Westlake Chemical Corporation — Q3 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2017, compared with the same periods in 2016. Westlake is a vertically integrated petrochemicals, polymers and building-products manufacturer, operating through Olefins and Vinyls. Comparisons are materially affected by Axiall, acquired on August 31, 2016: 2017 includes a full quarter and nine months of Axiall operations, versus one month in the 2016 comparable periods.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $2.109 billion | $1.279 billion | $6.031 billion | $3.340 billion |
| Gross profit | $498.1 million | $202.1 million | $1.271 billion | $699.1 million |
| Gross margin | 23.6% | 15.8% | 21.1% | 20.9% |
| Operating income | $365.7 million | $46.6 million | $868.2 million | $428.8 million |
| Net income attributable to Westlake | $210.8 million | $65.7 million | $501.8 million | $299.9 million |
| Diluted EPS | $1.61 | $0.51 | $3.85 | $2.29 |
| EBITDA (non-GAAP) | $521.4 million | $182.1 million | $1.323 billion | $708.1 million |
For the nine months, operating cash flow was $962.7 million, capital expenditures were $414.3 million, and cash dividends paid were $76.5 million. Cash and cash equivalents were $678.2 million at September 30, 2017, up from $459.5 million at year-end 2016. Long-term debt, net, was $3.349 billion; the company reported no borrowings on its $1.0 billion revolving credit facility, with $954.6 million available after letters of credit. Current assets were $2.700 billion and current liabilities $1.170 billion.
Q3 performance improved as higher product prices and Axiall contributions lifted earnings; the prior-year quarter included a $49.1 million gain on previously held Axiall shares. Nine-month operating cash flow rose from $544.2 million in 2016, while investing cash outflow fell to $459.4 million from $2.389 billion, which included the Axiall acquisition in 2016. Interest expense increased to $118.8 million for the nine months from $37.0 million, mainly due to acquisition-related debt and lower capitalized interest.
Material changes, outlook and risks
- Q3 net sales increased 64.9%; average selling prices rose 12.1% and total sales volumes 52.8%. Nine-month sales rose 80.5%, with prices up 14.1% and volumes up 66.4%. Much of the volume growth reflects the additional Axiall operations in the comparison.
- Vinyls drove much of the reported increase: Q3 segment operating income was $216.5 million versus $22.2 million, while Olefins operating income was $165.4 million versus $118.5 million. Management cited higher sales prices and Axiall earnings, partly offset by higher feedstock and energy costs.
- Transaction and integration costs declined to $6.7 million in Q3 from $82.8 million, and to $22.9 million for nine months from $90.6 million.
- Management provided no specific numerical earnings guidance. It said existing cash, operating cash flow and available credit should meet normal operating needs for the foreseeable future, absent a major expansion or acquisition. It cautioned that new industry capacity may create oversupply and lower profitability; commodity prices, raw-material and energy costs, demand, operating interruptions, and Axiall integration remain risks.
- The company directed redemption of $250 million of GO Zone bonds on November 1, 2017, funded with cash on hand; the related $250 million 2032 notes were to be surrendered for cancellation. The term loan was repaid in January 2017.
- Environmental reserves were approximately $47.4 million; additional reasonably possible environmental losses were estimated at $40–$80 million. The company stated that known legal and regulatory matters were not expected in aggregate to materially adversely affect its financial statements, but individual-period costs could be material. A 2012–2014 IRS audit began in Q2 2017.
- The company had funded $106.4 million of its maximum $225 million LACC ethylene-plant commitment as of September 30, 2017; startup was anticipated in 2019. It reported compliance with debt covenants and effective disclosure controls, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate growth from Axiall’s added contribution from organic volume, pricing and margin changes; confirm the acquisition-driven comparability effects in segment results.
- Track Olefins and Vinyls margins against feedstock, energy and product prices, industry capacity additions, and operating rates.
- Review debt and cash after the GO Zone redemption, interest costs, and remaining revolver availability and covenant headroom.
- Assess working-capital needs, capital spending, the remaining LACC funding commitment, and the project’s expected timing.
- Monitor environmental proceedings and the stated $40–$80 million reasonably possible additional loss range, as well as the IRS audit.