Westlake Chemical Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Westlake is a vertically integrated global producer of basic chemicals, polymers, vinyls and PVC building products, operating through Olefins and Vinyls segments. The 2017 comparison is affected by the Axiall acquisition: Westlake included Axiall for all of 2017 but only from August 31, 2016 in the prior-year results.
Financial and operating performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $8.041 billion | $5.076 billion |
| Gross profit / gross margin | $1.769 billion / 22% | $981 million / 19% |
| Operating income | $1.233 billion | $581 million |
| Net income attributable to Westlake | $1.304 billion | $399 million |
| Diluted EPS | $10.00 | $3.06 |
| Operating cash flow | $1.538 billion | $834 million |
| Capital expenditures | $577 million | $629 million |
| EBITDA (non-GAAP) | $1.841 billion | $1.015 billion |
Sales rose 58%, reflecting a full year of Axiall revenue, higher product prices and 46% higher company-wide sales volumes. Average selling prices increased 12%. Operating income improved across both segments: Olefins earned $655 million versus $558 million, and Vinyls earned $647 million versus $174 million. Vinyls’ large increase mainly reflected Axiall’s fuller-year contribution and higher prices and volumes. Higher energy costs, turnarounds and unplanned outages partly offset the improvement.
FY2017 net income included an approximately $591 million one-time income tax benefit from the Tax Cuts and Jobs Act, including deferred-tax remeasurement and deemed repatriation effects. Management reported a 24% effective tax benefit rate for the year, versus a 25% tax expense rate in 2016. The tax benefit was approximately $4.54 per diluted share; reported earnings growth therefore substantially exceeded the underlying operating improvement.
Fourth-quarter 2017 net sales were $2.010 billion, operating income was $365 million and net income attributable to Westlake was $802 million. The quarter’s earnings included the Tax Act benefit.
Cash, debt and liquidity
- Cash and cash equivalents were $1.531 billion at year-end, up from $459 million; working capital was $1.496 billion.
- Total debt, including current maturities, was $3.837 billion, compared with $3.679 billion in 2016. The filing reports 2017 interest expense of $159 million.
- The $1.0 billion revolving credit facility had no borrowings outstanding, $6 million of letters of credit and $994 million of availability at year-end. Westlake reported compliance with its leverage covenant.
- Cash dividends declared were $0.8012 per share for 2017, up from $0.7442 in 2016.
- The company issued $500 million of 4.375% notes due 2047 and refinanced $250 million of higher-rate tax-exempt bonds with 3.50% refunding bonds. It redeemed $688 million of 2021 notes on February 15, 2018, using cash on hand and financing proceeds.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said liquidity should support normal operations and ongoing capital expenditures; large expansions or acquisitions could require additional financing.
- Management cited potential margin pressure from industry cyclicality, new ethylene and polyethylene capacity, volatile feedstock and energy prices, competition, and demand tied to construction and housing markets. Lower crude oil prices had reduced the North American ethane-based feedstock cost advantage.
- Westlake’s 10% LACC joint-venture commitment is up to $225 million; approximately $125 million had been funded by year-end. Construction was expected to start up in the first quarter of 2019. Cost overruns, delays and the partner’s operational control are risks.
- Environmental compliance capital spending was $15 million in 2017; the company estimated approximately $42 million in each of 2018 and 2019, substantially associated with EPA requirements at Axiall chlor-alkali sites.
- Environmental reserves were $49 million. The company disclosed additional reasonably possible environmental losses of $55 million to $110 million. At Calvert City, the EPA’s draft remedy estimate was $200 million to $250 million, but Westlake’s share is uncertain and subject to a dispute with Goodrich/PolyOne; the filing says the company could not estimate the arbitration’s financial impact.
- Other material risks include plant outages and safety events, regulatory changes, foreign exchange exposure, pension funding, acquisition integration and ERP system conversion. The filing identifies pension obligations and other post-retirement obligations as constraints on future cash; its detailed plan disclosures report a $281 million pension underfunding on a projected-benefit-obligation basis and $76 million of unfunded OPEB obligations.
Most important facts for investors to verify
- Separate recurring operating performance from the $591 million Tax Act benefit and from Axiall’s changing contribution to year-over-year comparisons.
- Track segment margins, product pricing, input costs, operating rates and the effects of turnaround and unplanned outage costs.
- Confirm the post-February 2018 debt balance and liquidity after redemption of the $688 million 2021 notes, and assess debt service alongside planned investment and dividends.
- Monitor LACC construction progress, total project cost, remaining Westlake contributions and expected startup timing.
- Follow Calvert City remediation and arbitration developments, including any changes to reserves or Westlake’s potential allocation of costs.
- Review execution of the disclosed environmental spending program and any changes in regulatory requirements or associated costs.