LyondellBasell Industries N.V. — Q2 2017 Form 10-Q
Business context and period. The company manufactures chemicals and polymers, refines crude oil, and licenses process technologies. This unaudited filing covers the quarter and six months ended June 30, 2017; year-over-year comparisons are to the corresponding 2016 periods. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $8,403 | $7,328 | $16,833 | $14,071 |
| Operating income | $1,577 | $1,403 | $2,787 | $2,763 |
| Net income | $1,130 | $1,091 | $1,927 | $2,121 |
| Diluted EPS | $2.81 | $2.56 | $4.78 | $4.93 |
| Operating cash flow | Not separately provided | Not separately provided | $2,238 | $2,561 |
| Capital expenditures | Not separately provided | Not separately provided | $828 | $1,090 |
- Q2 revenue rose 15% and operating income rose 12%; net income increased 4%. Approximate operating margin was 18.8% versus 19.1% a year earlier; net margin was 13.4% versus 14.9%.
- First-half revenue increased 20%, while operating income was nearly flat and net income fell 9%. Approximate operating margin declined to 16.6% from 19.6%; net margin declined to 11.4% from 15.1%. First-half diluted EPS fell 3%.
- Segment EBITDA was $1,970 in Q2 versus $1,783; first-half EBITDA was $3,587 versus $3,590. In Q2, O&P-Americas and O&P-EAI improved; I&D and Technology declined, while Refining moved to positive EBITDA. First-half O&P-EAI improved, offset by lower O&P-Americas, I&D and Technology results.
- First-half operating cash flow decreased 13%. Working capital consumed $462, compared with $94 in the prior-year period. Cash flow less capital expenditures was approximately $1,410, versus $1,471.
- At June 30, cash and cash equivalents were $734; short-term investments were $1,278. Management reported $2,012 of unrestricted cash and cash equivalents plus short-term investments, and a further $542 in repurchase agreements. Total debt, including current maturities, was $9,059; equity was $6,868. The current ratio was approximately 2.44, based on current assets of $10,075 and current liabilities of $4,131.
Material changes and notable items
- Revenue growth largely reflected higher prices, which tracked higher crude oil prices, and higher volumes. Cost of sales rose faster than revenue in the first half, chiefly from higher feedstock and energy costs.
- Q2 results benefited from strong operating rates and demand, with improved chain margins in O&P-Americas and O&P-EAI. I&D was affected by turnarounds and weaker oxyfuels results; Refining benefited from higher processing rates but faced weaker margins and maintenance-related costs.
- Q2 2016 included a $68 benefit from reversal of prior inventory valuation charges. First-half 2016 included a $78 gain on sale of the Argentine subsidiary. First-half 2017 included a $31 Lake Charles site-sale gain and a $21 non-cash gain from eliminating a lease obligation.
- First-half 2017 interest expense was $302 versus $165, including $113 of charges from redeeming $1,000 of 5% notes due 2019. The company issued $1,000 of 3.5% notes due 2027 and used the proceeds, with available cash, to redeem those notes; the redemption also involved $65 of premiums.
- First-half 2017 included $38 of I&D charges primarily related to precious-metal financing settlements. The effective tax rate rose to 28.8% in Q2 from 24.1%, and to 28.5% for the first half from 26.8%.
Liquidity, capital allocation and outlook
- Unused availability under credit facilities was $2,881, including $1,999 under the revolving credit facility and $882 under the receivables securitization facility. The company had $498 of commercial paper outstanding, no borrowings under the revolver, and reported compliance with its leverage covenant. The $2,500 revolving facility was extended to June 2022.
- During the first half, the company paid $704 in dividends ($1.75 per share) and repurchased approximately 7 million shares for about $579. Shareholders authorized repurchases of up to approximately 40 million shares through November 2018; about 35 million remained authorized as of July 25.
- Management said near-term global polyolefin demand should support strong operating rates and chain margins, while noting pressure on domestic spot ethylene margins and weak heavy-crude discounts. It expected no major planned maintenance for the remainder of 2017 and described fuel-market demand prospects as cautious. No quantified earnings guidance was provided.
Risks, contingencies and unusual items
- Key risks include volatile feedstock, energy and product prices; industry capacity and oversupply; operational outages and maintenance; environmental regulation; international, currency and tax exposure; and the ability to fund or refinance debt. The Houston refinery is the company’s sole refining operation.
- Accrued environmental remediation liabilities were $99; the company said additional losses may be reasonably possible but could not estimate a range. An Access Industries-related indemnity dispute remained subject to appeal, and management said it could not estimate a reasonably possible loss. The filing also describes a Texas environmental order with a $77,626 administrative penalty.
- The company uses derivatives to manage commodity, currency and interest-rate risks. First-half comprehensive income and accumulated other comprehensive items were affected by hedge and foreign-currency movements.
- Management reported effective disclosure controls as of June 30 and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Assess whether higher selling prices and volumes can sustain margins as feedstock, energy, and product spreads fluctuate.
- Review the causes and persistence of first-half working-capital cash use and the gap between operating cash flow and capital spending.
- Evaluate debt-service costs, commercial-paper reliance, covenant headroom, and the effects of the 2017 refinancing and associated charges.
- Track execution and returns from capital projects, turnarounds, and planned maintenance, particularly across I&D and Refining.
- Monitor environmental remediation exposure, the pending Access-related appeal, tax developments, and other contingencies for changes in estimated costs.
- Compare subsequent dividends and share repurchases with liquidity needs, investment spending, and debt priorities.