Westlake Chemical Corporation (NYSE: WLK) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Figures are in millions of dollars except per-share data. Westlake is a vertically integrated chemicals, polymers and building-products manufacturer, reporting in Olefins and Vinyls segments.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2,066 | $2,255 | $6,235 | $6,640 |
| Gross profit | $371 | $539 | $1,010 | $1,633 |
| Gross margin | 18% | 24% | 16% | 25% |
| Operating income | $226 | $396 | $554 | $1,201 |
| Net income attributable to Westlake | $158 | $308 | $349 | $873 |
| Diluted earnings per share | $1.22 | $2.35 | $2.69 | $6.67 |
| EBITDA (non-GAAP) | $425 | $580 | $1,111 | $1,727 |
| Cash provided by operating activities | $501 | $606 | $968 | $1,155 |
For the first nine months, investing activities used $948, including $604 of capital expenditures and $314 for acquisitions, net of cash acquired. Financing activities provided $669. Cash and cash equivalents were $1,437 at September 30, versus $753 at year-end 2018; cash, cash equivalents and restricted cash totaled $1,459. Long-term debt, net, was $3,424, up from $2,668. The $1,000 revolving credit facility was undrawn and fully available; Westlake reported compliance with its debt covenants. Current assets were $3,482 and current liabilities $1,238.
Dividends were $0.2625 per share in Q3 and $0.7625 per share for the first nine months. Westlake repurchased $30 of stock in the first nine months.
Changes versus prior comparable periods
- Q3 sales fell 8%, while average selling prices declined 12% and sales volume rose 4%. For the nine-month period, sales fell 6%, with average prices down 10% and volume up 4%.
- Lower selling prices for major products drove the decline in gross profit and earnings; lower ethane feedstock, purchased ethylene and fuel costs partly offset the impact. Management cited slower global growth and international trade uncertainty.
- Olefins Q3 operating income declined to $92 from $162; Vinyls declined to $153 from $251. Lower prices were the principal pressure in both segments. Olefins trading activity was a $15 loss in Q3 versus a $4 gain a year earlier.
- Nine-month operating cash flow decreased $187, mainly due to lower operating income, partly offset by a favorable working-capital change. Working capital provided $41 of cash versus using $252 in the prior-year period.
Outlook, significant developments and risks
- No specific earnings or financial guidance is provided. Management warned that new ethylene and polyethylene capacity in North America, Asia and the Middle East could add supply and weigh on Olefins profitability. Trade policy, global economic growth, crude oil and feedstock prices, and capacity timing could affect results in either direction.
- On October 29, 2019, after quarter-end, Westlake agreed to buy at least an additional 34.787% of LACC for approximately $817, increasing its interest from about 12%; closing is subject to regulatory waiting-period and customary conditions. The filing says the company expects to fund the purchase with cash on hand. LACC’s ethylene facility began commercial operations in Q3.
- Westlake acquired NAKAN on January 2, 2019 for $249 in cash. Its post-acquisition sales and earnings were not material to consolidated results for the nine-month period; purchase-price allocation remained preliminary.
- In July, Westlake issued €700 of 1.625% senior notes due 2029, receiving approximately $779 of net proceeds. The euro debt was designated as a hedge of euro-denominated net investments.
- Environmental reserves were approximately $46 at September 30. The company disclosed additional reasonably possible environmental losses of $65–$130. It also faces caustic-soda antitrust class actions seeking unspecified damages; Westlake said it could not estimate their financial impact.
- Management stated that known legal and regulatory matters were not expected, in aggregate, to have a material adverse effect, while noting uncertainty around environmental proceedings. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Investor facts to verify
- Whether margins and earnings stabilize amid lower product prices and expected industry capacity additions.
- Final purchase price, acquired interest, funding and closing conditions for the LACC transaction, and its effect on liquidity and debt.
- Progress and cash requirements for capital projects, including the ongoing PVC and VCM expansions.
- Developments in the caustic-soda antitrust cases and environmental matters, including Calvert City remediation and the disclosed possible-loss range.
- Cash generation relative to capital spending, dividends, repurchases and the company’s increased debt balance.