Westlake Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Westlake is an integrated manufacturer of performance and essential materials and housing and infrastructure products. Unless otherwise noted, financial amounts are in millions of dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $3,956 | $3,055 | $12,495 | $8,271 |
| Gross profit | $776 | $1,018 | $3,506 | $2,399 |
| Gross margin | 20% | 33% | 28% | 29% |
| Income from operations | $516 | $861 | $2,723 | $1,927 |
| Net income attributable to Westlake | $401 | $607 | $2,015 | $1,371 |
| Diluted EPS | $3.10 | $4.69 | $15.54 | $10.60 |
| EBITDA (non-GAAP) | $804 | $1,077 | $3,560 | $2,562 |
| Free cash flow (non-GAAP) | $629 | $611 | $1,749 | $1,223 |
- Q3 earnings and margins: Sales rose 29%, but operating income fell $345 and attributable net income fell $206 year over year. Management cited higher energy and feedstock costs, weaker polyethylene and PVC resin prices and margins, lower demand for certain products, and a $70 litigation charge. Higher caustic soda prices and higher polyethylene volumes partly offset these pressures.
- Nine-month results: Sales increased 51% and attributable net income increased 47%, reflecting stronger prices and integrated margins, particularly in the first half, higher volumes in some products, and acquired businesses. Higher energy and feedstock costs partly offset gains.
- Segments, Q3: Performance and Essential Materials sales were $2,711, up 17%; operating income was $353, down from $769. Housing and Infrastructure Products sales were $1,245, up 70%; operating income was $186, up from $103. Acquisitions contributed to growth in both segments, especially Housing and Infrastructure Products.
- Cash flow: Nine-month operating cash flow was $2,560, versus $1,637 a year earlier. Capital expenditures were $811, versus $414; free cash flow was $1,749. Investing used $2,148, including $1,171 for Westlake Epoxy, LACC contributions and purchase of an additional interest, and capital spending.
Balance sheet and liquidity
- At September 30, 2022, cash and cash equivalents were $1,778; current assets were $6,101 and current liabilities $2,461.
- Debt, net of discounts and issuance costs, totaled $4,819, including $6 current. The company redeemed $250 of 3.60% notes due 2022 during the period. Long-term debt covenants were reported in compliance.
- A new $1.5 billion revolving credit facility matures in June 2027. It had no borrowings or letters of credit outstanding, leaving $1.5 billion available at quarter-end.
- Dividends paid in the first nine months were $123. Share repurchases totaled $68. The board authorized an additional $500 for the existing repurchase program in August 2022.
Outlook, risks and unusual items
- Management expected higher energy costs, inflation and macroeconomic conditions to weigh on margins and demand in the near term. European operations faced elevated energy prices and reduced demand; North American businesses faced rising energy costs and interest rates and slowing demand.
- Residential construction and repair/remodeling activity began weakening late in Q2 as mortgage rates rose. The filing cites inflation, high interest rates, possible recession, supply-chain constraints, labor availability, commodity volatility, new industry capacity, and the Russia-Ukraine conflict as risks. No quantified earnings or revenue guidance is provided.
- Westlake completed its $1,207 Westlake Epoxy acquisition in February 2022. The business contributed $1,146 of sales and $68 of net income from acquisition through September 30. The purchase price allocation remained preliminary.
- Litigation: On October 27, 2022, after quarter-end, a jury found Westlake liable for trespass and negligence in the Natrium Plant matter and awarded approximately $70. The company recorded a roughly $70 reserve in Q3; final judgment could include additional damages, interest and attorneys’ fees, and Westlake said it would appeal any damages judgment.
- Environmental reserves were approximately $55 at quarter-end, with an additional reasonably possible loss range of $65–$130. A flare-related consent decree, not yet effective pending court entry, was estimated to require about $110 in implementation costs over 2021–2023 plus a $1 penalty.
- Caustic soda antitrust class actions seek $861 in single damages for direct purchasers and approximately $500 for indirect purchasers, before potential trebling and other relief. The company could not estimate the financial impact. The Inflation Reduction Act’s corporate minimum tax and stock-repurchase excise tax were under evaluation.
Important facts for investors to verify
- Whether weaker housing demand, lower resin prices and elevated energy/feedstock costs persist, and how these factors affect segment margins.
- The final judgment and appeal outcome in the Natrium Plant litigation, including any amounts beyond the recorded $70 reserve.
- Progress and final valuation of the Westlake Epoxy acquisition, including realized integration benefits and purchase accounting adjustments.
- Developments in the caustic soda antitrust cases, environmental contingencies and flare consent decree costs.
- Capital spending, working-capital requirements, share repurchases and liquidity needs under changing operating conditions.