Westlake Chemical Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also presents unaudited quarterly results, including the fourth quarter. Westlake is a vertically integrated global producer of chemicals, polymers, vinyls and PVC building products, operating through Olefins and Vinyls segments.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $8.635 billion | $8.041 billion |
| Gross profit / margin | $1.987 billion / 23% | $1.761 billion / 22% |
| Operating income | $1.408 billion | $1.225 billion |
| Net income attributable to Westlake | $996 million | $1.304 billion |
| Diluted EPS | $7.62 | $10.00 |
| Operating cash flow | $1.409 billion | $1.528 billion |
| Capital expenditures | $702 million | $577 million |
| Cash and cash equivalents at year-end | $753 million | $1.531 billion |
| Long-term debt, net | $2.668 billion | $3.127 billion |
| Working capital | $1.659 billion | $1.496 billion |
FY 2018 EBITDA, a non-GAAP measure, was $2.101 billion versus $1.841 billion. Interest expense was $126 million, down from $159 million. Dividends declared were $0.92 per share, compared with $0.8012.
At December 31, 2018, Westlake had $2.668 billion of debt and $753 million of cash. Its $1 billion revolving facility had no borrowings outstanding, with $996 million available; the company reported compliance with its leverage covenant. Cash flow from operations less capital expenditures was approximately $707 million.
Material changes versus FY 2017
- Sales rose 7%, as average selling prices increased 5% and sales volumes increased 3%. Higher caustic soda prices and volumes, plus higher PVC resin and polyethylene volumes, drove growth.
- Operating income increased 15%, led by Vinyls. Vinyls operating income rose to $913 million from $639 million, while Olefins operating income declined to $573 million from $655 million.
- Olefins results were pressured by higher ethane feedstock costs and lower polyethylene prices; styrene sales volume was also affected by a planned turnaround. Vinyls benefited from higher caustic soda prices and volumes, lower purchased ethylene costs, improved operating rates and fewer outages and turnarounds.
- Net income attributable to Westlake fell $308 million. The principal reason was the $591 million income tax benefit recorded in 2017 under the Tax Act; higher ethane costs also weighed on 2018 results. These effects were partly offset by stronger Vinyls performance, lower interest expense and a lower ongoing U.S. corporate tax rate.
- Operating cash flow decreased $119 million, mainly because working capital consumed more cash. Capital expenditures increased $125 million to $702 million, principally for expansion, capacity, maintenance, safety and environmental projects.
Fourth-quarter 2018 net sales were $1.995 billion and net income attributable to Westlake was $123 million, compared with $2.010 billion and $802 million, respectively, in fourth-quarter 2017. The 2017 quarter included the substantial Tax Act benefit; quarterly diluted EPS was $0.95 in Q4 2018 versus $6.15 in Q4 2017.
Outlook, management commentary, risks and unusual items
- Management described chemical markets as cyclical and sensitive to supply-demand balance, feedstock and energy prices, capacity additions, and economic conditions. It noted that new ethylene and polyethylene capacity in North America, Asia and the Middle East could weigh on margins, though demand growth may absorb some supply.
- No quantified earnings, revenue or margin guidance was provided. Management said existing cash, operating cash flow and available credit were expected to meet normal operating needs for the foreseeable future; major expansions or acquisitions could require additional financing.
- The LACC joint venture’s 2.2-billion-pound-per-year ethylene plant was expected to start up in the first half of 2019. Westlake had funded $183 million of its commitment by year-end, against a maximum $225 million commitment and approximately 10% ownership.
- On January 2, 2019, Westlake completed the NAKAN compounding business acquisition for approximately $250 million, subject to post-closing adjustments. The acquisition is subsequent to the reporting period.
- Westlake redeemed approximately $1.138 billion principal amount of 2021 and 2023 notes during 2018. The new $1 billion revolver, entered in July 2018, matures in 2023.
- One-time items included a $14 million pension settlement gain and a $6 million net gain on redemption of the 2021 notes. The 2017 comparison included the $591 million Tax Act tax benefit.
- Environmental reserves were approximately $54 million at year-end. The filing also identifies reasonably possible additional environmental losses of $65 million to $130 million. At Calvert City, the EPA selected a remedy with an estimated implementation cost of $107 million plus $1 million to $3 million in annual operating and maintenance costs; Westlake’s allocation remains subject to arbitration and was not estimable in the filing.
- Environmental compliance capital expenditures were $23 million in 2018; management estimated $47 million for 2019 and $45 million for 2020. Other key risks include commodity and energy volatility, industry overcapacity, operating interruptions, environmental regulation, international and currency exposure, acquisition integration, pension obligations and debt-service needs.
Most important facts for investors to verify
- Whether Vinyls strength and improved operating rates can offset Olefins feedstock-cost and pricing pressure as new industry capacity comes online.
- Actual LACC start-up timing, project costs and Westlake’s final funding or ownership obligations.
- NAKAN’s post-acquisition contribution to sales, margins and cash flow, and any integration costs.
- The outcome of the Calvert City arbitration, Westlake’s eventual share of remediation costs, and developments in other environmental proceedings.
- Cash conversion and working-capital needs relative to the elevated capital expenditure program, dividends and repurchases.
- The reported 2018 earnings comparison excluding the unusually large 2017 Tax Act benefit; EBITDA is non-GAAP and should be assessed alongside GAAP earnings and cash flow.