LyondellBasell Industries N.V. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone Q4 report; quarterly figures below provide Q4 context. Amounts are U.S. dollars unless noted.
Business context
Global chemicals, polymers and refining company operating through five segments: Olefins and Polyolefins—Americas (O&P—Americas), O&P—Europe, Asia, International (O&P—EAI), Intermediates and Derivatives (I&D), Refining, and Technology. Results are sensitive to product supply and demand, feedstock and energy prices, operating reliability and commodity margins.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $34.484 billion | $29.183 billion |
| Operating income | $5.460 billion | $5.060 billion |
| Net income | $4.877 billion | $3.837 billion |
| Diluted EPS, continuing operations | $12.28 | $9.15 |
| Segment EBITDA | $7.134 billion | $6.602 billion |
| Cash from operating activities | $5.206 billion | $5.606 billion |
| Capital expenditures | $1.547 billion | $2.243 billion |
| Year-end total debt, including current maturities | $8.619 billion | $8.981 billion |
| Year-end cash and short-term investments | $2.830 billion | $2.022 billion |
- Revenue increased 18% year over year, primarily from higher average sales prices; higher volumes contributed 2% and favorable foreign exchange 1%.
- Operating margin was approximately 15.8% versus 17.3%; segment EBITDA margin was approximately 20.7% versus 22.6%. Net income benefited materially from a non-cash tax benefit.
- Net cash from operations less capital expenditures was approximately $3.659 billion, compared with $3.363 billion in 2016. Working capital used $593 million of cash in 2017.
- Working capital was $4.861 billion. In addition to $2.830 billion of cash and short-term investments, the company held $570 million in tri-party repurchase agreements. Unused availability under credit and receivables facilities totaled $3.4 billion; neither facility had borrowings outstanding at year-end.
- Dividends declared were $3.55 per share, up from $3.33. The company repurchased about 10.0 million shares for $845 million during 2017.
Material changes versus 2016
- Operating income rose $400 million. O&P—Americas benefited from higher olefins volumes following the Corpus Christi expansion; O&P—EAI and I&D improved on stronger margins and volumes; Refining improved with higher throughput and industry margins. Technology EBITDA declined on lower licensing revenue.
- Cost of sales rose 21%, largely reflecting higher feedstock and energy costs. Operating income and EBITDA remained below 2015 levels.
- Cash from operations declined $400 million, while capital spending fell $696 million, mainly as the Corpus Christi ethylene expansion was completed.
- The effective tax rate fell to 10.9% from 26.5%, including an $819 million non-cash benefit from remeasurement of U.S. deferred tax liabilities under the Tax Cuts and Jobs Act. Excluding discrete items, management expected an approximately 21% effective tax rate for 2018, subject to the mix of U.S. and non-U.S. earnings and further tax-law analysis.
- In March 2017, the company issued $1.0 billion of 3.5% notes due 2027 and redeemed $1.0 billion of 5% notes due 2019. The redemption generated $113 million of reported interest expense charges.
Q4, outlook, risks and unusual items
- Q4 2017 revenue was $9.135 billion versus $7.747 billion in Q4 2016; net income was $1.894 billion versus $763 million, and diluted EPS was $4.79 versus $1.87. Q4 2017 continuing-operations income included the $819 million non-cash Tax Act benefit.
- Management described the 2018 market outlook as improved, citing strong global demand and delayed industry capacity additions. It expected approximately $2.4 billion of 2018 capital expenditures, including investment in the Hyperzone polyethylene and Texas PO/TBA projects.
- Management estimated that January 2018 Gulf Coast cold-weather disruptions would reduce EBITDA by about $45 million. Planned Channelview cracker maintenance was expected to reduce O&P—Americas EBITDA by about $50 million in each of Q1 and Q2 2018. I&D was expected to benefit from continued strength in oxyfuels; management also targeted further improvement in Houston refinery reliability and profitability.
- The Texas PO/TBA project was estimated at $2.4 billion, with 1 billion pounds of PO and 2.2 billion pounds of TBA capacity; construction was expected to begin in H2 2018 and completion in mid-2021. The Hyperzone HDPE plant was under construction.
- After year-end, the company agreed to acquire A. Schulman for stated total consideration of $2.25 billion, plus assumption of debt and certain obligations. The deal was subject to customary conditions and expected to close in H2 2018; the company said it planned to use cash on hand.
- Key risks include volatile feedstock and energy prices and limited ability to pass through cost increases; cyclicality, new capacity and competitive pricing; outages and severe weather (including at the company’s sole refinery); project cost or schedule overruns; environmental and regulatory liabilities; currency and tax changes; and execution and integration risks for the Schulman acquisition.
- Environmental remediation liabilities were $102 million at year-end; the company said additional losses were reasonably possible but could not be estimated. Several environmental enforcement matters remained pending, including proposed penalties and orders. The filing also describes an unresolved Access-related indemnity and management-fee dispute; management disputed the claims and said it would defend its position.
Important facts for investors to verify
- How much of 2017 earnings growth reflects recurring operating performance versus the $819 million tax benefit and asset-sale or other gains.
- Whether higher feedstock and energy costs, new industry capacity, and changing product spreads affect margins and cash generation.
- Actual 2018 capital spending, project costs and schedules, and the realized impacts of cold weather and planned turnarounds.
- The financing, closing conditions, assumed obligations and integration progress for the A. Schulman acquisition.
- Debt maturities, liquidity and covenant headroom, alongside the company’s dividend and share-repurchase commitments.
- Developments in environmental proceedings, remediation estimates, pension funding (the pension deficit was $903 million), and tax positions, including the provisional Tax Act accounting.