Westlake Chemical Corporation — Q1 2013 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Westlake manufactures and markets petrochemicals, polymers and building products through its Olefins and Vinyls segments. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $864.6 | $1,034.9 |
| Gross profit | $227.8 | $172.6 |
| Gross margin | 26.3% | 16.7% |
| Operating income | $194.1 | $145.6 |
| Net income | $123.3 | $87.8 |
| Diluted EPS | $1.84 | $1.31 |
| Cash from operations | $116.3 | $105.6 |
| Capital expenditures | $150.8 | $64.9 |
Revenue declined 16.5%, while net income increased about 40%. Sales volume fell 14.7% and average sales prices fell 1.7%. Lower feedstock and energy costs improved integrated margins despite lower sales. Operating income includes $19.9 million of unabsorbed fixed manufacturing and other costs associated with the Lake Charles turnaround and expansion.
Olefins sales were $582.8 million, down 20.4%, while segment operating income rose 24.7% to $161.1 million. Vinyls sales were $281.8 million, down 6.9%, while operating income more than doubled to $43.7 million. Management attributed both segments’ improved margins principally to lower feedstock and energy costs.
Operating cash flow increased $10.7 million year over year. Investing used $121.3 million, largely reflecting higher capital spending; financing used $7.1 million, including $12.6 million of dividends paid. Cash and cash equivalents were $777.9 million at March 31, with $94.9 million of current marketable securities. Long-term debt was $763.8 million, with no revolver borrowings; $383.8 million of the $400 million facility was available after letters of credit. The company reported compliance with debt covenants.
Total assets were $3.56 billion and stockholders’ equity was $1.99 billion at quarter-end. The quarterly dividend was $0.1875 per share, versus $0.0738 in Q1 2012.
Material changes and management commentary
- Revenue fell primarily because feedstock, ethylene and co-product sales volumes were lower, alongside lower polyethylene and PVC resin prices. Ethylene volumes were especially affected by the 74-day Lake Charles unit turnaround and expansion.
- Industry ethane and propane prices were down 54.0% and 31.2%, respectively, year over year. Management said the reductions helped lift segment margins; lower sales prices only partly offset the benefit.
- Interest expense declined to $6.3 million from $12.2 million, mainly due to increased capitalized interest on major projects and lower average interest rates. Debt balances were broadly unchanged.
- Management described the U.S. economy as slowly improving but still challenging. Weak construction markets and municipal budget constraints continue to weigh on Vinyls demand. Management cited possible future capacity additions, particularly in Asia and North America, as a risk to Olefins margins.
Outlook, projects, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said existing cash, operating cash flow and available revolver capacity should fund normal operations and ongoing capital spending; major expansions or acquisitions could require additional financing.
- Planned projects include a Geismar chlor-alkali plant, targeted for startup in Q4 2013, estimated at $390–$420 million; Calvert City ethylene feedstock conversion and expansion plus PVC expansion, targeted for 2014 and estimated at $210–$240 million combined; and Calvert City furnace modernization, estimated at about $40 million and expected by mid-2013. The company reported approximately $344.7 million incurred on these projects as of March 31, 2013.
- The CertainTeed Pipe and Foundation Group acquisition, announced for $175 million in cash including working capital and subject to post-closing adjustments, closed May 1, 2013, after quarter-end. The filing added integration and retention risks.
- Environmental proceedings at Calvert City involve potential CERCLA liability and remediation-cost allocation among Westlake, Goodrich and PolyOne. The company could not estimate any potential loss; remediation costs, if allocated to Westlake, are expected to be spread over time. A separate EPA settlement for Lake Charles emissions-related allegations remained subject to court approval; a $0.5 million penalty was accrued.
- Other principal risks include cyclical chemical demand, commodity and energy price volatility, competition, operational interruptions, customer credit, financing access, regulatory changes and environmental obligations. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether improved margins persist if feedstock costs rise, product prices weaken, or industry capacity expands.
- The production, cost and margin effects of the Lake Charles turnaround and expansion, and progress against the stated capacity-project timelines and budgets.
- Actual cash generation and liquidity after elevated capital expenditures, the CertainTeed acquisition and planned project spending.
- Integration results and realized benefits from the CertainTeed business, including retention of key employees and contracts.
- Developments in the Calvert City environmental proceedings, including any remediation-cost allocation or change in the company’s ability to estimate exposure.