Westlake Chemical Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. Westlake manufactures and markets chemicals, vinyls, polymers and building products through its Olefins and Vinyls segments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,185.0 | $998.6 | $2,288.5 | $2,026.3 |
| Gross profit | $353.2 | $306.0 | $637.7 | $593.0 |
| Income from operations | $295.4 | $266.8 | $524.7 | $514.8 |
| Net income attributable to Westlake | $205.1 | $169.4 | $351.4 | $327.5 |
| Diluted EPS | $1.54 | $1.26 | $2.64 | $2.44 |
| Gross margin | 29.8% | 30.6% | 27.9% | 29.3% |
Q2 sales rose 18.7% and attributable net income rose $35.7 million year over year; six-month sales increased 12.9% and attributable net income increased $23.9 million. Lower prices were offset by higher sales volumes and acquired Vinnolit sales. Profit growth included significant nonrecurring acquisition-related income.
Segments and drivers
- Olefins: Q2 sales fell 11.2% to $620.9 million and operating income fell 7.5% to $220.9 million. For the first half, sales declined 15.3% to $1,204.0 million and operating income declined 19.4% to $412.0 million. Lower product prices—affected by crude oil’s decline—more than offset higher volumes and lower feedstock and energy costs; Q2 maintenance turnarounds also weighed on results.
- Vinyls: Q2 sales increased 88.3% to $564.1 million and operating income rose to $88.0 million from $38.1 million. First-half sales increased 79.5% to $1,084.6 million and operating income to $135.1 million from $17.0 million. Growth reflected Vinnolit, higher volumes, improved integrated margins and increased production at Calvert City and Geismar. Lower prices and maintenance and supply disruptions partly offset gains.
- Company average selling prices declined 24.0% in Q2 and 23.3% in the first half year over year, while volumes increased 42.6% and 36.2%, respectively. Acquired Vinnolit materially affects comparability.
Cash flow, liquidity and debt
- First-half operating cash flow was $435.4 million, versus $432.2 million in 2014. Capital expenditures were $203.9 million, versus $216.9 million; operating cash flow less capital expenditures was approximately $231.4 million.
- Cash and cash equivalents were $1,026.6 million at June 30, up from $880.6 million at year-end. Current assets were $2,166.2 million and current liabilities $534.7 million.
- Long-term debt was $764.1 million, broadly unchanged from year-end; the company also reported $19.2 million of notes payable to banks. No borrowings were outstanding under its $400 million revolving facility; availability was $370.3 million after letters of credit.
- First-half financing cash use was $113.1 million, including $43.9 million in dividends, $7.2 million in distributions to noncontrolling interests and $62.8 million in share repurchases. Dividends were $0.165 per share for Q2, compared with $0.126 a year earlier.
- Management said available cash, operating cash flow and revolving-credit availability should meet normal operating needs and ongoing capital expenditures. The filing does not provide earnings or revenue guidance.
Material developments, outlook and risks
- On June 1, Westlake acquired an additional 35.7% of China-based PVC venture Huasu, raising ownership to 95%. The $5.5 million cash purchase led to a $22.6 million bargain-purchase gain; remeasurement of the existing interest and related items affected the reported net gain. Westlake also recorded a $4.9 million impairment of an equity-method investment. Management reported a net pretax gain of $15.5 million from the bargain purchase and partial impairment, or $0.13 per diluted share.
- A partial insurance recovery of approximately $4.5 million reduced cost of sales after a third-party ethylene supplier fire disrupted the company’s German facilities.
- Westlake expects to upgrade and expand its Lake Charles Petro 1 ethylene unit during the first half of 2016. Estimated project cost is $275–$335 million, with approximately 250 million pounds of additional annual ethylene capacity; about $114.4 million had been incurred by June 30.
- Management cited crude-oil-driven price and margin pressure, the reduced cost advantage of North American ethane-based production, weak European demand and continued softness in North American construction and municipal spending as risks. Commodity price volatility, supply interruptions, competition, economic conditions and environmental regulation are additional risks. Management cautioned that actual results may differ materially from forward-looking statements.
- Environmental matters include EPA discussions over alleged flare compliance at Calvert City and Lake Charles, with possible added controls and costs; the company disputes that violations or corrective action are warranted. Calvert City contamination proceedings remain unresolved, and Westlake said it could not estimate a potential loss. A possible Louisiana environmental settlement could involve approximately $0.2 million in civil penalties.
- Westlake reported compliance with debt covenants and effective disclosure controls. It said there were no material changes to previously disclosed risk factors.
Key facts for investors to verify
- How much reported earnings growth depends on the Huasu bargain-purchase gain, investment impairment, insurance recovery and other unusual items.
- Whether Vinyls margin gains can persist, and whether Olefins margins recover as product prices, crude oil and feedstock economics change.
- Vinnolit’s contribution to growth and the comparability of acquired versus organic volumes and earnings.
- Actual spending, timing, funding and returns for the Petro 1 expansion, alongside ongoing capital expenditure and repurchase plans.
- Developments, potential costs and timing in the EPA flare matter and Calvert City environmental proceedings.