Westlake Chemical Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Westlake manufactures and markets petrochemicals, polymers, and building products through its Olefins and Vinyls segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $939.0 | $914.0 | $1,803.7 | $1,948.8 |
| Gross profit / margin | $273.5 / 29.1% | $201.9 / 22.1% | $501.3 / 27.8% | $374.5 / 19.2% |
| Operating income | $235.2 | $171.0 | $429.3 | $316.6 |
| Net income | $145.8 | $115.5 | $269.2 | $203.3 |
| Diluted EPS | $2.17 | $1.72 | $4.01 | $3.03 |
| Interest expense | $5.3 | $11.6 | $11.6 | $23.7 |
- Q2 sales rose 2.7%, operating income 37.6%, and net income 26.2% year over year. Six-month sales declined 7.4%, while operating income rose 35.6% and net income 32.4%.
- Management attributed stronger margins mainly to lower feedstock costs. Q2 industry ethane and propane prices fell 32.4% and 6.5%, respectively; for the six-month period they fell 45.4% and 20.8%.
- Q2 Olefins sales were $623.3 million and segment operating income was $187.7 million; Vinyls sales were $315.7 million and operating income was $52.9 million. Vinyls sales benefited from higher volumes and the acquired pipe business. Six-month Olefins operating income was $348.7 million and Vinyls operating income was $96.6 million.
- Six-month operating cash flow was $255.5 million, down from $316.1 million. Capital expenditures were $297.9 million, versus $140.6 million, and the PFG acquisition used $178.3 million. Cash flow from operations less capital expenditures was approximately negative $42.4 million, before acquisition and other investing activity.
- At June 30, cash and cash equivalents were $625.5 million and current marketable securities were $30.0 million, totaling $655.5 million. Current assets were $1,601.1 million and current liabilities $394.5 million. Long-term debt was $763.8 million; no revolving-credit borrowings were outstanding, with $383.1 million available after letters of credit.
Material changes and notable items
- On May 1, Westlake acquired CertainTeed’s Pipe and Foundation Group for $178.3 million in cash. The business was included in Vinyls; its reported-period revenue and earnings were not separately material. Purchase-price allocation remained preliminary.
- Q2 results included $5.7 million after tax, or $0.05 per diluted share, of non-recurring acquisition-related costs, including expense from selling acquired inventory recorded at fair value. The six-month period also included $19.9 million of costs and lost production associated with a Lake Charles ethylene-unit turnaround and expansion.
- Q2 2012 had a $16.0 million gain from equity-security sales; there was no comparable gain in 2013. In Q2 2013, trading activity generated a $9.4 million gain, versus a $1.6 million loss in Q2 2012.
- Debt was essentially unchanged from year-end 2012. Cash and marketable securities declined from $914.9 million at year-end. The quarterly dividend was $0.1875 per share; $13.3 million of shares were repurchased in the first half.
Outlook, risks, and contingencies
- The filing provides no specific consolidated earnings or revenue guidance. Management said liquidity should meet normal operating needs and planned capital spending, but future large expansions or acquisitions could require additional financing.
- Planned projects include a Geismar chlor-alkali plant targeted to start in Q4 2013, estimated at $390–$420 million; Calvert City ethylene feedstock conversion and expansion and PVC expansion, together estimated at $210–$240 million and targeted for 2014. Approximately $416.6 million had been spent on these projects by June 30.
- Management cited potential pressure from future global ethylene-capacity additions, weak U.S. construction and municipal demand, commodity price volatility, and broader economic and competitive conditions. Operational interruptions, raw-material costs, access to financing, regulatory changes, and customer creditworthiness are also risks.
- Environmental proceedings at Calvert City remain unresolved. The company said it could not estimate any loss or reasonably possible loss from the proceedings; remediation expenditures attributable to Westlake, if any, are expected to be spread over an extended period. A separate EPA matter concerning Lake Charles ethylene-unit leak-detection requirements was settled with a $0.5 million cash penalty in Q2.
- The company reported compliance with debt covenants and effective disclosure controls, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower feedstock costs and stronger integrated margins persist, and how capacity additions affect Olefins profitability.
- Progress, spending, timing, and expected returns for the Geismar, Calvert City, and Lake Charles projects.
- Integration and performance of the PFG acquisition, including final purchase-price allocation and realized synergies.
- Cash conversion and working-capital trends, given lower operating cash flow and elevated capital expenditures.
- Developments in Calvert City environmental proceedings and any resulting financial exposure.