LyondellBasell Industries N.V. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. LyondellBasell manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses process technologies. The company reports five segments: O&P-Americas, O&P-EAI, Intermediates & Derivatives (I&D), Refining & Oxyfuels, and Technology. Interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $11.879 billion | $12.252 billion; down 3% |
| Operating income | $946 million | $1.065 billion; down 11% |
| Operating margin | 8.0% | 8.7% |
| Net income attributable to company | $600 million | $663 million; down 10% |
| Basic / diluted EPS | $1.04 / $1.04 | $1.16 / $1.15 |
| Net income margin | 5.1% | 5.4% |
| Operating cash flow | $921 million | $221 million |
| Capital expenditures | $228 million | $221 million |
Cash and cash equivalents were $1.670 billion at March 31, up from $1.065 billion at year-end 2011. Working capital was $7.152 billion (current assets of $12.098 billion less current liabilities of $4.946 billion). Total debt, including current maturities, was $4.026 billion; the filing reports $4.021 billion carrying value and $4.392 billion estimated fair value for short- and long-term debt. Cash dividends paid were $143 million, or $0.25 per share.
Material changes and segment results
- Revenue declined primarily because the Berre refinery ceased operations on January 4, 2012; excluding Berre, management cited higher volumes and prices.
- O&P-Americas operating income increased to $519 million from $421 million, benefiting from stronger ethylene margins and lower North American NGL feedstock costs.
- O&P-EAI operating income fell to $5 million from $179 million as European market weakness and higher raw-material costs pressured margins; results included a $22 million impairment charge for damage at the Wesseling LDPE plant.
- I&D operating income rose to $245 million from $234 million. Refining & Oxyfuels declined to $140 million from $164 million, and Technology declined to $38 million from $66 million.
- Equity investment income fell to $46 million from $58 million, mainly reflecting weaker results at several joint ventures.
- Interest expense decreased to $99 million from $163 million, largely following prior debt repayments. The effective tax rate increased to 33.5% from 28.5%, primarily due to a greater share of earnings in higher-tax jurisdictions and taxable foreign currency gains.
Operating cash flow improved year over year, supported by $244 million of income-tax refunds and $52 million of cash provided by the principal working-capital accounts; those accounts used $432 million in Q1 2011. Q1 2012 investing cash use was $185 million and financing cash use was $148 million. Cash flow from operations less capital expenditures was $693 million.
Outlook, financing, risks, and unusual items
- Management described continued economic uncertainty in Europe and uncertainty about China’s growth, alongside improved U.S. conditions. It expected U.S. production economics to continue favoring natural gas liquids over crude-based feedstocks in the near and medium term, assuming crude oil remained high relative to natural gas.
- Management said cash, operating cash flow, and credit facilities should provide sufficient resources for anticipated requirements. It intended to pay quarterly dividends, with a goal of increasing them over time, subject to cash balances and expected results.
- Subsequent to quarter-end, on April 9, the company issued $2 billion of 5% notes due 2019 and $1 billion of 5.75% notes due 2024. It tendered for $2.606 billion of 8% and 11% notes, paid $287 million in premiums and $38 million in issuance fees, and expected to use cash on hand to repurchase remaining notes. Amendments eliminated substantially all restrictive covenants on the remaining 8% and 11% notes. The company also expected to refinance its $2 billion U.S. asset-based revolver with an unsecured revolving facility in Q2 2012. These subsequent transactions are not reflected in the March 31 debt balance.
- Q1 included a $42 million benefit from liquidation of Berre refinery inventory and a $41 million charge from interim LIFO inventory liquidation in O&P-Americas, expected to be sustained through year-end. The Wesseling impairment was $22 million. Q1 net income was $599 million versus a $218 million net loss in Q4 2011; Q4 included $614 million of pretax charges, including debt repayment costs and Berre-related and other items.
- Environmental remediation liabilities were $132 million, up from $120 million at year-end. The company said additional losses were reasonably possible but could not estimate a range. It also disclosed unresolved indemnity demands related to Access affiliates and the Weisfelner litigation, and an ongoing investigation and voluntary disclosure to the U.S. Department of Justice concerning potential FCPA compliance issues; potential penalties could be material, but the company could not estimate a range.
- Market risks include volatile raw-material and energy prices, cyclical oversupply, foreign exchange, operating interruptions, and legal, environmental, regulatory, and financing risks. The Houston refinery is the company’s only North American refining operation. The filing reported no material change in risk factors or market-risk exposure versus the 2011 annual report.
Important facts for investors to verify
- Whether the April debt refinancing and planned repayment of remaining high-coupon notes were completed as expected, and the resulting debt, interest burden, and liquidity.
- Progress and costs associated with the Berre refinery closure, including the expected persistence of the $41 million LIFO charge and any remaining social-plan costs.
- Whether O&P-EAI margins recover, given Europe’s weak conditions and higher feedstock costs, and whether U.S. feedstock cost advantages persist.
- Developments in the FCPA investigation, environmental exposures, and Access-related indemnity and litigation claims, for which loss ranges were not estimable.
- Cash generation and dividend capacity, including the effect of working-capital swings, capital spending, and the planned refinancing of the U.S. revolver.