LyondellBasell Industries N.V. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports quarterly results, including fourth-quarter 2018. LyondellBasell is a global chemicals and polymers producer, refiner, and process-technology licensor, operating through six reportable segments.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $39.00 billion | $34.48 billion |
| Operating income | $5.23 billion | $5.46 billion |
| Net income | $4.69 billion | $4.88 billion |
| Diluted EPS from continuing operations | $12.03 | $12.28 |
| Operating cash flow | $5.47 billion | $5.21 billion |
| Capital expenditures | $2.11 billion | $1.55 billion |
| Total debt at year-end | $9.39 billion | $8.62 billion |
| Cash and cash equivalents | $332 million | $1.52 billion |
| Short-term investments | $892 million | $1.31 billion |
| Dividends declared per share | $4.00 | $3.55 |
Revenue rose 13%, mainly from higher average selling prices, favorable currency effects, and $846 million of sales from acquired A. Schulman operations; overall sales volumes were lower. Operating income fell 4% as weaker O&P results and higher costs outweighed stronger Intermediates and Derivatives and Technology results. Net income declined 4%. Gross margin was approximately 16.6% versus 18.6% in 2017; operating margin was approximately 13.4% versus 15.8%.
Segment EBITDA was $6.87 billion, down from $7.13 billion. O&P–EAI EBITDA fell 40% to $1.16 billion, while I&D rose 35% to $2.01 billion and Technology rose 47% to $328 million. O&P–Americas declined 5% to $2.76 billion; APS declined 9% to $400 million; Refining increased 6% to $167 million.
Operating cash flow less capital expenditures was approximately $3.37 billion (a simple calculation, not a company-defined measure). Financing activities used $3.01 billion, including $1.85 billion of share repurchases and $1.55 billion of dividends. Year-end unrestricted cash and cash equivalents plus short-term investments totaled $1.22 billion; the company also reported $544 million in tri-party repurchase agreements and $2.52 billion of unused credit availability. A $2.5 billion revolving facility supported the commercial-paper program, of which $809 million was outstanding at year-end.
Material changes and unusual items
- Completed the approximately $1.94 billion A. Schulman acquisition in August 2018, adding the APS business. A. Schulman contributed $846 million of revenue and $58 million of EBITDA after acquisition; APS also incurred $69 million of transaction and integration costs. Preliminary purchase accounting included $1.27 billion of goodwill.
- Fourth-quarter results weakened: revenue was $8.88 billion versus $9.14 billion a year earlier; operating income was $794 million versus $1.34 billion, and net income was $692 million versus $1.89 billion. The 2017 comparison included an $819 million non-cash tax benefit from U.S. tax reform; second-quarter 2018 included a $346 million tax benefit from audit settlements.
- Management estimated planned and unplanned downtime reduced fourth-quarter 2018 results by approximately $225 million. O&P–EAI faced customer destocking, pricing pressure, low Rhine River levels, maintenance at Wesseling, and feedstock constraints at Münchsmünster. Refining margins were hurt by high gasoline inventories and unusually weak Maya crude discounts.
- 2018 operating results included $73 million of acquisition-related costs and a $36 million gain on the French carbon-black subsidiary sale. The company acquired a 50% interest in recycling joint venture Quality Circular Polymers.
- Cash and cash equivalents declined substantially year over year, while total debt increased. The company repaid the $375 million A. Schulman-assumed notes in September 2018. In February 2019, it borrowed $2.0 billion under a 364-day term facility and used proceeds to redeem the remaining $1.0 billion of 5% notes due 2019.
Outlook, risks, and contingencies
Management said markets had normalized and polymer demand increased during January 2019. It expected growth to accelerate in 2019, with the Hyperzone polyethylene plant planned to start in the third quarter. Global polyethylene capacity additions were expected to moderate in 2019 and 2020, supporting industry operating rates and ethylene-chain profitability. The new Texas PO/TBA plant, estimated to cost $2.4 billion, was under construction and expected to be completed in the third quarter of 2021. Expected 2019 capital spending and PO joint-venture contributions were approximately $2.8 billion. Management projected an effective tax rate of approximately 20% for 2019 and intended to continue quarterly dividends, with a long-term goal of increases.
- Major business risks include volatile feedstock, energy, product prices and margins; capacity additions and cyclicality; inability to pass costs through; operational outages and supply disruptions; and dependence on the Houston refinery as the sole refining operation.
- Other risks include economic and foreign-exchange volatility, regulation and environmental or climate-related costs, potential reduced demand for plastics, acquisition integration, cybersecurity, financing access, and reliance on joint ventures and intellectual property.
- Environmental remediation liabilities were $90 million at year-end; management said additional losses were reasonably possible but could not be estimated. Disclosed EPA flare matters and other environmental proceedings remain subject to resolution. The Houston refinery’s Texas emissions settlement and a Morris, Illinois penalty were paid; a German pipeline-leak fine notice was €1.8 million.
- Pension plan obligations exceeded plan assets by $992 million at year-end. The company reported $25.38 billion of take-or-pay purchase commitments and $2.48 billion of operating lease payments in its contractual-obligations schedule.
- The 2018 audit opinion was unqualified, and management and the auditor concluded internal control over financial reporting was effective. A. Schulman, representing 5% of assets and 2% of revenues, was excluded from the year-end internal-control assessment while integration work continued.
Most important facts for investors to verify
- Whether 2019 demand, margins, and management’s approximately 20% tax-rate expectation materialized, and how much 2018 earnings benefited from the $358 million tax-audit benefit.
- Progress, total cost, returns, and timing for the Hyperzone and PO/TBA projects, alongside the planned $2.8 billion of 2019 capital spending and joint-venture contributions.
- APS integration, realized synergies, and whether acquired operations can improve margins after $69 million of transaction and integration costs.
- Liquidity and leverage after the February 2019 $2.0 billion borrowing and repayment of the 2019 notes, including compliance with the 3.50-to-1.00 leverage covenant.
- Recovery in O&P–EAI and refining profitability, and exposure to further outages, destocking, feedstock cost changes, and capacity additions.
- Potential cash requirements from the pension deficit, environmental matters, and contractual purchase commitments.