Westlake Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Westlake is an integrated manufacturer of performance and essential materials and housing and infrastructure products.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $3.356 billion | $4.056 billion |
| Gross profit / gross margin | $792 million / 24% | $1.285 billion / 32% |
| Income from operations | $536 million | $1.032 billion |
| Net income attributable to Westlake | $394 million | $756 million |
| Diluted EPS | $3.05 | $5.83 |
| Operating cash flow | $512 million | $700 million |
| Capital expenditures | $267 million | $263 million |
| Free cash flow (non-GAAP) | $245 million | $437 million |
| EBITDA (non-GAAP) | $825 million | $1.300 billion |
Sales fell 17%; average selling prices declined 8% and volumes fell 9%. Management attributed weaker results mainly to lower PVC resin and polyethylene prices and volumes and lower PVC pipe and fittings volumes. Higher caustic soda and chlorine prices and lower natural gas and feedstock costs partly offset the declines. SG&A rose $22 million to $222 million, mainly due to compensation and a full quarter of expenses from the acquired epoxy business.
Segments: Performance and Essential Materials sales were $2.349 billion, down 17%, and operating income was $403 million versus $879 million. Housing and Infrastructure Products sales were $1.007 billion, down 18%, and operating income was $143 million versus $185 million. Housing and infrastructure segment volumes declined 21%; average prices increased 3%.
Liquidity and debt: Cash and cash equivalents were $2.414 billion at March 31, 2023, versus $2.228 billion at year-end 2022. Long-term debt, net, was $4.892 billion, compared with $4.879 billion. Westlake had no borrowings or letters of credit under its $1.5 billion revolving facility and reported $1.5 billion available. It was in compliance with debt covenants. Current assets were $6.146 billion and current liabilities $2.159 billion. Q1 financing uses included $47 million of dividends, $22 million of share repurchases and $10 million of distributions to noncontrolling interests.
Outlook, risks and contingencies
Westlake provided no specific numerical earnings or revenue guidance. Management said near-term energy-price volatility, higher interest rates, inflation and other macroeconomic conditions are expected to weigh on margins and demand. It cited weaker demand across most products, particularly in Europe and in North American housing-related markets; lower energy costs had recently emerged as prices stabilized from elevated 2022 levels. The company noted potential longer-term support for infrastructure-related products from the Infrastructure Investment and Jobs Act, while near-term housing demand faces pressure from mortgage rates, inflation and recession risk.
Key operating risks include cyclical supply and demand, commodity and energy price volatility, capacity additions, the Russia-Ukraine conflict, recession risk, housing activity, raw-material cost recovery through pricing, environmental and climate regulation, and financing-market conditions. Westlake said its liquidity sources should cover normal operations and ongoing capital spending, but large expansions or acquisitions could require additional financing.
Legal and environmental matters: A jury awarded Triad Hunter approximately $70 million in an Ohio trespass and negligence case; no final judgment had been entered, Westlake reserved approximately $70 million and said it intended to appeal if required to pay. Environmental reserves were approximately $54 million; additional reasonably possible environmental losses were estimated at $75 million to $135 million. Caustic soda antitrust class actions seek $861 million in single damages from direct purchasers and approximately $500 million from indirect purchasers, before possible trebling and other relief; the company said it could not estimate the impact. A March 2023 Netherlands ethylene-related lawsuit also had an unestimable potential impact. Management generally believes known legal and regulatory matters will not have a material adverse effect in aggregate, while acknowledging outcomes may be material in a particular period.
Important facts for investors to verify
- Whether demand, prices and margins for PVC resin, polyethylene and housing products stabilize or decline further, and whether caustic soda strength continues to offset weakness.
- Cash generation relative to capital expenditures, and the sustainability of the reported $245 million of non-GAAP free cash flow.
- Debt maturities, refinancing exposure and continued covenant compliance; management estimates a 1% higher rate upon refinancing fixed-rate debt would increase annual interest expense by about $50 million.
- Developments in the Triad Hunter appeal and judgment, the caustic soda and ethylene antitrust cases, and environmental remediation exposures.
- Actual effects of macroeconomic conditions, energy and feedstock prices, housing activity, regulatory changes and the Inflation Reduction Act.