Westlake Chemical Corporation: Q3 2009 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009. Westlake Chemical Corporation is a vertically integrated manufacturer and marketer of petrochemicals, polymers, and fabricated products, operating primarily through two segments: Olefins and Vinyls. The company operates in a cyclical industry heavily influenced by raw material costs, energy prices, and construction market demand.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | YTD 9M 2009 | YTD 9M 2008 |
|---|---|---|---|---|
| Net Sales | $632.6 million | $1,073.7 million | $1,695.7 million | $3,095.2 million |
| Net Income | $29.8 million | $27.4 million | $40.5 million | $80.0 million |
| Diluted EPS | $0.45 | $0.42 | $0.61 | $1.22 |
| Operating Income | $49.0 million | $48.8 million | $84.3 million | $136.2 million |
| Gross Margin % | 11.5% | 6.7% | 8.7% | 6.6% |
| Cash from Operations (9M) | $213.5 million (vs. $76.6 million in 2008) | |||
| Long-Term Debt | $515.4 million (as of Sept 30, 2009) | |||
| Cash & Equivalents | $252.9 million (plus $112.3 million restricted cash) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 41.1% in Q3 and 45.2% YTD compared to 2008. This was driven primarily by a 41.0% drop in average sales prices due to lower raw material costs and a 10.6% decline in sales volumes YTD.
- Profitability Resilience: Despite lower sales, Q3 net income increased 8.8% year-over-year. Gross margins improved significantly (from 6.7% to 11.5% in Q3) as raw material cost reductions outpaced the decline in product sales prices.
- Segment Performance:
- Olefins: Generated $61.7 million in operating income for Q3 (up 239% from 2008) due to lower feedstock costs and strong export demand.
- Vinyls: Incurred an operating loss of $8.1 million in Q3 (down from $30.5 million profit in 2008) due to a 78.2% drop in caustic prices, weak construction demand, and $3.9 million in asset impairments.
- Asset Impairments: The company recorded $3.9 million in impairments related to idled PVC pipe facilities, including the Bristol, Indiana plant, which was idled in October 2009 to reduce costs.
Outlook, Risks, and Management Commentary
- Liquidity and Covenants: The company maintains strong liquidity with $365.2 million in total cash. However, the fixed charge coverage ratio under the senior notes indenture was 1.30:1 for the trailing twelve months, below the 2.0:1 threshold required to incur additional debt. Consequently, the company is restricted from incurring new debt (except for permitted borrowings) and is limited to paying regular quarterly dividends.
- Capital Expenditures: CapEx was reduced to $65.0 million YTD (down from $127.2 million in 2008) to preserve cash. The company is evaluating the start date for a planned $250-$300 million chlor-alkali plant in Geismar, Louisiana, due to economic conditions.
- Environmental and Legal Risks: Significant ongoing proceedings involve environmental remediation at the Calvert City, Kentucky complex. The EPA has notified the company of potential liability under CERCLA. While the company believes costs will not be material in any single period, ultimate resolution could impact future results.
- Market Risks: The company faces risks from global economic slowdowns, volatility in energy and raw material prices, and potential new regulations regarding greenhouse gas emissions (e.g., EPA rules and cap-and-trade legislation).
Investor Verification Checklist
- Covenant Compliance: Verify the current fixed charge coverage ratio and its impact on the ability to pay dividends or incur debt.
- Vinyls Segment Turnaround: Monitor the impact of the idled Bristol facility and the recovery of caustic margins in the Vinyls segment.
- Environmental Liabilities: Review updates on the Calvert City CERCLA proceedings and potential remediation cost accruals.
- Capital Allocation: Assess the timing and funding strategy for the Geismar chlor-alkali expansion given current credit market conditions.
- Working Capital Trends: Confirm the sustainability of the strong operating cash flow driven by reduced working capital requirements in a low-price environment.