Business context and reporting period
Westlake Chemical Corporation filed this Form 10-K for the fiscal year ended December 31, 2012. The company is an integrated North American producer of petrochemicals, polymers and fabricated building products, operating through Olefins and Vinyls segments. The filing also reports unaudited quarterly results, including the three months ended December 31, 2012.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $3,571.0 million | $3,619.8 million |
| Gross profit / margin | $737.0 million / 20.6% | $559.0 million / 15.4% |
| Operating income | $615.4 million | $446.8 million |
| Net income | $385.6 million | $259.0 million |
| Diluted EPS | $5.75 | $3.87 |
| Operating cash flow | $624.1 million | $362.3 million |
| Capital expenditures | $386.9 million | $176.8 million |
| EBITDA (non-GAAP) | $772.8 million | $583.8 million |
Fourth-quarter 2012 net sales were $801.0 million, operating income $156.2 million, net income $95.3 million and diluted EPS $1.42. In fourth-quarter 2011, the corresponding figures were $859.2 million, $50.5 million, $26.4 million and $0.40.
Net sales fell 1.3% for the year as average sales prices declined 5.9%, partly offset by a 4.5% increase in sales volumes. Profitability improved primarily because feedstock and energy costs fell substantially; industry ethane and propane prices decreased 48.1% and 31.5%, respectively. Operating cash flow increased by $261.8 million, aided by improved operating income and a favorable working-capital contribution.
At year-end, cash and cash equivalents were $790.1 million and current marketable securities were $124.9 million; working capital was $1,352.9 million. Total debt was $763.8 million, about 29% of capitalization. No revolver borrowings were outstanding; reported availability was $383.8 million under the $400 million facility, after letters of credit. The company reported compliance with debt covenants and no long-term debt maturities before 2022.
Material changes versus the prior comparable period
- Olefins operating income rose to $552.8 million from $459.3 million, despite lower segment sales, as lower input costs improved integrated margins.
- Vinyls operating income rose to $85.9 million from $4.0 million. Lower feedstock and energy costs and higher caustic and building-products volumes helped; the March 2012 Geismar fire and resulting outage were a partial offset.
- Cash capital spending more than doubled, chiefly reflecting major capacity and integration projects. Property, plant and equipment increased to $1,510.0 million from $1,232.1 million.
- The company issued $250 million of 3.60% notes due 2022 and redeemed $250 million of 6⅝% notes due 2016, recording $7.1 million of debt-retirement costs.
- Cash dividends declared were $4.2725 per share, including a $3.75 special dividend; cash dividends paid totaled $285.5 million.
Outlook, management commentary, risks and unusual items
Management said liquidity and expected operating cash flow were adequate for normal operations and ongoing capital expenditures, while noting that larger expansions or acquisitions could require additional financing. The filing provides project timelines and cost estimates, but no specific earnings or revenue guidance.
- Planned projects include a Geismar chlor-alkali plant targeted for start-up in the second half of 2013; a Lake Charles ethylene expansion targeted for completion in the first quarter of 2013; and Calvert City ethylene feedstock conversion/capacity expansion and PVC expansion targeted for 2014. The Calvert City projects were estimated at $210–$240 million combined; other major project estimates include $370–$420 million for Geismar chlor-alkali and $110–$145 million for the Lake Charles ethylene expansion.
- A March 2012 fire at Geismar caused an unscheduled shutdown; the company reported approximately $10.5 million of related costs in 2012, in addition to lost production.
- Key business risks include commodity-industry cyclicality, volatile raw-material and energy prices, pricing pressure and dependence on housing and construction markets. Management cautioned that additional global capacity could pressure Olefins margins and a slow U.S. construction recovery could constrain Vinyls.
- Environmental and remediation matters include an EPA-supervised investigation at Calvert City, where Westlake may face strict, joint-and-several CERCLA liability. The company could not estimate a potential loss; it stated that any allocable costs would likely be spread over time. PolyOne’s arbitration seeking about $1.4 million in reimbursement and a changed allocation of remediation costs was stayed.
- Environmental compliance capital spending was estimated at $10 million in 2013 and $13 million in 2014. These estimates and the costs of future remediation or regulatory changes remain uncertain.
- The 2012 results included a $16.4 million gain from sales of equity securities and $7.1 million of debt-retirement expense. EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
Most important facts for investors to verify
- Whether margin improvement from lower feedstock and energy costs is sustainable as commodity prices and product spreads change.
- Actual project spending, schedules, start-ups and returns, particularly for the Geismar, Lake Charles and Calvert City expansions.
- Geismar’s recovery and whether further outage-related costs or operating constraints arise.
- Developments in Calvert City environmental investigations, cost allocation and the stayed PolyOne arbitration, including any change in Westlake’s ability to estimate exposure.
- Cash generation and liquidity after the special dividend, elevated capital spending and ongoing debt service; confirm revolver availability and covenant headroom.
- Underlying performance excluding the equity-sale gain and debt-retirement expense, and the reconciliation and limitations of management’s non-GAAP EBITDA measure.