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HUNTSMAN CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD-LOOKING STATEMENTS With respect to Huntsman Corporation, certain information set forth in this report contains "forward-looking statements" within the meaning of the federal securities laws. Huntsman International is a limited liability company, and, pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the safe harbor for certain forward-looking statements is inapplicable to it. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as "believes," "expects," "may," "should," "anticipates," or "intends" or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements, including without limitation management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks referenced in "Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013. OVERVIEW Business We are a global manufacturer of differentiated organic chemical products and of inorganic chemical products. Our products comprise a broad range of chemicals and formulations, which we market globally 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, personal care and hygiene, 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, amines, surfactants, maleic anhydride, epoxy-based polymer formulations, textile chemicals, dyes and titanium dioxide. We had revenues for the nine months ended September 30, 2014 and 2013 of $8,627 million and $8,374 million, respectively. We operate in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. Our Polyurethanes, Performance Products, Advanced Materials and Textile Effects segments produce differentiated organic chemical products and our Pigments segment produces primarily inorganic chemical products. 69 -------------------------------------------------------------------------------- Table of Contents RECENT DEVELOPMENTS Rockwood Acquisition On October 1, 2014, we completed the acquisition of the Performance Additives and Titanium Dioxide businesses of Rockwood, which manufacture and market specialty titanium dioxide and performance additives products. We paid $1.04 billion in cash, subject to certain purchase price adjustments, and assumed certain unfunded pension liabilities in connection with the Rockwood Acquisition. The acquisition was financed using a bank term loan. The following businesses were acquired from Rockwood: º • º titanium dioxide, a white pigment derived from titanium bearing ores with strong specialty business in fibers, inks, pharmaceuticals, food and cosmetics; º • º functional additives made from barium and zinc based inorganics used to make colors more brilliant, primarily in plastics, coatings, films, food, cosmetics, pharmaceuticals and paper; º • º color pigments made from synthetic iron-oxide and other non-TiO2 inorganic pigments used by manufacturers of coatings and colorants; º • º timber treatment wood protection chemicals used primarily in residential and commercial applications; º • º water treatment products used to improve water purity in industrial, commercial and municipal applications; and º • º specialty automotive molded components. The unaudited condensed combined balance sheet of the acquired businesses as of June 30, 2014 and the unaudited condensed combined statements of operations, comprehensive income (loss), cash flows, and changes in parent company equity of the acquired businesses for the six months ended June 30, 2014 and June 30, 2013 can be found in our current report on Form 8-K filed on October 7, 2014. In connection with securing certain regulatory approvals required to complete the Rockwood Acquisition, we entered into a definitive agreement to sell our Ti02 product line used in printing inks to Henan Billions Chemicals Co., Ltd. The sale does not include any manufacturing assets. The sale is expected to close in the fourth quarter of 2014. Port Neches Manufacturing Disruption During the third quarter of 2014, we experienced an unplanned manufacturing disruption on a production unit at our facility in Port Neches, Texas. There were no injuries resulting from the equipment failure. The Port Neches facility manufactures methyl tertiary butyl ether (MTBE), propylene oxide (PO) and propylene glycols (PG). The manufacturing disruption also impacted internal PO supply to downstream derivatives. The affected unit was off-line for approximately three weeks, with an estimated negative impact of approximately $30 million EBITDA for our Polyurethanes segment. OUTLOOK We continue to experience growing demand for key products such as MDI polyurethanes, amines, aerospace composites and textile dyes and chemicals and broad earnings growth from products across our business segments. With the successful completion of the Rockwood Acquisition, we believe we can deliver synergies within the next couple of years that will drive strong earnings growth for years to come. 70 -------------------------------------------------------------------------------- Table of Contents The following is a summary of the key trends in our business segments: Polyurethanes: º • º Strong MDI demand in the U.S. and Asia, modest demand in Europe º • º Improving sales price leverage º • º Fourth quarter 2014 seasonal slowdown º • º PO/MTBE maintenance outage in the first quarter 2015 Performance Products: º • º Benefits of European surfactants restructuring expected in 2015 º • º Improving amines sales volumes and margins º • º U.S. Gulf Coast raw material cost advantage º • º Fourth quarter 2014 seasonal slowdown Advanced Materials: º • º Strong aerospace market º • º Fourth quarter 2014 seasonal slowdown in Europe Textile Effects: º • º Selective growth above underlying market demand º • º New environmental regulations impacting raw materials costs Pigments: º • º Approximately $130 million of synergies from integration of former Rockwood businesses We expect to spend approximately $550 million in 2014 on capital expenditures, net of reimbursements, and including approximately $50 million in the fourth quarter for the acquired Rockwood businesses, including the Augusta, Georgia facility. We expect our 2014 adjusted effective tax rate to be approximately 30%, including the impact of the Rockwood Acquisition. 71 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS For each of our Company and Huntsman International, the following tables set forth the unaudited condensed consolidated results of operations (dollars in millions, except per share amounts): Huntsman Corporation Three months Nine months ended ended September 30, Percent September 30, Percent 2014 2013 Change 2014 2013 Change Revenues $ 2,884 $ 2,842 1 % $ 8,627 $ 8,374 3 % Cost of goods sold 2,369 2,335 1 % 7,157 7,067 1 % Gross profit 515 507 2 % 1,470 1,307 12 % Operating expenses 274 272 1 % 811 808 - Restructuring, impairment and plant closing costs 39 37 5 % 91 110 (17 )% Operating income 202 198 2 % 568 389 46 % Interest expense (49 ) (48 ) 2 % (148 ) (146 ) 1 % Equity in income of investment in unconsolidated affiliates 2 3 (33 )% 6 6 - Loss on early extinguishment of debt - - - - (35 ) NM Other (expense) income (1 ) - NM - 2 NM Income from continuing operations before income taxes 154 153 1 % 426 216 97 % Income tax benefit (expense) 40 (81 ) NM (39 ) (105 ) (63 )% Income from continuing operations 194 72 169 % 387 111 249 % Loss from discontinued operations, net of tax - (2 ) NM (7 ) (4 ) 75 % Net income 194 70 177 % 380 107 255 % Net income attributable to noncontrolling interests (6 ) (6 ) - (19 ) (20 ) (5 )% Net income attributable to Huntsman Corporation 188 64 194 % 361 87 315 % Interest expense 49 48 2 % 148 146 1 % Income tax expense from continuing operations (40 ) 81 NM 39 105 (63 )% Income tax benefit from discontinued operations - - - (2 ) - NM Depreciation and amortization 96 110 (13 )% 335 326 3 % EBITDA(1) $ 293 $ 303 (3 )% $ 881 $ 664 33 % 72 -------------------------------------------------------------------------------- Table of Contents Three months Nine months ended ended September 30, September 30, 2014 2013 2014 2013 Reconciliation of EBITDA to adjusted EBITDA: EBITDA(1) $ 293 $ 303 $ 881 $ 664 Acquisition expenses and integration costs 10 9 27 14 EBITDA from discontinued operations - 2 9 3 Gain on disposition of businesses/assets - - (2 ) - Loss on early extinguishment of debt - - - 35 Certain legal settlements and related expenses 1 - 3 8 Amortization of pension and postretirement actuarial losses 12 19 37 56 Restructuring, impairment and plant closing and transition costs (credits)(3): Polyurethanes 16 - 18 3 Performance Products 4 13 27 17 Advanced Materials 5 3 10 30 Textile Effects 11 24 25 56 Pigments - - 3 3 Corporate and other 4 3 10 11 Total restructuring, impairment and plant closing and transition costs (credits)(3) 40 43 93 120 Adjusted EBITDA(1) $ 356 $ 376 $ 1,048 $ 900 Net cash provided by operating activities $ 343 $ 388 (12 )% Net cash used in investing activities (337 ) (388 ) (13 )% Net cash provided by financing activities 62 12 417 % 73 -------------------------------------------------------------------------------- Table of Contents Huntsman International Three months Nine months ended ended September 30, Percent September 30, Percent 2014 2013 Change 2014 2013 Change Revenues $ 2,884 $ 2,842 1 % $ 8,627 $ 8,374 3 % Cost of goods sold 2,368 2,331 2 % 7,150 7,054 1 % Gross profit 516 511 1 % 1,477 1,320 12 % Operating expenses 273 270 1 % 807 803 - Restructuring, impairment and plant closing costs 39 37 5 % 91 110 (17 )% Operating income 204 204 - 579 407 42 % Interest expense (52 ) (51 ) 2 % (155 ) (156 ) (1 )% Equity in income of investment in unconsolidated affiliates 2 3 (33 )% 6 6 - Loss on early extinguishment of debt - - - - (35 ) NM Other (expense) income (1 ) - NM - 2 NM Income from continuing operations before income taxes 153 156 (2 )% 430 224 92 % Income tax benefit (expense) 51 (80 ) NM (29 ) (106 ) (73 )% Income from continuing operations 204 76 168 % 401 118 240 % Loss from discontinued operations, net of tax - (2 ) NM (7 ) (4 ) 75 % Net income 204 74 176 % 394 114 246 % Net income attributable to noncontrolling interests (6 ) (6 ) - (19 ) (20 ) (5 )% Net income attributable to Huntsman International LLC 198 68 191 % 375 94 299 % Interest expense 52 51 2 % 155 156 (1 )% Income tax expense from continuing operations (51 ) 80 NM 29 106 (73 )% Income tax benefit from discontinued operations - - - (2 ) - NM Depreciation and amortization 93 104 (11 )% 322 308 5 % EBITDA(1) $ 292 $ 303 (4 )% $ 879 $ 664 32 % 74 -------------------------------------------------------------------------------- Table of Contents Three months Nine months ended ended September 30, September 30, 2014 2013 2014 2013 Reconciliation of EBITDA to adjusted EBITDA: EBITDA(1) $ 292 $ 303 $ 879 $ 664 Acquisition expenses and integration costs 10 9 27 14 EBITDA from discontinued operations - 2 9 3 Gain on disposition of businesses/assets - - (2 ) - Loss on early extinguishment of debt - - - 35 Certain legal settlements and related expenses 1 - 3 8 Amortization of pension and postretirement actuarial losses 14 24 43 61 Restructuring, impairment and plant closing and transition costs (credits)(3): Polyurethanes 16 - 18 3 Performance Products 4 13 27 17 Advanced Materials 5 3 10 30 Textile Effects 11 24 25 56 Pigments - - 3 3 Corporate and other 4 3 10 11 Total restructuring, impairment and plant closing and transition costs (credits)(3) 40 43 93 120 Adjusted EBITDA(1) $ 357 $ 381 $ 1,052 $ 905 Net cash provided by operating activities $ 338 $ 382 (12 )% Net cash used in investing activities (341 ) (404 ) (16 )% Net cash (used in) provided by financing activities (26 ) 192 NM 75 -------------------------------------------------------------------------------- Table of Contents Huntsman Corporation Three months Nine months ended ended September 30, September 30, 2014 2013 2014 2013 Reconciliation of net income to adjusted net income: Net income attributable to Huntsman Corporation $ 188 $ 64 $ 361 $ 87 Acquisition expenses and integration costs, net of tax of $(2) and $(1) for the three months ended, respectively, and $(6) and $(2) for the nine months ended, respectively 8 8 21 12 Impact of certain foreign tax credit elections (94 ) - (94 ) - Loss from discontinued operations, net of tax of nil each for the three months ended and $(2) and nil for the nine months ended, respectively - 2 7 4 Discount amortization on settlement financing, net of tax of nil each for the three months ended, respectively, and nil and $(2) for the nine months ended, respectively - 2 - 5 Gain on disposition of businesses/assets, net of tax of nil each for the three months ended and $1 and nil for the nine months ended, respectively - - (1 ) - Loss on early extinguishment of debt, net of tax of nil each for the three months ended and nil and $(13) for the nine months ended, respectively - - - 22 Certain legal settlements and related expenses, net of tax of nil each for the three months ended and nil and $(2) for the nine months ended, respectively 1 - 3 6 Amortization of pension and postretirement actuarial losses, net of tax of $(2) each for the three months ended and $(10) and $(13) for the nine months ended, respectively 10 17 27 43 Restructuring, impairment and plant closing and transition costs(3), net of tax of $(6) and $(4) for the three months ended, respectively, and $(20) and $(27) for the nine months ended, respectively 34 39 73 93 Adjusted net income(2) $ 147 $ 132 $ 397 $ 272 Weighted average shares-basic 242.6 239.8 241.8 239.5 Weighted average shares-diluted 246.7 242.5 245.7 242.1 Weighted average shares for adjusted income per share-diluted 246.7 242.5 245.7 242.1 Net income per share: Basic $ 0.77 $ 0.27 $ 1.49 $ 0.36 Diluted 0.76 0.26 1.47 0.36 Other non-GAAP measures: Adjusted income per share(2): Basic $ 0.61 $ 0.55 $ 1.64 $ 1.14 Diluted 0.60 0.54 1.62 1.12 76 -------------------------------------------------------------------------------- Table of Contents Huntsman International Three months Nine months ended ended September 30, September 30, 2014 2013 2014 2013 Reconciliation of net income to adjusted net income: Net income attributable to Huntsman International $ 198 $ 68 $ 375 $ 94 Acquisition expenses and integration costs, net of tax of $(2) and $(1) for the three months ended, respectively, and $(6) and $(2) for the nine months ended, respectively 8 8 21 12 Impact of certain foreign tax credit elections (105 ) - (105 ) - Loss from discontinued operations, net of tax of nil each for the three months ended and $(2) and nil for the nine months ended, respectively - 2 7 4 Discount amortization on settlement financing, net of tax of nil each for the three months ended, respectively, and nil and $(2) for the nine months ended, respectively - 2 - 5 Gain on disposition of businesses/assets, net of tax of nil each for the three months ended and $1 and nil for the nine months ended, respectively - - (1 ) - Loss on early extinguishment of debt, net of tax of nil each for the three months ended and nil and $(13) for the nine months ended, respectively - - - 22 Certain legal settlements and related expenses, net of tax of nil each for the three months ended and nil and $(2) for the nine months ended, respectively 1 - 3 6 Amortization of pension and postretirement actuarial losses, net of tax of $(2) and $(3) for the three months ended, respectively, and $(10) and $(14) for the nine months ended, respectively 12 21 33 47 Restructuring, impairment and plant closing and transition costs(3), net of tax of $(6) and $(4) for the three months ended, respectively, and $(20) and $(27) for the nine months ended, respectively 34 39 73 93 Adjusted net income(2) $ 148 $ 140 $ 406 $ 283 -------------------------------------------------------------------------------- NM-Not Meaningful º (1) º Our management uses EBITDA and adjusted EBITDA to assess financial performance. EBITDA is defined as net income (loss) attributable to Huntsman Corporation or Huntsman International, as appropriate, before interest, income taxes, depreciation and amortization. Adjusted EBITDA is computed by eliminating the following from EBITDA: (a) acquisition expenses and integration costs; (b) EBITDA from discontinued operations; (c) gain on disposition of businesses/assets; (d) loss on early extinguishment of debt; (e) certain legal settlements and related expenses; (f) amortization of pension and postretirement actuarial losses; and (g) restructuring, impairment, plant closing and transition costs. EBITDA and adjusted EBITDA may not necessarily be comparable to other similarly titled measures used by other companies. There are material limitations associated with our use of these measures because they do not reflect overall financial performance, including the effects of interest, income taxes, depreciation and amortization. Our management compensates for the limitations of these measures by using them as a supplement to GAAP results. º (2) º Adjusted net income is computed by eliminating the after-tax amounts related to the following from net income attributable to Huntsman Corporation or Huntsman International, as appropriate: 77 -------------------------------------------------------------------------------- Table of Contents (a) acquisition expenses and integration costs; (b) impact of certain foreign tax credit elections; (c) loss from discontinued operations; (d) discount amortization on settlement financing; (e) gain on disposition of businesses/assets; (f) loss on early extinguishment of debt; (g) certain legal settlements and related expenses; (h) amortization of pension and postretirement actuarial losses; and (i) restructuring, impairment and plant closing and transition costs. The income tax impacts, if any, of each adjusting item represent a ratable allocation of the total difference between the unadjusted tax expense and the total adjusted tax expense, computed without consideration of any adjusting items using a with and without approach. We do not adjust for changes in tax valuation allowances because we do not believe it provides more meaningful information than is provided under GAAP. Basic adjusted income per share excludes dilution and is computed by dividing adjusted net income by the weighted average number of shares outstanding during the period. Diluted net income per share reflects all potential dilutive common shares outstanding during the period and is computed by dividing adjusted net income by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities. º (3) º Includes cost associated with the transition of our Textile Effects segment's production from Basel, Switzerland to a tolling facility. These transition costs were included in cost of sales on our condensed consolidated statement of operations (unaudited). Adjusted net income and adjusted income per share amounts are presented solely as supplemental information. Three Months Ended September 30, 2014 Compared with Three Months Ended September 30, 2013 For the three months ended September 30, 2014, net income attributable to Huntsman Corporation was $188 million on revenues of $2,884 million, compared with net income attributable to Huntsman Corporation of $64 million on revenues of $2,842 million for the same period of 2013. For the three months ended September 30, 2014, net income attributable to Huntsman International was $198 million on revenues of $2,884 million, compared with net income attributable to Huntsman International of $68 million on revenues of $2,842 million for the same period of 2013. The increase of $124 million in net income attributable to Huntsman Corporation and the increase of $130 million in net income attributable to Huntsman International was the result of the following items: º • º Revenues for the three months ended September 30, 2014 increased by $42 million, or 1%, as compared with the 2013 period. The increase was due principally to higher average selling prices in our Performance Products, Advanced Materials and Textile Effects segments, and higher sales volumes in our Pigments segment. See "-Segment Analysis" below. º • º Our gross profit and the gross profit of Huntsman International for the three months ended September 30, 2014 increased by $8 million and $5 million, or 2% and 1%, respectively, as compared with the 2013 period. The increase resulted from higher gross margins in our Performance Products, Advanced Materials and Textile Effects segments. See "-Segment Analysis" below. º • º Operating expenses for the three months ended September 30, 2014 increased by $2 million and $3 million, respectively, or 1% each, as compared with the 2013 period, primarily related to an increase in legal settlement costs. 78 -------------------------------------------------------------------------------- Table of Contents º • º Restructuring, impairment and plant closing costs for the three months ended September 30, 2014 increased to $39 million from $37 million in the 2013 period. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). º • º Our income tax expense decreased and the income tax expense of Huntsman International decreased by $121 million and $131 million, respectively, as compared with the same period in 2013, primarily due to the benefit of utilizing U.S. foreign tax credits, which had been subject to a valuation allowance. Excluding the impact of the U.S. foreign tax credits, our income tax expense decreased and the income tax expense of Huntsman International decreased by $27 million and $26 million, respectively, as compared with the same period in 2013. For the three months ended September 30, 2014, excluding the impact of the benefit of our U.S. foreign tax credits, our effective tax rate was 35%, which is lower than our effective tax rate of 53% for the three months ended September 30, 2013 primarily due to various valuation allowance releases in 2014 and because our Textile Effects segment's restructuring charges in 2013 received nominal tax benefit. Our tax expense is significantly affected by the mix of income and losses in the tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions. For further information concerning taxes, see "Note 16. Income Taxes" to our condensed consolidated financial statements (unaudited). 79 -------------------------------------------------------------------------------- Table of Contents Segment Analysis Three months Percent ended Change September 30, Favorable 2014 2013 (Unfavorable) Revenues Polyurethanes $ 1,321 $ 1,306 1 % Performance Products 762 779 (2 )% Advanced Materials 310 309 - Textile Effects 221 198 12 % Pigments 318 310 3 % Eliminations (48 ) (60 ) 20 % Total $ 2,884 $ 2,842 1 % Huntsman Corporation Segment EBITDA(1) Polyurethanes $ 162 $ 203 (20 )% Performance Products 123 106 16 % Advanced Materials 51 33 55 % Textile Effects 3 (18 ) NM Pigments 6 27 (78 )% Corporate and other (52 ) (46 ) (13 )% Subtotal 293 305 (4 )% Discontinued Operations - (2 ) NM Total $ 293 $ 303 (3 )% Huntsman International Segment EBITDA(1) Polyurethanes $ 162 $ 203 (20 )% Performance Products 123 106 16 % Advanced Materials 51 33 55 % Textile Effects 3 (18 ) NM Pigments 6 27 (78 )% Corporate and other (53 ) (46 ) (15 )% Subtotal 292 305 (4 )% Discontinued Operations - (2 ) NM Total $ 292 $ 303 (4 )% -------------------------------------------------------------------------------- º (1) º For more information, including reconciliation of segment EBITDA to net income attributable to Huntsman Corporation or Huntsman International, as appropriate, see "Note 18. Operating Segment Information" to our condensed consolidated financial statements (unaudited). 80 -------------------------------------------------------------------------------- Table of Contents Three months ended September 30, 2014 vs. 2013 Average Selling Price(1) Foreign Currency Local Translation Sales Currency Impact Sales Mix Volumes(2) Period-Over-Period Increase (Decrease) Polyurethanes - - 6 % (5 )% Performance Products 5 % - 1 % (8 )% Advanced Materials 4 % 1 % 3 % (8 )% Textile Effects 17 % 1 % 3 % (9 )% Pigments (5 )% 1 % 1 % 6 % Total Company 3 % 1 % - (3 )% Three months ended September 30, 2014 vs. June 30, 2014 Average Selling Price(1) Foreign Currency Local Translation Sales Currency Impact Sales Mix Volumes(2) Period-Over-Period Increase (Decrease) Polyurethanes (2 )% - 7 % (4 )% Performance Products (1 )% - (2 )% (6 )% Advanced Materials (1 )% - 1 % (4 )% Textile Effects 1 % - (1 )% (11 )% Pigments (1 )% (1 )% - (4 )% Total Company - - 2 % (5 )% -------------------------------------------------------------------------------- º (1) º Excludes revenues from tolling arrangements, byproducts and raw materials. º (2) º Excludes sales volumes of byproducts and raw materials. Polyurethanes The increase in revenues in our Polyurethanes segment for the three months ended September 30, 2014 compared to the same period of 2013 was primarily due to improved MDI sales, partially offset by lower PO/MTBE sales volumes. MDI average selling prices increased in the Americas and European regions, partially offset by lower component pricing in China. PO/MTBE average selling prices were essentially unchanged. PO/MTBE sales volumes decreased primarily as a result of an unplanned manufacturing disruption at our Port Neches, Texas facility in the third quarter of 2014. The decrease in PO/MTBE sales volumes was partially offset by an increase in MDI sales volumes due to improved demand in the Americas and Asian regions and across most major markets. The decrease in segment EBITDA was due to lower PO/MTBE earnings, partially offset by higher MDI earnings. During the three months ended September 30, 2014 and 2013, our Polyurethanes segment recorded restructuring, impairment and plant closing costs of $16 million and nil, respectively. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). 81 -------------------------------------------------------------------------------- Table of Contents Performance Products The decrease in revenues in our Performance Products segment for the three months ended September 30, 2014 compared to the same period of 2013 was primarily due to lower sales volumes, partially offset by higher average selling prices. Sales volumes decreased primarily in connection with the restructuring of our European surfactants business in the second quarter of 2014, partially offset by increased sales volumes in amines and maleic anhydride. Average selling prices increased in response to higher raw material costs and continued strong market conditions for amines, maleic anhydride and specialty surfactants. The increase in segment EBITDA was primarily due to higher margins and lower restructuring charges, which more than offset lower sales volumes. During the three months ended September 30, 2014 and 2013, our Performance Products segment recorded restructuring, impairment and plant closing costs of $4 million and $13 million, respectively. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). Advanced Materials Revenues in our Advanced Materials segment for the three months ended September 30, 2014 compared to the same period of 2013 were essentially unchanged. Average selling prices increased in all regions and across most markets primarily due to certain price increase initiatives and our focus on higher value markets. Sales volumes decreased primarily due to our restructuring efforts. During the fourth quarter of 2013, we closed two of our base resins production units as we focus on higher value markets, such as aerospace, transportation and industrial and coatings and construction. The increase in segment EBITDA was primarily due to higher margins and improved sales mix, partially offset by higher manufacturing and selling, general and administrative costs, and higher restructuring, impairment and plant closing costs. During the three months ended September 30, 2014 and 2013, our Advanced Materials segment recorded restructuring, impairment and plant closing costs of $5 million and $3 million, respectively. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). Textile Effects The increase in revenues in our Textile Effects segment for the three months ended September 30, 2014 compared to the same period of 2013 was primarily due to higher average selling prices, partially offset by lower sales volumes. Average selling prices increased primarily in response to higher raw material costs and improved sales mix. Sales volumes decreased primarily due to the de-selection of lower value business. The increase in segment EBITDA was primarily due to higher margins and lower restructuring, impairment and plant closing and transition costs, partially offset by higher selling, general and administrative costs. During the three months ended September 30, 2014 and 2013, our Textile Effects segment recorded restructuring, impairment and plant closing and transition costs of $11 million and $24 million, respectively. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). Pigments The increase in revenues in our Pigments segment for the three months ended September 30, 2014 compared to the same period of 2013 was primarily due to higher sales volumes, partially offset by lower average selling prices. Sales volumes increased primarily as a result of higher end-use demand, particularly in the Asia-Pacific region. Average selling prices decreased primarily as a result of high industry inventory levels. The decrease in segment EBITDA was primarily due to lower margins and higher acquisition expenses and integration costs, partially offset by higher sales volumes. During the 82 -------------------------------------------------------------------------------- Table of Contents three months ended September 30, 2014 and 2013, our Pigments segment recorded acquisition expenses and integration costs of $6 million and $5 million, respectively. For more information concerning acquisition expenses and integration costs, see "Note 1. General-Recent Developments-Rockwood Acquisition" to our condensed consolidated financial statements (unaudited). Corporate and other Corporate and other includes unallocated corporate overhead, unallocated foreign exchange gains and losses, LIFO inventory valuation reserve adjustments, loss on early extinguishment of debt, unallocated restructuring, impairment and plant closing costs, nonoperating income and expense, benzene sales and gains and losses on the disposition of corporate assets. For the three months ended September 30, 2014, EBITDA from Corporate and other for Huntsman Corporation decreased by $6 million to a loss of $52 million from a loss of $46 million for the same period in 2013. For the three months ended September 30, 2014, EBITDA from Corporate and other for Huntsman International decreased by $7 million to a loss of $53 million from a loss of $46 million for the same period of 2013. The decrease in EBITDA from Corporate and other resulted primarily from an increase in unallocated foreign currency exchange loss of $6 million ($6 million loss in 2014 compared to nil in 2013). Discontinued Operations The operating results of our former polymers, base chemicals and Australian styrenics businesses are classified as discontinued operations, and, accordingly, the revenues of these businesses are excluded from revenues for all periods presented. The EBITDA of these former businesses are included in discontinued operations for all periods presented. The loss from discontinued operations represents the operating results, legal costs, restructuring, impairment and plant closing costs and gain (loss) on disposal with respect to our former businesses. Nine Months Ended September 30, 2014 Compared with Nine Months Ended September 30, 2013 For the nine months ended September 30, 2014, net income attributable to Huntsman Corporation was $361 million on revenues of $8,627 million, compared with net income attributable to Huntsman Corporation of $87 million on revenues of $8,374 million for the same period of 2013. For the nine months ended September 30, 2014, net income attributable to Huntsman International was $375 million on revenues of $8,627 million, compared with net income attributable to Huntsman International of $94 million on revenues of $8,374 million for the same period of 2013. The increase of $274 million in net income attributable to Huntsman Corporation and the increase of $281 million in net income attributable to Huntsman International was the result of the following items: º • º Revenues for the nine months ended September 30, 2014 increased by $253 million, or 3%, as compared with the 2013 period. The increase was due principally to higher average selling prices in our Performance Products, Advanced Materials and Textile Effects segments and higher sales volumes in our Polyurethanes, Performance Products and Pigments segments. See "-Segment Analysis" below. º • º Our gross profit and the gross profit of Huntsman International for the nine months ended September 30, 2014 increased by $163 million and $157 million, respectively, or 12% each, as compared with the 2013 period. The increase resulted from higher gross margins in our Performance Products, Advanced Materials and Textile Effects segments. See "-Segment Analysis" below. º • º Operating expenses for the nine months ended September 30, 2014 increased by $3 million and $4 million, respectively, or less than 1% each, as compared with the 2013 period, primarily related to higher acquisition and integration related costs and higher foreign currency losses, partially offset by lower legal settlement costs. 83 -------------------------------------------------------------------------------- Table of Contents º • º Restructuring, impairment and plant closing costs for the nine months ended September 30, 2014 decreased to $91 million from $110 million in the 2013 period. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). º • º Loss on early extinguishment of debt for the nine months ended September 30, 2014 decreased to nil from $35 million in the 2013 period. The loss in the 2013 period resulted primarily from the repurchase of the remainder of our 5.50% senior notes due 2016. For more information, see "Note 7. Debt-Direct and Subsidiary Debt-Redemption of Notes and Loss on Early Extinguishment of Debt" to our condensed consolidated financial statements (unaudited). º • º Our income tax expense decreased and the income tax expense of Huntsman International decreased by $66 million and $77 million, respectively, as compared with the same period in 2013, primarily due to the benefit of utilizing U.S. foreign tax credits, which had been subject to a valuation allowance. Excluding the impact of the U.S. foreign tax credits, our income tax expense increased and the income tax expense of Huntsman International increased by $28 million, as compared with the same period in 2013. For the nine months ended September 30, 2014, excluding the impact of the benefit of our U.S. foreign tax credits, our effective tax rate was 31%, which is lower than our effective tax rate of 49% for the nine months ended September 30, 2013, primarily due to various valuation allowance releases in 2014 and because our Textile Effects segment's restructuring charges in 2013 received nominal tax benefit. Our tax expense is significantly affected by the mix of income and losses in the tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions. For further information concerning taxes, see "Note 16. Income Taxes" to our condensed consolidated financial statements (unaudited). 84 -------------------------------------------------------------------------------- Table of Contents Segment Analysis Nine months Percent ended Change September 30, Favorable 2014 2013 (Unfavorable) Revenues Polyurethanes $ 3,831 $ 3,734 3 % Performance Products 2,360 2,278 4 % Advanced Materials 953 966 (1 )% Textile Effects 693 602 15 % Pigments 976 974 - Eliminations (186 ) (180 ) (3 )% Total $ 8,627 $ 8,374 3 % Huntsman Corporation Segment EBITDA(1) Polyurethanes $ 506 $ 533 (5 )% Performance Products 332 260 28 % Advanced Materials 142 60 137 % Textile Effects 25 (54 ) NM Pigments 31 55 (44 )% Corporate and other (146 ) (187 ) 22 % Subtotal 890 667 33 % Discontinued Operations (9 ) (3 ) (200 )% Total $ 881 $ 664 33 % Huntsman International Segment EBITDA(1) Polyurethanes $ 506 $ 533 (5 )% Performance Products 332 260 28 % Advanced Materials 142 60 137 % Textile Effects 25 (54 ) NM Pigments 31 55 (44 )% Corporate and other (148 ) (187 ) 21 % Subtotal 888 667 33 % Discontinued Operations (9 ) (3 ) (200 )% Total $ 879 $ 664 32 % -------------------------------------------------------------------------------- º (1) º For more information, including reconciliation of segment EBITDA to net income attributable to Huntsman Corporation or Huntsman International, as appropriate, see "Note 18. Operating Segment Information" to our condensed consolidated financial statements (unaudited). 85 -------------------------------------------------------------------------------- Table of Contents Nine months ended September 30, 2014 vs. 2013 Average Selling Price(1) Foreign Currency Local Translation Sales Currency Impact Sales Mix Volumes(2) Period-Over-Period Increase (Decrease) Polyurethanes (1 )% - 3 % 1 % Performance Products 4 % - (1 )% 1 % Advanced Materials 6 % - 5 % (12 )% Textile Effects 17 % (1 )% 2 % (3 )% Pigments (5 )% 2 % - 3 % Total Company 2 % - (1 )% 2 % -------------------------------------------------------------------------------- º (1) º Excludes revenues from tolling arrangements, byproducts and raw materials. º (2) º Excludes sales volumes of byproducts and raw materials. Polyurethanes The increase in revenues in our Polyurethanes segment for the nine months ended September 30, 2014 compared to the same period of 2013 was primarily due to higher sales volumes and improved sales mix, partially offset by lower average selling prices. MDI sales volumes increased due to improved demand in the Americas and Asian regions and across most major markets, partially offset by a decrease in PO/MTBE sales volumes primarily as a result of two manufacturing disruptions at our Port Neches, Texas facility in the second and third quarters of 2014. PO/MTBE average selling prices decreased primarily due to less favorable market conditions. MDI average selling prices increased in the Americas and European regions, partially offset by lower component pricing in China. The decrease in segment EBITDA was primarily due to lower PO/MTBE earnings, partially offset by higher MDI sales margins. During the nine months ended September 30, 2014 and 2013, our Polyurethanes segment recorded restructuring, impairment and plant closing costs of $18 million and $3 million, respectively. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). Performance Products The increase in revenues in our Performance Products segment for the nine months ended September 30, 2014 compared to the same period of 2013 was primarily due to higher average selling prices and slightly higher sales volumes. Average selling prices increased in response to higher raw material costs and continued strong market conditions for amines, maleic anhydride and specialty surfactants. Sales volumes were up slightly primarily as a result of increased demand for amines and maleic anhydride, partially offset by a decline in sales volumes of surfactants, which resulted primarily from the restructuring of our European surfactants business. The increase in segment EBITDA was primarily due to the impact of our scheduled maintenance in the first quarter of 2013, estimated at $55 million, and increased margins in amines and maleic anhydride, partially offset by higher restructuring charges. During the nine months ended September 30, 2014 and 2013, our Performance Products segment recorded restructuring, impairment and plant closing costs of $27 million and $17 million, respectively. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). 86 -------------------------------------------------------------------------------- Table of Contents Advanced Materials The decrease in revenues in our Advanced Materials segment for the nine months ended September 30, 2014 compared to the same period of 2013 was primarily due to lower sales volumes, partially offset by higher average selling prices and improved sales mix. Sales volumes decreased primarily in our coatings and construction market due to our restructuring efforts, partially offset by higher demand in the wind market in the Americas and Asia Pacific regions. During the fourth quarter of 2013, we closed two of our base resins production units as we focus on higher value markets, such as aerospace, transportation and industrial and coatings construction. During the nine months ended September 30, 2014, we also experienced an unplanned production outage due to a raw materials supply disruption in the Americas. Average selling prices increased in all regions and across most markets primarily due to certain price increase initiatives and a focus on higher value markets. The increase in segment EBITDA was primarily due to higher margins, improved sales mix,lower restructuring, impairment and plant closing costs and lower selling, general and administrative costs as a result of recent restructuring efforts. During the nine months ended September 30, 2014 and 2013, our Advanced Materials segment recorded restructuring, impairment and plant closing costs of $10 million and $30 million, respectively. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). Textile Effects The increase in revenues in our Textile Effects segment for the nine months ended September 30, 2014 compared to the same period of 2013 was primarily due to higher average selling prices, partially offset by lower sales volumes. Average selling prices increased primarily in response to higher raw material costs and improved sales mix. Sales volumes decreased primarily due to the de-selection of lower value business. The increase in segment EBITDA was primarily due to higher margins, lower manufacturing costs and lower restructuring, impairment and plant closing and transition costs, partially offset by higher selling, general and administrative costs. During the nine months ended September 30, 2014 and 2013, our Textile Effects segment recorded restructuring, impairment and plant closing and transition costs of $25 million and $56 million, respectively. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). Pigments The increase in revenues in our Pigments segment for the nine months ended September 30, 2014 compared to the same period of 2013 was primarily due to higher sales volumes, partially offset by lower average selling prices. Sales volumes increased primarily as a result of higher end-use demand, particularly in the European and Asia-Pacific regions. Average selling prices decreased primarily as a result of high industry inventory levels, partially offset by the strength of the euro against the U.S. dollar. The decrease in segment EBITDA was primarily due to lower margins and higher acquisition expenses and integration costs, partially offset by higher sales volumes and lower manufacturing and selling, general and administrative costs. During the nine months ended September 30, 2014 and 2013, our Pigments segment recorded acquisition expenses and integration costs of $18 million and $5 million, respectively. For more information concerning acquisition expenses and integration costs, see "Note 1. General-Recent Developments-Rockwood Acquisition" to our condensed consolidated financial statements (unaudited). During the nine months ended September 30, 2014 and 2013, our Pigments segment recorded restructuring, impairment and plant closing costs of $3 million each. For more information concerning restructuring activities, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). 87 -------------------------------------------------------------------------------- Table of Contents Corporate and other Corporate and other includes unallocated corporate overhead, unallocated foreign exchange gains and losses, LIFO inventory valuation reserve adjustments, loss on early extinguishment of debt, unallocated restructuring, impairment and plant closing costs, nonoperating income and expense, benzene sales and gains and losses on the disposition of corporate assets. For the nine months ended September 30, 2014, EBITDA from Corporate and other for Huntsman Corporation increased by $41 million to a loss of $146 million from a loss of $187 million for the same period in 2013. For the nine months ended September 30, 2014, EBITDA from Corporate and other for Huntsman International increased by $39 million to a loss of $148 million from a loss of $187 million for the same period in 2013. The increase in EBITDA from Corporate and other resulted primarily from a $16 million increase in income from benzene sales ($8 million gain in 2014 compared to $8 million loss in 2013), a decrease in legal settlements of $5 million (nil in 2014 compared to $5 million of expense in 2013) and a decrease in loss on early extinguishment of debt of $35 million (nil in 2014 compared to $35 million loss in 2013). For more information concerning the loss on early extinguishment of debt, see "Note 7. Debt-Direct and Subsidiary Debt-Redemption of Notes and Loss on Early Extinguishment of Debt" to our condensed consolidated financial statements (unaudited). The increase in EBITDA was partially offset by a $7 million increase in LIFO inventory valuation expense ($5 million of expense in 2014 compared to $2 million of income in 2013) and an increase in unallocated foreign currency exchange loss of $5 million ($6 million loss in 2014 compared to $1 million loss in 2013). Discontinued Operations The operating results of our former polymers, base chemicals and Australian styrenics businesses are classified as discontinued operations, and, accordingly, the revenues of these businesses are excluded from revenues for all periods presented. The EBITDA of these former businesses are included in discontinued operations for all periods presented. The loss from discontinued operations represents the operating results, legal costs, restructuring, impairment and plant closing costs and gain (loss) on disposal with respect to our former businesses. LIQUIDITY AND CAPITAL RESOURCES The following is a discussion of our liquidity and capital resources and does not include separate information with respect to Huntsman International in accordance with General Instructions H(1)(a) and (b) of Form 10-Q. Cash Net cash provided by operating activities for the nine months ended September 30, 2014 and 2013 was $343 million and $388 million, respectively. The decrease in net cash provided by operating activities during the nine months ended September 30, 2014 compared with the same period in 2013 was primarily attributable to a $227 million unfavorable variance in operating assets and liabilities for the nine months ended September 30, 2014 as compared with the same period of 2013, offset in part by an increase in operating income as described in "-Results of Operations" above. Net cash used in investing activities for the nine months ended September 30, 2014 and 2013 was $337 million and $388 million, respectively. During the nine months ended September 30, 2014 and 2013, we paid $351 million and $295 million, respectively, for capital expenditures. During the nine months ended September 30, 2014 and 2013, we made investments in Louisiana Pigment Company, L.P. of $25 million and $44 million, respectively, and in Nanjing Jinling Huntsman New Materials Co., Ltd of $12 and $25 million, respectively, and we received dividends from Louisiana Pigment Company, L.P. 88 -------------------------------------------------------------------------------- Table of Contents of $38 million and $48 million, respectively. During the nine months ended September 30, 2014 and 2013, we paid nil and $66 million, respectively, for the acquisition of businesses. Net cash provided by financing activities for the nine months ended September 30, 2014 and 2013 was $62 million and $12 million, respectively. The increase in net cash provided by financing activities was primarily due to higher net borrowings during the 2014 period as compared to the 2013. Changes in Financial Condition The following information summarizes our working capital position (dollars in millions): September 30, December 31, Increase Percent 2014 2013 (Decrease) Change Cash and cash equivalents $ 582 $ 520 $ 62 12 % Restricted cash 10 9 1 11 % Accounts and notes receivable, net 1,676 1,575 101 6 % Inventories 1,788 1,741 47 3 % Prepaid expenses 91 61 30 49 % Deferred income taxes 52 53 (1 ) (2 )% Other current assets 295 200 95 48 % Total current assets 4,494 4,159 335 8 % Accounts payable 1,176 1,113 63 6 % Accrued liabilities 629 726 (97 ) (13 )% Deferred income taxes 43 43 - - Current portion of debt 274 277 (3 ) (1 )% Total current liabilities 2,122 2,159 (37 ) (2 )% Working capital $ 2,372 $ 2,000 $ 372 19 % Our working capital increased by $372 million as a result of the net impact of the following significant changes: º • º The increase in cash and cash equivalents of $62 million resulted from the matters identified on our condensed consolidated statements of cash flows (unaudited). º • º Accounts and notes receivable increased by $101 million mainly due to higher sales in the third quarter of 2014 compared with the fourth quarter of 2013. º • º Inventories increased by $47 million mainly due to higher inventory levels primarily in our Polyurethanes and Performance Products segments resulting from the timing of a MTBE shipment occurring in early October 2014, anticipated scheduled maintenance outages at certain manufacturing facilities during the first quarter of 2015 and higher raw material costs. º • º Prepaid expenses increased by $30 million mainly due to increases in prepaid financing costs in connection with financing the Rockwood Acquisition and prepaid insurance. º • º Other current assets increased by $95 million mainly due to increases in income taxes receivable and the value of cross-currency interest rate contracts. º • º Accounts payable increased by $63 million mainly due to higher purchases to support the higher inventory balance. º • º Accrued liabilities decreased by $97 million mainly due to decreases in accrued taxes other than income taxes of $25 million, income taxes payable of $15 million, accrued rebates of $19 million and accrued restructuring, impairment and plant closing costs of $8 million. 89 -------------------------------------------------------------------------------- Table of Contents DIRECT AND SUBSIDIARY DEBT Huntsman Corporation's direct debt and guarantee obligations consist of a guarantee of certain indebtedness incurred from time to time to finance certain insurance premiums. Substantially all of our other debt, including the facilities described below, has been incurred by our subsidiaries (primarily Huntsman International). Huntsman Corporation is not a guarantor of such subsidiary debt. Certain of our subsidiaries are designated as nonguarantor subsidiaries and have third-party debt agreements. These debt agreements contain certain restrictions with regard to dividends, distributions, loans or advances. In certain circumstances, the consent of a third party would be required prior to the transfer of any cash or assets from these subsidiaries to us. Senior Credit Facilities As of September 30, 2014, our Senior Credit Facilities consisted of our Revolving Facility, our Extended Term Loan B, our Extended Term Loan B-Series 2 and our Term Loan C as follows (dollars in millions): Committed Principal Carrying Interest Facility Amount Outstanding Value Rate(3) Maturity Revolving USD LIBOR Facility $ 600 (1) $ - (2) $ - (2) plus 2.50% 2017 Extended Term USD LIBOR Loan B NA 952 952 plus 2.50% 2017 Extended Term USD LIBOR Loan B-Series 2 NA 339 339 plus 2.75% 2017 USD LIBOR Term Loan C NA 50 48 plus 2.25% 2016 -------------------------------------------------------------------------------- º (1) º On October 1, 2014, Huntsman International entered into the thirteenth amendment to the Credit Agreement. The amendment increased revolving commitments in an aggregate principal amount of $25 million. º (2) º We had no borrowings outstanding under our Revolving Facility; we had approximately $17 million (U.S. dollar equivalents) of letters of credit and bank guarantees issued and outstanding under our Revolving Facility. º (3) º The applicable interest rate of the Senior Credit Facilities is subject to certain secured leverage ratio thresholds. As of September 30, 2014, the weighted average interest rate on our outstanding balances under the Senior Credit Facilities was approximately 3%. Our obligations under the Senior Credit Facilities are guaranteed by our Guarantors, and are secured by a first priority lien 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 certain of our subsidiaries. Amendment to the Credit Agreement On October 15, 2013, Huntsman International entered into a tenth amendment to the Credit Agreement. The amendment, among other things, permits us to incur the New Term Loan and to increase our Revolving Facility. In August 2014, we entered into the eleventh and twelfth amendments, which modified the Credit Agreement to initially fund the New Term Loan into escrow and completed the increase of our Revolving Facility of $200 million. On October 1, 2014, the New Term Loan was used to fund the Rockwood Acquisition. The New Term Loan matures on October 1, 2021 and will amortize in aggregate annual amounts equal to 1% of the original principal amount of the New Term Loan, payable quarterly commencing March 31, 2015. The New Term Loan bears interest at an interest rate margin of LIBOR plus 3.00% (subject to a 90 -------------------------------------------------------------------------------- Table of Contents 0.75% floor). The $1.2 billion New Term Loan will be recorded at a carrying value of $1,188 million as of October 1, 2014. The commitments associated with the increase of our Revolving Facility bear interest at the same rate as the existing Revolving Facility and will mature on the same date as the existing facility. Notes As of September 30, 2014, we had outstanding the following notes (monetary amounts in millions): Interest Notes Maturity Rate Amount Outstanding 2020 Senior Notes November 2020 4.875 % $650 ($647 carrying value) €445 (€450 carrying value 2021 Senior Notes April 2021 5.125 % ($572)) Senior Subordinated Notes March 2020 8.625 % $350 Senior Subordinated Notes March 2021 8.625 % $530 ($540 carrying value) On June 2, 2014, pursuant to an indenture entered into on December 23, 2013, Huntsman International issued €145 million (approximately $197 million) aggregate principal amount of additional 2021 Senior Notes. The additional notes are recorded at carrying value €150 million (approximately $190 million) as of September 30, 2014. The 2021 Senior Notes bear interest at the rate of 5.125% per year payable semi-annually on April 15 and October 15 of each year and are due on April 15, 2021. Huntsman International may redeem the 2021 Senior Notes in whole or in part at any time prior to January 15, 2021 at a price equal to 100% of the principal amount thereof plus a "make-whole" premium and accrued and unpaid interest. The 2021 Senior Notes and 2020 Senior Notes are general unsecured senior obligations of Huntsman International and are guaranteed on a general unsecured senior basis by the Guarantors. The indentures impose certain limitations on the ability of Huntsman International and its subsidiaries to, among other things, incur additional indebtedness secured by any principal properties, incur indebtedness of nonguarantor subsidiaries, enter into sale and leaseback transactions with respect to any principal properties and consolidate or merge with or into any other person or lease, sell or transfer all or substantially all of its properties and assets. Upon the occurrence of certain change of control events, holders of the 2021 Senior Notes and 2020 Senior Notes will have the right to require that Huntsman International purchase all or a portion of such holder's notes in cash at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. Redemption of Notes and Loss on Early Extinguishment of Debt We did not redeem or repurchase any of our notes during the nine months ended September 30, 2014. During the nine months ended September 30, 2013, we redeemed or repurchased the following notes (monetary amounts in millions): Amount Paid Principal (Excluding Loss on Early Amount of Accrued Extinguishment Date of Redemption Notes Notes Redeemed Interest) of Debt 5.50% Senior Notes due March 4, 2013 2016 $ 200 $ 200 $ 34 91 -------------------------------------------------------------------------------- Table of Contents Variable Interest Entity Debt As of September 30, 2014, Arabian Amines Company, our consolidated 50%-owned joint venture, had $163 million outstanding under its loan commitments and debt financing arrangements. Arabian Amines Company is currently not in compliance with certain financial covenants under its loan commitments. We do not guarantee these loan commitments, and Arabian Amines Company is not a guarantor of any of our other debt obligations. Arabian Amines Company's noncompliance with its financial covenants does not affect any of our debt obligations. While the lenders under the loan commitments have agreed to certain modifications, we continue discussions with Arabian Amines Company's lenders and expect to resolve the noncompliance. As of September 30, 2014, the amounts outstanding under these loan commitments were classified as current in our condensed consolidated balance sheets (unaudited). Note Payable from Huntsman International to Huntsman Corporation As of September 30, 2014, we have a loan of $807 million to our subsidiary, Huntsman International. The Intercompany Note is unsecured and $100 million of the outstanding amount is classified as current as of September 30, 2014 on our condensed consolidated balance sheets (unaudited). As of September 30, 2014, under the terms of the Intercompany Note, Huntsman International promises to pay us interest on the unpaid principal amount at a rate per annum based on the previous monthly average borrowing rate obtained under our U.S. A/R Program, less 10 basis points (provided that the rate shall not exceed an amount that is 25 basis points less than the monthly average borrowing rate obtained for the U.S. LIBOR-based borrowings under our Revolving Facility). COMPLIANCE WITH COVENANTS We believe that we are in compliance with the covenants contained in the agreements governing our material debt instruments, including our Senior Credit Facilities, our A/R Programs and our notes. However, Arabian Amines Company, our consolidated 50%-owned joint venture, is currently not in compliance with certain financial covenants contained under its loan commitments. See "-Variable Interest Entity Debt" above. Our material financing arrangements contain certain covenants with which we must comply. A failure to comply with a covenant could result in a default under a financing arrangement unless we obtained an appropriate waiver or forbearance (as to which we can provide no assurance). A default under these material financing arrangements generally allows debt holders the option to declare the underlying debt obligations immediately due and payable. Furthermore, certain of our material financing arrangements contain cross-default and cross-acceleration provisions under which a failure to comply with the covenants in one financing arrangement may result in an event of default under another financing arrangement. Our Senior Credit Facilities are subject to the Leverage Covenant which applies only to the Revolving Facility and is calculated at the Huntsman International level. The Leverage Covenant is applicable only if borrowings, letters of credit or guarantees are outstanding under the Revolving Facility (cash collateralized letters of credit or guarantees are not deemed outstanding). The Leverage Covenant is a net senior secured leverage ratio covenant which requires that Huntsman International's ratio of senior secured debt to EBITDA (as defined in the applicable agreement) is not more than 3.75 to 1. If in the future Huntsman International fails to comply with the Leverage Covenant, then we may not have access to liquidity under our Revolving Facility. If Huntsman International failed to comply with the Leverage Covenant at a time when we had uncollateralized loans or letters of credit outstanding under the Revolving Facility, Huntsman International would be in default under the Senior Credit Facilities, and, unless Huntsman International obtained a waiver or forbearance with respect to 92 -------------------------------------------------------------------------------- Table of Contents such default (as to which we can provide no assurance), Huntsman International could be required to pay off the balance of the Senior Credit Facilities in full, and we may not have further access to such facilities. The agreements governing our A/R Programs also contain certain receivable performance metrics. Any material failure to meet the applicable A/R Programs' metrics in the future could lead to an early termination event under the A/R Programs, which could require us to cease our use of such facilities, prohibiting us from additional borrowings against our receivables or, at the discretion of the lenders, requiring that we repay the A/R Programs in full. An early termination event under the A/R Programs would also constitute an event of default under our Senior Credit Facilities, which could require us to pay off the balance of the Senior Credit Facilities in full and could result in the loss of our Senior Credit Facilities. SHORT-TERM AND LONG-TERM LIQUIDITY We depend upon our cash, credit facilities, A/R Programs and other debt instruments to provide liquidity for our operations and working capital needs. As of September 30, 2014, we had $1,365 million of combined cash and unused borrowing capacity, consisting of $592 million in cash and restricted cash, $583 million in availability under our Revolving Facility, and $190 million in availability under our A/R Programs. Our liquidity can be significantly impacted by various factors. The following matters had, or are expected to have, a significant impact on our liquidity: º • º Cash invested in our accounts receivable and inventory, net of accounts payable, increased by approximately $142 million for the nine months ended September 30, 2014, as reflected in our condensed consolidated statements of cash flows (unaudited). We expect volatility in our working capital components to continue. º • º During 2014, we expect to spend approximately $550 million on capital expenditures, net of reimbursements, and including approximately $50 million for the acquired Rockwood businesses, including the Augusta, Georgia facility. Our future expenditures include certain EHS maintenance and upgrades; periodic maintenance and repairs applicable to major units of manufacturing facilities; expansions of our existing facilities or construction of new facilities; certain cost reduction projects; and certain information technology expenditures. We expect to fund this spending with cash provided by operations. º • º During the nine months ended September 30, 2014, we made contributions to our pension and postretirement benefit plans of $113 million. During 2014, we expect to contribute an additional amount of approximately $30 million to these plans. º • º We are also involved in a number of cost reduction programs for which we have established restructuring accruals. As of September 30, 2014, we had $102 million of accrued restructuring costs from continuing operations, and we expect to incur and pay additional restructuring and plant closing costs of up to approximately $39 million. º • º During the nine months ended September 30, 2014, after extensive analysis, we filed amended U.S. tax returns for tax years 2008 thought 2012, along with our original U.S. tax return for tax year 2013, which allowed us to utilize substantially all of our U.S. foreign tax credits. As a result of utilizing these assets, we realized reductions in our cash taxes paid of $25 million for the nine months ended September 30, 2014 and expect to realize an additional $42 million reduction in future cash taxes paid. º • º On October 1, 2014, Huntsman completed the Rockwood Acquisition for a purchase price of $1.04 billion in cash, subject to certain purchase price adjustments. See "Note 1. Recent Developments-Rockwood Acquisition" to our condensed consolidated financial statements (unaudited). The transaction was financed by a $1.2 billion New Term Loan under our existing 93 -------------------------------------------------------------------------------- Table of Contents Senior Credit Facilities. See "Note 7. Debt-Direct and Subsidiary Debt" to our condensed consolidated financial statements (unaudited). º • º On August 12, 2014, we completed an amendment to our Senior Credit Facilities to assume the increased commitments of $200 million to our existing Revolving Facility to an aggregate principal amount commitment of $600 million. See "Note 7. Debt-Direct and Subsidiary Debt" to our condensed consolidated financial statements (unaudited). In addition, on October 1, 2014 we increased commitments under our Revolving Facility by $25 million to an aggregate principal amount of $625 million. As of September 30, 2014, we had $274 million classified as current portion of debt, including debt at our variable interest entities of $176 million, a borrowing facility and short term debt in China for Huntsman Polyurethanes Shanghai Ltd. (our consolidated splitting joint venture with Shanghai Chlor-Alkali Chemical Company, Ltd) totaling $38 million, our scheduled Senior Credit Facilities amortization payments totaling $14 million, our annual financing of various insurance premiums totaling $23 million, and certain other short-term facilities and scheduled amortization payments totaling $23 million. Although we cannot provide assurances, we intend to renew or extend the majority of these short-term facilities in the current period. As of September 30, 2014, we had approximately $323 million of cash and cash equivalents, including restricted cash held by our foreign subsidiaries, including our variable interest entities. Additionally, we have material intercompany debt obligations owed to us by our non-U.S. subsidiaries. We intend to use cash held in our foreign subsidiaries to fund our local operations. Nevertheless, we could repatriate cash as dividends or as repayments of intercompany debt. If foreign cash were repatriated as dividends, the dividends could be subject to U.S. federal and state income taxes without any offsetting foreign tax credit relief. At present, we estimate that we will generate sufficient cash in our U.S. operations, together with the payments of intercompany debt, if necessary, to meet our cash needs in the U.S and we do not expect to repatriate cash to the U.S. as dividends. Cash held by certain foreign subsidiaries, including our variable interest entities, may also be subject to legal restrictions, including those arising from the interests of our partners, which could limit the amounts available for repatriation. RESTRUCTURING, IMPAIRMENT AND PLANT CLOSING COSTS Our Polyurethanes, Performance Products, Advanced Materials and Textile Effects segments are involved in cost reduction programs that are expected to reduce costs in these businesses by approximately $240 million. These cost savings are expected to be achieved through the beginning of 2015. For further discussion of these plans and the costs involved, see "Note 6. Restructuring, Impairment and Plant Closing Costs" to our condensed consolidated financial statements (unaudited). LEGAL PROCEEDINGS For a discussion of legal proceedings, see "Note 13. Commitments and Contingencies-Legal Matters" and "Note 14. Environmental, Health and Safety Matters" to our condensed consolidated financial statements (unaudited). ENVIRONMENTAL, HEALTH AND SAFETY MATTERS For a discussion of environmental, health and safety matters, see "Note 14. Environmental, Health and Safety Matters" to our condensed consolidated financial statements (unaudited). 94 -------------------------------------------------------------------------------- Table of Contents RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS For a discussion of recently issued accounting pronouncements, see "Note 2. Recently Issued Accounting Pronouncements" to our condensed consolidated financial statements (unaudited). CRITICAL ACCOUNTING POLICIES Our critical accounting policies are presented in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013. |