Westlake Corporation (NYSE: WLK) — 2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023, with comparisons to 2022 and 2021. Westlake is a vertically integrated global manufacturer operating two segments: Performance and Essential Materials (PEM), including chemicals, vinyls, polyethylene and epoxy; and Housing and Infrastructure Products (HIP), including building products, pipe and fittings, and compounds.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $12.548 billion | $15.794 billion | Down 21% |
| Gross profit / margin | $2.219 billion / 18% | $4.073 billion / 26% | Margin down 8 percentage points |
| Operating income | $729 million | $3.050 billion | Down $2.321 billion |
| Net income attributable to Westlake | $479 million | $2.247 billion | Down $1.768 billion |
| Diluted EPS | $3.70 | $17.34 | Down $13.64 |
| Operating cash flow | $2.336 billion | $3.395 billion | Down $1.059 billion |
| Capital expenditures | $1.034 billion | $1.108 billion | Down $74 million |
| Free cash flow (non-GAAP) | $1.302 billion | $2.287 billion | Down $985 million |
At year-end, cash and cash equivalents were $3.304 billion, total debt carrying value was $4.906 billion, and the $1.5 billion revolving credit facility was undrawn and fully available. Current assets were $6.609 billion and current liabilities were $2.790 billion. Interest expense was $165 million; the effective tax rate was 25%. Dividends paid were $221 million, and the company repurchased $23 million of shares under its repurchase program.
Material changes versus 2022
- Company-wide average selling prices fell 16% and sales volumes fell 5%, reflecting weaker demand across both segments.
- PEM sales declined 24% to $8.336 billion; operating income fell to $59 million from $2.416 billion. Lower product prices and volumes, outages, and exceptional charges outweighed lower feedstock and natural gas costs.
- HIP sales declined 12% to $4.212 billion, while operating income increased to $710 million from $675 million. Lower raw-material costs and higher prices for some building products partly offset weaker housing demand and customer destocking.
- Gross margin declined to 18% from 26%. Operating results included $475 million of non-cash epoxy impairments and an approximately $150 million pre-tax litigation charge.
- Operating cash flow fell, but working-capital changes provided $600 million of cash in 2023, compared with $174 million in 2022. Year-end cash increased from $2.228 billion to $3.304 billion.
Outlook, risks and unusual items
- Management said near-term volatility in energy prices, elevated interest rates, inflation and other macroeconomic conditions are expected to continue affecting demand and margins. It reported lower energy costs in recent months as natural gas and electricity prices eased from 2022 highs. No specific company earnings or revenue guidance is provided in the supplied filing text.
- Westlake expects housing weakness to remain a near-term headwind. The cited industry outlook estimates U.S. housing starts of 1.366 million in 2024 and 1.417 million in 2025; these are industry estimates, not company guidance.
- Epoxy weakness—particularly European base resins amid lower-priced Asian exports, contracting demand and high European energy costs—led to a $128 million goodwill impairment and a $347 million long-lived-asset impairment in the fourth quarter. Further impairment remains a risk if assumptions or market conditions worsen.
- Settlements related to a 2021 Petro 2 flash fire and a 2022 EDC tank explosion totaled approximately $382 million. The company recorded an approximately $150 million charge for amounts it says are not currently covered by insurers and is pursuing recovery; it reported a $43 million insurance receivable and a $183 million legal accrual at year-end.
- Environmental matters include the Sulphur Brine Dome cavern-pressure issue, for which the company reserved approximately $13 million for monitoring-related work but cannot estimate other potential costs or future injunctive relief. It also disclosed reasonably possible environmental losses of $98 million to $165 million beyond recorded reserves.
- Other material exposures include cyclical chemical markets, raw-material and energy volatility, housing-market weakness, new industry capacity, regulatory and climate-related costs, operating interruptions, litigation, and foreign-exchange and interest-rate risk. The company was in compliance with its debt covenants at year-end and stated that available cash, operating cash flow and borrowing capacity should cover normal needs absent a large expansion or acquisition.
Important facts for investors to verify
- Whether weaker prices and demand persist, and how segment margins respond to changes in feedstock and energy costs.
- Progress in Westlake Epoxy performance and whether additional impairment or restructuring is required.
- Insurance recovery and final cash payments for the $382 million incident settlements.
- Costs and potential obligations associated with the Sulphur Brine Dome and other environmental matters.
- Ability to sustain cash generation and capital spending while addressing the $300 million debt maturity in 2024 and ongoing dividends.
The consolidated financial statements received an unqualified audit opinion; the auditor identified the Westlake Epoxy goodwill impairment assessment as a critical audit matter. Management and the auditor reported effective internal control over financial reporting as of December 31, 2023.