Westlake Chemical Corporation 2008 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Westlake Chemical Corporation (Westlake)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: Westlake is a vertically integrated manufacturer and marketer 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).
Operational Status: As of February 15, 2009, the company had 11.8 billion pounds of annual production capacity across 15 North American sites and a 59% interest in a China joint venture. In 2008, the company permanently closed one fabricated products plant and idled another due to the economic downturn.
Key Financial Metrics (Year Ended Dec 31, 2008)
| Metric | 2008 | 2007 |
|---|---|---|
| Net Sales | $3,692.4 million | $3,192.2 million |
| Gross Profit | $69.4 million | $271.4 million |
| Gross Margin | 1.9% | 8.5% |
| Operating Income (Loss) | $(29.5) million | $174.7 million |
| Net Income (Loss) | $(29.5) million | $114.7 million |
| Diluted EPS | $(0.45) | $1.76 |
| EBITDA | $87.9 million | $280.9 million |
| Cash Flow from Operations | $186.1 million | $62.2 million |
| Total Debt | $510.3 million | $511.4 million |
| Working Capital | $586.7 million | $650.9 million |
| Cash & Cash Equivalents | $90.2 million | $24.9 million |
Material Changes vs. Prior Period
- Profitability Collapse: The company reported a net loss of $29.5 million in 2008, a reversal from a net income of $114.7 million in 2007. This was driven primarily by a $109.6 million net loss in the fourth quarter of 2008.
- Margin Compression: Gross margin plummeted from 8.5% in 2007 to 1.9% in 2008. This was caused by a sharp drop in product prices in Q4 2008 while the company was selling inventory purchased at higher feedstock costs (FIFO accounting impact), resulting in approximately $168 million in inventory losses and unabsorbed fixed costs.
- Sales Volume vs. Price: Net sales increased by 15.7% due to an 18.7% increase in average sales prices during the first three quarters. However, overall sales volume decreased by 3.0% year-over-year.
- Segment Performance:
- Olefins: Shifted from $152.6 million operating income in 2007 to a $40.1 million operating loss in 2008, largely due to negative margins in Q4.
- Vinyls: Operating income declined from $30.0 million to $17.9 million, impacted by weakness in the construction market and plant closures.
- Allowance for Doubtful Accounts: Increased by $10.9 million in 2008 due to the deteriorating economic environment.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects operating rates and margins may not improve and could decline further in 2009 and 2010 due to projected capacity growth exceeding demand growth in both the PVC and ethylene markets. The global financial crisis and credit market volatility remain significant risks.
- Liquidity Constraints: The company's fixed charge coverage ratio fell below 2.0 at year-end, restricting the incurrence of additional debt (except for specified permitted debt) and limiting distributions. The borrowing base of the revolving credit facility declined to $257.9 million due to reduced working capital.
- Capital Expenditures: Capital expenditures were $172.6 million in 2008. The company plans to construct a new chlor-alkali plant in Geismar, Louisiana (completion expected 2011) at a cost of $250-$300 million.
- Unusual Items:
- Q4 Inventory Losses: Significant losses due to the rapid drop in feedstock and product prices combined with FIFO accounting.
- Plant Closures: Costs of approximately $3.9 million were recorded for the closure of the Pawling, NY facility and the idling of the Van Buren, AR plant.
- Trading Losses: A $9.4 million loss from trading activities in 2008 compared to a $1.0 million loss in 2007.
- Risks: Key risks include cyclicality in the petrochemical industry, volatility in raw material and energy costs, the global credit crisis, and environmental liabilities (specifically ongoing litigation and remediation regarding the Calvert City, KY site).
Investor Verification Checklist
- Debt Covenants: Verify the impact of the fixed charge coverage ratio falling below 2.0 on future borrowing capacity and dividend payments.
- Inventory Valuation: Assess the sustainability of margins given the FIFO accounting mismatch between high-cost inventory and low selling prices in Q4 2008.
- Environmental Liabilities: Review the status of the Calvert City remediation disputes with Goodrich/PolyOne and EPA investigations for potential future cash outflows.
- Capacity Utilization: Monitor operating rates in 2009, as the company expects capacity growth to outpace demand, potentially suppressing margins.
- Credit Facility: Confirm the availability of the $257.9 million borrowing base and the terms of the February 2009 amendment to the credit facility.