Westlake Chemical Corporation — Q2 2014 Form 10-Q
Business context and reporting period. Westlake is a vertically integrated chemicals and building-products producer, operating through Olefins and Vinyls segments. This unaudited report covers the quarter and six months ended June 30, 2014; comparisons are with the same 2013 periods. Unless stated otherwise, dollar figures below are in millions. Prior-year per-share figures reflect the 2014 two-for-one stock split.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $998.6 | $939.0 | $2,026.3 | $1,803.7 |
| Gross profit | $306.0 | $273.5 | $593.0 | $501.3 |
| Gross margin | 30.6% | 29.1% | 29.3% | 27.8% |
| Operating income | $266.8 | $235.2 | $514.8 | $429.3 |
| Net income | $169.4 | $145.8 | $327.5 | $269.2 |
| Diluted EPS | $1.26 | $1.09 | $2.44 | $2.01 |
| Interest expense | $9.5 | $5.3 | $18.7 | $11.6 |
- Cash flow and investment: Six-month operating cash flow was $432.2, versus $255.5 a year earlier. Capital expenditures were $216.9, down from $297.9. Investing activities provided $7.5, compared with $388.9 used in 2013, when business acquisition spending was substantial. Cash and cash equivalents were $876.1 at June 30.
- Debt and liquidity: Long-term debt was $763.9, broadly unchanged from year-end 2013; no borrowings were outstanding on the $400 million revolving facility, with $382.2 available after letters of credit. The company reported compliance with debt covenants. Total assets were $4,369.4 and total liabilities $1,641.3.
- Dividends: Dividends per share were $0.1260 in Q2 and $0.2520 for the first half, compared with $0.0938 and $0.1875, respectively, in 2013.
Material changes versus prior periods
- Q2 sales increased 6.3%; six-month sales increased 12.3%. Higher Olefins prices and volumes drove most of the growth, with acquired specialty PVC pipe sales also contributing to first-half results.
- Olefins operating income rose to $238.7 in Q2 from $187.7, and to $511.0 for the first half from $348.7, reflecting stronger integrated margins and higher sales volumes. Six-month trading results were a $0.4 loss versus a $16.7 gain in 2013.
- Vinyls operating income fell to $38.1 in Q2 from $52.9 and to $17.0 for the first half from $96.6. First-half results included $20.4 of unabsorbed fixed manufacturing and other costs related to the Calvert City turnaround and expansion, as well as lower PVC volumes, lower caustic prices, severe winter weather, and high propane costs.
- Interest expense rose largely because less interest was capitalized on major projects. Six-month net income nevertheless increased 21.7%, to $327.5.
Outlook, management commentary, risks and unusual items
- Management said the cost advantage of North American ethane-based production had supported exports and Olefins margins. It described the U.S. and global economic environment as slowly improving, while cautioning that economic conditions could still adversely affect results. No specific earnings or revenue guidance was provided.
- The Calvert City ethylene conversion and expansion was completed in April: the plant shifted to ethane feedstock and added about 180 million pounds of annual capacity. A roughly 19-day complex shutdown, including five days in Q2, and related turnaround costs affected production and results. An unplanned outage at a Lake Charles ethylene unit also weighed on Q2.
- On July 31, 2014, Westlake completed its approximately €490 million Vinnolit acquisition, financed with existing cash and credit facilities. The filing identifies integration, retention and management-capacity risks. Investors should note this transaction closed after the reporting date.
- Westlake’s subsidiary WLKP completed an IPO on August 4, 2014. Westlake retained an 89.4% limited-partner interest in OpCo and a significant WLKP interest; the parent reported approximately $230.8 million of net proceeds received as reimbursement of contributed-asset capital expenditures and repayment of intercompany debt.
- A July amendment extended the revolving facility maturity to July 17, 2019 and reduced its pricing and fees. Westlake planned a Lake Charles ethylene-unit upgrade and expansion for late 2015 to early 2016, estimated at $250–$310 million; $25.5 million had been incurred by June 30.
- Key exposures include chemical-industry cyclicality, volatile feedstock and energy prices, plant outages, customer credit, financing access, and environmental and regulatory matters. For Calvert City contamination proceedings, the company said it could not estimate any potential loss; remediation could continue for the foreseeable future. Management did not expect routine legal proceedings to have a material adverse effect.
Most important facts for investors to verify
- Whether higher Olefins margins and sales volumes persist as feedstock, energy and product prices change.
- How quickly Vinyls operations recover from the Calvert City work, and whether production outages or turnaround costs recur.
- The acquisition’s final funding, integration progress and contribution from Vinnolit, which closed after quarter-end.
- Post-IPO ownership, cash proceeds and related-party flows between Westlake, WLKP and OpCo.
- Actual spending and timing for the Lake Charles expansion, and the company’s liquidity after the acquisition and planned investment.
- Developments in Calvert City environmental proceedings and any resulting costs or allocation of remediation liabilities.