Westlake Chemical Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Amounts are in millions of dollars unless stated otherwise. The interim financial statements are unaudited.
Business context and results
Westlake is a vertically integrated manufacturer and marketer of petrochemicals, polymers and fabricated building products. Its principal segments are Olefins and Vinyls.
| Metric | Q2 2011 | Q2 2010 | First six months 2011 | First six months 2010 |
|---|---|---|---|---|
| Net sales | $925.0 | $818.4 | $1,792.3 | $1,596.7 |
| Gross profit | $167.1 | $126.0 | $334.7 | $183.7 |
| Gross margin | 18.1% | 15.4% | 18.7% | 11.5% |
| Income from operations | $138.4 | $99.5 | $279.0 | $134.0 |
| Net income | $81.0 | $56.9 | $164.6 | $74.6 |
| Diluted EPS | $1.21 | $0.86 | $2.46 | $1.13 |
For Q2, average selling prices rose 18.6% year over year while overall volume fell 5.6%. For the six-month period, prices rose 16.4% and volume declined 4.1%. Higher prices across major products drove sales and margin improvement, partly offset by higher feedstock costs and operational disruptions.
Segments and material changes
- Olefins: Q2 external sales were $645.3 and operating income was $132.8, versus $577.3 and $111.2 a year earlier. Six-month operating income increased to $278.0 from $169.4. Improved integrated margins and higher polyethylene prices were partly offset by higher feedstock costs, lower volumes and the Lake Charles outage.
- Vinyls: Q2 external sales were $279.7 and operating income was $10.3, compared with a $10.9 operating loss a year earlier. Six-month operating income was $7.4 versus a $25.8 loss. Strong PVC export demand, better prices and higher PVC resin volume supported results; building-products volume and weak construction demand remained concerns.
- Interest expense increased to $12.8 in Q2 from $8.8 and to $25.7 for six months from $17.6, primarily reflecting higher average debt following 2010 senior-note issuances. Six-month effective tax rate was 35.7%, compared with 36.4% in 2010.
Cash flow, liquidity and debt
- Six-month operating cash flow was $125.3, up from $55.6. Working-capital changes used $124.4, mainly reflecting higher inventories and feedstock costs.
- Investing cash outflow was $66.3, including $69.2 of capital expenditures, versus $22.4 outflow and $31.1 of capital expenditures in 2010. Financing provided $23.1; cash and cash equivalents increased $82.0 to $712.3.
- At June 30, cash and cash equivalents were $712.3 and restricted cash was $124.2; total cash balances were $836.5. Restricted funds are held by a trustee for eligible Louisiana facility expenditures.
- Long-term debt was $764.5, with no borrowings under the $400.0 revolving credit facility. Availability under the facility was $382.3 after $17.7 of letters of credit; it matures September 2013. The company reported compliance with debt covenants and fixed-charge coverage ratios of 13.6:1 under the senior-note indenture and 2.1:1 under the revolver.
Outlook, management commentary and risks
- No earnings or revenue guidance was provided. Management said liquidity and available borrowings should fund normal operations and ongoing capital expenditures, while future large expansions or acquisitions may require additional financing.
- The first planned Lake Charles ethylene-unit expansion is expected to finish by late 2012, add approximately 230–240 million pounds of annual capacity and cost an estimated $110–$145. A second-unit expansion is being scoped. The Geismar chlor-alkali project is estimated at $250–$300, with start-up targeted for the second half of 2013. Funding is expected from cash, operating cash flow, revenue-bond proceeds and, if needed, external financing.
- Risks include commodity price and feedstock volatility, potential global ethylene capacity additions, weak U.S. construction and municipal spending, PVC capacity additions, customer credit, economic and credit-market conditions, and operating interruptions. Management noted that industry margins and operating rates may be negatively affected.
- Q2 operating results were burdened by a Lake Charles ethylene-unit power-related outage and the Calvert City turnaround, together associated with $10.8 of repair costs and unabsorbed fixed manufacturing costs, plus $3.4 of impairment, severance and other costs from closing the Springfield, Kentucky PVC pipe facility. The closure followed excess PVC pipe capacity; production was shifted to other facilities.
- Environmental matters include a Calvert City contamination investigation under an EPA-led process; the company said it could not estimate any potential loss. PolyOne sought arbitration to revise remediation-cost allocation and recover approximately $1.4; the arbitration was stayed until August 15, 2011. The company has accrued a probable loss for proposed Lake Charles environmental penalties and said resolution was not expected to materially adversely affect its financial condition, results or cash flows.
Most important facts for investors to verify
- Whether strong product pricing and PVC export demand persist, and how feedstock costs, volumes and new capacity affect margins.
- Operational recovery and cost effects of the Lake Charles outage, Calvert City turnaround and Springfield facility closure.
- Actual expansion spending, completion schedules, funding sources and impact on restricted cash, debt and liquidity.
- Developments and potential exposure in the Calvert City remediation proceedings and Lake Charles environmental matter.
- Working-capital and inventory trends, capital expenditures, debt covenants and availability under the revolving facility.