LyondellBasell Industries N.V. - Q1 2011 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2011. LyondellBasell Industries N.V. (the "Successor") emerged from Chapter 11 bankruptcy on April 30, 2010, adopting fresh-start accounting effective May 1, 2010. The company is a global manufacturer of chemicals and polymers, a refiner of crude oil, and a producer of gasoline blending components. Results for the quarter ended March 31, 2011, are compared to the same period in 2010 (the "Predecessor" period), noting that financial statements are not directly comparable due to the reorganization and accounting changes.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2011 (Successor) | Q1 2010 (Predecessor) |
|---|---|---|
| Sales and Operating Revenues | $12,252 | $9,755 |
| Operating Income | $1,065 | $367 |
| Net Income | $660 | $8 |
| Net Income Attributable to Company | $663 | $10 |
| Earnings Per Share (Diluted) | $1.15 | Not Applicable |
| Operating Cash Flow | $221 | $(373) |
| Cash and Cash Equivalents (End of Period) | $4,383 | $537 |
| Total Debt (including current maturities) | $6,109 | Not directly comparable |
| Interest Expense | $163 | $411 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased by $2,497 million (26%) driven by higher average product sales prices and increased sales volumes across most segments due to improved global economic conditions.
- Profitability Surge: Operating income increased by $698 million. This was driven by higher product margins, particularly in Olefins and Polyolefins, and significantly lower depreciation and amortization expense ($209 million reduction) resulting from the fresh-start accounting asset write-downs in 2010.
- Interest Expense Reduction: Interest expense decreased by $248 million due to the discharge of high-cost debt during the bankruptcy reorganization and subsequent debt repayments.
- Working Capital: Operating cash flow turned positive ($221 million) compared to a significant outflow in Q1 2010. However, working capital usage increased in Q1 2011, primarily due to a $799 million increase in inventory driven by higher crude oil prices and strategic stockpiling.
- Reorganization Items: The company recorded a $2 million expense in Q1 2011 compared to a $207 million benefit in Q1 2010, which included adjustments for rejected contracts and environmental liability reductions.
Outlook, Risks, and Contingencies
- Dividend Declaration: On May 5, 2011, shareholders approved a dividend of $0.10 per share. Management intends to declare additional interim dividends subject to cash flow and covenant compliance.
- Debt Redemption: In May 2011, the company redeemed $203 million of 8% senior secured dollar notes and €34 million of 8% senior secured Euro notes.
- Registration Rights Penalty Risk: The company failed to make registration statements effective by the May 3, 2011 deadline for its 8% and 11% senior secured notes. Consequently, interest rate penalties of 0.25% per annum (increasing quarterly up to 1.00%) apply starting May 4, 2011.
- Legal Proceedings:
- BASF Lawsuit: A $170 million verdict against the company was reversed on appeal in December 2010; the case was remanded. The company does not expect a material adverse effect on liquidity.
- Access Indemnity Demand: Affiliates of Access Industries demanded indemnification and $50 million in management fees related to a pending lawsuit. The company disputes these claims and has filed a declaratory judgment action.
- FCPA and Sanctions: The company is investigating potential violations of the Foreign Corrupt Practices Act (Kazakhstan project) and U.S. economic sanctions (business in Iran, Syria, Sudan). Voluntary disclosures have been made to the DOJ and Treasury. The company has ceased business with sanctioned entities.
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of March 31, 2011, due to a material weakness in tax provision reporting previously disclosed. Remediation measures are in progress.
Investor Verification Checklist
- Verify the impact of the registration rights penalty on future interest expense and cash flow.
- Monitor the resolution of the Access Industries indemnity demand and the BASF lawsuit remand.
- Assess the status of the FCPA and sanctions investigations and potential fines or penalties.
- Review the progress of remediation efforts for the material weakness in internal controls over financial reporting.
- Track inventory levels and working capital trends given the significant build-up in Q1 2011.
- Confirm the company's ability to meet debt covenants while paying dividends and managing debt redemptions.