Business context and reporting period
Westlake Chemical Corporation (NYSE: WLK), a vertically integrated chemicals, polymers and building-products manufacturer, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. Its principal segments are Vinyls and Olefins. Results are compared with the corresponding 2020 periods.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2.859 billion | $1.709 billion | $5.216 billion | $3.641 billion |
| Gross profit | $872 million | $169 million | $1.381 billion | $452 million |
| Gross margin | 31% | 10% | 26% | 12% |
| Operating income | $720 million | $36 million | $1.066 billion | $172 million |
| Net income attributable to Westlake | $522 million | $15 million | $764 million | $160 million |
| Diluted EPS | $4.04 | $0.11 | $5.91 | $1.24 |
| EBITDA, non-GAAP | $932 million | $236 million | $1.485 billion | $573 million |
For the six months, operating cash flow was $882 million, versus $509 million a year earlier; capital expenditures were $270 million, compared with $291 million. Operating activities provided $617 million in Q2 2021 versus $448 million in Q2 2020. Working capital used $303 million in the first half, chiefly as higher prices increased receivables and higher costs increased inventory. Cash and cash equivalents were $1.844 billion at June 30, 2021, up from $1.313 billion at year-end 2020. Total debt was approximately $3.6 billion; the company had no borrowings on its $1 billion revolving facility and reported full availability and compliance with its financial covenant. Current assets were $4.445 billion and current liabilities $1.485 billion.
Six-month dividends paid were $69 million; dividends declared were $0.54 per common share. Interest expense was $36 million in Q2 and $69 million for the first half. The six-month 2020 comparison benefited from a $68 million CARES Act-related tax benefit, affecting year-over-year tax and earnings comparisons.
Changes versus prior comparable periods
Q2 sales rose 67% year over year, with average selling prices up 63% and sales volume up 4%. Six-month sales increased 43%, with average prices up 42% and volume up 2%. Management attributed the substantial earnings improvement mainly to higher selling prices and integrated margins amid stronger global demand, improved economic activity, and robust North American residential construction and repair markets. Higher feedstock, natural gas and SG&A costs partly offset the improvement.
Vinyls Q2 sales were $2.188 billion and operating income $435 million, versus $1.348 billion and $20 million. Olefins Q2 sales were $671 million and operating income $277 million, versus $361 million and $25 million. Olefins volume fell 14% in Q2 and 11% for the first half, primarily because winter-storm disruption and prior hurricane-related inventory shortages constrained production and availability. Vinyls volume rose 9% in Q2 and 5% for the first half.
The February 2021 winter storm disrupted southern U.S. facilities, causing lost production and sales and approximately $14 million of additional maintenance costs in Q1. Affected facilities had resumed production. First-half earnings also reflected lower operating rates and production resulting from the storm.
Outlook, risks and unusual items
Management expected global demand for most Vinyls and Olefins products to remain robust through the rest of 2021. The filing gives no numerical earnings or revenue guidance. Management noted that new ethylene and polyethylene capacity in North America, Asia and the Middle East could add supply and pressure Olefins profitability. Outcomes also depend on economic conditions, crude oil and feedstock prices, trade policies, demand durability, COVID-19 developments and operating reliability. A Petro 2 ethylene unit turnaround at Lake Charles was planned for the second half of 2021.
Westlake had agreed to acquire Boral’s North American building-products businesses for $2.15 billion cash, with closing expected in the second half of 2021 subject to approvals and other conditions. It also agreed to acquire LASCO for approximately $252.5 million cash. On August 2, 2021, it agreed to acquire Dimex for $170 million cash. These were pending transactions, not completed acquisitions as of the filing; management said the purchases were not subject to financing conditions. The company expected to incur up to $1.7 billion of additional debt to complete the acquisitions. Risks include regulatory approval, closing, integration, unanticipated liabilities, added interest costs and whether anticipated benefits are realized.
Environmental reserves were approximately $53 million. The company disclosed additional reasonably possible environmental losses of $65 million to $130 million beyond amounts reserved. Caustic-soda price-fixing class actions in the U.S. and Canada seek unspecified damages; the company said it could not estimate their impact. An EPA flare-compliance matter could involve a monetary sanction above $1 million, though Westlake did not expect a material adverse effect. The filing describes commodity-price, interest-rate, foreign-exchange, pandemic, supply-demand and cyclical-industry risks. Management stated that COVID-19’s future effects could not be estimated with certainty.
Key facts for investors to verify
- Whether strong selling prices and demand persist, and whether new industry capacity or lower volumes weaken segment margins.
- How working-capital requirements and capital spending affect cash generation as prices and input costs change.
- Financing, final purchase prices, regulatory approvals, closing status and integration results for Boral, LASCO and Dimex, including the potential debt increase.
- Developments in the caustic-soda litigation, environmental contingencies and EPA flare matter.
- Whether the planned Petro 2 turnaround and any further operational disruptions affect production and cash flow.