurance Recoveries—Port Arthur, Texas Plant Fire.” In the event that the Port Arthur, Texas olefins manufacturing facility is not operating at a specified performance level by August 15, 2007, Flint Hills Resources has the option to close on its purchase of the U.S. polymers business separate from the purchase of the U.S. base chemicals business (the “Polymers Purchase Option”). If Flint Hills Resources exercises the Polymers Purchase Option, the U.S. polymers business purchase price will be $150 million, plus the value of associated inventory, and we will amend the asset purchase agreement to facilitate the separate closing of the U.S. base chemicals business for the remaining $306 million of sales price, plus the value of associated inventory. We currently expect that the Port Arthur, Texas olefins manufacturing facility may not achieve the specified performance level by August 15, 2007.

We expect to incur a pretax loss in connection with the Pending U.S. Petrochemicals Disposition of approximately $270 million, related primarily to the polymers assets. As of March 31, 2007, these assets were classified as held and used in accordance with SFAS No. 144 because these assets were not immediately available for sale in their present condition due to the required repair and restart of the Port Arthur, Texas facility. We tested these assets for recoverability using expected future cash flows, including the expected proceeds from the Port Arthur fire insurance recovery, and concluded that the expected future cash flows were in excess of the carrying value of the business expected to be sold. Therefore, we did not recognize an impairment charge as of March 31, 2007. We will continue to assess these assets for recoverability during 2007 through the sale date. As the date of sale completion nears and insurance proceeds are received, future cash flows associated with these assets will diminish. At some point in 2007, we expect that future cash flows will no longer be sufficient to recover the carrying value of the business to be sold, which will continue to increase as we rebuild the plant, and we will recognize an impairment charge.

The pending transaction includes our olefins and polymers manufacturing assets located at five U.S. sites: Port Arthur, Odessa and Longview, Texas; Peru, Illinois; and Marysville, Michigan. These plants employ about 900 associates. The captive ethylene unit at our retained Port Neches, Texas site which is part of our Performance Products segment operations is not included in the sale. This asset, along with a long-term post-closing arrangement for the supply of ethylene and propylene from Flint Hills Resources to us, will continue to provide feedstock for our downstream derivative units.

 

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Sale of Australian Polyester Resins Assets

On January 4, 2007, we completed the sale of our Australian polyester resins assets to Nuplex for A$9.6 million ($7.5 million) in cash, plus the value of inventory at the sale date, for a total transaction value of A$20.3 million ($15.8 million), subject to post-closing adjustments. During the three months ended March 31, 2007, we recognized a pretax gain on the sale of these assets of $4.1 million. The transaction further includes additional consideration to be received over a three year period upon achieving certain associated earnings targets. The sale includes our Australian polyesters, vinylesters and gelcoats manufacturing assets. In connection with the sale agreement, we also entered into a tolling agreement with Nuplex pursuant to which we will continue to manufacture product using the Australian polyester resins assets. Nuplex will own the assets located on our site. The tolling agreement expires January 2009.

The results of operations of these assets were not classified as a discontinued operation under applicable accounting rules because we expect significant continuing cash flows from the Australian polyester resins assets through the tolling arrangement with Nuplex.

Sale of U.S. Butadiene and MTBE Business

On June 27, 2006, we sold the assets comprising our U.S. butadiene and MTBE business operated by our Base Chemicals segment. The total sales price was $274.0 million, of which $204.0 million was paid to us during 2006. The additional $70.0 million will be payable to us after the restart of our Port Arthur, Texas olefins unit that was damaged in a fire (see “Note 16. Casualty Losses and Insurance Recoveries—Port Arthur, Texas Plant Fire”) and the related resumption of crude butadiene supply; provided that we achieve certain intermediate steps toward restarting the plant and the restart occurs within 30 months of this sale. We expect to recognize an additional pretax gain of approximately $69 million upon completion of the conditions referenced above.

The results of operations of this business were not classified as a discontinued operation under applicable accounting rules because of the expected continuing cash flows from the MTBE business we continue to operate in our Polyurethanes segment.

In connection with the sale, we indemnified the buyer with respect to any losses resulting from (i) the breach of representations and warranties contained in the asset purchase agreement, (ii) pre-sale liabilities related to the pre-sale operations of the assets sold not assumed by the buyer, and (iii) environmental liability related to the pre-sale operations of the assets sold. We are not required to pay under these indemnification obligations until claims against us exceed $5 million. Upon exceeding this $5 million threshold, we generally are obligated to provide indemnification for any losses in excess of $5 million, up to a limit of $137.5 million. We believe that there is a remote likelihood that we will be required to pay any significant amounts under the indemnity provision. As a result, we have estimated that the fair value of this indemnity at the date of the closing of the sale is minimal, and accordingly, no amounts have been recorded.

Textile Effects Acquisition

On June 30, 2006, we acquired Ciba’s textile effects business for $172.1 million (CHF 215 million) in cash (the “Textile Effects Acquisition”). This purchase price was subject to finalization of post-closing working capital adjustments, which are currently recorded as a receivable to us of $26.9 million, and we expect receipt of this amount during the second quarter of 2007. The operating results of the textile effects business have been consolidated with our operating results beginning on July 1, 2006 and are reported with our advanced materials operations as part of our Materials and Effects segment.

We have accounted for the Textile Effects Acquisition using the purchase method in accordance with SFAS No. 141, Business Combinations. As such, we analyzed the fair value of tangible and intangible assets acquired and liabilities assumed, and we determined the excess of fair value of net assets acquired over cost. Because the fair value of the acquired assets and liabilities assumed exceeded the acquisition price, the valuation of the long-lived assets acquired was reduced to zero in accordance with SFAS No. 141. Accordingly, no basis was assigned to property,

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plant and equipment or any other non-current assets and the remaining excess was recorded as an extraordinary gain, net of taxes (which were not applicable because the gain was recorded in purchase accounting). The preliminary allocation of the purchase price to the assets and liabilities acquired is summarized as follows (dollars in millions):

Acquisition cost:
Acquisition payment, exclusive of post-closing working capital adjustment		$	172.1
Post-closing working capital adjustment		(26.9		)
Direct costs of acquisition		12.9
Total acquisition costs		158.1
Fair value of assets acquired and liabilities assumed:
Cash		7.7
Accounts receivable		254.6
Inventories		233.6
Prepaid expenses and other current assets		12.6
Deferred taxes		1.9
Accounts payable		(95.8		)
Accrued liabilities		(35.1		)
Short-term debt		(5.0		)
Noncurrent liabilities		(158.1		)
Total fair value of net assets acquired		216.4
Extraordinary gain on the acquisition of a business—excess of fair value of net assets acquired over cost		$	58.3

 

During the three months ended March 31, 2007, we adjusted the preliminary purchase price allocation and in April 2007, we finalized the post-closing working capital adjustments, resulting in our recording an additional extraordinary gain on the acquisition of $2.4 million in the first quarter of 2007. This purchase price allocation is preliminary pending finalization of the determination of the fair value of assets acquired and liabilities assumed, including final valuation of working capital acquired, finalization of restructuring plans, estimates of asset retirement obligations and determination of related deferred taxes. We are assessing and formulating plans to exit certain activities of the textile effects business and expect to involuntarily terminate the employment of, or relocate, certain textile effects employees. We estimate that we will eliminate up to 650 positions and will create approximately 300 new positions, globally. These plans include the exit of various manufacturing, sales and administrative activities throughout the business through 2009. This preliminary purchase price allocation includes recorded liabilities for workforce reductions, non-cancelable lease termination costs, demolition and decommissioning and other restructuring costs of $65.4 million, $3.4 million, $1.5 million and $5.6 million, respectively. We have not yet finalized plans to exit certain business activities and may record additional liabilities for workforce reductions or other restructuring costs as these plans are finalized. We expect that it is reasonably possible that material changes to the allocation could occur. Any changes to our purchase price allocation will be recorded as an adjustment to the extraordinary gain in the second quarter of 2007.

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The following tables reflect our and Huntsman International’s results of operations on an unaudited pro forma basis as if the Textile Effects Acquisition had been completed at the beginning of the three months ended March 31, 2006, presented utilizing historical results for each entity (dollars in millions, except per share amounts):

Huntsman Corporation

 

Huntsman International

 

Our pro forma net income and the pro forma net income of Huntsman International reflect an extraordinary gain on the Textile Effects Acquisition of $58.3 million for the three months ended March 31, 2006.

5.            INVENTORIES

Inventories consisted of the following (dollars in millions):

		March 31, 2007			December 31, 2006
Raw materials and supplies		$	296.0		$	320.1
Work in progress		116.6			109.8
Finished goods		1,271.5			1,204.3
Total		1,684.1			1,634.2
LIFO reserves		(102.3		)	(114.1		)
Net		$	1,581.8		$	1,520.1

 

As of March 31, 2007 and December 31, 2006, approximately 16% and 18%, respectively, of inventories were recorded using the last-in, first-out cost method.

In the normal course of operations, we at times exchange raw materials and finished goods with other companies for similar inventories for the purpose of reducing transportation costs. The net open exchange positions are valued at our cost. The amount included in inventory under open exchange agreements payable by us at March 31, 2007 was $9.8 million (28.8 million pounds of feedstock and products). The amount included in inventory under open exchange agreements receivable by us at December 31, 2006 was $9.7 million (30.9 million pounds of feedstock and products).

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6.             RESTRUCTURING, IMPAIRMENT AND PLANT CLOSING COSTS

As of March 31, 2007 and December 31, 2006, accrued restructuring costs by type of cost and initiative consisted of the following (dollars in millions):

 

		Workforce reductions(1)			Demolition and decommissioning			Non-cancelable lease costs			Other restructuring costs			Total(2)
Accrued liabilities as of December 31, 2006		$	76.4		$	0.3		$	8.7		$	16.7		$	102.1
2007 charges for 2004 initiatives		0.4			—			—			0.1			0.5
2007 charges for 2005 initiatives		0.2			—			—			—			0.2
2007 charges for 2007 initiatives		1.0			—						5.9			6.9
Reversal of reserves no longer required		(1.2		)	—			—			—			(1.2		)
2007 payments for 2003 initiatives		(0.8		)	—			(0.1		)	(0.1		)	(1.0		)
2007 payments for 2004 initiatives		(1.9		)	(0.1		)	(0.1		)	(0.1		)	(2.2		)
2007 payments for 2005 initiatives		(1.8		)	—			—			—			(1.8		)
2007 payments for 2006 initiatives		(3.1		)	—			—			—			(3.1		)
2007 payments for 2007 initiatives		—									(5.9		)	(5.9		)
Foreign currency effect on reserve balance		1.1			—			0.5			(0.9		)	0.7
Accrued liabilities as of March 31, 2007		$	70.3		$	0.2		$	9.0		$	15.7		$	95.2

(1)                                 With the exception of liabilities recorded in connection with business combinations, accrued liabilities classified as workforce reductions consist primarily of restructuring programs involving ongoing termination benefit arrangements and restructuring programs involving special termination benefits. Accordingly, the related liabilities were accrued as a one-time charge to earnings in accordance with SFAS No. 112, Employers’ Accounting for Postemployment Benefits, and with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, respectively. The remaining accrued liabilities related to these charges of $6.6 million represent workforce reductions to be paid by the end of 2011. Liabilities for workforce reductions recorded in connection with business combinations were accrued in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, and are expected to be paid through 2009. Of the total workforce reduction reserves of $70.3 million, $62.6 million relates to 627 positions that have not been terminated as of March 31, 2007.

(2)           Accrued liabilities by initiatives were as follows (dollars in millions):

 

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