Westlake Chemical Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparison is Q1 2013 unless noted. Westlake is a vertically integrated producer of chemicals, polymers, vinyls and building products, reporting Olefins and Vinyls segments. Amounts below are in U.S. dollars; financial statement figures are unaudited. Share and per-share comparisons reflect the February 2014 two-for-one stock split.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1,027.7 million | $864.6 million | +18.9% |
| Gross profit | $287.0 million | $227.8 million | +26.0% |
| Gross margin | 27.9% | 26.3% | +1.6 percentage points |
| Operating income | $248.1 million | $194.1 million | +27.8% |
| Net income | $158.0 million | $123.3 million | +28.1% |
| Diluted EPS | $1.18 | $0.92 | +$0.26 |
| Operating cash flow | $212.5 million | $116.3 million | +$96.3 million |
| Capital expenditures | $110.7 million | $150.8 million | -$40.0 million |
Sales rose on higher volumes of polyethylene and ethylene, higher prices for most major products, and contributions from the specialty PVC pipe business acquired in May 2013. Company-average sales prices increased 9.5% and volumes increased 8.8%. Operating income benefited chiefly from stronger Olefins integrated margins and improved volumes; cash from operations also benefited from lower working-capital use.
Segments
- Olefins: Sales increased 24.0% to $722.8 million; operating income rose 69.0% to $272.3 million. Higher prices and volumes, with price increases outpacing feedstock and energy cost increases, drove improvement. Trading activity shifted from a $7.3 million gain to a $0.6 million loss.
- Vinyls: Sales increased 8.2% to $304.9 million, but the segment recorded a $21.1 million operating loss versus $43.7 million operating income a year earlier. Results were affected by Calvert City downtime and related costs, severe winter weather and higher propane costs.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $532.6 million, current marketable securities were $243.7 million, and total current assets were $1.687 billion. Management reported cash, cash equivalents and current marketable securities of $776.3 million.
- Long-term debt was $763.9 million, approximately unchanged from year-end. No borrowings were outstanding under the $400 million revolving credit facility; availability was $383.1 million after $16.9 million of letters of credit. The company reported compliance with debt covenants.
- Operating activities provided $212.5 million; investing activities used $130.0 million and financing activities used $11.1 million. Cash increased by $71.3 million during the quarter.
- Dividends paid were $16.8 million; dividends declared per common share were $0.1260. The company made no repurchases under its announced repurchase program during the quarter.
Material changes, outlook and risks
- Calvert City’s ethylene plant conversion to cost-advantaged ethane feedstock and capacity expansion was completed in April 2014, adding approximately 180 million pounds of annual capacity. The project and a maintenance turnaround caused about 19 days of shutdown, including 14 days in Q1; management attributed $16.9 million of Vinyls expense to unabsorbed fixed manufacturing and other related costs.
- The Geismar chlor-alkali plant began operating in Q4 2013. Management expects the Geismar and Calvert City projects to improve Vinyls profitability; the filing provides no specific earnings guidance.
- Westlake plans a second Lake Charles ethylene-unit upgrade and expansion in late 2015 to early 2016. Estimated cost is $250–$310 million, with approximately 250 million pounds of additional annual capacity. Funding is expected from cash, operating cash flow and, if needed, external financing.
- Management said liquidity should be adequate for normal operations and ongoing capital spending, while large expansions or acquisitions could require additional financing. Outlook remains exposed to chemical-industry cyclicality, commodity prices and availability, demand, competition, weather and operating interruptions, credit markets, and regulatory or environmental developments.
- Environmental proceedings concerning contamination at Calvert City remain unresolved. The company cannot estimate any potential loss; it believes any costs allocable to it are unlikely to be material in an individual reporting period and would likely be spread over time. A PolyOne arbitration seeking a cost-allocation change and approximately $1.4 million reimbursement is stayed.
- Effective tax rate was 34.5%, versus 35.5% in Q1 2013. Interest expense increased to $9.2 million, mainly because less interest was capitalized on major projects. The company reported effective disclosure controls and no material changes to internal controls.
Important facts for investors to verify
- Whether Olefins’ margin strength and favorable feedstock economics persist, and how commodity prices affect integrated margins.
- Whether Vinyls profitability recovers following Calvert City project completion, including the plants’ operating performance and remaining project or turnaround costs.
- Actual spending, schedule and financing for the planned Lake Charles expansion and other capital projects.
- Future operating cash flow, working-capital needs, capital expenditures, and liquidity relative to debt and dividend commitments.
- Developments and potential financial exposure from the Calvert City environmental proceedings and PolyOne arbitration.