Lyondellbasell Industries N.V. quarterly report, Q3 FY2011

LyondellBasell Industries N.V. — Q3 2011 Form 10-Q

Reporting period: Three and nine months ended September 30, 2011. LyondellBasell manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses related technologies. The unaudited filing reports in millions of U.S. dollars unless noted.

Financial performance and position

Metric	Q3 2011	Q3 2010	First nine months 2011
Revenue	$13.297 billion	$10.302 billion	$39.591 billion
Operating income	$1.467 billion	$988 million	$3.797 billion
Net income attributable to the Company	$895 million	$474 million	$2.362 billion
Basic / diluted EPS	$1.56 / $1.51	$0.84 / $0.84	$4.14 / $4.12

• Q3 revenue rose 29% year over year, reflecting higher average selling prices and sales volumes. Operating income increased 48%; management attributed the improvement chiefly to refining, O&P-Americas and Intermediates and Derivatives.
• Calculated operating margin was approximately 11.0% in Q3 2011 versus 9.6% in Q3 2010. Higher raw-material costs, particularly crude oil and other hydrocarbons, also increased cost of sales.
• First-nine-month operating cash flow was $2.778 billion; capital expenditures were $761 million. Cash and cash equivalents increased to $5.609 billion from $4.222 billion at December 31, 2010. Restricted cash was an additional $292 million.
• At September 30, total debt was approximately $5.833 billion, compared with $6.082 billion at year-end 2010. Unrestricted cash exceeded total debt by approximately $224 million. Unused credit availability was $2.329 billion; the $2 billion U.S. ABL facility had no borrowings and $262 million of letters of credit outstanding.
• Total current assets were $16.718 billion and current liabilities $5.178 billion. The company paid $171 million in dividends during the first nine months ($0.30 per share) and contributed $222 million to pension plans.

Changes versus prior periods

• Q3 2011 revenue, operating income and attributable net income all increased from Q3 2010. Refining and Oxyfuels operating income rose to $454 million from $83 million; O&P-Americas increased to $599 million from $448 million; Intermediates and Derivatives increased to $259 million from $207 million. O&P-EAI fell to $144 million from $231 million, and Technology fell to $7 million from $38 million.
• For the first nine months, revenue increased 30% against the comparable combined 2010 periods, and management cited higher product prices and volumes. First-nine-month 2011 operating income was $3.797 billion; the combined 2010 periods reported $2.100 billion. Comparisons require caution: the company adopted fresh-start accounting upon emergence from Chapter 11 on April 30, 2010, so predecessor and successor results are not directly comparable. 2010 net income also included substantial reorganization gains.
• Interest expense was $155 million in Q3, down $27 million year over year; management cited debt repayments. First-nine-month 2011 interest expense was $495 million, down from $1.027 billion across the corresponding 2010 predecessor and successor periods.
• Cash from operations was higher than in the combined first nine months of 2010, while capital spending rose to $761 million from $492 million. Working capital used $594 million, mainly reflecting inventory and receivables increases.

Outlook, risks and unusual items

• No quantified earnings or revenue guidance is provided. Management said U.S. ethylene production economics should continue to favor natural gas liquids in the near to medium term if crude oil remains expensive relative to natural gas. It said cash, operating cash flow and credit facilities should meet anticipated capital needs and obligations.
• On October 20, 2011, the company announced a tender offer for specified 2017 and 2018 notes and a consent solicitation to release collateral and modify covenants. Completion was not assured. It also said it anticipated, subject to market and other conditions, returning up to $2.6 billion to shareholders through a special dividend, potentially funded with cash and new debt. A further $250 million voluntary pension contribution was expected in Q4.
• The Berre refinery sale process attracted no offers. The company announced consultations concerning a possible closure affecting about 370 employees; related costs and cash outlays could be material but were not yet estimable. It recorded a $20 million Berre-related impairment in the first nine months and a further $19 million Q3 impairment for abandoned R&D projects.
• Environmental remediation liabilities were $121 million, up from $107 million at year-end; additional reasonably possible losses could not be estimated. In the BASF matter, the judgment was reversed and remanded for a new trial; the estimated reasonably possible loss was $0–$135 million, excluding interest. Potential Access-related indemnity losses were not estimable.
• An investigation into a former Kazakhstan project identified potential Foreign Corrupt Practices Act concerns. The company voluntarily disclosed the matter and said the investigation was ongoing; potential penalties could be material and were not estimable. Separately, the U.S. Treasury Department closed its review of disclosed sanctioned-country activities with a cautionary letter and no civil penalty; the company decided to cease business with Iran, Syria and Sudan.
• A joint venture was in default on financing following a start-up delay; negotiations were ongoing, and the company reported no evidence then that resolution would fail or materially affect its operations or liquidity.
• Controls: Management concluded disclosure controls were not effective at September 30 because of a previously reported material weakness related to tax provision controls. Remediation measures were underway but the weakness was not yet remediated. Management nevertheless stated that additional procedures supported fair presentation of the financial statements.
• Key operating risks include cyclical chemical and refining markets, volatile commodity and energy costs, inability to pass through cost increases, facility outages, regulation, foreign exchange, and legal and environmental proceedings.

Important facts for investors to verify

• Whether the note tender and consent solicitation were completed, and the terms and financing of any special dividend.
• Progress and estimated costs of the possible Berre closure, and any impairment or restructuring charges that follow.
• Developments in the Kazakhstan FCPA investigation, Access claims, BASF retrial and environmental exposures.
• Whether the tax-control material weakness was subsequently remediated, and the effect of reduced U.S. tax attributes on future cash taxes.
• Underlying earnings and cash generation after separating fresh-start accounting effects, 2010 reorganization items, working-capital movements and one-time gains or charges.