Westlake Chemical Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Westlake is a vertically integrated chemicals, polymers and building-products manufacturer operating through Vinyls and Olefins segments. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,898 | $2,066 | $5,539 | $6,235 |
| Gross profit | $248 | $371 | $700 | $1,010 |
| Gross margin | 13% | 18% | 13% | 16% |
| Income from operations | $79 | $226 | $251 | $554 |
| Net income attributable to Westlake | $57 | $158 | $217 | $349 |
| Diluted EPS | $0.45 | $1.22 | $1.69 | $2.69 |
| EBITDA (non-GAAP) | $287 | $425 | $860 | $1,111 |
- Cash flow and investment: Nine-month operating cash flow was $866, versus $968 in 2019; capital expenditures were $403, versus $604. Operating cash flow less capital expenditures was approximately $463, compared with $364 in 2019. Third-quarter operating cash flow was $357, versus $501.
- Balance sheet at September 30: Cash and cash equivalents were $1,217; current assets $3,381 and current liabilities $1,218. Long-term debt was $3,681 net of discounts and issuance costs ($3,736 principal), versus $3,445 net at year-end 2019. Cash less reported long-term debt was approximately negative $2,464.
- Available liquidity: The company had no borrowings under its $1 billion revolving facility and reported $1 billion available. It stated that cash, operating cash flow and available borrowing capacity should support normal operations and ongoing capital expenditure needs.
- Dividends and repurchases: Dividends were $0.27 per share in Q3 and $0.795 for the nine-month period. Nine-month cash dividends were $102; share repurchases were $54.
Changes versus comparable periods
- Q3 sales fell 8% year over year; average prices declined about 3% and sales volumes 5%. Operating income fell $147 and Westlake-attributable net income fell $101.
- Nine-month sales declined 11%; average sales prices fell 9% and volumes 2%. Operating income decreased $303 and attributable net income decreased $132.
- Q3 Vinyls operating income declined to $42 from $153; Olefins operating income declined to $51 from $92. For nine months, Vinyls operating income was $135 versus $383 and Olefins was $138 versus $211.
- Interest expense rose to $37 from $31 for Q3 and to $108 from $89 for nine months, principally reflecting higher average debt and lower capitalization of interest.
Outlook, management commentary and risks
- COVID-19 and markets: Management reported gradual demand improvement from mid-Q2, but continuing demand and price pressure and below-normal operating rates at some facilities. Further impacts remain uncertain. Commodity cyclicality, lower crude-oil prices, reduced North American ethane cost advantage and new industry capacity may pressure margins.
- Hurricanes: Hurricane Laura disrupted Lake Charles operations through much of September, contributing to lower production and $39 of higher Q3 maintenance expense. Facilities were idled again around Hurricane Delta in October and subsequently resumed production.
- Unusual charges and tax benefit: Q3 included $34 of costs related primarily to closing a non-integrated PVC plant in Germany, including an $8 asset write-off. CARES Act NOL carrybacks generated tax benefits of $27 in Q3 and $95 for nine months; these benefits supported reported earnings and should be distinguished from operating performance.
- Capital spending and maintenance: Management expected 2020 capital spending of $500–$550, below the $604 spent in the first nine months of 2019. The Petro 2 ethylene-unit turnaround was deferred to the second half of 2021 and expected to last about 60 days. These are management expectations, not guaranteed outcomes.
- Debt actions: Westlake issued $300 of 3.375% notes due 2030 and used proceeds in part to retire $100 of 6.5% notes due 2029 and to fund the November 2020 purchase of $154 of 6.5% bonds due 2035. The revolver draw of $1 billion in March was fully repaid in June. The company reported compliance with debt covenants.
- Contingencies: U.S. and Canadian class actions allege caustic-soda price-fixing; damages are unspecified and the company could not estimate financial impact. Environmental reserves were approximately $48; additional reasonably possible environmental losses were estimated at $70–$130. Calvert City remediation exposure remains uncertain, with EPA-estimated implementation costs of $107 plus annual operating costs; the company’s allocation is subject to agreements with other parties. Management did not believe known matters would, in aggregate, materially adversely affect the financial statements.
- Other: No off-balance-sheet arrangements were reported. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand, product pricing and operating rates continued to recover after September, and the longer-term effects of COVID-19 and added industry capacity.
- The duration and financial effects of hurricane-related interruptions, including the disclosed $39 maintenance expense and any subsequent impacts.
- Progress and total costs of the German plant closure, and whether the $34 charge captures the expected restructuring costs.
- Realization and timing of CARES Act tax refunds, and the extent to which tax benefits affect comparisons with future earnings.
- Actual 2020 capital spending versus the $500–$550 outlook and the timing, cost and operational effects of the deferred Petro 2 turnaround.
- Developments in caustic-soda litigation and environmental matters, including whether potential losses exceed recorded reserves or current estimates.