Attached files
| file | filename |
|---|---|
| EX-99.1 - EXHIBIT 99.1 - WESTLAKE CHEMICAL CORP | exhibit99120160630.htm |
| EX-32.1 - EXHIBIT 32.1 - WESTLAKE CHEMICAL CORP | exhibit321_20160630.htm |
| EX-31.2 - EXHIBIT 31.2 - WESTLAKE CHEMICAL CORP | exhibit312_20160630.htm |
| EX-31.1 - EXHIBIT 31.1 - WESTLAKE CHEMICAL CORP | exhibit311_20160630.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 June 30, 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 August 2, 2016 was 128,783,338.
INDEX
Item | Page |
NON-GAAP FINANCIAL MEASURES
The body of accounting principles generally accepted in the United States is commonly referred to as "U.S. GAAP." For this purpose, a non-GAAP financial measure is generally defined by the Securities and Exchange Commission ("SEC") as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measures. In this report, we disclose so-called non-GAAP financial measures, primarily earnings before interest, taxes, depreciation and amortization ("EBITDA"). EBITDA is calculated as net income before interest expense, income taxes, depreciation and amortization. The non-GAAP financial measures described in this Form 10-Q are not substitutes for the GAAP measures of earnings and cash flow.
EBITDA is included in this Form 10-Q because our management considers it an important supplemental measure of our performance and believes that it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, some of which present EBITDA when reporting their results. We regularly evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates by using EBITDA. In addition, we utilize EBITDA in evaluating acquisition targets. Management also believes that EBITDA is a useful tool for measuring our ability to meet our future debt service, capital expenditures and working capital requirements, and EBITDA is commonly used by us and our investors to measure our ability to service indebtedness. EBITDA is not a substitute for the GAAP measures of earnings or of cash flow and is not necessarily a measure of our ability to fund our cash needs. In addition, it should be noted that companies calculate EBITDA differently and, therefore, EBITDA as presented for us may not be comparable to EBITDA reported by other companies. EBITDA has material limitations as a performance measure because it excludes interest expense, depreciation and amortization, and income taxes.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTLAKE CHEMICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2016 | December 31, 2015 | |||||||
(in thousands of dollars, except par values and share amounts) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 770,997 | $ | 662,525 | ||||
Marketable securities | 352,021 | 520,144 | ||||||
Accounts receivable, net | 582,855 | 508,532 | ||||||
Inventories | 448,526 | 434,060 | ||||||
Prepaid expenses and other current assets | 35,642 | 14,489 | ||||||
Deferred income taxes | — | 35,439 | ||||||
Total current assets | 2,190,041 | 2,175,189 | ||||||
Property, plant and equipment, net | 3,230,523 | 3,004,067 | ||||||
Equity investments | 8,929 | 9,208 | ||||||
Other assets, net | ||||||||
Intangible assets, net | 208,376 | 213,404 | ||||||
Deferred charges and other assets, net | 282,695 | 167,417 | ||||||
Total other assets, net | 491,071 | 380,821 | ||||||
Total assets | $ | 5,920,564 | $ | 5,569,285 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities | ||||||||
Accounts and notes payable | $ | 307,116 | $ | 235,329 | ||||
Accrued liabilities | 312,985 | 287,313 | ||||||
Total current liabilities | 620,101 | 522,642 | ||||||
Long-term debt, net | 758,453 | 758,148 | ||||||
Deferred income taxes | 664,987 | 575,603 | ||||||
Other liabilities | 139,587 | 150,961 | ||||||
Total liabilities | 2,183,128 | 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; 134,651,380 and 134,663,244 shares issued at June 30, 2016 and December 31, 2015, respectively | 1,347 | 1,347 | ||||||
Common stock, held in treasury, at cost; 5,867,617 and 4,444,898 shares at June 30, 2016 and December 31, 2015, respectively | (322,802 | ) | (258,312 | ) | ||||
Additional paid-in capital | 545,797 | 542,148 | ||||||
Retained earnings | 3,296,922 | 3,109,987 | ||||||
Accumulated other comprehensive loss | (82,101 | ) | (129,292 | ) | ||||
Total Westlake Chemical Corporation stockholders' equity | 3,439,163 | 3,265,878 | ||||||
Noncontrolling interests | 298,273 | 296,053 | ||||||
Total equity | 3,737,436 | 3,561,931 | ||||||
Total liabilities and equity | $ | 5,920,564 | $ | 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(in thousands of dollars, except per share data and share amounts) | ||||||||||||||||
Net sales | $ | 1,086,061 | $ | 1,185,002 | $ | 2,061,248 | $ | 2,288,533 | ||||||||
Cost of sales | 844,695 | 831,821 | 1,564,297 | 1,650,806 | ||||||||||||
Gross profit | 241,366 | 353,181 | 496,951 | 637,727 | ||||||||||||
Selling, general and administrative expenses | 61,428 | 57,807 | 114,737 | 113,073 | ||||||||||||
Income from operations | 179,938 | 295,374 | 382,214 | 524,654 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (5,915 | ) | (8,958 | ) | (12,600 | ) | (18,549 | ) | ||||||||
Other income, net | 8,181 | 22,058 | 10,826 | 31,154 | ||||||||||||
Income before income taxes | 182,204 | 308,474 | 380,440 | 537,259 | ||||||||||||
Provision for income taxes | 66,584 | 98,413 | 135,884 | 176,791 | ||||||||||||
Net income | 115,620 | 210,061 | 244,556 | 360,468 | ||||||||||||
Net income attributable to noncontrolling interests | 4,496 | 4,966 | 10,304 | 9,031 | ||||||||||||
Net income attributable to Westlake Chemical Corporation | $ | 111,124 | $ | 205,095 | $ | 234,252 | $ | 351,437 | ||||||||
Earnings per common share attributable to Westlake Chemical Corporation: | ||||||||||||||||
Basic | $ | 0.85 | $ | 1.55 | $ | 1.80 | $ | 2.65 | ||||||||
Diluted | $ | 0.85 | $ | 1.54 | $ | 1.79 | $ | 2.64 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 129,583,224 | 132,538,123 | 129,886,594 | 132,625,857 | ||||||||||||
Diluted | 129,980,527 | 133,044,975 | 130,290,521 | 133,124,697 | ||||||||||||
Dividends per common share | $ | 0.1815 | $ | 0.1650 | $ | 0.3630 | $ | 0.3300 | ||||||||
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 June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(in thousands of dollars) | ||||||||||||||||
Net income | $ | 115,620 | $ | 210,061 | $ | 244,556 | $ | 360,468 | ||||||||
Other comprehensive (loss) income, net of income taxes | ||||||||||||||||
Pension and other post-retirement benefits liability | ||||||||||||||||
Pension and other post-retirement reserves adjustment (excluding amortization) | (206 | ) | (186 | ) | (206 | ) | (186 | ) | ||||||||
Amortization of benefits liability | 369 | 675 | 703 | 1,327 | ||||||||||||
Income tax provision on pension and other post-retirement benefits liability | (63 | ) | (164 | ) | (191 | ) | (389 | ) | ||||||||
Foreign currency translation adjustments | (13,500 | ) | 17,872 | 9,305 | (41,826 | ) | ||||||||||
Available-for-sale investments | ||||||||||||||||
Unrealized holding gains on investments | 35,545 | 3,077 | 59,973 | 4,703 | ||||||||||||
Reclassification of net realized gains to net income | (1,267 | ) | (3,795 | ) | (1,319 | ) | (3,795 | ) | ||||||||
Income tax (provision) benefit on available-for-sale investments | (12,316 | ) | 259 | (21,074 | ) | (325 | ) | |||||||||
Other comprehensive income (loss) | 8,562 | 17,738 | 47,191 | (40,491 | ) | |||||||||||
Comprehensive income | 124,182 | 227,799 | 291,747 | 319,977 | ||||||||||||
Comprehensive income attributable to noncontrolling interests, net of tax | 4,496 | 4,966 | 10,304 | 9,031 | ||||||||||||
Comprehensive income attributable to Westlake Chemical Corporation | $ | 119,686 | $ | 222,833 | $ | 281,443 | $ | 310,946 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
WESTLAKE CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, | ||||||||
2016 | 2015 | |||||||
(in thousands of dollars) | ||||||||
Cash flows from operating activities | ||||||||
Net income | $ | 244,556 | $ | 360,468 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 132,964 | 118,981 | ||||||
Provision for doubtful accounts | 403 | 228 | ||||||
Amortization of debt issuance costs | 417 | 1,002 | ||||||
Stock-based compensation expense | 5,084 | 4,905 | ||||||
Loss from disposition of property, plant and equipment | 3,331 | 890 | ||||||
Gains from sales of securities | (1,319 | ) | (3,795 | ) | ||||
Gain on acquisition, net of loss on the fair value remeasurement of preexisting equity interest | — | (21,045 | ) | |||||
Impairment of equity method investment | — | 4,925 | ||||||
Deferred income taxes | 102,990 | 3,088 | ||||||
Windfall tax benefits from share-based payment arrangements | (319 | ) | (1,895 | ) | ||||
Loss (income) from equity method investments, net of dividends | 279 | (1,760 | ) | |||||
Other losses, net | 1,210 | 423 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | (72,996 | ) | (22,380 | ) | ||||
Inventories | (12,719 | ) | 50,115 | |||||
Prepaid expenses and other current assets | (12,586 | ) | (10,844 | ) | ||||
Accounts payable | 54,394 | (2,327 | ) | |||||
Accrued liabilities | (1,617 | ) | (40,526 | ) | ||||
Other, net | (74,180 | ) | (5,098 | ) | ||||
Net cash provided by operating activities | 369,892 | 435,355 | ||||||
Cash flows from investing activities | ||||||||
Acquisition of business, net of cash acquired | — | 15,782 | ||||||
Additions to property, plant and equipment | (287,160 | ) | (203,933 | ) | ||||
Proceeds from disposition of assets | 105 | — | ||||||
Proceeds from sales and maturities of securities | 302,432 | 15,037 | ||||||
Purchase of securities | (138,422 | ) | — | |||||
Settlements of derivative instruments | (3,372 | ) | (1,174 | ) | ||||
Net cash used for investing activities | (126,417 | ) | (174,288 | ) | ||||
Cash flows from financing activities | ||||||||
Debt issuance costs | (9,700 | ) | — | |||||
Dividends paid | (47,317 | ) | (43,896 | ) | ||||
Distributions to noncontrolling interests | (8,084 | ) | (7,218 | ) | ||||
Proceeds from exercise of stock options | 481 | 831 | ||||||
Proceeds from issuance of notes payable | 3,842 | 2,392 | ||||||
Repayment of notes payable | (8,626 | ) | (4,299 | ) | ||||
Repurchase of common stock for treasury | (67,404 | ) | (62,804 | ) | ||||
Windfall tax benefits from share-based payment arrangements | 319 | 1,895 | ||||||
Net cash used for financing activities | (136,489 | ) | (113,099 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 1,486 | (2,000 | ) | |||||
Net increase in cash and cash equivalents | 108,472 | 145,968 | ||||||
Cash and cash equivalents at beginning of period | 662,525 | 880,601 | ||||||
Cash and cash equivalents at end of period | $ | 770,997 | $ | 1,026,569 | ||||
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 June 30, 2016, its results of operations for the three and six months ended June 30, 2016 and 2015 and the changes in its cash position for the six months ended June 30, 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 (ASU No. 2014-09)
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 2016, the FASB issued various additional authoritative guidance for the new revenue recognition standard. 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 standard will have on its consolidated financial position, results of operations and cash flows.
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU No. 2016-01)
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 (ASU No. 2016-02)
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 (ASU No. 2016-09)
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. In addition, the new guidance permits entities to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. The accounting standard will be effective for reporting periods beginning after December 15, 2016 and is not expected to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Credit Losses (ASU No. 2016-13)
In June 2016, the FASB issued an accounting standards update providing new guidance for the accounting for credit losses on loans and other financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. The standard also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The accounting standard will be effective for reporting periods beginning after December 15, 2019. 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 (ASU No. 2015-02)
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.
Simplifying the Presentation of Debt Issuance Costs (ASU No. 2015-03)
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.
Intangibles—Goodwill and Other—Internal use software (ASU No. 2015-05)
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.
6
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Simplifying the Accounting for Measurement-Period Adjustments (ASU No. 2015-16)
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 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 (ASU No. 2015-17)
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 $376,901 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 June 30, 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:
June 30, 2016 | December 31, 2015 | ||||||
Current | $ | 352,021 | $ | 520,144 | |||
Non-current | 109,337 | 48,081 | |||||
Total available-for-sale securities | $ | 461,358 | $ | 568,225 | |||
The cost, gross unrealized gains, gross unrealized losses and fair value of the Company's available-for-sale securities were as follows:
June 30, 2016 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses (1) | Fair Value | |||||||||||||
Debt securities | ||||||||||||||||
Corporate bonds | $ | 219,971 | $ | 1,162 | $ | (16 | ) | $ | 221,117 | |||||||
U.S. government debt (2) | 72,702 | 462 | — | 73,164 | ||||||||||||
Asset-backed securities | 57,546 | 197 | (3 | ) | 57,740 | |||||||||||
Equity securities | 60,281 | 49,194 | (138 | ) | 109,337 | |||||||||||
Total available-for-sale securities | $ | 410,500 | $ | 51,015 | $ | (157 | ) | $ | 461,358 | |||||||
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 June 30, 2016 and December 31, 2015, net unrealized gains (losses) on the Company's available-for-sale securities of $32,585 and $(4,995), respectively, net of income tax expense (benefit) of $18,273 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 June 30, 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 to three 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 to five years.
The proceeds from sales and maturities of available-for-sale securities included in the consolidated statements of cash flows and the gross realized gains and losses included in the consolidated statements of operations are reflected in the table below. The cost of securities sold was determined using the specific identification method.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Proceeds from sales and maturities of securities | $ | 275,573 | $ | 15,037 | $ | 302,432 | $ | 15,037 | ||||||||
Gross realized gains | 1,280 | 3,795 | 1,341 | 3,795 | ||||||||||||
Gross realized losses | (13 | ) | — | (22 | ) | — | ||||||||||
3. Accounts Receivable
Accounts receivable consist of the following:
June 30, 2016 | December 31, 2015 | |||||||
Trade customers | $ | 507,690 | $ | 438,538 | ||||
Allowance for doubtful accounts | (14,534 | ) | (14,095 | ) | ||||
493,156 | 424,443 | |||||||
Federal and state taxes | 69,183 | 60,748 | ||||||
Other | 20,516 | 23,341 | ||||||
Accounts receivable, net | $ | 582,855 | $ | 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:
June 30, 2016 | December 31, 2015 | |||||||
Finished products | $ | 253,828 | $ | 253,338 | ||||
Feedstock, additives and chemicals | 118,262 | 106,435 | ||||||
Materials and supplies | 76,436 | 74,287 | ||||||
Inventories | $ | 448,526 | $ | 434,060 | ||||
5. Property, Plant and Equipment
As of June 30, 2016, the Company had property, plant and equipment, net totaling $3,230,523. 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 $57,930 and $51,263 is included in cost of sales in the consolidated statements of operations for the three months ended June 30, 2016 and 2015, respectively. Depreciation expense on property, plant and equipment of $113,971 and $100,921 is included in cost of sales in the consolidated statements of operations for the six months ended June 30, 2016 and 2015, respectively.
6. Other Assets
Amortization expense on intangible and other assets of $9,394 and $9,455 is included in the consolidated statements of operations for the three months ended June 30, 2016 and 2015, respectively. Amortization expense on intangible and other assets of $19,164 and $18,816 is included in the consolidated statements of operations for the six months ended June 30, 2016 and 2015, respectively.
Goodwill
Goodwill for the Olefins segment was $29,990 at June 30, 2016 and December 31, 2015. Goodwill for the Vinyls segment was $32,026 at June 30, 2016 and December 31, 2015. There were no changes in the carrying amount of goodwill for either operating segment for the six months ended June 30, 2016.
7. Accounts and Notes Payable
Accounts and notes payable consist of the following:
June 30, 2016 | December 31, 2015 | |||||||
Accounts payable | $ | 305,853 | $ | 229,219 | ||||
Notes payable to banks | 1,263 | 6,110 | ||||||
Accounts and notes payable | $ | 307,116 | $ | 235,329 | ||||
9
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
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.
Long-term debt consists of the following:
June 30, 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 | $ | (2,061 | ) | $ | 247,939 | $ | 250,000 | $ | (2,232 | ) | $ | 247,768 | ||||||||||
6 ½% senior notes due 2029 | 100,000 | (952 | ) | 99,048 | 100,000 | (989 | ) | 99,011 | ||||||||||||||||
6 ¾% senior notes due 2032 | 250,000 | (1,943 | ) | 248,057 | 250,000 | (2,002 | ) | 247,998 | ||||||||||||||||
6 ½% senior notes due 2035 (the "6 ½% GO Zone Senior Notes Due 2035") | 89,000 | (862 | ) | 88,138 | 89,000 | (884 | ) | 88,116 | ||||||||||||||||
6 ½% senior notes due 2035 (the "6 ½% IKE Zone Senior Notes Due 2035") | 65,000 | (618 | ) | 64,382 | 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 | $ | (6,436 | ) | $ | 758,453 | $ | 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 June 30, 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 June 30, 2016, the Company had outstanding letters of credit totaling $18,545 and borrowing availability of $369,832 under the revolving credit facility.
Bridge Financing of Pending Acquisition
In connection with the recent announcement of the definitive agreement under which the Company will acquire all of the issued and outstanding shares of common stock of Axiall Corporation, the Company has entered into a commitment letter, dated June 10, 2016, with various lenders pursuant to which such lenders have agreed to provide for a senior unsecured bridge loan facility of up to $1,765,000 in the aggregate. Any amounts borrowed under the senior unsecured bridge loan facility would mature 364 days following the closing of the transaction. The Company paid structuring and other fees of approximately $9,700 during the three months ended June 30, 2016 in connection with the senior unsecured bridge loan facility, which were deferred in prepaid expenses and other current assets on the consolidated balance sheet and are being amortized over the term of the facility to other income, net in the consolidated statement of operations. As of June 30, 2016, there were no outstanding borrowings on the senior unsecured bridge loan facility. See Note 20 for further details regarding the pending acquisition.
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 six months ended June 30, 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 | — | — | — | 234,252 | — | 10,304 | 244,556 | |||||||||||||||||||||
Other comprehensive income, net of income taxes: | ||||||||||||||||||||||||||||
Pension and other post- retirement benefits liability | — | — | — | — | 306 | — | 306 | |||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 9,305 | — | 9,305 | |||||||||||||||||||||
Net unrealized holding gains on investments | — | — | — | — | 37,580 | — | 37,580 | |||||||||||||||||||||
Common stock repurchased | — | (66,725 | ) | — | — | — | — | (66,725 | ) | |||||||||||||||||||
Shares issued—stock- based compensation | — | 2,235 | (1,754 | ) | — | — | — | 481 | ||||||||||||||||||||
Stock-based compensation, net of tax on stock options exercised | — | — | 5,403 | — | — | — | 5,403 | |||||||||||||||||||||
Dividends paid | — | — | — | (47,317 | ) | — | — | (47,317 | ) | |||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (8,084 | ) | (8,084 | ) | |||||||||||||||||||
Balances at June 30, 2016 | $ | 1,347 | $ | (322,802 | ) | $ | 545,797 | $ | 3,296,922 | $ | (82,101 | ) | $ | 298,273 | $ | 3,737,436 | ||||||||||||
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 | — | — | — | 351,437 | — | 9,031 | 360,468 | |||||||||||||||||||||
Other comprehensive income (loss), net of income taxes | ||||||||||||||||||||||||||||
Pension and other post- retirement benefits liability | — | — | — | — | 752 | — | 752 | |||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (41,826 | ) | — | (41,826 | ) | |||||||||||||||||||
Net unrealized holding gains on investments | — | — | — | — | 583 | — | 583 | |||||||||||||||||||||
Common stock repurchased | — | (62,804 | ) | — | — | — | — | (62,804 | ) | |||||||||||||||||||
Shares issued—stock- based compensation | — | 704 | 127 | — | — | — | 831 | |||||||||||||||||||||
Stock-based compensation, net of tax on stock options exercised | — | — | 6,800 | — | — | — | 6,800 | |||||||||||||||||||||
Dividends paid | — | — | — | (43,896 | ) | — | — | (43,896 | ) | |||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (7,218 | ) | (7,218 | ) | |||||||||||||||||||
Noncontrolling interest in acquired business | — | — | — | — | — | 1,597 | 1,597 | |||||||||||||||||||||
Balances at June 30, 2015 | $ | 1,347 | $ | (158,472 | ) | $ | 537,368 | $ | 2,863,069 | $ | (119,924 | ) | $ | 293,787 | $ | 3,417,175 | ||||||||||||
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 six months ended June 30, 2016 and 2015 were as follows:
Benefits Liability, Net of Tax | Cumulative Foreign Currency Exchange | Net Unrealized Holding Gains (Losses) on Investments, Net of Tax | Total | |||||||||||||
Balances at December 31, 2015 | $ | (8,607 | ) | $ | (115,690 | ) | $ | (4,995 | ) | $ | (129,292 | ) | ||||
Other comprehensive (loss) income before reclassifications | (127 | ) | 9,305 | 38,425 | 47,603 | |||||||||||
Amounts reclassified from accumulated other comprehensive loss (income) | 433 | — | (845 | ) | (412 | ) | ||||||||||
Net other comprehensive income for the period | 306 | 9,305 | 37,580 | 47,191 | ||||||||||||
Balances at June 30, 2016 | $ | (8,301 | ) | $ | (106,385 | ) | $ | 32,585 | $ | (82,101 | ) | |||||
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 | (115 | ) | (41,826 | ) | 3,015 | (38,926 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive loss (income) | 867 | — | (2,432 | ) | (1,565 | ) | ||||||||||
Net other comprehensive income (loss) for the period | 752 | (41,826 | ) | 583 | (40,491 | ) | ||||||||||
Balances at June 30, 2015 | $ | (22,690 | ) | $ | (98,050 | ) | $ | 816 | $ | (119,924 | ) | |||||
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 six months ended June 30, 2016 and 2015:
Details about Accumulated Other Comprehensive Income (Loss) Components | Location of Reclassification (Income (Expense)) in Consolidated Statements of Operations | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||
Amortization of pension and other post-retirement items | ||||||||||||||||||
Net loss | (1) | $ | (369 | ) | $ | (675 | ) | $ | (703 | ) | $ | (1,327 | ) | |||||
Provision for income taxes | 142 | 235 | 270 | 460 | ||||||||||||||
(227 | ) | (440 | ) | (433 | ) | (867 | ) | |||||||||||
Net unrealized gains on available-for-sale investments | ||||||||||||||||||
Realized gain on available-for-sale investments | Other income, net | 1,267 | 3,795 | 1,319 | 3,795 | |||||||||||||
Provision for income taxes | (455 | ) | (1,363 | ) | (474 | ) | (1,363 | ) | ||||||||||
812 | 2,432 | 845 | 2,432 | |||||||||||||||
Total reclassifications for the period | $ | 585 | $ | 1,992 | $ | 412 | $ | 1,565 | ||||||||||
12
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
_____________
(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. |
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||||
Service cost | $ | — | $ | 137 | $ | 1 | $ | 414 | $ | — | $ | 462 | $ | 29 | $ | 835 | ||||||||||||||||
Interest cost | 493 | 582 | 489 | 525 | 1,060 | 1,149 | 1,032 | 1,061 | ||||||||||||||||||||||||
Expected return on plan assets | (658 | ) | — | (705 | ) | — | (1,460 | ) | — | (1,524 | ) | — | ||||||||||||||||||||
Amortization of net loss | 337 | — | 318 | 261 | 640 | — | 609 | 526 | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 172 | $ | 719 | $ | 103 | $ | 1,200 | $ | 240 | $ | 1,611 | $ | 146 | $ | 2,422 | ||||||||||||||||
The Company made no contribution to the U.S. salaried pension plan in the first six months of 2016 and 2015. The Company made no contribution to the U.S. wage pension plan in the first six months of 2016. The Company contributed $349 to the U.S. wage pension plan in the first six 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 does not expect to make contributions to either the salaried or 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
U.S. Plans | U.S. Plans | U.S. Plans | U.S. Plans | |||||||||||||
Service cost | $ | 5 | $ | 6 | $ | 10 | $ | 11 | ||||||||
Interest cost | 145 | 149 | 290 | 299 | ||||||||||||
Amortization of net loss | 32 | 96 | 63 | 192 | ||||||||||||
Net periodic benefit cost | $ | 182 | $ | 251 | $ | 363 | $ | 502 | ||||||||
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 $2,781 and $2,565 for the three months ended June 30, 2016 and 2015, respectively, and $5,084 and $4,905 for the six months ended June 30, 2016 and 2015, respectively.
13
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
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 and six months ended June 30, 2016 and 2015.
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 | |||||||||
June 30, 2016 | December 31, 2015 | |||||||||
Not designated as hedging instruments | ||||||||||
Commodity forward contracts | Accounts receivable, net | $ | 4,491 | $ | 3,465 | |||||
Commodity forward contracts | Deferred charges and other assets, net | 5,517 | 2,088 | |||||||
Total derivative assets | $ | 10,008 | $ | 5,553 | ||||||
Derivative Liabilities | ||||||||||
Balance Sheet Location | Fair Value as of | |||||||||
June 30, 2016 | December 31, 2015 | |||||||||
Not designated as hedging instruments | ||||||||||
Commodity forward contracts | Accrued liabilities | $ | 2,215 | $ | 9,325 | |||||
Commodity forward contracts | Other liabilities | 5,506 | 12,437 | |||||||
Total derivative liabilities | $ | 7,721 | $ | 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||
Commodity forward contracts | Gross profit | $ | 11,567 | $ | 595 | $ | 15,624 | $ | 4,836 | |||||||||
See Note 13 for the fair value of the Company's derivative instruments.
14
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
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 | ||||||||
June 30, 2016 | December 31, 2015 | |||||||
Derivative assets subject to enforceable master netting arrangements | $ | 504 | $ | — | ||||
Derivative assets not subject to enforceable master netting arrangements | 5,773 | 462 | ||||||
Total derivative assets | $ | 6,277 | $ | 462 | ||||
June 30, 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 | $ | 4,235 | $ | (3,731 | ) | $ | 504 | $ | 5,091 | $ | (5,091 | ) | $ | — | ||||||||||
June 30, 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 | $ | 414 | $ | — | $ | 414 | $ | — | $ | — | $ | — | ||||||||||||
Counterparty B | 90 | — | 90 | — | — | — | ||||||||||||||||||
Total | $ | 504 | $ | — | $ | 504 | $ | — | $ | — | $ | — | ||||||||||||
Derivative Liabilities as of | ||||||||
June 30, 2016 | December 31, 2015 | |||||||
Derivative liabilities subject to enforceable master netting arrangements | $ | 290 | $ | 5,803 | ||||
Derivative liabilities not subject to enforceable master netting arrangements | 3,700 | 10,868 | ||||||
Total derivative liabilities | $ | 3,990 | $ | 16,671 | ||||
June 30, 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 | $ | 4,021 | $ | (3,731 | ) | $ | 290 | $ | 10,894 | $ | (5,091 | ) | $ | 5,803 | ||||||||||
15
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
June 30, 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 | $ | 290 | $ | — | $ | 290 | $ | 5,564 | $ | — | $ | 5,564 | ||||||||||||
Counterparty B | — | — | — | 239 | — | 239 | ||||||||||||||||||
Total | $ | 290 | $ | — | $ | 290 | $ | 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.
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:
June 30, 2016 | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Derivative instruments | ||||||||||||
Risk management assets—Commodity forward contracts | $ | 1,607 | $ | 8,401 | $ | 10,008 | ||||||
Risk management liabilities—Commodity forward contracts | (7,348 | ) | (373 | ) | (7,721 | ) | ||||||
Marketable securities | ||||||||||||
Available-for-sale securities | 109,337 | 352,021 | 461,358 | |||||||||
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 six months ended June 30, 2016 and 2015.
16
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
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.
June 30, 2016 | December 31, 2015 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
3.60% senior notes due 2022 | $ | 247,939 | $ | 251,523 | $ | 247,768 | $ | 244,828 | ||||||||
6 ½% senior notes due 2029 | 99,048 | 120,125 | 99,011 | 117,153 | ||||||||||||
6 ¾% senior notes due 2032 | 248,057 | 268,790 | 247,998 | 268,490 | ||||||||||||
6 ½% GO Zone Senior Notes Due 2035 | 88,138 | 107,025 | 88,116 | 106,491 | ||||||||||||
6 ½% IKE Zone Senior Notes Due 2035 | 64,382 | 78,127 | 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.
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 was 36.5% for the three months ended June 30, 2016. The effective tax rate for the 2016 period was above the U.S. federal statutory rate of 35.0% primarily due to state income taxes, partially offset by the domestic manufacturing deduction and income attributable to noncontrolling interests. The effective income tax rate was 31.9% for the three months ended June 30, 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, the non-recognition of tax related to the bargain purchase of a controlling interest in Suzhou Huasu Plastics Co., Ltd. ("Huasu") and the foreign earnings rate differential, partially offset by state income taxes.
The effective income tax rate was 35.7% for the six months ended June 30, 2016. The effective tax rate for the 2016 period was above the U.S. federal statutory rate of 35.0% primarily due to state income taxes, partially offset by the domestic manufacturing deduction, income attributable to noncontrolling interests and the foreign earnings rate differential. The effective income tax rate was 32.9% for the six months ended June 30, 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, the non-recognition of tax related to the bargain purchase of a controlling interest in Huasu and the foreign earnings rate differential, partially offset by state income taxes.
There were no unrecognized tax benefits for the six months ended June 30, 2016. The Company recognizes penalties and interest accrued related to unrecognized tax benefits in income tax expense. As of June 30, 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.
17
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(Unaudited)
(in thousands of dollars, except share amounts and per share data)
For the six months ended June 30, 2016, the Company is in a deferred tax asset position related to outside basis differences in its foreign subsidiaries. The Company will assess whether it will permanently reinvest its foreign subsidiaries' undistributed earnings in connection with the recent announcement of the definitive agreement under which the Company will acquire all of the issued and outstanding shares of common stock of Axiall Corporation. See Note 20 for further details regarding the pending acquisition.
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 June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income attributable to Westlake Chemical Corporation | $ | 111,124 | $ | 205,095 | $ | 234,252 | $ | 351,437 | ||||||||
Less: | ||||||||||||||||
Net income attributable to participating securities | (504 | ) | (253 | ) | (1,054 | ) | (457 | ) | ||||||||
Net income attributable to common shareholders | $ | 110,620 | $ | 204,842 | $ | 233,198 | $ | 350,980 | ||||||||
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 June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Weighted average common shares—basic | 129,583,224 | 132,538,123 | 129,886,594 | 132,625,857 | ||||||||||||
Plus incremental shares from: | ||||||||||||||||
Assumed exercise of options | 397,303 | 506,852 | ||||||||||||||