LyondellBasell Industries N.V. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. All financial figures are in U.S. dollars unless noted.
Business context
LyondellBasell is a global chemicals, polymers, refining and technology company operating through five segments: Olefins and Polyolefins—Americas (O&P—Americas), O&P—Europe, Asia, International (O&P—EAI), Intermediates and Derivatives (I&D), Refining, and Technology. Results are sensitive to feedstock and energy prices, product margins, industry supply and demand, and plant reliability.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $29.183 billion | $32.735 billion |
| Operating income | $5.060 billion | $6.122 billion |
| Net income | $3.837 billion | $4.474 billion |
| Diluted EPS, continuing operations | $9.15 | $9.60 |
| Operating cash flow | $5.606 billion | $5.842 billion |
| Capital expenditures | $2.243 billion | $1.440 billion |
| Dividends declared per share | $3.33 | $3.04 |
Operating margin was approximately 17.3% in 2016 versus 18.7% in 2015; net margin was approximately 13.1% versus 13.7%. Segment EBITDA, the company’s principal segment profitability measure, was $6.602 billion, down from $7.533 billion. The filing does not present a consolidated gross-margin percentage.
At year-end, total assets were $23.442 billion, working capital was $4.122 billion, and cash and cash equivalents were $875 million. Short-term investments were $1.147 billion; management reported $2.022 billion of unrestricted cash and cash equivalents plus marketable securities. Total debt was approximately $9.0 billion. Available capacity under credit facilities was $2.710 billion, including $500 million of commercial paper outstanding. The company generated $3.309 billion of cash after capital expenditures.
Changes versus comparable periods
- Revenue fell 11% from 2015, mainly because lower crude oil and feedstock prices reduced average selling prices; lower refinery volumes also contributed. The Argentine subsidiary sale reduced revenue by $290 million.
- Operating income declined $1.062 billion and net income declined $637 million. Lower O&P—Americas results, weaker I&D margins, and reduced Refining results outweighed improvement in O&P—EAI and Technology.
- O&P—EAI EBITDA rose to $2.067 billion from $1.825 billion, while O&P—Americas fell to $2.877 billion from $3.661 billion. Refining EBITDA dropped to $72 million from $342 million; I&D fell to $1.333 billion from $1.475 billion.
- Operating cash flow decreased modestly, while capital expenditures rose by $803 million, reflecting expansion and turnaround work, including the Corpus Christi ethylene project.
- Year-end debt increased from $8.028 billion in 2015 to approximately $8.98 billion in 2016; cash and equivalents declined from $924 million to $875 million. The company repurchased 36.6 million shares for $2.914 billion and paid $1.395 billion in dividends.
- Fourth-quarter 2016 revenue was $7.747 billion, operating income $1.048 billion, net income $763 million and diluted EPS $1.87. These were below third-quarter results; the filing attributes the sequential earnings decline in part to lower gross profit and year-end charges.
Outlook, risks and unusual items
- Management said the 2017 industry outlook had improved, citing healthy U.S. and global economic activity and delays to ethylene projects. It said 2016 maintenance spending positioned the company favorably. This is qualitative outlook, not quantified earnings guidance.
- Management expected 2017 capital spending of approximately $2 billion and an effective tax rate of approximately 27%. It intended to continue quarterly dividends, with a goal of increasing them over time, subject to results, cash needs and other constraints.
- 2016 results included a $29 million noncash lower-of-cost-or-market inventory charge, a $58 million pension settlement charge, a $78 million gain on the Argentine subsidiary sale, and $135 million of noncash prior-period tax adjustments. The company identified $2.2 billion of inventory as “at-risk” for further valuation adjustments.
- Houston refinery operations were affected by planned maintenance and unplanned outages, including a coker-unit fire and utility interruptions. Refinery EBITDA and heavy-crude processing rates fell sharply year over year. The refinery is the company’s only refining operation.
- Principal business risks include commodity-price and margin volatility, announced industry capacity additions, outages and severe weather, raw-material and utility supply constraints, competition, environmental and regulatory costs, foreign-exchange exposure, and tax-law changes. The company disclosed a $942 million pension-plan deficit.
- Contingencies include an Access-related lawsuit and indemnity demand for which the company could not estimate a reasonably possible loss; an IRS Section 409A matter with a possible company exposure ranging from zero to $170 million; and $95 million of accrued environmental remediation liabilities, with additional losses possible but not estimable. Certain environmental enforcement matters and penalties are also disclosed.
- The company issued €750 million of 1.875% notes due 2022 and increased its revolving credit facility and commercial-paper program to $2.5 billion. It stated that it intended to refinance certain debt in early 2017 and estimated charges of approximately $125 million under then-current conditions.
Most important facts for investors to verify
- Whether petrochemical margins and supply-demand conditions support the improved 2017 outlook, particularly amid planned North American capacity additions.
- Refinery reliability, utilization and margins after the 2016 outages, and whether further maintenance or operational events affect results.
- Progress, costs and expected returns for the polyethylene and propylene-oxide projects, and whether 2017 capital spending remains near $2 billion.
- Cash generation and capital allocation, including debt refinancing, dividend growth and share repurchases, relative to investment needs and approximately $9 billion of debt.
- Resolution and potential financial effects of the Section 409A and Access matters, environmental contingencies, tax adjustments and inventory valuation exposure.
- Whether pension funding needs, tax-law changes and currency movements alter liquidity, reported earnings or the stated outlook.