LyondellBasell Industries N.V. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unless otherwise noted, amounts are in U.S. dollars; financial-statement amounts are in millions. The company manufactures chemicals and polymers, refines crude oil, and licenses production technologies.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $10,206 | $8,403 | $19,973 | $16,833 |
| Operating income | $1,626 | $1,577 | $3,120 | $2,787 |
| Net income attributable to company shareholders | $1,654 | $1,131 | $2,885 | $1,928 |
| Diluted EPS | $4.22 | $2.81 | $7.33 | $4.78 |
| EBITDA, company-defined segment measure | $2,010 | $1,970 | $3,923 | $3,587 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2,733 | $2,238 |
Revenue rose 21% in Q2 and 19% in the first half. Management attributed the increases mainly to higher product prices as crude oil prices increased, with contributions from volumes and foreign exchange. Cost of sales rose faster than revenue in Q2, increasing 26%; operating margin was approximately 15.9%, versus 18.8% a year earlier. First-half operating margin was approximately 15.6%, versus 16.6%. Net income benefited materially from a one-time, non-cash tax benefit described below.
Segment performance
- O&P-Americas: Q2 EBITDA fell to $700 from $859; first-half EBITDA was $1,480 versus $1,582. Lower olefins margins and planned Channelview turnaround-related volume reductions offset strong polyethylene margins.
- O&P-EAI: Q2 EBITDA declined to $447 from $699; first-half EBITDA was $965 versus $1,228, mainly due to weaker European margins, partly offset by favorable foreign exchange.
- Intermediates and Derivatives: Q2 EBITDA increased to $642 from $339; first-half EBITDA rose to $1,128 from $678, on strong demand, constrained industry supply and improved margins.
- Refining: Q2 EBITDA was $104 versus $25; first-half EBITDA was $167 versus a $5 loss, reflecting improved refining margins and, for the first half, better yields and higher heavy-crude processing.
- Technology: Q2 EBITDA rose to $113 from $48; first-half EBITDA increased to $169 from $108, principally from licensing and services revenue.
Financial position, liquidity and capital allocation
- At June 30, cash and cash equivalents were $2,384; short-term investments were $933. Management reported $3,317 of unrestricted cash and cash equivalents plus short-term investments, and $554 of tri-party repurchase agreements classified in current assets.
- Total debt, including current maturities, was $8,540, compared with $8,551 at year-end 2017. Current maturities increased to $974 from $2; long-term debt was $7,490.
- Total unused availability under credit facilities was $3,400, including a $2,500 revolving facility and a $900 receivables facility. Neither facility had borrowings or letters of credit outstanding at June 30. The company reported compliance with the applicable 3.50-to-1.00 leverage covenant.
- First-half investing cash outflow was $589, including $925 of capital expenditures. Financing cash outflow was $1,265, including $787 of dividends and $470 of cash paid for share repurchases. Cash and cash equivalents and restricted cash increased by $858 to $2,386.
- Quarterly dividend was increased to $1.00 per share; $2.00 per share was paid in the first half. A new authorization permits repurchase of up to 57.8 million shares through December 2019.
Outlook, material developments and risks
- Management said polyethylene capacity additions were being absorbed by robust demand. It cited prospective earnings support from I&D, refining improvements, the Schulman acquisition, the planned 2019 start-up of the Hyperzone HDPE plant, and potential refinery benefits from new marine-fuel regulations in the latter half of 2019. No quantified earnings guidance was provided.
- The $2.25 billion A. Schulman acquisition was approved by Schulman shareholders and several regulators; closing was expected in the second half of 2018 and was to be funded with cash on hand. The company also entered exclusive discussions with Odebrecht concerning a potential Braskem transaction; no completed transaction was reported.
- The company’s approximately $2.4 billion PO/TBA project was expected to begin construction in Q3 2018 and be completed in mid-2021. U.S. Gulf Coast polyethylene and propylene oxide capacity projects were reported on schedule. A South Korean joint-venture plant was expected to add 400 kilotons of polypropylene capacity.
- A tax audit settlement produced a $346 million non-cash tax benefit in Q2: $288 million from recognizing previously unrecognized tax benefits and $58 million from releasing accrued interest. The Q2 effective tax rate was negative 1.3%; the first-half rate was 8.9%. Unrecognized tax benefits remained $252 million at June 30.
- Environmental remediation liabilities were $95 million; the company said additional losses were reasonably possible but could not be estimated. Disclosed environmental matters included EPA and state enforcement proceedings, including potential penalties, and a €1.8 million German regulatory fine related to a pipeline leak. The Access Entities dispute was settled with no payment required by either side.
- Principal risks include commodity and feedstock price volatility, industry oversupply and new capacity, operational outages (including at the company’s sole refinery), project execution and acquisition integration, tax-law changes, environmental and legal proceedings, foreign-exchange exposure, and financing and counterparty risks. Management reported no material change in risk factors from its 2017 Form 10-K.
Most important facts for investors to verify
- How much of the reported earnings increase is sustainable after excluding the $346 million non-cash tax benefit and other period-specific effects?
- Whether margins and earnings in O&P-Americas and O&P-EAI stabilize amid new capacity, feedstock costs and regional margin pressure.
- Schulman closing, final funding and integration costs; any subsequent developments on the potential Braskem transaction.
- Actual spending, timing and returns for the major growth projects, particularly the PO/TBA and Hyperzone plants.
- Future share repurchases and dividends relative to acquisition spending, capital expenditures, debt maturities and operating cash generation.
- Outcomes and potential costs of environmental and tax matters; the filing does not quantify a possible range of additional environmental losses.