Westlake Chemical Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Amounts are in millions of dollars unless stated otherwise.
Business context and results
Westlake is a vertically integrated global manufacturer and marketer of petrochemicals, polymers and building products. Its two operating segments are Olefins and Vinyls.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $2,150 | $1,943 |
| Gross profit / margin | $542 / 25.2% | $366 / 18.8% |
| Operating income | $401 | $234 |
| Net income attributable to Westlake | $287 | $138 |
| Diluted EPS | $2.20 | $1.06 |
| EBITDA | $579 | $391 |
| Operating cash flow | $225 | $157 |
Financial position, cash flow and liquidity
- Cash and cash equivalents were $851 at quarter-end, down from $1,531 at December 31, 2017. Cash, cash equivalents and restricted cash totaled $874 at quarter-end.
- Debt carrying value, including current maturities, was $3,127 ($461 current and $2,666 long-term), compared with $3,837 at year-end. Approximate net debt based on cash and debt carrying value was $2,276.
- Westlake had no borrowings under its $1 billion revolving credit facility, $5 of letters of credit and $995 of available borrowing capacity; it was in compliance with the facility’s leverage covenant.
- Operating cash flow of $225 less $154 of capital expenditures implies approximately $71 of cash flow after capital spending, before $26 invested in unconsolidated subsidiaries. Working capital used $233 of cash, primarily reflecting increases in receivables and inventory.
- Financing activities used $731, including $706 to repay notes payable, chiefly redemption of the 2021 notes. Dividends paid were $27; dividends declared were $0.21 per common share.
Changes versus prior year and segment performance
- Sales rose 10.7%; average selling prices increased 9.0% and overall sales volume increased 1.7%. Higher prices for major products and greater caustic soda and PVC resin volumes drove improvement.
- Vinyls sales increased 17.6% to $1,647 and operating income rose to $266 from $70. The comparison benefited from improved prices and volumes and from prior-year costs associated with turnarounds, outages and the Calvert City ethylene-unit expansion.
- Olefins sales declined 7.4% to $503 and operating income fell to $163 from $180. Polyethylene sales volume declined 8.6%; higher feedstock prices partly offset improved polyethylene prices.
- Interest expense declined to $37 from $40, primarily due to lower average debt after the 2021 notes redemption. Other income increased to $22 from $7, including a $6 gain on that redemption.
- The effective tax rate fell to 22.9% from 27.9%, primarily reflecting the Tax Act’s lower U.S. corporate rate. Westlake recorded a provisional $591 tax benefit in 2017 from the Tax Act; no measurement-period adjustment was made in Q1 2018.
Outlook, risks, contingencies and unusual items
- The filing gives no specific earnings or revenue guidance. Management said available cash, operating cash flow and revolver capacity should meet normal operating needs and planned capital spending; major expansions or acquisitions could require additional financing.
- Management noted that the chemical business is cyclical and exposed to commodity prices, feedstock and energy costs, supply-demand changes, new industry capacity and economic conditions. Additional ethylene and polyethylene capacity could pressure Olefins margins; the outlook for Vinyls depends in part on demand and caustic soda pricing.
- The LACC ethylene joint venture had an anticipated 2019 start-up. Westlake’s maximum commitment was $225, of which approximately $141 had been funded by March 31, 2018.
- Westlake redeemed $688 principal amount of 2021 notes in February at 102.313% plus accrued interest. It had also given notice to redeem $450 principal amount of 2023 notes on May 15, 2018 at 102.438% plus accrued interest; the notes were classified as current liabilities at quarter-end.
- Environmental reserves were approximately $49. The company disclosed additional reasonably possible environmental losses of $55 to $110. The Calvert City remediation plan’s estimated total cost was $200–$250, but Westlake’s allocation remained subject to arbitration and related litigation; the company said it could not estimate the impact.
- The filing identifies pending environmental enforcement matters involving facility air permits, flares and Risk Management Program requirements. Westlake did not expect their resolution to materially adversely affect its financial condition, results or cash flows. Broader risks include operating interruptions, regulatory changes, foreign exchange and access to capital.
- Westlake entered into €220 million of cross-currency swaps designated as net-investment hedges. The filing reports no hedge ineffectiveness in the quarter.
Important facts for investors to verify
- Whether Vinyls pricing and volume strength persists, and whether Olefins polyethylene volumes and margins recover amid feedstock costs and capacity additions.
- Cash and working-capital trends, including the impact of elevated receivables and inventory on operating cash generation.
- Completion and cost of the May 2018 redemption of the 2023 notes, and subsequent debt and liquidity levels.
- Progress, remaining funding needs and start-up timing for the LACC project.
- Updates to environmental exposure estimates, Calvert City allocation proceedings and pending regulatory matters.