Westlake Chemical Corporation — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020; compared with Q1 2019 unless otherwise noted. Amounts are in millions of dollars except per-share data. The filing identifies the registrant as Westlake Chemical Corporation.
Business context
Westlake is a vertically integrated manufacturer and marketer of basic chemicals, vinyls, polymers and building products. Its principal segments are Olefins and Vinyls. The company describes these markets as cyclical, with profitability sensitive to product prices, supply and demand, and feedstock and energy costs.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net sales | $1,932 | $2,025 | Down $93, or 5%; average prices fell 9%, while volumes rose 5%. |
| Gross profit | $283 | $299 | Gross margin was approximately 15% in both periods. |
| Operating income | $136 | $134 | Operating margin was approximately 7.0%, versus 6.6%. |
| Net income attributable to Westlake | $145 | $72 | More than doubled; the 2020 result included a $62 tax benefit from NOL carrybacks under the CARES Act. |
| Diluted EPS | $1.13 | $0.55 | 2020 earnings benefited by approximately $0.48 per share from the NOL carryback. |
| EBITDA, company-defined non-GAAP | $337 | $314 | Up $23. |
| Cash from operating activities | $61 | $147 | Down $86; working-capital changes used substantially more cash. |
| Capital expenditures | $164 | $203 | Lower by $39. |
Segments and notable comparisons
- Olefins: Sales were $427 versus $459; operating income increased to $62 from $37. Higher polyethylene volumes and lower feedstock and fuel costs outweighed lower selling prices.
- Vinyls: Sales were $1,505 versus $1,566; operating income declined to $73 from $101. Lower global prices for caustic soda and PVC were partly offset by higher PVC resin and building-products volumes, lower costs and a contribution from the Lotte Chemical ethylene joint venture.
- Company-wide operating income was broadly stable despite lower sales. There were no restructuring, transaction or integration costs in Q1 2020, compared with $22 in Q1 2019.
Liquidity, debt and capital allocation
- At March 31, 2020, cash and cash equivalents were $1,537, current assets $3,768 and current liabilities $1,024. Total assets were $14,163 and total equity $6,438.
- Long-term debt, net, was $4,432, up from $3,445 at year-end 2019. The increase primarily reflects a $1,000 draw on the revolving credit facility on March 20 to preserve financial flexibility. The facility was fully drawn, with no borrowing availability as of quarter-end; its scheduled maturity is July 2023.
- Westlake reported compliance with debt covenants. Management said cash, operating cash flow and available financing were expected to cover normal operations and ongoing capital needs, but warned that future financing could be affected by volatile credit markets.
- Financing cash flow was $883, principally reflecting the revolver borrowing. The company paid $34 in dividends and repurchased $54 of stock. Investing cash outflow was $132, including $164 of capital expenditures and a $39 return of investment from LACC.
Outlook, risks and unusual items
- COVID-19 had not significantly disrupted Q1 operations, but April brought customer cancellations and expected weaker demand in some markets. Westlake temporarily idled several smaller non-integrated plants and reduced operating rates at others; additional curtailments were possible. Management could not reliably estimate the pandemic’s financial impact.
- Management expected 2020 capital spending of $500–$550 and planned to defer the Petro 2 ethylene-unit turnaround to the first half of 2021; the turnaround was expected to last 60 days.
- Management cited lower crude-oil prices eroding North American ethane-based producers’ cost advantage, new industry capacity, weak demand and volatile feedstock prices as risks to prices and margins.
- The $62 CARES Act tax benefit arose from carrying federal NOLs back to earlier tax years. It materially increased reported net income and should be distinguished from operating performance.
- Environmental reserves were approximately $46. The company also disclosed reasonably possible additional environmental losses of $70–$130. It could not estimate potential exposure from caustic-soda price-fixing litigation; direct-purchaser cases were proceeding to discovery.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How subsequent COVID-19 demand, customer cancellations, plant curtailments and operating rates affected results after March 31.
- Whether the $500–$550 capital-spending outlook and deferred Petro 2 turnaround remained current.
- The sustainability of earnings excluding the $62 tax benefit, and the timing and receipt of expected tax refunds.
- Debt, cash and liquidity after the full $1 billion revolver draw, including covenant headroom and future financing needs.
- Developments in environmental matters, caustic-soda litigation and the potential $70–$130 of additional reasonably possible environmental losses.