Westlake Chemical Corporation: Q2 2009 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Westlake Chemical Corporation for the period ended June 30, 2009. Westlake is a vertically integrated manufacturer and marketer of petrochemicals, polymers, and fabricated products, operating through two principal segments: Olefins and Vinyls. The company reported results during a period of significant global economic recession, which impacted demand and pricing across its product lines.
Key Financial Metrics
| Metric | Q2 2009 (3 Months) | Q2 2008 (3 Months) | YTD 2009 (6 Months) | YTD 2008 (6 Months) |
|---|---|---|---|---|
| Net Sales | $574.9 million | $1,106.4 million | $1,063.1 million | $2,021.5 million |
| Net Income | $16.9 million | $47.3 million | $10.8 million | $52.7 million |
| Diluted EPS | $0.26 | $0.72 | $0.16 | $0.80 |
| Operating Income | $36.2 million | $73.6 million | $35.3 million | $87.4 million |
| Gross Margin % | 9.7% | 8.7% | 7.1% | 6.6% |
| Operating Cash Flow (YTD) | $153.4 million (2009) vs. $(8.0) million used (2008) | |||
| Total Cash & Equivalents | $204.0 million (as of June 30, 2009) | |||
| Long-Term Debt | $510.4 million (as of June 30, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 48% in Q2 2009 and 47% YTD 2009 compared to the prior year. This was driven by a 34.5% drop in average sales prices and a 13.6% decline in volumes due to the economic downturn and weak construction markets.
- Profitability: Net income fell 64% in Q2 and 80% YTD. However, gross margin percentages improved slightly (9.7% vs 8.7% in Q2) because raw material cost reductions (ethane and propane) outpaced the decline in product sales prices.
- Segment Performance:
- Olefins: Remained profitable with operating income of $44.3 million in Q2, though down 23% from the prior year. Gains from trading activity ($9.8 million) partially offset lower volumes and prices.
- Vinyls: Reported an operating loss of $4.8 million in Q2, a reversal from $18.4 million income in Q2 2008. Weakness in construction markets and lower caustic prices drove the loss.
- Cash Flow: Operating cash flow turned strongly positive ($153.4 million YTD 2009) compared to a cash outflow in 2008, primarily due to favorable working capital changes (reduced inventory and receivables) and a $30 million federal tax refund.
- Acquisition: The company acquired a PVC pipe plant in Janesville, Wisconsin, for $6.3 million in March 2009.
Outlook, Risks, and Management Commentary
- Market Outlook: Management notes that while the Olefins segment benefited from a cost advantage for gas-based ethylene producers, industry forecasts indicate significant capacity increases globally (particularly from the Middle East), which could deteriorate margins. The Vinyls segment continues to face headwinds from the construction market.
- Liquidity and Covenants:
- The company has $281.8 million in borrowing availability under its revolving credit facility.
- Covenant Restrictions: The fixed charge coverage ratio for the senior notes was 1.27:1 (below the 2.0:1 requirement), restricting the incurrence of additional debt. The ratio for the revolving credit facility was 0.25:1 (below the 1.0:1 threshold), restricting distributions and acquisitions unless specific liquidity buffers are maintained.
- Capital Projects: The company is evaluating the start date for a new chlor-alkali plant in Geismar, Louisiana (estimated cost $250M-$300M) due to current economic conditions.
- Legal and Environmental: Significant ongoing proceedings involve environmental remediation at the Calvert City, Kentucky site (involving Goodrich and PolyOne) and an EPA audit of ethylene units in Lake Charles. The company believes these will not have a material adverse effect on financial condition but notes potential for future costs.
- Unusual Items: Q1 2009 results were impacted by an ice storm at Calvert City and a turnaround at Lake Charles, resulting in $19.5 million in repair costs and expensed fixed manufacturing costs.
Investor Verification Checklist
- Covenant Compliance: Verify the impact of the fixed charge coverage ratio (1.27:1) on the company's ability to incur new debt or make acquisitions beyond the regular dividend.
- Working Capital Trends: Confirm if the strong operating cash flow in H1 2009 is sustainable or if it was primarily driven by one-time factors like the $30 million tax refund and destocking.
- Environmental Liabilities: Monitor the status of the EPA and Kentucky Cabinet proceedings regarding the Calvert City site and the Lake Charles LDAR audit for potential future accruals.
- Margin Sustainability: Assess whether the spread between raw material costs and product prices can be maintained as global ethylene capacity expands.
- Capital Expenditure Plans: Track the decision timeline for the Geismar chlor-alkali plant expansion and its funding sources given current credit market volatility.