LyondellBasell Industries N.V. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. Unless noted otherwise, amounts are U.S. dollars. The company is a global chemicals and polymers producer with six operating segments and one refinery, in Houston.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $34.727 billion | $39.004 billion | Down 11% |
| Operating income | $4.116 billion | $5.231 billion | Down 21% |
| Net income | $3.397 billion | $4.690 billion | Down 28% |
| Diluted EPS from continuing operations | $9.60 | $12.03 | Down 20% |
| Segment EBITDA | $5.692 billion | $6.867 billion | Down 17% |
| Cash from operating activities | $4.961 billion | $5.471 billion | Down $510 million |
| Capital expenditures | $2.694 billion | $2.105 billion | Up $589 million |
Calculated from reported figures, gross margin was approximately 15.6% versus 16.6% and operating margin was approximately 11.9% versus 13.4%. Cash from operations less capital expenditures was approximately $2.267 billion, compared with $3.366 billion in 2018; this is a simple calculation, not a company-defined measure.
At year-end, total debt including current maturities was $12.062 billion, up from approximately $9.387 billion in 2018. Cash and cash equivalents plus short-term investments were $1.054 billion, implying approximate net debt of $11.008 billion. Working capital was $4.762 billion. Available capacity under the revolving credit and receivables facilities totaled $2.919 billion; the company reported covenant compliance.
Dividends declared were $4.15 per share, versus $4.00 in 2018. The company returned approximately $5.2 billion through dividends and share repurchases, including $3.8 billion of share repurchases. Its 2019 capital spending was concentrated in O&P–Americas and I&D.
Fourth-quarter results
Fourth-quarter revenue was $8.179 billion, operating income $798 million, income from continuing operations $612 million, and diluted EPS $1.83. Compared with fourth-quarter 2018, revenue fell from $8.876 billion, operating income was nearly unchanged at $794 million, and continuing income declined from $697 million; diluted EPS increased from $1.79. Compared with the third quarter of 2019, revenue and continuing income also declined. Management attributed pressure across most businesses to slow industrial demand and normal seasonality; refining improved quarter over quarter as margins and processing rates recovered.
Business changes and segment trends
- Lower product prices—generally associated with lower crude oil prices—accounted for most of the annual revenue decline; lower volumes and unfavorable foreign exchange also contributed. A full year of A. Schulman operations added $1.304 billion of revenue versus 2018.
- O&P–Americas EBITDA fell 17%, primarily as polyethylene spreads narrowed amid new capacity and weaker demand; improved olefin margins partly offset the decline.
- O&P–EAI EBITDA fell 9%, reflecting weaker polyolefin spreads, lower joint-venture income, and unfavorable currency effects.
- I&D EBITDA fell 23%, mainly on weaker intermediate-chemical margins and lower PO volumes. APS EBITDA rose 6%, principally from the A. Schulman contribution, partly offset by integration costs and softer demand.
- Refining EBITDA shifted to a $65 million loss from $167 million income, as narrow heavy-crude discounts and weaker byproduct margins pressured results. Technology EBITDA rose 25% on higher licensing revenue, reaching a segment record, according to management.
Outlook, risks, and unusual items
- Management expected typical seasonal improvement in the second and third quarters of 2020, with potential upside from improved trade-policy resolution and a recovery in industrial demand. It anticipated benefits from IMO 2020 for the Houston refinery and completion of the Hyperzone polyethylene project in 2020. This outlook was stated in a filing dated February 20, 2020.
- Expected 2020 capital spending was approximately $2.4 billion, including about $75 million for U.S. and European PO joint ventures. Hyperzone was expected to complete in early 2020; the Channelview PO/TBA project was targeted for late 2021. Management forecast an approximately 20% effective tax rate for 2020.
- Planned maintenance was expected to reduce segment EBITDA in 2020: O&P–Americas by about $25 million and $30 million in the first and second quarters; O&P–EAI by about $15 million in each of the third and fourth quarters; and I&D by about $10 million in each of the first two quarters and $25 million in each of the last two.
- 2019 included $116 million of pretax A. Schulman integration costs and $33 million of noncash lower-of-cost-or-market inventory charges. A $113 million noncash tax benefit from previously unrecognized tax benefits also supported results. The 2018 comparison included a $358 million noncash tax benefit, so reported earnings comparisons are affected by tax items.
- Major risks include cyclical chemical and refining markets, new industry capacity and potential oversupply, feedstock and energy price volatility, limits on passing costs to customers, operating interruptions, and reliance on the Houston refinery as the company’s sole refining operation. The filing also identifies foreign exchange, regulatory and environmental exposure, climate-related costs, plastics regulation or reduced demand, and joint-venture control risks.
- Environmental remediation liabilities were $132 million at year-end; the company said additional losses were reasonably possible but could not be estimated. Disclosed regulatory matters included U.S. flare-emissions enforcement discussions, a €1.8 million German fine notice related to a pipeline leak, and Illinois and Texas emission matters under settlement discussions. The company did not believe pending lawsuits would have a material adverse effect.
- The pension-plan deficit was $1.287 billion. Contractual obligations included $26.004 billion of take-or-pay commitments and $22.065 billion of other purchase contracts; these cover future periods and are not equivalent to current debt.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. Lease accounting was adopted in 2019, adding operating lease assets and liabilities to the balance sheet.
Most important facts for investors to verify
- Whether demand, product spreads, and new industry capacity support a sustained recovery in margins, particularly polyethylene, intermediates, and refining.
- Whether the 2020 outlook, Hyperzone startup, and Channelview PO/TBA construction schedule and costs were achieved; the filing provides expectations, not subsequent results.
- How debt, liquidity, and shareholder distributions evolve after the debt-funded 2019 repurchase, including compliance with leverage covenants.
- The realization and cash impact of tax benefits, environmental remediation estimates, pension funding needs, and other disclosed contingencies.