Westlake Corporation — Q2 2022 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2022, compared with the same 2021 periods. Westlake is an integrated materials and building-products manufacturer operating in Performance and Essential Materials and Housing and Infrastructure Products. Results include Westlake Epoxy from its February 1, 2022 acquisition; prior-year segment results were recast after the 2021 segment reorganization.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $4,483 million | $2,859 million | $8,539 million | $5,216 million |
| Gross profit | $1,445 million | $872 million | $2,730 million | $1,381 million |
| Gross margin | 32% | 31% | 32% | 26% |
| Income from operations | $1,175 million | $720 million | $2,207 million | $1,066 million |
| Net income attributable to Westlake | $858 million | $522 million | $1,614 million | $764 million |
| Diluted EPS | $6.60 | $4.04 | $12.43 | $5.91 |
| Operating cash flow | $913 million | $617 million | $1,613 million | $882 million |
Drivers and changes. Q2 sales rose 57% year over year, primarily on higher prices and acquired-business contributions; average sales prices increased 32% and sales volumes 25%. Management attributed higher earnings mainly to stronger prices and integrated margins across major products and contributions from acquisitions, partly offset by higher feedstock and energy costs. Q2 operating income increased $455 million. Six-month sales rose 64%, and operating income increased $1,141 million.
- Performance and Essential Materials: Q2 sales were $3,104 million and operating income $965 million, versus $2,146 million and $671 million a year earlier. Higher PVC, caustic soda, chlorine and styrene prices and stronger polyethylene margins contributed; higher energy and feedstock costs and lower PVC resin volumes were offsets.
- Housing and Infrastructure Products: Q2 sales were $1,379 million and operating income $236 million, versus $713 million and $96 million. Acquisitions and higher prices supported results, partly offset by increased raw-material and production costs.
- Six-month SG&A increased to $420 million from $261 million, and amortization rose to $85 million from $54 million, largely reflecting acquisitions and higher compensation. Acquisition-related restructuring, transaction and integration costs were $18 million for the six months.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1,613 million, up from $882 million. Working capital used $577 million, versus $303 million in the prior-year period, mainly reflecting higher receivables and inventories, prices, inventory costs and acquired operations.
- Investing cash outflow was $1,803 million, including $1,163 million net cash paid for Westlake Epoxy, $156 million of contributions to unconsolidated subsidiaries and $493 million of capital expenditures. Financing cash outflow was $377 million, including $250 million of senior-note redemption, $77 million of dividends and $31 million of share repurchases.
- At June 30, cash and equivalents were $1,317 million, compared with $1,908 million at December 31, 2021. Total current assets were $6,013 million and current liabilities $2,513 million.
- Debt was approximately $4.9 billion. Westlake redeemed its $250 million 3.60% notes due 2022 and entered a new $1.5 billion revolving facility maturing in 2027. The facility was undrawn, with $1.5 billion available at quarter-end; the company reported compliance with debt covenants.
- Management said available cash, operating cash flow and borrowing capacity should cover normal operating needs and planned capital expenditures, absent a major expansion or acquisition. Additional financing may be needed for large projects or acquisitions.
Outlook, risks and unusual items
- Management expected global demand for most products to remain favorable through 2022. It also cited potential headwinds from inflation, higher interest rates, recession or financial-market instability, supply-chain constraints and weaker housing demand. No quantified earnings or revenue guidance was provided.
- Results remain exposed to cyclical chemical and building-products markets, commodity prices, feedstock and energy availability and costs, pricing lags, plant disruptions, foreign exchange, and acquisition integration. Management noted the Russia-Ukraine conflict, labor availability and potential COVID-19 resurgence as sources of uncertainty.
- U.S. caustic-soda antitrust cases continue; direct purchasers seek $861 million in single damages, plus treble damages and fees. The company said it could not estimate the financial impact. Related Canadian proceedings are also pending.
- Environmental reserves were approximately $56 million. The filing disclosed additional reasonably possible environmental losses of $65 million to $130 million beyond amounts reserved. A proposed flare-related consent decree calls for approximately $110 million in implementation costs and a $1 million penalty; court effectiveness remained subject to completion of comment periods and entry of the decree.
- A Calvert City dispute with Avient concerns up to $22 million in remediation costs claimed by Avient; Westlake disputes the claims. The company stated it believed its allocable costs were unlikely to result in material expenditures in any individual reporting period.
Important facts for investors to verify
- Whether strong product pricing and margins persist as feedstock, energy and other costs change, and as demand and industry capacity evolve.
- How much reported growth reflects acquired businesses versus comparable underlying performance, and whether integration benefits materialize.
- Whether working-capital investment converts back to cash and how capital expenditures and further investment affect liquidity.
- Progress and final cost of the flare consent decree and other environmental remediation, and developments in the caustic-soda antitrust and Calvert City proceedings.
- Whether housing demand, supply-chain conditions and broader economic risks develop in line with management’s outlook.