Westlake Chemical Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial figures are in millions unless noted. The filing was signed August 9, 2016.
Business context and results
Westlake is a vertically integrated global producer of basic chemicals, vinyls, polymers and building products. Its two principal segments are Olefins and Vinyls.
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Net sales | $1,086.1 | $1,185.0 | $2,061.2 | $2,288.5 |
| Gross profit | $241.4 | $353.2 | $497.0 | $637.7 |
| Gross margin | 22.2% | 29.8% | 24.1% | 27.9% |
| Income from operations | $179.9 | $295.4 | $382.2 | $524.7 |
| Net income attributable to Westlake | $111.1 | $205.1 | $234.3 | $351.4 |
| Diluted EPS | $0.85 | $1.54 | $1.79 | $2.64 |
| EBITDA (non-GAAP) | $255.4 | $377.8 | $526.0 | $674.8 |
Q2 sales fell 8.3% year over year; H1 sales fell 9.9%. Average selling prices declined 9.3% in Q2 and 10.8% in H1. Sales volumes were slightly higher overall, but Olefins volumes fell 8.3% in Q2 and 8.8% in H1. Vinyls volumes rose 11.1% and 11.5%, respectively.
- Segment performance: Q2 Olefins sales were $494.5 million and operating income was $140.6 million, down 20.4% and 36.4%, respectively. Vinyls sales rose 4.9% to $591.6 million, while operating income fell 40.7% to $52.2 million.
- Lower crude-linked product prices, lost sales and manufacturing costs from maintenance and unplanned outages pressured results. Lower feedstock and energy costs and stronger European product margins partly offset the declines.
- The prior-year comparison included a $15.5 million net pre-tax gain related to the Huasu acquisition and an equity investment impairment. H1 2016 included a $2.7 million insurance recovery for business interruption costs related to a 2015 feedstock interruption in Germany.
Cash flow, balance sheet and debt
- H1 operating cash flow: $369.9 million, down from $435.4 million. The decline reflected lower operating income, higher working-capital needs and deferred turnaround costs, partly offset by lower income taxes paid. Q2 operating cash flow was $241.0 million versus $244.8 million.
- Investing and financing: Capital expenditures were $287.2 million in H1, versus $203.9 million. Net investing cash use was $126.4 million; net financing cash use was $136.5 million, including $47.3 million of dividends and $67.4 million of share repurchases.
- Liquidity at June 30: Cash and cash equivalents were $771.0 million; current marketable securities were $352.0 million. Total current assets were $2.19 billion and current liabilities were $620.1 million. The reported current ratio was approximately 3.5x, calculated from those balances.
- Debt: Long-term debt, net, was $758.5 million; no borrowings were outstanding under the $400 million revolving facility. Availability was $369.8 million after letters of credit. Westlake reported compliance with debt covenants.
- Total assets were $5.92 billion and total equity was $3.74 billion at quarter-end.
Material changes, outlook and risks
- Westlake agreed to acquire Axiall for $33 per share in cash; transaction value was approximately $3.8 billion including assumed liabilities. The deal was pending at quarter-end and subject to customary conditions, including Axiall shareholder approval and regulatory approvals. It was not subject to a financing condition.
- Westlake had arranged a bridge facility commitment of up to $1.765 billion, with no draw at June 30. Subsequent to quarter-end, it announced a proposed $1.0 billion five-year revolving facility and priced $1.45 billion of senior notes intended to help fund the acquisition and repay Axiall debt.
- The Calvert City facility suffered an unplanned outage beginning June 1 due to an ethylene-unit mechanical failure; restart was in progress in July. The Lake Charles Petro 1 unit also underwent a planned turnaround and expansion in July, expected to add approximately 250 million pounds of annual ethylene capacity. Management said both events would negatively affect Q2 and Q3 operating income through lost production, unabsorbed fixed costs and other expenses.
- Management cited risks from lower crude oil prices and product margins, potential industry capacity additions and oversupply, weak construction demand and European economic conditions. No formal full-year financial guidance is provided in the supplied filing text.
- Environmental matters include Calvert City contamination proceedings and EPA discussions concerning flare emissions at Calvert City and Lake Charles. Westlake could not estimate a possible loss for the Calvert City remediation matters; additional flare controls could raise capital and operating costs. The company reported a verbal agreement to settle certain Louisiana notices of violation for $192, with other matters still being discussed.
- Westlake stated that its normal operating needs and ongoing capital expenditures were adequately funded by available liquidity, but large acquisitions or expansions would require additional financing. It also warned that acquisition debt, integration challenges, regulatory conditions and failure to realize expected benefits could adversely affect results.
Most important facts for investors to verify
- Progress, approvals, final financing terms and closing conditions for the Axiall acquisition, including the resulting debt burden and integration costs.
- The duration and full earnings impact of the Calvert City outage and Lake Charles turnaround, and whether expected capacity expansions meet schedules and cost estimates.
- Whether lower product prices, feedstock-cost changes and new industry capacity continue to compress Olefins and Vinyls margins.
- Cash conversion and working-capital trends alongside the elevated capital expenditure program, dividends and share repurchases.
- Updates on environmental proceedings, potential flare requirements and any liability estimates or settlement commitments.
EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow.