LyondellBasell Industries N.V. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated financial statements; amounts in U.S. dollars unless noted. LyondellBasell manufactures chemicals and polymers, refines crude oil, and licenses polymer technologies.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $8.430 billion | $6.743 billion |
| Operating income | $1.210 billion | $1.360 billion |
| Operating margin | 14.4% | 20.2% |
| Net income | $797 million | $1.030 billion |
| Diluted EPS | $1.98 | $2.37 |
| Segment EBITDA | $1.617 billion | $1.807 billion |
| Operating cash flow | $613 million | $1.300 billion |
| Capital expenditures | $421 million | $527 million |
Revenue increased 25%, primarily from higher sales prices reflecting higher feedstock and crude-oil prices, with a smaller contribution from volume. Cost of sales rose 35%, outpacing revenue growth. Net income included an $8 million after-tax loss from discontinued operations. The effective tax rate was 28.1%, versus 29.5%.
Segments and material period-over-period changes
- O&P-Americas: EBITDA $723 million, down from $878 million. Lower polyolefin margins from higher feedstock costs and more balanced markets, plus turnaround impacts, outweighed volume gains. Q1 2017 included a $31 million site-sale gain; Q1 2016 included a $57 million gain on sale of the Argentine subsidiary.
- O&P-EAI: EBITDA $529 million, up from $509 million, reflecting stronger volumes and the absence of a prior-year $40 million inventory valuation charge; Q1 2016 also included a $21 million Argentine-sale gain. European polyethylene spreads weakened.
- I&D: EBITDA $339 million, up from $326 million. Improved intermediate-chemical and oxyfuels margins were partly offset by precious-metal financing settlement impacts; Q1 2016 included a $28 million inventory valuation charge.
- Refining: EBITDA was a loss of $30 million, versus $14 million income. Planned fluid catalytic cracker and crude-unit maintenance reduced yields, despite higher benchmark refining margins and higher heavy-crude processing rates.
- Technology: EBITDA $60 million, down from $83 million, mainly due to lower licensing revenue.
Cash, debt, and capital allocation
- Cash and cash equivalents were $485 million at March 31, down from $875 million at year-end. Short-term investments were $1.176 billion; management reported $1.661 billion of unrestricted cash and marketable securities, plus $497 million in repurchase agreements.
- Total debt, including current maturities, was $9.032 billion. Short-term debt was $611 million, including $550 million commercial paper; long-term debt was $8.419 billion.
- Unused availability under credit facilities totaled $2.827 billion. The company reported compliance with its leverage covenant, which requires a ratio of 3.50-to-1.00 or less.
- Operating cash flow fell to $613 million, primarily because of lower earnings and a $432 million cash use from increased receivables. Cash used for investing was $539 million and cash used for financing was $472 million; cash declined by $390 million during the quarter.
- The company issued $1 billion of 3.5% notes due 2027 and redeemed $1 billion of 5% notes due 2019. The redemption generated $113 million in charges: $65 million premiums, $44 million hedge-adjustment write-off, and $4 million debt-cost write-off.
- Dividends paid were $343 million ($0.85 per share). The company repurchased approximately 1.5 million shares for $139 million of purchase price; cash paid, including settlement timing, was $160 million.
Outlook, risks, and unusual items
Management said global olefin and polyolefin conditions remained favorable in April, with planned maintenance expected to be higher in Europe and Asia during Q2. It expected to benefit through 2017 from completed maintenance and expanded olefins capacity. No quantified earnings or revenue guidance was provided. Management intended to continue quarterly dividends, subject to cash balances and expected operating results, and said available resources were sufficient for anticipated requirements.
- Key risks include raw-material and energy price volatility, inability to pass cost increases through, capacity additions and oversupply, operational interruptions, environmental regulation, cyclicality, foreign-exchange exposure, legal and tax matters, and access to financing. The filing reported no material change in risk factors from the 2016 Form 10-K.
- Environmental remediation accruals were $94 million; the company said additional losses were reasonably possible but could not estimate a range.
- In April 2017, a court awarded $7.2 million to plaintiffs in the Weisfelner litigation; the ruling could be appealed. Related indemnity demands include $100 million in management fees and other unspecified amounts. The company could not estimate any reasonably possible loss.
- Executive tax audits relating to Section 409A were settled in early 2017 at an aggregate cost of $1.7 million.
- The filing identifies a proposed Texas environmental Agreed Order. Management did not expect claims on financial assurance instruments to have a material adverse effect.
Most important facts for investors to verify
- Whether margin pressure and turnaround-related weakness persist, particularly in O&P-Americas and Refining, and whether forecast maintenance benefits materialize.
- Whether operating cash flow recovers as receivables and working capital normalize; cash flow was substantially below the prior-year quarter.
- The ongoing effects of debt-redemption charges, debt mix, commercial paper, and covenant headroom.
- The outcome and potential financial exposure of the Weisfelner/Access dispute and environmental proceedings, including losses beyond recorded reserves.
- The company’s capital-allocation pace, including remaining share-repurchase authorization and dividend sustainability.