Westlake(WLK) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Consolidated financial statements for H1 2022 show significant growth, with total assets reaching $20.4 billion and net income more than doubling to $1.6 billion, reflecting strong market conditions and acquisitions | Financial Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Sales | $8,539 million | $5,216 million | | Gross Profit | $2,730 million | $1,381 million | | Income from Operations | $2,207 million | $1,066 million | | Net Income Attributable to Westlake | $1,614 million | $764 million | | Diluted EPS | $12.43 | $5.91 | | Balance Sheet Item | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $6,013 million | $5,263 million | | Total Assets | $20,372 million | $18,459 million | | Total Current Liabilities | $2,513 million | $2,344 million | | Total Liabilities | $10,398 million | $9,931 million | | Total Equity | $9,974 million | $8,528 million | | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $1,613 million | $882 million | | Net Cash used for Investing Activities | ($1,803) million | ($264) million | | Net Cash used for Financing Activities | ($377) million | ($72) million | - On February 1, 2022, the Company completed its acquisition of Westlake Epoxy for a total purchase consideration of $1,207 million, with the acquired business included in the Performance and Essential Materials segment[29] - The company reorganized its business segments in Q4 2021 from Vinyls and Olefins to two new principal operating segments: Performance and Essential Materials, and Housing and Infrastructure Products, with this change retrospectively applied to all periods presented[26][94] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q2 2022 performance to higher sales prices and integrated margins, despite rising costs and interest rates, with robust cash flow supporting acquisitions and shareholder returns Overview Westlake operates as a vertically integrated manufacturer in two segments, benefiting from ethane-based cost advantages and strong demand, but faces raw material cost volatility and potential economic headwinds - The company operates under two principal segments: Performance and Essential Materials (including vinyls, chlor-alkali, olefins, and epoxy) and Housing and Infrastructure Products (including building products, pipes, and compounds)[104] - The acquisition of Westlake Epoxy represents a strategic expansion into high-growth applications like wind turbine blades and lightweight automotive components, providing vertical integration with the company's chlor-alkali business[109] - While global demand for most products remained strong through Q2 2022, management warns that inflation, rising interest rates, and the possibility of a recession are expected to have an unfavorable impact on demand for housing and other products[107][115] Recent Developments In H1 2022, Westlake completed key strategic actions including the $1.2 billion acquisition of Hexion's epoxy business, increased its LACC joint venture stake, redeemed senior notes, and secured a new $1.5 billion revolving credit facility - On February 1, 2022, the company completed the acquisition of Hexion's global epoxy business (Westlake Epoxy) for a purchase consideration of $1,207 million[119] - In March 2022, the company acquired an additional 3.2% interest in LACC, LLC from Lotte Chemical Corporation for $89 million[121] - In May 2022, the company redeemed all outstanding 3.60% Senior Notes due 2022[122] - On June 9, 2022, the company entered into a new $1.5 billion revolving credit facility scheduled to mature in June 2027, terminating its existing agreement[123] Results of Operations For Q2 2022, net sales surged 57% to $4.5 billion and net income rose to $858 million, driven by increased sales prices and volumes, largely from acquisitions, with both segments reporting significant growth | Metric | Q2 2022 | Q2 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $4,483M | $2,859M | +57% | | Income from Operations | $1,175M | $720M | +63% | | Net Income Attributable to Westlake | $858M | $522M | +64% | | Diluted EPS | $6.60 | $4.04 | +63% | | EBITDA | $1,456M | $932M | +56% | | Segment | Q2 2022 vs Q2 2021 Change | | :--- | :--- | | Performance and Essential Materials | | | Average Sales Price | +27.1% | | Volume | +17.5% | | Housing and Infrastructure Products | | | Average Sales Price | +46.1% | | Volume | +47.3% | - Performance and Essential Materials segment income from operations increased by $294 million to $965 million in Q2 2022, driven by higher sales prices for PVC resin, caustic soda, and styrene, and contributions from the Westlake Epoxy acquisition[142] - Housing and Infrastructure Products segment income from operations increased by $140 million to $236 million in Q2 2022, driven by higher sales prices from strong housing construction and remodeling activity, plus contributions from 2021 acquisitions[144] Liquidity and Capital Resources The company's liquidity remains strong, with cash from operations increasing to $1.6 billion for H1 2022, supporting the $1.2 billion Westlake Epoxy acquisition and capital expenditures, while maintaining a new $1.5 billion credit facility and active stock repurchase program | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $1,613 million | $882 million | | Net Cash used for Investing Activities | ($1,803) million | ($264) million | | Net Cash used for Financing Activities | ($377) million | ($72) million | - As of June 30, 2022, cash and cash equivalents totaled $1,317 million and total indebtedness was $4.9 billion[165][166] - During Q2 2022, the company repurchased 412,490 shares of its common stock for approximately $41 million under its authorized stock repurchase program[162][209] - On June 9, 2022, the company entered into a new $1.5 billion revolving credit facility maturing in 2027, which was undrawn as of June 30, 2022[168][55] Quantitative and Qualitative Disclosures about Market Risk Westlake is exposed to commodity price risk for products and raw materials, interest rate risk on its $4.9 billion fixed-rate debt, and foreign currency exchange risk, which it partially mitigates through derivatives and hedging instruments - A substantial portion of the company's products and raw materials are commodities, exposing it to price fluctuations, where a hypothetical $0.10 increase in the price of a gallon of ethane would have increased pre-tax income by $30 million as of June 30, 2022[196] - As of June 30, 2022, the company had $4.9 billion in fixed-rate debt and $26 million in variable-rate debt, exposing it to interest rate risk upon refinancing or rate changes[197] - The company is exposed to foreign currency risk and uses hedges to mitigate it, having designated its €700 million senior notes due 2029 as a non-derivative net investment hedge for its euro-denominated subsidiaries[199][200] Controls and Procedures Based on management's evaluation, including the CEO and CFO, the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - The President and CEO and the Executive VP and CFO concluded that the company's disclosure controls and procedures are effective as of the end of the period covered by the report[201] - No changes in internal control over financial reporting occurred during the three months ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[202] PART II. OTHER INFORMATION Legal Proceedings Westlake is involved in several legal matters, including a class-action antitrust lawsuit concerning caustic soda pricing with an unestimable financial impact, and an EPA agreement for flare emissions estimated to cost $110 million plus a $1 million penalty - The company is a defendant in multiple class-action lawsuits alleging a conspiracy to fix the price of caustic soda, with plaintiffs for direct purchasers seeking $861 million in single damages, though the company cannot estimate the potential impact at this time[204][81] - The company reached an agreement on a consent decree with the EPA and state agencies regarding flare emissions, with compliance estimated to cost approximately $110 million in capital expenditures and other costs, plus a $1 million penalty[206] Risk Factors This section directs investors to the detailed discussion of risk factors in the company's 2021 Form 10-K, with no new or updated risk factors presented in this quarterly report - The report refers readers to Item 1A, "Risk Factors" in the 2021 Form 10-K for a comprehensive discussion of potential risks[207] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2022, Westlake repurchased 414,910 shares of common stock, with 412,490 shares purchased for approximately $41 million under its stock repurchase program, leaving about $61 million available for future repurchases | Period (2022) | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Program | Approx. Dollar Value Remaining in Program | | :--- | :--- | :--- | :--- | :--- | | April | 611 | $119.41 | — | $101,151,083 | | May | 1,621 | $141.19 | — | $101,151,083 | | June | 412,678 | $98.19 | 412,490 | $60,652,803 | | Total | 414,910 | $98.39 | 412,490 | $60,652,803 | - The majority of shares repurchased were under the company's publicly announced 2014 Program, which has been expanded multiple times, and the program may be discontinued by the Board at any time[209] Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, the new $1.5 billion Credit Agreement dated June 9, 2022, and certifications by the Principal Executive and Financial Officers - A key exhibit filed is the Credit Agreement dated June 9, 2022, relating to a $1.5 billion senior unsecured revolving credit facility[211]