Westlake(WLK) - 2020 Q4 - Annual Report

PART I Item 1. Business Westlake Chemical is a global, integrated manufacturer of chemicals and building products, operating Vinyls and Olefins segments - The company operates through two principal segments: Vinyls and Olefins, and is highly integrated across its product chains[32] - In 2019, Westlake acquired NAKAN, a global compounding solutions business, and increased its ownership in the LACC ethylene plant joint venture to 46.8%[35] - As of February 17, 2021, the company had an aggregate production capacity of approximately 44.3 billion pounds per year across sites in North America, Europe, and Asia[36] Vinyls Business The Vinyls segment produces PVC, VCM, EDC, chlor-alkali, and fabricated building products, holding the world's second-largest PVC and chlor-alkali producer positions Vinyls Production Capacities (as of Feb 17, 2021) | Product | Annual Capacity (Millions of pounds) | Key End Uses | | :--- | :--- | :--- | | Specialty PVC | 980 | Automotive sealants, medical applications | | Commodity PVC | 6,820 | Construction materials (pipe, siding, profiles) | | VCM | 7,830 | PVC, PVC Compounds | | Chlorine | 7,140 | VCM, bleach, water treatment | | Caustic Soda | 7,860 | Pulp and paper, chemicals, alumina | | Chlorinated Derivative Products | 2,290 | Coatings, refrigerants, water treatment | | Ethylene (for Vinyls) | 1,760 | VCM | | Building Products and PVC Compounds | 3,470 | Pipe, siding, window profiles, decking | - Westlake is the second-largest PVC producer in the world, with a capacity of approximately 6.8 billion pounds of commodity PVC and 1.0 billion pounds of specialty PVC per year[42] - The company is the second-largest chlor-alkali producer globally and uses most of its chlorine production internally for VCM and chlorinated derivative products[44] - The segment's main competitors include Formosa Plastics, Oxy Chem, Shintech, Olin, and Orbia[52] Olefins Business The Olefins segment manufactures ethylene, polyethylene, and styrene, holding the second-largest LDPE producer position in North America Olefins Production Capacities (as of Feb 17, 2021) | Product | Annual Capacity (Millions of pounds) | Key End Uses | | :--- | :--- | :--- | | Ethylene | 2,990 | Polyethylene, EDC, styrene | | Low-Density Polyethylene (LDPE) | 1,500 | High clarity packaging, shrink films, food packaging | | Linear Low Density Polyethylene (LLDPE) | 1,070 | Heavy-duty films and bags, liners | | Styrene | 570 | Consumer disposables, packaging, appliances | - Westlake is the second-largest producer of LDPE by capacity in North America, primarily using autoclave technology capable of producing higher-margin specialty products[59] - The segment's primary competitors are large chemical companies including Chevron Phillips, Dow, ExxonMobil, and LyondellBasell[66] Environmental The company is subject to extensive environmental regulations, with planned capital expenditures of $41 million for 2021 and $45 million for 2022 Environmental Capital Expenditures | Year | Amount (in millions) | | :--- | :--- | | 2020 (Actual) | $31 | | 2021 (Estimate) | $41 | | 2022 (Estimate) | $45 | - The EPA is conducting an enforcement initiative related to flare emissions at the Calvert City and certain Lake Charles facilities, with a potential monetary sanction exceeding $1 million[70] Human Capital As of December 31, 2020, Westlake employed approximately 9,220 people, with 38% represented by labor unions Employee Headcount by Category (as of Dec 31, 2020) | Category | Number of Employees | | :--- | :--- | | Vinyls segment | 8,060 | | Olefins segment | 820 | | Corporate and other | 340 | | Total | 9,220 | - Approximately 38% of employees are represented by labor unions under collective bargaining agreements expiring through 2024[72] Item 1A. Risk Factors The company faces risks from the COVID-19 pandemic, industry cyclicality, cost volatility, environmental regulations, debt, and principal stockholder control - The COVID-19 pandemic could materially adversely affect business, financial condition, and results of operations due to operational disruptions and reduced demand[78] - The petrochemical industry's cyclicality, driven by supply/demand imbalances and new capacity additions, can lead to reduced operating margins or losses[80][82] - Volatility in raw material and energy costs, particularly crude oil and natural gas, significantly affects operating expenses and can compress margins[84][86] - Operations are subject to extensive environmental, health, and safety laws, which require costly compliance and may lead to fines or sanctions[102][105][108] - As of December 31, 2020, total indebtedness was $3.6 billion, which could limit financial flexibility and expose the company to interest rate risks[116] - The principal stockholder, TTWF LP, and its affiliates own a majority of the common stock, enabling them to control all matters affecting the company, which may lead to conflicts of interest[136] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[140] Item 2. Properties Details on manufacturing properties are in Item 1, with principal executive offices leased in Houston, Texas - Details on manufacturing properties are provided in Item 1 of the report[141] - Principal executive offices are located in Houston, Texas, and are leased from an affiliate of the principal stockholder[141] Item 3. Legal Proceedings The company is involved in various legal proceedings but does not expect a material adverse effect on its financial condition - The company is involved in various legal proceedings but does not expect them to have a material adverse effect on its financial condition[142] Item 4. Mine Safety Disclosure This item is not applicable to the company - Not Applicable[143] Information about our Executive Officers This section provides biographical information for the company's executive officers, including Chairman James Y. Chao and CEO Albert Y. Chao - James Y. Chao serves as Chairman of the Board, and his brother, Albert Y. Chao, serves as President and Chief Executive Officer[144][145] - M. Steven Bender is the Executive Vice President and Chief Financial Officer[146] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with an active stock repurchase program having $131 million remaining as of December 31, 2020 - The company's stock repurchase program, first authorized in 2014 and expanded in 2015 and 2018, had $131,155,000 remaining for future purchases as of December 31, 2020[155][156] Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 2020 | 1,080 | $66.92 | | November 2020 | — | — | | December 2020 | 128 | $78.26 | | Total | 1,208 | $68.12 | - As of year-end, there were 2,382,316 securities to be issued upon exercise of outstanding options and rights, with 3,112,855 securities remaining available for future issuance under equity compensation plans[157] Item 6. Selected Financial and Operational Data This section presents a five-year summary of key financial data, with 2020 net sales of $7.5 billion and net income of $330 million Selected Financial Data (2018-2020) | (in millions, except per share data) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $7,504 | $8,118 | $8,635 | | Income from operations | $429 | $656 | $1,408 | | Net income attributable to Westlake | $330 | $421 | $996 | | Diluted EPS | $2.56 | $3.25 | $7.62 | | EBITDA | $1,246 | $1,407 | $2,101 | Selected Balance Sheet and Cash Flow Data (Year-End 2020) | (in millions) | Amount | | :--- | :--- | | Cash and cash equivalents | $1,313 | | Total assets | $13,835 | | Total long-term debt, net | $3,566 | | Total Westlake stockholders' equity | $6,043 | | Cash from operating activities | $1,297 | | Capital expenditures | $525 | - A reconciliation of the non-GAAP measure EBITDA to GAAP measures is provided, with EBITDA of $1,246 million reconciled from a net income of $373 million for 2020[164] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, highlighting the impact of 2020 events, with net income decreasing to $330 million and strong liquidity maintained Significant Developments In 2020, Westlake was impacted by COVID-19, hurricanes, and a plant closure, partially offset by a $95 million CARES Act tax benefit - The COVID-19 pandemic caused significant disruptions in Q2 2020, leading to temporarily idled production, with the company responding by reducing costs, increasing efficiencies, and lowering capital spending[178][182] - The CARES Act allowed for the carryback of a federal net operating loss, resulting in a net tax benefit of $95 million for 2020[185] - Hurricanes Laura and Delta in late 2020 caused shutdowns at Lake Charles facilities, resulting in approximately $83 million in additional maintenance expenses and lower production[189] - The company closed its paste PVC plant in Schkopau, Germany in December 2020, taking an accounting charge of $34 million[190] Results of Operations Net income decreased to $330 million in 2020 from $421 million in 2019, driven by lower sales prices and hurricane impacts, partially offset by a tax benefit Comparison of Results (2019 vs. 2020) | Metric (in millions) | 2020 | 2019 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $7,504 | $8,118 | ($614) | -8% | | Income from Operations | $429 | $656 | ($227) | -35% | | Net Income Attributable to Westlake | $330 | $421 | ($91) | -22% | Segment Income from Operations (2019 vs. 2020) | Segment (in millions) | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Vinyls | $301 | $451 | ($150) | | Olefins | $160 | $260 | ($100) | - The decrease in 2020 income was driven by lower sales prices for major products (caustic soda), lower sales volumes, and hurricane impacts, partially offset by a $95M CARES Act tax benefit, higher building products volumes, and contributions from the LACC JV[198] - The effective income tax rate was a benefit of 13% in 2020 compared to an expense of 19% in 2019, primarily due to the NOL carryback benefit under the CARES Act[205] Cash Flows Operating cash flow was strong at $1,297 million in 2020, while investing activities decreased significantly due to fewer acquisitions Summary of Cash Flows (in millions) | Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $1,297 | $1,301 | $1,409 | | Net cash used for investing activities | ($509) | ($1,954) | ($754) | | Net cash (used for) provided by financing activities | ($216) | $630 | ($1,427) | - Investing activities in 2020 were primarily for capital expenditures ($525 million), a decrease from 2019 which included $817 million for an additional interest in LACC and $314 million for acquisitions[226] - Financing activities in 2020 included borrowing and fully repaying $1 billion on the revolving credit facility, issuing $300 million in new senior notes, and redeeming $254 million of other notes[228] Liquidity and Capital Resources The company maintains strong liquidity with $1.3 billion cash and a $1 billion credit facility, with total debt at $3.6 billion and $13.1 billion in contractual obligations - As of December 31, 2020, the company had $1,313 million in cash and cash equivalents and full availability of $1 billion under its revolving credit facility[237][240] - Total long-term debt was $3.6 billion as of December 31, 2020, with the company in compliance with all debt covenants[238][254] Contractual Obligations Summary (as of Dec 31, 2020) | Obligation (in millions) | Total | 2021 | 2022-2023 | 2024-2025 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $3,620 | $— | $250 | $— | $3,370 | | Operating leases | $523 | $102 | $154 | $96 | $171 | | Purchase obligations | $6,654 | $1,747 | $1,714 | $1,220 | $1,973 | | Interest payments | $1,970 | $126 | $238 | $233 | $1,373 | | Total Selected | $12,767 | $1,975 | $2,356 | $1,549 | $6,717 | Critical Accounting Policies Management identifies critical accounting policies requiring significant judgment, including impairment assessments, fair value estimates, and long-term employee benefit costs - Key estimates for long-lived assets include useful lives and recoverability, with $24 million in major maintenance costs deferred in 2020[269][272] - Goodwill impairment tests for both Olefins and Vinyls reporting units in 2020 indicated no impairment, with fair values exceeding carrying values by more than 10%[276][277] - Long-term employee benefit costs, particularly pensions, rely on key assumptions, with an underfunded status of $337 million for pension plans at year-end 2020[125][278] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to commodity price, interest rate, and foreign currency risks, using derivatives and hedges to mitigate volatility - The company is exposed to commodity price risk, where a hypothetical $0.10 increase per gallon in ethane price would have increased pre-tax income by $35 million at year-end 2020[287] - The company is exposed to interest rate risk on its $3.6 billion of fixed-rate debt upon refinancing, where a 1.0% increase in rates would increase annual interest expense by approximately $36 million[288] - To mitigate foreign currency risk, the company designated its €700 million senior notes and €150 million in foreign exchange contracts as net investment hedges of its euro-denominated subsidiaries[290][291] Item 8. Financial Statements and Supplementary Data This section contains the audited consolidated financial statements for 2020 and the independent auditor's unqualified report - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020[301] - The auditor identified the goodwill impairment assessment for the North America Vinyls reporting unit as a critical audit matter due to significant management judgment[309][310] Consolidated Financial Highlights (as of and for the Year Ended Dec 31, 2020) | Metric (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $13,835 | $13,261 | | Total Liabilities | $7,257 | $6,858 | | Total Equity | $6,578 | $6,403 | | Statement of Operations | | | | Net Sales | $7,504 | $8,118 | | Income from Operations | $429 | $656 | | Net Income Attributable to Westlake | $330 | $421 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, including the NAKAN acquisition, LACC joint venture, debt, pension underfunding, and CARES Act tax benefit - The 2019 acquisition of NAKAN for $249 million resulted in the recording of $40 million in goodwill and $130 million in intangible assets (Note 2)[375][379] - The investment in the LACC joint venture was $961 million at year-end 2020, with the company's equity in losses from LACC, representing its share of depreciation, at $37 million for the year (Note 9)[405] - As of Dec 31, 2020, the company had $3.62 billion in principal long-term debt, with the largest single issues being the €700M 1.625% notes due 2029 and the $750M 3.60% notes due 2026 (Note 11)[410] - The company's defined benefit pension plans had a total underfunded status of $337 million as of December 31, 2020 (Note 14)[444] - The company recognized a net tax benefit of $95 million in 2020 due to the carryback of federal net operating losses as permitted under the CARES Act (Note 17)[495] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[546] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of December 31, 2020 - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[547] - There were no material changes in internal control over financial reporting during the fourth quarter of 2020[549] PART III This part addresses directors, executive officers, corporate governance, executive compensation, security ownership, related party transactions, and principal accountant fees, incorporated by reference from the Proxy Statement Items 10-14 Information for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's definitive Proxy Statement to be filed with the SEC[553] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and provides an index of all exhibits filed with the Form 10-K, including certifications - This section contains the index of financial statements and exhibits filed with the Form 10-K[557] Item 16. Form 10-K Summary The company reports that there is no Form 10-K summary - None[561]