Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
LYB > SEC Filings for LYB > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for LYONDELLBASELL INDUSTRIES N.V. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LYONDELLBASELL INDUSTRIES N.V.


26-Oct-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

This discussion and analysis should be read in conjunction with the information contained in our Consolidated Financial Statements and the accompanying notes elsewhere in this report. When we use the terms "we," "us," "our" or similar words in this discussion, unless the context otherwise requires, we are referring to LyondellBasell Industries N.V. and its consolidated subsidiaries.

In addition to comparisons of current operating results with the same period in the prior year, we have included trailing quarter comparisons of our third quarter 2012 operating results to our results in the second quarter 2012. Because many of our businesses are highly cyclical and also subject to some less significant seasonal effects, trailing quarter comparisons may offer important insight into current business direction.

References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by IHS, Inc. However, references to industry benchmarks for refining and oxyfuels market margins are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies, and crude oil and natural gas benchmark price references are to Bloomberg.

OVERVIEW

Our ability to maintain strong performance in a volatile economic environment, including continued uncertainties caused by recessionary conditions in Europe and the reduced growth outlook for China, is reflected in our results of operations in the third quarter and first nine months of 2012. We continue to focus on safe, reliable operations, cost reductions, particularly in Europe, and disciplined growth. We believe this strategy allows us to generate solid results even while facing challenges due to external factors. Significant items that affected our third quarter 2012 results include:

The continued benefit in the U.S. from an abundance of low cost, natural gas liquids ("NGLs") supply;

Increasing raw materials costs in Europe, which rose more rapidly than our sales prices, reversing the second quarter benefit to olefins margins from falling prices in that region;

Improved refining margins benefitting our refining results although the positive impact was partially eroded by depressed by-product spreads relative to the price of crude oil and reduced crude processing rates due to unplanned outages; and

A higher butane to gasoline spread and increased sales volumes that led to exceptionally strong oxyfuels results.

Other noteworthy items during the first nine months of 2012, include the following:

LyondellBasell N.V. was included in the Standard & Poor's 500 Index following the close of market on September 4, 2012;

We entered into a $1 billion U. S. accounts receivable securitization facility in September 2012;

We completed the refinancing of nearly $3 billion of our debt with new debt issuances of unsecured senior notes, significantly improving our debt structure and replaced our $2 billion U.S. ABL Facility with an unsecured revolving credit facility during the first six months of 2012;

We increased our interim dividend from $0.25 to $0.40 in the second quarter 2012; and


Table of Contents
We ceased the under-performing operations at the Berre refinery in early January 2012.

We expect that we will continue to face challenges related to economic uncertainties in Europe and the rest of the world in the foreseeable future. Our performance is significantly influenced by global economic conditions generally and their impact on demand for our products. Additionally, raw material and energy prices significantly impact our operating results. Finally, industry-specific issues, such as our own production capacity and capacity within the chemicals and refining industries, can have material effects on our results of operations.

Results of operations for the periods discussed are presented in the table below.

                                           Three Months Ended                         Nine Months Ended
                                              September 30,                             September 30,
Millions of dollars                     2012                 2011                 2012                 2011
Sales and other operating
revenues                           $      11,273        $      12,516        $      34,255        $      37,202
Cost of sales                              9,670               10,734               29,763               32,475
Selling, general and
administrative expenses                      236                  236                  660                  687
Research and development
expenses                                      39                   53                  115                  142

Operating income                           1,328                1,493                3,717                3,898
Interest expense                             (71)                (156)                (581)                (495)
Interest income                                4                   10                   10                   30
Other income (expense), net                   (7)                  19                  - -                   16
Income from equity investments                32                   52                  105                  183
Reorganization items                         - -                  - -                    4                  (30)
Provision for income taxes                   435                  506                1,042                1,157

Income from continuing
operations                                   851                  912                2,213                2,445
Loss from discontinued
operations, net of tax                        (7)                 (17)                  (2)                 (87)

Net income                         $         844        $         895        $       2,211        $       2,358

RESULTS OF OPERATIONS

Revenues-Revenues decreased by $1,243 million, or 10%, in the third quarter 2012 compared to the third quarter 2011 and by $2,947 million, or 8%, in the first nine months of 2012 compared to the first nine months of 2011. Lower average sales volumes were responsible for revenue decreases of 8% in the third quarter 2012 and 6% in the first nine months of 2012, respectively, while lower average product prices contributed 2% to the revenue deceases in each of the third quarter and first nine months of 2012. Sales volumes averaged lower in the third quarter and first nine months of 2012, primarily in European olefins and polyolefins and in refining. Weak economic conditions in Europe, turnaround activity at our cracker in Wesseling, Germany, and the resale of crude oil in 2011 to take advantage of favorable crude purchases all contributed to the reduced level of sales volumes in the third quarter and first nine months of 2012.

Cost of Sales-Cost of sales in the third quarter and first nine months of 2012 decreased by $1,064 million and $2,712 million, respectively, compared to the corresponding periods in 2011. The lower prices of NGL-based raw materials, particularly ethane, used in North American olefins and the lower prices of ethylene and propylene used in North American polyolefins contributed to the decreases in cost of sales in the third quarter and first nine months of 2012. Falling raw material costs, including butane, methanol and ethanol, used in oxyfuels also benefited costs of sales in the I&D segment. These lower costs were partially offset by higher naphtha feedstock costs in the O&P-EAI segment and higher crude oil prices in the Refining segment.


Table of Contents

In the third quarter 2012, cost of sales include a $71 million non-cash benefit reversing, due to the recovery of market price, the $71 million lower of cost or market inventory valuation adjustment recorded in the second quarter 2012. Cost of sales in the first nine months of 2012 includes a $100 million benefit related to an insurance settlement related to Hurricane Ike.

R&D Expenses-Research and development expenses in the third quarter and first nine months of 2012 decreased $14 million and $27 million, respectively, compared to the third quarter and first nine months of 2011. The higher R&D expenses in the 2011 periods were a result of a $19 million charge related to impairments, which included $17 million for the impairment of an R&D project in Europe during the third quarter 2011 and a $16 million charge related to employee severance and asset retirement obligations in the second quarter 2011 associated with the relocation of an R&D facility.

Operating Income-The decrease in our operating income in the third quarter and first nine months of 2012 reflects the effect of lower results for our O&P-EAI and Refining segments, which were offset in part by higher results for our I&D and O&P-Americas segments. Our Technology segment results were higher in the third quarter 2012 and relatively unchanged in the first nine months of 2012 compared to the same periods in 2011. Results for each of our business segments are reviewed further in the "Segment Analysis" section below.

Interest Expense-Interest expense decreased $85 million in the third quarter 2012 and increased $86 million in the first nine months of 2012 compared to the third quarter and first nine months of 2011, respectively. The lower interest expense in the third quarter 2012 compared to third quarter 2011 was a result of the refinancing of notes bearing interest rates of 8% and 11% per annum with lower coupon notes.

The benefit of the lower interest bearing notes was more than offset in the first nine months of 2012 by premiums and the write-off of unamortized debt issuance costs related to refinancing activity in the second quarter of 2012. We paid premiums totaling $294 million and wrote off unamortized debt issuance costs totaling $18 million associated with the repayment of our 8% and 11% notes in the second quarter of 2012. Additionally, we wrote off $17 million of capitalized debt issuance costs as a result of the termination of the ABL credit facility in May 2012.

Income from Equity Investments-Income from equity investments decreased $20 million and $78 million in the third quarter and first nine months of 2012, compared to the third quarter and first nine months of 2011. These decreases were due to the lower operating results of our joint ventures in the Middle East and Asia, which were driven by lower average sales prices and in the first nine months of 2012 by higher raw material costs and unplanned outages.

Income Tax-The effective tax rate for the third quarter of 2012 was 33.8% compared with 35.7% for the third quarter of 2011. The effective tax rate for the first nine months of 2012 was 32.0% compared with 32.1% for the first nine months of 2011. Our effective tax rate fluctuates based on, among other factors, pretax income in countries with varying statutory tax rates, nontaxable income related to joint venture equity earnings, notional royalties, the U.S. domestic production activity deduction, changes in valuation allowance and changes in unrecognized tax benefits. Compared with the third quarter of 2011, the effective tax rate for the third quarter of 2012 was lower due to valuation allowance releases, partially offset with a reduction of unrecognized tax benefits in the prior year. The effective tax rate for the first nine months of 2012 was comparable with the effective tax rate for the first nine months of 2011.


Table of Contents

Income from Continuing Operations-The following table summarizes the major components contributing to income from continuing operations:

                                                     Three Months Ended                    Nine Months Ended
                                                        September 30,                        September 30,
Millions of dollars                                2012               2011              2012               2011
Operating income                              $       1,328      $       1,493      $      3,717      $       3,898
Interest expense, net                                   (67)              (146)             (571)              (465)
Other income (expense), net                              (7)                19               - -                 16
Income from equity investments                           32                 52               105                183
Reorganization items                                    - -                - -                 4                (30)
Provision for income taxes                              435                506             1,042              1,157

Income from continuing operations             $         851      $         912      $      2,213      $       2,445

Loss from Discontinued Operations, Net of Tax-The improvement in the results of our discontinued operations in the third quarter and first nine months of 2012, compared to the corresponding periods in 2011, primarily reflect pretax benefits of $16 million and $65 million, respectively, related to the liquidation of product inventory following the suspension of operations at the Berre refinery in early January 2012.

Comprehensive Income-Comprehensive income increased by $646 million in the third quarter 2012 and decreased by $118 million in the first nine months of 2012 compared to the third quarter and first nine months of 2011, respectively. Currency translation adjustments were the predominant factor contributing to the third quarter 2012 increase in comprehensive income. The decrease in comprehensive income in the first nine months of 2012 was largely due to the decrease in net income, which was offset to a small degree by the effect of currency translation.

The predominant local currency of our operations outside of the United States is the Euro. The value of the U.S. dollar relative to the Euro increased in the third quarter and first nine months of 2012 but decreased in the corresponding periods of 2011, resulting in losses in 2012 and gains in 2011 as reflected in the Statements of Comprehensive Income.

Third Quarter 2012 versus Second Quarter 2012-Income from continuing operations was $851 million in the third quarter 2012 compared to $768 million in the second quarter 2012. Third quarter operating results include a $71 million pretax benefit related to the reversal of the second quarter lower of cost or market inventory valuation adjustment of the same amount due to market price recovery in the third quarter. Second quarter operating results benefited from a pretax insurance settlement related to Hurricane Ike of $100 million.

Apart from these items, the higher income from continuing operations in the third quarter reflected lower interest expense offset to a large degree by lower operating results and a higher third quarter provision for income taxes. The lower interest expense is due to the pretax charges of $329 million in the second quarter related to refinancing activities. The lower operating results in the third quarter reflect the negative effect of lower olefins margins on the results of our O&P-Americas and O&P-EAI segments. These negative impacts were partially offset by improvements in our I&D & Refining segments, which reflected the strong performance of our oxyfuels business and higher refining margins, respectively. Results for our Technology segment were relatively unchanged between the two periods.

The increase in operating results provided for a provision for income taxes of $435 million in the third quarter compared to a $306 million tax expense in the second quarter. The $129 million increase in tax expense was primarily attributable to higher earnings in jurisdictions with higher statutory tax rates coupled with discrete tax expense related to gains attributable to foreign exchange remeasurement.


Table of Contents

Segment Analysis

Our continuing operations are divided into five reportable segments:
O&P-Americas; O&P-EAI; I&D; Refining; and Technology. In the second quarter 2012, the operations of our Berre refinery in France were reported as discontinued operations for all periods presented. In addition, our oxyfuels business, which was previously managed in conjunction with our refining operations and included in our Refining segment, was included in our I&D segment beginning in the second quarter 2012. Accordingly, all comparable periods presented have been revised to reflect the results of our oxyfuels business in our I&D segment. For additional information related to the Berre refinery and the realignment of the oxyfuels business, see Footnotes 3 and 17 to the Consolidated Financial Statements.

                                                     Three Months Ended                     Nine Months Ended
                                                        September 30,                         September 30,
Millions of dollars                                2012               2011               2012               2011
Sales and other operating revenues:
O&P - Americas segment                        $       3,217      $       3,875      $       9,849      $      11,457
O&P - EAI segment                                     3,448              3,954             10,921             12,234
I&D segment                                           2,637              2,491              7,407              7,358
Refining segment                                      3,272              3,955              9,971             10,818
Technology segment                                      124                129                358                394
Other, including intersegment eliminations           (1,425)            (1,888)            (4,251)            (5,059)

Total                                         $      11,273      $      12,516      $      34,255      $      37,202


Operating income (loss):
O&P - Americas segment                        $         738      $         598      $       1,957      $       1,527
O&P - EAI segment                                        15                130                221                508
I&D segment                                             424                368              1,184                971
Refining segment                                        114                390                248                806
Technology segment                                       31                  7                 99                 96
Other, including intersegment eliminations                6                - -                  8                (10)

Total                                         $       1,328      $       1,493      $       3,717      $       3,898


Income (loss) from equity investments:
O&P - Americas segment                        $           7      $           7      $          17      $          18
O&P - EAI segment                                        23                 38                 92                150
I&D segment                                               2                  7                 (4)                15

Total                                         $          32      $          52      $         105      $         183

Olefins and Polyolefins-Americas Segment

Overview-The U.S. ethylene industry continues to benefit from processing NGLs. Ethylene produced from NGLs in North America is currently lower in cost compared to that produced from crude oil-based liquids, which is the predominant feedstock used in the rest of the world.

Ethylene margins continued to be strong in the first nine months of 2012 although third quarter 2012 margins declined from very strong second quarter levels. The continued benefit of lower NGL-based raw material prices was substantially offset in the third quarter and partially offset in the first nine months of 2012 by lower prices for ethylene and ethylene co-products compared to the same periods in 2011. Olefins sales volumes reflect stronger third quarter 2012 demand for ethylene and polyethylene. Polypropylene results reflect higher margins in both 2012 periods and higher sales volumes in the first nine months of 2012 compared to the same periods in 2011. Polyethylene results were higher in the third quarter 2012 compared to the third quarter of 2011, mainly due to higher product margins and higher sales volumes, while results in the first nine months of 2012 were lower compared to the same period in 2011 largely due to lower product margins.


Table of Contents

Ethylene Raw Materials-Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of the movement of raw material and energy costs for ethylene and its co-products in the O&P-Americas segment. Ethylene and its co-products are produced from two major raw material groups:

crude oil-based liquids ("liquids" or "heavy liquids"), including naphtha, condensates and gas oils, the prices of which are generally related to crude oil prices; and

NGLs, principally ethane and propane, the prices of which are generally affected by natural gas prices.

Although the prices of these raw materials are generally related to crude oil and natural gas prices, during specific periods the relationships among these materials and benchmarks may vary significantly.

In the U.S., we have significant capability to shift the ratio of raw materials used in the production of ethylene and its co-products to take advantage of the relative costs of heavy liquids and NGLs.

Production economics for the U.S. industry have continued to favor NGLs throughout 2012. As a result, we have maintained our focus on maximizing the use of NGLs at our U.S. plants. Approximately 85% of our ethylene production was from NGLs during the third quarter and first nine months of 2012.

During the third quarter and first nine months of 2011, approximately 75% of our ethylene production was from NGLs. Based on current trends and assuming the price of crude oil remains at a high level relative to natural gas, we would expect production economics in the U.S. to continue to favor NGLs for the near and mid-term.

The following table shows the average U.S. benchmark prices for crude oil and natural gas for the applicable periods, as well as benchmark U.S. sales prices for ethylene and propylene, which we produce and sell or consume internally, and certain polyethylene and polypropylene products. West Texas Intermediate, or "WTI", and Light Louisiana Sweet, or "LLS", are light crude oils. The benchmark weighted average cost of ethylene production, which reflects credits for co-product sales, is based on IHS's estimated ratio of heavy liquid raw materials and NGLs used in U.S. ethylene production. Benchmark prices for polyethylene and polypropylene reflect discounted prices.

                                                                          Average Benchmark Price and Percent Change
                                                                               Versus Prior Year Period Average
                                                     Three Months Ended                                Nine Months Ended
                                                       September  30,                                   September  30,
                                                    2012             2011           Change           2012             2011           Change
Crude oil - dollars per barrel:
WTI                                                    92.2            89.5                3%           96.2            95.5                1%
LLS                                                   109.4           112.5              (3)%          112.4           112.9                -%
Natural gas (Henry Hub) dollars per million
BTUs                                                    2.9             4.3             (32)%            2.6             4.3             (39)%
Weighted average U.S. cost of ethylene
production - cents per pound                           19.7            34.3             (43)%           22.2            33.6             (34)%
United States - cents per pound:
Ethylene                                               45.4            55.8             (19)%           49.1            54.2              (9)%
Polyethylene (HD)                                      59.3            63.0              (6)%           63.1            64.4              (2)%
Propylene - polymer grade                              49.8            76.5             (35)%           60.4            78.5             (23)%
Polypropylene                                          63.8            90.2             (29)%           73.9            93.1             (21)%


Table of Contents

The following table sets forth the O&P-Americas segment's sales and other operating revenues, operating income, income from equity investments and selected product sales volumes.

                                                               Three Months  Ended                          Nine Months  Ended
                                                                  September 30,                                September 30,
Millions of dollars                                       2012                   2011                  2012                  2011
Sales and other operating revenues                  $           3,217      $           3,875      $          9,849      $         11,457
Operating income                                                  738                    598                 1,957                 1,527
Income from equity investments                                      7                      7                    17                    18

Production Volumes, in millions of pounds
Ethylene                                                        2,401                  2,134                 6,523                 6,152
Propylene                                                         633                    838                 1,781                 2,163
Sales Volumes, in millions of pounds
Polyethylene                                                    1,434                  1,368                 4,198                 4,150
Polypropylene                                                     651                    635                 1,935                 1,831

Revenues-O&P-Americas revenues decreased by $658 million, or 17%, in the third quarter 2012 and $1,608 million, or 14%, in the first nine months of 2012 compared to the same periods of 2011. Lower average sales prices across most products were responsible for revenue decreases of 19% in the third quarter of 2012, partly offset by higher polyethylene sales volumes that increased revenues by 2%. Lower average sales prices resulted in a 9% revenue decline in the first nine months of 2012. Lower olefins sales volumes offset slightly higher polyethylene and polypropylene sales volumes, decreasing revenues by 5% for the first nine months of 2012 compared to the same prior year period. Average sales prices for ethylene and polyethylene were lower in the third quarter and first nine months of 2012 compared to the same periods in 2011 mainly as a result of . . .

  Add LYB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for LYB - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.