Westlake Chemical Corporation — FY2020 Form 10-K
Business context and reporting period. This audited annual report covers the year ended December 31, 2020, with comparisons to 2019. Westlake is a vertically integrated global producer of chemicals, polymers and building products, operating Vinyls and Olefins segments. The filing reports full-year results, not a standalone fourth quarter.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $7.504 billion | $8.118 billion |
| Gross profit / gross margin | $1.023 billion / 13.6% | $1.260 billion / 15.5% |
| Operating income / operating margin | $429 million / 5.7% | $656 million / 8.1% |
| Net income attributable to Westlake | $330 million | $421 million |
| Diluted earnings per share | $2.56 | $3.25 |
| Operating cash flow | $1.297 billion | $1.301 billion |
| Capital expenditures | $525 million | $787 million |
| Cash and cash equivalents at year-end | $1.313 billion | $728 million |
| Working capital | $2.120 billion | $1.501 billion |
| Long-term debt, net | $3.566 billion | $3.445 billion |
| Dividends declared per share | $1.065 | $1.025 |
Year-end liquidity also included $1 billion available on the undrawn revolving credit facility. The company reported $142 million of interest expense and $1.246 billion of EBITDA, a non-GAAP measure. Debt was approximately 35% of total capitalization. The company was in compliance with debt covenants.
Material changes versus 2019
- Sales fell 8%; average sales prices declined 4% and total sales volumes declined 3%. Lower prices and caustic soda volumes, pandemic-related disruption, lower crude oil prices and hurricane shutdowns pressured results.
- Operating income decreased $227 million and attributable net income fell $91 million. The effective tax rate shifted from a 19% expense to a 13% benefit, principally reflecting a $95 million CARES Act tax benefit from carrying back federal net operating losses.
- Vinyls sales declined 6% to $5.972 billion and segment operating income fell to $301 million from $451 million. Building-products sales volumes increased, partly offsetting weaker caustic soda results.
- Olefins sales declined 14% to $1.532 billion and segment operating income fell to $160 million from $260 million, reflecting lower prices and hurricane-related production losses.
- Operating cash flow was nearly flat despite lower earnings, supported in part by a $188 million CARES Act income-tax refund. Investing cash use decreased substantially, mainly because 2019 included the $817 million additional investment in LACC and higher acquisition spending.
- Cash rose by $585 million year over year. Debt increased by $121 million net; the company issued $300 million of 3.375% notes due 2030 and used proceeds in part to retire $254 million of 6.5% notes due 2029 and 2035.
Outlook, management commentary, risks and unusual items
- Management said demand for most products strengthened in Q4 2020 and expected it to remain robust into early 2021. This is commentary, not quantified earnings or sales guidance. Outlook remains sensitive to the global economy, trade and tariff policy, crude oil prices, new industry capacity and whether strong demand continues.
- The planned Petro 2 ethylene-unit turnaround was deferred to the second half of 2021 and was expected to last about 60 days. February 2021 severe winter weather disrupted several facilities and caused lost production and additional maintenance costs; the filing does not quantify the impact.
- Hurricanes Laura and Delta shut down most Lake Charles facilities for periods in late 2020. The shutdowns caused approximately $83 million of additional maintenance expense and reduced production and operating rates.
- Westlake closed its non-integrated paste PVC plant in Schkopau, Germany, in December 2020 because management considered it lacking long-term economic viability. The closure generated a $34 million charge in Q3; supply was to shift to other German sites.
- Principal risks include COVID-19 and demand uncertainty; cyclical chemical markets and competitive capacity additions; volatile feedstock and energy costs; operating interruptions and severe weather; environmental and climate regulation; leverage and refinancing needs; and execution risks for capital projects and joint ventures.
- Caustic soda producers, including Westlake, face U.S. and Canadian class-action price-fixing allegations. The company said it could not estimate the potential financial impact. Environmental reserves were $53 million; the company disclosed an additional reasonably possible environmental loss range of $65 million to $130 million. The EPA flare enforcement matter may require corrective action and a monetary sanction above $1 million; management did not expect a material adverse effect.
- Environmental compliance capital expenditures were $31 million in 2020; estimated at $41 million in 2021 and $45 million in 2022. Contractual purchase obligations totaled $6.654 billion, including feedstock, utilities, logistics and capital-project commitments.
Important facts for investors to verify
- Whether the anticipated early-2021 demand strength and recovery in segment margins materialized, and the effect of new olefins and polyethylene capacity.
- The actual cost, duration and production impact of the Petro 2 turnaround and the February 2021 winter-weather disruption.
- Progress and potential exposure in the caustic soda antitrust cases, EPA flare matter and environmental remediation matters, including the disclosed reasonably possible loss range.
- Cash conversion and liquidity after the CARES Act tax refund, alongside scheduled debt maturities, interest costs and substantial purchase obligations.
- Whether the $34 million Schkopau closure charge and other restructuring costs are complete, and whether the plant closure improves Vinyls economics.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor reported internal controls effective at year-end.