Westlake Chemical Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited results; amounts below are in U.S. dollars unless noted. Westlake manufactures and markets petrochemicals, polymers and building products through its Olefins and Vinyls segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $914.0m | $925.0m | $1,948.8m | $1,792.3m |
| Gross profit | $201.9m | $167.1m | $374.5m | $334.7m |
| Gross margin | 22.1% | 18.1% | 19.2% | 18.7% |
| Operating income | $171.0m | $138.4m | $316.6m | $279.0m |
| Net income | $115.5m | $81.0m | $203.3m | $164.6m |
| Diluted EPS | $1.72 | $1.21 | $3.03 | $2.46 |
- Q2 net sales declined 1.2%, while net income increased about 43%. Lower average selling prices were partly offset by higher total sales volumes and substantially lower feedstock and energy costs.
- For the first half, sales rose 8.7% and net income rose about 24%. Management attributed improved operating income primarily to stronger integrated margins as ethane and propane costs fell.
- Q2 results included a $16.0m pretax gain from selling Georgia Gulf shares and approximately $3.0m pretax expense related to the withdrawn acquisition proposal. Management said these items increased Q2 net income by $8.5m, or $0.13 per share, net of tax.
Segments and operating drivers
- Olefins: Q2 sales increased 4.2% to $672.7m and operating income increased 17.4% to $155.9m. First-half sales rose 12.4% to $1,405.0m, while operating income increased 2.6% to $285.1m. Q2 average segment price fell 12.7%, but volume rose 16.9%; lower feedstock and energy costs supported margins.
- Vinyls: Q2 sales fell 13.8% to $241.2m, while operating income rose to $22.6m from $10.3m. First-half sales were nearly flat at $543.8m, but operating income increased to $43.7m from $7.4m. Margin improvement reflected lower input costs and stronger caustic and building-products margins; the Geismar fire and resulting reduced production weighed on 2012 results.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $322.6m, compared with $125.3m in 2011. The improvement reflected higher operating income and a favorable working-capital change, including inventory reduction.
- Capital expenditures were $140.6m, up from $69.2m. Net cash used in investing was $97.7m; financing provided $59.8m. Cash and cash equivalents increased $284.6m to $1,110.5m. Restricted cash was $20.5m. Operating cash flow less reported capital expenditures was approximately $182.0m, a simple derived measure.
- At June 30, total assets were $3,441.9m, total liabilities $1,489.6m, and stockholders’ equity $1,952.3m. Inventories declined to $407.1m from $490.8m at year-end 2011.
- Long-term debt was $764.6m, with no revolver borrowings. The $400m revolving facility had $384.3m available after letters of credit. Cash and cash equivalents exceeded reported debt by approximately $345.9m, before considering restricted cash.
- The company reported compliance with debt covenants and believed cash, operating cash flow and available revolver capacity would cover normal operations and ongoing capital spending. It cautioned that large expansions or acquisitions could require additional financing.
Outlook, significant events and risks
- No specific earnings or revenue guidance was provided. Management noted that additional global ethylene and derivative capacity could pressure Olefins margins, while weak U.S. construction demand and municipal budget constraints could weigh on Vinyls operating rates and margins. The company said it was matching production to demand, pursuing cost controls and monitoring discretionary capital spending.
- Planned capital projects included the Geismar chlor-alkali plant, estimated at $370m–$420m with targeted startup in the second half of 2013; the Lake Charles ethylene expansion, estimated at $110m–$145m; and Calvert City furnace modernization, estimated at about $40m. Funding was expected from cash, operations, restricted cash and, if needed, external financing.
- A March 2012 fire at the Geismar VCM unit caused an unscheduled shutdown. Operations returned to normal in June after staged restarts; the company expensed about $9.5m in Q2 and about $11.5m in the first half in connection with the event.
- After quarter-end, Westlake issued $250m of 3.60% notes due 2022 and redeemed the $250m 6⅝% notes due 2016 at 102.208% of principal. It expected $6.8m of Q3 non-operating expense for the redemption premium and debt-cost write-off. Treasury-lock settlements in July required a $1.9m payment.
- Environmental matters include Calvert City remediation and disputes involving Goodrich and PolyOne. The company could not estimate a loss or reasonably possible loss from these proceedings; it stated remediation costs allocable to it were unlikely to be material in any individual reporting period. A separate EPA matter included an accrued $0.5m penalty.
- Key risks include chemical-industry cyclicality, commodity and energy price volatility, product supply-demand shifts, competition, economic conditions, operating interruptions, regulatory and environmental exposure, and access to financing. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of Q2 and first-half earnings growth was recurring operating performance versus the $16.0m securities gain and acquisition-related costs.
- Geismar’s full recovery, production levels and remaining costs following the fire.
- Progress, cost and funding for the Geismar, Lake Charles and Calvert City capital projects, and their expected returns.
- Olefins margin resilience as industry capacity expands, and Vinyls demand and margins given continued construction-market weakness.
- Developments in Calvert City environmental proceedings and any resulting cost allocation or liability.
- Post-refinancing interest expense and the effect of the 2022 notes and redemption costs on future periods.