Lyondellbasell Industries N.V. quarterly report, Q3 FY2012

LyondellBasell Industries N.V. — Q3 2012 Form 10-Q

Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated results; amounts are U.S. dollars unless stated otherwise. The company manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses technology.

Key financial results

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Revenue	$11.273 billion	$12.516 billion	$34.255 billion	$37.202 billion
Operating income	$1.328 billion	$1.493 billion	$3.717 billion	$3.898 billion
Net income	$844 million	$895 million	$2.211 billion	$2.358 billion
Diluted EPS	$1.46	$1.51	$3.83	$4.12
Cash from operations	—	$3.477 billion	$2.778 billion
Capital expenditures	—	$727 million	$740 million

• Revenue fell 10% year over year in Q3 and 8% for the first nine months, reflecting lower sales volumes and prices. Operating income declined about 11% in Q3 and 5% year to date.
• Calculated operating margin was approximately 11.8% in Q3 2012 versus 11.9% in Q3 2011; for the nine-month periods it was approximately 10.9% versus 10.5%.
• Cash and cash equivalents were $3.527 billion at September 30, up from $1.065 billion at year-end 2011. Current assets were $13.395 billion and current liabilities $4.825 billion.
• Total debt, including current maturities, was $4.352 billion. Unused availability under credit and receivables facilities totaled $3.309 billion; no borrowings were outstanding under the new revolving or U.S. receivables facilities. The company reported $57 million of letters of credit under the revolving facility.
• Operating cash flow less reported capital expenditures was approximately $2.750 billion for the nine months, a derived measure.
• Interest expense was $71 million in Q3 versus $156 million a year earlier, but $581 million for the nine months versus $495 million, principally due to refinancing premiums and debt-cost write-offs in the second quarter.

Material changes and operating performance

• Olefins and Polyolefins—Americas operating income increased to $738 million in Q3 from $598 million, supported by lower-cost U.S. natural-gas-liquids feedstocks and stronger polyolefin results. Results included a $71 million non-cash reversal of a second-quarter inventory valuation adjustment.
• Olefins and Polyolefins—Europe, Asia and International operating income fell to $15 million from $130 million. Weak European demand, higher naphtha costs, lower margins and the Wesseling cracker turnaround weighed on results; nine-month results included a $22 million impairment charge.
• Intermediates and Derivatives operating income rose to $424 million from $368 million, with strong oxyfuels margins and volumes offsetting weaker propylene-oxide derivatives results.
• Refining operating income fell to $114 million from $390 million. Higher refining margins were offset by lower by-product spreads, weaker heavy/light crude economics and unplanned outages that reduced Q3 crude processing rates.
• The Berre refinery in France suspended operations in January 2012 and was classified as discontinued operations from Q2. Its remaining exit and disposal costs are expected over the next two years; employee payments are expected to be substantially complete by 2019.
• The company refinanced nearly $3 billion of higher-coupon notes in 2012, issuing $2 billion of 5% notes due 2019 and $1 billion of 5.75% notes due 2024, and repaid its 8% and 11% notes. It also established a five-year $2 billion revolving facility and a three-year $1 billion U.S. receivables securitization facility.

Outlook, commentary, risks and unusual items

• Management cited continuing economic uncertainty in Europe and slower growth in China, and said it expected these challenges to persist. Its stated priorities were safe, reliable operations, cost reductions—particularly in Europe—and disciplined growth. No quantified earnings or revenue guidance was provided.
• Management said U.S. results continued to benefit from abundant, lower-cost NGL feedstocks, while European raw-material costs rose faster than sales prices. It also cited stronger refining margins, partly offset by outages and depressed by-product spreads, and exceptionally strong oxyfuels results.
• Management said cash, operating cash flow and facility availability were sufficient for anticipated capital needs and obligations. It intended to continue quarterly dividends. After the quarter, the Supervisory Board authorized a proposed special dividend of $2.75 per share, approximately $1.6 billion, expected December 11, 2012, subject to Management Board approval and funded from cash on hand.
• Environmental remediation liabilities were $125 million. The company said additional losses may be reasonably possible but could not estimate an amount or range. A Harris County lawsuit concerning four Channelview emissions events alleges a maximum penalty of $200,000.
• The company is investigating a former Kazakhstan project payment for possible FCPA compliance issues, made a voluntary disclosure to the U.S. Department of Justice and is cooperating; it could not estimate potential liability. Access-affiliated entities also asserted indemnity and management-fee demands related to litigation and an earlier management agreement; the company disputed the claims and could not estimate a possible loss.
• In October 2012, the company and the IRS entered a closing agreement concluding that Section 7874 does not apply to the company. The filing also notes disputed indemnity obligations relating to contamination and the Berre assets.
• Other notable items include $294 million of premiums paid to retire higher-coupon debt; $18 million of debt-cost write-offs related to that repayment; a $17 million write-off following termination of the U.S. ABL facility; and $65 million of nine-month Berre discontinued-operations benefit from liquidation of LIFO inventory.
• Principal stated risks include commodity and energy price volatility, inability to pass costs through, weaker global demand, industry overcapacity, loss of the U.S. low-cost feedstock advantage, plant interruptions, regulatory and legal exposures, and international currency and counterparty risks.

Important facts for investors to verify

• Whether the proposed $2.75-per-share special dividend received final approval and its effect on cash, debt and liquidity after payment.
• Whether Q3’s segment trends persisted, especially weak European olefins performance, refining reliability and margins, and the sustainability of oxyfuels results.
• The extent to which reported earnings and cash flow reflect one-time items, including refinancing costs, inventory valuation changes, insurance recoveries and Berre inventory liquidation.
• Any developments in the FCPA investigation, Access-related claims, environmental remediation and disputed indemnity obligations, including any estimable exposure.
• The company’s ability to maintain cash generation and the U.S. feedstock cost advantage amid economic uncertainty, changing commodity spreads and potential industry capacity additions.