WLK

Westlake Chemical Corporation: Q2 2010 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Westlake Chemical Corporation for the period ended June 30, 2010. Westlake is a vertically integrated manufacturer and marketer of petrochemicals, polymers, and fabricated products, operating primarily through two segments: Olefins and Vinyls. The company reported strong financial performance driven by higher product prices and improved operating rates, particularly in the Olefins segment, while the Vinyls segment continued to face margin pressure due to construction market weakness and lower caustic prices.

Key Financial Metrics (Six Months Ended June 30, 2010)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by 50.2% ($533.6 million) compared to the first six months of 2009. This was driven by a 41.1% increase in average sales prices and a 9.1% increase in sales volume.
• Profitability Surge: Net income rose 592% to $74.6 million from $10.8 million in the prior year period. Income from operations increased by $98.7 million to $134.0 million.
• Segment Performance:
  • Olefins: Generated $169.4 million in operating income (up $109.0 million YoY) due to improved integrated product margins and higher operating rates.
  • Vinyls: Reported an operating loss of $25.8 million (worsening by $5.6 million YoY) due to lower caustic margins and higher feedstock costs, despite increased sales volumes.
• Cash Flow: Operating cash flow decreased to $55.6 million from $153.4 million in the prior year, primarily due to a $204.1 million unfavorable change in working capital (increases in accounts receivable and inventory).

Outlook, Risks, and Contingencies

• Guidance and Outlook: Management notes that North American PVC capacity is projected to increase over the next two years, which may negatively impact Vinyls operating rates and margins. Olefins margins may also face pressure from significant global capacity increases, particularly from the Middle East and Asia. The company is monitoring discretionary capital spending to preserve cash.
• Recent Financing: In July 2010 (subsequent event), the company completed a reoffering of $100 million in 6.5% tax-exempt revenue bonds due 2029. Proceeds are held as restricted cash for facility expansion in Louisiana.
• Legal and Environmental Contingencies:
  • Calvert City Site: Ongoing administrative proceedings and potential arbitration with PolyOne regarding the allocation of environmental remediation costs. The company cannot currently estimate the financial impact.
  • EPA Proceedings: The company is engaged in settlement discussions regarding potential violations at its Calvert City and Lake Charles facilities. While penalties and capital expenditures are expected, management does not believe the resolution will have a material adverse effect.
• Market Risks: The company is exposed to commodity price volatility (ethane, propane, natural gas) and interest rate risk on variable-rate debt ($15.9 million outstanding).

Key Facts for Investor Verification

• Margin Sustainability: Verify if the 41.1% increase in sales prices is sustainable given the projected increase in global Olefins and Vinyls capacity.
• Vinyls Segment Turnaround: Assess the timeline for the Vinyls segment to return to profitability given the structural weakness in construction markets and caustic pricing.
• Working Capital Management: Monitor the trend in accounts receivable and inventory, which consumed significant cash in the first half of 2010.
• Environmental Liabilities: Track the status of the arbitration with PolyOne and EPA settlements, as these could result in unforeseen capital expenditures or costs.
• Debt Covenants: Confirm continued compliance with fixed charge coverage ratios (currently 9.5:1 for Senior Notes and 3.0:1 for the credit facility) to ensure unrestricted ability to pay dividends and make acquisitions.