Westlake Chemical Corporation (NYSE: WLK) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Westlake is a vertically integrated global producer of olefins, vinyls, polymers and building products, operating through its Olefins and Vinyls segments.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $8.118 billion | $8.635 billion |
| Gross profit / margin | $1.260 billion / 16% | $1.987 billion / 23% |
| Income from operations | $656 million | $1.408 billion |
| Net income attributable to Westlake | $421 million | $996 million |
| Diluted EPS | $3.25 | $7.62 |
| Operating cash flow | $1.301 billion | $1.409 billion |
| Capital expenditures | $787 million | $702 million |
| EBITDA (non-GAAP) | $1.407 billion | $2.101 billion |
| Cash and cash equivalents, year-end | $728 million | $753 million |
| Working capital, year-end | $1.501 billion | $1.659 billion |
| Long-term debt, net, year-end | $3.445 billion | $2.668 billion |
Amounts are in U.S. dollars; financial figures are rounded. EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Net sales fell 6%; average selling prices declined 11% while sales volumes rose 5%. Lower prices for major products, including amid trade uncertainty, slower global growth and new industry capacity, drove the earnings decline. Lower feedstock, purchased ethylene and fuel costs partly offset the pressure.
- Olefins sales were $1.782 billion and operating income was $260 million, versus $2.019 billion and $573 million in 2018. Segment average sales prices fell 21%; volumes increased 9%. Trading activity produced a $26 million loss, compared with a $3 million gain in 2018.
- Vinyls sales were $6.336 billion and operating income was $451 million, versus $6.616 billion and $913 million. Segment average sales prices fell 8%; volumes increased 3%. Lower caustic soda and PVC resin prices were key pressures.
- Net cash used in investing was $1.954 billion, including $787 million of capital expenditures, $314 million for acquisitions net of cash acquired, and $817 million to buy an additional 34.8% interest in LACC. Operating cash flow exceeded capital expenditures by $514 million.
- Net cash provided by financing was $630 million, including approximately $784 million net proceeds from the euro-denominated 1.625% senior notes due 2029. The company paid $132 million in dividends and repurchased $30 million of common stock.
- Year-end debt was $3.445 billion; the filing cites total indebtedness of $3.4 billion and debt at approximately 35% of capitalization. Interest expense was $124 million. The $1 billion revolving credit facility was undrawn, with $1 billion available; the company reported compliance with its leverage covenant and long-term debt covenants.
- Cash dividends declared were $1.025 per share, up from $0.92 in 2018.
Fourth-quarter results
For the three months ended December 31, 2019, net sales were $1.883 billion, gross profit $250 million, operating income $102 million, net income attributable to Westlake $72 million and diluted EPS $0.56. In the fourth quarter of 2018, the corresponding figures were $1.995 billion, $354 million, $207 million, $123 million and $0.95.
Material developments, outlook and risks
- Westlake acquired NAKAN, a global compounding solutions business, on January 2, 2019 for approximately $249 million. NAKAN’s contribution to 2019 consolidated sales and earnings was not material.
- In November 2019, Westlake acquired an additional 34.8% of LACC for approximately $817 million, raising its interest to 46.8%. The LACC ethylene plant began commercial operations in the third quarter. Westlake accounts for LACC under the equity method and receives its proportionate ethylene output on a cash-cost basis.
- Management provided no specific financial guidance. It cautioned that new ethylene and polyethylene capacity in North America, Asia and the Middle East could continue to pressure Olefins profitability. Global economic conditions, trade and tariff policy, crude oil and feedstock prices, and supply-demand balances could affect results.
- Environmental compliance capital expenditures were $28 million in 2019; management estimated approximately $40 million in 2020 and $34 million in 2021. The filing describes environmental proceedings and reserves of $47 million at year-end, plus reasonably possible environmental losses of $70 million to $130 million beyond recorded reserves.
- Westlake and other producers face purported class-action lawsuits alleging caustic soda price-fixing and supply/customer allocation. Plaintiffs seek unspecified damages and injunctive relief; the company said it could not estimate the financial impact.
- Other key exposures include petrochemical cyclicality and commodity-price competition, volatile raw material and energy costs, operational and weather interruptions, international and currency risks, acquisition and joint-venture risks, debt and pension obligations, and evolving environmental and climate regulation. Management said it did not expect the identified legal and environmental matters, individually or collectively, to have a material adverse effect, while noting uncertainties in their resolution.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified goodwill impairment testing for the North America Vinyls reporting unit as a critical audit matter; no goodwill impairment was recorded in 2019.
Important facts for investors to verify
- Whether selling prices and segment margins stabilize as new global capacity enters service, particularly in Olefins.
- Whether operating cash flow can support planned capital spending, dividends and debt obligations following the LACC investment and acquisition spending.
- The timing, cost and outcome of the caustic soda litigation and environmental proceedings, including Calvert City remediation responsibilities and the stated reasonably possible loss range.
- How LACC performs commercially and financially, and the effect of Westlake’s minority ownership and shared governance on returns and ethylene supply.
- The assumptions supporting Vinyls goodwill valuations and the sensitivity of those valuations to prices, volumes, discount rates and industry conditions.