Westlake Chemical Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dollar amounts are in millions except per-share data. Westlake manufactures and markets chemicals, polymers, vinyls and building products through its Vinyls and Olefins segments.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $3,055 | $1,898 | $8,271 | $5,539 |
| Gross profit | $1,018 | $248 | $2,399 | $700 |
| Gross margin | 33% | 13% | 29% | 13% |
| Income from operations | $861 | $79 | $1,927 | $251 |
| Net income attributable to Westlake | $607 | $57 | $1,371 | $217 |
| Diluted EPS | $4.69 | $0.45 | $10.60 | $1.69 |
| EBITDA (non-GAAP) | $1,077 | $287 | $2,562 | $860 |
Cash flow: Operating cash flow was $755 in Q3 and $1,637 for the first nine months, versus $357 and $866 in the comparable 2020 periods. Nine-month capital expenditures were $414; acquisitions used $428 net of cash acquired. Cash, cash equivalents and restricted cash ended the period at $3,610; balance-sheet cash and cash equivalents were $3,571.
Debt and liquidity: Long-term debt, net of current portion, was $4,929, with $268 current debt; total debt was approximately $5.2 billion, up from $3.6 billion at year-end 2020. The company had no borrowings on its $1 billion revolver and reported the full amount available. It was in compliance with debt covenants. Current assets were $6,435 and current liabilities $1,898.
Margins and segments: Q3 Vinyls operating income was $601 versus $42 a year earlier; Olefins was $281 versus $51. Nine-month operating income was $1,236 for Vinyls and $738 for Olefins. Both businesses benefited from higher selling prices and margins; increased feedstock and fuel costs partly offset gains.
Material changes versus prior period
- Q3 sales increased 61% and nine-month sales increased 49%, chiefly from higher prices amid strong demand and improved economic activity. Q3 average selling prices rose 60%; sales volume increased 1%. Nine-month prices rose 48% and volume rose 2%.
- Q3 operating income rose by $782 and nine-month operating income by $1,676. Improved product pricing and integrated margins drove the increase; 2020 results were also depressed by pandemic-related demand impacts.
- Nine-month operating cash flow increased $771, but working-capital changes used $381, versus $120 in the prior-year period, mainly reflecting higher receivables and inventories.
- 2020 benefited from a $95 income-tax benefit related to CARES Act NOL carrybacks. The 2021 nine-month effective tax rate was 23.1%, compared with a 42.9% tax benefit rate in 2020.
- Interest expense rose to $61 in Q3 and $130 year to date, primarily due to higher average debt and costs related to interest-rate locks for the 2021 notes offering.
Acquisitions, outlook and notable items
- Westlake acquired LASCO Fittings for $277 and Dimex for $172 during Q3. Both were included in Vinyls; their post-acquisition operating results were not material.
- The $2.15 billion cash acquisition of Boral’s North American building-products businesses closed October 1, 2021, after quarter-end. It includes a potential earn-out of up to $65 tied to the windows business. Final purchase accounting information was not yet available.
- Management expected robust global demand for most Vinyls products through the rest of 2021 and well into 2022, and for most Olefins products through the rest of 2021 and the first half of 2022. These expectations are subject to economic conditions, product demand, trade and tariff policies, crude oil prices and new capacity additions.
- Hurricane Ida disrupted regional facilities, causing lost production and sales and higher maintenance expense; affected facilities had resumed production. A September flash fire at the Petro 2 ethylene unit injured contractors. The turnaround was extended and was expected to conclude in December; five lawsuits were pending.
- Key risks include the cyclical nature of chemical markets, volatile commodity and energy costs, new industry capacity, COVID-19 and supply-chain uncertainty, weather-related outages, acquisition integration, and environmental and legal exposures.
- Environmental reserves were approximately $55. The company also disclosed reasonably possible additional environmental losses of $65–$130. Caustic-soda antitrust class actions in the U.S. and Canada seek unspecified damages; Westlake said it could not estimate the potential impact.
Most important facts for investors to verify
- Whether strong pricing and margins persist as industry capacity additions, supply conditions and demand evolve.
- The financing, integration, purchase accounting and realized benefits of the Boral, LASCO and Dimex acquisitions, including Boral’s potential earn-out.
- Cash conversion and working-capital needs, especially receivables and inventory, alongside planned capital spending.
- Debt levels, interest expense and liquidity after acquisition funding; the $1 billion revolver was fully available at quarter-end.
- Operational and legal developments from the Petro 2 incident, weather disruptions, antitrust litigation and environmental matters.