Westlake Chemical Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited financial statements; amounts below are in millions of dollars unless stated otherwise. Westlake manufactures chemicals, vinyls, polymers and building products through its Olefins and Vinyls segments.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,253.2 | $1,004.2 | $3,279.5 | $2,807.9 |
| Gross profit | $361.5 | $304.5 | $954.5 | $805.8 |
| Gross margin | 28.8% | 30.3% | 29.1% | 28.7% |
| Income from operations | $306.8 | $266.6 | $821.6 | $695.9 |
| Net income attributable to Westlake | $167.8 | $170.3 | $495.2 | $439.5 |
| Diluted EPS | $1.25 | $1.27 | $3.69 | $3.27 |
Q3: Sales rose 24.8%, but attributable net income fell $2.5 million. Higher product prices and sales volumes, lower feedstock costs and acquired Vinnolit sales supported revenue and operating income. Gross margin declined, reflecting unplanned outages, lower production and lost sales, higher energy costs, and expense from selling Vinnolit inventory marked up at acquisition. The quarter also included about $21.6 million of after-tax WLKP formation/IPO and Vinnolit-related costs, $16.2 million of discrete tax expense, and $7.1 million of after-tax outage costs, as identified by management.
Nine months: Sales increased 16.8% and attributable net income increased 12.7%. Operating income growth was led by improved Olefins margins and increased Lake Charles ethylene production; Vinyls results were pressured by outages, turnaround and expansion costs, winter weather, and elevated propane costs early in the year. Management cited approximately $24.5 million of after-tax WLKP/Vinnolit-related costs and the $16.2 million discrete tax items as drags on year-to-date net income.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $776.1 million, up from $547.5 million. Capital expenditures were $311.2 million, making operating cash flow less capital expenditures a simple $464.9 million cash-flow proxy, before acquisitions and other investing activity.
- Investing activities used $652.2 million, including $611.1 million net cash for Vinnolit and $311.2 million of capital expenditures. Financing activities provided $231.9 million, including $286.1 million of WLKP unit proceeds.
- At September 30, cash and cash equivalents were $813.5 million; long-term debt was $764.0 million, with no borrowings on the revolver. Cash exceeded debt by approximately $49.5 million, comparing reported balances. Current assets were $1,951.9 million and current liabilities $573.0 million.
- The $400 million revolving credit facility matures July 17, 2019; $367.6 million was available after $32.4 million of letters of credit. The company reported compliance with debt covenants.
- Total assets were $5,126.3 million, up from $4,060.9 million at year-end 2013, principally reflecting the Vinnolit acquisition and related asset additions. Stockholders’ equity included $288.5 million of noncontrolling interests following the WLKP IPO.
Material developments, outlook and risks
- Westlake acquired German specialty PVC producer Vinnolit on July 31 for total consideration of $736.2 million, including $413.2 million of seller debt retired at closing. Vinnolit contributed $195.5 million of sales and a $3.0 million net loss from acquisition through September 30. Purchase-price allocation was preliminary; no goodwill was recorded.
- WLKP completed its IPO on August 4. Westlake retained an 89.4% limited partner interest in OpCo and a significant WLKP interest, and consolidates WLKP. The IPO sold 47.8% of WLKP’s common and subordinated units.
- Management expected the Geismar chlor-alkali plant, Calvert City ethane conversion/ethylene expansion, and Vinnolit acquisition to support Vinyls profitability. It estimated a 2014 annual tax rate on ordinary income of approximately 35.6%.
- Westlake planned to upgrade and expand the second Lake Charles ethylene unit in late 2015 to early 2016. Estimated cost was $250–$310 million, adding about 250 million pounds of annual ethylene capacity; $40.4 million had been incurred by September 30. Management expected liquidity to cover normal operations and ongoing capital spending.
- Management noted falling crude prices toward quarter-end were narrowing the cost advantage of ethane-based production. Key risks include chemical-industry cyclicality, commodity and energy prices, product demand and pricing, operating interruptions, acquisition integration, foreign exchange and access to financing.
- Environmental proceedings at Calvert City involve potential CERCLA liabilities and disputes among Westlake, Goodrich and PolyOne. Westlake said it could not estimate any resulting loss or reasonably possible loss. PolyOne’s arbitration claim seeking about $1.4 million remained stayed.
- Commodity sensitivity: a hypothetical $0.10/gallon increase in ethane would increase pretax income by $8.4 million; a $0.10/pound increase in ethylene would reduce it by $3.0 million, based on open positions at period-end. Management reported effective disclosure controls and no material change to risk factors.
Most important facts to verify
- How much of sales and earnings growth is attributable to Vinnolit and other acquired operations versus underlying volume, pricing and margins.
- Whether unplanned outages and acquisition-related costs recur, and how quickly Vinyls profitability improves.
- Final Vinnolit purchase-price allocation, including asset valuations, deferred taxes and the power-purchase agreement liability.
- Progress, cost and funding needs for the Lake Charles expansion and other planned capital projects.
- Commodity-price exposure, the narrowing ethane cost advantage, and the potential outcome and cost of Calvert City environmental proceedings.