Westlake Chemical Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Westlake is a vertically integrated petrochemical, polymer and building-products manufacturer, reporting Olefins and Vinyls segments. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,004.2 | $821.2 | $2,807.9 | $2,770.0 |
| Gross profit | $304.5 | $172.2 | $805.8 | $546.7 |
| Gross margin | 30.3% | 21.0% | 28.7% | 19.7% |
| Operating income | $266.6 | $142.5 | $695.9 | $459.1 |
| Net income | $170.3 | $87.0 | $439.5 | $290.3 |
| Diluted EPS | $2.54 | $1.30 | $6.54 | $4.33 |
| Operating cash flow | Not separately stated | Not separately stated | $547.5 | $492.8 |
- Q3 sales rose 22.3%; management attributed growth to higher prices for most major products, stronger styrene and caustic volumes, and the acquired specialty PVC pipe business. Nine-month sales increased 1.4%.
- Q3 operating income increased 87% year over year. Management cited stronger integrated margins, higher product prices and lower overall feedstock costs. Nine-month operating income rose 52%.
- Operating cash flow increased $54.7 million year over year for the nine-month period, but working capital used $46.5 million, versus providing $115.3 million in the prior-year period.
- Capital expenditures were $498.3 million for nine months, versus $235.5 million. Investing activities used $694.6 million, including $178.3 million for the acquisition. Financing activities used $51.4 million; dividends paid were $40.2 million and treasury-stock repurchases were $19.4 million.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $591.6 million and current marketable securities were $125.6 million, totaling $717.2 million. Cash had been $790.1 million at December 31, 2012.
- Long-term debt was $763.8 million, broadly unchanged from year-end. The company reported no revolver borrowings and $383.1 million of borrowing availability under its $400 million facility, net of letters of credit.
- Current assets were $1,642.9 million and current liabilities $432.7 million. Stockholders’ equity was $2,265.1 million.
- Management stated that available cash, operating cash flow and revolver capacity should meet normal operating needs and planned capital spending. The company reported compliance with debt covenants.
Material changes, outlook and risks
- Segments: Q3 Olefins operating income rose to $237.2 million from $124.5 million; Vinyls rose to $39.6 million from $24.1 million. For nine months, Olefins sales fell 3.0%, partly reflecting lower ethylene and co-product volumes during the Lake Charles turnaround and expansion; Vinyls sales rose 11.8%.
- Acquisition: On May 1, Westlake acquired CertainTeed’s Pipe and Foundation Group for $178.3 million in cash. It added PVC pipe, fittings, profiles and foundation products, with about 150 million pounds of annual production capacity. Purchase accounting remained preliminary; reported acquisition-related impacts included $5.8 million after tax for the nine-month period, including the effect of selling acquired inventory marked to fair value.
- Capital projects: The Geismar chlor-alkali plant, estimated at $400–$425 million, was expected to start up in Q4 2013. The Calvert City ethylene feedstock conversion and expansion and PVC expansion were targeted for 2014 and estimated at $210–$240 million combined. The first Lake Charles ethylene-unit expansion was completed in Q1 2013; a second-unit expansion was under evaluation for 2015. These are management plans, not guarantees.
- Market and operating risks: Management noted possible future pressure on Olefins margins from significant worldwide capacity additions, and continued weakness in U.S. construction and municipal spending could weigh on Vinyls demand and margins. Results are also exposed to commodity prices, feedstock and energy costs, cyclicality, customer credit, operating interruptions, regulation and access to financing.
- Environmental contingency: Westlake may have CERCLA liability at the Calvert City site. Draft remediation investigation reports were submitted to the EPA in July 2013; allocation of remediation costs among parties had not been established, and the company could not estimate a potential loss. A related PolyOne arbitration seeking cost reallocation and about $1.4 million reimbursement was stayed.
- No specific full-year earnings or revenue guidance was provided in the filing. Management said liquidity was adequate for normal operations and ongoing capital expenditures, while large expansions or acquisitions could require additional financing. The company expected additional 2013 pension contributions of $0.7 million.
Most important facts for investors to verify
- Whether the Q3 margin improvement is sustainable as feedstock prices and product pricing change, and as new industry capacity comes online.
- Progress, final costs and start-up timing for the Geismar and Calvert City projects, plus funding needs for planned capital spending.
- Acquisition integration, realized contribution from the Pipe and Foundation Group, and final purchase-price allocation.
- Working-capital trends and cash conversion, given the nine-month cash use in working capital and the decline in cash balances.
- Developments in the Calvert City environmental proceedings and any resulting cost allocation or financial exposure.