Westlake(WLK) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Westlake Corporation's unaudited consolidated interim financial statements as of September 30, 2022, detail balance sheets, operations, cash flows, and notes on acquisitions, financial instruments, and segment information Consolidated Balance Sheets As of September 30, 2022, total assets increased to $20.4 billion, liabilities to $10.2 billion, and equity to $10.2 billion, primarily due to acquisitions and retained earnings growth Consolidated Balance Sheet Highlights | Account | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | | :--- | :--- | :--- | | Total Assets | $20,425 | $18,459 | | Total Current Assets | $6,101 | $5,263 | | Property, plant and equipment, net | $8,301 | $7,606 | | Goodwill | $2,143 | $2,024 | | Total Liabilities | $10,237 | $9,931 | | Long-term debt, net | $4,813 | $4,911 | | Total Equity | $10,188 | $8,528 | | Retained Earnings | $9,700 | $7,808 | Consolidated Statements of Operations Q3 2022 net sales rose to $3.96 billion, but net income decreased to $401 million; nine-month net sales grew to $12.5 billion, with net income increasing to $2.02 billion Q3 2022 vs Q3 2021 Performance | Metric | Q3 2022 (in millions) | Q3 2021 (in millions) | | :--- | :--- | :--- | | Net sales | $3,956 | $3,055 | | Gross profit | $776 | $1,018 | | Income from operations | $516 | $861 | | Net income attributable to Westlake | $401 | $607 | | Diluted EPS | $3.10 | $4.69 | Nine Months 2022 vs 2021 Performance | Metric | Nine Months 2022 (in millions) | Nine Months 2021 (in millions) | | :--- | :--- | :--- | | Net sales | $12,495 | $8,271 | | Gross profit | $3,506 | $2,399 | | Income from operations | $2,723 | $1,927 | | Net income attributable to Westlake | $2,015 | $1,371 | | Diluted EPS | $15.54 | $10.60 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, operating cash flow increased to $2.56 billion, investing activities used $2.15 billion due to acquisitions, and financing activities used $480 million for debt repayment and share repurchases Cash Flow Summary for Nine Months Ended Sep 30 | Cash Flow Activity | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,560 | $1,637 | | Net cash used for investing activities | $(2,148) | $(842) | | Net cash provided by (used for) financing activities | $(480) | $1,487 | | Net increase (decrease) in cash | $(135) | $2,273 | Notes to Consolidated Financial Statements Notes detail financial statement preparation, Q4 2021 segment reorganization, the $1.2 billion Westlake Epoxy acquisition, debt instruments, fair value measurements, income tax, segment performance, and ongoing legal contingencies - In Q4 2021, the company reorganized into two principal operating segments: Performance and Essential Materials, and Housing and Infrastructure Products, applied retrospectively[28][102] - On February 1, 2022, the company acquired Westlake Epoxy for $1,207 million, with results included in the Performance and Essential Materials segment[34] - The company is involved in multiple class-action lawsuits alleging price-fixing of caustic soda, with the potential financial impact currently unestimable[88] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2022 net income decrease due to higher costs and a $70 million litigation charge, while nine-month net income increased significantly due to strong pricing and acquisitions, noting slowing demand and strong liquidity - Q3 2022 net income decreased to $401 million from $607 million in Q3 2021, primarily due to higher costs, lower prices, and a $70 million litigation charge[138] - For the first nine months of 2022, net income increased to $2,015 million from $1,371 million, driven by higher sales prices, strong H1 2022 margins, and acquisitions[139] - The company anticipates near-term margin and demand reduction due to higher energy costs, inflation, and rising interest rates, impacting European operations and the North American housing market[114][119] - In August 2022, the Board authorized an additional $500 million for the existing share repurchase program[124] Results of Operations Q3 2022 net sales rose 29% to $3.96 billion, but gross margin fell to 20%; nine-month sales grew 51% to $12.5 billion with stable gross margin, and SG&A expenses increased due to acquisitions Q3 2022 vs Q3 2021 Comparison | Metric | Q3 2022 (in millions) | Q3 2021 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $3,956 | $3,055 | +29% | | Gross Profit Margin | 20% | 33% | -13 p.p. | | Income from Operations | $516 | $861 | -40% | | SG&A Expenses | $215 | $122 | +76% | Nine Months 2022 vs 2021 Comparison | Metric | Nine Months 2022 (in millions) | Nine Months 2021 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $12,495 | $8,271 | +51% | | Gross Profit Margin | 28% | 29% | -1 p.p. | | Income from Operations | $2,723 | $1,927 | +41% | | SG&A Expenses | $635 | $383 | +66% | Cash Flow Discussion For the first nine months of 2022, operating cash flow increased to $2.56 billion, investing activities used $2.15 billion primarily for acquisitions and capital expenditures, and financing activities used $480 million for debt repayment and share repurchases - Operating cash flow for the first nine months of 2022 increased by $923 million year-over-year, primarily due to higher income from operations[164] - Investing cash outflow increased significantly due to the $1.17 billion acquisition of Westlake Epoxy and a $397 million increase in capital expenditures[165] - Financing activities in the first nine months of 2022 used $480 million, mainly for $250 million in senior notes redemption, $123 million in dividends, and $68 million in share repurchases[166] Liquidity and Capital Resources As of September 30, 2022, Westlake maintained strong liquidity with $1.78 billion in cash, $4.8 billion in debt, a new $1.5 billion credit facility, and an expanded $500 million share repurchase program - The company's cash and cash equivalents totaled $1,778 million as of September 30, 2022[171] - In June 2022, the company established a new $1.5 billion revolving credit facility maturing in 2027, with no outstanding borrowings as of September 30, 2022[175] - The Board expanded the share repurchase program by an additional $500 million in August 2022, with $68 million of common stock repurchased in the first nine months of 2022[168][166] Quantitative and Qualitative Disclosures about Market Risk The company manages commodity price risk for raw materials, interest rate risk on its $4.9 billion debt, and foreign currency risk from international operations using derivative instruments and net investment hedges - The company faces commodity price risk from raw materials like ethane and natural gas; a hypothetical $0.10 increase per gallon of ethane would increase pre-tax income by $27 million[201] - As of September 30, 2022, the company had $4.89 billion in fixed-rate debt and $24 million in variable-rate debt, exposing it to interest rate risk[202] - To mitigate foreign currency risk, the company uses hedging contracts and designated its €700 million senior notes due 2029 as a non-derivative net investment hedge for euro-denominated subsidiaries[204][205] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during Q3 2022 - The President and CEO, along with the Executive VP and CFO, concluded that the company's disclosure controls and procedures were effective as of the report period end[206] - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2022[207] PART II. OTHER INFORMATION Legal Proceedings The company faces class-action lawsuits for caustic soda price-fixing with unestimable impact, and an EPA consent decree for flares requiring $110 million in compliance costs and a $1 million penalty - Westlake is a defendant in class-action lawsuits in the U.S. and Canada alleging caustic soda price-fixing, with the potential financial impact currently unestimable[209] - The company reached an EPA consent decree for flares, requiring approximately $110 million in compliance costs and a $1 million penalty[211] Risk Factors Updated risk factors emphasize external factors like inflation, rising interest rates, and potential recession impacting demand and margins, alongside dependency on cyclical markets like the softening U.S. housing market - External factors including inflation, interest rates, potential recession, supply chain constraints, and geopolitical events can cause demand and margin fluctuations[213][214] - The U.S. housing market softened in Q2 and Q3 2022 due to inflationary pricing and rising mortgage rates, potentially adversely affecting the Housing and Infrastructure Products segment[218][219] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2022, the company repurchased 372,430 shares at an average price of $87.27, and in August 2022, the Board authorized an additional $500 million for the repurchase program, with $528 million remaining Share Repurchases for Q3 2022 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2022 | 51,330 | $97.37 | | August 2022 | — | — | | September 2022 | 321,100 | $85.64 | | Total Q3 | 372,430 | $87.27 | - In August 2022, the Board approved a $500 million expansion of the stock repurchase program, with $528 million available as of September 30, 2022[222] Exhibits This section lists exhibits filed with Form 10-Q, including corporate governance documents and certifications from the Principal Executive Officer and Principal Financial Officer - The exhibits filed include corporate governance documents and required certifications from the CEO and CFO under Rule 13a-14(a) and Section 1350[225]