WLK

Westlake Chemical Corporation: Q1 2009 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2009. Westlake Chemical Corporation is a vertically integrated manufacturer and marketer of petrochemicals, polymers, and fabricated products, operating through two principal segments: Olefins and Vinyls. The quarter was characterized by a severe economic downturn, significantly lower product prices, and operational disruptions including an ice storm at the Calvert City facility and a planned turnaround at the Lake Charles ethylene unit.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by $426.8 million (46.6%) due to a 29.1% drop in average sales prices and a 17.5% decline in sales volumes across major products.
• Profitability Reversal: The company shifted from a net income of $5.4 million in Q1 2008 to a net loss of $6.1 million in Q1 2009. Operating loss was driven by lower volumes, weak vinyls markets, and $19.5 million in costs related to the Calvert City ice storm outage and Lake Charles turnaround.
• Segment Performance:
  • Olefins: Income from operations decreased 20.3% to $16.1 million, impacted by reduced polyethylene demand and the Lake Charles turnaround.
  • Vinyls: Loss from operations widened to $15.4 million from $3.1 million, driven by construction market weakness and the Calvert City outage.
• Cash Flow Improvement: Despite the net loss, operating cash flow turned positive at $120.3 million, a $148.6 million improvement year-over-year, primarily due to favorable working capital changes (reduced inventory and receivables) and a $30.0 million federal tax refund.

Outlook, Risks, and Unusual Items

• Acquisitions & Expansions: Completed the acquisition of a PVC pipe plant in Janesville, Wisconsin ($6.3 million) and began operations at a new plant in Yucca, Arizona. Completed a PVC resin expansion in Calvert City, increasing capacity by 300 million pounds annually.
• Future Projects: Evaluating the start date for a new chlor-alkali plant in Geismar, Louisiana (estimated cost $250–$300 million) due to current economic conditions. Funding is expected from restricted cash, credit facilities, and operations.
• Liquidity & Debt Covenants: The company has $235.3 million in borrowing availability under its revolving credit facility. However, the fixed charge coverage ratio fell below 2.0, restricting the incurrence of additional debt and limiting distributions to regular quarterly dividends unless specific liquidity thresholds are met.
• Operational Risks: Significant exposure to commodity price volatility. The company faces ongoing environmental litigation and remediation obligations at the Calvert City complex involving Goodrich and PolyOne, though management does not expect these to be material in any single reporting period.
• Unusual Items: The Q1 2009 results included a $2.5 million gain from trading activity (commodity derivatives), partially offsetting operational losses. The Lake Charles turnaround cost of $23.1 million was capitalized.

Investor Verification Checklist

• Verify the sustainability of the $120.3 million operating cash flow given the net loss and reliance on working capital reductions.
• Monitor the fixed charge coverage ratio to assess potential restrictions on future debt incurrence and dividend payments.
• Assess the impact of the Calvert City ice storm and Lake Charles turnaround on full-year production capacity and margins.
• Review the status of the proposed Geismar chlor-alkali plant and its funding requirements in the context of the current credit market environment.
• Track commodity price trends (ethane, propane, ethylene) to evaluate margin recovery potential in the Olefins and Vinyls segments.