Westlake Chemical Corporation — FY2013 Form 10-K
Business context and reporting period. Westlake is a vertically integrated chemicals and building-products manufacturer with Olefins and Vinyls segments. This filing covers the fiscal year ended December 31, 2013; fourth-quarter figures are also reported. Amounts below are U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $3.759 billion | $3.571 billion |
| Gross profit / gross margin | $1.101 billion / 29.3% | $737.0 million / 20.6% |
| Income from operations | $953.5 million | $615.4 million |
| Net income | $610.4 million | $385.6 million |
| Diluted EPS | $9.09 | $5.75 |
| Operating cash flow | $752.7 million | $612.1 million |
| Capital expenditures | $679.2 million | $386.9 million |
| EBITDA (non-GAAP) | $1.118 billion | $772.8 million |
Fourth-quarter 2013 net sales were $951.6 million, operating income $257.6 million, net income $171.0 million and diluted EPS $2.54, compared with $801.0 million, $156.2 million, $95.3 million and $1.42, respectively, in fourth-quarter 2012. Quarterly EPS is on a pre-split basis.
Cash and cash equivalents plus current marketable securities were $700.7 million at year-end; working capital was $1.244 billion. Total debt was $763.9 million, with no borrowings under the $400 million revolving facility and $383.1 million of reported borrowing availability. The company reported compliance with debt covenants. Cash flow from operations less capital expenditures was approximately $73.5 million. Net cash used in investing activities was $1.002 billion, reflecting capital spending, the acquisition and securities activity.
Material changes versus prior year
- Sales increased 5.3%, while operating income rose $338.1 million and net income rose $224.9 million. Management attributed the improvement mainly to wider integrated product margins, particularly substantially lower ethane costs; average industry ethane prices fell 34.3% year over year.
- Olefins operating income increased to $833.2 million from $552.8 million. Vinyls operating income increased to $154.7 million from $85.9 million.
- Vinyls sales grew 12.6%, supported by higher PVC and caustic soda sales and the acquired specialty pipe business. The CertainTeed Pipe and Foundation Group was acquired in May for $178.3 million.
- Interest expense fell to $18.1 million from $43.0 million, mainly due to increased capitalized interest on major projects and lower average interest rates.
- Capital expenditures increased substantially as major capacity and integration projects advanced. Year-end cash and cash equivalents declined to $461.3 million from $790.1 million; marketable securities increased to $239.4 million from $124.9 million.
Outlook, management commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said its liquidity sources should fund normal operations and ongoing capital expenditures; major expansions or acquisitions could require additional financing.
- Management described the global economy as slowly improving but the U.S. construction market as still recovering slowly. It cited continued risk to Vinyls operating rates and margins from construction weakness and municipal budget constraints. It also warned that forecast industry capacity additions could pressure Olefins margins.
- Planned Calvert City projects were targeted for 2014: ethylene feedstock conversion and capacity expansion in the second quarter, and a PVC expansion in the second half. Together, those projects were estimated to cost $210–$240 million. A further Lake Charles ethylene expansion was planned for late 2015 to early 2016.
- Geismar’s new chlor-alkali plant started up in December 2013. The company recorded $11.1 million in Vinyls pre-operating expenses related to the plant. The Lake Charles turnaround and ethylene expansion incurred $19.9 million of unabsorbed fixed manufacturing and other costs. Acquisition-related costs and the fair-value step-up of acquired inventory affected Vinyls results by $5.8 million, or $0.06 per diluted share after tax.
- Key risks include commodity-cycle and pricing volatility, feedstock and energy costs, supply-demand shifts, operational outages, severe weather, capital-project delays or overruns, environmental regulation and remediation, and debt and financing constraints.
- At Calvert City, the EPA identified Westlake as potentially liable under CERCLA for contamination; responsibility among the parties has not been allocated, and the company said it could not estimate a potential loss. PolyOne’s stayed arbitration seeks to revise remediation-cost allocation and recover approximately $1.4 million. The company said it did not expect any remediation costs allocated to it to be material in an individual reporting period, but the ultimate exposure remains uncertain.
- The board authorized a two-for-one stock split in February 2014, to be distributed in March to shareholders of record February 28. The filing’s reported share counts and EPS are pre-split; pro forma FY2013 diluted EPS after the split was $4.54.
Most important facts for investors to verify
- Whether the exceptional margin improvement—driven largely by lower ethane costs—persists as feedstock prices and product spreads change.
- Actual completion dates, final costs and operating benefits of the Calvert City and Lake Charles projects, and ramp-up of the Geismar chlor-alkali plant.
- Future cash generation relative to elevated capital spending, dividends, share repurchases and the company’s $763.9 million debt balance.
- Developments in the Calvert City environmental investigation and PolyOne arbitration, including any eventual allocation or estimate of remediation liability.
- The effects of sluggish construction demand, prospective industry capacity additions, and environmental compliance requirements on segment margins and capital needs.