Westlake Chemical Corporation — Q1 2015 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Westlake is a vertically integrated manufacturer and marketer of basic chemicals, vinyls, polymers and building products, operating through Olefins and Vinyls segments.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $1,103.5 million | $1,027.7 million |
| Gross profit / margin | $284.5 million / 25.8% | $287.0 million / 27.9% |
| Income from operations | $229.3 million | $248.1 million |
| Net income attributable to Westlake | $146.3 million | $158.0 million |
| Diluted EPS | $1.10 | $1.18 |
| Operating cash flow | $190.6 million | $212.5 million |
| Capital expenditures | $95.8 million | $110.7 million |
| Dividends per common share | $0.165 | $0.126 |
- Cash and cash equivalents were $945.6 million at March 31, 2015, versus $880.6 million at year-end 2014. Long-term debt was $764.0 million, nearly unchanged from year-end; no borrowings were outstanding on the $400 million revolving facility, with $370.0 million available after letters of credit.
- Current assets were $2,002.2 million and current liabilities $453.2 million. Operating cash flow less capital expenditures was approximately $94.7 million.
- Q1 2015 foreign currency translation reduced other comprehensive income by $59.7 million; comprehensive income attributable to Westlake was $88.1 million.
Changes versus Q1 2014
- Sales increased 7.4%, mainly from the acquired Vinnolit business and higher Vinyls volumes, despite a 21.6% decline in average sales prices. Overall sales volumes rose 29.0%.
- Westlake-attributable net income fell $11.7 million, or about 7%. Lower Olefins integrated margins—amid sharply lower product prices following the crude-oil decline—more than offset Vinyls improvement. Gross margin decreased to 25.8% from 27.9%.
- Olefins sales fell 19.3% to $583.1 million and segment operating income fell 29.8% to $191.1 million. Vinyls sales rose 70.7% to $520.5 million, and the segment moved from a $21.1 million operating loss to $47.1 million operating income, reflecting Vinnolit, improved integrated margins and higher caustic-soda volumes.
- Operating cash flow declined $21.9 million, attributed to lower operating income and less favorable working-capital movements, particularly lower accrued liabilities. Capital spending declined as major Calvert City projects were completed.
- SG&A rose $16.3 million to $55.3 million, primarily from Vinnolit costs, higher labor and incentive compensation, and professional fees. Other income increased to $9.1 million, partly from equity-method income and foreign-exchange gains.
Outlook, risks and notable items
- Management gave no specific earnings or revenue guidance. It said lower crude-oil prices have reduced the cost advantage of North American ethane-based producers and may pressure prices and margins; volatility and global economic conditions remain important uncertainties. European naphtha-based operations may benefit from lower crude prices.
- Management cited slow recovery in U.S. construction and municipal spending as a potential constraint on Vinyls demand, and excess European capacity and weak regional conditions as ongoing challenges. It stated that cash, operating cash flow and available credit should fund normal operations and planned spending, absent a major new expansion or acquisition.
- The planned Petro 1 ethylene-unit upgrade and expansion at Lake Charles is estimated to cost $275–$335 million, add about 250 million pounds of annual capacity, and is planned for the first half of 2016. Approximately $74.2 million had been incurred by March 31, 2015.
- On April 29, 2015, Westlake Partners purchased an additional 2.7% newly issued OpCo interest for about $135.3 million, bringing its interest to approximately 13.3%; Westlake retained approximately 86.7%. Westlake Partners entered a $300 million revolving facility with a Westlake subsidiary to fund the purchase.
- Westlake agreed in February 2015 to acquire a further 35.7% interest in Suzhou Huasu Plastics, a PVC joint venture, subject to government approvals; it already owned 59%.
- Environmental matters include EPA inquiries and negotiations concerning flares at Calvert City and Lake Charles, which could require controls and raise costs. The company could not estimate a loss from Calvert City contamination proceedings; a proposed Louisiana NOV settlement could involve approximately $0.2 million in civil penalties. Management said other legal proceedings were not expected to have a material adverse effect.
- Commodity prices, feedstock and energy costs, operating interruptions, demand, competition, foreign exchange, access to financing, environmental regulation and the ability to integrate acquired businesses are among the stated risks. A proposed U.S. tax regulation could affect Westlake Partners’ tax status after a ten-year transition period and potentially reduce distributions to Westlake.
Important facts for investors to verify
- Whether Olefins margins and earnings stabilize or continue to weaken as crude-linked prices and the ethane cost advantage change.
- Whether Vinyls’ operating improvement is sustained, including the effects of Vinnolit, Geismar performance and turnaround-related costs.
- Progress, remaining cost, timing and expected returns of the Lake Charles Petro 1 expansion, and funding needs for planned capital spending.
- Final approvals and terms for the Suzhou Huasu stake purchase, and the financial and cash-flow effects of the OpCo interest transfer and Westlake Partners’ related-party credit facility.
- Developments in EPA flare discussions and Calvert City remediation proceedings, including any eventual costs or allocation of liability.
- Cash generation, working-capital trends, dividends and repurchases; the filing reports covenant compliance at quarter-end and no revolver borrowings.