Westlake Chemical Corporation — Q1 2016 Form 10-Q
Business context and period: Westlake is a vertically integrated global producer of chemicals, vinyls, polymers and building products, reporting through Olefins and Vinyls segments. This unaudited filing covers the three months ended March 31, 2016, compared with Q1 2015; balance-sheet comparisons are with December 31, 2015. Unless noted, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net sales | $975.2 | $1,103.5 |
| Gross profit / gross margin | $255.6 / 26.2% | $284.5 / 25.8% |
| Operating income | $202.3 | $229.3 |
| Net income attributable to Westlake | $123.1 | $146.3 |
| Diluted EPS | $0.94 | $1.10 |
| Operating cash flow | $128.9 | $190.6 |
| Capital expenditures | $136.3 | $95.8 |
| Cash and cash equivalents | $615.0 | $662.5 at Dec. 31, 2015 |
| Current marketable securities | $525.0 | $520.1 at Dec. 31, 2015 |
| Long-term debt, net | $758.3 | $758.1 at Dec. 31, 2015 |
Cash flow from operations less capital expenditures was approximately negative $7.4 million, calculated from reported figures. Working capital changes used $118.5 million in cash. Current assets were $2,191.7 million and current liabilities $506.2 million at quarter-end. The $400 million revolving credit facility had no borrowings outstanding; reported availability was $354.8 million, with $30.4 million of letters of credit. Westlake reported compliance with debt covenants.
Changes versus prior comparable period
- Sales fell 11.6%, principally because average sales prices declined 13.3%, reflecting lower crude oil prices; total sales volumes rose 1.7%.
- Net income attributable to Westlake decreased $23.2 million, and diluted EPS declined from $1.10 to $0.94. Operating income decreased $27.0 million.
- Gross margin edged up to 26.2% from 25.8%, as lower feedstock and energy costs and improved European product margins partly offset lower selling prices.
- Olefins sales decreased 26.1% to $431.0 million and segment operating income fell 21.9% to $149.2 million. Vinyls sales increased 4.6% to $544.2 million and segment operating income rose 31.8% to $62.1 million.
- Operating cash flow declined $61.7 million, mainly due to lower operating income and greater working-capital needs, including inventory buildup ahead of a planned turnaround.
Outlook, management commentary and notable items
- Management said lower crude prices reduced the cost advantage of North American ethane-based producers and pressured prices and margins. It also cited possible industry overcapacity from announced capacity additions, soft construction demand and municipal budget constraints affecting Vinyls, and a slower European recovery. Management expects its liquidity sources to meet normal operating needs, but stated large expansions or acquisitions could require additional financing. No specific earnings or revenue guidance was provided.
- OpCo began an approximately 80-day Petro 1 turnaround and expansion at Lake Charles in April 2016. The project is expected to add about 250 million pounds of annual ethylene capacity and cost $285–$345 million. A Calvert City expansion is expected to add about 70 million pounds annually, cost $70–$80 million and be completed in the first half of 2017.
- Westlake’s revised April 2016 proposal to acquire Axiall for $23.35 per share, including cash and Westlake shares, was rejected by Axiall’s board. Westlake said it intended to seek election of its alternate director slate; it held approximately 4.4% of Axiall’s shares as of April 27, 2016. The initial proposal was also rejected.
- A $2.7 million final insurance recovery for 2015 business-interruption losses at German facilities was recognized in Q1 2016 as a reduction of cost of sales.
- Environmental matters include potential CERCLA remediation liability at Calvert City, EPA discussions regarding flare compliance and Louisiana air-quality notices. The company could not estimate a loss for the Calvert City proceedings; it said flare-related corrective actions could raise capital and operating costs. A verbal agreement covered certain Louisiana notices for $0.2 million in combined penalties. The company did not expect remaining notice settlements to materially affect its financial condition, results or cash flows.
- Commodity prices, raw-material and energy costs, industry cycles, capacity additions, operating interruptions, foreign exchange, customer credit and access to financing are among the stated risks. The filing reported no material change in risk factors from the 2015 Form 10-K.
Key facts for investors to verify
- Whether sales prices and integrated product margins stabilize, particularly in Olefins, and how segment performance evolves.
- Cash conversion and working-capital trends after the Petro 1 turnaround inventory build; planned capital spending and project costs, timing and completion.
- Funding implications of the Axiall proposal or any other large acquisition, including availability and cost of external financing.
- Developments, potential costs and timing in the Calvert City remediation and EPA flare matters; the filing does not provide a clear estimate of potential Calvert City losses.
- Liquidity and covenant headroom: the $354.8 million reported revolver availability is subject to borrowing-base and facility terms.