Westlake Chemical Corporation: Q2 2007 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2007, for Westlake Chemical Corporation, a vertically integrated manufacturer and marketer of petrochemicals, polymers, and fabricated products. The company operates through two principal segments: Olefins and Vinyls. The reporting period includes the impact of a major turnaround at the Lake Charles ethylene unit and the integration of the Longview facilities acquired from Eastman Chemical in late 2006.
Key Financial Metrics (Six Months Ended June 30, 2007)
| Metric | 2007 (YTD) | 2006 (YTD) | Change |
|---|---|---|---|
| Net Sales | $1,501.5 million | $1,288.0 million | +16.6% |
| Gross Profit | $142.3 million | $256.3 million | -44.5% |
| Gross Margin % | 9.5% | 19.9% | -10.4 pts |
| Income from Operations | $94.9 million | $217.7 million | -56.4% |
| Net Income | $57.6 million | $118.5 million | -51.4% |
| Diluted EPS | $0.88 | $1.82 | -51.6% |
| Operating Cash Flow | $34.2 million | $146.9 million | -76.7% |
| Capital Expenditures | $50.5 million | $62.9 million | -19.7% |
| Long-Term Debt | $260.2 million | $260.2 million | Flat |
| Cash & Equivalents | $42.6 million | $52.6 million | -19.0% |
Material Changes vs. Prior Period
- Revenue Growth vs. Margin Compression: Net sales increased significantly due to higher volumes from the Longview acquisition (polyethylene) and increased ethylene/caustic sales. However, gross margins collapsed from 19.9% to 9.5% due to a dramatic drop in selling prices for polyethylene, PVC resin, and PVC pipe, coupled with higher feedstock costs (ethane and propane).
- Segment Performance:
- Olefins: Sales rose 45.1% to $999.1 million, but operating income fell 42.5% to $69.9 million due to lower margins and a 30-day turnaround at the Lake Charles unit.
- Vinyls: Sales declined 16.2% to $502.4 million, and operating income plummeted 71.0% to $28.6 million, driven by weakness in the housing market and falling PVC prices.
- Working Capital: Operating cash flow decreased by $112.7 million, primarily due to lower operating income and a $65.5 million increase in cash used for working capital (notably a $92.8 million increase in accounts receivable).
- One-Time Items: The prior year (2006) included a $25.9 million debt retirement cost, which is not present in the current period.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that while prices for ethylene, polyethylene, and PVC have improved from early 2007 lows, margins remain under pressure. The Vinyls segment faces further negative pressure in early 2008 due to new industry capacity coming on-stream.
- Capital Projects: A $9.0 million turnaround at the Lake Charles ethylene unit was completed to upgrade feedstock flexibility. The company is also conducting a feasibility study for a potential $1.5 billion ethane-based project in Trinidad and Tobago, with construction potentially commencing in 2008.
- Liquidity: The company maintains a $300 million revolving credit facility with no borrowings outstanding as of June 30, 2007. Management believes current cash flows and borrowing capacity are adequate for foreseeable needs.
- Legal & Environmental: Ongoing litigation and administrative proceedings regarding environmental remediation at the Calvert City, Kentucky facility (involving Goodrich and PolyOne) continue. A trial is set for October 2007. The company believes any potential remediation costs will likely be spread over an extended period and not be material in any single reporting period.
Investor Verification Checklist
- Margin Sustainability: Verify if the recent price increases in ethylene and PVC are sufficient to offset rising feedstock costs and restore historical margin levels.
- Working Capital Trends: Monitor the $92.8 million increase in accounts receivable to ensure it reflects sales growth rather than collection issues.
- Legal Exposure: Track the outcome of the October 2007 trial regarding the Calvert City environmental liabilities and potential indemnification from Goodrich/PolyOne.
- Trinidad Project Viability: Assess the feasibility study results for the proposed $1.5 billion project and the likelihood of securing project financing.
- Capacity Constraints: Evaluate the impact of new industry capacity coming online in 2008 on the Vinyls segment's pricing power.