Westlake Chemical Corporation — Q3 2016 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Westlake manufactures chemicals, vinyls, polymers and building products through its Olefins and Vinyls segments. On August 31, 2016, it completed its acquisition of Axiall, adding substantial Vinyls and building-products operations; Axiall results are included from the acquisition date.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,279.0 million | $1,188.0 million | $3,340.3 million | $3,476.6 million |
| Gross profit | $202.1 million | $311.3 million | $699.1 million | $949.0 million |
| Gross margin | 15.8% | 26.2% | 20.9% | 27.3% |
| Income from operations | $46.6 million | $254.0 million | $428.8 million | $778.7 million |
| Net income attributable to Westlake | $65.7 million | $183.6 million | $299.9 million | $535.0 million |
| Diluted EPS | $0.51 | $1.39 | $2.29 | $4.02 |
| EBITDA, non-GAAP | $182.1 million | $317.9 million | $708.1 million | $992.7 million |
- Q3 net sales rose 7.7%, primarily from Axiall, despite a 4.6% decrease in average sales prices. Overall sales volumes rose 12.3%, largely due to the acquisition.
- Nine-month net sales fell 3.9%; average sales prices declined 8.9%, while overall volumes increased 5.0%, mainly reflecting Axiall and Huasu contributions.
- Operating cash flow for the first nine months was $544.2 million, down from $841.3 million. Capital expenditures were $467.3 million; free cash flow after capital expenditures was approximately $76.8 million.
- At September 30, cash and cash equivalents were $380.5 million, current assets $2.42 billion and current liabilities $1.20 billion. Restricted cash totaled $195.7 million, including $169.3 million classified as current. The new $1.0 billion revolving facility had $598.4 million available after borrowings and letters of credit.
- Debt was approximately $3.8 billion, including a $148.7 million current term-loan balance and $3.68 billion of net long-term debt. The term loan matures March 2017. Interest expense was $24.4 million in Q3 and $37.0 million year to date.
- Quarterly dividends were $0.1906 per share; nine-month dividends paid totaled $71.9 million. The company repurchased $67.4 million of shares during the nine-month period.
Material changes and unusual items
- Q3 operating performance was affected by $82.8 million of transaction and integration costs, approximately $36.0 million of turnaround/outage costs, lost sales and the cost of selling Axiall inventory marked up to fair value at acquisition. These factors were partly offset by a $49.1 million gain on Westlake’s previously held Axiall shares and a Q3 tax benefit.
- For the nine months, transaction and integration costs were $90.6 million; turnaround, outage and related costs were approximately $116.2 million. The $49.1 million Axiall-share gain also benefited reported results.
- Q3 effective tax rate was negative 10.3%, influenced by discrete tax items; the nine-month rate was 29.1%. Management estimated an approximately 35.6% 2016 annual tax rate on ordinary income.
- Axiall contributed $257.4 million of sales and a $47.2 million net loss from August 31 through September 30; the loss included integration costs and higher-cost acquired inventory. Preliminary acquisition accounting recorded $863.1 million of goodwill.
- Olefins Q3 sales declined 15.4% and operating income fell to $118.5 million. Vinyls sales grew 30.3%, chiefly due to Axiall, but operating income declined to $22.2 million amid outages, turnarounds, lower building-product prices and acquired inventory costs.
Outlook, risks and contingencies
- Management said cash, operating cash flow and available borrowing capacity should cover normal operations and ongoing capital needs, absent a major expansion or acquisition. No specific earnings or revenue guidance was provided.
- The Calvert City ethylene expansion was estimated to cost $70–$80 million, with completion targeted for the first half of 2017; approximately $30.5 million had been incurred by September 30. The Lake Charles Petro 1 expansion was expected to add approximately 250 million pounds of annual ethylene capacity.
- Management cited risks from chemical-industry cyclicality, commodity prices and margins, announced capacity additions and possible oversupply, slow construction demand, European economic weakness, operational interruptions, and the ability to integrate Axiall and realize expected benefits.
- Acquisition-related borrowing increases interest and refinancing exposure; the company reported compliance with debt covenants at quarter-end. A 100-basis-point increase in rates on variable-rate debt was estimated to increase annual interest expense by approximately $4.9 million.
- Environmental contingency reserves were approximately $60.7 million at September 30, primarily assumed in the Axiall acquisition, versus $1.1 million at year-end 2015. The company stated that known legal and regulatory matters were not expected in aggregate to materially harm its financial statements, while acknowledging uncertainty and potential period-specific impacts.
Important facts for investors to verify
- Whether Axiall integration costs, acquired-inventory effects and operating performance evolve as expected; acquisition pro forma results exclude potential synergies and are illustrative.
- How much of the reported earnings decline reflects recurring product economics versus outages, turnarounds, acquisition costs and the Axiall share gain.
- Debt repayment and refinancing plans, covenant headroom, liquidity availability and the March 2017 term-loan maturity.
- Progress, cost and timing of the Calvert City and Lake Charles capacity projects, and operating reliability following the reported outages.
- Final purchase-price allocation, including acquired environmental and other contingencies, and the eventual resolution and cost of outstanding environmental matters.
EBITDA is a company-presented non-GAAP measure and should not be viewed as a substitute for GAAP earnings or cash flow.