Lyondellbasell Industries N.V. quarterly report, Q2 FY2019

LyondellBasell Industries N.V. — Q2 2019 Form 10-Q

Business context and reporting period. The filing reports unaudited results for the three and six months ended June 30, 2019. LyondellBasell manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses chemical and polymer technologies. Comparisons are with the corresponding 2018 periods; segment comparisons reflect recast prior-period classifications following the A. Schulman acquisition.

Key financial results

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Revenue	$9.048 billion	$10.206 billion	$17.826 billion	$19.973 billion
Operating income	$1.177 billion	$1.626 billion	$2.194 billion	$3.120 billion
Net income	$1.003 billion	$1.654 billion	$1.820 billion	$2.885 billion
Diluted EPS	$2.70	$4.22	$4.88	$7.33
Segment EBITDA	$1.579 billion	$2.010 billion	$3.007 billion	$3.923 billion

• Q2 revenue fell 11% year over year; management attributed the decline to lower prices, volumes and foreign-exchange effects. The A. Schulman business contributed $554 million of Q2 revenue, partly offsetting those declines.
• Q2 operating margin was approximately 13.0%, versus 15.9% a year earlier. Net margin was approximately 11.1%, versus 16.2%.
• For the first six months, operating cash flow was $1.843 billion, down from $2.733 billion. Working capital consumed $538 million. Capital expenditures were $1.221 billion, compared with $925 million.
• At June 30, cash and cash equivalents were $1.279 billion; total debt, including current maturities, was $10.402 billion. The company reported $6.645 billion of unused availability under credit facilities. Liquidity figures are not directly interchangeable: management also reported $1.331 billion of unrestricted cash and cash equivalents plus short-term investments, and $541 million of tri-party repurchase agreements.
• Cash returned to shareholders in the first half included $760 million in common dividends and $512 million of cash paid for share repurchases. The quarterly dividend was $1.05 per share.

Material changes and drivers

• Management said lower margins across most segments drove weaker results. Q2 operating income declined 28%; first-half operating income declined 30%.
• Q2 segment EBITDA fell in O&P-Americas ($635 million versus $671 million), O&P-EAI ($331 million versus $355 million), I&D ($448 million versus $642 million), Refining (a loss of $66 million versus income of $104 million), and Technology ($107 million versus $113 million). APS was broadly flat at $120 million versus $121 million.
• Refining was particularly weak amid a narrower heavy-to-light crude differential, lower gasoline crack spreads and weaker byproduct margins. I&D faced weaker margins and volumes; O&P-EAI was affected by lower polyolefins margins, weaker European volumes and unfavorable foreign exchange.
• APS revenue benefited from A. Schulman, acquired in August 2018, but its Q2 EBITDA included $19 million of integration costs. The first-half integration costs were $35 million.
• The Q2 2018 comparison benefited from a $346 million non-cash tax benefit from an audit settlement. The 2019 effective tax rate was 14.4%, versus negative 1.3% in Q2 2018; this unusual prior-year tax item affects the net-income comparison.

Outlook, risks and contingencies

• Management described July demand as resilient for most products, with consumer-based demand supporting stable O&P-Americas and O&P-EAI volumes. It expected low-cost North American natural gas liquids to support O&P-Americas and oxyfuels chain margins. No quantified earnings or revenue guidance was provided.
• The Hyperzone HDPE plant was on track to start up in the second half of 2019. The approximately $2.4 billion PO/TBA project was expected to be completed in Q3 2021; first-half capital expenditures included spending on both projects.
• After quarter-end, the company repurchased 35.1 million shares for $3.093 billion at $88 per share. It financed the transaction with $1.000 billion from the 2022 term loan, $500 million from the receivables facility, $1.280 billion from commercial paper, and the remainder from operating cash. This post-quarter transaction materially changes the capital and liquidity picture reported at June 30.
• Environmental remediation accruals were $127 million at June 30, up from $90 million at year-end. Management said additional losses were reasonably possible but could not estimate an amount or range. Capital expenditure commitments were approximately $484 million, primarily related to the PO/TBA project.
• Risks highlighted include commodity-price and feedstock volatility, industry oversupply, unplanned outages, weak demand and margins, project execution, foreign exchange, tax uncertainty, legal and environmental matters, and access to financing. The filing reported compliance with debt covenants at June 30.
• The company was still assessing A. Schulman’s internal controls; that business, representing 5% of consolidated assets and 6% of six-month revenue, was excluded from management’s internal-control assessment at June 30. Disclosure controls were assessed as effective.

Investor verification priorities

• Verify the funding, final cash impact and resulting debt and liquidity after the $3.093 billion July tender offer, including commercial-paper and receivables-facility balances.
• Assess whether weaker segment margins, lower volumes and refining-market conditions continued after June, and compare subsequent results with management’s July demand commentary.
• Track Hyperzone start-up timing and PO/TBA project spending, commitments and schedule against stated plans.
• Review A. Schulman integration progress, integration costs and control remediation, given its exclusion from the internal-control assessment.
• Monitor environmental remediation exposure and uncertain tax positions, including the potential reduction of up to approximately $105 million in unrecognized tax benefits and the stated possible $60 million tax impact if specified foreign earnings are repatriated.