Westlake Chemical Corporation (NYSE: WLK) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; financial amounts below are in millions of dollars unless stated otherwise.
Business context and results
Westlake is a vertically integrated chemicals, polymers and building-products manufacturer operating through its Olefins and Vinyls segments. The company attributed weaker results primarily to lower selling prices and margins amid trade uncertainty, slower global growth and industry capacity additions.
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Net sales | $2,144 | $2,235 | $4,169 | $4,385 |
| Gross profit | $340 | $552 | $639 | $1,094 |
| Gross margin | 16% | 25% | 15% | 25% |
| Income from operations | $194 | $404 | $328 | $805 |
| Net income attributable to Westlake | $119 | $278 | $191 | $565 |
| Diluted EPS | $0.92 | $2.12 | $1.47 | $4.31 |
| EBITDA (non-GAAP) | $372 | $568 | $686 | $1,147 |
For Q2, average selling prices declined 11% year over year while sales volume rose 7%. For H1, prices fell 10% and volume increased 5%. Lower feedstock, purchased ethylene and fuel costs, along with higher polyethylene volumes, partly offset price and margin pressure.
Segments and material changes
- Olefins: Q2 sales were $477 and operating income $82, versus $482 and $158 a year earlier. H1 sales were $936 and operating income $119, versus $985 and $321. Lower prices and margins, associated partly with new industry capacity, outweighed higher volumes and lower costs.
- Vinyls: Q2 sales were $1,667 and operating income $129, versus $1,753 and $271 a year earlier. H1 sales were $3,233 and operating income $230, versus $3,400 and $537. Lower caustic soda prices and PVC margins were key pressures; segment volumes increased modestly.
- Companywide Q2 operating income fell $210 year over year; H1 operating income fell $477. The H1 comparison also reflects $24 of restructuring, transaction and integration costs, including $19 of restructuring charges tied to asset write-offs.
Cash flow, financial position and liquidity
- Cash flow: H1 operating cash flow was $467, down from $549 in H1 2018. Investing used $763, including $314 for business acquisitions and $411 of capital expenditures. Financing used $48, compared with $1,242 in the prior-year period, when substantial notes were redeemed. Q2 operating cash flow was $320 versus $324.
- Cash and liquidity: June 30 cash and cash equivalents were $409, down from $753 at December 31, 2018. Current assets were $2,595 and current liabilities $1,254. The $1,000 revolving credit facility was undrawn, with full availability; Westlake reported compliance with its covenants.
- Debt: Long-term debt, net, was $2,669 at June 30; principal amount was $2,715. Westlake reported total indebtedness of approximately $2.7 billion. It was in compliance with long-term debt covenants.
- Capital returns: H1 dividends paid were $65; dividends declared were $0.50 per share versus $0.42 in H1 2018. Westlake repurchased $20 of stock in H1.
- Investment and acquisition: Westlake acquired NAKAN on January 2 for $249, funded with cash. NAKAN’s post-acquisition sales and earnings were not material to consolidated results. H1 capital expenditures were $411 versus $312 a year earlier.
Outlook, risks and unusual items
- No specific quantitative earnings or revenue guidance is provided. Management said existing cash, operating cash flow and available credit should cover normal operations and ongoing capital expenditures for the foreseeable future; large expansions or acquisitions could require additional financing.
- Management cited continued risks from cyclical chemical markets, new capacity, product and raw-material price volatility, global economic conditions, trade policy and tariffs, operating interruptions, foreign exchange, and access to capital markets.
- On July 17, 2019, after quarter-end, Westlake issued €700 million of 1.625% notes due 2029 and received approximately $779 million net proceeds for general corporate purposes.
- Eight purported class-action lawsuits allege caustic soda price-fixing and related conduct. Westlake says the claims are without merit, intends to defend them, and cannot estimate their potential financial impact.
- Environmental reserves were approximately $49 at June 30. Additional reasonably possible environmental losses were estimated at $65–$130. The Calvert City remediation cost allocation remains subject to further litigation; Westlake could not estimate its potential impact.
- Westlake adopted lease accounting in 2019, recording operating lease right-of-use assets of $381 and total operating lease liabilities of $385 at June 30. The filing reports no material change in risk factors and no material effect on internal control over financial reporting.
Important facts for investors to verify
- Whether lower product prices, caustic soda inventories and new olefins capacity continue to pressure segment margins.
- How capital spending, acquisition spending and operating cash generation affect cash balances and funding needs.
- The use of proceeds from the July 2019 euro-note offering and any resulting changes in debt, interest expense or currency exposure.
- Developments and potential financial exposure from the caustic soda antitrust suits and environmental matters, including Calvert City.
- Final purchase-price allocation and subsequent contribution of NAKAN, whose acquisition accounting was preliminary.