Westlake Chemical Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited; financial amounts are in millions of dollars unless stated otherwise. Westlake manufactures petrochemicals, polymers and building products through its Olefins and Vinyls segments.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior period |
|---|---|---|
| Net sales | $2,025 | $2,150; down 6% |
| Gross profit / gross margin | $299 / 15% | $542 / 25% |
| Income from operations | $134 | $401 |
| Net income attributable to Westlake | $72 | $287 |
| Diluted EPS | $0.55 | $2.20 |
| EBITDA (non-GAAP) | $314 | $579 |
| Cash from operating activities | $147 | $225 |
| Capital expenditures | $203 | $154 |
- Cash and cash equivalents were $445 at March 31, 2019, versus $753 at December 31, 2018. Cash, cash equivalents and restricted cash totaled $467 at quarter-end in the cash flow statement.
- Long-term debt, net, was $2,669; aggregate debt principal was approximately $2.7 billion. The $1.0 billion revolving credit facility had no borrowings, $4 of letters of credit and $996 of availability. The company reported compliance with debt covenants.
- Total current assets were $2,627 and current liabilities $1,226. The company said available cash, operating cash flow and credit availability should fund normal operations and ongoing capital expenditures; large expansions or acquisitions could require additional financing.
- Dividends declared were $0.25 per common share, versus $0.21 in Q1 2018. Operating lease liabilities were $404 at quarter-end following adoption of the new lease standard.
Changes versus the prior comparable period
- Net sales declined $125, primarily due to lower product prices and weaker downstream Vinyls volumes, partly offset by higher polyethylene and styrene volumes and NAKAN sales. Overall average sales prices fell 8%, while total sales volume rose 3%.
- Profitability fell sharply as lower prices for major products and higher ethane feedstock costs compressed margins. The company also recorded $22 of restructuring, transaction and integration costs, versus $7 a year earlier, including $19 of asset write-offs.
- Olefins sales were $459, down 9%; operating income was $37, down from $163. Segment average prices fell 23%, while volumes increased 15%.
- Vinyls sales were $1,566, down 5%; operating income was $101, down from $266. Segment prices fell 4% and volumes fell 1%.
- Operating cash flow declined $78. Working-capital use was $135, compared with $233 in Q1 2018. Investing cash outflow increased to $475, including the NAKAN acquisition and higher capital spending. Financing provided $21, versus $731 used in Q1 2018, when debt redemptions were substantial.
Outlook, commentary and risks
- No numerical earnings or revenue guidance is provided. Management describes results as exposed to cyclical supply and demand, commodity prices, raw-material and energy costs, capacity additions, global economic conditions, trade uncertainty and tariffs.
- Management cited weaker demand associated with trade uncertainty, increased olefins capacity, high global chlor-alkali operating rates and the late-2018 decline in crude oil prices as pressures on product prices and margins. It noted that additional ethylene and polyethylene capacity could continue to weigh on profitability.
- The January 2 acquisition of NAKAN cost approximately $246 and was included in Vinyls. Its Q1 sales and earnings contribution was not material. Preliminary purchase accounting included $44 of goodwill.
- Environmental reserves were approximately $53. The filing also disclosed reasonably possible additional environmental losses of $65–$130. A Calvert City remediation allocation arbitration was pending, with a decision anticipated in Q2 2019; the company could not estimate its financial impact.
- Six purported class-action lawsuits filed in March and April 2019 allege caustic soda price-fixing and related conduct and seek unspecified damages and injunctive relief. Westlake disputes the claims and said the impact could not be estimated.
- The company reported no material change to its previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether product pricing, ethane costs and segment margins improve or deteriorate, particularly amid planned industry capacity additions and trade uncertainty.
- Progress and final valuation of NAKAN, including the acquisition’s contribution to Vinyls performance and any purchase-accounting revisions.
- Actual capital spending and cash generation relative to the $203 of Q1 capital expenditures and the company’s stated liquidity expectations.
- Outcomes and potential costs of the caustic soda litigation, Calvert City arbitration and other environmental proceedings; several exposures remain unquantified or uncertain.
- Reconcile the $445 balance-sheet cash figure with $467 of cash, cash equivalents and restricted cash reported in the cash flow statement; the filing identifies restricted cash of $22.