Business context and reporting period
Westlake Chemical Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company manufactures and markets petrochemicals, polymers and fabricated building products through its Olefins and Vinyls segments. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and condition
- Third quarter: Revenue was $968.4, up 24.2% year over year; net income was $67.9, up from $62.7; diluted EPS was $1.01 versus $0.95. Operating income was $117.3 versus $107.3. Gross margin was 15.2%, down from 17.3%.
- Nine months: Revenue was $2,760.7, up 16.2%; net income was $232.5 versus $137.3; diluted EPS was $3.48 versus $2.07. Operating income was $396.3 versus $241.3. Gross margin improved to 17.4% from 13.4%.
- Segment results: Third-quarter Olefins operating income fell to $105.4 from $136.1, mainly as feedstock costs outpaced price increases and volumes and operating rates declined. Vinyls swung to $16.1 of operating income from a $24.2 loss, reflecting improved PVC resin, PVC pipe and caustic margins. For nine months, Olefins operating income rose to $383.4 from $305.5 and Vinyls improved to $23.6 from a $50.0 loss.
- Cash flow and investment: Nine-month operating cash flow was $244.4, versus $215.0. Investing used $138.8, including $111.8 of capital expenditures and $29.9 of investment purchases. Financing provided $23.1; dividends paid were $13.4. Cash and cash equivalents rose to $758.9 from $630.3.
- Liquidity and debt: At September 30, cash and cash equivalents were $758.9 and restricted cash was $116.7. Long-term debt was $764.5, substantially unchanged from year-end 2010; no borrowings were outstanding on the $400 million revolving facility, with $382.3 of availability after letters of credit. The facility maturity was extended to September 16, 2016, and pricing was reduced. The company reported compliance with its debt covenants.
- Other metrics: Interest expense increased to $12.7 for the quarter and $38.4 for nine months, primarily due to higher debt following 2010 note issuances. The nine-month effective tax rate was 35.8%. Dividends were $0.0738 per share for the quarter.
Material changes and management commentary
Higher sales prices across major products drove revenue growth, while overall sales volume declined 4.8% for the quarter and 4.3% for nine months. In the quarter, price increases averaged 28.6%, but higher feedstock costs, lower rates and weaker building-products demand compressed gross margin. Nine-month results benefited from stronger integrated Olefins margins and improved Vinyls pricing and PVC resin volume.
Management cited production and operating disruptions during the nine-month period: an unscheduled Lake Charles ethylene-unit outage, a Calvert City turnaround, a fire at a third-party Mont Belvieu storage facility, and the Springfield, Kentucky PVC pipe facility closure. The closure generated $2.0 of asset impairment charges and $1.4 of severance and other costs. Management said the Springfield closure responded to excess PVC pipe capacity and was intended to reduce costs and optimize operations.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided in the supplied filing text. Management expects normal operating needs and ongoing capital expenditures to be funded by cash, operating cash flow and available revolver capacity, but notes that large expansions or acquisitions could require external financing.
- Planned investment includes a Lake Charles ethylene-capacity expansion, estimated at $110–$145 million, with one unit expected to be completed by late 2012, and a Geismar chlor-alkali plant estimated at $250–$300 million, targeted to start up in the second half of 2013.
- Management warned that global ethylene capacity additions could pressure Olefins margins, while weak U.S. construction demand and North American PVC capacity additions could weigh on Vinyls operating rates and margins. Feedstock and energy price volatility, industry cyclicality, outages, customer credit and access to capital are additional risks.
- The company authorized a $100 million share-repurchase program in August 2011 and had repurchased 54,654 shares for $2.0 million by quarter-end. The program may be discontinued at the board’s discretion.
- Environmental matters at Calvert City include ongoing remediation and disputes over cost allocation; the company said it could not estimate a potential loss, if any. A PolyOne arbitration seeking approximately $1.4 million was stayed. Separately, the company had accrued a probable loss for proposed penalties related to an EPA audit of Lake Charles ethylene units; the ultimate amount was not ascertainable, and management did not expect a material adverse effect.
- The company reported no material changes to its previously disclosed risk factors and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Whether the quarter’s feedstock-cost pressure and lower Olefins operating rates persist, and the extent of recovery in building-products demand.
- Progress, timing, financing and final costs of the Lake Charles expansion and Geismar chlor-alkali project.
- Cash conversion and working-capital needs: receivables growth contributed to $108 million of working-capital cash use during the first nine months.
- Final exposure and timing for Calvert City remediation and the Lake Charles EPA matter, including any changes to recorded accruals.
- Use of the repurchase authorization alongside planned capital spending, dividends and liquidity needs.