Westlake Chemical Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Financial amounts below are in U.S. dollars. The comparison with Q1 2016 is materially affected by Axiall, acquired on August 31, 2016, whose results are included in Q1 2017.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,942.6 million | $975.2 million |
| Gross profit / margin | $367.1 million / 18.9% | $255.6 million / 26.2% |
| Operating income | $235.3 million | $202.3 million |
| Net income attributable to Westlake | $138.2 million | $123.1 million |
| Diluted EPS | $1.06 | $0.94 |
| Operating cash flow | $157.4 million | $128.9 million |
| Capital expenditures | $134.3 million | $136.3 million |
| EBITDA (non-GAAP) | $390.6 million | $270.6 million |
- Sales rose 99.2%; management attributed the increase primarily to Axiall and higher prices. Average sales prices rose 13.8% and volumes 85.4% year over year, with the volume increase largely reflecting Axiall.
- Gross margin declined mainly because the acquired Vinyls business represented a larger share of sales and has lower industry margins than Olefins, as well as from turnaround-related costs and lost production. Operating income nevertheless increased, supported by higher product prices and Axiall earnings.
- Olefins sales were $543.0 million and operating income was $179.8 million, versus $431.0 million and $149.2 million. Vinyls sales were $1,399.6 million and operating income was $71.4 million, versus $544.2 million and $62.1 million. The large Vinyls sales increase primarily reflects the acquisition.
- Interest expense increased to $39.8 million from $6.7 million, primarily reflecting higher debt following the Axiall acquisition and lower capitalized interest. The effective tax rate was 27.9%, compared with 35.0% in Q1 2016.
- Operating cash flow increased by $28.5 million, while working-capital changes used $150.8 million of cash. Cash flow less capital expenditures was approximately $23.1 million; this is a simple calculation, not a company-defined measure.
Financial position and liquidity
- At March 31, 2017, cash and cash equivalents were $372.6 million, down from $459.5 million at year-end 2016. Total assets were $10.7 billion and total equity was $4.0 billion.
- Long-term debt, net, was $3.60 billion; the $150 million term loan was repaid in January. Revolver borrowings were $250 million, with $673.5 million of borrowing availability after letters of credit. The company reported compliance with its financial covenant and other debt covenants.
- Financing cash outflow was $99.7 million, including the term-loan repayment and $125 million repayment of revolver borrowings, partly offset by a $50 million revolver draw. A $154 million cash restriction associated with the term loan was released.
- Capital spending was $134.3 million, primarily for the Calvert City ethylene unit upgrade and expansion. Westlake had funded $74.4 million of its commitment to the LACC ethylene project by quarter-end.
- The quarterly dividend was $0.1906 per share. No shares were repurchased under the public repurchase program during the quarter.
Outlook, commentary, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management said existing cash, operating cash flow, and available credit were expected to meet normal operating needs for the foreseeable future, absent a major expansion or acquisition; additional financing may be needed for such projects.
- The Calvert City ethylene unit upgrade and capacity expansion was completed in April 2017. Together with other initiatives, it is expected to add about 100 million pounds of annual ethylene capacity, bringing total capacity to about 730 million pounds. The LACC plant was anticipated to start up in Q1 2019.
- Management cited $36.3 million of pretax unabsorbed fixed manufacturing costs and other costs from the Calvert City turnaround and expansion and other turnarounds or outages, plus associated lost sales. Transaction and integration costs were $8.2 million. These items partly offset stronger prices and Axiall contributions.
- Key business risks include chemical-industry cyclicality; volatile feedstock and energy costs; potential capacity additions and oversupply; weaker construction demand and municipal spending affecting Vinyls; European economic weakness; operating outages; and execution and integration risks related to Axiall. Management noted that falling crude oil prices had reduced North American ethane producers’ cost advantage, while benefiting its European naphtha-based operations.
- Environmental reserves were approximately $48.2 million. The company disclosed additional reasonably possible environmental losses of $40 million to $80 million beyond recorded reserves. It stated that known legal and regulatory matters were not expected in aggregate to materially adversely affect its financial statements, while acknowledging uncertainty and potentially material period-specific costs.
- Management reported no material changes to the risk factors in the 2016 Form 10-K and concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Separate underlying price, volume, and margin trends from the acquisition-driven increase in sales and volumes; compare future periods on a consistent post-Axiall basis.
- Track whether gross margins recover and whether turnaround costs, outages, and lost sales abate after the Calvert City work.
- Monitor operating cash generation, working-capital requirements, debt levels, interest expense, and revolver availability.
- Assess Axiall integration progress and whether anticipated synergies and operating benefits materialize.
- Review environmental remediation developments and potential losses above the recorded reserve, along with progress and costs for the LACC project and other capital spending.