Attached files
| file | filename |
|---|---|
| EX-31.1 - EXHIBIT 31.1 - WESTLAKE CHEMICAL CORP | exhibit311_20160331.htm |
| EX-32.1 - EXHIBIT 32.1 - WESTLAKE CHEMICAL CORP | exhibit321_20160331.htm |
| EX-99.1 - EXHIBIT 99.1 - WESTLAKE CHEMICAL CORP | exhibit991_20160331.htm |
| EX-31.2 - EXHIBIT 31.2 - WESTLAKE CHEMICAL CORP | exhibit312_20160331.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016 | |
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to | |
Commission File No. 001-32260
Westlake Chemical Corporation
(Exact name of Registrant as specified in its charter)
Delaware | 76-0346924 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
2801 Post Oak Boulevard, Suite 600
Houston, Texas 77056
(Address of principal executive offices, including zip code)
(713) 960-9111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
The number of shares outstanding of the registrant's sole class of common stock as of April 27, 2016 was 130,306,311.
INDEX
Item | Page |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTLAKE CHEMICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2016 | December 31, 2015 | |||||||
(in thousands of dollars, except par values and share amounts) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 614,976 | $ | 662,525 | ||||
Marketable securities | 525,008 | 520,144 | ||||||
Accounts receivable, net | 549,037 | 508,532 | ||||||
Inventories | 478,656 | 434,060 | ||||||
Prepaid expenses and other current assets | 24,057 | 14,489 | ||||||
Deferred income taxes | — | 35,439 | ||||||
Total current assets | 2,191,734 | 2,175,189 | ||||||
Property, plant and equipment, net | 3,114,821 | 3,004,067 | ||||||
Equity investments | 9,431 | 9,208 | ||||||
Other assets, net | ||||||||
Intangible assets, net | 213,508 | 213,404 | ||||||
Deferred charges and other assets, net | 194,907 | 167,417 | ||||||
Total other assets, net | 408,415 | 380,821 | ||||||
Total assets | $ | 5,724,401 | $ | 5,569,285 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities | ||||||||
Accounts and notes payable | $ | 257,384 | $ | 235,329 | ||||
Accrued liabilities | 248,777 | 287,313 | ||||||
Total current liabilities | 506,161 | 522,642 | ||||||
Long-term debt, net | 758,300 | 758,148 | ||||||
Deferred income taxes | 609,752 | 575,603 | ||||||
Other liabilities | 145,786 | 150,961 | ||||||
Total liabilities | 2,019,999 | 2,007,354 | ||||||
Commitments and contingencies (Notes 8 and 18) | ||||||||
Stockholders' equity | ||||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock, $0.01 par value, 300,000,000 shares authorized; 134,663,244 shares issued at March 31, 2016 and December 31, 2015 | 1,347 | 1,347 | ||||||
Common stock, held in treasury, at cost; 4,372,222 and 4,444,898 shares at March 31, 2016 and December 31, 2015, respectively | (256,459 | ) | (258,312 | ) | ||||
Additional paid-in capital | 542,886 | 542,148 | ||||||
Retained earnings | 3,209,415 | 3,109,987 | ||||||
Accumulated other comprehensive loss | (90,663 | ) | (129,292 | ) | ||||
Total Westlake Chemical Corporation stockholders' equity | 3,406,526 | 3,265,878 | ||||||
Noncontrolling interests | 297,876 | 296,053 | ||||||
Total equity | 3,704,402 | 3,561,931 | ||||||
Total liabilities and equity | $ | 5,724,401 | $ | 5,569,285 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
1
WESTLAKE CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
(in thousands of dollars, except per share data and share amounts) | ||||||||
Net sales | $ | 975,187 | $ | 1,103,531 | ||||
Cost of sales | 719,602 | 818,985 | ||||||
Gross profit | 255,585 | 284,546 | ||||||
Selling, general and administrative expenses | 53,309 | 55,266 | ||||||
Income from operations | 202,276 | 229,280 | ||||||
Other income (expense) | ||||||||
Interest expense | (6,685 | ) | (9,591 | ) | ||||
Other income, net | 2,645 | 9,096 | ||||||
Income before income taxes | 198,236 | 228,785 | ||||||
Provision for income taxes | 69,300 | 78,378 | ||||||
Net income | 128,936 | 150,407 | ||||||
Net income attributable to noncontrolling interests | 5,808 | 4,065 | ||||||
Net income attributable to Westlake Chemical Corporation | $ | 123,128 | $ | 146,342 | ||||
Earnings per common share attributable to Westlake Chemical Corporation: | ||||||||
Basic | $ | 0.94 | $ | 1.10 | ||||
Diluted | $ | 0.94 | $ | 1.10 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 130,189,964 | 132,714,566 | ||||||
Diluted | 130,600,514 | 133,205,306 | ||||||
Dividends per common share | $ | 0.1815 | $ | 0.1650 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
WESTLAKE CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
(in thousands of dollars) | ||||||||
Net income | $ | 128,936 | $ | 150,407 | ||||
Other comprehensive income (loss), net of income taxes | ||||||||
Pension and other post-retirement benefits liability | ||||||||
Amortization of benefits liability | 334 | 652 | ||||||
Income tax provision on pension and other post-retirement benefits liability | (128 | ) | (225 | ) | ||||
Foreign currency translation adjustments | 22,805 | (59,698 | ) | |||||
Available-for-sale investments | ||||||||
Unrealized holding gains on investments | 24,428 | 1,626 | ||||||
Reclassification of net realized gains to net income | (52 | ) | — | |||||
Income tax provision on available-for-sale investments | (8,758 | ) | (584 | ) | ||||
Other comprehensive income (loss) | 38,629 | (58,229 | ) | |||||
Comprehensive income | 167,565 | 92,178 | ||||||
Comprehensive income attributable to noncontrolling interests, net of tax | 5,808 | 4,065 | ||||||
Comprehensive income attributable to Westlake Chemical Corporation | $ | 161,757 | $ | 88,113 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
WESTLAKE CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
(in thousands of dollars) | ||||||||
Cash flows from operating activities | ||||||||
Net income | $ | 128,936 | $ | 150,407 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 65,714 | 58,641 | ||||||
Provision for (recovery of) doubtful accounts | 148 | (9 | ) | |||||
Amortization of debt issuance costs | 220 | 501 | ||||||
Stock-based compensation expense | 2,303 | 2,340 | ||||||
Loss from disposition of property, plant and equipment | 309 | 133 | ||||||
Gains from sales of securities | (52 | ) | — | |||||
Deferred income taxes | 58,637 | 5,331 | ||||||
Windfall tax benefits from share-based payment arrangements | (266 | ) | (1,701 | ) | ||||
Income from equity method investments, net of dividends | (223 | ) | (3,416 | ) | ||||
Other losses (gains), net | 661 | (554 | ) | |||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | (36,324 | ) | 18,517 | |||||
Inventories | (40,878 | ) | 35,979 | |||||
Prepaid expenses and other current assets | (10,791 | ) | (6,202 | ) | ||||
Accounts payable | 23,752 | (3,625 | ) | |||||
Accrued liabilities | (54,257 | ) | (59,585 | ) | ||||
Other, net | (8,954 | ) | (6,201 | ) | ||||
Net cash provided by operating activities | 128,935 | 190,556 | ||||||
Cash flows from investing activities | ||||||||
Additions to property, plant and equipment | (136,328 | ) | (95,822 | ) | ||||
Proceeds from disposition of assets | 104 | — | ||||||
Proceeds from sales and maturities of securities | 26,859 | — | ||||||
Purchase of securities | (36,637 | ) | — | |||||
Settlements of derivative instruments | (1,219 | ) | (833 | ) | ||||
Net cash used for investing activities | (147,221 | ) | (96,655 | ) | ||||
Cash flows from financing activities | ||||||||
Dividends paid | (23,700 | ) | (21,964 | ) | ||||
Distributions to noncontrolling interests | (3,985 | ) | (3,558 | ) | ||||
Proceeds from exercise of stock options | 22 | 157 | ||||||
Proceeds from issuance of notes payable | 2,050 | — | ||||||
Repayment of notes payable | (7,095 | ) | — | |||||
Repurchase of common stock for treasury | (679 | ) | (2,000 | ) | ||||
Windfall tax benefits from share-based payment arrangements | 266 | 1,701 | ||||||
Net cash used for financing activities | (33,121 | ) | (25,664 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 3,858 | (3,189 | ) | |||||
Net (decrease) increase in cash and cash equivalents | (47,549 | ) | 65,048 | |||||
Cash and cash equivalents at beginning of period | 662,525 | 880,601 | ||||||
Cash and cash equivalents at end of period | $ | 614,976 | $ | 945,649 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
1. Basis of Financial Statements
The accompanying unaudited consolidated interim financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim periods. Accordingly, certain information and footnotes required for complete financial statements under generally accepted accounting principles in the United States ("U.S. GAAP") have not been included. These interim consolidated financial statements should be read in conjunction with the December 31, 2015 financial statements and notes thereto of Westlake Chemical Corporation (the "Company") included in the annual report on Form 10-K for the fiscal year ended December 31, 2015 (the "2015 Form 10-K"), filed with the SEC on February 24, 2016. These financial statements have been prepared in conformity with the accounting principles and practices as disclosed in the notes to the consolidated financial statements of the Company for the fiscal year ended December 31, 2015.
In the opinion of the Company's management, the accompanying unaudited consolidated interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company's financial position as of March 31, 2016, its results of operations for the three months ended March 31, 2016 and 2015 and the changes in its cash position for the three months ended March 31, 2016 and 2015.
Results of operations and changes in cash position for the interim periods presented are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2016 or any other interim period. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update on a comprehensive new revenue recognition standard that will supersede the existing revenue recognition guidance. The new accounting guidance creates a framework by which an entity will allocate the transaction price to separate performance obligations and recognize revenue when each performance obligation is satisfied. Under the new standard, entities will be required to use judgment and make estimates, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and determining when an entity satisfies its performance obligations. The standard allows for either "full retrospective" adoption, meaning that the standard is applied to all of the periods presented with a cumulative catch-up as of the earliest period presented, or "modified retrospective" adoption, meaning the standard is applied only to the most current period presented in the financial statements with a cumulative catch-up as of the current period. In March 2016, the FASB issued additional authoritative guidance to provide clarification on principal versus agent considerations included within the new revenue recognition standard. The accounting standard (including the clarification guidance issued in March 2016) will be effective for reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the impact that the new accounting guidance will have on its consolidated financial position, results of operations and cash flows.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued an accounting standards update making certain changes principally to the current guidance for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. Among other things, the guidance (1) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value, with changes in fair value recognized in net income; (2) provide entities with a policy election to record equity investments without readily determinable fair values at cost, less impairment, and subsequent adjustments for observable price changes (changes in the basis of these equity investments to be reported in net income); (3) requires an entity that has elected the fair value option for financial liabilities to recognize changes in fair value due to instrument-specific credit risk separately in other comprehensive income; (4) clarified current guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities; and (5) requires specific disclosure pertaining to financial assets and financial liabilities in the financial statements. The accounting standard will be effective for reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the impact that the new accounting guidance will have on its consolidated financial position, results of operations and cash flows.
5
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
Leases
In February 2016, the FASB issued an accounting standards update on a new lease standard that will supersede the existing lease guidance. The standard requires a lessee to recognize assets and liabilities related to long-term leases that are classified as operating leases under current guidance on its balance sheet. An asset would be recognized related to the right to use the underlying asset and a liability would be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures related to leases. The accounting standard will be effective for reporting periods beginning after December 15, 2018. The Company is in the process of evaluating the impact that the new accounting guidance will have on its consolidated financial position, results of operations and cash flows.
Stock Compensation
In March 2016, the FASB issued an accounting standards update to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classifications of awards as either equity or liabilities and certain related classifications on the statement of cash flows. The accounting standard is effective for reporting periods beginning after December 15, 2016. The Company is in the process of evaluating the impact that the new accounting guidance will have on its consolidated financial position, results of operations and cash flows.
Recently Adopted Accounting Standards
Amendments to the Consolidation Analysis
In February 2015, the FASB issued an accounting standards update making certain changes to the current consolidation guidance. The amendments affect both the variable interest entity and voting interest entity consolidation models. The new standard changes the consideration of substantive rights, related party interests and fees paid to the decision maker when applying the variable interest entity consolidation model and eliminates certain guidance for limited partnerships and similar entities under the voting interest consolidation model. The accounting standard is effective for annual periods beginning after December 15, 2015. The Company adopted this accounting standard effective January 1, 2016 and the adoption did not have an impact on the Company's consolidated financial position, results of operations and cash flows.
Intangibles—Goodwill and Other—Internal use software
In April 2015, the FASB issued an accounting standards update to provide clarification on accounting for cloud computing arrangements which include a software license. The accounting standard is effective for annual periods beginning after December 15, 2015. The Company adopted this accounting standard, to be applied prospectively, effective January 1, 2016. Consistent with the prospective application of this accounting standard, prior period comparative information was not adjusted. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued an accounting standards update on simplifying the presentation of debt issuance costs, which requires all costs incurred to issue debt to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The accounting standard is effective for reporting periods beginning after December 15, 2015. The Company adopted this accounting standard effective January 1, 2016. As a result, Other assets, net—Deferred charges and other assets, net and Long-term debt on the consolidated balance sheet as of December 31, 2015 have been adjusted to $167,417 and $758,148, respectively, from the originally reported $173,384 and $764,115, respectively, to reflect the retrospective application of the new accounting guidance. The adoption of this accounting standard did not have an impact on the Company's results of operations and cash flows.
Simplifying the Accounting for Measurement-Period Adjustments
In September 2015, the FASB issued an accounting standards update that requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance requires that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The new guidance further requires specific disclosure pertaining to the measurement period adjustments. The accounting standard is effective for reporting periods beginning after
6
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
December 15, 2015. The Company adopted this accounting standard effective January 1, 2016 and the adoption did not have an impact on the Company's consolidated financial position, results of operations and cash flows.
Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued an accounting standards update that requires all deferred tax assets and liabilities, along with any related valuation allowance, to be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that only permits offsetting within a jurisdiction. The accounting standard is required to be adopted for reporting periods beginning after December 15, 2016; however, early adoption of this standard is permitted. The Company elected to early adopt this accounting standard, to be applied prospectively, effective January 1, 2016. Consistent with the prospective application of this accounting standard, prior period comparative information was not adjusted. The early adoption of this accounting standard did not have an impact on the Company's results of operations and cash flows.
2. Financial Instruments
Cash Equivalents
The Company had $292,903 and $221,918 of held-to-maturity securities with original maturities of three months or less, primarily consisting of corporate debt securities, classified as cash equivalents at March 31, 2016 and December 31, 2015, respectively. The Company's investments in held-to-maturity securities are held at amortized cost, which approximates fair value.
Available-for-Sale Marketable Securities
Investments in available-for-sale securities were classified as follows:
March 31, 2016 | December 31, 2015 | ||||||
Current | $ | 525,008 | $ | 520,144 | |||
Non-current | 75,114 | 48,081 | |||||
Total available-for-sale securities | $ | 600,122 | $ | 568,225 | |||
The cost, gross unrealized gains, gross unrealized losses and fair value of the Company's available-for-sale securities were as follows:
March 31, 2016 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses (1) | Fair Value | |||||||||||||
Debt securities | ||||||||||||||||
Corporate bonds | $ | 341,856 | $ | 1,411 | $ | (185 | ) | $ | 343,082 | |||||||
U.S. government debt (2) | 125,114 | 425 | (9 | ) | 125,530 | |||||||||||
Asset-backed securities | 56,289 | 120 | (13 | ) | 56,396 | |||||||||||
Equity securities | 60,283 | 14,927 | (96 | ) | 75,114 | |||||||||||
Total available-for-sale securities | $ | 583,542 | $ | 16,883 | $ | (303 | ) | $ | 600,122 | |||||||
7
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
December 31, 2015 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses (1) | Fair Value | |||||||||||||
Debt securities | ||||||||||||||||
Corporate bonds | $ | 336,665 | $ | 55 | $ | (1,076 | ) | $ | 335,644 | |||||||
U.S. government debt (2) | 135,226 | 2 | (374 | ) | 134,854 | |||||||||||
Asset-backed securities | 49,759 | 2 | (115 | ) | 49,646 | |||||||||||
Equity securities | 54,371 | 466 | (6,756 | ) | 48,081 | |||||||||||
Total available-for-sale securities | $ | 576,021 | $ | 525 | $ | (8,321 | ) | $ | 568,225 | |||||||
_____________
(1) | All unrealized loss positions were held at a loss for less than 12 months. |
(2) | U.S. Treasury obligations, U.S. government agency obligations and U.S government agency mortgage-backed securities. |
As of March 31, 2016 and December 31, 2015, net unrealized gains (losses) on the Company's available-for-sale securities of $10,623 and $(4,995), respectively, net of income tax expense (benefit) of $5,957 and $(2,801), respectively, were recorded in accumulated other comprehensive loss. See Note 13 for the fair value hierarchy of the Company's available-for-sale securities.
As of March 31, 2016, the corporate bond securities held by the Company had maturities ranging between one month to five years; the U.S. government debt securities held by the Company, excluding U.S. government agency mortgage-backed securities, had maturities ranging between one month to four years; the U.S. government agency mortgage-backed securities held by the Company had maturities of approximately five years; and the asset-backed securities held by the Company had maturities ranging between one month to five years.
The proceeds from sales and maturities of available-for-sale securities included in the consolidated statement of cash flows and the gross realized gains and losses included in the consolidated statement of operations are reflected in the table below. The cost of securities sold was determined using the specific identification method. There were no sales or maturities of available-for-sale securities during the three months ended March 31, 2015.
Three Months Ended March 31, 2016 | ||||
Proceeds from sales and maturities of securities | $ | 26,859 | ||
Gross realized gains | 61 | |||
Gross realized losses | (9 | ) | ||
3. Accounts Receivable
Accounts receivable consist of the following:
March 31, 2016 | December 31, 2015 | |||||||
Trade customers | $ | 465,697 | $ | 438,538 | ||||
Allowance for doubtful accounts | (14,321 | ) | (14,095 | ) | ||||
451,376 | 424,443 | |||||||
Federal and state taxes | 81,255 | 60,748 | ||||||
Other | 16,406 | 23,341 | ||||||
Accounts receivable, net | $ | 549,037 | $ | 508,532 | ||||
8
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
4. Inventories
Inventories consist of the following:
March 31, 2016 | December 31, 2015 | |||||||
Finished products | $ | 298,236 | $ | 253,338 | ||||
Feedstock, additives and chemicals | 103,837 | 106,435 | ||||||
Materials and supplies | 76,583 | 74,287 | ||||||
Inventories | $ | 478,656 | $ | 434,060 | ||||
5. Property, Plant and Equipment
As of March 31, 2016, the Company had property, plant and equipment, net totaling $3,114,821. The Company assesses these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including when negative conditions such as significant current or projected operating losses exist. Other factors considered by the Company when determining if an impairment assessment is necessary include, but are not limited to, significant changes or projected changes in supply and demand fundamentals (which would have a negative impact on operating rates or margins), new technological developments, new competitors with significant raw material or other cost advantages, adverse changes associated with the U.S. and world economies and uncertainties associated with governmental actions. Long-lived assets assessed for impairment are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
Depreciation expense on property, plant and equipment of $56,041 and $49,658 is included in cost of sales in the consolidated statements of operations for the three months ended March 31, 2016 and 2015, respectively.
6. Other Assets
Amortization expense on intangible and other assets of $9,770 and $9,361 is included in the consolidated statements of operations for the three months ended March 31, 2016 and 2015, respectively.
Goodwill
Goodwill for the Olefins segment was $29,990 at March 31, 2016 and December 31, 2015. Goodwill for the Vinyls segment was $32,026 at March 31, 2016 and December 31, 2015. There were no changes in the carrying amount of goodwill for either operating segment for the three months ended March 31, 2016.
7. Accounts and Notes Payable
Accounts and notes payable consist of the following:
March 31, 2016 | December 31, 2015 | |||||||
Accounts payable | $ | 256,351 | $ | 229,219 | ||||
Notes payable to banks | 1,033 | 6,110 | ||||||
Accounts and notes payable | $ | 257,384 | $ | 235,329 | ||||
8. Long-Term Debt
The Company adopted an accounting standards update to simplify the presentation of debt issuance costs effective January 1, 2016. The standard requires, on a retrospective basis, all costs incurred to issue debt, excluding line-of-credit arrangements, to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. As a result, Other assets, net—Deferred charges and other assets, net and Long-term debt on the consolidated balance sheet as of December 31, 2015 have been adjusted to $167,417 and $758,148, respectively, from the originally reported $173,384 and $764,115, respectively, to reflect the retrospective application of the new accounting guidance.
9
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
Long-term debt consists of the following:
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
Principal Amount | Unamortized Discount and Debt Issuance Costs | Net Long-term Debt | Principal Amount | Unamortized Discount and Debt Issuance Costs | Net Long-term Debt | |||||||||||||||||||
3.60% senior notes due 2022 | $ | 250,000 | $ | (2,147 | ) | $ | 247,853 | $ | 250,000 | $ | (2,232 | ) | $ | 247,768 | ||||||||||
6 ½% senior notes due 2029 | 100,000 | (971 | ) | 99,029 | 100,000 | (989 | ) | 99,011 | ||||||||||||||||
6 ¾% senior notes due 2032 | 250,000 | (1,972 | ) | 248,028 | 250,000 | (2,002 | ) | 247,998 | ||||||||||||||||
6 ½% senior notes due 2035 (the "6 ½% GO Zone Senior Notes Due 2035") | 89,000 | (873 | ) | 88,127 | 89,000 | (884 | ) | 88,116 | ||||||||||||||||
6 ½% senior notes due 2035 (the "6 ½% IKE Zone Senior Notes Due 2035") | 65,000 | (626 | ) | 64,374 | 65,000 | (634 | ) | 64,366 | ||||||||||||||||
Loan related to tax-exempt waste disposal revenue bonds due 2027 | 10,889 | — | 10,889 | 10,889 | — | 10,889 | ||||||||||||||||||
Long-term debt, net | $ | 764,889 | $ | (6,589 | ) | $ | 758,300 | $ | 764,889 | $ | (6,741 | ) | $ | 758,148 | ||||||||||
Revolving Credit Facility
The Company has a $400,000 senior secured revolving credit facility. The facility includes a provision permitting the Company to increase the size of the facility, up to four times, in increments of at least $25,000 each (up to a maximum of $200,000) under certain circumstances if the lenders agree to commit to such an increase. At March 31, 2016, the Company had no borrowings outstanding under the revolving credit facility. Any borrowings under the facility will bear interest at either LIBOR plus a spread ranging from 1.25% to 1.75%, provided that so long as the Company is rated investment grade, the margin for LIBOR loans will not exceed 1.50%, or a base rate plus a spread ranging from 0.00% to 0.50%. The revolving credit facility also requires an unused commitment fee of 0.25% per annum. All interest rates under the facility are subject to monthly grid pricing adjustments based on prior month average daily loan availability. The revolving credit facility matures on July 17, 2019. As of March 31, 2016, the Company had outstanding letters of credit totaling $30,445 and borrowing availability of $354,821 under the revolving credit facility.
10
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
9. Stockholders' Equity
Changes in stockholders' equity for the three months ended March 31, 2016 and 2015 were as follows:
Common Stock | Common Stock, Held in Treasury | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total | ||||||||||||||||||||||
Balances at December 31, 2015 | $ | 1,347 | $ | (258,312 | ) | $ | 542,148 | $ | 3,109,987 | $ | (129,292 | ) | $ | 296,053 | $ | 3,561,931 | ||||||||||||
Net income | — | — | — | 123,128 | — | 5,808 | 128,936 | |||||||||||||||||||||
Other comprehensive income, net of income taxes: | ||||||||||||||||||||||||||||
Pension and other post- retirement benefits liability | — | — | — | — | 206 | — | 206 | |||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 22,805 | — | 22,805 | |||||||||||||||||||||
Net unrealized holding gains on investments | — | — | — | — | 15,618 | — | 15,618 | |||||||||||||||||||||
Shares issued—stock- based compensation | — | 1,853 | (1,831 | ) | — | — | — | 22 | ||||||||||||||||||||
Stock-based compensation, net of tax on stock options exercised | — | — | 2,569 | — | — | — | 2,569 | |||||||||||||||||||||
Dividends paid | — | — | — | (23,700 | ) | — | — | (23,700 | ) | |||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (3,985 | ) | (3,985 | ) | |||||||||||||||||||
Balances at March 31, 2016 | $ | 1,347 | $ | (256,459 | ) | $ | 542,886 | $ | 3,209,415 | $ | (90,663 | ) | $ | 297,876 | $ | 3,704,402 | ||||||||||||
Common Stock | Common Stock, Held in Treasury | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total | ||||||||||||||||||||||
Balances at December 31, 2014 | $ | 1,347 | $ | (96,372 | ) | $ | 530,441 | $ | 2,555,528 | $ | (79,433 | ) | $ | 290,377 | $ | 3,201,888 | ||||||||||||
Net income | — | — | — | 146,342 | — | 4,065 | 150,407 | |||||||||||||||||||||
Other comprehensive income (loss), net of income taxes | ||||||||||||||||||||||||||||
Pension and other post- retirement benefits liability | — | — | — | — | 427 | — | 427 | |||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (59,698 | ) | — | (59,698 | ) | |||||||||||||||||||
Net unrealized holding gains on investments | — | — | — | — | 1,042 | — | 1,042 | |||||||||||||||||||||
Common stock repurchased | — | (2,000 | ) | — | — | — | — | (2,000 | ) | |||||||||||||||||||
Shares issued—stock- based compensation | — | 97 | 60 | — | — | — | 157 | |||||||||||||||||||||
Stock-based compensation, net of tax on stock options exercised | — | — | 4,041 | — | — | — | 4,041 | |||||||||||||||||||||
Dividends paid | — | — | — | (21,964 | ) | — | — | (21,964 | ) | |||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (3,558 | ) | (3,558 | ) | |||||||||||||||||||
Balances at March 31, 2015 | $ | 1,347 | $ | (98,275 | ) | $ | 534,542 | $ | 2,679,906 | $ | (137,662 | ) | $ | 290,884 | $ | 3,270,742 | ||||||||||||
11
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2016 and 2015 were as follows:
Benefits Liability, Net of Tax | Cumulative Foreign Currency Exchange | Net Unrealized Holding (Losses) Gains on Investments, Net of Tax | Total | |||||||||||||
Balances at December 31, 2015 | $ | (8,607 | ) | $ | (115,690 | ) | $ | (4,995 | ) | $ | (129,292 | ) | ||||
Other comprehensive income before reclassifications | — | 22,805 | 15,651 | 38,456 | ||||||||||||
Amounts reclassified from accumulated other comprehensive loss (income) | 206 | — | (33 | ) | 173 | |||||||||||
Net other comprehensive income for the period | 206 | 22,805 | 15,618 | 38,629 | ||||||||||||
Balances at March 31, 2016 | $ | (8,401 | ) | $ | (92,885 | ) | $ | 10,623 | $ | (90,663 | ) | |||||
Benefits Liability, Net of Tax | Cumulative Foreign Currency Exchange | Net Unrealized Holding Gains on Investments, Net of Tax | Total | |||||||||||||
Balances at December 31, 2014 | $ | (23,442 | ) | $ | (56,224 | ) | $ | 233 | $ | (79,433 | ) | |||||
Other comprehensive (loss) income before reclassifications | — | (59,698 | ) | 1,042 | (58,656 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive loss | 427 | — | — | 427 | ||||||||||||
Net other comprehensive income (loss) for the period | 427 | (59,698 | ) | 1,042 | (58,229 | ) | ||||||||||
Balances at March 31, 2015 | $ | (23,015 | ) | $ | (115,922 | ) | $ | 1,275 | $ | (137,662 | ) | |||||
The following table provides the details of the amounts reclassified from accumulated other comprehensive income (loss) into net income in the consolidated statements of operations for the three months ended March 31, 2016 and 2015:
Details about Accumulated Other Comprehensive Income (Loss) Components | Location of Reclassification (Income (Expense)) in Consolidated Statements of Operations | Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||||
Amortization of pension and other post-retirement items | ||||||||||
Net loss | (1) | $ | (334 | ) | $ | (652 | ) | |||
Provision for income taxes | 128 | 225 | ||||||||
(206 | ) | (427 | ) | |||||||
Net unrealized gains on available-for-sale investments | ||||||||||
Realized gain on available-for-sale investments | Other income, net | 52 | — | |||||||
Provision for income taxes | (19 | ) | — | |||||||
33 | — | |||||||||
Total reclassifications for the period | $ | (173 | ) | $ | (427 | ) | ||||
_____________
(1) | These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. For additional information, please read Note 11 (Employee Benefits) to the financial statements included in the 2015 Form 10-K. |
12
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
10. Pension and Post-Retirement Benefit Costs
Defined Benefit Plans
Components of net periodic benefit cost for the Company's pension plans are as follows:
Three Months Ended March 31, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | |||||||||||||
Service cost | $ | — | $ | 323 | $ | 28 | $ | 422 | ||||||||
Interest cost | 567 | 568 | 544 | 535 | ||||||||||||
Expected return on plan assets | (802 | ) | — | (819 | ) | — | ||||||||||
Amortization of net loss | 303 | — | 290 | 266 | ||||||||||||
Net periodic benefit cost | $ | 68 | $ | 891 | $ | 43 | $ | 1,223 | ||||||||
The Company made no contribution to the U.S. salaried pension plan in the first three months of 2016 and 2015. The Company made no contribution to the U.S. wage pension plan in the first three months of 2016. The Company contributed $112 to the U.S. wage pension plan in the first three months of 2015. The Company's funding policy for its U.S. plans is consistent with the minimum funding requirements of federal law and regulations, and based on preliminary estimates, the Company expects to make contributions of approximately $900 each for both the salaried and wage pension plans for the fiscal year ending December 31, 2016.
Other Post-retirement Benefits
Components of net periodic benefit cost for the Company's other post-retirement benefits are as follows:
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
U.S. Plans | U.S. Plans | |||||||
Service cost | $ | 5 | $ | 6 | ||||
Interest cost | 145 | 149 | ||||||
Amortization of net loss | 31 | 96 | ||||||
Net periodic benefit cost | $ | 181 | $ | 251 | ||||
11. Stock-Based Compensation
Under the Westlake Chemical Corporation 2013 Omnibus Incentive Plan (as amended and restated, the "2013 Plan"), all employees and non-employee directors of the Company, as well as certain individuals who have agreed to become the Company's employees, are eligible for awards. Shares of common stock may be issued as authorized in the 2013 Plan. At the discretion of the administrator of the 2013 Plan, employees and non-employee directors may be granted awards in the form of stock options, stock appreciation rights, stock awards, restricted stock units or cash awards (any of which may be a performance award). Total stock-based compensation expense related to the 2013 Plan was $2,303 and $2,340 for the three months ended March 31, 2016 and 2015, respectively.
12. Derivative Instruments
Commodity Risk Management
The Company uses derivative instruments to reduce price volatility risk on raw materials and products as a substantial portion of its raw materials and products are commodities whose prices fluctuate as market supply and demand fundamentals change. Business strategies to protect against such instability include ethylene product feedstock flexibility and moving downstream into the olefins and vinyls products where pricing is more stable. The Company does not use derivative instruments to engage in speculative activities.
Gains and losses from changes in the fair value of derivative instruments that are not designated as hedging instruments were included in gross profit in the consolidated statements of operations for the three months ended March 31, 2016 and 2015.
13
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
The exposure on commodity derivatives used for price risk management includes the risk that the counterparty will not pay if the market declines below the established fixed price. In such case, the Company would lose the benefit of the derivative differential on the volume of the commodities covered. In any event, the Company would continue to receive the market price on the actual volume hedged. The Company also bears the risk that it could lose the benefit of market improvements over the fixed derivative price for the term and volume of the derivative instruments (as such improvements would accrue to the benefit of the counterparty).
The fair values of derivative instruments in the Company's consolidated balance sheets were as follows:
Derivative Assets | ||||||||||
Balance Sheet Location | Fair Value as of | |||||||||
March 31, 2016 | December 31, 2015 | |||||||||
Not designated as hedging instruments | ||||||||||
Commodity forward contracts | Accounts receivable, net | $ | 4,239 | $ | 3,465 | |||||
Commodity forward contracts | Deferred charges and other assets, net | 1,716 | 2,088 | |||||||
Total derivative assets | $ | 5,955 | $ | 5,553 | ||||||
Derivative Liabilities | ||||||||||
Balance Sheet Location | Fair Value as of | |||||||||
March 31, 2016 | December 31, 2015 | |||||||||
Not designated as hedging instruments | ||||||||||
Commodity forward contracts | Accrued liabilities | $ | 7,730 | $ | 9,325 | |||||
Commodity forward contracts | Other liabilities | 9,137 | 12,437 | |||||||
Total derivative liabilities | $ | 16,867 | $ | 21,762 | ||||||
The impact of derivative instruments that have not been designated as hedges on the Company's consolidated statements of operations were as follows:
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivative | Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||||
Commodity forward contracts | Gross profit | $ | 4,057 | $ | 4,241 | |||||
See Note 13 for the fair value of the Company's derivative instruments.
Disclosure about Offsetting Asset and Liability Derivatives
Certain of the Company's derivative instruments are executed under an International Swaps and Derivatives Association ("ISDA") Master Agreement, which permits the Company and a counterparty to aggregate the amounts owed by each party under multiple transactions and replace them with a single net amount payable by one party to the other. The following tables present the Company's derivative assets and derivative liabilities reported on the consolidated balance sheets and derivative assets and derivative liabilities subject to enforceable master netting arrangements.
Derivative Assets as of | ||||||||
March 31, 2016 | December 31, 2015 | |||||||
Derivative assets subject to enforceable master netting arrangements | $ | 340 | $ | — | ||||
Derivative assets not subject to enforceable master netting arrangements | 513 | 462 | ||||||
Total derivative assets | $ | 853 | $ | 462 | ||||
14
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
Offsetting of Derivative Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Consolidated Balance Sheet | Net Amounts of Assets Presented in the Consolidated Balance Sheet | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Consolidated Balance Sheet | Net Amounts of Assets Presented in the Consolidated Balance Sheet | ||||||||||||||||||
Commodity forward contracts | $ | 5,442 | $ | (5,102 | ) | $ | 340 | $ | 5,091 | $ | (5,091 | ) | $ | — | ||||||||||
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
Derivative Assets by Counterparty | Net Amounts of Assets Presented in the Consolidated Balance Sheet | Gross Amounts Not Offset in the Consolidated Balance Sheet | Net Amount | Net Amounts of Assets Presented in the Consolidated Balance Sheet | Gross Amounts Not Offset in the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||
Counterparty A | $ | 340 | $ | — | $ | 340 | $ | — | $ | — | $ | — | ||||||||||||
Derivative Liabilities as of | ||||||||
March 31, 2016 | December 31, 2015 | |||||||
Derivative liabilities subject to enforceable master netting arrangements | $ | 3,278 | $ | 5,803 | ||||
Derivative liabilities not subject to enforceable master netting arrangements | 8,487 | 10,868 | ||||||
Total derivative liabilities | $ | 11,765 | $ | 16,671 | ||||
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
Offsetting of Derivative Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Consolidated Balance Sheet | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Consolidated Balance Sheet | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | ||||||||||||||||||
Commodity forward contracts | $ | 8,380 | $ | (5,102 | ) | $ | 3,278 | $ | 10,894 | $ | (5,091 | ) | $ | 5,803 | ||||||||||
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
Derivative Liabilities by Counterparty | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | Gross Amounts Not Offset in the Consolidated Balance Sheet | Net Amount | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | Gross Amounts Not Offset in the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||
Counterparty A | $ | 3,149 | $ | — | $ | 3,149 | $ | 5,564 | $ | — | $ | 5,564 | ||||||||||||
Counterparty B | 129 | — | 129 | 239 | — | 239 | ||||||||||||||||||
Total | $ | 3,278 | $ | — | $ | 3,278 | $ | 5,803 | $ | — | $ | 5,803 | ||||||||||||
13. Fair Value Measurements
The Company reports certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Under the accounting guidance for fair value measurements, inputs used to measure fair value are classified in one of three levels:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
15
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The following tables summarize, by level within the fair value hierarchy, the Company's assets and liabilities that were accounted for at fair value on a recurring basis:
March 31, 2016 | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Derivative instruments | ||||||||||||
Risk management assets—Commodity forward contracts | $ | 5,896 | $ | 59 | $ | 5,955 | ||||||
Risk management liabilities—Commodity forward contracts | (11,983 | ) | (4,884 | ) | (16,867 | ) | ||||||
Marketable securities | ||||||||||||
Available-for-sale securities | 75,114 | 525,008 | 600,122 | |||||||||
December 31, 2015 | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Derivative instruments | ||||||||||||
Risk management assets—Commodity forward contracts | $ | 5,553 | $ | — | $ | 5,553 | ||||||
Risk management liabilities—Commodity forward contracts | (11,648 | ) | (10,114 | ) | (21,762 | ) | ||||||
Marketable securities | ||||||||||||
Available-for-sale securities | 48,081 | 520,144 | 568,225 | |||||||||
The Level 2 measurements for the Company's commodity contracts are derived using forward curves supplied by industry-recognized and unrelated third-party services. The Level 2 measurements for the Company's available-for-sale securities are derived using market-based pricing provided by unrelated third-party services.
There were no transfers in or out of Levels 1 and 2 of the fair value hierarchy for the three months ended March 31, 2016 and 2015.
In addition to the financial assets and liabilities above, the Company has other financial assets and liabilities subject to fair value measures. These financial assets and liabilities include cash and cash equivalents, accounts receivable, net, accounts and notes payable and long-term debt, all of which are recorded at carrying value. The amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, net and accounts and notes payable approximate their fair value due to the short maturities of these instruments. The carrying and fair values of the Company's long-term debt are summarized in the table below. The Company's long-term debt instruments are publicly-traded. A market approach, based upon quotes from financial reporting services, is used to measure the fair value of the Company's long-term debt. Because the Company's long-term debt instruments may not be actively traded, the inputs used to measure the fair value of the Company's long-term debt are classified as Level 2 inputs within the fair value hierarchy.
March 31, 2016 | December 31, 2015 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
3.60% senior notes due 2022 | $ | 247,853 | $ | 245,500 | $ | 247,768 | $ | 244,828 | ||||||||
6 ½% senior notes due 2029 | 99,029 | 115,436 | 99,011 | 117,153 | ||||||||||||
6 ¾% senior notes due 2032 | 248,028 | 267,593 | 247,998 | 268,490 | ||||||||||||
6 ½% GO Zone Senior Notes Due 2035 | 88,127 | 106,167 | 88,116 | 106,491 | ||||||||||||
6 ½% IKE Zone Senior Notes Due 2035 | 64,374 | 77,538 | 64,366 | 76,741 | ||||||||||||
Loan related to tax-exempt waste disposal revenue bonds due 2027 | 10,889 | 10,889 | 10,889 | 10,889 | ||||||||||||
The carrying values of the Company's long-term debt as of December 31, 2015 have been adjusted to reflect the retrospective application of the accounting standards update on simplifying the presentation of debt issuance costs discussed in Note 8.
16
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
14. Income Taxes
The Company elected to early adopt an accounting standards update requiring the noncurrent classification of all deferred tax assets and liabilities, along with any related valuation allowance, effective January 1, 2016. As a result, the Company's deferred tax assets and liabilities have been classified, by jurisdiction, as a net noncurrent deferred tax asset or liability on the consolidated balance sheet. Consistent with the prospective application of this accounting standard, prior period comparative information was not adjusted.
The effective income tax rate for the three months ended March 31, 2016 was at the U.S. federal statutory rate of 35.0% primarily due to the benefit of state tax credits, the domestic manufacturing deduction, income attributable to noncontrolling interests and the foreign earnings rate differential, offset by state income taxes. The effective income tax rate was 34.3% for the three months ended March 31, 2015. The effective income tax rate for the 2015 period was below the U.S. federal statutory rate of 35.0% primarily due to the benefit of state tax credits, the domestic manufacturing deduction, income attributable to noncontrolling interests and the foreign earnings rate differential, partially offset by state income taxes.
There were no unrecognized tax benefits for the three months ended March 31, 2016. The Company recognizes penalties and interest accrued related to unrecognized tax benefits in income tax expense. As of March 31, 2016, the Company had no accrued interest and penalties related to uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company is no longer subject to examinations by tax authorities before the year 2010.
The Company intends to reinvest its foreign subsidiaries' undistributed earnings, which are estimated to be $115,000 for the year ending December 31, 2016, indefinitely outside of the U.S. to support its foreign operations. The estimated deferred tax liability associated with such foreign undistributed earnings is expected to be immaterial for the year ending December 31, 2016, taking into account the availability of foreign tax credits under current law to reduce the resulting U.S. income tax liability.
15. Earnings per Share
The Company has unvested shares of restricted stock and restricted stock units outstanding that are considered participating securities and, therefore, computes basic and diluted earnings per share under the two-class method. Basic earnings per share for the periods are based upon the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share include the effect of certain stock options.
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Net income attributable to Westlake Chemical Corporation | $ | 123,128 | $ | 146,342 | ||||
Less: | ||||||||
Net income attributable to participating securities | (549 | ) | (200 | ) | ||||
Net income attributable to common shareholders | $ | 122,579 | $ | 146,142 | ||||
The following table reconciles the denominator for the basic and diluted earnings per share computations shown in the consolidated statements of operations:
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Weighted average common shares—basic | 130,189,964 | 132,714,566 | ||||||
Plus incremental shares from: | ||||||||
Assumed exercise of options | 410,550 | 490,740 | ||||||
Weighted average common shares—diluted | 130,600,514 | 133,205,306 | ||||||
Earnings per common share attributable to Westlake Chemical Corporation: | ||||||||
Basic | $ | 0.94 | $ | 1.10 | ||||
Diluted | $ | 0.94 | $ | 1.10 | ||||
17
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
Excluded from the computation of diluted earnings per share are options to purchase 555,948 and 241,312 shares of common stock for the three months ended March 31, 2016 and 2015, respectively. These options were outstanding during the periods reported but were excluded because the effect of including them would have been antidilutive.
16. Supplemental Information
Accrued Liabilities
Accrued liabilities were $248,777 and $287,313 at March 31, 2016 and December 31, 2015, respectively. Accrued capital expenditures and accrued incentive compensation, which are components of accrued liabilities, were $32,037 and $25,680 at March 31, 2016, respectively, and $21,597 and $41,168 at December 31, 2015, respectively. No other component of accrued liabilities was more than five percent of total current liabilities.
Other Liabilities
Other liabilities were $145,786 and $150,961 at March 31, 2016 and December 31, 2015, respectively. Non-current pension obligation, which is a component of other liabilities, was $107,413 and $106,250 at March 31, 2016 and December 31, 2015, respectively. No other component of other liabilities was more than five percent of total liabilities.
17. Insurance Recovery
During the second and third quarters of 2015, the Company's production rates and operating costs at its Knapsack, Germany and Cologne, Germany facilities were negatively impacted due to an interruption of feedstock supply as a result of a fire at a third-party supplier's ethylene production facility. During the three months ended March 31, 2016, the Company received a final insurance recovery of approximately $2,670 related to business interruption costs. The insurance recovery is included in cost of sales in the consolidated statement of operations. The Company had received and recognized approximately $7,809 as a partial insurance recovery during the year ended December 31, 2015.
18. Commitments and Contingencies
The Company is subject to environmental laws and regulations that can impose civil and criminal sanctions and that may require it to mitigate the effects of contamination caused by the release or disposal of hazardous substances into the environment. Under one law, the U.S. Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), an owner or operator of property may be held strictly liable for remediating contamination without regard to whether that person caused the contamination, and without regard to whether the practices that resulted in the contamination were legal at the time they occurred. Because several of the Company's production sites have a history of industrial use, it is impossible to predict precisely what effect these legal requirements will have on the Company.
European Regulations. Under the Industrial Emission Directive ("IED"), European Union member state governments are expected to adopt rules and implement environmental permitting programs relating to air, water and waste for industrial facilities. In this context, concepts such as BAT ("best available technique") are being explored. Future implementation of these concepts may result in technical modifications in the Company's European facilities. In addition, under the Environmental Liability Directive, European Union member states can require the remediation of soil and groundwater contamination in certain circumstances, under the "polluter pays principle." The Company is unable to predict the impact these requirements and concepts may have on its future costs of compliance.
Contract Disputes with Goodrich and PolyOne. In connection with the 1990 and 1997 acquisitions of the Goodrich Corporation ("Goodrich") chemical manufacturing facility in Calvert City, Kentucky, Goodrich agreed to indemnify the Company for any liabilities related to preexisting contamination at the site. For its part, the Company agreed to indemnify Goodrich for post-closing contamination caused by the Company's operations. The soil and groundwater at the site, which does not include the Company's nearby polyvinyl chloride ("PVC") facility, had been extensively contaminated under Goodrich's operations. In 1993, Goodrich spun off the predecessor of PolyOne Corporation ("PolyOne"), and that predecessor assumed Goodrich's indemnification obligations relating to preexisting contamination.
In 2003, litigation arose among the Company, Goodrich and PolyOne with respect to the allocation of the cost of remediating contamination at the site. The parties settled this litigation in December 2007 and the case was dismissed. In the settlement the parties agreed that, among other things: (1) PolyOne would pay 100% of the costs (with specified exceptions), net of recoveries or credits from third parties, incurred with respect to environmental issues at the Calvert City site from
18
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
August 1, 2007 forward; (2) either the Company or PolyOne might, from time to time in the future (but not more than once every five years), institute an arbitration proceeding to adjust that percentage; and (3) the Company and PolyOne would negotiate a new environmental remediation utilities and services agreement to cover the Company's provision to, or on behalf of, PolyOne of certain environmental remediation services at the site. The current environmental remediation activities at the Calvert City site do not have a specified termination date but are expected to last for the foreseeable future. The costs incurred by the Company that have been invoiced to PolyOne to provide the environmental remediation services were $2,210 in 2015. By letter dated March 16, 2010, PolyOne notified the Company that it was initiating an arbitration proceeding under the settlement agreement. In this proceeding, PolyOne sought to readjust the percentage allocation of costs and to recover approximately $1,400 from the Company in reimbursement of previously paid remediation costs. In December 2015, the arbitration panel dismissed the proceeding with prejudice. In a separate proceeding in Ohio state court, the Company is seeking certain insurance documents from PolyOne.
State Administrative Proceedings. There are several administrative proceedings in Kentucky involving the Company, Goodrich and PolyOne related to the same manufacturing site in Calvert City. In 2003, the Kentucky Environmental and Public Protection Cabinet (the "Cabinet") re-issued Goodrich's Resource Conservation and Recovery Act ("RCRA") permit which requires Goodrich to remediate contamination at the Calvert City manufacturing site. Both Goodrich and PolyOne challenged various terms of the permit in an attempt to shift Goodrich's clean-up obligations under the permit to the Company. The Company intervened in the proceedings. The Cabinet has suspended all corrective action under the RCRA permit in deference to a remedial investigation and feasibility study ("RIFS") being conducted, under the auspices of the U.S. Environmental Protection Agency ("EPA"), pursuant to an Administrative Settlement Agreement ("AOC"), which became effective on December 9, 2009. See "Federal Administrative Proceedings" below. The proceedings have been postponed. Periodic status conferences will be held to evaluate whether additional proceedings will be required.
Federal Administrative Proceedings. In May 2009, the Cabinet sent a letter to the EPA requesting the EPA's assistance in addressing contamination at the Calvert City site under CERCLA. In its response to the Cabinet also in May 2009, the EPA stated that it concurred with the Cabinet's request and would incorporate work previously conducted under the Cabinet's RCRA authority into the EPA's cleanup efforts under CERCLA. Since 1983, the EPA has been addressing contamination at an abandoned landfill adjacent to the Company's plant which had been operated by Goodrich and which was being remediated pursuant to CERCLA. The EPA has directed Goodrich and PolyOne to conduct additional investigation activities at the landfill and at the Company's plant. In June 2009, the EPA notified the Company that the Company may have potential liability under section 107(a) of CERCLA at its plant site. Liability under section 107(a) of CERCLA is strict and joint and several. The EPA also identified Goodrich and PolyOne, among others, as potentially responsible parties at the plant site. The Company negotiated, in conjunction with the other potentially responsible parties, an AOC and an order to conduct a RIFS. On July 12, 2013, the parties submitted separate draft RIFS reports to the EPA. The EPA has hired a contractor to complete the remedial investigation report.
Monetary Relief. Except as noted above with respect to the settlement of the contract litigation among the Company, Goodrich and PolyOne, none of the court, the Cabinet nor the EPA has established any allocation of the costs of remediation among the various parties that are involved in the judicial and administrative proceedings discussed above. At this time, the Company is not able to estimate the loss or reasonable possible loss, if any, on the Company's financial statements that could result from the resolution of these proceedings. Any cash expenditures that the Company might incur in the future with respect to the remediation of contamination at the site would likely be spread out over an extended period. As a result, the Company believes it is unlikely that any remediation costs allocable to it will be material in terms of expenditures made in any individual reporting period.
Potential Flare Modifications. For several years, the EPA has been conducting an enforcement initiative against petroleum refineries and petrochemical plants with respect to emissions from flares. A number of companies have entered into consent agreements with the EPA requiring both modifications to reduce flare emissions and the installation of additional equipment to better track flare operations and emissions. On April 21, 2014, the Company received a Clean Air Act Section 114 Information Request from the EPA which sought information regarding flares at the Calvert City and Lake Charles, Louisiana facilities. The EPA has informed the Company that the information provided leads the EPA to believe that some of the flares are out of compliance with applicable standards. The EPA has demanded that the Company conduct additional flare sampling and provide supplemental information. The Company is currently in negotiations with the EPA regarding these demands. The EPA has indicated that it is seeking a consent decree that would obligate the Company to take corrective actions relating to the alleged noncompliance. The Company has not agreed that any flares are out of compliance or that any corrective actions are
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WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
warranted. Depending on the outcome of the Company's negotiations with the EPA, additional controls on emissions from its flares may be required and these could result in increased capital and operating costs.
Louisiana Notice of Violations. The Louisiana Department of Environmental Quality ("LDEQ") has issued notices of violations ("NOVs") regarding the Company's assets for various air compliance issues. The Company is working with LDEQ to settle these claims, and a global settlement of all claims is being discussed. The Company has reached a verbal agreement with the LDEQ to settle certain of the NOVs in two separate settlements for a combined $192 in civil penalties. The Company does not believe that any settlements for the remaining NOVs will have a material adverse effect on the Company's financial condition, results of operations or cash flows.
In addition to the matters described above, the Company is involved in various legal proceedings incidental to the conduct of its business. The Company does not believe that any of these legal proceedings will have a material adverse effect on its financial condition, results of operations or cash flows.
19. Segment Information
The Company operates in two principal operating segments: Olefins and Vinyls. These segments are strategic business units that offer a variety of different products. The Company manages each segment separately as each business requires different technology and marketing strategies.
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Net external sales | ||||||||
Olefins | ||||||||
Polyethylene | $ | 346,032 | $ | 409,432 | ||||
Styrene, feedstock and other | 84,988 | 173,645 | ||||||
Total Olefins | 431,020 | 583,077 | ||||||
Vinyls | ||||||||
PVC, caustic soda and other | 430,902 | 416,988 | ||||||
Building products | 113,265 | 103,466 | ||||||
Total Vinyls | 544,167 | 520,454 | ||||||
$ | 975,187 | $ | 1,103,531 | |||||
Intersegment sales | ||||||||
Olefins | $ | 27,949 | $ | 23,462 | ||||
Vinyls | 364 | 370 | ||||||
$ | 28,313 | $ | 23,832 | |||||
Income (loss) from operations | ||||||||
Olefins | $ | 149,235 | $ | 191,103 | ||||
Vinyls | 62,116 | 47,086 | ||||||
Corporate and other | (9,075 | ) | (8,909 | ) | ||||
$ | 202,276 | $ | 229,280 | |||||
Depreciation and amortization | ||||||||
Olefins | $ | 28,697 | $ | 26,939 | ||||
Vinyls | 36,287 | 31,584 | ||||||
Corporate and other | 730 | 118 | ||||||
$ | 65,714 | $ | 58,641 | |||||
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WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Other income (expense), net | ||||||||
Olefins | $ | 1,513 | $ | 2,552 | ||||
Vinyls | (1,519 | ) | 5,503 | |||||
Corporate and other | 2,651 | 1,041 | ||||||
$ | 2,645 | $ | 9,096 | |||||
Provision for (benefit from) income taxes | ||||||||
Olefins | $ | 52,533 | $ | 66,457 | ||||
Vinyls | 17,270 | 12,805 | ||||||
Corporate and other | (503 | ) | (884 | ) | ||||
$ | 69,300 | $ | 78,378 | |||||
Capital expenditures | ||||||||
Olefins | $ | 95,152 | $ | 55,300 | ||||
Vinyls | 40,256 | 36,855 | ||||||
Corporate and other | 920 | 3,667 | ||||||
$ | 136,328 | $ | 95,822 | |||||
A reconciliation of total segment income from operations to consolidated income before income taxes is as follows:
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Income from operations | $ | 202,276 | $ | 229,280 | ||||
Interest expense | (6,685 | ) | (9,591 | ) | ||||
Other income, net | 2,645 | 9,096 | ||||||
Income before income taxes | $ | 198,236 | $ | 228,785 | ||||
March 31, 2016 | December 31, 2015 | |||||||
Total assets | ||||||||
Olefins | $ | 1,971,395 | $ | 1,869,888 | ||||
Vinyls | 2,704,560 | 2,638,833 | ||||||
Corporate and other | 1,048,446 | 1,060,564 | ||||||
$ | 5,724,401 | $ | 5,569,285 | |||||
20. Subsequent Events
Subsequent events were evaluated through the date on which the financial statements were issued.
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WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
21. Guarantor Disclosures
The Company's payment obligations under the 3.60% senior notes due 2022 are fully and unconditionally guaranteed by each of its current and future domestic subsidiaries that guarantee other debt of the Company or of another guarantor of the 3.60% senior notes due 2022 in excess of $5,000 (the "Guarantor Subsidiaries"). Except for Westlake Chemical OpCo LP ("OpCo"), which is less than 100% owned, each Guarantor Subsidiary is 100% owned by Westlake Chemical Corporation (the "100% Owned Guarantor Subsidiaries"). The August 4, 2014 initial public offering of Westlake Chemical Partners LP ("Westlake Partners") resulted in OpCo ceasing to be a 100% owned subsidiary of the Company. These guarantees are the joint and several obligations of the Guarantor Subsidiaries. The following unaudited condensed consolidating financial information presents the financial condition, results of operations and cash flows of Westlake Chemical Corporation, the 100% owned Guarantor Subsidiaries, OpCo and the remaining subsidiaries that do not guarantee the 3.60% senior notes due 2022 (the "Non-Guarantor Subsidiaries"), together with consolidating eliminations necessary to present the Company's results on a consolidated basis.
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WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
Condensed Consolidating Financial Information as of March 31, 2016
Westlake Chemical Corporation | 100% Owned Guarantor Subsidiaries | OpCo (Less Than 100% Owned Guarantor Subsidiary) | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 263,150 | $ | 1,164 | $ | 170,755 | $ | 179,907 | $ | — | $ | 614,976 | ||||||||||||
Marketable securities | 525,008 | — | — | — | — | 525,008 | ||||||||||||||||||
Accounts receivable, net | 11,705 | 2,205,593 | 62,109 | 133,547 | (1,863,917 | ) | 549,037 | |||||||||||||||||
Inventories | ||||||||||||||||||||||||