Westlake Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparative periods ended June 30, 2022. Westlake is an integrated global manufacturer of performance and essential materials and housing and infrastructure products. All dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $3,251 | $4,483 | $6,607 | $8,539 |
| Gross profit | $642 | $1,445 | $1,434 | $2,730 |
| Gross margin | 20% | 32% | 22% | 32% |
| Income from operations | $396 | $1,175 | $932 | $2,207 |
| Net income attributable to Westlake | $297 | $858 | $691 | $1,614 |
| Diluted EPS | $2.31 | $6.60 | $5.35 | $12.43 |
| Operating cash flow | $555 | $913 | $1,067 | $1,613 |
| Free cash flow (non-GAAP) | $315 | $683 | $560 | $1,120 |
At June 30, cash and cash equivalents were $2,677, long-term debt carrying value was $4,894, and current assets and current liabilities were $6,296 and $2,131, respectively. The company had $1,500 available under its revolving credit facility, with no borrowings or letters of credit outstanding, and reported compliance with debt covenants. Six-month capital expenditures were $507. The board-declared dividend was $0.357 per share for Q2 and $0.714 per share for the first half.
Changes versus comparable periods
- Q2 sales fell 27%; management attributed the decline to lower prices and volumes across most products. Average selling prices decreased 15% and volumes fell 13% year over year.
- Q2 operating income decreased $779 and Westlake-attributable net income decreased $561. Lower prices and weaker demand, along with planned and unplanned outages, were the principal causes; higher caustic soda and chlorine prices and lower natural gas and feedstock costs partly offset the decline.
- Performance and Essential Materials Q2 sales decreased 31% to $2,136 and operating income fell to $215 from $965. Housing and Infrastructure Products sales decreased 19% to $1,115 and operating income declined to $190 from $236.
- For the first half, sales fell 23%, operating income declined $1,275, and Westlake-attributable net income declined $923. Operating cash flow was $546 lower than in 2022, mainly due to lower operating income, partly offset by a favorable $607 year-over-year change in working-capital cash flows.
- Investing cash use was $499 versus $1,803 in the prior-year first half, largely because 2022 included the $1,163 Hexion epoxy acquisition. Financing cash use was $131, including dividends, noncontrolling-interest distributions, and share repurchases.
Outlook, risks, and notable items
Management gave no quantified earnings or revenue guidance. It expected near-term volatility in energy prices, higher interest rates, inflation, and other macroeconomic conditions to continue weighing on demand and margins. Management noted recent declines in energy prices and signs of easing inflation, but highlighted weaker global demand, European energy costs, potential recession, housing-market affordability, industry capacity additions, and the Russia-Ukraine conflict as risks. Commodity-price volatility, raw-material costs, outages, environmental regulation and climate-related requirements, and foreign-exchange exposure are also material risks.
Legal and environmental matters include a Triad Hunter jury verdict of approximately $70 for which Westlake recorded a reserve; no final judgment had been entered, and the company intended to appeal if required to pay. Environmental reserves were approximately $53; the company also disclosed reasonably possible additional environmental losses of $75–$135. The company said it could not estimate the impact of the caustic soda antitrust lawsuits or the 2023 European ethylene antitrust suit. Management stated that, in aggregate, known legal and regulatory matters were not expected to have a material adverse effect, while cautioning that outcomes may be uncertain.
Important facts for investors to verify
- Whether product prices, volumes, demand, and operating rates stabilize, particularly for PVC, polyethylene, epoxy, and housing-related products.
- Whether margin pressure from macroeconomic conditions and any further plant outages is offset by lower energy/feedstock costs and chlor-alkali pricing.
- Cash generation, capital spending, and liquidity needs, including the effect of working-capital changes and planned projects.
- Developments in the Triad Hunter appeal and environmental, caustic soda, and ethylene proceedings, including changes in reserves or estimated exposure.
- Debt maturities, refinancing costs, covenant compliance, and the availability of the revolving facility.