Westlake Chemical Corporation: Q3 2007 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2007. Westlake Chemical Corporation is a vertically integrated manufacturer and marketer of petrochemicals, polymers, and fabricated products, operating through two principal segments: Olefins and Vinyls. The company recently acquired Eastman Chemical Company's polyethylene business (Longview facilities) in late 2006, which significantly impacted volume comparisons.
Key Financial Metrics (Nine Months Ended Sept 30, 2007)
| Metric | 2007 (9 Months) | 2006 (9 Months) |
|---|---|---|
| Net Sales | $2,341.6 million | $1,960.5 million |
| Gross Profit | $228.4 million | $365.4 million |
| Income from Operations | $154.7 million | $304.7 million |
| Net Income | $95.9 million | $180.2 million |
| Diluted EPS | $1.47 | $2.76 |
| Operating Cash Flow | $95.0 million | $213.9 million |
| Capital Expenditures | $86.3 million | $100.7 million |
| Long-Term Debt | $335.2 million | $260.2 million |
| Cash and Equivalents | $139.3 million | $52.6 million (Year-end 2006) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19.4% year-over-year, driven primarily by a 49.5% increase in Olefins sales volume due to the Longview acquisition. However, average selling prices for Vinyls products decreased by 20.8%.
- Profitability Decline: Net income dropped 46.8% compared to the prior year. The decline is attributed to compressed margins in the Vinyls segment due to the housing market slowdown and rising feedstock costs that could not be passed to customers.
- Segment Performance:
- Olefins: Operating income decreased 22.3% to $127.0 million, despite volume gains, due to lower product prices and higher feedstock costs.
- Vinyls: Operating income plummeted 77.0% to $34.0 million, impacted by lower prices, higher costs, and a $6.7 million charge for legal settlement.
- Debt Structure: Long-term debt increased by $75.0 million due to borrowings under the revolving credit facility to fund capital expenditures and working capital.
Outlook, Risks, and Unusual Items
- Legal Settlement: The company reached an agreement in principle to settle contract litigation with Goodrich and PolyOne regarding environmental costs at the Calvert City facility. A $3.0 million payment was recorded in Q3 2007, with PolyOne assuming 100% of future environmental costs at the site.
- Capital Projects:
- Announced expansion of chlor-alkali and PVC resin units in Kentucky (completion expected 2009).
- Planning a new large diameter PVC pipe plant (completion expected late 2008).
- Feasibility study ongoing for a $1.9 billion ethane-based project in Trinidad and Tobago.
- Liquidity: The company secured a $250 million allocation for tax-exempt revenue bonds in Louisiana. Management believes current cash, operations, and credit facilities are adequate for foreseeable needs.
- Risks: Significant exposure to commodity price volatility (ethane, propane, crude oil). The Vinyls segment remains under pressure from the residential construction market downturn. Environmental remediation costs remain a contingency, though the recent settlement mitigates future exposure at the Calvert City site.
Investor Verification Checklist
- Verify the sustainability of the Vinyls segment margin recovery given the ongoing weakness in the housing market.
- Monitor the execution and cost overruns of the announced $90 million Kentucky expansion and the potential $1.9 billion Trinidad project.
- Review the impact of rising feedstock costs (ethane/propane) on the Olefins segment margins in upcoming quarters.
- Confirm the status of the tax-exempt bond issuance in Louisiana and its effect on future capital expenditure funding.
- Assess the company's ability to maintain dividend payments under the covenants of the 6 5/8% senior notes and revolving credit facility.