LyondellBasell Industries N.V. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited U.S. GAAP results. The company manufactures chemicals and polymers, refines crude oil, and licenses process technologies.
Financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $8,516 | $7,365 | $25,349 | $21,436 |
| Operating income | $1,332 | $1,249 | $4,119 | $4,012 |
| Net income | $1,056 | $953 | $2,983 | $3,074 |
| Net income attributable to company shareholders | $1,057 | $952 | $2,985 | $3,073 |
| Diluted EPS, continuing operations | $2.67 | $2.31 | $7.49 | $7.24 |
| Operating margin | 15.6% | 17.0% | 16.3% | 18.7% |
| Effective tax rate | 26.4% | 25.4% | 27.8% | 26.4% |
Q3 revenue rose 16%, largely on higher average prices, increased volumes and favorable foreign exchange. Operating income increased 7%, while net income attributable to shareholders rose 11%. For the first nine months, revenue increased 18%, but net income declined 3%; lower equity investment income and higher interest and tax expense weighed on results. Operating margin declined in both comparisons as costs rose faster than revenue.
Segment EBITDA, the company’s primary segment performance measure, was $1.821 billion in Q3 versus $1.606 billion in Q3 2016, and $5.408 billion for nine months versus $5.196 billion. Q3 growth was led by O&P-EAI and Intermediates and Derivatives (I&D); O&P-Americas EBITDA declined. Refining improved from a loss to positive EBITDA. EBITDA is a non-GAAP measure.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $3.724 billion, compared with $3.893 billion in 2016. Capital expenditures were $1.146 billion versus $1.676 billion; operating cash flow less capital expenditures was approximately $2.578 billion versus $2.217 billion.
- At September 30, cash and cash equivalents were $1.204 billion, short-term investments $1.295 billion, and restricted cash $7 million. The company reported $2.499 billion of unrestricted cash and cash equivalents plus short-term investments, and $561 million in tri-party repurchase agreements.
- Total debt, including current maturities, was $8.915 billion; long-term debt was $8.531 billion and short-term debt $381 million. Cash and short-term investments exceeded total debt by approximately $3.2 billion, before other liquidity considerations.
- Unused availability under credit facilities was $2.955 billion. The company reported compliance with its leverage covenant; its revolving facility and receivables securitization facility each require a leverage ratio of 3.50 to 1.00 or less.
- Nine-month financing included $1.060 billion of dividends and $866 million of cash share repurchases. The quarterly dividend increased to $0.90 per share. Approximately 10 million shares were repurchased in the first nine months.
Material changes, outlook and risks
- Management cited strong global polyolefin demand, improving I&D performance and better refining results. Q3 Gulf Coast output was disrupted by Hurricane Harvey; company-wide production losses were partly offset by margin improvements.
- Management estimated Hurricane Harvey-related lost sales and expenses would reduce Q4 2017 results by approximately $100 million, primarily from the La Porte, Texas outage. October unplanned maintenance at the Wesseling, Germany cracker was expected to reduce O&P-EAI Q4 results by approximately $40 million.
- Management described firm olefin and polyolefin markets as supply chains restocked after Harvey, and expected strong global polyolefin demand. Intermediate and derivative products were viewed as well positioned entering Q4, while oxyfuels typically face seasonal weakness. Gulf Coast refining markets were described as having reset favorably after the hurricanes. No full-year earnings or EPS guidance is provided in the supplied filing text.
- In March, 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 of charges, including premiums and noncash hedge and debt-cost write-offs; nine-month interest expense increased to $396 million from $237 million.
- Unusual gains included $108 million from the sale of the Geosel joint-venture interest, $31 million from the Lake Charles site sale, and a $21 million noncash lease-obligation gain. These items benefited 2017 results, particularly O&P-EAI and other income.
- The company committed to a Texas PO/TBA plant with estimated cost of approximately $2.4 billion; construction was expected to begin in the second half of 2018, with completion anticipated in mid-2021.
- Key risks include volatile feedstock and energy prices, commodity-market competition and capacity additions, operating interruptions and weather events, environmental regulation, execution and cost risks for major projects, foreign exchange, tax-law changes, and legal and environmental contingencies. Environmental remediation liabilities were $99 million; the company said possible additional losses could not be estimated. An Access-related dispute remained subject to appeal, and the company could not estimate a reasonably possible loss range.
Important facts for investors to verify
- Whether the estimated $100 million Harvey impact and $40 million Wesseling outage impact were realized in Q4, and the duration of related production constraints.
- How much earnings growth depended on one-time asset-sale and other unusual gains, versus recurring segment margins and volumes.
- Cash generation, working-capital needs, capital spending and funding plans for the approximately $2.4 billion PO/TBA project alongside dividends and buybacks.
- Debt, covenant headroom and liquidity availability, including the commercial paper balance and receivables-facility borrowing-base limits.
- Developments in environmental remediation exposure, tax examinations and unrecognized tax benefits, and the pending Access-related litigation.