LyondellBasell Industries N.V. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless otherwise stated. Amounts are in millions of dollars, except per-share data.
Business context
LyondellBasell is a global chemicals and polymers manufacturer, refiner, producer of gasoline blending components, and process-technology developer and licensor. Its five reporting segments are O&P-Americas, O&P-EAI, Intermediates and Derivatives (I&D), Refining, and Technology.
Financial performance and liquidity
- Revenue: $10,669, down 9% from $11,734. The company attributed most of the decline to lower sales volumes, including effects from weak European conditions, refinery and facility turnarounds, and a third-party feedstock outage.
- Operating income: $1,267, up 35% from $940. Operating margin was approximately 11.9%, compared with 8.0% in Q1 2012. Lower feedstock costs and stronger olefins margins were important contributors.
- Net income: $900, versus $599; income from continuing operations was $906, versus $594. Net income attributable to Company shareholders was $901. Basic and diluted EPS were $1.56 and $1.55, respectively, compared with $1.04 for both measures in Q1 2012.
- Cash flow: Operating cash flow was $799, down from $913. Capital expenditures were $391, up from $228; cash used in investing activities was $408. Dividends paid were $229, versus $143, and cash used in financing activities was $234.
- Cash and liquidity: Cash and cash equivalents were $2,879 at March 31, up from $2,732 at year-end 2012. The company reported $3,351 of unused credit-facility availability and total debt, including current maturities, of $4,423.
- Debt and balance sheet: Long-term debt was $4,307 and short-term debt was $115. Total assets were $24,677 and total equity was $11,680. Current assets were $12,655 and current liabilities were $5,107.
- Tax and other items: The effective tax rate fell to 28.3% from 33.6%. Interest expense declined to $71 from $99, primarily reflecting 2012 debt refinancing. Foreign-currency translation reduced other comprehensive income by $191, contributing to a $188 total other comprehensive loss.
Material changes and segment results
- O&P-Americas: Operating income rose to $821 from $519, mainly on stronger olefins margins and higher olefins sales volumes, supported by low-cost U.S. natural gas liquids. About 87% of U.S. ethylene production used NGLs, versus 82% a year earlier.
- O&P-EAI: Operating income increased to $93 from $3, benefiting from improved olefins margins and the absence of the prior-year $22 impairment charge. Management said European demand and economic conditions remained weak.
- I&D: Operating income declined to $323 from $370. Lower results in oxyfuels, PO and derivatives, and EO and derivatives were partly offset by improved styrene results.
- Refining: The segment recorded an operating loss of $17, versus income of $10. Planned and unplanned Houston refinery maintenance reduced heavy-crude processing rates to 173,000 barrels per day from 259,000; higher refining margins partly offset the impact. Higher renewable identification number (RIN) costs also weighed on results.
- Technology: Operating income increased to $50 from $38, with higher licensing revenue partly offset by lower catalyst sales.
- Q1 2012 comparisons included a $41 charge related to interim LIFO inventory liquidation in O&P-Americas and a $22 impairment charge in O&P-EAI. The Berre refinery was reported as discontinued operations; it contributed a $6 loss in Q1 2013 versus $5 income in Q1 2012, which included a $42 LIFO inventory liquidation benefit.
Outlook, commentary, and risks
- Management expected business conditions similar to Q1 2013 to continue at least through Q2. It expected O&P-Americas and I&D to continue benefiting from shale gas developments, while O&P-EAI conditions were expected to remain challenging.
- Although refining margins were below Q1 levels at the time of the filing, management expected Houston results to benefit from a return to full crude processing after maintenance. No specific earnings or revenue guidance was provided.
- The company reported commencing construction of an ethylene expansion at La Porte, Texas, and restarting a methanol plant in Channelview, Texas. It also reported an April amendment to its European receivables securitization facility, reducing pricing and extending maturity to April 2016.
- Key risks include commodity and energy price volatility, dependence on low-cost U.S. natural gas liquids, industry capacity and oversupply, operational interruptions, regulation, weak global and European demand, foreign-exchange movements, and litigation and environmental exposures.
- Contingencies: Environmental remediation liabilities were $123; management said additional losses were reasonably possible but could not estimate a range. Access-affiliate indemnity demands, including a demand for $100 of management fees, remain disputed; the company could not estimate potential losses. The company also disclosed an ongoing investigation and voluntary disclosure to the U.S. Department of Justice concerning potential FCPA compliance issues tied to a former Kazakhstan project; the outcome and any penalty could not be estimated.
- The filing said the company had received a $108 refund of Italian VAT receivables in April and expected to collect the remaining amounts. It also noted Berre closure-related payments, with exit costs expected over two years and affected-employee payments substantially complete by 2019.
Important facts for investors to verify
- Whether strong U.S. olefins margins and low-cost NGL feedstocks persist, particularly amid announced U.S. capacity expansions.
- Houston refinery return-to-service timing, throughput, refining margins, and the effect of RIN costs.
- European demand and margins, and whether the Q1 improvement in O&P-EAI is sustainable.
- Capital-spending requirements and cash conversion, given higher capex and working-capital cash use in Q1.
- Developments in the environmental, Access-affiliate, and FCPA matters, for which potential additional losses or penalties were not estimable.
- Collection of remaining Italian VAT receivables and the financial effects of the Berre refinery closure.