WLK

Westlake Chemical Corporation: Q1 2010 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Westlake Chemical Corporation for the period ended March 31, 2010. Westlake is a vertically integrated manufacturer and marketer of petrochemicals, polymers, and fabricated products, operating primarily through two segments: Olefins and Vinyls. The company reported a return to profitability in the first quarter of 2010, contrasting with a net loss in the same period of the prior year.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by 59.4% ($290.0 million) driven by a 39.1% increase in average sales prices and a 20.2% increase in sales volume across major products.
• Profitability Turnaround: The company moved from a net loss of $6.1 million in Q1 2009 to a net income of $17.6 million in Q1 2010. Operating income improved by $35.3 million.
• Segment Performance:
  • Olefins: Income from operations surged to $58.2 million (from $16.1 million) due to improved polyethylene margins and higher operating rates.
  • Vinyls: Operating loss narrowed slightly to $14.9 million (from $15.4 million). Results were negatively impacted by a 66.7% drop in industry caustic prices, despite a 25.8% volume increase.
• Cash Flow: Operating cash flow turned negative ($55.1 million used) compared to positive ($120.3 million provided) in the prior year. This was primarily due to a $204.6 million unfavorable change in working capital, specifically increases in accounts receivable and inventory driven by higher prices and volumes.
• Unusual Items: An unscheduled shutdown of an ethylene unit in Lake Charles due to freezing temperatures in January 2010 resulted in approximately $6.9 million in repair costs and unabsorbed fixed manufacturing costs.

Guidance, Outlook, and Risks

• Market Outlook: Management notes that North American PVC capacity is projected to increase over the next two years, which may negatively impact operating rates and margins in the Vinyls segment. Similarly, significant increases in worldwide ethylene capacity (particularly from the Middle East and Asia) may pressure Olefins margins.
• Capital Projects: The company is evaluating the start date for a new chlor-alkali plant in Geismar, Louisiana (estimated cost $250-$300 million) based on current economic conditions. No completion date can be predicted.
• Liquidity: The company maintains a $400 million revolving credit facility with $379.1 million available. Fixed charge coverage ratios were 2.8:1 (credit facility) and 7.6:1 (Senior Notes) for the trailing twelve months, well above covenant requirements.
• Legal and Environmental: Ongoing administrative proceedings and litigation regarding environmental remediation at the Calvert City, Kentucky site (involving Goodrich and PolyOne) remain unresolved. A new arbitration proceeding regarding cost allocation was initiated by PolyOne in March 2010. The company believes these matters are unlikely to be material in any single reporting period.
• Risk Factors: Key risks include the cyclical nature of the chemical industry, volatility in raw material and energy prices, potential operating interruptions, and the impact of global economic slowdowns.

Investor Verification Checklist

• Verify the sustainability of the 59.4% sales increase given the cyclical nature of commodity pricing.
• Monitor the impact of the $6.9 million Lake Charles outage on future production schedules and margins.
• Assess the cash flow implications of the $96.7 million working capital drain in Q1 2010.
• Review the status of the Calvert City environmental arbitration and potential liability exposure.
• Track the timeline and funding strategy for the proposed Geismar chlor-alkali plant expansion.
• Confirm the company's ability to maintain fixed charge coverage ratios if market conditions deteriorate.