Lyondellbasell Industries N.V. annual report, FY2014

LyondellBasell Industries N.V. — FY2014 Form 10-K

Reporting period: Year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are from the filing’s unaudited quarterly summary. Amounts are U.S. dollars unless noted.

Business context and results

LyondellBasell is a global chemicals and polymers producer, with five reporting segments: Olefins and Polyolefins—Americas (O&P—Americas), Olefins and Polyolefins—Europe, Asia and International (O&P—EAI), Intermediates and Derivatives (I&D), Refining, and Technology. The company operates one refinery, in Houston. Management said it achieved record earnings in 2014 despite a substantial non-cash inventory valuation charge.

MetricFY2014FY2013Change
Revenue$45.608 billion$44.062 billion+4%
Gross profit$6.669 billion$6.122 billion+9%
Operating income$5.736 billion$5.102 billion+12%
Net income$4.168 billion$3.853 billion+8%
Diluted EPS from continuing operations$8.00$6.76+18%
Segment EBITDA$7.050 billion$6.311 billion+12%
Cash provided by operating activities$6.048 billion$4.835 billion+$1.213 billion
Capital expenditures$1.499 billion$1.561 billion−4%

Gross margin was approximately 14.6% in 2014 versus 13.9% in 2013; operating margin was approximately 12.6% versus 11.6%. The effective tax rate rose to 27.0% from 22.7%; 2013 included a $353 million tax benefit from releasing valuation allowances. Income from equity investments rose to $257 million from $203 million.

Fourth-quarter performance

Q4 2014 revenue was $10.290 billion, down from $11.138 billion in Q4 2013. Gross profit was $1.301 billion versus $1.537 billion; operating income was $1.077 billion versus $1.264 billion; and net income was $791 million versus $1.175 billion. Diluted EPS was $1.54 versus $2.11. Q4 2014 results included $715 million of pretax non-cash inventory valuation charges ($455 million after tax); Q4 2013 included the $353 million tax benefit noted above.

Material changes and segment performance

  • 2014 included $760 million of pretax lower-of-cost-or-market (LCM) inventory charges, primarily from falling crude oil and related product prices. Charges were $279 million in O&P—Americas, $44 million in O&P—EAI, $93 million in I&D and $344 million in Refining.
  • O&P—Americas EBITDA increased to $3.911 billion from $3.573 billion, supported by stronger olefins and polyethylene margins; the segment’s LCM charge partly offset improvement.
  • O&P—EAI EBITDA rose to $1.366 billion from $839 million, reflecting higher margins, volumes and equity-investment income. Results included a $52 million environmental-claims settlement benefit and the $44 million LCM charge.
  • I&D EBITDA declined to $1.459 billion from $1.492 billion. Better acetyls and propylene oxide results were offset by weaker styrene, EO/EG, oxyfuels and C4 chemicals, plus the $93 million LCM charge.
  • Refining EBITDA fell to $65 million from $182 million, largely because of the $344 million LCM charge. Excluding that charge, management reported improved margins and higher throughput; annual crude processing averaged approximately 259,000 barrels per day, versus 232,000 in 2013.
  • Technology EBITDA was unchanged at $232 million. Its 2014 revenue was lower, primarily due to reduced licensing and services revenue.

Cash, debt and capital allocation

  • At year-end, cash and cash equivalents were $1.031 billion and short-term investments were $1.593 billion, totaling $2.624 billion in cash and marketable securities. Cash and equivalents alone were down from $4.450 billion a year earlier, partly reflecting substantial repurchases and dividends.
  • Total debt was $7.107 billion, up from $5.835 billion at year-end 2013. The company had $262 million of commercial paper outstanding and no borrowings under its revolving credit facility.
  • Unused availability under credit facilities was $3.253 billion. The $2.0 billion revolving facility, which backs the commercial-paper program, had $1.712 billion available. The company reported compliance with its credit-facility leverage covenant.
  • Financing activities used $5.907 billion in 2014. The company repurchased 63.3 million shares for approximately $5.873 billion and paid $1.403 billion in dividends. Dividends declared were $2.70 per share, up from $2.00 in 2013.
  • Management planned 2015 capital expenditures of approximately $1.562 billion, including higher projected spending in I&D and Refining. Operating cash flow less reported capital expenditures was approximately $4.549 billion in 2014.

Outlook, risks and contingencies

  • Management expected 2015 North American olefins and polymers margins to be below 2014 levels because of a narrower U.S. natural-gas-liquids feedstock advantage and additional industry supply, while still anticipating an NGL cost advantage. European olefins margins were expected to decline from high Q4 2014 levels.
  • Management expected I&D to benefit from competitor outages in the propylene oxide chain and lower feedstock costs. Refining margins had declined with oil and refined-product prices, partly offset by higher volumes of advantaged North American crude.
  • Further sustained crude and product price declines could trigger additional LCM charges in Q1 2015. The company was reevaluating capital plans for a proposed Gulf Coast polyethylene facility in light of energy prices and construction costs.
  • Growth projects included planned ethylene expansions at Channelview and Corpus Christi and a proposed Gulf Coast PO/TBA facility targeted for 2019. The company also completed ethylene and polyethylene capacity expansions in 2014.
  • Material risks include volatile commodity prices and limited ability to pass through cost changes; cyclicality and new capacity; plant outages and Gulf Coast weather or supply disruptions; environmental regulation and remediation; foreign exchange and international exposures; and joint-venture, pension and financing risks. The Houston refinery is the company’s only refining operation.
  • The defined-benefit pension deficit was $953 million at year-end. Environmental remediation accruals were $106 million; the company said possible losses above recorded amounts could not be estimated. Several environmental notices and proceedings were disclosed, and the potential loss in an Access-related dispute could not be estimated.
  • The Houston refinery workforce’s labor agreement expired February 1, 2015; the company disclosed that the union called employees to strike immediately before expiry. This post-year-end development warrants review for operational and financial effects.

Important facts for investors to verify

  • How much of record 2014 earnings and segment performance was recurring, versus the $760 million inventory charge, the $52 million settlement benefit, and tax or other unusual items?
  • How did the Q1 2015 oil-price decline affect inventory valuations, margins, cash flow and the company’s 2015 outlook?
  • What was the operational and financial impact of the Houston refinery labor strike, and what was the status of negotiations?
  • Did share repurchases and dividends remain consistent with liquidity, debt levels, investment needs and the stated capital-spending plan?
  • What are the developments and potential exposures in environmental matters, the Access dispute, pension funding and major expansion projects?