Westlake Chemical Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company manufactures petrochemicals, polymers and building products through its Olefins and Vinyls segments. Results include Axiall, acquired August 31, 2016; therefore, prior-year comparisons do not include a comparable full period of Axiall operations.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,979.2 million | $1,086.1 million | $3,921.8 million | $2,061.2 million |
| Gross profit | $405.8 million | $241.4 million | $773.0 million | $497.0 million |
| Income from operations | $267.1 million | $179.9 million | $502.4 million | $382.2 million |
| Net income attributable to Westlake | $152.8 million | $111.1 million | $291.0 million | $234.3 million |
| Diluted EPS | $1.17 | $0.85 | $2.23 | $1.79 |
| EBITDA (non-GAAP) | $411.2 million | $255.4 million | $801.8 million | $526.0 million |
- Q2 gross margin was 20.5%, down from 22.2%; first-half gross margin was 19.7%, down from 24.1%. Management attributed the lower percentage primarily to the larger contribution from Axiall’s Vinyls business, whose industry margins were lower than Olefins.
- Q2 sales rose 82.2%; first-half sales rose 90.3%. In both periods, acquisition-related sales and higher prices were the main drivers. Q2 average company sales prices increased 8.4% and volumes 73.9% year over year; the volume increase largely reflects Axiall.
- Q2 segment operating income was $143.3 million for Olefins and $143.3 million for Vinyls, versus $140.6 million and $52.2 million, respectively, a year earlier. First-half amounts were $323.1 million and $214.8 million, versus $289.8 million and $114.3 million.
- Interest expense increased to $39.0 million in Q2 from $5.9 million and to $78.7 million for the first half from $12.6 million, mainly because of debt incurred to finance the Axiall acquisition and less capitalized interest.
- Effective tax rates were 30.0% for Q2 and 29.0% for the first half, versus 36.5% and 35.7%, respectively, in 2016. Management cited deductions, credits and other tax items.
Cash flow, debt and liquidity
- First-half operating cash flow was $479.7 million, up from $369.9 million. Working-capital changes used $120.9 million, compared with $45.5 million in the prior-year period.
- First-half capital expenditures were $280.9 million, versus $287.2 million. Investing cash outflow was $310.5 million, including a $31.0 million investment in the Lotte ethylene project.
- Cash and cash equivalents were $395.8 million at June 30, versus $459.5 million at year-end 2016. Total current assets were $2.38 billion and current liabilities $1.03 billion. Restricted cash was $31.5 million in total.
- Debt was approximately $3.49 billion net, compared with $3.68 billion at year-end. The $150 million term loan was repaid in January. The revolving credit facility had $140 million drawn, $76.5 million of letters of credit and $783.5 million available; the company reported compliance with its leverage covenant and other debt covenants.
- Management said cash, operating cash flow and available revolver capacity should meet normal operating needs and ongoing capital spending, absent a large expansion or acquisition. Dividends paid in the first half were $49.3 million; dividends declared were $0.3812 per share.
Changes, outlook and notable matters
- Management cited higher prices and improved integrated product margins, Axiall earnings, and lower turnaround and outage costs versus the prior-year quarter as drivers of improved earnings. These benefits were partly offset by higher feedstock and energy costs, lower polyethylene and styrene volumes, and higher interest expense.
- Olefins faces risk from reduced North American ethane-cost advantage and potential new industry capacity, which could increase supply and pressure margins. Vinyls remains exposed to construction demand and chlor-alkali/PVC market conditions. Management noted expected support for caustic soda from demand and export competitiveness, but provided no specific earnings or revenue guidance.
- The Calvert City ethylene unit upgrade was completed in April 2017 and is expected to add about 100 million pounds of annual capacity, bringing capacity to 730 million pounds. The LACC joint-venture ethylene plant was expected to start up in Q1 2019; Westlake’s commitment is up to $225 million, of which approximately $90.4 million had been funded by June 30.
- On August 1, 2017, a subsidiary extended its $300 million revolving credit facility with Westlake Chemical Partners LP to April 2021. This occurred after quarter-end.
- Environmental reserves were approximately $47.7 million. The company also disclosed reasonably possible additional environmental losses of $40 million to $80 million, excluding amounts reserved. It stated known legal and regulatory matters were not expected in aggregate to materially adversely affect the financial statements, while noting outcomes remain uncertain.
- The IRS began an audit during Q2 covering tax years 2012–2014. Commodity prices, energy costs, operating interruptions, foreign exchange, debt and integration of Axiall are among the disclosed risks. Management reported no material change in the risk factors from the 2016 Form 10-K.
- Axiall-related transaction and integration costs were $8.1 million in Q2 and $16.3 million in the first half. No goodwill impairment was identified in the company’s Q2 annual impairment tests.
Investor verification priorities
- Separate organic operating trends from Axiall’s acquired revenue, volumes, expenses and segment contribution.
- Track Olefins and Vinyls margins, product pricing, feedstock and energy costs, and new industry capacity.
- Assess debt-service costs, leverage, revolver availability and cash generation against capital spending and the LACC commitment.
- Monitor the environmental loss range, ongoing remediation and proceedings, and the IRS audit outcome.
- Confirm progress and economics of the Calvert City expansion and LACC project, and review whether integration costs and expected acquisition benefits develop as anticipated.