Westlake Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; filed November 2, 2023. Unaudited interim results. Westlake is an integrated global manufacturer of performance and essential materials and housing and infrastructure products.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3.115 billion | $3.956 billion | $9.722 billion | $12.495 billion |
| Gross profit | $586 million | $776 million | $2.020 billion | $3.506 billion |
| Gross margin | 19% | 20% | 21% | 28% |
| Income from operations | $349 million | $516 million | $1.281 billion | $2.723 billion |
| Net income attributable to Westlake | $285 million | $401 million | $976 million | $2.015 billion |
| Diluted EPS | $2.20 | $3.10 | $7.56 | $15.54 |
| EBITDA | $682 million | $804 million | $2.197 billion | $3.560 billion |
| Free cash flow | $451 million | $629 million | $1.011 billion | $1.749 billion |
For the first nine months, operating cash flow was $1.763 billion, down from $2.560 billion. Capital expenditures were $752 million. At September 30, cash and cash equivalents were $3.057 billion, compared with $2.228 billion at year-end 2022. Debt carrying value was $4.873 billion, including $299 million current; the company had no borrowings under its $1.5 billion revolving credit facility and reported full availability. It was in compliance with debt covenants.
Material changes and segment results
- Q3 sales declined 21% year over year, mainly because average sales prices fell 20%; volumes were down 1%. Nine-month sales declined 22%, reflecting 15% lower average prices and 8% lower volumes.
- Performance and Essential Materials Q3 sales fell 27% to $1.971 billion and operating income fell to $105 million from $353 million, primarily on lower prices for PVC, polyethylene, epoxy, caustic soda and chlorine. Lower energy and feedstock costs partly offset the declines.
- Housing and Infrastructure Products Q3 sales fell 8% to $1.144 billion, while operating income rose to $256 million from $186 million, primarily due to lower raw-material costs. Nine-month operating income declined to $589 million from $607 million, mainly on lower volumes and prices.
- Nine-month operating cash flow fell by $797 million, principally due to lower operating income. Favorable working-capital changes partly offset the decline. Investing cash outflow fell substantially versus 2022, which included the epoxy acquisition.
Outlook, risks and unusual items
- Management expects near-term volatility in energy prices, higher interest rates, inflation and other macroeconomic conditions to continue weighing on demand and margins. No quantified earnings or sales guidance is provided in the filing.
- Management cited weaker global demand, lower product prices, planned and unplanned outages, European energy-cost exposure, and housing-market sensitivity to elevated mortgage rates. Commodity supply-demand cycles, input-cost volatility, capacity additions, geopolitical conflicts and environmental regulation are also risks.
- Q3 other income included $28 million of interest income and $17 million of insurance recoveries. For the nine months, other income included $66 million of interest income and $25 million of insurance recoveries.
- Westlake reserved $19 million in Q3 for a proposed caustic-soda direct-purchaser antitrust settlement, subject to court approval. The company admits no wrongdoing under the settlement; related indirect-purchaser and Canadian proceedings remain.
- A final $70 million judgment was entered in the Triad Hunter case, with interest accruing from judgment; Westlake appealed and sought a stay. A Dutch ethylene claim seeks approximately €1.026 billion plus interest, and the company says it cannot estimate the potential financial impact.
- Environmental reserves were approximately $47 million. The filing also identifies $75 million to $135 million of reasonably possible additional environmental losses. The company states that the ultimate outcomes of legal and environmental matters are uncertain.
Important facts for investors to verify
- Whether product pricing and demand stabilize, particularly in Performance and Essential Materials, and whether lower input costs continue to cushion margins.
- Operating cash generation and capital spending relative to the lower earnings environment; reported nine-month free cash flow was $1.011 billion.
- Upcoming debt maturity: $300 million principal of 0.875% senior notes due in August 2024; assess refinancing needs and interest-rate exposure.
- Progress and potential financial effects of the caustic-soda, Triad Hunter, ethylene and environmental matters, including court outcomes and insurance recoveries.
- Housing and infrastructure demand, including the effect of mortgage rates and any continued strength in selected categories such as siding, trim and municipal water systems.