WLK

Westlake Chemical Corporation 2009 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009. Westlake Chemical Corporation is a vertically integrated manufacturer of basic chemicals, vinyls, polymers, and fabricated products. The company operates in two principal segments: Olefins (ethylene, polyethylene, styrene) and Vinyls (PVC, VCM, chlorine, caustic soda, and fabricated products like pipe and fencing). The company owns 14 manufacturing sites in North America and a 59% interest in a joint venture in China.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 37.0% to $2.3 billion, driven by a 32.1% drop in average sales prices and a 4.9% decline in sales volumes. This reflects the global economic downturn and weakness in the construction market.
• Profitability Recovery: Despite lower sales, the company returned to profitability with $53.0 million in net income, compared to a $29.5 million loss in 2008. This turnaround was primarily due to significantly lower energy and feedstock costs (ethane and propane prices dropped 46% and 40%, respectively) which outpaced the decline in product prices.
• Segment Performance:
  • Olefins: Generated $177.1 million in operating income (vs. $40.1 million loss in 2008) due to strong export demand and a cost advantage for gas-based ethylene producers.
  • Vinyls: Recorded a $57.4 million operating loss (vs. $17.9 million income in 2008) due to weak construction demand, lower caustic margins, and higher chlorine costs.
• Asset Optimization: The company closed its Bristol, Indiana PVC pipe facility in October 2009 and acquired a PVC pipe plant in Janesville, Wisconsin, in March 2009 to optimize capacity.

Guidance, Outlook, and Risks

• Outlook: Management expects North American PVC capacity to increase over the next two years, potentially negatively impacting operating rates and margins. Olefins margins may also face pressure from significant capacity additions in the Middle East and Asia.
• Capital Expenditures: Capital spending was reduced to $99.8 million in 2009 (down from $172.6 million in 2008) to preserve cash. Environmental compliance spending is estimated at $5.9 million for 2010 and $6.1 million for 2011.
• Liquidity: The company maintains a $400 million revolving credit facility. As of year-end, the borrowing base was $326.7 million due to lower receivables and inventory levels. The company had no borrowings outstanding under the facility at year-end.
• Key Risks:
  • Cyclicality: The petrochemical industry is highly cyclical; margins are sensitive to supply/demand balances.
  • Raw Material Volatility: Prices for ethane, propane, and natural gas are volatile and impact margins.
  • Environmental Liabilities: Ongoing litigation and administrative proceedings regarding contamination at the Calvert City, Kentucky site (involving Goodrich and PolyOne) present potential liabilities, though management believes costs will not be material in any single period.
  • Debt Covenants: The company must maintain specific fixed charge coverage ratios to avoid restrictions on dividends and additional debt.

Investor Verification Checklist

• Feedstock Cost Correlation: Verify the sustainability of the margin improvement by monitoring the spread between product prices and feedstock costs (ethane/propane).
• Construction Market Recovery: Assess the health of the U.S. residential and commercial construction sectors, which directly drive demand for the Vinyls segment.
• Debt Covenant Compliance: Monitor the fixed charge coverage ratio to ensure compliance with senior notes and credit facility covenants, particularly if operating income fluctuates.
• Environmental Litigation Status: Track developments in the Calvert City contamination proceedings and any potential cost allocations from Goodrich/PolyOne.
• Capacity Utilization: Review future industry capacity additions in the Middle East and Asia that could impact Olefins pricing power.