Westlake Chemical Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 6, 2020. Westlake is a vertically integrated chemicals, polymers and building-products manufacturer, reporting Olefins and Vinyls segments. Figures below are in millions of dollars except per-share data and where noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,709 | $2,144 | $3,641 | $4,169 |
| Gross profit / margin | $169 / 10% | $340 / 16% | $452 / 12% | $639 / 15% |
| Income from operations | $36 | $194 | $172 | $328 |
| Net income attributable to Westlake | $15 | $119 | $160 | $191 |
| Diluted EPS | $0.11 | $0.92 | $1.24 | $1.47 |
| EBITDA (non-GAAP) | $236 | $372 | $573 | $686 |
- Q2 sales fell 20%; average sales prices declined 15% and sales volumes 6% year over year. Six-month sales fell 13%, with average prices down 12% and volumes down 1%.
- Q2 operating income declined $158 million. Lower prices across major products and lower caustic soda and downstream vinyl volumes were partially offset by lower feedstock, fuel and operating costs. Higher polyethylene volumes provided some offset.
- Q2 interest expense was $40 million versus $28 million; six-month expense was $71 million versus $58 million, reflecting higher average debt outstanding.
- Six-month operating cash flow was $509 million, compared with $467 million. Investing used $260 million, including $291 million of capital expenditures; financing provided $131 million. Cash, cash equivalents and restricted cash totaled $1,130 million at June 30.
- At June 30, cash and cash equivalents were $1,109 million and net long-term debt was $3,745 million. The $1 billion revolving facility was fully repaid in June, leaving $1 billion available; the company reported compliance with debt covenants. Current assets were $3,165 million and current liabilities $1,109 million.
- Capital spending was $291 million for the first half, down from $411 million a year earlier. The company forecast 2020 capital spending of $500–$550 million.
Segments and material changes
- Olefins: Q2 sales were $361 million versus $477 million and operating income $25 million versus $82 million. Lower polyethylene prices, linked to oil prices and weak economic activity, outweighed lower feedstock and fuel costs; polyethylene volumes increased. Six-month operating income was $87 million versus $119 million.
- Vinyls: Q2 sales were $1,348 million versus $1,667 million and operating income $20 million versus $129 million. Lower prices and reduced caustic soda and downstream vinyl volumes drove the decline. Six-month operating income was $93 million versus $230 million.
- The CARES Act NOL carryback generated tax benefits of $6 million in Q2 and $68 million for the first half. The resulting reported tax benefits were a significant contributor to net income, particularly for the six-month period.
Outlook, risks and contingencies
- COVID-19 caused significant disruption and weaker demand and pricing. Westlake temporarily idled several smaller non-integrated plants and reduced operating rates early in Q2; all idled plants had restarted by quarter-end. Rates improved during the quarter but remained below normal seasonal levels. The company said it could again cut rates or idle production if conditions worsened.
- Management cited uncertainty over the pandemic’s duration and severity, government measures, customer and supplier activity, workforce availability and the return of normal operating conditions. It also noted that lower crude oil prices eroded North American ethane-based producers’ cost advantage, while new industry capacity may pressure Olefins profitability.
- The planned Petro 2 ethylene-unit turnaround was deferred to the first half of 2021 and was expected to last 60 days. Management said cash, operating cash flow and available revolver capacity were adequate for normal operations and planned capital spending; major expansions or acquisitions could require additional financing.
- In June, Westlake issued $300 million of 3.375% senior notes due 2030. On August 1, 2020, after quarter-end, it purchased $100 million of 2029 GO Zone bonds using a portion of the proceeds. The company also planned to redeem and purchase in lieu of redemption its 2035 GO Zone and IKE Zone bonds around November 1, 2020.
- Environmental reserves were approximately $46 million at June 30; additional reasonably possible environmental losses were estimated at $70–$130 million. In caustic soda antitrust class actions, direct-purchaser claims proceeded to discovery; Westlake said the potential impact could not be estimated. Other environmental proceedings include flare-emissions matters and a Natrium discharge lawsuit; the filing says their ultimate impacts are uncertain.
Important facts for investors to verify
- Whether demand, product prices and operating rates continued recovering after June 30, and whether further COVID-19 disruptions or plant idling occurred.
- Whether 2020 capital spending remained within the $500–$550 million outlook and whether the Petro 2 turnaround proceeded as planned in 2021.
- How much of reported earnings and cash flow reflects the CARES Act tax refund and working-capital movements, rather than recurring operating performance.
- Completion and funding of the planned 2035 bond transactions, subsequent debt and cash balances, and continued covenant compliance.
- Developments in environmental and antitrust proceedings, including potential costs beyond recorded reserves; several exposures are not reliably estimable in the filing.