Business context and reporting period
Westlake Chemical Corporation’s Form 10-K covers the fiscal year ended December 31, 2014; it is an annual filing, not a standalone quarterly report. Westlake is an integrated chemicals and building-products manufacturer operating in Olefins and Vinyls. Its products include polyethylene, styrene, PVC, caustic soda and PVC building products.
Major 2014 developments included the July acquisition of German PVC producer Vinnolit and the August IPO of Westlake Chemical Partners LP. Westlake retained control and consolidates the partnership. The Vinnolit acquisition added European operations and specialty PVC products.
Financial and operating performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $4,415.4 million | $3,759.5 million |
| Gross profit / margin | $1,317.4 million / 29.8% | $1,101.4 million / 29.3% |
| Operating income | $1,124.0 million | $953.5 million |
| Net income attributable to Westlake | $678.5 million | $610.4 million |
| Diluted earnings per share | $5.07 | $4.55 |
| Operating cash flow | $1,032.4 million | $752.7 million |
| Capital expenditures | $431.1 million | $679.2 million |
| EBITDA (non-GAAP) | $1,329.8 million | $1,118.1 million |
For the fourth quarter of 2014, net sales were $1,135.9 million, gross profit $362.8 million, operating income $302.4 million, net income attributable to Westlake $183.3 million and diluted EPS $1.37. In Q4 2013, those figures were $951.6 million, $295.7 million, $257.6 million, $171.0 million and $1.27, respectively.
FY 2014 sales rose 17.4% and attributable net income rose 11.2% year over year. Olefins operating income increased to $1,013.8 million from $833.2 million; Vinyls operating income declined to $142.7 million from $154.7 million. Higher polyethylene prices and improved Olefins margins supported results; Vinyls was affected by turnarounds, lower production, winter-related propane costs and acquisition-related inventory accounting.
At year-end, cash and cash equivalents were $880.6 million, working capital was $1,474.1 million, total debt was $764.0 million, and total equity was $3,201.9 million. The company had no revolver borrowings and reported $368.6 million of borrowing availability under its $400 million facility. No long-term debt maturities were scheduled before 2022. Reported interest expense was $37.4 million.
Material changes versus the prior period
- Vinnolit contributed $431.4 million of sales and a $3.7 million net loss for the five months after acquisition. The acquisition was funded with available cash; reported cash used, net of cash acquired, was $611.1 million.
- Vinyls sales increased 40.3%, principally reflecting Vinnolit and North American Specialty Products, acquired in 2013, as well as higher caustic volumes and PVC prices.
- Operating cash flow increased by $279.6 million, reflecting higher operating income and a favorable working-capital movement. Investing cash outflow decreased as capital expenditures fell from the prior year, although the Vinnolit acquisition required substantial cash.
- Cash increased from $461.3 million to $880.6 million. Total debt remained broadly unchanged.
- Westlake completed an ethane feedstock conversion and 180-million-pound annual capacity expansion at OpCo’s Calvert City ethylene plant, and expanded Calvert City PVC capacity by approximately 200 million pounds annually.
Outlook, commentary, risks and unusual items
Management did not provide specific earnings or revenue guidance. It said lower crude oil prices beginning in the second half of 2014 could reduce the cost advantage of North American ethane-based production and increase market volatility, potentially pressuring 2015 prices and margins. Lower oil prices may benefit Westlake’s European naphtha-based operations. Management also cited slow U.S. construction recovery and continued European economic weakness as risks to Vinyls demand and margins.
OpCo planned a Petro 1 ethylene-unit upgrade and expansion for the first half of 2016, estimated to cost $275 million to $335 million and add about 250 million pounds of annual capacity. Environmental compliance capital expenditures were $16.8 million in 2014; management estimated $13.0 million in 2015 and $14.6 million in 2016.
- FY 2014 net income was reduced by approximately $26 million after tax for Westlake Partners formation/IPO and Vinnolit acquisition-related costs, and by $14.8 million for state tax-rate changes and other discrete tax items.
- Vinnolit acquisition accounting was preliminary. The company recorded a fair-value inventory step-up that increased 2014 cost of sales by approximately $16.9 million.
- Environmental matters include EPA inquiries concerning flares at Calvert City and Lake Charles, potential corrective actions and costs, and unresolved remediation allocation proceedings concerning historical contamination at Calvert City. Westlake said it could not estimate a possible loss for those remediation proceedings.
- About $122.7 million of projected benefit obligations relate to unfunded non-U.S. pension plans assumed with Vinnolit. Management expects future operating cash flow to fund these obligations.
- The company reported effective internal controls, but Vinnolit, representing 15.7% of consolidated assets and 9.8% of sales, was excluded from management’s and the auditor’s 2014 internal-control assessment because it was acquired during the year.
Most important facts for investors to verify
- How crude-oil, ethane and energy-price changes affect North American Olefins margins and the relative performance of the European business.
- Whether the Petro 1 expansion remains on schedule and within its estimated cost range, and how it will be funded.
- Vinnolit’s post-acquisition profitability, integration progress and final purchase-price allocation.
- Progress and potential financial exposure from EPA flare discussions and Calvert City remediation proceedings.
- Cash generation, capital spending, distributions and debt capacity, including the terms and use of the newly authorized $250 million repurchase program.