Westlake Chemical Corporation: Q3 2008 10-Q Summary
Business Context and Reporting Period
Westlake Chemical Corporation (Westlake) is a vertically integrated manufacturer and marketer of petrochemicals, polymers, and fabricated products. The company operates through two principal segments: Olefins and Vinyls. This summary covers the quarterly period ended September 30, 2008, and the nine-month period ended on the same date.
Key Financial Metrics
| Metric (in thousands) | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Net Sales | $1,073,735 | $840,160 | $3,095,245 | $2,341,626 |
| Gross Profit | $71,787 | $86,060 | $204,951 | $228,380 |
| Income from Operations | $48,788 | $59,755 | $136,223 | $154,700 |
| Net Income | $27,364 | $38,341 | $80,024 | $95,903 |
| Diluted EPS | $0.42 | $0.59 | $1.23 | $1.47 |
| Cash from Operations (9M) | $76,586 | $95,001 | ||
| Capital Expenditures (9M) | ||||
| Long-Term Debt | $515,948 (as of Sept 30, 2008) | |||
| Cash & Equivalents | $22,452 (as of Sept 30, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 27.8% in Q3 2008 and 32.2% for the nine months ended Sept 30, 2008, driven primarily by higher average sales prices (up 30.2% in Q3 and 29.9% for 9M) across major products.
- Profitability Decline: Despite revenue growth, Net Income decreased 28.6% in Q3 and 16.6% for the nine months. Gross margin percentage contracted to 6.7% in Q3 (from 10.2% in Q3 2007) and 6.6% for 9M (from 9.8% in 9M 2007).
- Cost Pressures: Operating income was negatively impacted by significantly higher feedstock (ethane, propane) and energy costs, which outpaced price increases in certain periods. Trading activity resulted in a net loss of $7.8 million for the nine months of 2008, compared to a gain of $6.4 million in 2007.
- Operational Disruptions: Hurricanes Gustav and Ike caused facility shutdowns in Louisiana (Lake Charles and Geismar) during Q3, impacting volumes and margins. The Olefins segment income dropped 68.1% in Q3 due to these outages and higher costs.
- Interest Expense: Interest expense rose 72.5% in Q3 and 102.6% for the nine months, attributed to higher average debt levels following the issuance of $250 million in senior notes in late 2007.
Outlook, Risks, and Management Commentary
- Market Conditions: Management cites a weak U.S. construction market suppressing Vinyls downstream margins and global economic weakness affecting Olefins demand. Instability in credit and financial markets is noted as a risk to liquidity and customer/supplier solvency.
- Capital Projects:
- Geismar, LA: Announced construction of a new chlor-alkali plant ($250M-$300M), expected completion H1 2011.
- Calvert City, KY: Expansions of chlor-alkali and PVC resin units expected to complete in 2009.
- Yucca, AZ: New PVC pipe plant expected to begin full operations in Q1 2009.
- Trinidad & Tobago: Active work on a proposed ethane-based project has been suspended due to rising international capital costs.
- Liquidity: The company amended its revolving credit facility in September 2008, increasing commitments from $300 million to $400 million. Management believes current cash flows and borrowing capacity are adequate for foreseeable needs.
- Legal & Environmental: Ongoing proceedings regarding environmental remediation at the Calvert City complex (involving Goodrich/PolyOne) and EPA audits regarding leak detection and repair (LDAR) at Lake Charles. Management believes ultimate resolution will not materially affect financial condition, though penalties and capital expenditures are expected.
Investor Verification Checklist
- Hurricane Impact Quantification: Verify the specific volume and revenue impact of the Lake Charles and Geismar shutdowns versus the reported sales volume decrease.
- Feedstock Cost Pass-Through: Assess the sustainability of current sales prices given the 33-48% increase in raw material costs (ethane/propane) and the resulting margin compression.
- Debt Covenants: Review the fixed charge coverage ratio requirements under the senior notes and revolving credit facility, especially given the increase in interest expense and potential earnings volatility.
- Environmental Liabilities: Monitor the status of the Calvert City remediation settlement and EPA LDAR penalties to ensure accruals remain adequate.
- Capital Expenditure Funding: Confirm the drawdown schedule for the $250M restricted cash (revenue bonds) and the funding sources for the new Geismar chlor-alkali plant.