SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to __________________
Commission file number 1-9988
HUNTSMAN POLYMERS
CORPORATION
(Exact name of registrant as specified in charter)
Delaware 75-2104131
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
500 Huntsman Way
Salt Lake City, Utah 84108
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (801) 532-5200
Indicate by a check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes |X| No [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
At August 14, 1998, 1,000 Shares of Common Stock, par value $0.01 per
Share, of Huntsman Polymers Corporation were outstanding.
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1998
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements................................... 2
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997...................................... 3
Consolidated Statements of Operations for the three
months and six months
ended June 30, 1998 and 1997........................... 4
Consolidated Statements of Cash Flows for the six
months ended June 30,
1998 and 1997.......................................... 5
Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................... 16
Signature ....................................................... 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
June 30, 1998 and December 31, 1997
June 30, 1998 December 31, 1997
------------- -----------------
(Thousands of dollars)
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts and notes receivables, net 12,156 21,900
Accounts and advances receivable -
Affiliates 22,729 78,396
Inventories 53,612 57,443
Deferred income taxes 9,219 5,543
Other current assets 24,538 20,062
--------- ---------
Total current assets 122,544 183,344
--------- ---------
Net properties, plant and equipment 820,497 727,418
Intangible assets, net 10,214 8,446
Other noncurrent assets 24,543 23,915
--------- ---------
Total assets $ 977,508 $ 943,123
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 29,161 $ 52,740
Accounts payable - Affiliates 1,644 6,404
Accrued liabilities 14,966 19,216
Accrued interest 1,723 1,723
--------- ---------
Total current liabilities 47,494 80,083
--------- ---------
Long-term debt 174,882 174,882
Long-term debt - Affiliates 332,632 309,590
Deferred income taxes 172,537 166,219
Other noncurrent liabilities 41,299 43,550
--------- ---------
Total liabilities 768,844 774,324
--------- ---------
Stockholder's equity:
Common Stock ($0.01 par value:
1 million shares authorized
1,000 shares issued and outstanding) - -
Additional paid-in capital 218,500 173,500
Retained earnings (deficit) (9,836) (4,701)
--------- ---------
Total stockholder's equity 208,664 168,799
Total liabilities and stockholder's
equity $ 977,508 $ 943,123
========= =========
See accompanying notes to financial statements
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Predecessor Predecessor
Company Company
------------- -------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Revenues
Trade sales and services $ 26,908 $ 110,983 $ 55,298 $ 236,299
Affiliate sales 64,468 - 136,438 -
--------- --------- --------- ---------
91,376 110,983 191,736 236,299
Cost of goods sold 86,522 78,442 180,284 186,665
--------- --------- --------- ---------
Gross profit 4,854 32,541 11,452 49,634
Expenses
Selling, general and
administrative 3,684 8,470 7,257 16,930
Research and development 1,874 1,743 3,639 3,185
Reversal of environmental
accrual - - - (9,000)
--------- --------- --------- ---------
Operating income (704) 22,328 556 38,519
Interest expense, net
Affiliate interest (2,988) - (5,779) -
Other interest (5,148) (5,585) (10,320) (10,486)
Defense and merger costs - (1,800) - (2,408)
Other income (expense) 7,264 97 7,261 (677)
--------- --------- --------- ---------
Net income (loss) from
continuing operations
before income taxes (1,576) 15,040 (8,282) 24,948
--------- --------- --------- ---------
Income tax expense (benefit) (600) 5,685 (3,148) 9,447
--------- --------- --------- ---------
Net income (loss) from
continuing operations (977) 9,355 (5,135) 15,501
Loss from discontinued
operations (net of income
tax benefits of $221 and
$399, respectively) - (440) - (472)
--------- --------- --------- ---------
Net income (loss) before
extraordinary loss (977) 8,915 (5,135) 15,029
Extraordinary loss (net of
income tax benefit $425) - (694) - (694)
--------- --------- --------- ---------
Net income (loss) $ (977) $ 8,221 $ (5,135) $ 14,335
Other comprehensive income,
net of tax:
Foreign currency
translation adjustment
(net of income tax
expense of $133 and
income tax benefit of
$203, respectively) -
discontinued operations - 218 - (332)
--------- --------- --------- ---------
Comprehensive income (loss) $ (977) $ 8,439 $ (5,135) $ 14,003
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Predecessor
Company
-------------
Six Months
Six Months Ended
Ended, 1998 June 30, 1997
----------- -------------
Operating Activities
Net income (loss) $ (5,135) $ 14,335
Reconciliation to net cash provided by
(used in) continuing operations:
Loss from discontinued operations - 472
Depreciation and amortization 22,301 10,806
Deferred income taxes 2,642 6,177
Amortization of debt issuance costs 434 903
Extraordinary loss, net of income taxes - 694
Changes in operating working capital
(net of acquisition):
Receivables 10,505 (715)
Inventories 3,831 1,861
Other current assets (4,476) (2)
Accounts payable (29,807) (22,127)
Current income taxes - 2,292
Other current liabilities (4,250) (671)
Deferred charges and other noncurrent
assets (3,053) (2,370)
Deferred credits and other noncurrent
liabilities (2,251) (9,259)
-------- --------
Net cash provided by (used in)
continuing operations (9,259) 2,396
Net cash provided by (used in) discontinued
operations - 474
-------- --------
Net cash provided by operating
activities (9,259) 2,870
Investing Activities
Advances receivable - affiliates 49,029 -
Capital expenditures of continuing operations (107,812) (46,029)
Capital expenditures of discontinued
operations - (2,462)
Purchase of intangible assets - (750)
--------- --------
Net cash used in investing activities (58,783) (49,241)
Financing Activities
Intercompany borrowing from parent 23,042 -
Bank borrowing, net of repayment - 89,750
Debt issuance costs and other - (3,090)
Repayment of advance payment from customer - (1,800)
Cash dividends paid - (1,505)
Repurchase of common stock - (166)
Proceeds of capital contribution by parent 45,000 -
Proceeds of issuance of common stock - 199
--------- --------
Net cash provided by financing activities 68,042 83,388
Increase (Decrease) in Cash and Cash
Equivalents - 37,017
Cash and Cash Equivalents at Beginning of
Period - 714
--------- --------
Cash and Cash Equivalents at End of Period $ - $ 37,731
========= ========
Supplemental Cash Flow Information:
Cash paid for interest $ 10,274 $ 14,118
Cash paid for income taxes $ 19 $ 991
See accompanying notes to financial statements
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Merger
Effective September 1, 1997 (the "Effective Date") for financial
accounting purposes, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") by and with Rexene Corporation ("Rexene"), Huntsman
Corporation ("HC") and Huntsman Centennial Corporation ("HCC"), a wholly
owned subsidiary of HC, HCC was merged with and into Rexene, and Rexene
changed its name to Huntsman Polymers Corporation (the "Company"). Pursuant
to the merger, stockholders of Rexene received from HCC $16.00 in cash for
each outstanding share of common stock of Rexene (the "Merger"). As a
result of the Merger, HC indirectly owns all of the presently issued common
stock of the Company. The accounting treatment of the cash consideration
paid by HCC in connection with the Merger is shown under "push-down"
accounting rules.
To finance the Merger, HCC entered into a loan agreement with an
affiliate, Huntsman Group Holdings Finance Company ("HGHFC"). HCC borrowed
approximately $131.1 million under this loan agreement. Additionally, HCC
received an equity contribution from its parent company, Huntsman Polymers
Holding Corporation ("HPHC"), in the amount of $173.5 million. After the
Merger, the Company entered into a loan agreement with HGHFC, and borrowed
$225.1 million (the "Intercompany Loan"). The proceeds of this borrowing
were used to repay debt of HCC assumed by the Company in the Merger and
bank debt of Rexene.
The Merger closed on August 27, 1997.
The sources and applications of funds required to consummate the
Merger are summarized below in thousands of dollars.
Sources of Funds:
Loan agreement with HGHFC $ 225,067
Equity Contribution 173,500
Rexene Working Capital 3,382
-----------
Total $ 401,949
-----------
Uses of Funds:
Payment of the Merger Consideration $ 301,614
Liquidation of Rexene debt 100,080
Transaction fees and expenses (1) 255
-----------
Total $ 401,949
-----------
-------------------
(1) Total transaction fees and expenses totaled $6.8 million,
of which $0.3 million was paid on August 27, 1997. The
remainder were paid using funds provided by operations.
The Merger has been accounted for as a purchase transaction, and
accordingly, the consolidated financial statements subsequent to the
Effective Date reflect the purchase price, including transaction costs and
liabilities assumed based on their estimated fair values as of the
Effective Date. Although none of the purchase price has been allocated to
intangible assets, valuation and other studies have not been finalized. It
is not expected that the final allocation of purchase price will produce
materially different results from those presented herein. The combined
financial statements for periods prior to September 1, 1997 have been
prepared on the historical cost basis. Operating results subsequent to the
Merger are comparable to the operating results prior to the Merger except
for depreciation expense, amortization of intangible assets, pensions, and
interest expense. In addition, Rexene's pre-Merger common stock was
canceled and replaced with 1,000 shares of common stock (all of which are
owned by HPHC), rendering the presentation of per share data no longer
meaningful.
The allocation of the $308 million Merger consideration (including
fees and expenses) is summarized as follows (in thousands of dollars):
Current assets $ 95,569
CT Business 70,000
Plant and equipment 700,697
Other non-current assets 44,254
Liabilities assumed (599,131)
----------
Total $ 308,389
----------
The following unaudited pro forma data has been prepared assuming
that the Merger and related financing and the sale of the Company's polymer
film manufacturing business known as the CT Film Division ("CT Business")
(see note two) were consummated on January 1, 1997. Amounts are in
thousands.
Three Months Ended June Six Months Ended June
30, 30,
1998 1997 1998 1997
Actual Pro Forma Actual Pro Forma
--------- --------- --------- ---------
Revenues $ 91,376 $ 110,983 $ 191,736 $ 236,299
Net income (loss) $ (977) $ 6,031 $ (5,135) $ 9,138
The accompanying financial statements of Huntsman Polymers
Corporation and Subsidiaries are unaudited; however, in management's
opinion, all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of results of operations, financial
position and cash flows for the periods shown, have been made. Results for
interim periods are not necessarily indicative of those to be expected for
the full year.
2. Discontinued Operations
The Company sold its CT Business effective September 30, 1997. The
results of operations for the CT Business have been reclassified as
discontinued operations for all periods presented in the Consolidated
Statements of Operations prior to the Effective Date. Revenues of the CT
Business were $41.0 million and $79.4 million for the three months ended
June 30, 1997. In connection with the sale, the Company received $70.0
million in cash, and the buyer assumed approximately $8.0 million in current
liabilities. No gain or loss was realized on the sale of the CT Film assets
because the value assigned in the purchase accounting allocation was equal
to the selling price, as adjusted for September's operating results.
3. Extraordinary Loss
The Company recorded a non-cash charge of $0.7 million (after tax)
in the second quarter of 1997 to write-off certain deferred debt issuance
costs as a result of a May 8, 1997 amendment to its credit agreement.
4. Summary of Significant Accounting Policies
Description of Business
The Company manufactures products used in a wide variety of
industrial and consumer-related applications. The Company's principal
products are polyethylene, polypropylene, amorphous polyalphaolefins
("APAO"), flexible polyolefin ("FPO") and styrene.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Principles of Consolidation
The consolidated financial statements of the Company include its
wholly-owned subsidiaries. Intercompany transactions and balances are
eliminated.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months
or less when purchased are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market using the
first-in, first-out method.
Plant and Equipment and Depreciation and Amortization
Property, plant and equipment is stated at cost. Depreciation is
provided utilizing the straight line method over the estimated useful lives
of the assets, ranging from 3 to 20 years. Improvements are capitalized as
part of major construction projects. Upon disposal of assets, the cost and
related accumulated depreciation are removed from the accounts and
resulting gain or loss is included in income.
Intangible Assets
Debt issuance costs are amortized over the term of the related
debt, ranging from five to ten years. Other intangible assets are stated at
their fair market values at the time of the Merger and are amortized using
the straight-line method over their estimated useful lives of five to
fifteen years or over the life of the related agreement and are included in
"Intangible assets, net."
Income Taxes
Deferred income taxes are provided for temporary differences
between financial statement income and taxable income using the asset and
liability method in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
Environmental Expenditures
Environmental related restoration and remediation costs are
recorded as liabilities and expensed when site restoration and
environmental remediation and clean-up obligations are either known or
considered probable and the related costs can be reasonably estimated.
Other environmental expenditures, which are principally maintenance or
preventative in nature, are recorded when expended and are expensed or
capitalized as appropriate.
5. Inventories
Inventories consist of the following (in thousands):
June 30,1998 December 31, 1997
------------ -----------------
Raw materials $ 8,047 $ 11,297
Work in progress 8,263 7,952
Finished goods 37,302 38,194
-------- --------
$ 53,612 $ 57,443
======== ========
6. Property, Plant and Equipment
The cost and accumulated depreciation of property, plant and
equipment are as follows (in thousands):
June 30,1998 December 31, 1997
------------ -----------------
Property, plant and equipment $ 857,375 $ 741,954
Less accumulated depreciation (36,878) (14,536)
---------- ----------
$ 820,497 $ 727,418
========== ==========
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
June 30,1998 December 31, 1997
------------ -----------------
Intercompany borrowings $ 279,048 $ 258,055
Capital lease - Affiliate 50,000 50,000
11 3/4% Senior Notes due 2004 174,882 174,882
Other 3,584 1,535
--------- ---------
$ 507,514 $ 484,472
========= =========
8. Contingencies
The Company and the industry in which it competes are subject to
extensive environmental laws and regulations concerning, for example,
emissions to the air, discharges to surface and subsurface waters and the
generation, handling, storage, transportation, treatment and disposal of
waste and other materials. The Company believes that, in light of its
historical expenditures, it will have adequate resources to conduct its
operations in compliance with currently applicable environmental and health
and safety laws and regulations. However, in order to comply with changing
facility permitting and regulatory standards, the Company may be required
to make additional significant site or operational modifications. Further,
the Company has incurred and may in the future incur liability to
investigate and clean up waste or contamination at its current or former
facilities, or which it may have disposed of at facilities operated by
third parties. On the basis of its investigation and analysis, management
believes that the approximately $8.2 million accrued in June 30, 1998
balance sheet is adequate for the total potential environmental liability
with respect to contaminated sites. Extensive environmental investigation
of the groundwater, soils and solid waste management has been conducted at
the Odessa facility. Risk assessments and corrective measures pertaining to
groundwater and solid waste management units continue to be developed and
implemented respectively. Costs associated with these unit closures are
included in the aforementioned environmental accrual figure. The Company
continually reviews its estimates of potential environmental liabilities.
However, no assurance can be given that all potential liabilities arising
out of the Company's present or past operations have been identified or
fully assessed or that the amounts that might be required to investigate
and remediate such sites will not be significant to the Company.
Railroad Commission Enforcement Action
On May 20, 1998, the Company received a Notice of Opportunity for
Hearing and Original Complaint in an administrative enforcement action
initiated by the Railroad Commission of Texas ("Railroad Commission"). The
action arises out of an incident occurring on February 5, 1998 when
ethylene was released from an underground storage facility located at the
Company's plant in Odessa, Texas. The ethylene ignited when ethylene was
released from an underground storage facility located at the Company's
plant in Odessa, Texas. The ethylene ignited when it came in contact with
an electrical power line. There were no injuries and no significant
property damage resulted. The Railroad Commission contends that the release
resulted from violations of Statewide Rule 95 relating to underground
storage of hydrocarbons. The Railroad Commission alleges violations of
operating, monitoring and record-keeping requirements of Statewide Rule 95
and seeks administrative penalties in the amount of $345,000. While the
Company does not dispute that a release occurred due to an isolated
incident of operator error, the Company does dispute the Railroad
Commission's position regarding the circumstances giving rise to the
release. On June 17, 1998 the Company answered the Complaint and contested
most of the violations alleged by the Railroad Commission.
Although there can be no assurance of the final resolution of any
of these matters, the Company believes that, based upon its current
knowledge of the facts of each case, it has meritorious defenses to the
various claims made and intends to defend each suit vigorously, and the
Company does not believe that the outcome of any of these lawsuits will
have a material adverse effect on the Company's financial position, results
of operations or cash flows.
The Company is also a party to various lawsuits arising in the
ordinary course of business and does not believe that the outcome of any of
these lawsuits will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Through September 30, 1997, Huntsman Polymers Corporation, formerly
Rexene Corporation, conducted its business through two operating divisions:
the Rexene Products division, which manufactured polyethylene,
polypropylene, APAO, FPO, styrene, and olefins and the CT Film division,
which manufactured plastic film. On September 30, 1997, the Company sold
the CT Film Business to Huntsman Packaging Corporation, an affiliate of the
Company ("Huntsman Packaging"). The Company now consists solely of those
assets which formerly comprised Rexene Products division. Consequently,
management believes that a description of the CT Business' results and
financial condition of the CT Business is not meaningful to an evaluation
of the Company's results of operations or financial condition.
The markets in which the Company competes are generally cyclical
markets that are sensitive to relative changes in supply and demand as well
as general economic conditions. Historically, these products have
experienced alternating periods of tight supply, rising prices and
increased profits followed by periods of large capacity additions resulting
in oversupply, lower selling prices and lower profits. Like most of the
companies in the industry, the Company's operations have been affected by
the shortages and delay of rail transportation into and out of the Odessa
plant. Certain of the Company's products, such as APAO, are generally less
sensitive to economic cycles. In addition, the Company's polyethylene and
polypropylene businesses are geared toward higher value-added, specialty
grades, which are less sensitive to cyclical swings experienced by
commodity grades. Management believes that many of the factors contributing
to the lower selling prices experienced by the industry in the first half
of 1998 will continue throughout the balance of 1998 and 1999. Like most of
the companies in the industry, the Company's operations have been affected
by the shortages and delay of rail transportation into and out of the
Odessa plant.
Principal raw materials purchased by the Company consist of ethane
and propane extracted from natural gas liquids ("NGLs"), propylene and
benzene (all four of which are referred to as "feedstocks") for the
polyethylene, polypropylene and styrene businesses. Management believes the
feedstock supplies available in Odessa, Texas are currently adequate for
the Company's requirements. The percentage of feedstock costs compared to
the Company's total cost of sales excluding those costs associated with the
CT Business decreased from 40% for the first six months ended June 30, 1997
for the same period in 1998.
Results of Operations
The Merger of Rexene and Centennial effective on the Effective Date
for financial accounting purposes, resulted in the implementation of a new
basis of accounting and thus new carrying values for certain of the
Company's assets, liabilities, and equity. The Company's consolidated
financial statements reflect this new basis of accounting beginning with
the date of the Merger. The Company's operations after the Effective Date
are significantly affected by (1) the incremental depreciation associated
with the net increase in property, plant and equipment, (2) the impact on
interest expense of the replacement of selected debt vehicles with
intercompany debt, and (3) the deferred income tax affect adjustments
associated with these adjustments. For these reasons, among others, certain
financial information for periods before and after the Effective Date is
not comparable.
Effective September 30, 1997, the Company sold the assets of the CT
Business. The operations of the CT Business are presented as discontinued
operations for all periods presented. The following discussion is based on
a comparison of the three months and six months ended June 30, 1998 and
1997 in the context of historical data adjusted for discontinued
operations.
Three months ended June 30, 1998 compared to three months ended June 30, 1997
Revenues
The Company's revenue decreased by $19.6 million to $91.4 million
for the three months ended June 30, 1998 from $110.0 million for the three
months ended June 30, 1997. The major factors contributing to the drop in
revenue were the downward slide in feedstock sales prices as well as the
over-supply of polyethylene, polypropylene, and styrene in the market.
These conditions were primarily attributable to additional new capacity and
the inability of the industry to maintain export volumes due to continued
Asian economic problems. Sales dollars were lower in polyethylene,
polypropylene, styrene and feedstocks, partially offset by an increase in
FPO sales. Polyethylene sales decreased $4.4 million primarily due to a
decrease in sales volumes of 9.9 million pounds. Polypropylene sales
decreased $7.4 million due to a decrease in average sales price of 10.5
cents per pound and a decrease in sales volumes of 6.3 million pounds.
Styrene sales decreased $7.0 million due to a decrease in average sales
price of 4.4 cents per pound and a decrease in sales volumes of 16.1
million pounds. Other sales, primarily comprised of feedstocks, decreased
$3.3 million. FPO sales increased $2.7 million primarily due to an increase
in average sales price and pounds sold.
Gross Profit
The Company's gross profit decreased by $27.6 million to $4.9
million for the three months ended June 30, 1998 from $32.5 million for the
three months ended June 30, 1997. The Company's gross profit as a
percentage of sales decreased from 29.3% for the three months ended June
30, 1997 to 5.3% for the three months ended June 30, 1998. This decrease
was principally due to decreases in sales prices and volumes of
polyethylene, styrene and feedstocks as described above. The major factors
contributing to the drop in the gross profits were higher manufacturing
costs dues mainly to the effects of the transformer outage which occurred
in the first quarter, downward pressure on pricing and a weak export
product.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses
decreased $4.8 million from $8.5 million for the three months ended June
30, 1997 to $3.7 million for the three months ended June 30, 1998
principally due to an administrative restructuring following the Merger.
Interest Expense, Net
The Company's net interest expense increased $2.5 million from $5.6
million for the three months ended June 30, 1997 to $8.1 million for the
three months ended June 30, 1998. This increase was principally due to
higher interest rates on the Company's intercompany debt for the quarter
ended June 30, 1998 as compared to the interest rates on the bank debt held
during the same period of the prior year, as well as higher levels of debt
outstanding.
Other Income
The Company's other income increased $7.2 million to $7.3 million
for the three months ended June 30, 1998 as compared to the same period in
1997. Substantially all of the increase in other income is due to one-time
items relating to the licensing of technology and settlements of commercial
disputes and other agreements related to production and distribution costs.
Income Tax Expense
Income tax expense decreased from $5.7 million of expense for the
three months ended June 30, 1997 to $0.6 million of benefit for the three
months ended June 30, 1998 due to decreased operating results.
Six months ended June 30, 1998 compared to six months ended June 30, 1997
Revenues
The Company's revenue decreased by $44.6 million to $203.3 for the
six months ended June 30, 1998 from $236.3 million for the six months ended
June 30, 1997. The major factors contributing to the drop in revenue were
the downward slide in feedstock sales prices as well as the over-supply of
polyethylene, polypropylene and styrene in the market. These conditions
were primarily attributed to additional new capacity and the inability of
the industry to maintain export volumes due to continued Asian economic
problems. Sales dollars were lower in polyethylene, polypropylene, styrene
and feedstocks , partially offset by an increase in FPO sales. Polyethylene
sales decreased $7.8 million primarily due to a decrease in sales volumes
of 5.6 million pounds. Polypropylene sales decreased $11.0 million due to a
decrease in average sales price of 7.1 cents per pound and a decrease in
sales volumes of 10.2 million pounds. Styrene sales decreased $13.8 million
due to a decrease in average sales price of 3.3 cents per pound and a
decrease in sales volumes of 35.6 million pounds. Other sales, primarily
comprised of feedstocks, decreased $17.3 million. FPO sales increased
$7.0 million primarily due to an increase in average sales price and pounds
sold.
Gross Profit
The Company's gross profit decreased by $38.1 million to $11.5
million for the six months ended June 30, 1998 from $49.6 million for the
six months ended June 30, 1997. The Company's gross profit as a percentage
of sales decreased from 21.0% for the six months ended June 30, 1997 to
6.0% for the six months ended June 30, 1998. This decrease was principally
due to decreases in sales prices and volumes of polyethylene, styrene and
feedstock sales as described above. The major factors contributing to the
drop in gross profit were higher manufacturing costs due mainly to the
effects of the transformer outage which occurred in the first quarter,
downward pressure on pricing and a weak export market.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses
decreased $9.6 million from $16.9 million for the six months ended June 30,
1997 to $7.3 million for the six months ended June 30, 1998 principally due
to administrative restructuring following the Merger.
Reversal of Environmental Accrual
An environmental accrual established in prior years was reduced by
$9.0 million during the first quarter of 1997 as a result of modifications
to the Company's remedial action plans at the Company's Odessa Facility
that were approved by the Texas Natural Resources Conservation Commission
("TNRCC").
Other Income
The Company's other income increased $8.0 million to $7.3 million
for the six months ended June 30, 1998 from $0.7 million loss for the six
months ended June 30, 1997. Substantially all of the increase in other
income is due to one time events relating to licensing of technology and
settlements of commercial disputes and other agreements related to
production and distribution costs.
Interest Expense, Net
The Company's net interest expense increased $5.6 million from
$10.5 million for the six months ended June 30, 1997 to $16.1 million for
the six months ended June 30, 1998. This increase was principally due to
higher interest rates on the Company's intercompany debt for the six months
ended June 30, 1998 as compared to the interest rates on the bank debt held
during the same period of the prior year, as well as higher levels of debt
outstanding.
Income Tax Expense
Income tax expense decreased from $9.4 million of expense for the
six months ended June 30, 1997 to $3.1 million of benefit for the six
months ended June 30, 1998 due to decreased operating results.
Liquidity and Capital Resources
Net cash used in operating activities for the six months ended June
30, 1998 was $9.2 million, as compared to net cash provided by operations
of $2.9 million in the same period in 1997. This decrease was primarily
attributable to a decline in net income, as described above, partially
offset by higher levels of depreciation and a lower net investment in
working capital.
Net cash used in investing activities for the six months ended June
30, 1998 was $58.8 million, an increase of $ 9.6 million over the same
period in 1997. This increase was primarily attributable to a higher level
of capital spending resulting from the Company's modernization and
expansion program, partially offset by collections of advances receivable
due from an affiliate of the Company.
Net cash provided by financing activities for the six months ended
June 30, 1998 was $68.0 million, a decrease of $15.4 million over the same
period in 1997. This decrease was primarily attributable to a lower level
of intercompany borrowings for the six months ended June 30, 1998 as
compared to bank borrowings incurred in the same period of the previous
year, as well as a $45.0 million equity contribution to the Company by its
parent in the first six months of 1998.
In connection with the Merger, the Company entered into an
intercompany loan agreement with HGHFC, (the "Intercompany Loan Agreement")
a wholly-owned subsidiary of Huntsman. As of June 30, 1998, the Company
owed $332.2 million under the Intercompany Loan Agreement. Subject to
certain terms and conditions, the Company may borrow additional amounts
under the Intercompany Loan Agreement. The Company has guaranteed on a
secured basis, subject to the limitations imposed by the indenture (the
"Indenture") governing the Company's 11 3/4% Senior Notes (the "Senior
Notes"), Huntsman Corporation's senior secured borrowings on a pari passu
basis with substantially all of Huntsman Corporation's domestic
subsidiaries.
Capital expenditures for the six months ended June 30, 1998 were
$107.8 million. The $61.8 million increase in capital expenditures for the
six months ended June 30, 1998 compared to the same period in 1997 was due
primarily to additional spending in connection with the Company's
modernization and expansion program. The two primary components of the
Company's modernization and expansion program include the modernization of
the Company's olefins facility and the building of a new LLDPE facility.
The estimated total costs of these projects have increased from prior
estimates by 17% due to a revision of engineering estimates associated with
labor and material costs. The Company expects to spend $175.0 million during
the second half of 1998 in connection with these projects. These projects
are scheduled for completion during the fourth quarter of this year.
The Company believes that, based on current levels of operation and
anticipated growth, its cash flow from operations, together with other
available sources of liquidity, will be adequate to make scheduled payments
of interest on the 11 3/4% Senior Notes, to permit anticipated capital
expenditures and to fund working capital requirements. However, the ability
of the Company to satisfy these obligations depends on a number of
significant assumptions, including but not limited to, the demand for the
Company's products and raw material costs.
A number of potential environmental liabilities exist which relate
to certain contaminated property. In addition, a number of potential
environmental costs relate to pending or proposed environmental
regulations. No assurance can be given that all of the potential
liabilities arising out of the Company's present or past operations have
been identified or that the amounts that might be required to investigate
and remediate such sites or comply with pending or proposed environmental
regulations can be accurately estimated. The Company has approximately $8.2
million accrued in the June 30, 1998 balance sheet as an estimate of its
total potential environmental liability with respect to investigating and
remediating known and assessed site contamination. Extensive environmental
investigation of the groundwater, soils and solid waste management has been
conducted at the Odessa facility. Risk assessments have been completed for
a number of these facilities and corrective measures have been defined and
conducted. If, however, additional liabilities with respect to
environmental contamination are identified, there is no assurance that
additional amounts that might be required to investigate and remediate such
potential sites would not have a material adverse effect on the financial
position, results of operations or cash flows of the Company. In addition,
future regulatory developments could restrict or possibly prohibit existing
methods of environmental compliance. At this time, the Company is unable to
determine the potential consequences such possible future regulatory
developments would have on its financial condition. Management continually
reviews its estimates of potential environmental liabilities. The Company
carries Pollution Legal Liability insurance to address many of the
potential environmental liabilities, subject to its terms, limits,
exclusions and deductibles, on both a sudden and accidental basis and on a
gradual basis for occurrences first commencing after July 1, 1997 on its
operations. The Company also carries Pollution Legal Liability and Closure
and Post Closure insurance on certain facilities at the Odessa
manufacturing location which are regulated by the TNRCC. This insurance
satisfies requirements of the TNRCC governing operations at this location.
Year 2000 Compliance
In response to the year 2000 compliance issue, the Company has
completed an inventory and assessment of all internally developed or
externally acquired system components. The Company has dedicated the
resources to either replace or remediate all known problems. External
computing technology service providers have been contacted and have assured
the Company that they will be 2000 compliant. The total cost to the Company
of these efforts is estimated to be approximately $500,000 with the
majority being expensed in 1998.
Other Matters
The Company is including the following cautionary statement in this
Form 10-Q to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Report Act of 1995 for any
forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements included statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of
historical facts. From time to time, the Company may publish or otherwise
make available forward-looking statements of this nature. All such
subsequent forward-looking statements, whether written or oral and whether
made by or on behalf of the Company, are also expressly qualified by these
cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risk and uncertainties
which could cause actual results or outcomes to differ materially from
those expressed in the forward-looking statements. The forward-looking
statements contained herein are based on various assumptions, many of which
are based, in turn, upon further assumptions. The Company's expectations,
beliefs and projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitation,
management's examination of historical operating trends, data contained in
the Company's records and other data available from third parties, but
there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition to the
other factors and matters discussed elsewhere herein, the following are
important factors that, in the view of the Company, could cause actual
results to differ materially from those discussed in the forward-looking
statements:
1. Changes in economic conditions and weather conditions;
2. Changes in the availability and/or price of feedstocks;
3. Changes in management ownership or control of the Company;
4. Inability to obtain new customers or retain existing ones;
5. Significant changes in competitive factors affecting the Company;
6. Environmental/safety requirements;
7. Significant changes from expectations in actual capital expenditures
and operating expenses and unanticipated project delays;
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures
and other investments;
9. The cyclical nature of the Company's business;
10. Significant changes in tax rates or policies or in rates of
inflation or interest;
11. Significant changes in the Company's relationship with its
employees and the potential adverse effects if labor disputes or
grievances were to occur;
12. Changes in accounting principles and/or the application of such
principles to the Company;
13. Unavailability of, and substantial delays in, transportation of raw
materials and products.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 20, 1998, the Company received a Notice of Opportunity for
Hearing and Original Complaint in an administrative enforcement action
initiated by the Railroad Commission of Texas ("Railroad Commission"). The
action arises out of an incident occurring on February 5, 1998 when
ethylene was released from an underground storage facility located at the
Company's plant in Odessa, Texas. The ethylene ignited when ethylene was
released from an underground storage facility located at the Company's
plant in Odessa, Texas. The ethylene ignited when it came in contact with
an electrical power line. There were no injuries and no significant
property damage resulted. The Railroad Commission contends that the release
resulted from violations of Statewide Rule 95 relating to underground
storage of hydrocarbons. The Railroad Commission alleges violations of
operating, monitoring and record-keeping requirements of Statewide Rule 95
and seeks administrative penalties in the amount of $345,000. While the
Company does not dispute that a release occurred due to an isolated
incident of operator error, the Company does dispute the Railroad
Commission's position regarding the circumstances giving rise to the
release. On June 17, 1998 the Company answered the Complaint and contested
most of the violations alleged by the Railroad Commission.
Although there can be no assurance of the final resolution of any
of these matters, the Company believes that, based upon its current
knowledge of the facts of each case, it has meritorious defenses to the
various claims made and intends to defend each suit vigorously, and the
Company does not believe that the outcome of any of these lawsuits will
have a material adverse effect on the Company's financial position, results
of operations or cash flows.
The Company is also a party to various lawsuits arising in the
ordinary course of business and does not believe that the outcome of any of
these lawsuits will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Exhibits
-------- --------
27 Financial Data Schedule
(b) Reports Submitted on Form 8-K:
There were no reports submitted on Form 8-K during the second
quarter of 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUNTSMAN POLYMERS CORPORATION
Registrant
Date: August 14, 1998 By: /s/ J. Kimo Esplin
------------------------
J. Kimo Esplin
Senior Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number Exhibit
-------- -------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the second quarter 10-Q and is qualified in its entirety by
reference to such 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 36,422
<ALLOWANCES> (1,537)
<INVENTORY> 53,612
<CURRENT-ASSETS> 122,254
<PP&E> 857,375
<DEPRECIATION> (36,878)
<TOTAL-ASSETS> 977,508
<CURRENT-LIABILITIES> 47,494
<BONDS> 174,882
<COMMON> 0
0
0
<OTHER-SE> 208,664
<TOTAL-LIABILITY-AND-EQUITY> 977,508
<SALES> 91,376
<TOTAL-REVENUES> 91,376
<CGS> 86,522
<TOTAL-COSTS> 86,522
<OTHER-EXPENSES> 5,558
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,136
<INCOME-PRETAX> (1,576)
<INCOME-TAX> (600)
<INCOME-CONTINUING> (977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (977)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
