LyondellBasell Industries N.V. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited; amounts are in U.S. dollars unless noted.
Business context and results
LyondellBasell is a global chemicals and polymers manufacturer, refiner, and technology licensor. The quarter’s results included A. Schulman from its August 21 acquisition. Management cited strong North American polyethylene margins, robust demand in Intermediates and Derivatives, higher Technology licensing revenue, and improved refinery performance; European olefins and polyolefins margins weakened.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $10.155bn | $8.516bn | $30.128bn | $25.349bn |
| Operating income | $1.317bn | $1.332bn | $4.437bn | $4.119bn |
| Net income attributable to shareholders | $1.113bn | $1.057bn | $3.998bn | $2.985bn |
| Diluted EPS, continuing operations | $2.85 | $2.67 | $10.19 | $7.49 |
| Segment EBITDA | $1.722bn | $1.821bn | $5.631bn | $5.412bn |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $4.174bn | $3.724bn |
Revenue rose 19% in both comparison periods, driven mainly by higher average sales prices, which generally tracked higher crude oil prices; acquired A. Schulman added $269 million of Q3 revenue. Q3 operating income was nearly flat, while nine-month operating income rose 8%. Approximate operating margin was 13.0% in Q3 2018 versus 15.6% a year earlier, and 14.7% for nine months versus 16.3%. Net income increased despite lower Q3 operating income, aided in part by lower taxes.
Cash used in investing activities was $2.901bn for nine months, including $1.776bn net cash paid for A. Schulman and $1.407bn of capital expenditures. Financing activities used $2.242bn, including $1.176bn of dividends and $801m of share repurchases. Cash, cash equivalents, and restricted cash ended the period at $532m.
At September 30, cash and cash equivalents plus short-term investments totaled $1.465bn; the company also held $550m in tri-party repurchase agreements. Total debt, including current maturities, was $8.669bn. Unused credit-facility availability was $3.260bn. The company reported compliance with facility covenants. Current liabilities increased to $6.242bn from $4.777bn at year-end 2017, including $984m of current maturities of long-term debt.
Material changes and notable items
- A. Schulman acquisition: Completed August 21 for approximately $1.940bn in aggregate consideration. The preliminary allocation included $1.259bn of goodwill, which is not tax deductible. Acquisition and integration costs reduced APS results; management reported $49m of segment transaction and integration costs and $30m of acquisition-related transaction costs in SG&A. A. Schulman contributed $17m of EBITDA after acquisition and reported a $2m pretax loss for the period included.
- Taxes: Nine-month effective tax rate was 11.4%, versus 27.8% in 2017. A $346m non-cash benefit from an audit settlement of uncertain tax positions materially lowered the 2018 rate. The Q3 rate was 17.2%, versus 26.4%.
- Dividends and repurchases: Dividends paid were $3.00 per share for the first nine months, versus $2.65 a year earlier; the quarterly dividend increased to $1.00. The company spent $801m cash on share repurchases during the period and had approximately 51m shares remaining under authorization as of October 26.
- Investment and capital spending: The company broke ground on a planned $2.4bn PO/TBA plant in Texas, with completion anticipated in mid-2021. Nine-month capital expenditures increased to $1.407bn from $1.146bn.
- Segment divergence: Q3 EBITDA increased in O&P-Americas ($704m vs. $591m), I&D ($504m vs. $402m), Refining ($84m vs. $58m), and Technology ($98m vs. $47m); it declined in O&P-EAI ($262m vs. $599m) and APS ($70m vs. $124m).
Outlook, risks, and contingencies
Management gave no numerical earnings guidance. For Q4, it expected to advance U.S. growth projects and pursue further operational and business improvements in I&D, Refining, and Technology. It said feedstock flexibility, portfolio balance, and integration synergies from A. Schulman position the company to respond to energy and trade volatility.
- Results remain exposed to volatile feedstock and energy prices, commodity pricing, supply additions and oversupply, demand, foreign exchange, and the ability to pass cost increases through to customers.
- Unplanned outages, weather and other operating interruptions, and execution or cost overruns on growth projects could affect results. The Houston refinery is the company’s sole refining operation.
- Environmental remediation liabilities were $92m; management said additional losses were reasonably possible but could not estimate an amount or range. A proposed La Porte wastewater penalty of approximately $114,000 remained under negotiation. Other cited air-emissions matters had been settled.
- Unrecognized tax benefits were $262m at September 30; management said they could decrease by up to approximately $180m within 12 months. Further adjustments related to the Tax Act’s provisional accounting could be reported no later than Q4 2018.
- Management reported disclosure controls were effective. A. Schulman was excluded from the internal-control-over-financial-reporting assessment while integration assessment continued.
Most important facts for investors to verify
- Whether the $346m tax benefit is nonrecurring and how normalized tax rates affect future earnings.
- Whether European margin weakness and feedstock-cost pressures persist, and whether North American capacity additions affect margins.
- Progress, integration costs, realized synergies, and final purchase accounting for A. Schulman.
- Funding and execution of the $2.4bn PO/TBA project alongside dividends, buybacks, capital expenditures, and debt maturities.
- Cash-flow conversion, working-capital needs, liquidity availability, and the timing and resolution of environmental and tax contingencies.