Westlake Chemical Corporation (NYSE: WLK) — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although requested as 2011 Q4, this is an annual 10-K; quarterly figures are included where disclosed. Filed February 23, 2012.
Business context
Westlake is a vertically integrated chemicals and building-products manufacturer operating Olefins and Vinyls segments. Products include polyethylene, ethylene, styrene, PVC, caustic soda, and PVC pipe and building products. Operations are concentrated in North America, with a 59% interest in a China PVC joint venture.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $3,619.8 million | $3,171.8 million |
| Gross profit / margin | $559.0 million / 15.4% | $482.7 million / 15.2% |
| Operating income | $446.8 million | $378.4 million |
| Net income | $259.0 million | $221.4 million |
| Diluted EPS | $3.87 | $3.34 |
| Operating cash flow | $362.3 million | $283.3 million |
| Capital expenditures | $176.8 million | $81.3 million |
| EBITDA (non-GAAP) | $583.8 million | $511.6 million |
Sales rose 14.1% and net income increased 17.0%. Higher prices across major product lines and greater PVC resin volume drove growth; total sales volume declined 2.9%, mainly due to weaker building-products demand. Feedstock costs increased and partly offset pricing benefits. Interest expense rose to $51.0 million from $39.9 million.
Olefins operating income was $459.3 million, essentially flat year over year; higher product prices were largely offset by higher feedstock costs and disruptions. Vinyls moved to $4.0 million operating income from a $62.4 million loss, reflecting improved caustic, PVC resin and building-products margins and increased PVC resin volume.
Fourth-quarter 2011 net sales were $859.2 million, gross profit $77.3 million, operating income $50.5 million and net income $26.4 million. Compared with Q4 2010, sales increased from $795.4 million, while operating income declined from $137.1 million and net income from $84.1 million.
At year-end, cash and cash equivalents were $825.9 million and restricted cash $96.3 million; working capital was $1,391.6 million. Total debt was $764.6 million, with no borrowings under the $400 million revolving facility and $384.3 million availability (net of letters of credit). Operating cash flow less capital expenditures was approximately $185.5 million. Dividends declared totaled $0.2746 per share.
Material changes and unusual items
- Olefins benefited from favorable North American natural-gas-based feedstock economics and export demand, but segment operating income was virtually unchanged from 2010.
- Vinyls improved substantially as PVC export demand and product prices strengthened, though domestic construction remained weak.
- Operating results were adversely affected by a Lake Charles ethylene outage, the Calvert City turnaround, a fire at a third-party Mont Belvieu storage facility, and closure of the Springfield pipe plant. The closure generated $3.4 million in impairment, severance and other costs.
- Capital spending more than doubled, principally for the Geismar chlor-alkali project and Lake Charles ethylene expansion. The company also invested $30.3 million in securities and other investments, primarily Georgia Gulf shares.
- The 2011 intersegment ethylene pricing methodology changed reported segment results but did not affect consolidated operating income.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said its cash, operating cash flow and available revolving credit were expected to support normal operations and ongoing capital spending; large acquisitions or expansions could require additional financing.
- Planned projects include a Lake Charles ethylene expansion expected to add approximately 230–240 million pounds of annual capacity by late 2012 (estimated cost $110–145 million), a Calvert City ethylene modification targeted for mid-2013 (about $40 million), and a Geismar chlor-alkali plant targeted for the second half of 2013 (estimated cost $370–420 million).
- Westlake proposed acquiring Georgia Gulf for $30 per share, then raised its proposal to $35 per share, valuing the transaction at approximately $1.2 billion. Georgia Gulf rejected both proposals; Westlake held about 4.8% of its shares as of February 17, 2012. Completion, financing and anticipated benefits were uncertain.
- Principal risks include chemical-industry cyclicality, volatile feedstock and energy costs, pricing lags, weak U.S. construction demand, global capacity additions, operational interruptions, and environmental and safety regulation. Projects face delay and cost-overrun risks.
- Environmental matters include Calvert City contamination investigations under CERCLA, where Westlake may face strict, joint-and-several liability and cannot estimate potential loss, and an EPA/DOJ Lake Charles emissions matter. Westlake accrued a probable penalty in the latter case; the amount was not ascertainable. PolyOne’s arbitration seeking cost reallocation and approximately $1.4 million reimbursement was stayed.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor also opined that internal controls were effective. Environmental compliance capital expenditures were estimated at $6 million in 2012 and $7 million in 2013.
Most important facts to verify
- Whether quarterly results after Q4 maintained margins, particularly as Q4 operating income and net income were markedly below Q4 2010.
- Actual project spending, timing, start-up and returns for the three major expansion and modification projects.
- Any change in the Georgia Gulf proposal, shareholding, acquisition financing or resulting debt and liquidity position.
- How feedstock costs, commodity prices, construction demand and global capacity affect segment margins and volumes.
- Developments and any new estimable exposure in the Calvert City remediation proceedings and Lake Charles EPA matter.
- Cash available for operations and investment, including restrictions on the $96.3 million restricted-cash balance and compliance with credit-facility covenants.