10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                

Commission file number: 001-34726

LYONDELLBASELL INDUSTRIES N.V.

(Exact name of registrant as specified in its charter)

 

The Netherlands   98-0646235

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1221 McKinney St.,
Suite 300

Houston, Texas

USA 77010

 

4th Floor, One Vine Street

London

W1J0AH

The United Kingdom

 

Delftseplein 27E

3013 AA Rotterdam

The Netherlands

(Addresses of registrant’s principal executive offices)

(713) 309-7200   +44 (0) 207 220 2600   +31 (0)10 275 5500

(Registrant’s telephone numbers, including area codes)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ☒    No  ☐

The registrant had 392,069,274 ordinary shares, €0.04 par value, outstanding at April 24, 2018 (excluding 186,370,889 treasury shares).

 

 

 


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

TABLE OF CONTENTS

 

     Page  

Part I – Financial Information

     1  

Item 1. Consolidated Financial Statements (Unaudited)

     1  

Consolidated Statements of Income

     1  

Consolidated Statements of Comprehensive Income

     2  

Consolidated Balance Sheets

     3  

Consolidated Statements of Cash Flows

     5  

Consolidated Statement of Stockholders’ Equity

     7  

Notes to the Consolidated Financial Statements

     9  

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     33  

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     49  

Item 4. Controls and Procedures

     49  

Part II – Other Information

     50  

Item 1. Legal Proceedings

     50  

Item 1A. Risk Factors

     50  

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

     50  

Item 4. Mine Safety Disclosures

     50  

Item 6. Exhibits

     51  

Signature

     52  

 


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended
March 31,
 

Millions of dollars, except earnings per share

       2018             2017      

Sales and other operating revenues:

    

Trade

   $ 9,530     $ 8,243  

Related parties

     237       187  
  

 

 

   

 

 

 
     9,767       8,430  

Operating costs and expenses:

    

Cost of sales

     8,012       6,991  

Selling, general and administrative expenses

     233       204  

Research and development expenses

     28       25  
  

 

 

   

 

 

 
     8,273       7,220  

Operating income

     1,494       1,210  

Interest expense

     (91     (207

Interest income

     11       6  

Other income, net

     24       30  
  

 

 

   

 

 

 

Income from continuing operations before equity investments and income taxes

     1,438       1,039  

Income from equity investments

     96       81  
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     1,534       1,120  

Provision for income taxes

     303       315  
  

 

 

   

 

 

 

Income from continuing operations

     1,231       805  

Loss from discontinued operations, net of tax

     —         (8
  

 

 

   

 

 

 

Net income

     1,231       797  

Net (income) loss attributable to non-controlling interests

     —         —    
  

 

 

   

 

 

 

Net income attributable to the Company shareholders

   $ 1,231     $ 797  
  

 

 

   

 

 

 

Earnings per share:

    

Net income (loss) attributable to the Company shareholders —

    

Basic:

    

Continuing operations

   $ 3.12     $ 2.00  

Discontinued operations

     —         (0.02
  

 

 

   

 

 

 
   $ 3.12     $ 1.98  
  

 

 

   

 

 

 

Diluted:

    

Continuing operations

   $ 3.11     $ 2.00  

Discontinued operations

     —         (0.02
  

 

 

   

 

 

 
   $ 3.11     $ 1.98  
  

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

1


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended
March 31,
 

Millions of dollars

       2018              2017      

Net income

   $ 1,231      $ 797  

Other comprehensive income (loss), net of tax –

     

Financial derivatives

     7        22  

Unrealized losses on available-for-sale debt securities

     —          (1

Unrealized gains on equity securities and equity securities held by equity investees

     —          9  

Defined pension and other postretirement benefit plans

     7        7  

Foreign currency translations

     40        36  
  

 

 

    

 

 

 

Total other comprehensive income, net of tax

     54        73  
  

 

 

    

 

 

 

Comprehensive income

     1,285        870  

Comprehensive (income) loss attributable to non-controlling interests

     —          —    
  

 

 

    

 

 

 

Comprehensive income attributable to the Company shareholders

   $ 1,285      $ 870  
  

 

 

    

 

 

 

See Notes to the Consolidated Financial Statements.

 

2


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS

 

Millions of dollars

   March 31,
2018
    December 31,
2017
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 1,840     $ 1,523  

Restricted cash

     —         5  

Short-term investments

     1,042       1,307  

Accounts receivable:

    

Trade, net

     3,642       3,359  

Related parties

     217       180  

Inventories

     4,257       4,217  

Prepaid expenses and other current assets

     1,070       1,147  
  

 

 

   

 

 

 

Total current assets

     12,068       11,738  

Property, plant and equipment at cost

     17,057       16,570  

Less: Accumulated depreciation

     (5,808     (5,573
  

 

 

   

 

 

 

Property, plant and equipment, net

     11,249       10,997  

Investments and long-term receivables:

    

Investment in PO joint ventures

     424       420  

Equity investments

     1,767       1,635  

Other investments and long-term receivables

     22       17  

Goodwill

     578       570  

Intangible assets, net

     567       568  

Other assets

     221       261  
  

 

 

   

 

 

 

Total assets

   $     26,896     $     26,206  
  

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

3


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS

 

Millions of dollars, except shares and par value data

   March 31,
2018
    December 31,
2017
 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Current maturities of long-term debt

   $ 5     $ 2  

Short-term debt

     77       68  

Accounts payable:

    

Trade

     2,379       2,258  

Related parties

     631       637  

Accrued liabilities

     1,506       1,812  
  

 

 

   

 

 

 

Total current liabilities

     4,598       4,777  

Long-term debt

     8,531       8,549  

Other liabilities

     2,350       2,275  

Deferred income taxes

     1,688       1,655  

Commitments and contingencies

    

Stockholders’ equity:

    

Ordinary shares, €0.04 par value, 1,275 million shares authorized, 393,482,424 and 394,512,054 shares outstanding, respectively

     31       31  

Additional paid-in capital

     10,186       10,206  

Retained earnings

     16,677       15,746  

Accumulated other comprehensive loss

     (1,301     (1,285

Treasury stock, at cost, 184,957,739 and 183,928,109 ordinary shares, respectively

     (15,865     (15,749
  

 

 

   

 

 

 

Total Company share of stockholders’ equity

     9,728       8,949  

Non-controlling interests

     1       1  
  

 

 

   

 

 

 

Total equity

     9,729       8,950  
  

 

 

   

 

 

 

Total liabilities and equity

   $     26,896     $     26,206  
  

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

4


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018     2017  

Cash flows from operating activities:

    

Net income

   $ 1,231     $ 797  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     299       296  

Amortization of debt-related costs

     4       4  

Charges related to repayment of debt

     —         48  

Share-based compensation

     9       13  

Equity investments –

    

Equity income

     (96     (81

Distributions of earnings, net of tax

     —         19  

Deferred income taxes

     61       47  

Changes in assets and liabilities that provided (used) cash:

    

Accounts receivable

     (196     (432

Inventories

     (55     (44

Accounts payable

     72       53  

Other, net

     (323     (42
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,006       678  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Expenditures for property, plant and equipment

     (429     (421

Payments for repurchase agreements

     —         (324

Proceeds from repurchase agreements

     —         202  

Purchases of available-for-sale debt securities

     (50     (408

Proceeds from sales and maturities of available-for-sale debt securities

     335       338  

Proceeds from maturities of held-to-maturity securities

     —         44  

Other, net

     (45     28  
  

 

 

   

 

 

 

Net cash used in investing activities

     (189     (541
  

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018     2017  

Cash flows from financing activities:

    

Repurchases of Company ordinary shares

     (119     (160

Dividends paid

     (395     (343

Issuance of long-term debt

     —         990  

Repayment of long-term debt

     —         (1,000

Debt extinguishment costs

     —         (65

Net proceeds from commercial paper

     —         50  

Payments of debt issuance costs

     —         (7

Other, net

     (6     (2
  

 

 

   

 

 

 

Net cash used in financing activities

     (520     (537
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     15       8  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents and restricted cash

     312       (392

Cash and cash equivalents and restricted cash at beginning of period

     1,528       878  
  

 

 

   

 

 

 

Cash and cash equivalents and restricted cash at end of period

   $ 1,840     $ 486  
  

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

    

 

Ordinary Shares

    Additional
Paid-in

Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive

Income (Loss)
    Company
Share of
Stockholders’

Equity
    Non-
Controlling

Interests
 

Millions of dollars

   Issued      Treasury            

Balance, December 31, 2017

   $ 31      $ (15,749   $ 10,206     $ 15,746     $ (1,285   $ 8,949     $ 1  

Adoption of accounting standards

     —          —         —         95       (70     25       —    

Net income

     —          —         —         1,231       —         1,231       —    

Other comprehensive income

     —          —         —         —         54       54       —    

Share-based compensation

     —          22       8       —         —         30       —    

Dividends ($1.00 per share)

     —          —         —         (395     —         (395     —    

Repurchases of Company ordinary shares

     —          (138     —         —         —         (138     —    

Purchase of non-controlling interest

     —          —         (28     —         —         (28     —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2018

   $ 31      $ (15,865   $ 10,186     $ 16,677     $ (1,301   $ 9,728     $ 1  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

7


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

 

         Page  

1.

 

Basis of Presentation

     9  

2.

 

Accounting and Reporting Changes

     9  

3.

 

Revenues

     11  

4.

 

Accounts Receivable

     13  

5.

 

Inventories

     13  

6.

 

Debt

     14  

7.

 

Financial Instruments and Fair Value Measurements

     16  

8.

 

Pension and Other Postretirement Benefits

     23  

9.

 

Income Taxes

     23  

10.

 

Commitments and Contingencies

     24  

11.

 

Stockholders’ Equity

     26  

12.

 

Per Share Data

     29  

13.

 

Segment and Related Information

     30  

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1. Basis of Presentation

LyondellBasell Industries N.V., together with its consolidated subsidiaries (collectively “LyondellBasell N.V.”), is a worldwide manufacturer of chemicals and polymers, a refiner of crude oil, a significant producer of gasoline blending components and a developer and licensor of technologies for production of polymers. Unless otherwise indicated, the “Company,” “we,” “us,” “our” or similar words are used to refer to LyondellBasell N.V.

The accompanying Consolidated Financial Statements are unaudited and have been prepared from the books and records of LyondellBasell N.V. in accordance with the instructions to Form 10-Q and Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

2. Accounting and Reporting Changes

Recently Adopted Guidance

Revenue Recognition—In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition requirements in ASC 606, Revenue Recognition. Under this guidance, entities should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This ASU also requires enhanced disclosures. This guidance including subsequently issued amendments: ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20, was effective for annual and interim periods beginning after December 15, 2017. We adopted this guidance in the first quarter of 2018. For disclosures related to the adoption of this guidance, see Note 3.

Financial Instruments—In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance in this ASU includes a requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This guidance was effective for annual and interim periods beginning on or after December 15, 2017. We adopted this guidance prospectively in the first quarter of 2018 and recorded a cumulative-effect adjustment of $15 million to beginning retained earnings.

Recognition and Measurement of Financial Assets and Financial Liabilities—In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10). This ASU was issued as part of the FASB’s ongoing agenda to make improvements clarifying the Accounting Standards Codification and provides technical corrections and improvements related to ASU 2016-01. This ASU was effective for annual and interim periods beginning after December 15, 2017. We adopted this guidance in the first quarter of 2018 and it did not have a material impact on our Consolidated Financial Statements.

Income Taxes—In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU is aimed at reducing complexity in accounting standards. Under current GAAP, the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

intra-entity sales of assets other than inventory. A reporting entity would be required to recognize tax expense from the sale of assets in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. This guidance was effective for annual periods beginning after December 15, 2017. We adopted this guidance in the first quarter of 2018 following the modified retrospective method and recorded a cumulative-effect adjustment of $9 million to beginning retained earnings.

Accumulated Other Comprehensive Income—In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the U.S.-enacted “H.R.1,” also known as the “Tax Cuts and Jobs Act” (the “Tax Act”) to retained earnings. The amendment will be effective for annual and interim periods beginning after December 15, 2018. We early adopted this guidance in the first quarter of 2018 using the specific identification method and recorded a cumulative-effect adjustment of $52 million to beginning retained earnings.

Business Combinations—In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether a transaction should be accounted for as an acquisition or disposal of an asset or a business. This amendment was effective for annual and interim periods beginning after December 15, 2017. The prospective adoption of this guidance in the first quarter of 2018 did not have a material impact on our Consolidated Financial Statements.

Other IncomeGains and Losses from the Derecognition of Nonfinancial Assets—In February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The guidance provides clarification about the term in substance nonfinancial asset, other aspects of the scope of Subtopic 610-20 Other Income, and how an entity should account for partial sales of nonfinancial assets once the amendments in ASU 2014-09 become effective. This amendment was effective for annual and interim periods beginning after December 15, 2017. The retrospective adoption of this guidance in the first quarter of 2018 did not have a material impact on our Consolidated Financial Statements.

Compensation—Retirement Benefits—In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The guidance requires changes in presentation of current service cost and other components of net benefit cost. This amendment was effective for annual and interim periods beginning after December 15, 2017. The retrospective adoption of this guidance in the first quarter of 2018 did not have a material impact on our Consolidated Financial Statements.

Derivatives and Hedging—In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The new guidance makes more financial and nonfinancial hedging strategies eligible for hedge accounting and amends the presentation and disclosure requirements while changing how companies assess effectiveness. These amendments will be effective for annual and interim periods beginning after December 15, 2018. The early adoption of this guidance in the first quarter of 2018 did not have a material impact on our Consolidated Financial Statements.

Accounting Guidance Issued But Not Adopted as of March 31, 2018

Leases—In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes the existing guidance for lease accounting in ASC 840, Leases. Under the new guidance, for leases with a term longer than 12 months a lessee should recognize a lease liability and a right-of-use asset representing its right to use the underlying asset for the lease term. Topic 842 retains a classification distinction between finance leases and operating leases, with the classification affecting the pattern of expense recognition in the income statement. This ASU also requires

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

enhanced disclosures. A modified retrospective transition approach is required for annual and interim periods beginning on or after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements via review of existing lease contracts and other purchase obligations that contain embedded lease features, which are generally classified as operating leases under the existing guidance. We will complete any required changes to our systems and processes, including updating our internal controls during 2018. In 2018, the FASB also issued ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842. Under this guidance, an optional transition practical expedient is available whereby existing or expired land easements that were not previously accounted for as leases under Topic 840 are not required to be evaluated under Topic 842. We will evaluate the application of this ASU together with the overall assessment of Topic 842.

Financial Instruments—In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This amendment requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, resulting in the use of a current expected credit loss (“CECL”) model when measuring an impairment of financial instruments. Credit losses related to available-for-sale securities should be recorded in the consolidated income statement through an allowance for credit losses. Estimated credit losses utilizing the CECL model are based on reasonable use of historical experience, current conditions and forecasts that affect the collectability of reported financial assets. This ASU also modifies the impairment model for available-for-sale debt securities by eliminating the concept of “other than temporary” as well as providing a simplified accounting model for purchased financial assets with credit deterioration since their origination. The guidance will be effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact of the amendment in this guidance on our Consolidated Financial Statements.

Receivables—Nonrefundable Fees and Other Costs—In March 2017, the FASB issued ASU 2017-08, Premium Amortization of Purchased Callable Debt Securities. This new guidance requires the premium on callable debt securities to be amortized to the earliest call date. Under current requirements, premiums on callable debt securities are generally amortized over the contractual life of the security. The amendment will be effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this guidance on our Consolidated Financial Statements.

 

3. Revenues

Adoption of new revenue accounting guidance—On January 1, 2018, we adopted the accounting standard ASC 606, Revenue from Contracts with Customers and all related amendments using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. We recognized an $18 million adjustment to the beginning retained earnings balance for the cumulative effect of initially applying the new standard. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The impact of the adoption of this new guidance was immaterial for the three months ended March 31, 2018, and we expect the impact to be immaterial to our Consolidated Financial Statements on an ongoing basis.

Revenue Recognition—Substantially all our revenues are derived from contracts with customers. We account for contracts when both parties have approved the contract and are committed to perform, the rights of the parties and payment terms have been identified, the contract has commercial substance, and collectability is probable. Payments are typically required within a short period following the transfer of control over the product to the customer. We occasionally require customers to prepay purchases to ensure collectability. Such prepayments do not represent financing arrangements, and payment and fulfillment of the performance obligation occurs within a short time frame. We elected to apply the practical expedient, which permits us not to adjust the promised amount of consideration for the effects of a significant financing component when, at contract inception, we expect that payment will occur in one year or less.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied. This generally occurs at the point in time when performance obligations are fulfilled and control transfers to the customer. In most instances, control transfers upon transfer of risk of loss and title to the customer, which usually occurs when we ship products to the customer from our manufacturing facility. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Customer incentives are generally based on volumes purchased and recognized over the period earned. Sales, value added, and other taxes that we collect concurrent with revenue-producing activities are excluded from the transaction price as they represent amounts collected on behalf of third parties. Incidental costs incurred to obtain a contract are immaterial in the context of the contract and are recognized as expense. We have elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. Shipping and handling costs are treated as a fulfillment cost and not a separate performance obligation.

Contract Balances—Contract balances typically arise when a difference in timing between the transfer of control to the customer and receipt of consideration occurs. Our contract liabilities, which are reflected in our Consolidated Financial Statements as Accrued liabilities and Other liabilities, consist primarily of customer payments for products or services received before the transfer of control to the customer occurs. These contract liabilities were $144 million as of March 31, 2018. Revenue recognized in the reporting period included in the contract liability balance at the beginning of the period is immaterial.

Disaggregation of Revenues—We participate globally across the petrochemical value chain and are an industry leader in many of our product lines. Our chemicals businesses consist primarily of large processing plants that convert large volumes of liquid and gaseous hydrocarbon feedstocks into plastic resins and other chemicals. Our chemical products tend to be basic building blocks for other chemicals and plastics, while our plastic products are typically used in large volume applications. Our refining business consists of our Houston refinery, which processes crude oil into refined products such as gasoline, diesel and jet fuel.

Petrochemical products generally follow global price trends of crude oil, natural gas liquids and/or natural gas. Price volatility significantly affects our revenues, as our sales contracts are tied to global commodity indexes. Other factors such as global industry capacities and operating rates, foreign exchange rates and worldwide geopolitical trends also affect our revenues.

The following table presents our revenues disaggregated by key products for the three months ended March 31, 2018:

 

Millions of dollars

 

Sales and other operating revenues:

  

Olefins & co-products

   $ 1,020  

Polyethylene

     1,978  

Polypropylene

     2,331  

PO & derivatives

     649  

Oxyfuels and related products

     795  

Intermediate chemicals

     848  

Refined products

     2,002  

Other

     144  
  

 

 

 

Total

   $         9,767  
  

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table presents our revenues disaggregated by geography, based upon the location of the customer, for the three months ended March 31, 2018:

 

Millions of dollars

 

Sales and other operating revenues:

  

United States

   $ 4,653  

Germany

     821  

Italy

     394  

France

     350  

Mexico

     478  

The Netherlands

     276  

Other

     2,795  
  

 

 

 

Total

   $         9,767  
  

 

 

 

Transaction Price Allocated to the Remaining Performance Obligations—We have elected to exclude contracts which have an initial term of one year or less from this disclosure. Our contracts with customers are commodity supply arrangements that settle based on market prices at future delivery dates; therefore, transaction prices are entirely variable. Transaction prices are known at the time revenue is recognized since they are generally determined by the commodity price index at a specific date, at month-end or at the month average once products are shipped to our customers. Future estimates of transaction prices for disclosure purposes are substantially constrained as they are highly susceptible to factors outside our influence, including volatility in commodity markets, industry production capacities and operating rates, planned and unplanned industry operating interruptions, foreign exchange rates and worldwide geopolitical trends.

 

4. Accounts Receivable

Our allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, was $17 million at March 31, 2018 and December 31, 2017.

 

5. Inventories

Inventories consisted of the following components:

 

Millions of dollars

   March 31,
2018
     December 31,
2017
 

Finished goods

   $ 2,849      $ 2,932  

Work-in-process

     190        142  

Raw materials and supplies

     1,218        1,143  
  

 

 

    

 

 

 

Total inventories

   $ 4,257      $ 4,217  
  

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

6. Debt

Long-term loans, notes and other long-term debt, net of unamortized discount and debt issuance cost, consisted of the following:

 

     March 31,     December 31,  

Millions of dollars

   2018     2017  

Senior Notes due 2019, $1,000 million, 5.0% ($2 million of debt issuance cost)

   $ 963     $ 961  

Senior Notes due 2021, $1,000 million, 6.0% ($7 million of debt issuance cost)

     967       981  

Senior Notes due 2024, $1,000 million, 5.75% ($8 million of debt issuance cost)

     992       992  

Senior Notes due 2055, $1,000 million, 4.625% ($16 million of discount; $11 million of debt issuance cost)

     973       973  

Guaranteed Notes due 2044, $1,000 million, 4.875% ($11 million of discount; $9 million of debt issuance cost)

     980       979  

Guaranteed Notes due 2043, $750 million, 5.25% ($21 million of discount; $7 million of debt issuance cost)

     722       722  

Guaranteed Notes due 2023, $750 million, 4.0% ($6 million of discount; $3 million of debt issuance cost)

     741       740  

Guaranteed Notes due 2027, $300 million, 8.1%

     300       300  

Guaranteed Notes due 2022, €750 million, 1.875% ($3 million of discount; $3 million of debt issuance cost)

     919       894  

Guaranteed Notes due 2027, $1,000 million, 3.5% ($9 million of discount; $8 million of debt issuance cost)

     953       984  

Other

     26       25  
  

 

 

   

 

 

 

Total

     8,536       8,551  

Less current maturities

     (5     (2
  

 

 

   

 

 

 

Long-term debt

   $ 8,531     $ 8,549  
  

 

 

   

 

 

 

Fair value hedging adjustments associated with the fair value hedge accounting of our fixed-for-floating interest rate swaps for the applicable periods are as follows:

 

                        Cumulative Fair Value  
                        Hedging Adjustment Included  
            Gains (Losses)     in Carrying Amount of Debt  
            Three Months Ended               
     Inception      March 31,     March 31,      December 31,  

Millions of dollars

   Year      2018     2017     2018      2017  

Senior Notes due 2019, 5.0%

     2014      $ (1   $ (36   $ 35      $ 36  

Senior Notes due 2021, 6.0%

     2016        14       2       26        12  

Guaranteed Notes due 2027, 3.5%

     2017        31       (1     30        (1
     

 

 

   

 

 

   

 

 

    

 

 

 

Total

      $ 44     $ (35   $ 91      $ 47  
     

 

 

   

 

 

   

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The cumulative fair value hedging adjustment remaining at March 31, 2018 and December 31, 2017 associated with our Senior Notes due 2019 includes $25 million and $31 million, respectively, for hedges that have been discontinued. The $36 million loss in the three months ended March 31, 2017 included a $44 million charge for the write-off of the cumulative fair value hedging adjustment related to our 5% Senior Notes due 2019 described below.

These fair value adjustments are recognized in Interest expense in the Consolidated Statements of Income.

Short-term loans, notes, and other short-term debt consisted of the following:

 

     March 31,      December 31,  

Millions of dollars

   2018      2017  

$2,500 million Senior Revolving Credit Facility

   $ —        $ —    

$900 million U.S. Receivables Securitization Facility

     —          —    

Commercial paper

     —          —    

Precious metal financings

     73        64  

Other

     4        4  
  

 

 

    

 

 

 

Total short-term debt

   $ 77      $ 68  
  

 

 

    

 

 

 

Long-Term Debt

Guaranteed Notes due 2027—In March 2017, LYB International Finance II B.V. (“LYB Finance II”), a direct, 100% owned finance subsidiary of LyondellBasell Industries N.V., as defined in Rule 3-10(b) of Regulation S-X, issued $1,000 million of 3.5% guaranteed notes due 2027 at a discounted price of 98.968%.

Senior Notes due 2019—In March 2017, we redeemed $1,000 million aggregate principal amount of our outstanding 5% senior notes due 2019, and paid $65 million in make-whole premiums. In conjunction with the redemption of these notes, we recognized non-cash charges of $4 million for the write-off of unamortized debt issuance costs and $44 million for the write-off of the cumulative fair value hedge accounting adjustment related to the redeemed notes.

Short-Term Debt

Senior Revolving Credit Facility—Our $2,500 million revolving credit facility, which expires in June 2022, may be used for dollar and euro denominated borrowings, has a $500 million sublimit for dollar and euro denominated letters of credit, a $1,000 million uncommitted accordion feature, and supports our commercial paper program. The aggregate balance of outstanding borrowings, including amounts outstanding under our commercial paper program, and letters of credit under this facility may not exceed $2,500 million at any given time. Borrowings under the facility bear interest at a Base Rate or LIBOR, plus an applicable margin. Additional fees are incurred for the average daily unused commitments.

The facility contains customary covenants and warranties, including specified restrictions on indebtedness and liens. In addition, we are required to maintain a leverage ratio at the end of every fiscal quarter of 3.50 to 1.00 or less for the period covering the most recent four quarters. We are in compliance with these covenants as of March 31, 2018.

Commercial Paper Program—We have a commercial paper program under which we may issue up to $2,500 million of privately placed, unsecured, short-term promissory notes (“commercial paper”). This program is backed by our $2,500 million Senior Revolving Credit Facility. Proceeds from the issuance of commercial paper may be used for general corporate purposes, including dividends and share repurchases.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

U.S. Receivables Securitization Facility—Our U.S. accounts receivable securitization facility, which expires in August 2018, has a purchase limit of $900 million in addition to a $300 million uncommitted accordion feature. This facility provides liquidity through the sale or contribution of trade receivables by certain of our U.S. subsidiaries to a wholly owned, bankruptcy-remote subsidiary on an ongoing basis and without recourse. The bankruptcy-remote subsidiary may then, at its option and subject to a borrowing base of eligible receivables, sell undivided interests in the pool of trade receivables to financial institutions participating in the facility. In the event of liquidation, the bankruptcy-remote subsidiary’s assets will be used to satisfy the claims of its creditors prior to any assets or value in the bankruptcy-remote subsidiary becoming available to us. We are responsible for servicing the receivables. This facility also provides for the issuance of letters of credit up to $200 million. The term of the securitization facility may be extended in accordance with the terms of the agreement. The facility is also subject to customary warranties and covenants, including limits and reserves and the maintenance of specified financial ratios. We are required to maintain a leverage ratio at the end of every fiscal quarter of 3.50 to 1.00 or less for the period covering the most recent four quarters. Performance obligations under the facility are guaranteed by the parent company. Additional fees are incurred for the average daily unused commitments.

At March 31, 2018, there were no borrowings or letters of credit under the facility.

Weighted Average Interest Rate—At March 31, 2018 and December 31, 2017, our weighted average interest rate on outstanding short-term debt was 4.1% and 1.8%, respectively.

Debt Discount and Issuance Costs—In the three months ended March 31, 2018 and 2017, amortization of debt discounts and debt issuance costs resulted in amortization expense of $4 million and $8 million, respectively, which is included in Interest expense in the Consolidated Statements of Income.

Other Information—On December 28, 2016, LYB International Finance III, LLC was formed as a private company with limited liability in Delaware. LYB International Finance III, LLC is a direct, 100% owned finance subsidiary of LyondellBasell N.V., as defined in Rule 3-10(b) of Regulation S-X. Any debt securities issued by LYB International Finance III, LLC will be fully and unconditionally guaranteed by LyondellBasell N.V.

 

7. Financial Instruments and Fair Value Measurements

We are exposed to market risks, such as changes in commodity pricing, currency exchange rates and interest rates. To manage the volatility related to these exposures, we selectively enter into derivative transactions pursuant to our risk management policies.

A summary of our financial instruments, risk management policies, derivative instruments, hedging activities and fair value measurement can be found in Notes 2 and 14 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. If applicable, updates have been included in the respective sections below.

At March 31, 2018 and December 31, 2017, we had marketable securities classified as Cash and cash equivalents of $1,312 million and $1,035 million, respectively.

Foreign Currency Gain (Loss)—Other income, net, in the Consolidated Statements of Income reflected foreign currency gains of $6 million for the three months ended March 31, 2018 and foreign currency losses of $5 million for the three months ended March 31, 2017.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Financial Instruments Measured at Fair Value on a Recurring Basis—The following table summarizes financial instruments outstanding as of March 31, 2018 and December 31, 2017 that are measured at fair value on a recurring basis:

 

     March 31, 2018      December 31, 2017         
     Notional      Fair      Notional      Fair      Balance Sheet  

Millions of dollars

   Amount      Value      Amount      Value      Classification  

Assets–

              

Derivatives designated as hedges:

              

Foreign currency

   $ 498      $ 54      $ —        $ 26        Prepaid expenses and other current assets  

Foreign currency

     —          —          2,000        25        Other assets  

Interest rates

     —          26        —          20        Prepaid expenses and other current assets  

Interest rates

     600        13        650        1        Other assets  

Derivatives not designated as hedges:

              

Commodities

     74        5        77        20        Prepaid expenses and other current assets  

Foreign currency

     377        2        19        —          Prepaid expenses and other current assets  

Non-derivatives:

              

Available-for-sale debt securities

     696        696        960        960        Short-term investments  

Equity securities

     350        346        350        347        Short-term investments  
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 2,595      $ 1,142      $ 4,056      $ 1,399     
  

 

 

    

 

 

    

 

 

    

 

 

    

Liabilities–

              

Derivatives designated as hedges:

              

Commodities

   $ 71      $ 7      $ 97      $ 8        Accrued liabilities  

Commodities

     3        —          5        —          Other liabilities  

Foreign currency

     139        52        139        29        Accrued liabilities  

Foreign currency

     2,950        237        950        140        Other liabilities  

Interest rates

     —          5        —          5        Accrued liabilities  

Interest rates

     3,400        67        3,350        58        Other liabilities  

Derivatives not designated as hedges:

              

Commodities

     65        8        108        29        Accrued liabilities  

Foreign currency

     372        5        995        11        Accrued liabilities  

Non-derivatives:

              

Performance share awards

     28        28        23        23        Accrued liabilities  

Performance share awards

     1        1        27        27        Other liabilities  
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 7,029      $ 410      $ 5,694      $ 330     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

All derivatives and available-for-sale debt securities in the tables above are classified as Level 2. Our limited partnership investments included in our equity securities discussed below, are measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient and have not been classified in the fair value hierarchy.

At March 31, 2018, our outstanding foreign currency and commodity contracts not designated as hedges mature from April 2018 to June 2018 and from April 2018 to January 2019, respectively.

Financial Instruments Not Measured at Fair Value on a Recurring Basis—The following table presents the carrying value and estimated fair value of our financial instruments that are not measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017. Short-term loans receivable, which represent our repurchase agreements, and short-term and long-term debt are recorded at amortized cost in the Consolidated Balance Sheets. The carrying fair values of short-term and long-term debt exclude capital leases and commercial paper.

 

     March 31, 2018      December 31, 2017  

Millions of dollars

   Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Non-derivatives:

           

Assets:

           

Short-term loans receivable

   $ 586      $ 586      $ 570      $ 570  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Short-term debt

   $ 73      $ 71      $ 64      $ 75  

Long-term debt

     8,510        9,158        8,526        9,442  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,583      $ 9,229      $ 8,590      $ 9,517  
  

 

 

    

 

 

    

 

 

    

 

 

 

All financial instruments in the table above are classified as Level 2. There were no transfers between Level 1 and Level 2 for any of our financial instruments during the three months ended March 31, 2018 and the year ended December 31, 2017.

Net Investment Hedges—In March 2018, we entered into €400 million of foreign currency contracts that were designated as net investment hedges. These foreign currency contracts expire June 15, 2018. In 2017, we entered into €617 million of foreign currency contracts that were designated as net investment hedges.

In 2016, we also issued euro denominated notes payable due 2022 with notional amounts totaling €750 million that were designated as a net investment hedge.

At March 31, 2018 and December 31, 2017, we had outstanding foreign currency contracts with an aggregate notional value of €1,142 million ($1,287 million) and €742 million ($789 million), respectively, designated as net investment hedges. In addition, at March 31, 2018 and December 31, 2017 we had outstanding foreign-currency denominated debt, with notional amounts totaling €750 million ($925 million) and €750 million ($899 million), respectively, designated as a net investment hedge.

There was no ineffectiveness recorded during the three months ended March 31, 2017 related to these hedging relationships.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Cash Flow Hedges—The following table summarizes our cash flow hedges outstanding at March 31, 2018 and December 31, 2017:

 

     March 31, 2018      December 31, 2017         

Millions of dollars

   Notional
Value
     Notional
Value
     Expiration
Date
 

Foreign currency

   $ 2,300      $ 2,300        2021 to 2027  

Interest rates

     1,000        1,000        2019  

Commodities

     74        102        2018 to 2019  

There was no ineffectiveness recorded during the three months ended March 31, 2017 related to these hedging relationships.

As of March 31, 2018, less than $1 million (on a pretax basis) is scheduled to be reclassified as a decrease to interest expense and $7 million (on a pretax basis) is scheduled to be reclassified as an increase to cost of sales over the next twelve months.

Fair Value HedgesIn February 2017, we entered into U.S. dollar fixed-for-floating interest rate swaps to mitigate changes in the fair value of our $1,000 million 3.5% guaranteed notes due 2027 associated with the risk of variability in the 3 Month USD LIBOR rate (the benchmark interest rate). The fixed-rate and variable-rate are settled semi-annually and quarterly, respectively.

In March 2017, concurrent with the redemption of $1,000 million of our outstanding 5% senior notes due 2019, we dedesignated the related $2,000 million fair value hedge and terminated swaps in the notional amount of $1,000 million. At the same time, we redesignated the remaining $1,000 million notional amount of swaps as a fair value hedge of the remaining $1,000 million of 5% senior notes outstanding.

We had outstanding interest rate contracts with aggregate notional amounts of $3,000 million at March 31, 2018 and December 31, 2017, respectively, designated as fair value hedges. Our interest rate contracts outstanding at March 31, 2018 mature from 2019 to 2027.

There was no ineffectiveness recorded for the three months ended March 31, 2017 related to these hedging relationships.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Impact on Earnings and Other Comprehensive Income—The following table summarizes the pre-tax effect of derivative instruments and non-derivative instruments on Other comprehensive income and earnings for the three months ended March 31:

 

    Effect of Financial Instruments  
    Gain (Loss)
Recognized

in AOCI
    Gain (Loss)
Reclassified

from AOCI
to Income
    Gain (Loss)
Recognized

in Income
    Income Statement  

Millions of dollars

      2018             2017             2018             2017             2018             2017         Classification  

Derivatives designated as net investment hedges:

             

Foreign currency

  $ (17   $ (22   $ —       $ —       $ 5     $ —         Interest expense  

Derivatives designated as cash flow hedges:

             

Commodities

    (3     (2     4       —         —         —         Cost of sales  

Foreign currency

    (108     (7     62       25       8       12      
Other income, net;
Interest expense
 
 

Interest rates

    49       7       —         —         —         —         Interest expense  

Derivatives designated as fair value hedges:

             

Interest rates

    —         —         —         —         (44     (1     Interest expense  

Derivatives not designated as hedges:

             

Commodities

    —         —         —         —         1       (1    
Sales and other
operating revenues
 
 

Commodities

    —         —         —         —         (4     (11     Cost of sales  

Foreign currency

    —         —         —         —         (19     (1     Other income, net  

Non-derivatives designated as net investment hedges:

             

Long-term debt

    (25     (10     —         —         —         —         Other income, net  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

  $ (104   $ (34   $ 66     $ 25     $ (53   $ (2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

The derivative amounts excluded from effectiveness testing for foreign currency contracts designated as net investment hedges recognized in other comprehensive income and interest expense for the three months ended March 31, 2018 were $4 million and $5 million, respectively.

For the three months ended March 31, 2018, a $62 million gain for our foreign currency contracts designated as cash flow hedges was reclassified from AOCI to Other income, net.

The pre-tax effect of the periodic receipt of fixed interest and payment of variable interest associated with our fixed-for-floating interest rate swaps resulted in an additional gain recognized in Interest expense of $3 million and $7 million during the three months ended March 31, 2018 and 2017, respectively.

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Investments in Available-for-Sale Debt Securities—The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of our available-for-sale debt securities that are outstanding as of March 31, 2018 and December 31, 2017:

 

     March 31, 2018  

Millions of dollars

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Available-for-sale debt securities:

          

Commercial paper

   $ 50      $ —        $ —       $ 50  

Bonds

     646        1        (1     646  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale debt securities

   $ 696      $ 1      $ (1   $ 696  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2017  

Millions of dollars

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Available-for-sale securities:

          

Commercial paper

   $ 180      $ —        $ —       $ 180  

Bonds

     630        —          —         630  

Certificates of deposit

     150        —          —         150  

Limited partnership investments

     350        2        (5     347  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 1,310      $ 2      $ (5   $ 1,307  
  

 

 

    

 

 

    

 

 

   

 

 

 

No losses related to other-than-temporary impairments of our available-for-sale debt securities have been recorded in Accumulated other comprehensive loss during the three months ended March 31, 2018 and the year ended December 31, 2017.

As of March 31, 2018, our available-for-sale debt securities had the following maturities: commercial paper securities had maturities of three months and bonds had maturities between three and thirty-one months.

The proceeds from maturities and sales of our available-for-sale debt securities during the three months ended March 31, 2018 and 2017 are summarized in the following table:

 

     Three Months Ended
March 31,
 

Millions of dollars

       2018              2017      

Proceeds from maturities of securities

   $ 335      $ 338  

Proceeds from sales of securities

     —          —    

No gain or loss was realized in connection with the sales of our available-for-sale debt securities during the three months ended March 31, 2018 and 2017.

During the three months ended March 31, 2017, we had maturities of our held-to-maturity securities of $44 million.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes the fair value and unrealized losses related to available-for-sale debt securities that were in a continuous unrealized loss position for less than and greater than twelve months as of March 31, 2018 and December 31, 2017:

 

     March 31, 2018  
     Less than 12 months     Greater than 12 months  

Millions of dollars

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

Available-for-sale debt securities:

          

Bonds

   $ 247      $ (1   $ 25      $ —    

 

     December 31, 2017  
     Less than 12 months     Greater than 12 months  

Millions of dollars

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

Available-for-sale securities:

          

Limited partnership investments

   $ 117      $ (5   $ —        $ —    

Investments in Equity Securities—Our equity securities primarily consist of our limited partnership investments, which include investments in, among other things, equities and equity related securities, debt securities, credit instruments, global interest rate products, currencies, commodities, futures, options, warrants and swaps. These investments may be redeemed at least monthly with advance notice ranging up to ninety days.

The following table summarizes the portion of unrealized gains and losses for the equity securities that are outstanding as of March 31, 2018:

 

Millions of dollars

 

Net losses recognized during the period

   $ (1

Less: Net gains (losses) recognized during the period on securities sold

     —    
  

 

 

 

Unrealized losses recognized during the period

   $ (1
  

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

8. Pension and Other Postretirement Benefits

Net periodic pension benefits included the following cost components for the periods presented:

 

     Three Months Ended March 31,  
     2018     2017  

Millions of dollars

       U.S.             Non-U.S.             U.S.             Non-U.S.      

Service cost

   $ 13     $ 9     $ 12     $ 9  

Interest cost

     15       8       15       5  

Expected return on plan assets

     (30     (6     (30     (4

Actuarial and investment loss amortization

     5       3       5       4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 3     $ 14     $ 2     $ 14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic other postretirement benefits included the following cost components for the periods presented:

 

     Three Months Ended March 31,  
     2018      2017  

Millions of dollars

       U.S.              Non-U.S.              U.S.              Non-U.S.      

Service cost

   $ 1      $ 1      $ 1      $ 1  

Interest cost

     2        —          2        —    

Actuarial loss amortization

     —          —          —          1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

   $ 3      $ 1      $ 3      $ 2  
  

 

 

    

 

 

    

 

 

    

 

 

 

The components of net periodic benefit cost other than the service cost component are included in Other income, net in the Consolidated Statements of Income.

 

9. Income Taxes

Our effective income tax rate for the three months ended March 31, 2018 was 19.8% compared with 28.1% for the three months ended March 31, 2017. Our effective income tax rate fluctuates based on, among other factors, changes in statutory tax rates, changes in pretax income in countries with varying statutory tax rates, changes in valuation allowances, changes in foreign exchange gains/losses, the amount of exempt income, and changes in unrecognized tax benefits associated with uncertain tax positions.

Compared with the three months ended March 31, 2017, the lower effective tax rate for the three months ended March 31, 2018 was primarily attributable to the impact of the reduction to the U.S. federal statutory tax rate as a result of the U.S.-enacted “H.R.1,” also known as the “Tax Act” and increases in exempt income, partially offset by the repeal of the U.S. domestic production activity deduction.

We monitor income tax developments in countries where we conduct business. On December 22, 2017, the Tax Act was enacted with some provisions effective as early as 2017 while others were delayed until 2018. This change in U.S. tax law included a reduction in the federal corporate tax rate from 35% to 21% for years beginning after 2017, which resulted in the remeasurement of our U.S. net deferred income tax liabilities. Our 2017 income tax provision included a provisional estimate of $819 million income tax benefit related to the remeasurement of our U.S. net deferred income tax liabilities. The impact of the Tax Act may differ from this reasonable estimate due to additional guidance that may be issued, changes in assumptions made, and the finalization of certain U.S. income tax positions

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

with the filing of our 2017 U.S. income tax return which will allow for the ability to conclude whether any further adjustments are necessary to our deferred tax assets and liabilities. Any adjustments to these provisional amounts will be reported as a component of income tax expense in the reporting period in which any such adjustments are identified which will be no later than the fourth quarter of 2018. We will continue to analyze the Tax Act to determine the full effects of the new law.

In September 2016, the United Kingdom enacted provisions (the so called “anti-hybrid provisions”), effective for years beginning January 1, 2017, that resulted in changes to our internal financing structure which did not materially impact our Consolidated Financial Statements. In addition, in October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that may impact our internal financings in future years. Pursuant to a recent Executive Order, the Treasury Department reviewed these regulations and determined to delay but retain these regulations, subject to further review after enactment of U.S. tax reform. There has been an increase in attention, both in the U.S. and globally, to the tax practices of multinational companies, including the European Union’s state aid investigations and proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in additional legislative changes that could adversely affect our tax rate. Other than the recently enacted Tax Act, management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.

 

10. Commitments and Contingencies

Financial Assurance Instruments—We have obtained letters of credit, performance and surety bonds and have issued financial and performance guarantees to support trade payables, potential liabilities and other obligations. Considering the frequency of claims made against the financial instruments we use to support our obligations, and the magnitude of those financial instruments in light of our current financial position, management does not expect that any claims against or draws on these instruments would have a material adverse effect on our Consolidated Financial Statements. We have not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for our current operations.

Environmental Remediation—Our accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $102 million as of March 31, 2018 and December 31, 2017. At March 31, 2018, the accrued liabilities for individual sites range from less than $1 million to $19 million. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In our opinion, it is reasonably possible that losses in excess of the liabilities recorded may have been incurred. However, we cannot estimate any amount or range of such possible additional losses. New information about sites, new technology or future developments such as involvement in investigations by regulatory agencies, could require us to reassess our potential exposure related to environmental matters.

The following table summarizes the activity in our accrued environmental liability included in “Accrued liabilities” and “Other liabilities:”

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018     2017  

Beginning balance

   $ 102     $ 95  

Amounts paid

     (2     (2

Foreign exchange effects

     2       1  
  

 

 

   

 

 

 

Ending balance

   $ 102     $ 94  
  

 

 

   

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Access Indemnity Demand—In December 2010, one of our subsidiaries received demand letters from affiliates of Access Industries (collectively, “Access Entities”), a more than five percent shareholder of the Company, demanding indemnity for losses, including attorney’s fees and expenses, arising out of a 2007 management agreement and a pending lawsuit styled Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust v. Leonard Blavatnik, et al., Adversary Proceeding No. 09-1375 (REG), in the United States Bankruptcy Court, Southern District of New York. In the Weisfelner lawsuit, the plaintiffs sought recovery from Access all amounts earned by the Access Entities related to their purchase of shares of Lyondell Chemical Company (“Lyondell Chemical”) prior to its acquisition by Basell AF S.C.A.; distributions by Basell AF S.C.A. to its shareholders before it acquired Lyondell Chemical; and management and transaction fees and expenses.

The Access Entities also demanded $100 million in management fees under the management agreement between an Access affiliate and the predecessor of LyondellBasell AF, as well as other unspecified amounts relating to advice purportedly given in connection with financing and other strategic transactions.

In June 2009, an Access affiliate filed a proof of claim in Bankruptcy Court against LyondellBasell AF seeking “no less than $723,963.65” for the amounts allegedly owed under the 2007 management agreement.

We do not believe that the 2007 management agreement is in effect or that the Company or any Company-affiliated entity owes any obligations under the management agreement, including for management fees or for indemnification. We have defended our position in proceedings and against any claims or demands that have been asserted. In April 2011, Lyondell Chemical filed an objection to the claim and brought a declaratory judgment action for a determination that the demands are not valid and the declaratory judgment action was stayed per the parties’ agreement pending the outcome of the Weisfelner lawsuit.

The Weisfelner lawsuit went to trial in October 2016. In April 2017, the trial court awarded $12.6 million to the plaintiffs and denied all other relief, and in May 2017 the court issued its Final Judgment reflecting this ruling. The plaintiffs filed an appeal to the Federal District Court for the Southern District of New York, which largely affirmed the Final Judgment on January 24, 2018.

In April 2018, the Company and the Access Entities agreed to settle all claims, including under the 2009 Proof of Claim and 2007 Management Agreement, described in the April 2011 declaratory judgment action and the Access Entities’ December 2010 demand letters. No payments were required by either side under the settlement agreement; the declaratory judgment action will be dismissed and the Proof of Claim will be withdrawn.

Indemnification—We are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation and dissolution of joint ventures. Pursuant to these arrangements, we provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of March 31, 2018, we had not accrued any significant amounts for our indemnification obligations, and we are not aware of other circumstances that would likely lead to significant future indemnification obligations. We cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.

As part of our technology licensing contracts, we give indemnifications to our licensees for liabilities arising from possible patent infringement claims with respect to certain proprietary licensed technologies. Such indemnifications have a stated maximum amount and generally cover a period of five to ten years.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

11. Stockholders’ Equity

Dividend Distributions—On March 12, 2018, we paid a cash dividend of $1.00 per share for an aggregate of $395 million to shareholders of record on March 5, 2018.

Share Repurchase Programs—In May 2017, our shareholders approved a proposal to authorize us to repurchase up to an additional 10% of our outstanding ordinary shares through November 2018 (“May 2017 Share Repurchase Program”). As a result, the authorization of the remaining unpurchased shares under the share repurchase program approved by our shareholders in May 2016 (“May 2016 Share Repurchase Program”) was superseded. These repurchases, which are determined at the discretion of our Management Board, may be executed from time to time through open market or privately negotiated transactions. The repurchased shares, which are recorded at cost, are classified as Treasury stock and may be retired or used for general corporate purposes, including for various employee benefit and compensation plans.

The following table summarizes our share repurchase activity for the periods presented:

 

     Three Months Ended March 31, 2018  

Millions of dollars, except shares and per share amounts

   Shares
Repurchased
     Average
Purchase
Price
     Total Purchase
Price, Including
Commissions
 

May 2017 Share Repurchase Program

     1,292,480      $ 107.17      $ 138  

 

     Three Months Ended March 31, 2017  

Millions of dollars, except shares and per share amounts

   Shares
Repurchased
     Average
Purchase
Price
     Total Purchase
Price, Including
Commissions
 

May 2016 Share Repurchase Program

     1,533,713      $ 90.64      $ 139  

Due to the timing of settlements, total cash paid for share repurchases for the three months ended March 31, 2018 and 2017 was $119 million and $160 million, respectively.

Ordinary Shares—The changes in the outstanding amounts of ordinary shares are as follows:

 

     Three Months Ended
March 31,
 
     2018     2017  

Ordinary shares outstanding:

    

Beginning balance

     394,512,054       404,046,331  

Share-based compensation

     235,671       237,758  

Warrants exercised

     —         4,099  

Employee stock purchase plan

     27,179       26,909  

Purchase of ordinary shares

     (1,292,480     (1,533,713
  

 

 

   

 

 

 

Ending balance

     393,482,424       402,781,384  
  

 

 

   

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Treasury Shares—The changes in the amounts of treasury shares held by the Company are as follows:

 

     Three Months Ended  
     March 31,  
     2018     2017  

Ordinary shares held as treasury shares:

    

Beginning balance

     183,928,109       174,389,139  

Share-based compensation

     (235,671     (237,758

Warrants exercised

     —         509  

Employee stock purchase plan

     (27,179     (26,909

Purchase of ordinary shares

     1,292,480       1,533,713  
  

 

 

   

 

 

 

Ending balance

     184,957,739       175,658,694  
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)—The components of, and after-tax changes in, Accumulated other comprehensive loss as of and for the three months ended March 31, 2018 and 2017 are presented in the following table:

 

                  Unrealized                    
                  Gains
(Losses)
                   
           Unrealized      on Equity                    
           Gains      Securities     Defined              
           (Losses)      and Equity     Benefit              
           on Available      Securities     Pension     Foreign        
           -For-Sale      Held by     and Other     Currency        
     Financial     Debt      Equity     Postretirement     Translation        

Millions of dollars

   Derivatives     Securities      Investees     Benefit Plans     Adjustments     Total  

Balance – January 1, 2018

   $ (120   $ —        $ 17     $ (421   $ (761   $ (1,285

Adoption of accounting standards

     (2     —          (17     (51     —         (70

Other comprehensive income (loss) before reclassifications

     (61     —          —         —         37       (24

Tax benefit before reclassifications

     17       —          —         —         3       20  

Amounts reclassified from accumulated other comprehensive income (loss)

     66       —          —         8       —         74  

Tax expense

     (15     —          —         (1     —         (16
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     7       —          —         7       40       54  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2018

   $ (115   $ —        $ —       $ (465   $ (721   $ (1,301
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

                 Unrealized                     
                 Gains (Losses)                     
           Unrealized     on Equity                     
           Gains     Securities      Defined              
           (Losses)     and Equity      Benefit              
           on Available     Securities      Pension     Foreign        
           -For-Sale     Held by      and Other     Currency        
     Financial     Debt     Equity      Postretirement     Translation        

Millions of dollars

   Derivatives     Securities     Investees      Benefit Plans     Adjustments     Total  

Balance – January 1, 2017

   $ (75   $ 1     $ —        $ (498   $ (939   $ (1,511

Other comprehensive income (loss) before reclassifications

     (2     (1     8        —         38       43  

Tax (expense) benefit before reclassifications

     6       —         1        —         (2     5  

Amounts reclassified from accumulated other comprehensive income (loss)

     25       —         —          10       —         35  

Tax expense

     (7     —         —          (3     —         (10
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     22       (1     9        7       36       73  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance – March 31, 2017

   $ (53   $ —       $ 9      $ (491   $ (903   $ (1,438
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The amounts reclassified out of each component of Accumulated other comprehensive loss are as follows:

 

     Three Months Ended
March 31,
     Affected Line Item on
the Consolidated
Statements of Income
 

Millions of dollars

   2018      2017     

Reclassification adjustments for:

        

Financial derivatives – Foreign currency

   $ 62      $ 25        Other income, net  

Financial derivatives – Commodities

     4        —          Cost of sales  

Income tax expense

     15        7        Provision for income taxes  
  

 

 

    

 

 

    

Financial derivatives, net of tax

     51        18     

Amortization of defined pension items:

        

Actuarial loss

     8        10     

Income tax expense

     1        3     
  

 

 

    

 

 

    

Defined pension items, net of tax

     7        7     

Total reclassifications, before tax

     74        35     

Income tax expense

     16        10        Provision for income taxes  
  

 

 

    

 

 

    

Total reclassifications, after tax

   $ 58      $ 25        Amount included in net income  
  

 

 

    

 

 

    

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Amortization of prior service cost and actuarial loss is included in the computation of net periodic pension and other postretirement benefit costs (see Note 8).

 

12. Per Share Data

Basic earnings per share are based upon the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share includes the effect of certain stock option awards and other equity-based compensation awards. We have unvested restricted stock units that are considered participating securities for earnings per share.

Earnings per share data and dividends declared per share of common stock are as follows:

 

     Three Months Ended March 31,  
     2018      2017  
     Continuing     Discontinued      Continuing     Discontinued  

Millions of dollars

   Operations     Operations      Operations     Operations  

Net income (loss)

   $ 1,231     $ —        $ 805     $ (8

Less: net (income) loss attributable to non-controlling interests

     —         —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to the Company shareholders

     1,231       —          805       (8

Net income attributable to participating securities

     (1     —          (1     —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to ordinary shareholders – basic and diluted

   $ 1,230     $ —        $ 804     $ (8
  

 

 

   

 

 

    

 

 

   

 

 

 

Millions of shares, except per share amounts

                         

Basic weighted average common stock outstanding

     394       394        403       403  

Effect of dilutive securities:

         

PSU awards

     1       1        —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Potential dilutive shares

     395       395        403       403  
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share:

         

Basic

   $ 3.12     $ —        $ 2.00     $ (0.02
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 3.11     $ —        $ 2.00     $ (0.02
  

 

 

   

 

 

    

 

 

   

 

 

 

Millions of shares, except per share amounts

                         

Participating securities

     0.5       0.5        0.4       0.4  
  

 

 

   

 

 

    

 

 

   

 

 

 

Dividends declared per share of common stock

   $ 1.00     $ —        $ 0.85     $ —    
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

13. Segment and Related Information

Our operations are managed through five operating segments, as shown below. We disclose the results of each of our operating segments in accordance with ASC 280, Segment Reporting. Each of our operating segments is managed by a senior executive reporting directly to our Chief Executive Officer, the chief operating decision maker. Discrete financial information is available for each of the segments, and our Chief Executive Officer uses the operating results of each of the operating segments for performance evaluation and resource allocation. The activities of each of our segments from which they earn revenues and incur expenses are described below:

 

    Olefins and Polyolefins–Americas (“O&P–Americas”). Our O&P–Americas segment produces and markets olefins and co-products, polyethylene and polypropylene.

 

    Olefins and Polyolefins–Europe, Asia, International (“O&P–EAI”). Our O&P–EAI segment produces and markets olefins and co-products, polyethylene, and polypropylene, including polypropylene compounds.

 

    Intermediates and Derivatives (“I&D”). Our I&D segment produces and markets propylene oxide and its co-products and derivatives, oxyfuels and related products and intermediate chemicals such as styrene monomer, acetyls, ethylene oxide and ethylene glycol.

 

    Refining. Our Refining segment refines heavy, high-sulfur crude oils and other crude oils of varied types and sources available on the U.S. Gulf Coast into refined products, including gasoline and distillates.

 

    Technology. Our Technology segment develops and licenses chemical and polyolefin process technologies and manufactures and sells polyolefin catalysts.

Our chief operating decision maker uses EBITDA as the primary measure for reviewing our segments’ profitability and therefore, in accordance with ASC 280, Segment Reporting, we have presented EBITDA for all segments. We define EBITDA as earnings before interest, taxes and depreciation and amortization.

“Other” includes intersegment eliminations and items that are not directly related or allocated to business operations, such as foreign exchange gains (losses) and components of pension and other postretirement benefit costs other than service cost. Sales between segments are made primarily at prices approximating prevailing market prices.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Summarized financial information concerning reportable segments is shown in the following table for the periods presented:

 

     Three Months Ended March 31, 2018  

Millions of dollars

   O&P–
Americas
     O&P–
EAI
     I&D      Refining      Technology      Other     Total  

Sales and other operating revenues:

                   

Customers

   $ 1,882      $ 3,485      $ 2,310      $ 2,002      $ 88      $ —       $ 9,767  

Intersegment

     876        77        33        255        27        (1,268     —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     2,758        3,562        2,343        2,257        115        (1,268     9,767  

Income from equity investments

     17        76        3        —          —          —         96  

EBITDA

     780        518        486        63        56        10       1,913  

 

     Three Months Ended March 31, 2017  

Millions of dollars

   O&P–
Americas
     O&P–
EAI
     I&D      Refining     Technology      Other     Total  

Sales and other operating revenues:

                  

Customers

   $ 1,999      $ 2,967      $ 2,121      $ 1,250     $ 93      $ —       $ 8,430  

Intersegment

     605        57        29        103       27        (821     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     2,604        3,024        2,150        1,353       120        (821     8,430  

Income from equity investments

     14        66        1        —         —          —         81  

EBITDA

     723        529        339        (30     60        (4     1,617  

In the first three months of 2017, our O&P–Americas segment results included a $31 million gain on the sale of our Lake Charles, Louisiana site. Our I&D segment results for the first quarter of 2017 included charges approximating $40 million primarily related to the precious metal catalysts.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

A reconciliation of EBITDA to Income from continuing operations before income taxes is shown in the following table for each of the periods presented:

 

     Three Months Ended March 31,  

Millions of dollars

   2018     2017  

EBITDA:

    

Total segment EBITDA

   $ 1,903     $ 1,621  

Other EBITDA

     10       (4

Less:

    

Depreciation and amortization expense

     (299     (296

Interest expense

     (91     (207

Add:

    

Interest income

     11       6  
  

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 1,534     $ 1,120  
  

 

 

   

 

 

 

 

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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.

OVERVIEW

We started 2018 with strong operations, capturing higher margins for several of our products and advancing our organic and inorganic growth programs. EBITDA improved by 11% relative to the fourth quarter of 2017 and by 18% relative to the first quarter of 2017. Global polyolefins demand remained solid. While U.S. ethylene prices weakened, a tight market for polyolefins supported a polyethylene price increase and strong chain margins. Strong results for our Intermediates and Derivatives (“I&D”) segment were driven primarily by higher margins, while our reliability initiatives at our Houston refinery resulted in strong operations during the first quarter of 2018.

Significant items that affected our results during the first quarter of 2018 relative to the first quarter of 2017 include:

 

    Strong global polyolefins markets led to higher margins in our O&P–Americas segment, offset in part by small volume declines;

 

    Slightly lower O&P–EAI results with margin declines in Europe, mostly offset by favorable foreign exchange impacts;

 

    I&D segment results improved with increased margins; and

 

    Refining segment results reflected normal operations relative to the turnaround activity in first quarter 2017, resulting in higher crude processing rates and improved yields.

Other noteworthy items since the beginning of the year include the following:

 

    Announcement of definitive agreement in February 2018 to acquire A. Schulman, Inc., a leading global supplier of high-performance plastic compounds, composites and powders, for a total consideration of $2.25 billion;

 

    Acquired a 50% interest in Quality Circular Polymers, a high standard plastics recycling company in Sittard-Geleen, Netherlands; and

 

    Increased quarterly dividend from $0.90 cents to $1.00 in February 2018.

 

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

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018     2017  

Sales and other operating revenues

   $ 9,767     $ 8,430  

Cost of sales

     8,012       6,991  

Selling, general and administrative expenses

     233       204  

Research and development expenses

     28       25  
  

 

 

   

 

 

 

Operating income

     1,494       1,210  

Interest expense

     (91     (207

Interest income

     11       6  

Other income, net

     24       30  

Income from equity investments

     96       81  

Provision for income taxes

     303       315  
  

 

 

   

 

 

 

Income from continuing operations

     1,231       805  

Loss from discontinued operations, net of tax

     —         (8
  

 

 

   

 

 

 

Net income

   $ 1,231     $ 797  
  

 

 

   

 

 

 

RESULTS OF OPERATIONS

Revenues—Revenues increased by $1,337 million, or 16%, in the first quarter of 2018 compared to the first quarter of 2017.

Average sales prices in the first quarter of 2018 were higher for most of our products as sales prices generally correlate with crude oil prices, which on average, increased compared to the corresponding period in 2017. These higher prices led to an increase in first quarter 2018 revenues of 7%. Higher volumes in our Refining and O&P-EAI segments, which were offset approximately 35% by lower O&P–Americas and I&D segment volumes, resulted in a revenue increase of 3% in the first quarter of 2018. Favorable foreign exchange impacts also resulted in a revenue increase of 6%.

Cost of Sales—Cost of sales increased by $1,021 million, or 15%, in the first quarter of 2018 compared to the first quarter of 2017 primarily due to increases in feedstock and energy costs.

Operating Income—Operating income increased by $284 million in the first quarter of 2018 compared to the first quarter of 2017.

Operating income for our I&D, O&P–Americas and Refining segments increased relative to the first quarter of 2017 by $139 million, $92 million and $85 million, respectively. These increases were offset in part by a decrease of $28 million in our O&P–EAI segment.

Results for each of our business segments are discussed further in the “Segment Analysis” section below.

Interest Expense—Interest expense decreased by $116 million in the first quarter of 2018 compared to the first quarter of 2017.

In March 2017, we recognized charges totaling $113 million related to the redemption of $1,000 million of our outstanding 5% senior notes due 2019. These charges included $65 million of prepayment premiums, $44 million for adjustments associated with fair value hedges and $4 million for the write-off of associated unamortized debt issuance costs.

 

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Compared to 2017 and excluding the effects of fair value hedges and the charges described above, interest expense decreased $13 million in the first quarter of 2018 due to the redemption of our 5% senior notes due 2019 in the first quarter of 2017, and increased $7 million as a result of the related debt issuance in March 2017 of our 3.5% guaranteed notes due 2027. An increase in the amount of interest capitalized resulted in an incremental decrease in interest expense of $4 million during the first quarter of 2018.

Income Tax—Our effective income tax rate for the first quarter of 2018 was 19.8% compared with 28.1% for the first quarter of 2017.

Our effective income tax rate fluctuates based on, among other factors, changes in statutory tax rates, changes in pretax income in countries with varying statutory tax rates, changes in valuation allowances, changes in foreign exchange gains/losses, the amount of exempt income, and changes in unrecognized tax benefits associated with uncertain tax positions. Our exempt income primarily includes interest income, export incentives, and equity earnings of joint ventures. The interest income is earned by certain of our European subsidiaries through intercompany financings and is either untaxed or taxed at rates substantially lower than the U.S. statutory rate. The export incentives relate to tax benefits derived from elections and structures available for U.S. exports. The equity earnings are attributable to our joint ventures and these earnings when paid through dividends to certain European subsidiaries are eligible for participation exemptions, which exempt the dividend payments from all or portions of normal statutory income tax rates. We currently anticipate the favorable treatment for the interest income and dividends to continue in the near term; however, this treatment is based on current law and tax rulings, which could change. The foreign exchange gains/losses have a permanent impact on our effective income tax rate that can cause unpredictable movement in our effective income tax rate.

Compared with the first quarter of 2017, the lower effective tax rate for the first quarter of 2018 was primarily attributable to the impact of the reduction to the U.S. federal statutory tax rate as a result of the U.S.-enacted “H.R.1,” also known as the “Tax Cuts and Jobs Act” (the “Tax Act”) (-6.3%) and increases in exempt income (-3.3%), partially offset by the repeal of the U.S. domestic production activity deduction (1.2%).

We monitor income tax developments in countries where we conduct business. On December 22, 2017, the Tax Act was enacted with some provisions effective as early as 2017 while others were delayed until 2018. This change in U.S. tax law included a reduction in the federal corporate tax rate from 35% to 21% for years beginning after 2017, which resulted in the remeasurement of our U.S. net deferred income tax liabilities. Our 2017 income tax provision included a provisional estimate of $819 million income tax benefit related to the remeasurement of our U.S. net deferred income tax liabilities. The impact of the Tax Act may differ from this reasonable estimate due to additional guidance that may be issued, changes in assumptions made, and the finalization of certain U.S. income tax positions with the filing of our 2017 U.S. income tax return which will allow for the ability to conclude whether any further adjustments are necessary to our deferred tax assets and liabilities. Any adjustments to these provisional amounts will be reported as a component of income tax expense in the reporting period in which any such adjustments are identified which will be no later than the fourth quarter of 2018. We will continue to analyze the Tax Act to determine the full effects of the new law.

In September 2016, the United Kingdom enacted provisions (the so called “anti-hybrid provisions”), effective for years beginning January 1, 2017, that resulted in changes to our internal financing structure which did not materially impact our Consolidated Financial Statements. In addition, in October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that may impact our internal financings in future years. Pursuant to a recent Executive Order, the Treasury Department reviewed these regulations and determined to delay but retain these regulations, subject to further review after enactment of U.S. tax reform. There has been an increase in attention, both in the U.S. and globally, to the tax practices of multinational companies, including the European Union’s state aid investigations and proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in additional legislative changes that could adversely affect our tax rate. Other than the recently enacted Tax Act, management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.

 

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Comprehensive Income—Comprehensive income increased by $415 million in the first quarter of 2018 compared to the first quarter of 2017. This improvement reflects higher net income in the first quarter of 2018. These increases were partly offset by unfavorable impacts of financial derivative instruments recognized in the first quarter of 2018 primarily driven by periodic changes in benchmark interest rates.

The predominant functional currency for our operations outside of the U.S. is the euro. Relative to the U.S. dollar, the value of the euro increased during the first quarter of 2018 resulting in net gains as reflected in the Consolidated Statements of Comprehensive Income. These net gains include pre-tax losses of $42 million in the first quarter of 2018 which represent the effective portion of our net investment hedges.

In the first quarter of 2018, the cumulative effects of our derivatives designated as cash flow hedges were net gains of $5 million. The strengthening of the euro against the U.S. dollar in the first quarter of 2018 and periodic changes in benchmark interest rates resulted in pre-tax losses of $108 million related to our cross-currency swaps. Pre-tax gains of $62 million related to our cross-currency swaps were reclassification adjustments included in other income, net in the first quarter of 2018. Pre-tax gains of $49 million related to forward-starting interest rate swaps were driven by changes in benchmark interest rates in the first quarter of 2018.

 

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Segment Analysis

We use earnings before interest, income taxes, and depreciation and amortization (“EBITDA”) as our measure of profitability for segment reporting purposes. This measure of segment operating results is used by our chief operating decision maker to assess the performance of and allocate resources to our operating segments. Intersegment eliminations and items that are not directly related or allocated to business operations, such as foreign exchange gains or losses and components of pension and other postretirement benefits other than service costs are included in “Other.” For additional information related to our operating segments, as well as a reconciliation of EBITDA to its nearest GAAP measure, Income from continuing operations before income taxes, see Note 13, Segment and Related Information, to our Consolidated Financial Statements.

Our continuing operations are divided into five reportable segments: O&P–Americas; O&P–EAI; I&D; Refining; and Technology. Revenues and the components of EBITDA for the periods presented are reflected in the table below.

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018     2017  

Sales and other operating revenues:

    

O&P–Americas segment

   $ 2,758     $ 2,604  

O&P–EAI segment

     3,562       3,024  

I&D segment

     2,343       2,150  

Refining segment

     2,257       1,353  

Technology segment

     115       120  

Other, including intersegment eliminations

     (1,268     (821
  

 

 

   

 

 

 

Total

   $ 9,767     $ 8,430  
  

 

 

   

 

 

 

Operating income (loss):

    

O&P–Americas segment

   $ 651     $ 559  

O&P–EAI segment

     373       401  

I&D segment

     408       269  

Refining segment

     15       (70

Technology segment

     46       50  

Other, including intersegment eliminations

     1       1  
  

 

 

   

 

 

 

Total

   $ 1,494     $ 1,210  
  

 

 

   

 

 

 

Depreciation and amortization:

    

O&P–Americas segment

   $ 107     $ 118  

O&P–EAI segment

     63       59  

I&D segment

     73       69  

Refining segment

     46       40  

Technology segment

     10       10  
  

 

 

   

 

 

 

Total

   $ 299     $ 296  
  

 

 

   

 

 

 

Income from equity investments:

    

O&P–Americas segment

   $ 17     $ 14  

O&P–EAI segment

     76       66  

I&D segment

     3       1  
  

 

 

   

 

 

 

Total

   $ 96     $ 81  
  

 

 

   

 

 

 

 

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     Three Months Ended
March 31,
 

Millions of dollars

   2018      2017  

Other income (expense), net:

     

O&P–Americas segment

   $ 5      $ 32  

O&P–EAI segment

     6        3  

I&D segment

     2        —    

Refining segment

     2        —    

Other, including intersegment eliminations

     9        (5
  

 

 

    

 

 

 

Total

   $ 24      $ 30  
  

 

 

    

 

 

 

EBITDA:

     

O&P–Americas segment

   $ 780      $ 723  

O&P–EAI segment

     518        529  

I&D segment

     486        339  

Refining segment

     63        (30

Technology segment

     56        60  

Other, including intersegment eliminations

     10        (4
  

 

 

    

 

 

 

Total

   $ 1,913      $ 1,617  
  

 

 

    

 

 

 

Olefins and Polyolefins–Americas Segment

Overview—EBITDA in the first quarter 2018 was higher than the first quarter of 2017 due to strong polyolefins results, which were partly offset by lower volumes. EBITDA for the first quarter of 2017 included a $31 million gain on the sale of our Lake Charles, Louisiana, site.

Ethylene Raw Materials—Although prices of crude-based liquids and natural gas liquids are generally related to crude oil and natural gas prices, during specific periods the relationships among these materials and benchmarks may vary significantly. We have significant flexibility to vary the raw material mix and process conditions in our U.S. olefins plants in order to maximize profitability as market prices for both feedstocks and products change.

As in recent years, strong supplies from the U.S. shale gas/oil boom resulted in ethane being a preferred feedstock in our U.S. plants in 2018. In the first quarters of 2018 and 2017, we produced approximately 80% and 75%, respectively, of our ethylene from ethane. Despite generally higher liquid feedstock prices, strong propylene and butadiene coproduct prices at various points during these periods also brought liquids into our feedslate.

The following table sets forth selected financial information for the O&P–Americas segment including Income from equity investments, which is a component of EBITDA:

 

     Three Months Ended
March 31,
 

Millions of dollars

       2018              2017      

Sales and other operating revenues

   $ 2,758      $ 2,604  

Income from equity investments

     17        14  

EBITDA

     780        723  

Revenues—Revenues for our O&P–Americas segment increased by $154 million, or 6%, in the first quarter of 2018 compared to the first quarter of 2017.

 

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Average polyolefins sales prices were higher in the first quarter of 2018, compared to first quarter of 2017. Polyethylene sales prices increased due to strong market demand, while polypropylene average sales prices rose in response to increases in propylene prices. These higher sales prices were responsible for an increase in revenues of 8% in the first quarter of 2018.

Sub-freezing weather conditions on the Gulf Coast in mid-January resulted in unplanned downtime at our facilities and those of our competitors. These unplanned outages led to a decline in sales volumes across most products, which was responsible for a revenue decrease of 2% in the first quarter of 2018.

EBITDA—EBITDA increased by $57 million, or 8%, in the first quarter of 2018 compared to the first quarter of 2017.

Polyethylene and polypropylene margins increased by 11 cents per pound and 5 cents per pound, respectively, leading to a 20% improvement in EBITDA in the first quarter of 2018. These margin increases reflect higher sales prices and lower ethylene feedstock price in the case of polyethylene, and for polypropylene, higher sales prices that rose in response to increases in propylene feedstock costs.

These EBITDA improvements were offset by a 4% decrease relative to the first quarter of 2017 related to the gain on sale of our Lake Charles, Louisiana site discussed above. The lower volumes discussed above resulted in a further decline in EBITDA of 8%.

Olefins and Polyolefins–Europe, Asia, International Segment

Overview—First quarter 2018 EBITDA declined slightly compared to the first quarter of 2017 as lower margins in Europe were mostly offset by the favorable impacts of foreign exchange, increased sales volumes and improved income from equity investments.

The following table sets forth selected financial information for the O&P–EAI segment including Income from equity investments, which is a component of EBITDA:

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018      2017  

Sales and other operating revenues

   $     3,562      $     3,024  

Income from equity investments

     76        66  

EBITDA

     518        529  

Revenues—Revenues increased by $538 million, or 18%, in the first quarter of 2018 compared to the first quarter of 2017.

Increased production stemming from an improvement in operating rates, and higher demand compared to the first quarter of 2017 led to higher sales volumes across most products. These increased volumes resulted in a revenue increase of 3% in the first quarter of 2018. Higher average sales prices for most products in the first quarter of 2018 also resulted in a 3% revenue increase.

Foreign exchange impacts that, on average, were favorable for the first quarter of 2018 resulted in an additional revenue increase of 12% compared to the first quarter of 2017.

EBITDA—EBITDA in the first quarter of 2018 decreased by $11 million, or 2%, compared to the first quarter of 2017.

In the first quarter of 2018, lower margins in Europe, which declined mainly due to a 4 cents per pound decrease in polyethylene spreads and a 4 cents per pound increase in the weighted average cost of ethylene production, led to a 19% decline in EBITDA.

 

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This decline was largely offset by favorable foreign exchange impacts and higher volumes across most products which increased EBITDA by 12% and 3%, respectively, relative to the first quarter of 2017. An additional 2% increase in EBITDA resulted from higher income from our equity investments in the first quarter of 2018.

Intermediates and Derivatives Segment

Overview—EBITDA for our I&D segment was higher in the first quarter of 2018 than the first quarter of 2017 as margins benefited from industry supply constraints and strong demand. EBITDA for the first quarter of 2017 included a negative impact of approximately $40 million related to precious metal catalysts.

The following table sets forth selected financial information for the I&D segment including Income from equity investments, which is a component of EBITDA:

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018      2017  

Sales and other operating revenues

   $ 2,343      $ 2,150  

Income from equity investments

     3        1  

EBITDA

     486        339  

Revenues—Revenues increased by $193 million, or 9%, in the first quarter of 2018 compared to the first quarter of 2017.

Higher average sales prices in the first quarter of 2018 for most products, which reflect the impacts of higher feedstock and energy costs and recent industry supply constraints, were responsible for a revenue increase of 7%. Foreign exchange impacts that, on average, were higher in the first quarter of 2018 relative to the prior year period added another 4% to revenues.

These increases were partially offset by a revenue decrease of 2% in the first quarter of 2018, primarily due to lower sales volumes for intermediate chemicals products. This volume driven decline was largely due to planned and unplanned outages at our facilities at La Porte and Channelview, Texas, and Tuscola, Illinois.

EBITDA—EBITDA increased $147 million, or 43%, in the first quarter of 2018 compared to the first quarter of 2017.

Higher margins led to a 36% improvement in first quarter 2018 EBITDA relative to the first quarter of 2017. Tight supplies driven by seasonal demand for PO and derivatives products and by industry outages for several intermediate chemicals products led to higher sales prices. PO and derivatives and intermediate chemicals each accounted for approximately 40% of the margin improvement. The remaining increase in margins was attributable to oxyfuels and related products, which benefited from an approximate $13 per barrel increase in crude oil prices that more than offset the higher cost of feedstocks. An additional 12% increase in first quarter 2018 EBITDA, as compared to the corresponding prior year period, stems from the absence of the first quarter 2017 unfavorable impact associated with precious metal catalysts. These improvements were partly offset by a 5% decline in EBITDA due to the impact of lower volumes discussed above.

 

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Refining Segment

Overview—EBITDA for our Refining segment benefited from higher crude processing rates and higher yields in the first quarter of 2018 compared to the corresponding period in 2017, which was impacted by planned and unplanned maintenance outages.

The following table sets forth selected financial information and heavy crude oil processing rates for the Refining segment and the U.S. refining market margins for the applicable periods. Light Louisiana Sweet, is a light, sweet crude oil, while “Maya” is a heavy, sour crude oil. References to industry benchmarks for refining market margins are to industry prices reported by Platts, a division of S&P Global.

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018      2017  

Sales and other operating revenues

   $ 2,257      $ 1,353  

EBITDA

     63        (30

Heavy crude processing rates, thousands of barrels per day

     252        193  

Market margins, dollars per barrel

             

Light crude oil – 2-1-1

   $ 12.62      $ 11.86  

Light crude – Maya differential

     8.10        8.78  
  

 

 

    

 

 

 

Total Maya 2-1-1

   $ 20.72      $ 20.64  
  

 

 

    

 

 

 

Revenues—Revenues increased by $904 million, or 67%, in the first quarter of 2018 compared to the first quarter of 2017.

Higher product prices led to a revenue increase of 26%, relative to the first quarter of 2017 due to an average crude oil price increase of approximately $13 per barrel. Heavy crude oil processing rates increased by approximately 30% in the first quarter of 2017, leading to a volume driven revenue increase of 41%.

EBITDA—EBITDA increased by $93 million, or 310%, in the first quarter of 2018 compared to the first quarter of 2017.

Higher production accounted for approximately one third of the EBITDA improvement in the first quarter of 2017. Crude oil processing rates in 2018 were higher than 2017, which was negatively impacted by downtime at one of our crude units and at our fluid catalytic cracking (“FCC”) unit.

Refining margins accounted for the remaining improvement in first quarter 2018 EBITDA. Margins were higher on better yields for the first quarter 2018 compared to the same period in 2017, which was negatively impacted by the planned turnaround activity on our FCC unit.

 

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Technology Segment

Overview—EBITDA for the Technology segment declined in the first quarter of 2018 compared to the first quarter 2017 with lower licensing and services revenues.

The following table sets forth selected financial information for the Technology segment:

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018      2017  

Sales and other operating revenues

   $ 115      $ 120  

EBITDA

     56        60  

Revenues—Revenues decreased by $5 million, or 4%, in the first quarter of 2018 compared to the first quarter of 2017.

Lower licensing and services revenues were responsible for a revenue decrease of 4% in the first quarter of 2018 relative to the first quarter of 2017. Lower catalyst volumes and average sales prices led to additional revenue declines of 9% and 5%, respectively. These revenue decreases were partially offset by a 14% revenue increase in the first quarter of 2018 stemming from favorable foreign exchange impacts.

EBITDA—EBITDA decreased by $4 million, or 7%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to lower licensing and services revenues.

 

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FINANCIAL CONDITION

Operating, investing and financing activities, which are discussed below, are presented in the following table:

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018     2017  

Source (use) of cash:

    

Operating activities

   $ 1,006     $ 678  

Investing activities

     (189     (541

Financing activities

     (520     (537

Operating Activities—Cash of $1,006 million generated by operating activities in the first quarter of 2018 reflected an increase in earnings adjusted for non-cash items, offset by payments for taxes and employee bonuses, and $179 million of cash consumed by the main components of working capital–accounts receivable, inventories and accounts payable.

Higher first quarter 2018 sales volumes in our O&P–EAI segment relative to the fourth quarter of 2017 resulted in the increase in accounts receivable. The delay in cargo deliveries for our refining segment from December 2017 to the first quarter of 2018 combined with their seasonally lower year-end inventory levels led to the increase in inventories. Increased feedstock prices for our refining segment in the first quarter of 2018 was the primary driver for the increase in accounts payable.

The main components of working capital consumed $423 million of cash in the first quarter of 2017. The increase in accounts receivable, which was the most significant component of the change in working capital, was mainly driven by higher product sales prices in our O&P–Americas, O&P–EAI and I&D segments in the first quarter of 2017 relative to the fourth quarter of 2016.

Investing Activities—We invest cash in investment-grade and other high-quality instruments that provide adequate flexibility to redeploy funds as needed to meet our cash flow requirements while maximizing yield.

In the first quarter of 2018 and 2017, we invested $50 million and $408 million, respectively, in debt securities that are deemed available-for-sale and classified as Short-term investments. In the first quarter of 2017, we also invested $324 million in tri-party repurchase agreements, which are classified as short-term loans receivable.

We received proceeds of $335 million and $338 million in the first quarter of 2018 and 2017, respectively, upon the sale and maturity of certain of our available-for-sale debt securities. In the first quarter of 2017, we also received proceeds of $202 million and $44 million, respectively, upon maturity of certain of our repurchase agreements and held-to-maturity securities.

See note 7 to the Consolidated Financial Statements for additional information regarding these investments.

 

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Capital Expenditures—The following table summarizes capital expenditures for the periods presented:

 

     Three Months Ended
March 31,
 

Millions of dollars

   2018      2017  

Capital expenditures by segment:

     

O&P–Americas

   $ 246      $ 202  

O&P–EAI

     69        47  

I&D

     68        77  

Refining

     36        84  

Technology

     8        7  

Other

     2        4  
  

 

 

    

 

 

 

Consolidated capital expenditures

   $ 429      $ 421  
  

 

 

    

 

 

 

In the first quarter of 2018 and 2017, our capital expenditures included construction related to our new Hyperzone polyethylene plant at our La Porte, Texas facility and our new PO/TBA plant at our Channelview, Texas facility, debottlenecks of certain assets to enhance production, turnaround activities at several sites as well as other plant improvement projects. The higher level of capital expenditures for our O&P–Americas segment in the first quarter of 2018 relative to the same period in 2017 is largely due to the construction of our new Hyperzone polyethylene plant. The lower level of capital expenditures for our Refining segment reflects the completion of turnaround activities in 2017.

Financing Activities—In the first quarter of 2018 and 2017, we made payments of $119 million and $160 million to acquire approximately 1 million and 2 million, respectively, of our outstanding ordinary shares. We also made dividend payments totaling $395 million and $343 million during the first quarter of 2018 and 2017, respectively. For additional information related to our share repurchases and dividend payments, see Note 11 to the Consolidated Financial Statements.

We received net proceeds of $50 million in the first quarter of 2017 through the issuance and repurchase of commercial paper instruments under our commercial paper program.

In March 2017, we issued $1,000 million of 3.5% guaranteed notes due 2027 and received net proceeds of $990 million. The proceeds from these notes, together with available cash, were used to repay $1,000 million of our outstanding 5% senior notes due 2019. We paid $65 million in premiums related to this prepayment.

Additional information related to these notes can be found in the Liquidity and Capital Resources section below and in Note 6 to the Consolidated Financial Statements.

 

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Liquidity and Capital Resources—As of March 31, 2018, we had $2,882 million of unrestricted cash and cash equivalents and marketable securities classified as Short-term investments and held $586 million of tri-party repurchase agreements classified as Prepaid expenses and other current assets. For additional information related to our purchases of marketable securities see “Investing Activities” above and Note 7 to the Consolidated Financial Statements.

At March 31, 2018, we held $617 million of cash in jurisdictions outside of the U.S., principally in the United Kingdom. There are currently no legal or economic restrictions that materially would impede our transfers of cash.

We also had total unused availability under our credit facilities of $3,400 million at March 31, 2018, which included the following:

 

    $2,500 million under our $2,500 million revolving credit facility, which backs our $2,500 million commercial paper program. Availability under this facility is net of outstanding borrowings, outstanding letters of credit provided under the facility and notes issued under our commercial paper program. A small portion of our availability under this facility is impacted by changes in the euro/U.S. dollar exchange rate. At March 31, 2018, we had no outstanding commercial paper, outstanding letters of credit or outstanding borrowings under the facility; and

 

    $900 million under our $900 million U.S. accounts receivable securitization facility. Availability under this facility is subject to a borrowing base of eligible receivables, which is reduced by outstanding borrowings and letters of credit, if any. This facility had no outstanding borrowings or letters of credit at March 31, 2018.

At March 31, 2018, we had total debt, including current maturities, of $8,613 million, and $296 million of outstanding letters of credit, bank guarantees and surety bonds issued under uncommitted credit facilities.

In accordance with our current interest rate risk management strategy and subject to management’s evaluation of market conditions and the availability of favorable interest rates among other factors, we may from time to time enter into interest rate swap agreements to economically convert a portion of our fixed rate debt to variable rate debt or convert a portion of variable rate debt to fixed rate debt.

For additional information related to our credit facilities discussed above, see Note 6 to the Consolidated Financial Statements.

In May 2017, our shareholders approved a proposal to authorize us to repurchase up to an additional 10%, or approximately 40 million, of our outstanding ordinary shares through November 2018 (“May 2017 Share Repurchase Program”). Our share repurchase program does not have a stated dollar amount, and purchases may be made through open market purchases, private market transactions or other structured transactions. Repurchased shares could be retired or used for general corporate purposes, including for various employee benefit and compensation plans. In the first quarter of 2018, we purchased approximately 1 million shares under this program for approximately $138 million. As of April 24, 2018, we had approximately 31 million shares remaining under the current authorization. The timing and amounts of additional shares repurchased will be determined by our Management Board based on its evaluation of market conditions and other factors. For additional information related to our share repurchase programs, see Note 11 to the Consolidated Financial Statements.

We may repay or redeem our debt, including purchases of our outstanding bonds in the open market, using cash and cash equivalents, cash from our short-term investments and tri-party repurchase agreements, cash from operating activities, proceeds from the issuance of debt, proceeds from asset divestitures, or a combination thereof. In connection with any repayment or redemption of our debt, we may incur cash and non-cash charges, which could be material in the period in which they are incurred.

 

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In July 2017, we announced our final investment decision to build a world-scale PO/TBA plant in Texas with a capacity of 1 billion pounds of PO and 2.2 billion pounds of TBA. The project is estimated to cost approximately $2.4 billion, with groundbreaking expected in the third quarter of 2018. We anticipate the project to be completed in the middle of 2021.

We plan to fund our ongoing working capital, capital expenditures, debt service and other funding requirements with cash from operations, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. Cash and cash equivalents, cash from our short-term investments and tri-party repurchase agreements, cash from operating activities, proceeds from the issuance of debt, or a combination thereof, may be used to fund the purchase of shares under our share repurchase program.

We intend to continue to declare and pay quarterly dividends, with the goal of increasing the dividend over time, after giving consideration to our cash balances and expected results from operations.

In March 2018, we received U.S. antitrust clearance for the acquisition of A. Schulman, Inc. The closing of this transaction remains subject to other customary closing conditions, including approval of A. Schulman, Inc.’s shareholders and the receipt of other required regulatory clearances and approvals. Closing of this $2.25 billion acquisition is expected in the second half of 2018. We plan to use cash-on-hand to fund the acquisition.

We believe that our current liquidity availability and cash from operating activities provide us with sufficient financial resources to meet our anticipated capital requirements and obligations as they come due.

CURRENT BUSINESS OUTLOOK

We are beginning to see the typical seasonal margin improvements for oxyfuels and related products and refining products, and we look forward to the benefits of continued high operating rates in the second quarter. Over the past two months, the U.S. market has experienced an imbalance between ethylene production and consumption, but this is expected to improve as the downstream derivative units attain full operating rates. Robust global demand and recent higher oil prices continue to support strong polyolefin pricing. Our organic growth program continues with our Hyperzone HDPE and PO/TBA projects on track.

ACCOUNTING AND REPORTING CHANGES

For a discussion of the impact of new accounting pronouncements on our consolidated financial statements, see Note 2 to the Consolidated Financial Statements.

 

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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.

We based forward-looking statements on our current expectations, estimates and projections of our business and the industries in which we operate. We caution you that these statements are not guarantees of future performance. They involve assumptions about future events that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. Our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:

 

    the cost of raw materials represents a substantial portion of our operating expenses, and energy costs generally follow price trends of crude oil, natural gas liquids and/or natural gas; price volatility can significantly affect our results of operations and we may be unable to pass raw material and energy cost increases on to our customers due to the significant competition that we face, the commodity nature of our products and the time required to implement pricing changes;

 

    our operations in the U.S. have benefited from low-cost natural gas and natural gas liquids; decreased availability of these materials (for example, from their export or regulations impacting hydraulic fracturing in the U.S.) could reduce the current benefits we receive;

 

    if crude oil prices fell materially, or decrease relative to U.S. natural gas prices, we would see less benefit from low-cost natural gas and natural gas liquids and it could have a negative effect on our results of operations;

 

    industry production capacities and operating rates may lead to periods of oversupply and low profitability; for example, substantial capacity expansions are underway in the U.S. olefins industry;

 

    we may face unplanned operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, supplier disruptions, labor shortages, strikes, work stoppages or other labor difficulties, transportation interruptions, spills and releases and other environmental incidents) at any of our facilities, which would negatively impact our operating results; for example, because the Houston refinery is our only refining operation, we would not have the ability to increase production elsewhere to mitigate the impact of any outage at that facility;

 

    changes in general economic, business, political and regulatory conditions in the countries or regions in which we operate could increase our costs, restrict our operations and reduce our operating results;

 

    our ability to execute our organic growth plans may be negatively affected by our ability to complete projects on time and on budget;

 

    uncertainties associated with worldwide economies could create reductions in demand and pricing, as well as increased counterparty risks, which could reduce liquidity or cause financial losses resulting from counterparty default;

 

    the negative outcome of any legal, tax and environmental proceedings or changes in laws or regulations regarding legal, tax and environmental matters may increase our costs or otherwise limit our ability to achieve savings under current regulations;

 

    any loss or non-renewal of favorable tax treatment under agreements or treaties, or changes in laws, regulations or treaties, may substantially increase our tax liabilities;

 

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    we may be required to reduce production or idle certain facilities because of the cyclical and volatile nature of the supply-demand balance in the chemical and refining industries, which would negatively affect our operating results;

 

    we rely on continuing technological innovation, and an inability to protect our technology, or others’ technological developments could negatively impact our competitive position;

 

    we have significant international operations, and fluctuations in exchange rates, valuations of currencies and our possible inability to access cash from operations in certain jurisdictions on a tax-efficient basis, if at all, could negatively affect our liquidity and our results of operations;

 

    we are subject to the risks of doing business at a global level, including wars, terrorist activities, political and economic instability and disruptions and changes in governmental policies, which could cause increased expenses, decreased demand or prices for our products and/or disruptions in operations, all of which could reduce our operating results;

 

    if we are unable to comply with the terms of our credit facilities, indebtedness and other financing arrangements, those obligations could be accelerated, which we may not be able to repay; and

 

    we may be unable to incur additional indebtedness or obtain financing on terms that we deem acceptable, including for refinancing of our current obligations; higher interest rates and costs of financing would increase our expenses.

Any of these factors, or a combination of these factors, could materially affect our future results of operations and the ultimate accuracy of the forward-looking statements. Our management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market and regulatory risks is described in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2017. Our exposure to such risks has not changed materially in the three months ended March 31, 2018.

 

Item 4. CONTROLS AND PROCEDURES

As of March 31, 2018, with the participation of our management, our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) carried out an evaluation, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Act), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of March 31, 2018.

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

Information regarding our litigation and other legal proceedings can be found in Note 10, Commitments and Contingencies, to the Consolidated Financial Statements, which is incorporated into this Item 1 by reference.

The following is a description of environmental proceedings to which a governmental authority is a party and potential monetary sanctions are reasonably likely to be $100,000 or more.

In August 2015, the Victoria plant experienced a hexane leak into the cooling water system which resulted in estimated emissions of 154,000 pounds of hexane over a 12-day period from the cooling water pond operated by the site host, Invista. In November 2017, the Texas Commission on Environmental Quality (the “TCEQ”) issued a proposed agreed order to both Invista and Equistar assessing a proposed penalty of $300,000. TCEQ issued a revised proposed agreed order in January 2018 that lowered the administrative penalty to $93,750.

In January 2018, Houston Refining, LP learned that the TCEQ had referred an environmental matter to the Texas Attorney General’s office (“TAGO”) for enforcement. The environmental matter referred to TAGO for enforcement stems from air emissions events sustained at the refinery. We reasonably believe that TAGO may assert a penalty demand in excess of $100,000.

Additional information about such environmental proceedings can be found in Part I, Item 3 of our 2017 Annual Report on Form 10-K, which is incorporated into this Item 1 by reference.

 

Item 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in Item 1A of our 2017 Annual Report on Form 10-K.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

     Issuer Purchases of Equity Securities         

Period

   Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
     Maximum Number
of Shares That May Yet
Be Purchased Under the
Plans or Programs (1)
 

January 1 – January 31

     —          —          —          33,570,716  

February 1 – February 28

     72,792      $ 109.92        72,792        33,497,924  

March 1 – March 31

     1,219,688      $ 107.01        1,219,688        32,278,236  
  

 

 

       

 

 

    

Total

     1,292,480      $ 107.17        1,292,480        32,278,236  
  

 

 

       

 

 

    

 

  (1) On May 24, 2017, we announced a share repurchase program of up to 40,087,633 of our ordinary shares through November 23, 2018, which superseded any prior repurchase authorizations. The maximum number of shares that may yet be purchased is not necessarily an indication of the number of shares that will ultimately be purchased.

 

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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Item 6. EXHIBITS

 

2.1    Agreement and Plan of Merger, dated as of February  15, 2018, among LyondellBasell Industries N.V., LYB Americas Holdco Inc., and A. Schulman, Inc. (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed with the SEC on February  15, 2018)
10.1    Form of the Contingent Value Rights Agreement, among A. Schulman, Inc., LyondellBasell Industries N.V., members of the committee and a paying agent to be specified (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on February 15, 2018)
31.1*    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32*    Certifications pursuant to 18 U.S.C. Section 1350
101.INS*    XBRL Instance Document
101.SCH*    XBRL Schema Document
101.CAL*    XBRL Calculation Linkbase Document
101.DEF*    XBRL Definition Linkbase Document
101.LAB*    XBRL Labels Linkbase Document
101.PRE*    XBRL Presentation Linkbase Document

 

* Filed herewith.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    LYONDELLBASELL INDUSTRIES N.V.
Date: April 27, 2018    

/s/ Thomas Aebischer

    Thomas Aebischer
    Executive Vice President and
    Chief Financial Officer
    (Principal Financial Officer)

 

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