Westlake Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Westlake is an integrated global manufacturer of performance and essential materials and housing and infrastructure products. The company changed its name from Westlake Chemical Corporation to Westlake Corporation in February 2022.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net sales | $4.056 billion | $2.357 billion; up 72% |
| Gross profit / margin | $1.285 billion / 31.7% | $509 million / 21.6% |
| Income from operations | $1.032 billion | $346 million |
| Net income attributable to Westlake | $756 million | $242 million |
| Diluted EPS | $5.83 | $1.87 |
| Operating cash flow | $700 million | $265 million |
| Capital expenditures | $263 million | $141 million |
| EBITDA (non-GAAP) | $1.300 billion | $553 million |
Higher selling prices across both segments and stronger polyethylene volumes drove much of the sales and profit growth; acquisitions also increased reported sales and volumes. Average sales prices rose 46% and volumes rose 26%. Higher feedstock and energy costs partly offset the benefits. The effective tax rate was 23.4%, versus 22.2%.
Operating cash flow rose $435 million, but working capital used $356 million, primarily reflecting higher receivables and inventories, higher prices and acquired businesses. Investing activities used $1.507 billion, including $1.154 billion for Westlake Epoxy, $89 million for an additional LACC interest and $263 million of capital expenditures. Financing activities used $47 million, including $39 million of dividends. Cash and cash equivalents were $1.055 billion at quarter-end, down from $1.908 billion at year-end 2021; quarter-end cash, cash equivalents and restricted cash totaled $1.084 billion.
At March 31, total debt was approximately $5.2 billion (carrying value $5.166 billion); cash and cash equivalents were $1.055 billion. The $1 billion revolving facility was undrawn and fully available, and the company reported compliance with debt covenants. Current assets were $5.405 billion and current liabilities were $2.550 billion. The quarterly dividend was $0.2975 per share, compared with $0.27.
Segments and material changes
- Performance and Essential Materials: Sales were $2.832 billion, up 63%; operating income was $879 million, versus $288 million. Higher prices for polyethylene, PVC, caustic soda, chlorine and other products, stronger polyethylene volumes and the Westlake Epoxy acquisition contributed.
- Housing and Infrastructure Products: Sales were $1.224 billion, up 99%; operating income was $185 million, versus $71 million. Acquisitions and higher prices supported results; volumes rose 46%, primarily due to acquisitions.
- The segment structure reflects a reorganization made in Q4 2021; comparative segment results were recast. Recent acquisitions included Westlake Epoxy, completed February 1, 2022 for $1.207 billion, and 2021 acquisitions of Boral’s North American building products businesses, LASCO and Dimex.
Outlook, risks and unusual items
Management expected global demand for most products to remain robust throughout 2022. It also cited strong residential construction and repair and remodeling markets, and expected the Infrastructure Investment and Jobs Act to benefit certain housing and infrastructure-related industries. The filing gives no quantified earnings, revenue or cash-flow guidance.
Management warned that results may be affected by cyclical chemical and building-products markets; volatile feedstock, energy and raw-material costs; inflation, supply-chain constraints and labor availability; capacity additions; housing and end-market demand; and the Russia-Ukraine conflict and COVID-19 developments. It noted that sales price increases may lag cost increases or may not be accepted by customers. Environmental regulation and climate-related requirements may add costs over time.
- Westlake Epoxy contributed $305 million in net sales and $27 million in net income from February 1 through March 31. Its purchase-price allocation was preliminary; recorded goodwill was $119 million. Acquisition-related costs were included in $11 million of restructuring, transaction and integration costs.
- In April 2022, the company elected to redeem $250 million principal amount of 3.60% notes due 2022 on May 14 at par plus accrued interest.
- Environmental reserves were approximately $57 million. The company disclosed an additional reasonably possible environmental loss range of $65 million to $130 million. It stated that it could not estimate the impact of U.S. and Canadian caustic-soda antitrust class actions.
- At Calvert City, Avient asserted that up to $22 million of remediation costs could be Westlake’s responsibility; Westlake disputed the claims and said it believed costs allocable to it were unlikely to cause material expenditures in an individual reporting period.
Important facts for investors to verify
- How much of the sharp year-over-year earnings increase reflects product prices and margins versus acquisitions, and whether margins persist as feedstock and energy costs change.
- Whether strong demand and housing activity continue, and how inflation, supply constraints and new industry capacity affect prices, volumes and cash conversion.
- Westlake Epoxy’s final purchase-price allocation, integration progress and realized benefits; the comparative pro forma figures are illustrative and not indicative of future performance.
- Working-capital requirements, capital spending and liquidity after the Epoxy acquisition and the planned 2022-note redemption.
- Developments in environmental matters, including the stated possible loss range, Calvert City dispute and caustic-soda antitrust proceedings.