Westlake Chemical Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Amounts are in millions of dollars except per-share data. Westlake is a vertically integrated producer of petrochemicals, polymers and building products, operating through its Olefins and Vinyls segments. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $1,034.9 | $867.3; up 19.3% |
| Gross profit / gross margin | $172.6 / 16.7% | $167.6 / 19.3% |
| Operating income | $145.6 | $140.6; up 3.5% |
| Net income | $87.8 | $83.5; up 5.1% |
| Diluted EPS | $1.31 | $1.25 |
| Operating cash flow | $110.1 | $40.7 |
| Capital expenditures | $64.9 | $28.8 |
| Cash and cash equivalents at March 31 | $895.1 | $825.9 at December 31, 2011 |
| Restricted cash at March 31 | $65.6 | $96.3 at December 31, 2011 |
| Long-term debt at March 31 | $764.6 | $764.6 at December 31, 2011 |
Current assets were $1,795.9 million and current liabilities $312.0 million at March 31. The company reported no revolver borrowings, with $384.3 million available after letters of credit. Cash plus restricted cash totaled $960.7 million. The company was in compliance with debt covenants. Dividends were $0.0738 per common share, versus $0.0635 in Q1 2011.
Material changes versus Q1 2011
- Sales rose mainly on higher prices and volumes, including increased feedstock sales. Average company sales prices increased 5.5% and sales volumes 13.8%.
- Gross margin declined to 16.7% from 19.3%. Management attributed the reduction largely to sales mix from feedstock sales and lower Olefins integrated margins, including higher-cost feedstock inventory flowing through cost of sales under FIFO.
- Olefins sales increased 21.0% to $732.3 million, but segment operating income fell 11.1% to $129.2 million. Higher volume and sales prices were outweighed by lower integrated margins.
- Vinyls sales increased 15.4% to $302.6 million. The segment moved from an operating loss of $2.8 million to operating income of $21.1 million, on improved prices, volumes and margins.
- Operating cash flow increased by $69.4 million, principally because working-capital use was lower. Inventory declined $68.4 million during Q1 2012.
- Capital spending more than doubled, primarily for the Geismar chlor-alkali plant and Lake Charles ethylene expansion.
Outlook, commentary, risks and unusual items
- Geismar fire: A March 22 fire shut down the vinyl chloride monomer unit. Westlake expected the complex to return to normal operations by mid-May 2012, with some operations potentially restarting sooner. The outage caused lost production and sales, and approximately $1.3 million of Q1 costs; management expected a further negative Vinyls impact in Q2.
- Industry outlook: Management cited North American ethane-cost advantages and export demand as supportive of Olefins, while warning that additional global ethylene and derivative capacity could pressure margins. Weak U.S. construction and municipal spending remained a risk to Vinyls demand and margins.
- Capital projects: Planned projects included a Lake Charles ethylene-unit expansion estimated at $110–145 million, with one unit expected to be completed by late 2012; a Geismar chlor-alkali plant estimated at $370–420 million, targeted to start up in H2 2013; and a Calvert City furnace modification estimated at $40 million, expected to finish by mid-2013. Westlake said liquidity should cover normal operations and ongoing capital expenditures; major expansions or acquisitions may require additional financing.
- Georgia Gulf proposal: Westlake’s cash offers of $30 and subsequently $35 per share were rejected. As of April 30, 2012, Westlake held approximately 4.8% of Georgia Gulf’s outstanding shares. The filing does not report a completed acquisition.
- Legal and environmental matters: The company could not estimate any loss from Calvert City remediation proceedings, including potential CERCLA liability; any costs allocable to Westlake were expected to be spread over time. Westlake had accrued a probable loss for penalties relating to an EPA audit of Lake Charles ethylene units, but said resolution was not expected to materially adversely affect its financial condition, results or cash flows.
- Market and financing risks: Commodity prices, industry cyclicality, capacity additions, customer credit, operating disruptions and access to capital markets could affect results. A hypothetical 100-basis-point increase in variable borrowing rates would add about $0.1 million to annual interest expense; a 1% higher rate when fixed-rate debt is refinanced would add about $7.5 million annually.
- Unusual comprehensive income: Q1 other comprehensive income was $17.2 million, including $16.3 million of after-tax unrealized gains on available-for-sale equity securities. This is distinct from net income.
Important facts for investors to verify
- Whether the Geismar complex returned to normal operations on schedule and the actual Q2 financial effect of the fire.
- Whether Olefins margins recovered after the high-cost inventory effects and whether global capacity additions affected pricing.
- Capital-project spending, completion dates and funding needs, particularly for the Geismar and Lake Charles projects.
- Developments in the Georgia Gulf proposal and the value, funding and strategic implications of Westlake’s stake.
- Potential exposure and timing for Calvert City remediation and the Lake Charles EPA matter; the filing provides no clear estimate for the former.
- Cash generation and working-capital trends: Q1 operating cash flow benefited from inventory reduction, while capital expenditures were elevated.
- Stock repurchases: the filing reports 102,776 shares withheld in February for employee tax obligations, but says no shares were repurchased under the public program during Q1; 69,816 shares had previously been acquired under that program.