Westlake Chemical Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Westlake is a vertically integrated chemicals, polymers, vinyls and building-products manufacturer, reporting Olefins and Vinyls segments. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,188.0 | $1,253.2 | $3,476.6 | $3,279.5 |
| Gross profit | $311.3 | $361.5 | $949.0 | $954.5 |
| Gross margin | 26.2% | 28.8% | 27.3% | 29.1% |
| Operating income | $254.0 | $306.8 | $778.7 | $821.6 |
| Net income attributable to Westlake | $183.6 | $167.8 | $535.0 | $495.2 |
| Diluted EPS | $1.39 | $1.25 | $4.02 | $3.69 |
- Q3 sales fell 5.2%, while Westlake-attributable net income rose $15.8 million. Nine-month sales rose 6.0% and attributable net income rose $39.8 million.
- Q3 average sales prices decreased 26.3% year over year, partly offset by 21.0% higher volume. For the nine-month period, prices fell 27.9% while volume rose 33.9%.
- Olefins operating income declined to $196.7 million in Q3 from $259.3 million; Vinyls operating income increased to $67.8 million from $59.4 million. For nine months, Olefins operating income was $608.7 million versus $770.3 million, while Vinyls rose to $202.8 million from $76.5 million.
- Nine-month operating cash flow was $841.3 million, compared with $776.1 million. Capital expenditures were $329.2 million; operating cash flow less capital expenditures was approximately $512.1 million.
- Cash and cash equivalents were $961.9 million and current marketable securities were $285.7 million at September 30. Long-term debt was $764.1 million; no borrowings were outstanding on the $400 million revolving facility, with $346.4 million available after letters of credit. Management reported compliance with debt covenants.
- Cash from operations funded investment and shareholder returns: investing cash outflow was $553.6 million and financing cash outflow was $203.1 million. The company paid $67.9 million in dividends and repurchased $114.3 million of shares during the first nine months.
Material changes and unusual items
- Lower crude-oil-linked product prices reduced sales and Olefins margins; lower feedstock and energy costs provided a partial offset. Several maintenance turnarounds also reduced production and sales and increased unabsorbed fixed costs.
- Vinyls benefited from the July 2014 Vinnolit acquisition, the June 2015 acquisition of an additional 35.7% of Huasu (raising ownership to 95%), higher production at Geismar, and improved production at Calvert City following its feedstock conversion and ethylene expansion.
- Nine-month other income included a $22.6 million Huasu bargain-purchase gain, partly offset by a $1.5 million remeasurement loss and related costs, and a $4.9 million impairment of an equity-method investment. Management described the net pre-tax effect of the bargain gain, related expenses and impairment as approximately $16.0 million.
- A third-party ethylene supplier fire disrupted feedstock supply to the company’s Knapsack and Cologne facilities. Westlake recorded partial insurance recoveries of $7.8 million for the first nine months, primarily for additional feedstock costs.
- Foreign-currency translation reduced other comprehensive income by $43.7 million in the first nine months.
Outlook, risks and contingencies
- Management estimated a 2015 annual effective tax rate of approximately 33.5%; the Q3 rate was 24.2% and the nine-month rate was 30.1%, both affected by tax items and adjustments. The Huasu bargain gain was non-taxable.
- Management said available cash, operating cash flow and revolving-credit availability should cover normal operations and ongoing capital expenditures; large expansions or acquisitions could require additional financing. The planned Petro 1 ethylene-unit upgrade and expansion at Lake Charles was expected to cost $275–$335 million, add about 250 million pounds of annual capacity, and begin in Q2 2016. Approximately $150.8 million had been incurred by September 30, 2015.
- Management noted that lower crude oil prices narrowed the cost advantage of North American ethane-based producers, while weak construction and municipal spending could pressure North American Vinyls demand. European capacity exceeds regional demand, and the European business also faced ethylene-supply constraints.
- Environmental matters include Calvert City contamination proceedings and EPA discussions concerning flare emissions at Calvert City and Lake Charles; potential corrective measures could increase capital and operating costs. The company could not estimate a loss, if any, for the Calvert City remediation proceedings. Louisiana violations were under settlement discussions, with a potential total civil penalty of approximately $0.2 million.
- Other stated risks include commodity-price volatility, operating interruptions, foreign-exchange exposure, customer creditworthiness, regulatory changes, and access to financing. Management reported no material change in previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether product prices and integrated margins stabilize as crude oil, feedstock costs, and supply-demand conditions change.
- The extent to which maintenance outages and European feedstock disruption affect production, costs, and subsequent insurance recoveries.
- How recurring earnings compare with reported results after separating the Huasu bargain-purchase gain, tax benefits, and other unusual items.
- Progress, remaining cost, timing, and expected returns for the Petro 1 expansion and other capital projects.
- Developments in the Calvert City remediation and EPA flare matters, including any agreed obligations, costs, or penalties.
- Liquidity and capital-allocation priorities, including continued share repurchases, dividends, and the effect of acquisition or expansion plans on financing needs.