Westlake Chemical Corporation: Q3 2010 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2010. Westlake Chemical Corporation is a vertically integrated manufacturer and marketer of petrochemicals, polymers, and fabricated products. The company operates through two principal segments: Olefins (polyethylene, ethylene, styrene) and Vinyls (PVC, VCM, caustic, and fabricated products). The reporting period reflects a recovery in the Olefins segment driven by higher product prices and volumes, contrasted with continued margin pressure in the Vinyls segment due to weak construction demand and rising feedstock costs.
Key Financial Metrics
| Metric (in thousands) | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net Sales | $779,677 | $632,571 | $2,376,400 | $1,695,687 |
| Gross Profit | $134,855 | $72,538 | $318,559 | $148,264 |
| Income from Operations | $107,346 | $49,023 | $241,312 | $84,295 |
| Net Income | $62,731 | $29,766 | $137,320 | $40,542 |
| Diluted EPS | $0.95 | $0.45 | $2.07 | $0.61 |
| Operating Cash Flow (9M) | $214,981 (2010) vs $213,456 (2009) | |||
| Capital Expenditures (9M) | $51,237 (2010) vs $65,031 (2009) | |||
| Total Debt (Long-term) | $610,461 (Sep 30, 2010) | |||
| Cash & Equivalents | $428,333 (Sep 30, 2010) |
Liquidity: Total cash and restricted cash stood at $601.0 million. The company maintains a $400 million revolving credit facility with $356 million available as of September 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 23.3% in Q3 2010 and 40.1% for the nine-month period compared to 2009. This was driven by a 17.6% increase in average sales prices (Q3) and a 5.7% increase in sales volume.
- Profitability Surge: Net income more than doubled in Q3 2010 ($62.7M vs $29.8M) and increased 239% for the nine-month period. The effective tax rate was 35.3% for Q3 and 35.9% for the nine months.
- Segment Divergence:
- Olefins: Generated $136.1M in operating income for Q3 (up from $61.7M in 2009) due to improved integrated margins, higher polyethylene volumes, and flat ethane costs.
- Vinyls: Reported an operating loss of $24.2M in Q3 (worsening from an $8.1M loss in 2009). Margins were compressed by higher propane and energy costs that could not be fully passed through to customers due to weak construction demand.
- Debt Structure: In July 2010, the company completed a reoffering of $100 million in 6.125% tax-exempt revenue bonds due 2029. Proceeds are held as restricted cash for facility expansion.
Outlook, Risks, and Management Commentary
- Capital Projects: Management announced plans to construct a new chlor-alkali plant in Geismar, Louisiana, estimated to cost $250–$300 million with a target start-up in late 2013. Funding will come from restricted cash proceeds, the revolving credit facility, and operating cash flow.
- Market Risks:
- Vinyls: Operating rates and margins remain depressed due to weakness in construction markets and projected North American PVC capacity additions.
- Olefins: Future margins may be negatively impacted by significant global capacity increases from the Middle East and Asia.
- Feedstock Volatility: The company remains exposed to fluctuations in natural gas, ethane, and propane prices.
- Legal & Environmental: The company is involved in ongoing environmental proceedings at its Calvert City, Kentucky facility regarding contamination remediation costs shared with former owners (Goodrich/PolyOne). An arbitration proceeding regarding cost allocation was initiated in March 2010; the company cannot currently estimate the potential loss. A $0.8 million penalty was settled in September 2010 regarding Clean Air Act audits.
- Dividends: The company paid a quarterly dividend of $0.0635 per share.
Investor Verification Checklist
- Vinyls Margin Sustainability: Verify if the company can successfully pass on rising propane and energy costs to customers given the weak construction outlook.
- Environmental Liability Exposure: Monitor the outcome of the arbitration with PolyOne regarding Calvert City remediation costs and any potential EPA assessments.
- Capital Allocation: Assess the impact of the planned $250–$300 million chlor-alkali plant on future leverage and cash flow.
- Debt Covenants: Confirm continued compliance with the fixed charge coverage ratio (currently 10.5:1 for Senior Notes and 2.4:1 for the credit facility) to ensure unrestricted ability to pay dividends.
- Feedstock Hedging: Review the effectiveness of derivative strategies in mitigating the volatility of ethane and propane prices.