Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010, for LyondellBasell Industries N.V. (the "Successor"). The filing is unique due to the company's emergence from Chapter 11 bankruptcy proceedings on April 30, 2010. Consequently, the financial statements present two distinct entities: the "Predecessor" (LyondellBasell AF) for the period January 1 through April 30, 2010, and the "Successor" for the period May 1 through September 30, 2010. The Successor applied "fresh-start" accounting, revaluing assets and liabilities to fair value upon emergence.
Key Financial Metrics
Successor Period (May 1 – September 30, 2010):
- Revenue: $17.074 billion
- Operating Income: $1.410 billion
- Net Income: $814 million
- Net Income Attributable to Company: $816 million
- Operating Cash Flow: $2.229 billion
- Cash and Cash Equivalents (Sept 30, 2010): $4.832 billion
- Total Debt: $7.325 billion (Short-term: $518 million; Long-term: $6.799 million)
Predecessor Period (Jan 1 – April 30, 2010):
- Revenue: $13.467 billion
- Operating Income: $690 million
- Net Income: $8.504 billion (Driven primarily by a $13.6 billion gain on discharge of liabilities)
Combined 2010 YTD (Jan 1 – Sept 30):
- Total Revenue: $30.541 billion
- Total Net Income: $9.318 billion
Material Changes vs. Prior Period
Comparisons to the nine months ended September 30, 2009, are significantly impacted by the bankruptcy emergence and fresh-start accounting.
- Revenue Growth: Combined 2010 revenue ($30.5 billion) increased 39% compared to 2009 ($22.0 billion), driven by higher sales volumes and improved product margins across all segments.
- Profitability: Operating income for the Successor period ($1.41 billion) was significantly higher than the Predecessor period ($690 million) and the 2009 period ($367 million). This improvement is attributed to better market conditions, lower depreciation due to asset write-downs under fresh-start accounting, and higher refining margins.
- Debt Restructuring: Total debt decreased from $25.35 billion (Predecessor Dec 31, 2009) to $7.33 billion (Successor Sept 30, 2010). Approximately $18.3 billion of pre-petition debt was discharged. New capital structure includes $3.24 billion in Senior Secured 11% Notes and $2.625 billion in other senior secured notes/term loans.
- Inventory Adjustments: The Successor recorded non-cash charges of $365 million to adjust inventory to market value (lower of cost or market), primarily due to declines in crude oil prices post-emergence.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook: Management notes that global market conditions continued to improve in Q3 2010 compared to 2009, with higher demand in durable goods and automotive sectors. The company expects to use excess cash and operating cash flows to repay debt. No specific forward-looking financial guidance was provided in this filing.
Unusual Items:
- Reorganization Items: The Predecessor period included a $13.6 billion gain on the discharge of liabilities subject to compromise, partially offset by a $5.7 billion charge for fresh-start accounting adjustments. The Successor period incurred $21 million in reorganization costs (professional fees).
- Environmental Indemnity Dispute: A $64 million charge was recorded in Q3 2010 related to a change in estimate regarding an environmental indemnity dispute.
- Refinery Outage: The Refining segment in Q2 2010 was negatively impacted by a crude unit fire at the Houston refinery, resulting in lost production and $14 million in cash costs.
Risks and Contingencies:
- Compliance Investigations: The company disclosed ongoing investigations regarding potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) related to a project in Kazakhstan and potential sanctions violations related to business activities in Iran. The company has made voluntary disclosures to the DOJ and Treasury Department. The ultimate liability cannot be estimated.
- Legal Proceedings: An ongoing appeal regarding a $170 million verdict against the company by BASF Corporation (plus interest) remains pending.
- Tax Attributes: Due to the bankruptcy emergence, the company expects to lose most U.S. net operating loss carryforwards and tax basis in depreciable assets, which will likely result in significantly higher cash tax liabilities in future years.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the new credit facilities (U.S. ABL, Senior Term Loan), specifically the minimum fixed charge coverage ratio triggers if liquidity falls below specified thresholds.
- Compliance Outcomes: Monitor the status and potential penalties of the FCPA and Iran sanctions investigations disclosed in Note 16.
- Inventory Valuation: Assess the impact of volatile crude oil prices on future inventory write-downs, given the $365 million charge already taken in the Successor period.
- Tax Liability: Confirm the projected increase in future U.S. cash tax payments resulting from the elimination of tax attributes (NOLs) post-emergence.
- Segment Margins: Review the sustainability of the improved margins in the Olefins and Polyolefins segments, which benefited from competitor outages and strong demand.