Westlake Chemical Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017. Amounts are in millions of dollars except per-share data. Westlake is a vertically integrated petrochemical, polymer and building-products manufacturer, operating through Olefins and Vinyls segments.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $2,255 | $2,109 | $6,640 | $6,031 |
| Gross profit | $539 | $496 | $1,633 | $1,265 |
| Gross margin | 23.9% | 23.5% | 24.6% | 21.0% |
| Income from operations | $396 | $364 | $1,201 | $862 |
| Net income attributable to Westlake | $308 | $211 | $873 | $502 |
| Diluted EPS | $2.35 | $1.61 | $6.67 | $3.85 |
| EBITDA (non-GAAP) | $580 | $522 | $1,727 | $1,324 |
| Operating cash flow | $606 | $482 | $1,155 | $962 |
- Q3 sales rose 6.9%; Westlake-attributable net income increased $97, or 46%. For the first nine months, sales rose 10.1% and attributable net income rose $371, or 74%.
- At September 30, cash and cash equivalents were $788, total current assets $3,004 and current liabilities $1,301. Long-term debt, net, was $2,667, with no current portion; total liabilities were $5,633. Cash and cash equivalents had been $1,531 at year-end 2017.
- Nine-month investing cash outflow was $561, including $507 of capital expenditures. Financing cash outflow was $1,331, including $1,177 of note repayments, $87 of dividends and $49 of share repurchases. Cash, cash equivalents and restricted cash ended the period at $811.
- The quarterly dividend was $0.25 per share, versus $0.21 in Q3 2017.
Material changes and drivers
- Vinyls was the principal earnings-growth driver: Q3 operating income increased to $251 from $214; nine-month operating income rose to $788 from $425. Higher caustic soda prices and volumes, higher PVC volumes, lower purchased ethylene costs and improved operating rates contributed.
- Olefins Q3 operating income declined to $162 from $166; nine-month operating income declined to $483 from $489. Higher feedstock costs and, for the nine-month period, planned turnarounds and unplanned outages offset pricing and volume contributions.
- Management attributed improved consolidated results to higher prices for major products, stronger Vinyls sales, lower purchased ethylene costs and fewer Vinyls outages. Higher ethane costs were a partial offset. Q3 sales prices rose 4.9% and volume 2.0%; nine-month prices rose 7.1% and volume 3.0%.
- Interest expense fell to $28 in Q3 and $96 for nine months, primarily following redemption of the 2021 notes in February and 2023 notes in May. Other income included a $14 one-time pension settlement gain; the nine-month figure also included a $6 gain on redemption of 2021 notes.
- The effective tax rate was 18.7% in Q3 and 22.0% for nine months, versus 33.1% and 30.8% in the respective 2017 periods. The decrease primarily reflected the Tax Act’s reduction of the U.S. corporate rate to 21%; Q3 also benefited from discrete tax adjustments.
Outlook, liquidity, risks and contingencies
- No specific earnings or financial guidance is provided. Management said cash, operating cash flow and available credit were expected to meet normal operating needs and ongoing capital expenditures; expansion or major acquisitions could require additional financing.
- Westlake entered a new $1 billion revolving credit facility maturing in July 2023. At quarter-end it had no borrowings, $4 of letters of credit and $996 of availability, and was in compliance with its leverage covenant.
- On September 25, Westlake announced an exclusive binding offer to acquire NAKAN for approximately $265 in cash, subject to adjustment and customary conditions; closing was expected by early 2019. The offer was not yet a completed acquisition. The LACC joint-venture ethylene plant was expected to start up in 2019; Westlake had funded $178 of its maximum $225 commitment.
- Management highlights cyclical chemical markets, new industry capacity, supply-demand shifts, volatile feedstock and energy costs, operating interruptions, competitive pricing, trade-policy changes, foreign exchange and access to capital as risks. Higher ethane costs had already pressured Olefins margins. Management cautions that global capacity additions could weigh on profitability, though demand growth could absorb added supply.
- Environmental reserves were approximately $57 at September 30; additional reasonably possible environmental losses were estimated at $55–$110. At Calvert City, the EPA’s revised estimated remedy cost was $107 plus estimated annual operating and maintenance costs of $1–$3; Westlake’s allocation remained subject to ongoing arbitration with PolyOne, and the company could not estimate its impact.
- Other environmental proceedings include alleged flare and Risk Management Program noncompliance and state matters. The filing says the identified matters were not expected to have a material adverse effect on financial condition, results or cash flows. Risk factors were reported as unchanged from the 2017 Form 10-K.
Most important facts for investors to verify
- Whether Vinyls pricing, volumes and operating rates remain strong, and whether Olefins margins withstand higher ethane and other feedstock costs.
- How much of earnings growth is recurring versus attributable to tax-rate changes and the $14 pension settlement and $6 note-redemption gains.
- Working-capital demands and capital spending: nine-month operating cash flow rose, but working capital used $252 of cash and capital expenditures increased to $507.
- Progress, final terms, funding and expected returns for the NAKAN offer and LACC project, including completion conditions and the planned 2019 LACC startup.
- Developments in Calvert City arbitration and environmental remediation exposure, including whether Westlake’s share of costs can be estimated.
- Debt, cash and liquidity following the note redemptions, and the company’s continued compliance with credit-facility covenants.