Westlake Chemical Corporation — 2015 Form 10-K
Business context and period: Annual report for the fiscal year ended December 31, 2015; the filing also provides unaudited fourth-quarter results. Westlake is an integrated producer of olefins, vinyls, polymers and PVC building products, reporting Olefins and Vinyls segments.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $4.463 billion | $4.415 billion |
| Gross profit / margin | $1.185 billion / 26.6% | $1.317 billion / 29.8% |
| Operating income | $959.8 million | $1.124 billion |
| Net income attributable to Westlake | $646.0 million | $678.5 million |
| Diluted EPS | $4.86 | $5.07 |
| Operating cash flow | $1.079 billion | $1.032 billion |
| Capital expenditures | $491.4 million | $431.1 million |
| Cash and current marketable securities at year-end | $1.183 billion | $880.6 million cash; no current marketable securities reported |
| Working capital | $1.653 billion | $1.474 billion |
| Total debt | $764.1 million | $764.0 million |
| EBITDA (non-GAAP) | $1.244 billion | $1.330 billion |
Westlake had no borrowings under its $400 million revolving facility at year-end; reported availability was $320.8 million, after letters of credit and borrowing-base limitations. The company declared $0.693 per share in dividends during 2015 and repurchased approximately $162.5 million of common stock.
Material changes versus prior year
- Sales rose 1.1%, as higher volumes and the inclusion of Vinnolit for a full year largely offset average selling prices 25.3% lower year over year.
- Operating income fell $164.2 million. Management cited lower Olefins integrated margins—primarily from lower selling prices—and turnaround impacts; lower feedstock and energy costs and stronger Vinyls results partly offset the decline.
- Olefins operating income declined to $747.4 million from $1.014 billion; Vinyls operating income increased to $254.5 million from $142.7 million. Vinyls sales growth reflected Vinnolit, Huasu and higher volumes.
- Net income attributable to Westlake declined 4.8%; 2015 included a net $20.4 million gain related to obtaining control of Huasu and a lower effective tax rate (31.0%, versus 36.8%).
- Operating cash flow increased 4.5%, helped by lower working-capital requirements. Investing cash outflow rose to $1.006 billion, including $491.4 million of capital expenditures and $605.1 million of securities purchases; financing cash outflow was $286.8 million.
- In unaudited Q4 2015, sales were $986.8 million and net income attributable to Westlake was $111.0 million, compared with $1.136 billion and $183.3 million, respectively, in Q4 2014.
Outlook, management commentary and risks
- Management said the global economy appeared to be improving slowly, but cautioned that results remained exposed to economic conditions and market developments. The filing gives no specific earnings or revenue guidance.
- Management warned that lower crude oil prices had reduced the cost advantage of North American ethane-based production and had pressured prices and margins. New capacity, cyclical demand, raw-material and energy volatility, and weak European and construction markets were also identified as risks.
- Planned projects included the Lake Charles Petro 1 ethylene upgrade and expansion, expected to add about 250 million pounds of annual capacity, with estimated cost of $275–$335 million and work expected to begin in Q2 2016. At year-end, about $201.1 million had been incurred. The Calvert City ethylene expansion was estimated at $70–$80 million, adding about 70 million pounds annually, with completion targeted for the first half of 2017.
- In January 2016 Westlake proposed acquiring Axiall for approximately $2.9 billion, including assumed liabilities; Axiall rejected the proposal. Westlake subsequently announced its intention to nominate directors to Axiall’s board.
- Environmental matters include EPA discussions concerning possible flare compliance and unresolved CERCLA remediation allocation at Calvert City. The company said it could not estimate a potential loss for the remediation proceedings. Estimated environmental-compliance capital spending was $24.1 million in 2016 and $23.8 million in 2017.
- Other exposures include unfunded European pension obligations of approximately $94.8 million, commodity and foreign-exchange risk, operating interruptions, and restrictions under debt agreements. The company reported compliance with debt covenants at year-end.
Most important facts for investors to verify
- Whether Olefins margins stabilized after the 2015 decline and how crude oil, ethane and product-price movements affect the company’s integrated margins.
- Actual costs, timing, capacity gains and expected returns for the Lake Charles and Calvert City projects.
- Progress and financial implications of the proposed Axiall transaction and board nomination activity; the proposal was rejected as of the filing.
- Developments in the EPA flare discussions and Calvert City remediation proceedings, including any new estimates of Westlake’s potential liability.
- Composition, maturity and liquidity of the $520.1 million current marketable-securities portfolio, alongside cash, debt and revolving-facility availability.
- How much reported earnings depended on the Huasu bargain-purchase gain and discrete tax items; EBITDA is a non-GAAP measure and should be considered with GAAP results and cash flow.