Westlake Chemical Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparative periods are the same periods in 2011. Westlake manufactures and markets petrochemicals, polymers and building products through its Olefins and Vinyls segments. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $821.2M | $968.4M | $2,770.0M | $2,760.7M |
| Gross profit | $172.2M | $147.1M | $546.7M | $481.7M |
| Gross margin | 21.0% | 15.2% | 19.7% | 17.4% |
| Operating income | $142.5M | $117.3M | $459.1M | $396.3M |
| Net income | $87.0M | $67.9M | $290.3M | $232.5M |
| Diluted EPS | $1.30 | $1.01 | $4.33 | $3.48 |
- Q3 sales fell 15.2%, while net income rose 28.0%. Lower average selling prices (down 15.8%) and lower styrene volume reduced revenue; overall volume increased 0.6%. Improved integrated margins, chiefly from lower feedstock and energy costs, lifted gross margin and operating income.
- For the first nine months, sales were nearly flat, with average prices down 8.3% offset by volume growth of 8.6%. Operating income increased 15.8%, primarily on stronger Olefins and Vinyls margins.
- Q3 Olefins operating income rose to $124.5M from $105.4M; Vinyls rose to $24.1M from $16.1M. Nine-month Olefins operating income was $409.6M versus $383.4M; Vinyls was $67.7M versus $23.6M.
- Q3 included $7.1M of debt retirement expense and $10.5M of unabsorbed fixed manufacturing costs from the planned Lake Charles styrene turnaround. Nine-month results also included a $16.4M gain on sales of equity securities and approximately $11.0M of costs from the March Geismar fire and resulting operational issues.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $500.6M, versus $244.4M in 2011. The improvement reflected higher operating income and a favorable working-capital swing; working capital provided $115.3M compared with using $108.0M a year earlier.
- Capital expenditures were $235.5M, up from $111.8M. Operating cash flow less capital expenditures was approximately $265.2M. Investing activities used $194.6M; financing activities provided $66.5M.
- Cash and cash equivalents at September 30 were $1,198.5M, up from $825.9M at year-end 2011. Current assets were $1,997.8M and current liabilities $362.8M. Total assets were $3,544.2M and stockholders’ equity $2,033.4M.
- Long-term debt was $763.7M, broadly unchanged from $764.6M at year-end. Westlake issued $250M of 3.60% notes due 2022 and redeemed $250M of 6.625% notes due 2016; the refinancing lowered interest expense but incurred a $7.1M early-retirement charge. Approximate cash less reported debt was $434.7M.
- The $400M revolving credit facility had no borrowings outstanding; borrowing availability was $365.9M after $16.2M of letters of credit. The company reported compliance with debt covenants. Dividends paid in the first nine months totaled $22.3M; declared dividends were $0.1875 per share for Q3.
Outlook, risks and other notable items
- Management cited North American feedstock-cost advantages and stronger export demand as supports to margins, while warning that added global ethylene and derivative capacity could pressure Olefins margins. Weak U.S. construction and constrained municipal spending continued to weigh on Vinyls demand and margins.
- Planned projects include a $370M–$420M Geismar chlor-alkali plant, targeted for second-half 2013 start-up; a $110M–$145M Lake Charles ethylene expansion targeted for Q1 2013; and Calvert City ethylene/feedstock conversion and PVC expansions estimated at $210M–$240M, targeted for 2014. Calvert City furnace modernization was estimated at about $40M, with completion expected by mid-2013. Management said projects would be funded with cash, operating cash flow and, if needed, borrowing or other financing; approximately $231.3M had been incurred on the identified capital projects by September 30.
- Management believed available cash, operating cash flow and revolver capacity would meet normal operating needs and planned capital spending. Large expansions or acquisitions could require additional financing, which might not be available on cost-effective terms.
- Environmental matters include ongoing Calvert City remediation and related proceedings involving Goodrich and PolyOne. The company could not estimate a potential loss or reasonably possible loss; it said any allocable remediation cash costs were likely to be spread over time. A $0.5M EPA penalty related to Lake Charles leak-detection matters was accrued, subject to court approval.
- Key exposures include volatile commodity and energy prices, industry cyclicality and capacity additions, operating interruptions, customer creditworthiness, financing-market access, construction-market weakness, environmental regulation and project execution. The filing reported no material change in risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether margin gains persist if feedstock costs rise, selling prices weaken or global capacity additions intensify competition.
- How much Q3 and year-to-date earnings depended on nonrecurring items, including the equity-sale gain, debt-refinancing charge, styrene turnaround and Geismar fire costs.
- Actual project spending, schedules, start-up performance and funding needs for the Geismar, Lake Charles and Calvert City investments.
- Future Vinyls demand and margins, including the effect of U.S. construction conditions and municipal spending.
- Developments in Calvert City environmental proceedings and any resulting cost allocation or remediation liability.