LyondellBasell Industries N.V. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited U.S. GAAP interim statements. The company manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses process technologies. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $11,248 | $13,306 | $22,982 | $24,686 |
| Operating income | $1,449 | $1,310 | $2,389 | $2,405 |
| Income from continuing operations | $768 | $851 | $1,362 | $1,533 |
| Net income | $768 | $803 | $1,367 | $1,463 |
| Diluted EPS, continuing operations | $1.33 | $1.46 | $2.36 | $2.68 |
- Revenue fell 15% in Q2 and 7% for the half, reflecting lower average prices and sales volumes. Operating income rose 11% in Q2 but was nearly flat for the half.
- Derived operating margin was approximately 12.9% in Q2 2012 versus 9.8% in Q2 2011, and 10.4% versus 9.7% for the six-month periods. Higher Q2 operating income did not translate into higher continuing income, largely because of debt-refinancing costs.
- Q2 interest expense was $411, up $235 year over year; the first-half amount was $510, up $171. Q2 included $294 of debt redemption premiums and $35 of debt issuance cost write-offs.
- Operating cash flow was $1,430 for the first half, versus $1,247 a year earlier. Capital expenditures were $461; operating cash flow less capital expenditures was approximately $969. Working capital used $880 of cash, principally from increases in receivables and inventories and lower payables.
- At June 30, cash was $1,950, total debt was approximately $4,353, and equity was $11,543. Current assets of $12,366 compared with current liabilities of $4,244. The company reported $2,468 of unused credit-facility availability.
Segments and material changes
- O&P-Americas: Q2 operating income increased to $700 from $508; first-half income rose to $1,219 from $929. Low-cost U.S. natural gas liquids supported ethylene margins; approximately 85% of ethylene production used NGLs. Q2 included a $71 inventory valuation charge and a $29 Hurricane Ike insurance benefit.
- O&P-EAI: Q2 operating income was $203, unchanged year over year; first-half income declined to $206 from $378. European demand and volumes were weak. The Q2 margin benefit from falling naphtha costs relative to sales pricing was described as temporary and not expected to continue into Q3. A $22 impairment related primarily to Wesseling plant damage was recorded in the first half.
- I&D: Operating income increased to $390 in Q2 and $760 for the half, from $327 and $603, respectively. Higher oxyfuels margins contributed; Q2 included an $18 insurance benefit.
- Refining: Operating income fell to $124 in Q2 from $258 and to $134 for the half from $416, mainly on weaker refining margins and by-product spreads. Houston operations ran near capacity in Q2; the period included a $53 insurance benefit.
- Operations at the underperforming Berre refinery were suspended in January 2012 and classified as discontinued operations from Q2, with prior periods reclassified. First-half discontinued operations recorded $5 of income after tax, including inventory-liquidation benefits; the Q2 result was approximately zero.
- Comprehensive income attributable to the company fell to $399 in Q2 from $930, primarily reflecting foreign-currency translation losses, including a $376 net translation loss in Q2.
Liquidity, financing, outlook and risks
- In April, the company issued $2 billion of 5% notes due 2019 and $1 billion of 5.75% notes due 2024, and repaid the remaining 8% and 11% notes, paying $294 in premiums. In May, it replaced the U.S. asset-based facility with a five-year, $2 billion revolving facility; there were no borrowings and $57 of letters of credit outstanding at quarter-end. Total debt was modestly higher than at December 31, 2011.
- Management cited continuing uncertainty from the Eurozone crisis and reduced China growth prospects, while emphasizing cost reductions, reliable operations and disciplined growth. It expected challenges from global economic conditions; it gave no specific earnings guidance in the provided filing text. Management said cash, operating cash flow and available facilities were sufficient for anticipated requirements and intended to pay quarterly dividends, with the goal of increasing them over time.
- Key business risks include volatile raw-material and energy costs, weak demand or industry oversupply, dependence on low-cost U.S. NGLs, operating interruptions, foreign-exchange movements, and access to financing. The Houston refinery is the company’s only refining operation.
- Environmental remediation liabilities were $124; management said additional losses were reasonably possible but could not estimate a range. The company also disclosed unresolved Access-related indemnity and fee demands and an ongoing voluntary disclosure and investigation concerning possible FCPA compliance issues; potential losses were not estimable. Indemnity disputes involving contamination and the Berre assets were also noted.
- The Berre closure is expected to generate exit costs over about two years and employee payments substantially through 2019. A Ferrara, Italy flaring proceeding included approximately $101,000 in fines paid and approximately $73,000 in additional fines sought.
Investor verification priorities
- Reconcile the reported debt balance, refinancing cash flows, premiums and interest expense, and assess the resulting debt-service burden.
- Assess the sustainability of operating cash flow given the $880 working-capital use and the composition of first-half cash generation.
- Verify whether U.S. NGL cost advantages persist and whether weak European demand and the temporary O&P-EAI margin benefit affect subsequent results.
- Track Berre closure and severance costs, environmental exposures, the Access-related claims, and the FCPA investigation as their outcomes are uncertain.
- Separate recurring operating performance from insurance benefits, the $71 inventory valuation adjustment, the Wesseling impairment and the debt-refinancing charges.