UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 20052008
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 No.) |
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which | |
Common Stock, $0.01 par value | New York Stock Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨No x
Indicate by check mark if the registrant in not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes¨No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):Act:
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant on June 30, 2005,2008, the end of the registrant’s most recently completed second fiscal quarter, based on a closing price on that dateJune 30, 2008 of $24.50$14.86 on the New York Stock Exchange was approximately $328$285 million.
There were 65,133,32465,658,642 shares of the registrant’s common stock outstanding as of February 13, 2006.2009.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required by Part II and Part III of this Form 10-K is incorporated by reference from the registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A with respect to the registrant’s 20062009 Annual Meeting of Stockholders to be held on May 15, 2006.14, 2009.
INDUSTRY AND MARKET DATA
Industry and market data used throughout this Form 10-K were obtained through internal company research, surveys and studies conducted by unrelated third parties and industry and general publications, including information from Chemical Market Associates, Inc., or CMAI, Chemical Data, Inc. and the Freedonia Group. We have not independently verified market and industry data from external sources. While we believe internal company estimates are reliable and market definitions are appropriate, neither such estimates nor these definitions have been verified by any independent sources.
PRODUCTION CAPACITY
Unless we state otherwise, annual production capacity estimates used throughout this Form 10-K represent rated capacity of the facilities at December 31, 2005.2008. We calculated rated capacity by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design feedstock mix. Because the rated capacity of a production unit is an estimated amount, actual production volumes may be more or less than the rated capacity.
NON-GAAP FINANCIAL MEASURES
The body of accounting principles generally accepted in the United States is commonly referred to as “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 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-K are not substitutes for the GAAP measures of earnings and cash flow.
EBITDA is included in this Form 10-K 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.
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Item 1. Business
Item 1. | Business |
General
We are a vertically integrated manufacturer and marketer of basic chemicals, vinyls, polymers and fabricated products. Our products include some of the most widely used chemicals in the world, which are fundamental to many diverse consumer and industrial markets, including flexible and rigid packaging, automotive products, coatings, residential and commercial construction as well as other durable and non-durable goods. We operate in two principal business segments, Olefins and Vinyls, and we are one of the few North American integrated producers of vinyls with substantial downstream integration into polyvinyl chloride, or PVC, fabricated products.
We began operations in 1986 after our first polyethylene plant, an Olefins segment business, near Lake Charles, Louisiana was acquired from Occidental Petroleum Corporation. We began our vinyls operations in 1990 with the acquisition of a vinyl chloride monomer, or VCM, plant in Calvert City, Kentucky from the Goodrich Corporation. In 1992, we commenced our Vinyls segment fabricated products operations after acquiring three PVC pipe plants. Since 1986, we have grown rapidly into an integrated producer of petrochemicals, polymers and fabricated products. We achieved this by acquiring 1922 plants (excluding plants that have subsequently been permanently closed or disposed of), constructing sixeight new plants (including our joint venture in China)China and a new fabricated products plant in Yucca, Arizona, which became operational in the first quarter of 2009) and completing numerous capacity or production line expansions.
In 2008, we permanently closed one and idled another fabricated products plant due to the current economic downturn.
We benefit from highly integrated production facilities that allow us to process raw materials into higher value-added chemicals and fabricated products. WeAs of February 15, 2009, we have 9.811.8 billion pounds per year of active aggregate production capacity at 1415 manufacturing sites in North America. We also have a 43%59% interest in a joint venture in China that operates a vinyls facility.
Olefins Business
Products
Olefins are the basic building blocks used to create a wide variety of petrochemical products. We manufacture ethylene, polyethylene, styrene, and associated co-products at our manufacturing facilitiesfacility in Lake Charles, Louisiana.Louisiana, and polyethylene at our Longview, Texas facility. We have two ethylene plants, two polyethylene plants and one styrene monomer plant at our Lake Charles complex. We have three polyethylene plants and a specialty polyethylene wax plant at our Longview facility. The following table illustrates our production capacities at February 15, 2009 by principal product and the primary end uses of these materials:
Product | Annual Capacity | End Uses | ||||
(Millions of pounds) | ||||||
Ethylene | Polyethylene, ethylene dichloride, or EDC, styrene, ethylene oxide/ethylene glycol | |||||
Low-Density Polyethylene, or LDPE | High clarity packaging, shrink films, laundry and dry cleaning bags, ice bags, frozen foods packaging, bakery bags, coated paper board, cup stock, paper folding cartons, lids, housewares, closures and general purpose molding | |||||
Linear Low-Density Polyethylene, or LLDPE, and High-Density Polyethylene, or HDPE | 980 | Heavy-duty films and bags, general purpose liners (LLDPE); thin-walled food tubs, housewares, pails, totes and crates (HDPE) | ||||
Styrene | Disposables, packaging material, appliances, paints and coatings, resins and building materials |
Ethylene. Ethylene is the world’s most widely used petrochemical in terms of volume. It is the key building block used to produce a large number of higher value-added chemicals including polyethylene, EDC, VCM and styrene. We have the capacity to produce 2.42.5 billion pounds of ethylene per year at our Lake Charles complex and the capability to consume the majorityall of our production internally to produce polyethylene and styrene monomer in our Olefins business and to produce VCM and EDC in our Vinyls business. We also produce ethylene in our Vinyls segment at our Calvert City, Kentucky facilities,facility, all of which is used internally in the production of VCM. In addition, we produce ethylene co-products including chemical grade propylene, crude butadiene, pyrolysis gasoline and hydrogen. We sell our entire output of these co-products to external customers. We are planning a major turnaround at one of our ethylene plants in Lake Charles in 2006.
Polyethylene. Polyethylene, the world’s most widely consumed polymer, is used in the manufacture of a wide variety of packaging, film, coatings and molded product applications. Polyethylene is generally classified as either LDPE, LLDPE or HDPE. The density correlates to the relative stiffness of the products. The difference between LDPE and LLDPE is molecular, and products produced from LLDPE are stronger than products produced from LDPE. LDPE is used in end products such as bread bags, dry cleaning bags, food wraps and milk carton and snack package coatings. LLDPE is used for higher film strength applications such as stretch film and heavy duty sacks. HDPE is used to manufacture products such as grocery, merchandise and trash bags, plastic containers and plastic caps and closures.
We are the fourththird largest producer of LDPE in North America based on capacity and, in 2005,2008, our annual capacity of 850 million1.5 billion pounds was available in numerous formulations to meet the needs of our diverse customer base. We also have the combined capacity to produce 550980 million pounds (combined) of either LLDPE orand HDPE per year in various different formulations. We produce the three primary types of polyethylene and sell them to external customers as a final product in pellet form. We produce LDPE at one of our polyethyleneplant in Lake Charles and two plants in Longview, and have the flexibility towe produce both LLDPE and HDPE in one plant at the other polyethylene plant.Lake Charles and LLDPE in one plant in Longview. This flexibility allows us to maximize production of either HDPE or LLDPE depending on prevailing market conditions.
Styrene. Styrene is used to produce synthetic rubber and other derivatives such as polystyrene, acrylonitrile butadiene styrene, unsaturated polyester and unsaturated polyester.synthetic rubber. These derivatives are used in a number of applications including injection molding, disposables, food packaging, housewares, paints and coatings, resins, building materials, tires and toys. We produce styrene at our Lake Charles plant, where we have the capacity to produce 485570 million pounds of styrene per year, all of which is sold to external customers. We completed a major turnaround at our styrene plant in Lake Charles in the first quarter of 2008 that increased the plant’s capacity by approximately 85 million pounds per year.
Feedstocks
We are highly integrated along our olefins product chain. We produce allmost of the ethylene required to produce our polyethylene, styreneVCM and VCM.styrene. Ethylene can be produced from either petroleum liquid feedstocks, such as naphtha, condensates and gas oils, or from natural gas liquid feedstocks, such as ethane, propane and butane. One of our ethylene plants uses ethane as its feedstock and the other can use ethane, ethane/propane mix, propane and butane, a heavier feedstock. We continue to seek waysDuring 2007, we completed a project designed to minimize our feedstock cost at one of our ethylene plants by further increasing our abilityflexibility to use alternative feedstocks.light naphtha. We receive ethane, propane and butanefeedstock at our Lake Charles facilitiesfacility through several pipelines from a variety of suppliers in Texas and Louisiana.
In addition to our internally supplied ethylene, we also acquire ethylene from third parties in order to supply a portion of our ethylene requirements. In addition, we acquire butene and hexene to manufacture polyethylene and benzene to manufacture styrene. We receive butene and hexene at the Lake Charles complex and hexene at the Longview complex via rail car from four primaryseveral suppliers. We receive benzene via barges, ships and pipeline pursuant to short termshort-term arrangements. TheWe purchase butene and hexene pursuant to multi-year contracts, expire over the next two years andsome of which are renewable for an additional term subject to either party to the contract notifying the other party that it does not wish to renew the contract.
Marketing, Sales and Distribution
We use the majority of our Lake Charles ethylene production in our polyethylene, styrene and VCM operations. We sell the remainder to external customers. In addition, we sell our ethylene co-products to external
customers. Our primary ethylene co-products are chemical grade propylene, crude butadiene, pyrolysis gasoline and hydrogen. The majority of sales in our Olefins business are made under long-term agreements. Contract volumes are established within a range. The terms of these contracts are fixed for a period, although earlier termination may occur if the parties fail to agree on price and deliveries are suspended for a period of several months.price. In most cases, these contracts also contemplate extension of the term unless terminated by one of the parties.
We typically ship our ethylene and propylene via a pipeline system that connects our plants to numerous customers. Our hydrogen is sold via pipeline to a single customer. We also have storage agreements and exchange agreements that allow us access to customers who are not directly connected to the pipeline system. We transport our polyethylene, styrene, crude butadiene and pyrolysis gasoline by rail or truck. Additionally, our pyrolysis gasoline and styrene can be transported by barge.
We have an internal sales force that sells directly to our customers. Our polyethylene customers are some of the nation’s largest purchasersproducers of film and flexible packaging. In 2005, one contract2008, no single customer in our Olefins segment accounted for 11.5%10% or more of segment net sales.
Competition
The markets in which our Olefins business operates are highly competitive. We compete on the basis of price, customer service, product deliverability, quality, consistency and performance. Our competitors in the ethylene, polyethylene and styrene markets are typically some of the world’s largest chemical companies, including INEOS (successor to BP Chemicals Ltd.), The Dow Chemical Company, ExxonMobil Chemical Company, Lyondell Chemical Company,LyondellBasell Industries, Chevron Phillips Chemical Company LP and NOVA Chemicals Corporation.
Vinyls Business
Products
Principal products in our integrated Vinyls segment include PVC, VCM, EDC, chlorine, caustic soda and ethylene. We also manufacture and sell products fabricated from the PVC we produce, including pipe, fence and deck, and window and patio door components. We manage our integrated Vinyls production chain, from the basic chemicals to finished fabricated products, to maximize product margins, pricing and capacity utilization. Our primary manufacturing facilities are located in our Calvert City, Kentucky and Geismar, Louisiana, complexes. Our Calvert City facilities includefacility includes an ethylene plant, a chlor-alkali plant, a VCM plant, a PVC plant and a larger diameter PVC pipe plant. Our Geismar facilities includefacility includes an EDC plant, a VCM plant and a PVC plant. WeAs of February 15, 2009, we also own elevenoperated 11 PVC fabricated product facilities and owned a 43%59% interest in a joint venture in China that produces PVC resin, PVC fabricated products and film.PVC film and sheet. The following table illustrates our production capacities at February 15, 2009 by principal product and the end uses of these products:
Product(1) | Annual Capacity(2) | End Uses | ||
(Millions of pounds) | ||||
PVC | Construction materials including pipe, siding, profiles for windows and doors, film and sheet for packaging and other consumer applications | |||
VCM | PVC | |||
Chlorine | VCM, organic/inorganic chemicals, bleach | |||
Caustic Soda | Pulp and paper, organic/inorganic chemicals, neutralization, alumina | |||
Ethylene | 450 | VCM | ||
Fabricated Products | Pipe: water and sewer, plumbing, irrigation, conduit; window and door components; fence and deck components |
(1) | EDC, a VCM intermediate product, is not included in the table. |
(2) | Annual capacity excludes total capacity of |
PVC. PVC, the world’s third most widely used plastic, is an attractive alternative to traditional materials such as glass, metal, wood, concrete and other plastic materials because of its versatility, durability and cost-competitiveness. PVC is produced from VCM, which is, in turn, made from chlorine and ethylene. PVC compounds are made by combining PVC resin with various additives in order to make either rigid and impact-resistant or soft and flexible compounds. The various compounds are then fabricated into end-products through extrusion, calendaring,calendering, injection-molding or blow-molding. Flexible PVC compounds are used for wire and cable insulation, automotive interior and exterior trims and packaging. Rigid extrusion PVC compounds are commonly used in window frames, vertical blinds and construction products, including pipes.pipe and siding. Injection-molding PVC compounds are used in specialty products such as computer housings and keyboards, appliance parts and bottles. We have the capacity to produce 800 million1.1 billion pounds of PVC per year at our Calvert City facilitiesfacility, including the additional volume from our recently completed expansion, and 600 million pounds per year at our Geismar facilities.facility. We use a majority of our PVC internally in the production of our fabricated products. The remainder of our PVC is sold to downstream fabricators.
VCM. VCM is used to produce PVC, solvents and PVC-related products. We use ethylene and chlorine to produce VCM. We have the capacity to produce 1.3 billion pounds of VCM per year at our Calvert City facilitiesfacility and 600550 million pounds per year at our Geismar facilities.facility. The majority of our VCM is used internally in our PVC operations. The remainder of our VCM production is sold under long-term contracts with external customers.
Chlorine and Caustic Soda. We combine salt and electricity to produce chlorine and caustic soda, co-products commonly referred to as chlor-alkali, at our Calvert City facilities.facility. We use our chlorine production in our VCM plants. We currently have the capacity to supply approximately 37%50% of our internal chlorine requirements.requirements internally. We purchase the remaining amount at market prices. Our caustic soda is sold to external customers who use it for, among other things, the production of pulp and paper, organic and inorganic chemicals and alumina. In October 2007, we announced our plans to expand our chlor-alkali plant at our Calvert City manufacturing complex, and in August 2008, we announced that we will construct a new chlor-alkali plant to be located at our vinyls manufacturing plant in Geismar, Louisiana. The Calvert City expansion was completed in the fourth quarter of 2008. The Geismar chlor-alkali unit is expected to be completed in 2011 and to produce 250,000 ECUs annually, bringing our total ECU capacity to 525,000 per year. These projects are expected to improve the vertical integration of our vinyls business from chlorine downstream into VCM and PVC and increase caustic soda sales. After the Geismar chlor-alkali unit has been completed, we expect that we will have the capacity to supply approximately 95% of our chlorine requirements through internal production.
Ethylene. We use all of the ethylene produced at Calvert City internally to produce VCM and in 2005, we producedCalvert City has the capacity to produce approximately 61%50% of the ethylene required for our VCM production. We obtain the remainder of the ethylene we need for our Vinyls business from our Lake Charles ethylene production. We are planning a major turnaround at our ethylene plant in Calvert City in 2006.
Fabricated Products. Products made from PVC are used in construction materials ranging from water and sewer systems to home and commercial applications for fence, deck, window and patio door systems. We manufacture and market water, sewer, irrigation and conduit pipe products under the “North American Pipe” brand. We also manufacture and market PVC fence, decking, windows and patio door profiles.profiles under the “Westech Building Products” brand. All of our fabricated products production is sold to external customers. All of the PVC we require for our fabricated products is produced internally. During the third quarter of 2008, we started production at a new large diameter PVC pipe facility at the Calvert City complex with a capacity of approximately 55 million pounds per year of large diameter pipe. In March 2008, we announced our plans to open a new PVC pipe plant in Yucca, Arizona to produce pipe for water, sewer, irrigation and related industrial and residential markets in the Western United States. The new plant became operational in the first quarter of 2009 and has the capacity to produce approximately 120 million pounds of PVC pipe annually. In addition, in the first quarter of 2008, we decided to close our PVC window and door components plant in Pawling, New York with an annual capacity of 14 million pounds, and in the fourth quarter of 2008, we announced the idling of our PVC pipe plant in Van Buren, Arkansas with an annual capacity of 47 million pounds.
China Joint Venture. We own a 43%59% interest in Suzhou Huasu Plastics Co. Ltd., a joint venture based near Shanghai, China. Our joint venture partners are Norway’s Norsk Hydro ASA, twoa local Chinese chemical companiescompany and International Finance Corporation, a unitsubsidiary of the World Bank.INEOS. In 1995, this joint venture constructed and began operating a PVC film plant that has a current annual capacity of 130145 million pounds of PVC film. In 1999, the joint venture constructed and began operating a PVC resin plant that has an annual capacity of 286300 million pounds of PVC resin. In 2006, we increased our ownership interest in this joint venture from 43% to 58%, and in 2007 we increased our ownership interest to 59%. In 2008, the joint venture began producing PVC fabricated products with an annual capacity of 33 million pounds of product.
Feedstocks
We are highly integrated along our vinyls production chain. We produce allmost of the ethylene and all of the VCM and PVC used in our Vinyls business, and approximately 37%50% of our chlorine requirements. The remainder of our chlorine requirements are purchased at market prices. Ethylene produced at our Calvert City facility utilizes propane feedstock. We purchase the salt required for our chlor-alkali plant pursuant to a long-term contract. We purchase electricity for our chlor-alkaliCalvert City facility production from the Tennessee Valley Authority under a long-term contract.
We are one of the few North American integrated producers of vinyls with substantial downstream integration into PVC fabricated products. Our Calvert City and Geismar facilities supply all the PVC required for
our fabricated products plants. The remaining feedstocks for fabricated products include pigments, fillers and stabilizers, which we purchase under short-term contracts based on prevailing market prices.
Marketing, Sales and Distribution
We are a leading manufacturer of PVC fabricated productspipe in the geographic regions where we operate. We sell a majority of our PVC pipe through a combination of manufacturermanufacturer’s representatives and our internal sales force to distributors who serve the wholesale PVC pipe market. We use a regional sales approach that allows us to provide focused customer service and to meet the specified needs of individual customers. We use an internal salaried sales force to market and sell our fence, window and patio door profiles.
We use a majority of our VCM production in our PVC resin operations. We sell substantially all of our caustic soda production to external customers, concentrating on customers who can receive the product by barge over the Mississippi, Tennessee and Ohio Riversin Calvert City’s geographical area to minimize transportation costs. In 2005, one contract customer2008, no customers in our Vinyls segment accounted for 16%10% or more of segment net sales.
Competition
Competition in the vinyls market is based on price, product availability, product performance and customer service. We compete in the vinyls market with other large and medium-sized producers including Oxy Vinyls,Chem, LP, The Dow Chemical Company, Shintech, Inc., Georgia Gulf Corporation and Formosa Plastics Corporation.
Competition in the fabricated products market is based on price, on-time delivery, product quality, customer service and product consistency. We compete in the fabricated products market with other medium and large-sized producers and fabricators including J-M Manufacturing Company, Inc.,JM Eagle, Diamond Plastics Corporation and National Pipe & Plastics, Inc. and PW Eagle, Inc. We are a leading manufacturer of PVC pipe by volume in the geographic areas served by our North American Pipe Corporation subsidiary. We believe that we are one of the second largest manufacturermanufacturers of PVC fence and deck components by volume in the United States.
Environmental and Other Regulation
As is common in our industry, obtaining, producing and distributing many of our products involves the use, storage, transportation and disposal of large quantities of toxic and hazardous materials, and our manufacturing operations require the generation and disposal of large quantities of hazardous wastes. We are subject to extensive, evolving and increasingly stringent federal and local environmental laws and regulations, which address, among other things, the following:
emissions to the air;
discharges to land or to surface and subsurface waters;
other releases into the environment;
remediation of contaminated sites;
generation, handling, storage, transportation, treatment and disposal of waste materials; and
maintenance of safe conditions in the workplace.
We are subject to environmental laws and regulations that can impose civil and criminal sanctions and that may require us to remove or mitigate the effects of contamination caused by the release or disposal or release of chemicalhazardous substances at various sites.into the environment. Under some of these laws and regulations, a current or previousone law, an owner or operator of property may be held strictly liable for the costs of removal or remediation of hazardous substances on, under, or in its property,remediating contamination without regard to whether the owner or operator knew of, orthat person caused the presence of the contaminants,contamination, and regardless ofwithout regard to whether the practices that resulted in the contamination were legal at the time they occurred. Because several of our production sites have a history of industrial use, it is impossible to predict precisely what effect these laws and regulationsrequirements will have on us in the future. As is typical for chemical businesses, soil and groundwater contamination has occurred in the past at some of our sites, and might occur or be discovered at other sites in the future. We have typically conducted extensive soil and groundwater assessments either prior to acquisitions or in connection with subsequent permitting requirements. Our investigations have not revealed any contamination caused by our operations that would likely require us to incur material long-term remediation efforts and associated liabilities.us.
Calvert City.
Contract LitigationDisputes with Goodrich and PolyOne.In connection with the 1990 and 1997 acquisitions of the Goodrich Corporation (“Goodrich”) chemical manufacturing complex in Calvert City, Kentucky, Goodrich agreed to indemnify us for any liabilities related to preexisting contamination at the site. In addition,complex. For our part, we agreed to indemnify Goodrich for post-closing contamination attributable to the ownership, use or operation of the plant after the closing dates.caused by our operations. The soil and groundwater at the manufacturing complex, which does not include our polyvinyl chloridenearby PVC facility, in Calvert City, had been extensively contaminated by Goodrich’s operations. In 1993, the Geon Corporation wasGoodrich spun off from Goodrich,the predecessor of PolyOne Corporation (“PolyOne”), and Geonthat predecessor assumed the responsibility to operate the site-wide remediation system and Goodrich’s indemnification obligations for any liabilities arising fromrelating to preexisting contamination at the site. Subsequently, Geon’s name was changed to PolyOne. Part of the former Goodrich facility, which we did not acquire and on which we do not operate and that we believe is still owned by either Goodrich orcontamination. PolyOne is listed onnow coordinating the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA. The investigation and remediation of contamination at our manufacturing complex is currently being coordinated by PolyOne.the complex.
GivenIn 2003, litigation arose among us, Goodrich and PolyOne with respect to the scope and extentallocation of the underlying contamination at our manufacturing complex, the remediation will likely take a numbercost of years. The costs incurred to treat contaminated groundwater collected from beneath the site were $4.6 million in 2005, and we expect this level of expenditures to continue for the life of the remediation. For the past several years, PolyOne has asserted that our actions after our acquisition of the complex have contributed to or otherwise exacerbated theremediating contamination at the site. We denied those allegations. Goodrich has also asserted claims similar to those of PolyOne.The parties settled this litigation in December 2007 and the case was dismissed. In addition, Goodrich has assertedthe settlement the parties agreed that, we are responsible for a portionamong other things: (1) PolyOne would pay 100% of the ongoing costs (with specified exceptions), net of treating contaminated groundwater being pumpedrecoveries or credits from beneaththird parties, incurred with respect to environmental issues at the Calvert City site from August 1, 2007 forward; (2) either we or PolyOne might, from time to time in the future (but not more than once every five years), institute a proceeding to adjust that percentage; and (3) we and PolyOne would negotiate a new environmental remediation utilities and services agreement to cover our provision to or on behalf of PolyOne of certain environmental remediation services at the site. In May 2003, Goodrich began withholding payment of 45% ofThe current environmental remediation activities at the monthlyCalvert City complex do not have a specified termination date but are expected to last for the foreseeable future. The costs incurred by usPolyOne to operate certain pollution control equipment owned by Goodrich atprovide the site.
In October 2003, we filed suit against Goodrichenvironmental remediation services were $3.8 million in the United States District Court for the Western District of Kentucky for breach of contract to recover unpaid invoices related to our operation of groundwater treatment equipment. Goodrich filed an answer and counterclaim in which it alleged that we were responsible for contamination at the facility. We denied those allegations and filed a motion to dismiss Goodrich’s counterclaim. By order dated April 9, 2004, the court dismissed part of Goodrich’s counterclaim while retaining the remainder. Goodrich also filed a third-party complaint against PolyOne. PolyOne in turn filed motions to dismiss, filed counterclaims against Goodrich and filed cross-claims against us in which it alleged breach of contract and that we had conspired with Goodrich to defraud PolyOne. On June 8, 2004, we filed a motion for summary judgment on our breach of contract claim against Goodrich. On June 16, 2004, we filed a motion to dismiss PolyOne’s cross-claims. By order dated March 9, 2005, the court granted our motion to dismiss PolyOne’s cross-claims. On March 29, 2005, the court granted our motion for summary judgment on our breach of contract claim against Goodrich. On April 12, 2005, Goodrich filed a motion for reconsideration of the order granting summary judgment. On July 5, 2005, we entered a Non-Waiver Agreement with Goodrich pursuant to which Goodrich paid us all past due amounts, including interest, in the amount of $3.1 million. This reimbursement is reflected in our consolidated statement of operations for the year ended December 31, 2005, resulting in a $2.6 million reduction of selling, general and administrative expenses and $0.5 million of interest income. Goodrich further agreed to make all future payments for services on a timely basis. Pursuant to the Non-Waiver Agreement, both parties retained all rights and legal arguments, including Goodrich’s right to pursue its motion for reconsideration. The granting of such motion could result in our being required to repay Goodrich for the amounts paid by Goodrich under the Non-Waiver Agreement. The case is continuing with respect to Goodrich’s counterclaims against us, and Goodrich’s third-party claims against PolyOne and PolyOne’s counterclaims against Goodrich. Extensive discovery is ongoing and the trial is set for December 2006.
2008.
Administrative Proceedings and Related LitigationProceedings.. In addition, thereThere are several administrative proceedings in Kentucky involving us, Goodrich and PolyOne. On September 23,PolyOne related to the same manufacturing complex in Calvert City. In 2003, the Kentucky StateEnvironmental and Public Protection Cabinet (“Cabinet”) re-issued Goodrich’s Resource Conservation and Recovery Act, or RCRA, permit which requires Goodrich to remediate contamination at the Calvert City manufacturing complex. Goodrich was named as the sole permittee. Both Goodrich and PolyOne have challenged that determination. Goodrich filedvarious terms of the permit in an appeal (Goodrich I) of that permit on October 23, 2003, and PolyOne filed a separate challenge (PolyOne I) on November 13, 2003. In both proceedings, Goodrich and PolyOne are seekingattempt to shift Goodrich’s cleanup responsibilitiesclean-up obligations under Goodrich’s RCRAthe permit to other parties, including us. We have either intervened directly or been named as a party in both of these proceedings. Mediation was conducted in these proceedings during 2004 but was unsuccessful. On September 27, 2004, the Kentucky State Cabinet sent PolyOne a determination requiring PolyOne to be added to the Goodrich RCRA permit due to PolyOne’s operation of the site remediation system. On October 22, 2004, PolyOne filed an appeal (PolyOne II). In this second proceeding, PolyOne is challenging the State’s determination that PolyOne is required to submit an application for a major modification of the Goodrich permit and assume the regulatory status of an operator under the permit. PolyOne makes a number of charges against us that, if proven, might cause the Kentucky State Cabinet to demand that we also be added to the Goodrich permit. Goodrich and PolyOne have alleged in Goodrich I and PolyOne I that Goodrich cannot be held responsible for contamination on property they do not own. Both Goodrich and PolyOne have also alleged that we are responsible for contamination at the manufacturing complex, which we have denied.
On January 24, 2005, Goodrich filed a challenge (Goodrich II) to the Kentucky State Cabinet’s determination which had rejected a Goodrich proposal to perform a particular soil remediation procedure. Our motion to intervene in PolyOne II and Goodrich II was subsequently granted.
On March 18, 2005, the Goodrich I and II and PolyOne I and II proceedings were consolidated and the hearing for the consolidated case was set for September 12, 2006. Subsequently, the Kentucky State Cabinet agreed to allow Goodrich to perform a test of the soil remediation procedure. Goodrich then withdrew its complaint and the Goodrich II proceeding was dismissed. By order dated January 19, 2006, the hearing for the consolidated administrative proceedings was rescheduled to April 3, 2007.
On March 22, 2005, after the court had dismissed PolyOne’s cross-claims against us, PolyOne filed a separate RCRA citizen suit against us in the United States District Court for the Western District of Kentucky, which covers the same issues raised in the Goodrich and PolyOne administrative proceedings. On May 23, 2005 we filed a motion to dismiss the PolyOne complaint, which PolyOne responded to on June 7, 2005. We filed a reply to PolyOne’s response on June 21, 2005, and the motion is pending.
In January 2004, the Kentucky State Cabinet notified us by letter that due to our ownership of a closed landfill (known as former Pond 4) at the manufacturing complex, we would be requiredrequires us to submit a post-closurean application for our own permit application under RCRA. This could require us to bear the responsibility and cost of performing remediation work at former Pond 4 and solid waste management unitsadjacent areas at the complex. We challenged the Cabinet’s January 2004 order and areashave obtained several extensions to submit the required permit application. In October 2006, the Cabinet notified Goodrich and us that both were “operators” of concern located on property adjacent toformer Pond 4 that is owned by us. We acquired Pond 4 fromunder RCRA, and ordered us to jointly submit an application for a RCRA permit. Goodrich in 1997 as part of the acquisition of other facilities. Under the 1997 contract,and we have both challenged the Cabinet’s October 2006 order.
All of these administrative proceedings have been consolidated, and the case is pending before the Cabinet.
Litigation Related to the Administrative Proceedings.We have the contractual right to reconvey title to former Pond 4 back to Goodrich, whichand we have tendered. Ontendered former Pond 4 back to Goodrich under this provision. In March 21, 2005, we filed suit againstsued Goodrich in the United States District Court for the Western District of Kentucky to require Goodrich to accept the tendered reconveyance and to indemnify us for our costs we incurred in connection with former Pond 4. On May 20, 2005, Goodrich filed a motion to dismiss portions of our complaint. On June 27, 2005, we filed a response in opposition to Goodrich’s motion to dismiss, and Goodrich filed its reply on July 18, 2005. In addition, on June 6, 2005, Goodrichsubsequently filed a third-party complaint against PolyOne, seeking to hold PolyOne responsible for any of Goodrich’s former Pond 4 liabilities to us. PolyOneGoodrich moved to dismiss Goodrich’s third-party complaint on August 30, 2005. Goodrich responded to PolyOne’s motion on October 7, 2005, and PolyOne filed its reply on October 21, 2005. Finally,our suit against it, we filed a motion for partial summary judgment onagainst Goodrich, and PolyOne moved to dismiss Goodrich’s liabilitythird-party complaint against it. In March 2007, the court granted Goodrich’s motion to dismiss our claim that Goodrich is required to accept the tendered reconveyance. Although our motion for the Company’spartial summary judgment was denied then, our claim for indemnification of our costs incurred in connection with Pond 4 on August 9, 2005. Goodrich responded to our motion on September 6, 2005, and we replied on September 27, 2005. The motion is now pending.
We have also filed an appeal withstill pending before the Kentucky State Cabinet regarding its January 2004 letter. Goodrich and PolyOne have both filed motions to intervene in this appeal. On July 1, 2004, we notified the Kentucky State Cabinet that we would prefer to conduct a clean-closure equivalency determination, or CCED, of Pond 4 rather than pursue a post-closure care RCRA permit. The proposal to conduct the CCED was rejected by the Kentucky State Cabinet. By letter dated, December 21, 2004, the Kentucky State Cabinet directed us to file a post-closure permit application for Pond 4. On February 23, 2005, we filed a motion for stay of the order requiring us to file the permit application. On February 18, 2005, we also sent a letter to the Kentucky State Cabinet demanding that it enforce the Goodrich RCRA permit against Goodrich since the RCRA permit requires Goodrich to address Pond 4. On March 25, 2005, the Kentucky State Cabinet granted us an extension until September 26, 2005 to file the permit application. On August 19, 2005, the Kentucky Cabinet granted an additional extension until March 25, 2006 to file the permit application.
court.
Monetary Relief. NoneExcept as noted above, with respect to the settlement of the parties involved in the proceedings relating to the disputes withcontract litigation among us, Goodrich and PolyOne, and the Kentucky State Cabinet described above has formally quantified the amount of monetary relief that they are seeking from us, nor hasneither the court ornor the Kentucky State Cabinet proposed orhas established anany allocation of the costs of
remediation among the various participants. Any monetary liabilitiesparties that we might incur with respect toare involved in the remediation of contamination at the manufacturing complex in Calvert City would likely be spread out over an extended period. While we have denied responsibility for any such remediation costsjudicial and are actively defending our position, we are not in a position at this time to state what effect, if any, theseadministrative proceedings could have on our financial condition, results of operations, or cash flows.
Environmental Investigations.In March and June 2002, the EPA’s National Enforcement Investigations Center, or NEIC, conducted an environmental investigation of our manufacturing complex in Calvert City consisting of the EDC/VCM, ethylene and chlor-alkali plants. In May 2003, we received a report prepared by the NEIC summarizing the results of that investigation. Among other things, the NEIC concluded that the requirements of several regulatory provisions had not been met. We analyzed the NEIC report and identified areas where we believe that erroneous factual or legal conclusions, or both, may have been drawn by the NEIC. We held a number of discussions with the EPA concerning its conclusions. In February 2004, representatives of the EPA orally informed us that the agency proposed to assess monetary penalties against us and to require us to implement certain injunctive relief to ensure compliance. In addition, the EPA’s representatives informed us that the EPA, the NEIC and the Kentucky State Cabinet would conduct an inspection of our PVC facility in Calvert City, which is separate from the manufacturing complex and was not visited during the 2002 inspection. That additional inspection took place in late February 2004. We have not yet received a written report from the agencies regarding the actions that they propose to take in response to that visit. The EPA submitted to us an information request under Section 114 of the Clean Air Act and issued a Notice of Violation, both pertaining to the inspection of the EDC/VCM plant. The Notice of Violation does not propose any specific penalties. The EPA also issued to us information requests under Section 3007 of RCRA and Section 114 of the Clean Air Act regarding the PVC plant inspection. We met with the EPA in June 2004 and have continued to hold settlement discussions pursuant to which the EPA has indicated it will impose monetary penalties and will require plant modifications that will require capital expenditures. We expect that, based on the EPA’s past practices, the amount of any monetary penalties would be reduced by a percentage of the expenditures that we would agree to make for certain “supplemental environmental projects.”discussed above. We are not in a position at this time to state what effect, if any, the resolution of these proceedings could have on our financial condition, results of operations or cash flows. However,flows in 2009 and later years. Any cash expenditures that we might incur in the future with respect to the remediation of contamination at the complex would likely be spread out over an extended period. As a result, we believe it is unlikely that any remediation costs allocable to us will be material in terms of expenditures made in any individual reporting period.
Environmental Investigations. In 2002, the National Enforcement Investigations Center, or NEIC, of the U.S. Environmental Protection Agency, or EPA, investigated our manufacturing complex in Calvert City. In early 2004, the NEIC investigated our nearby PVC plant. The EPA subsequently submitted information requests to us under the Clean Air Act and RCRA. We met with the EPA in 2004 to attempt to voluntarily resolve the notices of violation that were issued to us for the 2002 investigation and to voluntarily resolve any issues raised at the PVC plant in the 2004 investigation. Since then, the parties have continued to engage in settlement discussions. The EPA has indicated that it will impose monetary penalties and require plant modifications that will involve capital expenditures. We have recorded an accrual for a probable loss related to monetary penalties.penalties and other items to be expensed. Although the ultimate amount of liability is not ascertainable, we believe that any amounts exceeding the recorded accruals should not materially affect our financial condition. It is possible, however, that the ultimate resolution of this matter could result in a material adverse effect on our results of operations or cash flows for a particular reporting period.
EPA Audit of Ethylene Units in Lake Charles.During 2007, the EPA conducted an audit of our ethylene units in Lake Charles, Louisiana, with a focus on leak detection and repair, or LDAR. In January 2008, the U.S. Department of Justice, or DOJ, notified us that the EPA had referred the matter to the DOJ to bring a civil case against us alleging violations of various environmental laws and regulations. The DOJ informed us that it would seek monetary penalties and require us to implement an “enhanced LDAR” program for the ethylene units. Our representatives met with the EPA in February 2008 to conduct initial settlement discussions. While we can offer no assurance as to an outcome, we believe that the resolution of this matter will not have a material adverse effect on our financial condition, cash flows or results of operations.
General. It is our policy to comply with all environmental, health and safety requirements and to provide safe and environmentally sound workplaces for our employees. In some cases, compliance can be achieved only by incurring capital expenditures, and we are faced with instances of noncompliance from time to time. In 2005,2008, we made capital expenditures of $2.9$9.1 million related to environmental compliance. We estimate that we will make capital expenditures of $3.8$4.8 million in 20062009 and $3.2$10.1 million in 2007,2010, respectively, related to environmental compliance. A significant percentage of the 2009 and 2010 estimated amounts are related to equipment replacement and upgrades. We anticipate that stringent environmental regulations will continue to be imposed on us and the industry in general. Although we cannot predict with certainty future expenditures, management believes that our current spending trends will continue.
It is difficult to estimate the future costs of environmental protection and remediation because of many uncertainties, including uncertainties about the status of laws, regulations and information related to individual locations and sites and our ability to rely on third parties to carry out such remediation. Subject to the foregoing, but taking into consideration our experience regarding environmental matters of a similar nature and facts currently known, and except for the outcome of pending litigation and regulatory proceedings, which we cannot predict, but which could have a material adverse effect on us, we believe that capital expenditures and remedial actions to comply with existing laws governing environmental protection will not have a material adverse effect on our business and financial results.
Employees
As of December 31, 2005,2008, we had 1,8561,961 employees, 398727 contractors and 94 consultants in the following areas:
Category | Number | |
Olefins segment | ||
Vinyls segment | ||
|
Approximately 16%10% of our employees are represented by labor unions and all of these employees are working under collective bargaining agreements. TwoAll of the collective bargaining agreements expire in 20062009, but we expect the negotiations on future agreements will begin on time and proceed in a timely manner. We are not aware of any significant issues that might impede the remaining agreements, which cover 70% of our represented employees, expire in 2009.process. There have been no strikes or lockouts and we have not experienced any work stoppages throughout our history. We believe that our relationship with the local union officials and bargaining committees is open and positive.
Technology
OurHistorically, our technology strategy ishas been to selectively acquire and license third-party proprietary technology. Our selection process incorporates many factors, including the cost of the technology, our customers’ requirements, raw material and energy consumption rates, product quality, capital costs, maintenance requirements and reliability. We believe thatown a patent portfolio of intellectual property related to the most cost-effective way to acquire technology applicable to our businesses is to purchase or license it from third-party market providers. As a result, we have eliminated the need forpolyethylene business, as well as a research and development facilitygroup that developed this intellectual property. We also need to evaluate and believe we are able to select the best availableaccess third party technology at the timefor our need arises.Olefins businesses. After acquiring a technology, we devote considerable efforts to further develop and effectively apply the technology with a view to continuously improve our competitive position.
We license technology from a number of third-party providers. In 1988, we selected the providers as follows:
MW Kellogg technology for our first ethylene plant at our Lake Charles complex. In 1995, we selected theand ABB Lummus Crest technology for the secondour ethylene plantplants at Lake Charles. In 1990, we selected Charles;
Mobil/Badger technology for our styrene monomer plant at Lake Charles and in 1996 we selected BP technology for our second Lake Charles polyethylene plant. In 1997, we entered into a corporate-wide technology agreement with Aspen Technology. The Aspen Technology Plantelligence™ includes an advanced process control software system which improves process control and economic optimization. In 1998, we licensed Charles;
• | Aspen Technology PlantelligencyTM technology for our advanced process control software; |
Asahi Chemical membrane technology for our chlor-alkali plant. In 2005, we licensed plant;
Badger EBMax technology for our styrene plant inat Lake Charles. Also in 2005, we entered into a license with Nova Chemicals Corporation to use the Charles;
Novacat-T Catalyst System in connection with the production of polyethylene at our plant in Lake Charles. We have a license with Charles; and
INEOS (successor to BP Chemicals Ltd.) for technology used to produce LLDPE and HDPE that requires us to make annual paymentsat Lake Charles and Longview.
All of $3.1 million through 2007.these licenses are perpetual and have been paid in full.
We license out our patented Energx® technology for LLDPE production on a limited basis.
Segment and Geographic Information
Information regarding sales, income (loss) from operations and assets attributable to each of our industry segments, Olefins and Vinyls, and geographical information is presented in Note 1718 to our consolidated financial statements included in Item 8 of this Form 10-K.
Available Information
Our Web site address is www.westlakechemical.com.www.westlake.com. We make our Web site content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Form 10-K. We make available on this Web site under “Investor Relations/SEC Filings,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports and proxy statements as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the SEC. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including us.
We intend to satisfy the requirement under Item 5.05 of Form 8-K to disclose any amendments to our Code of Ethics and any waiver from a provision of our Code of Ethics by posting such information on our Web site at www.westlakechemical.comwww.westlake.com at “Investor Relations/Corporate Governance.”
Item 1A. | Risk Factors |
Cyclicality in the petrochemical industry has in the past, and may in the future, result in reduced operating margins or operating losses.
Our historical operating results reflect the cyclical and volatile nature of the petrochemical industry. The industry is mature and capital intensive. Margins in this industry are sensitive to supply and demand balances both domestically and internationally, which historically have been cyclical. The cycles are generally characterized by periods of tight supply, leading to high operating rates and margins, followed by periods of oversupply primarily resulting from significant capacity additions, leading to reduced operating rates and lower margins.
Moreover, profitability in the petrochemical industry is affected by the worldwide level of demand along with vigorous price competition which may intensify due to, among other things, new domestic and foreign industry capacity. In general, weak economic conditions either in the United States or in the world tend to reduce demand and put pressure on margins. It is not possible to predict accurately the supply and demand balances, market conditions and other factors that will affect industry operating margins in the future.
Olefins industry forecasts show a significant increase in worldwide ethylene capacity over the next five years, with the largest increase in the Middle East and Asia. As a result, operating margins may not improve and could decline further in 2009 and 2010.
PVC industry operating rates dropped from peak levels in the third quarter of 2006 to much lower levels in the fourth quarter of 2008. This downturn, which impacts our Vinyls segment, was primarily due to weakness in the construction market which started in September 2006 and continued through 2008. Looking forward, North American PVC capacity is projected to increase in 2009 and 2010. Capacity growth is expected to exceed demand growth and, as a result, operating rates and margins may not improve and could decline further from 2008 levels.
The global financial crisis may have impacts on our business and financial condition.
The continued credit crisis and related instability in the global financial system has had, and may continue to have, an impact on our business and our financial condition. We may face significant challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access such markets, which could have an impact on our flexibility to react to changing economic and business conditions.
We are currently restricted from incurring additional debt, other than specified permitted debt under the indenture governing our senior notes. These restrictions are based on our financial performance and may cease to restrict us in the future, but the availability of additional financing at cost effective interest rates cannot be
assured due to the current volatility of the commercial credit markets. In addition, reduced levels of accounts receivables and inventory affect our credit facility borrowing base. Our credit facility allows us to borrow up to the lesser of (1) the $400 million maximum capacity and (2) the calculated borrowing base, which is based on trade receivables and inventory balances. With our reduced levels of working capital, the borrowing base of our credit facility has declined to $257.9 million as of December 31, 2008. The credit crisis could have an impact on the lenders under our revolving credit facility or on our customers and suppliers, causing them to fail to meet their obligations to us. Additionally, the crisis could lead to reduced demand for our products, which could have a negative impact on our revenues.
We sell commodity products in highly competitive markets and face significant competition and price pressure.
We sell our products in highly competitive markets. Due to the commodity nature of many of our products, competition in these markets is based primarily on price and to a lesser extent on performance, product quality, product deliverability and customer service. As a result, we generally are not able to protect our market position for these products by product differentiation and may not be able to pass on cost increases to our customers. Accordingly, increases in raw material and other costs may not necessarily correlate with changes in prices for these products, either in the direction of the price change or in magnitude. Specifically, timing differences in pricing between raw material prices, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, sometimes with an additional lag in effective dates for increases, have had and may continue to have a negative effect on profitability. Significant volatility in raw material costs tends to place pressure on product margins as sales price increases generally tend tocould lag behind raw material cost increases. Conversely, when raw material costs decrease, customers could seek relief in the form of lower sales prices.
HighVolatility in costs of raw materials and energy may result in increased operating expenses and adversely affect our results of operations and cash flow.
Significant variations in the costs and availability of raw materials and energy may negatively affect our results of operations. These costs have risenrose significantly over the past several years until the fourth quarter of 2008, due primarily to oil and natural gas cost increases. We purchase significant amounts of ethane and propane feedstock, natural gas, chlorine and salt to produce several basic chemicals. We also purchase significant amounts of electricity to supply the energy required in our production processes. The cost of these raw materials and energy, in the aggregate, represents a substantial portion of our operating expenses. The prices of raw materials and energy generally follow price trends of, and vary with market conditions for, crude oil and natural gas, which are highly volatile and cyclical. Our results of operations have been and could in the future be significantly affected by increases in these costs. Price increases increase our working capital needs and, accordingly, can adversely affect our liquidity and cash flow. In addition, because we utilize the first-in, first-out (FIFO) method of inventory accounting, during periods of falling raw material prices and declining sales prices, such as the fourth quarter of 2008, our results of operations for a particular reporting period could be negatively impacted as the lower sales prices would be reflected in operating income more quickly than the corresponding drop in feedstock costs. We typically do not enter into significant hedging arrangements with respectuse derivative instruments to prices of raw materials. However, we have occasionally entered into short-term contracts in order to hedge our costs for ethane and natural gas.reduce price volatility risk on some feedstock commodities. In the future, we may decide not to hedge any of our raw material costs or any hedges we enter into may not have successful results.
In addition, higher natural gas prices could adversely affect the ability of many domestic chemical producers to compete internationally since U.S. producers are disproportionately reliant on natural gas and natural gas liquids as an energy source and as a raw material. In addition to the impact that this has on our exports, reduced
competitiveness of U.S. producers also has in the past increased the availability of chemicals in North America, as U.S. production that would otherwise have been sold overseas was instead offered for sale domestically, resulting in excess supply and lower prices in North America. We could also face the threat of imported products from countries that have a cost advantage.
External factors beyond our control can cause fluctuations in demand for our products and in our prices and margins, which may negatively affect our results of operations and cash flow.
External factors beyond our control can cause volatility in raw material prices, demand for our products, product prices and volumes and deterioration in operating margins. These factors can also magnify the impact of economic cycles on our business and results of operations. Examples of external factors include:
general economic conditions;
the level of business activity in the industries that use our products;
competitor action;
technological innovations;
currency fluctuations;
international events and circumstances;
governmental regulation in the United States and abroad; and
severe weather and natural disasters.disasters; and
credit worthiness of customers and vendors.
We believe that events in the Middle East have had a particular influence overin the past several years and may continue to do so untilin the situations normalize.future. In addition, a number of our products are highly dependent on durable goods markets, such as housing and construction, which are themselves particularly cyclical. The significant weakening of the U.S. residential housing market during recent years, and the current economic downturn, have had an adverse effect on demand and margins for our products. If the global economy worsens in general, or the U.S. residential housing market worsens in particular, demand for our products and our income and cash flow willcould be adversely affected.
affected to an even greater degree.
We may reduce production at or idle a facility for an extended period of time or exit a business because of high raw material prices, an oversupply of a particular product and/or a lack of demand for that particular product, which makes production uneconomical. In 2008, we closed a PVC window and door components plant and announced the idling of a PVC pipe plant. Temporary outages sometimes last for several quarters or, in certain cases, longer and cause us to incur costs, including the expenses of maintaining and restarting these facilities. Factors such as increases in raw material costs or lower demand in the future may cause us to further reduce operating rates, idle facilities or exit uncompetitive businesses.
Continued hostilitiesHostilities in the Middle East and/or the occurrence or threat of occurrence of terrorist attacks such as those against the United States on September 11, 2001 could adversely affect the economies of the United States and other developed countries. A lower level of economic activity could result in a decline in demand for our products, which could adversely affect our net sales and margins and limit our future growth prospects. In addition, these risks have increased in the past, and may continue to increase volatilityin the future. Volatility in prices for crude oil and natural gas and could also result in increased feedstock costs. In addition, these risks could cause increased instability in the financial and insurance markets and could adversely affect our ability to access capital and to obtain insurance coverage that we consider adequate or areis otherwise required by our contracts with third parties.
Our inability to compete successfully may reduce our operating profits.
The petrochemical industry is highly competitive. In the last severalrecent years, there have been a number of mergers, acquisitions, spin-offs and joint ventures in the industry. This restructuring activity has resulted in fewer but more competitive producers, many of which are larger than we are and have greater financial resources than we do. Among our competitors are some of the world’s largest chemical companies and chemical industry joint
ventures. Competition within the petrochemical industry and in the manufacturing of fabricated products is affected by a variety of factors, including:
product price;
quality;
reliability of supply;
availability of potential substitute materials; and
product performance.
Changes in the competitive environment could have a material adverse effect on our business and our operations. These changes could include:
the emergence of new domestic and international competitors;
the rate of capacity additions by competitors;
change in customer base due to mergers;
the intensification of price competition in our markets;
the introduction of new or substitute products by competitors;
the technological innovations of competitors; and
the adoption of new environmental laws and regulatory requirements.
Our production facilities process some volatile and hazardous materials that subject us to operating risks that could adversely affect our operating results.
We have threefour major manufacturing facilities: our olefins complex in Lake Charles, Louisiana, our polyethylene complex in Longview, Texas, our vinyls complex in Calvert City, Kentucky and our vinyls facility in Geismar, Louisiana. Our operations are subject to the usual hazards associated with commodity chemical and plastics manufacturing and the related use, storage, transportation and disposal of feedstocks, products and wastes, including:
pipeline leaks and ruptures;
explosions;
fires;
severe weather and natural disasters;
mechanical failure;
unscheduled downtime;
labor difficulties;
transportation interruptions;
chemical spills;
discharges or releases of toxic or hazardous substances or gases;
storage tank leaks;
other environmental risks; and
terrorist attacks.
These hazards can cause personal injury and loss of life, catastrophic damage to or destruction of property and equipment and environmental damage, and may result in a suspension of operations and the imposition of civil or criminal penalties. We could become subject to environmental claims brought by governmental entities or third parties. A loss or shutdown over an extended period of operations at any one of our threefour major operating facilities would have a material adverse effect on us. We maintain property, business interruption and casualty insurance that we believe is in accordance with customary industry practices, but we cannot be fully insured
against all potential hazards incident to our business, including losses resulting from war risks or terrorist acts. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position.
New regulationsRegulations concerning the transportation of hazardous chemicals and the security of chemical manufacturing facilities could result in higher operating costs.
Targets such as chemical manufacturing facilities may be at greater risk of terrorist attacks than other targets in the United States. As a result, the chemical industry has responded to the issues surrounding the terrorist attacks of September 11, 2001 by starting new initiatives relating to the security of chemicals industry facilities and the transportation of hazardous chemicals in the United States. Simultaneously, local, state and federal governments have begunbegan a regulatory process that could leadled to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals. Our business or our customers’ businesses could be adversely affected because of the cost of complying with newthese regulations.
Our operations and assets are subject to extensive environmental, health and safety laws and regulations.
We use large quantities of hazardous substances and generate large quantities of hazardous wastes in our manufacturing operations. Due to the large quantities of hazardous substances and wastes, our industry is highly regulated and monitored by various environmental regulatory authorities. As such, we are subject to extensive federal, state and local laws and regulations pertaining to pollution and protection of the environment, health and safety, which govern, among other things, emissions to the air, discharges onto land or waters, the maintenance of safe conditions in the workplace, the remediation of contaminated sites, and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations and require the installation of costly pollution control equipment or operational changes to limit pollution emissions and/or reduce the likelihood or impact of hazardous substance releases, whether permitted or not. For example, all threefour of our petrochemical facilities, in Lake Charles, Longview, Calvert City and Geismar, may require improvements to comply with the anticipated wastewater regulations of the synthetic organic chemical manufacturing industries.
certain changes in process safety management requirements.
In addition, we cannot accurately predict future developments, such as increasingly strict environmental and safety laws or regulations, and inspection and enforcement policies, as well as resulting higher compliance costs, which might affect the handling, manufacture, use, emission, disposal or remediation of products, other materials or hazardous and non-hazardous waste, and we cannot predict with certainty the extent of our future liabilities and costs under environmental, health and safety laws and regulations. These liabilities and costs may be material.
Members of the U.S. Congress have introduced proposals to reduce or cap the emissions of carbon dioxide and other greenhouse gases (“GHG”). Legislation that controls or limits GHG emissions could adversely affect our energy supply and costs and the costs of raw materials derived from fossil fuels. The cost of complying with any new law or regulation will depend on the details of the particular program. Any such laws and regulations could adversely affect the operation of our facilities, result in additional costs that could adversely affect our results of operations and reduce demand for our products.
We also may face liability for alleged personal injury or property damage due to exposure to chemicals or other hazardous substances at our facilities or to chemicals that we otherwise manufacture, handle or own. Although these types of claims have not historically had a material impact on our operations, a significant increase in the success of these types of claims could have a material adverse effect on our business, financial condition, operating results or cash flow.
Environmental laws may have a significant effect on the nature and scope of, and responsibility for, cleanup of contamination at our current and former operating facilities, the costs of transportation and storage of raw materials and finished products, the costs of reducing emissions and the costs of the storage and disposal of wastewater. In addition, the federal CERCLA and similar state laws impose joint and several liability for the costs of remedial investigations and actions on the entities that generated waste, arranged for disposal of the wastes, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such potentially responsible parties (or any one of them, including us) may be required to bear all of such costs regardless of fault, legality of the original disposal or ownership of the disposal site. In addition, CERCLA and similar state laws could impose liability for damages to natural resources caused by contamination.
Although we seek to take preventive action, our operations are inherently subject to accidental spills, discharges or other releases of hazardous substances that may make us liable to governmental entities or private parties. This may involve contamination associated with our current and former facilities, facilities to which we sent wastes or by-products for treatment or disposal and other contamination. Accidental discharges may occur in the future, future action may be taken in connection with past discharges, governmental agencies may assess damages or penalties against us in connection with any past or future contamination, or third parties may assert claims against us for damages allegedly arising out of any past or future contamination. In addition, we may be liable for existing contamination related to certain of our facilities for which, in some cases, we believe third parties are liable in the event such third parties fail to perform their obligations. For further discussion of such existing contamination, see Item 1, “Business—Environmental and Other Regulation.”
Our property insurance has only partial coverage for acts of terrorism and, in the event of terrorist attack, we could lose net sales and our facilities.
As a result of the terrorist attacks of September 11, 2001 and other events, our insurance carriers have created certain exclusions for losses from terrorism from our property insurance policies. While separate terrorism insurance coverage is available, premiums for suchfull coverage are very expensive, especially for chemical facilities, and the policies are subject to high deductibles. Available terrorism coverage typically excludes coverage for losses from acts of war and from acts of foreign governments as well as nuclear, biological and chemical attacks. We have determined that it is not economically prudent to obtain full terrorism insurance, especially given the significant risks that are not covered by such insurance. Where feasible we have secured some limited terrorism insurance coverage on our property where insurers have included it in their overall programs. In the event of a terrorist attack impacting one or more of our facilities, we could lose the net sales from the facilities and the facilities themselves, and could become liable for any contamination or for personal or property damage due to exposure to hazardous materials caused by any catastrophic release that may result from a terrorist attack.
We have significant debt, which could adversely affect our ability to operate our business.
As of December 31, 2005,2008, we had total outstanding debt of $266.9 million, which$510.3 million. Our debt, net of restricted cash, represented approximately 21%23% of our total capitalization. On January 13, 2006, we issued our 6 5/8% senior notes due in 2016 in an aggregate principal amount of $250 million, the proceeds of which, together with cash on hand, were used to redeem our 8 3/4% senior notes due in 2011, to pay the premium in connection with such redemption and to repay all of the indebtedness under our term loan. We expect ourOur annual interest expense for 2006 to be approximately $17.4 million. As of December 31, 2005, we had $171.7 million of available capacity under our $200 million senior secured revolving credit facility. On January 6, 2006, we amended this credit facility to increase the commitment from $200 to $3002008 was $34.0 million. Our level of debt and the limitations imposed on us by our existing or future debt agreements could have significant consequences on our business and future prospects, including the following:
a significant portion of our cash flow from operations will be dedicated to the payment of interest and principal on our debt and will not be available for other purposes, including the payment of dividends;
we may not be able to obtain necessary financing in the future for working capital, capital expenditures, acquisitions, debt service requirements or other purposes;
our less leveraged competitors could have a competitive advantage because they have greater flexibility to utilize their cash flow to improve their operations;
we may be exposed to risks inherent in interest rate fluctuations because some of our borrowings are at variable rates of interest, which would result in higher interest expense in the event of increases in interest rates; and
we could be more vulnerable in the event of a downturn in our business that would leave us less able to take advantage of significant business opportunities and to react to changes in our business and in market or industry conditions.conditions; and
should we pursue additional expansions of existing assets or acquisition of third party assets, the availability of additional liquidity at cost effective interest rates cannot be assured due to the current volatility of the commercial credit markets.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and pay cash dividends will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
Our business may not generate sufficient cash flow from operations, currently anticipated cost savings and operating improvements may not be realized on schedule and future borrowings may not be available to us under our credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. In addition, we may not be able to refinance any of our indebtedness, including our credit facility and our senior notes, on commercially reasonable terms or at all.
Our credit facility and the indenture governing our senior notes impose significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities and taking some actions.
Our credit facility and the indenture governing our senior notes impose significant operating and financial restrictions on us. These restrictions limit our ability to:
pay dividends on, redeem or repurchase our capital stock;
make investments and other restricted payments;
incur additional indebtedness or issue preferred stock;
create liens;
permit dividend or other payment restrictions on our restricted subsidiaries;
sell all or substantially all of our assets or consolidate or merge with or into other companies;
engage in transactions with affiliates; and
engage in sale-leaseback transactions.
These limitations are subject to a number of important qualifications and exceptions. Our credit facility also requires us to maintain a minimum fixed charge coverage ratio if the amount available to be borrowed falls belowor maintain a specified level.amount of availability under the credit facility. These covenants may adversely affect our ability to finance our future operations and capital needs and to pursue available business opportunities. A breach of any of these covenants could result in a default in respect of the related debt. If a
default occurred, the relevant lenders could elect to declare the debt, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that debt. In addition, any acceleration of debt under our credit facility will constitute a default under some of our other debt, including the indenture governing our senior notes.
Also, because of our current reduced levels of working capital, the borrowing base of our revolving credit facility declined to $257.9 million as of December 31, 2008, which is below the maximum borrowing capacity of $400 million. In addition, the indenture governing our senior notes currently restricts the incurrence of additional debt by us, except for specified permitted debt (including borrowings under our credit facility, additional borrowings under one or more term loan facilities not to exceed $200 million and $100 million of other debt), because our fixed charge coverage ratio fell below 2.0 at December 31, 2008.
We may pursue acquisitions, dispositions and joint ventures and other transactions that may impact our results of operations and financial condition.
We seek opportunities to maximize efficiency and create stockholder value through various transactions. These transactions may include various domestic and international business combinations, purchases or sales of assets or contractual arrangements or joint ventures that are intended to result in the realization of synergies, the creation of efficiencies or the generation of cash to reduce debt. To the extent permitted under our credit facility, the indenture governing our senior notes and other debt agreements, some of these transactions may be financed by additional borrowings by us. Although these transactions are expected to yield longer-term benefits if the expected efficiencies and synergies of the transactions are realized, they could adversely affect our results of operations in the short term because of the costs associated with such transactions. Other transactions may advance future cash flows from some of our businesses, thereby yielding increased short-term liquidity, but consequently resulting in lower cash flows from these operations over the longer term. These transactions may not yield the business benefits, synergies or financial benefits anticipated by management.
We may have difficulties integrating the operations of the businesses we may acquire.acquired businesses.
If we are unable to integrate or to successfully manage businesses that we have acquired or that we may acquire in the future, our business, financial condition and results of operations could be adversely affected. We may not be able to realize the operating efficiencies, synergies, cost savings or other benefits expected from the acquisitions for a number of reasons, including the following:
we may fail to integrate the businesses we acquire into a cohesive, efficient enterprise;
our resources, including management resources, are limited and may be strained if we engage in a significant number of acquisitions, and acquisitions may divert our management’s attention from initiating or carrying out programs to save costs or enhance revenues; and
our failure to retain key employees and contracts of the businesses we acquire.
The trading price of our common stock, which has declined substantially, may negatively impact us.
The capital and credit markets have been experiencing volatility and disruption for more than 12 months. Recently, the volatility and disruption has reached unprecedented levels. The markets have produced downward pressure on stock prices and credit availability. The market value of our common stock, which has declined significantly, is a factor in determining whether our goodwill is impaired. If current levels of market disruption and volatility continue or worsen, the market value of our common stock could decline further and result in an impairment of goodwill. A decline in the market value of our common stock could also negatively impact us in other ways, including making it more difficult for us to raise any equity capital.
We will be controlled by our principal stockholder and its affiliates as long as they own a majority of our common stock, and our other stockholders will be unable to affect the outcome of stockholder voting during that time. Our interests may conflict with those of the principal stockholder and its affiliates, and we may not be able to resolve these conflicts on terms possible in arms-length transactions.
As long as TTWF LP (the “principal stockholder”) and its affiliates (the “principal stockholder affiliates”) own a majority of our outstanding common stock, they will be able to exert significant control over us, and our other stockholders, by themselves, will not be able to affect the outcome of any stockholder vote. As a result, the principal stockholder, subject to any fiduciary duty owed to our minority stockholders under Delaware law, will be able to control all matters affecting us (some of which may present conflicts of interest), including:
the composition of our board of directors and, through the board, any determination with respect to our business direction and policies, including the appointment and removal of officers and the determination of compensation;
any determinations with respect to mergers or other business combinations or the acquisition or disposition of assets;
our financing decisions, capital raising activities and the payment of dividends; and
amendments to our amended and restated certificate of incorporation or amended and restated bylaws.
The principal stockholder will be permitted to transfer a controlling interest in us without being required to offer our other stockholders the ability to participate or realize a premium for their shares of common stock. A sale of a controlling interest to a third party may adversely affect the market price of our common stock and our business and results of operations because the change in control may result in a change of management decisions and business policy. Because we have elected not to be subject to Section 203 of the General Corporation Law of the State of Delaware, the principal stockholder may find it easier to sell its controlling interest to a third party than if we had not so elected.
In addition to any conflicts of interest that arise in the foregoing areas, our interests may conflict with those of the principal stockholder affiliates in a number of other areas, including:
business opportunities that may be presented to the principal stockholder affiliates and to our officers and directors associated with the principal stockholder affiliates, and competition between the principal stockholder affiliates and us within the same lines of business;
the solicitation and hiring of employees from each other; and
agreements with the principal stockholder affiliates relating to corporate services that may be material to our business.
We may not be able to resolve any potential conflicts with the principal stockholder affiliates, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party, particularly if the conflicts are resolved while we are controlled by the principal stockholder affiliates. Our amended and restated certificate of incorporation provides that the principal stockholder affiliates have no duty to refrain from engaging in activities or lines of business similar to ours and that the principal stockholder affiliates will not be liable to us or our stockholders for failing to present specified corporate opportunities to us.
Cautionary Statements about Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Certain of the statements contained in this Form 10-K are forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements can be identified by the use of words such as “believes,“believ es,” “intends,” “may,” “should,” “could,” “anticipates,” “expected” or comparable terminology, or by discussions of strategies
or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Forward-looking statements relate to matters such as:
future operating rates, margins, cash flow and demand for our products;
industry market outlook;
production capacities;
our ability to borrow additional funds under our credit facility;
our ability to meet our liquidity needs;
our intended quarterly dividends;
future capacity additions and expansions in the industry;
timing, size, scope, cost and other matters related to the project in the Republic of Trinidad and Tobago;
timing and results of the planned expansion of our chlor-alkali plant at our Geismar facility;
timing and duration of plant idlings;
compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures, remedial actions and proceedings;
timing and results of negotiations with respect to collective bargaining agreements;
effects of pending legal proceedings; and
timing of and amount of capital expendituresexpenditures.
We have based these statements on assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, we continue to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Risk Factors” and those described from time to time in our other filings with the SEC including, but not limited to, the following:
general economic and business conditions;
the cyclical nature of the chemical industry;
the availability, cost and volatility of raw materials and energy;
uncertainties associated with the United States and worldwide economies, including those due to the global economic slow down, the credit crisis and political tensions in the Middle East and elsewhere;
current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries;
industry production capacity and operating rates;
competitive products and pricing pressures;
instability in the credit and financial markets;
access to capital markets;
terrorist acts;
changes in laws or regulations;
technological developments;
our ability to implement our business strategies; and
creditworthiness of our customers.
Many of such factors are beyond our ability to control or predict. Any of the factors, or a combination of these factors, could materially affect our future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements.
Item 1B. Unresolved Staff Comments
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
Our manufacturing facilities and principal products are set forth below. Except as noted, we own each of these facilities.
Location | Principal Products | |
Lake Charles, Louisiana | Ethylene, polyethylene, styrene | |
Longview, Texas(1) | Polyethylene, polyethylene wax | |
Calvert City, | PVC, VCM, chlorine, caustic soda, ethylene, PVC pipe | |
Geismar, Louisiana | PVC, VCM and EDC | |
Booneville, Mississippi | PVC pipe | |
Springfield, Kentucky | PVC pipe | |
Litchfield, Illinois | PVC pipe | |
Wichita Falls, Texas | PVC pipe | |
Bristol, Indiana | PVC pipe | |
Leola, Pennsylvania | PVC pipe | |
Greensboro, Georgia | PVC pipe | |
Van Buren, Arkansas | PVC pipe (currently idled) | |
Yucca, Arizona(3) | PVC pipe | |
Evansville, Indiana | Fence and deck components | |
Calgary, Alberta, | Window | |
(1) | We lease the land on which our Longview facility is located. |
(2) | We lease a portion of our Calvert City |
We lease our Yucca facility. |
(4) | We lease our Calgary facility. |
Olefins
Our Lake Charles complex consists of three tracts on over 1,300 acres in Lake Charles, Louisiana, each within two miles of one another. The complex includes two ethylene plants, two polyethylene plants and a styrene monomer plant. The combined capacity of our two ethylene plants is approximately 2.42.5 billion pounds per year. The capacity of our two polyethylene plants is approximately 1.4 billion pounds per year and the capacity of our styrene plant is approximately 485570 million pounds per year. Our newest polyethylene plant has two production units that use gas phase technology to manufacture both LLDPE and HDPE. Our styrene monomer plant is being modernized with state-of-the-art technology. We are planning to implementimplemented modifications to the styrene monomer plant in 20072008 designed to save energy and reduce raw material consumption.
Our Lake Charles complex includes a marine terminal that provides for worldwide shipping capabilities. The complex also is located near rail transportation facilities, which allows for efficient delivery of raw materials and prompt shipment of our products to customers. In addition, the complex is connected by pipeline systems to our ethylene feedstock sources in both Texas and Louisiana. Within the complex, our ethylene plants are connected by pipeline systems to our polyethylene and styrene plants.
Our Longview, Texas facility consists of three polyethylene plants, a specialty polyethylene wax plant, and a 200 mile, ten inch ethylene pipeline that runs from Mt. Belvieu, Texas to Longview. The plants are located inside a large Eastman Chemical Company (Eastman) facility where Eastman produces a number of other chemical products. We can access ethylene to support our polyethylene operations either by purchasing ethylene from Eastman at the site or by transporting ethylene from our Lake Charles plant into the Gulf Coast grid and by transporting ethylene through our ethylene pipeline into our Longview facility. The technologies we use to produce LDPE, LLDPE and HDPE at Longview are similar to the technologies that we employ at Lake Charles (autoclave LDPE and gas phase LLDPE and HDPE). The Longview facility has a total capacity of 1.1 billion pounds per year.
Vinyls
Our Calvert City complex is situated on 550 acres on the Tennessee River in Kentucky and includes an ethylene plant, a chlor-alkali plant, a VCM plant, a PVC plant and a large diameter PVC pipe plant. The capacity of our Calvert City ethylene plant is 450 million pounds per year and the capacity of our chlor-alkali plant is 410550 million pounds of chlorine and 450605 million pounds of caustic soda per year. Our chlorine plant utilizes efficient, state-of-the-art membrane technology. Our VCM plant has a capacity of 1.3 billion pounds per year and our Calvert City PVC plant has a capacity of 8001.1 billion pounds per year.
In October 2007, we announced our plans to expand our chlor-alkali and PVC resin units and build a large diameter PVC pipe plant at our Calvert City complex. The chlor-alkali expansion was completed in the fourth quarter of 2008 and will enhance the integration of the vinyls product chain. The expanded chlor-alkali unit added 50,000 ECUs, bringing Calvert City’s total capacity to 275,000 ECUs per year. The PVC resin plant expansion was completed in the first quarter of 2009 and increased capacity by 300 million pounds per year.year, bringing our total PVC capacity to 1.7 billion pounds annually. During 2008, we completed construction of a new large diameter PVC pipe facility with a capacity of approximately 55 million pounds per year of large diameter pipe.
In 2002, we acquired aOur vinyls facility in Geismar, Louisiana which is situated on 184 acres on the Mississippi River. The site includes a PVC plant with a capacity of 600 million pounds per year and a VCM plant with a capacity of 600550 million pounds per year with related EDC capacity. In August 2008, we announced that we will construct a new chlor-alkali plant to be located at our vinyls manufacturing complex in Geismar. The new chlor-alkali unit is expected to produce 250,000 ECUs annually upon completion, which is expected in 2011. The new plant is expected to improve the vertical integration of our vinyls business from chlorine downstream into VCM and PVC, and increase caustic soda sales.
We currently operate elevenAs of February 15, 2009, we operated 11 fabricated products plants, consisting of eightnine PVC pipe plants, and threetwo profiles plants producing PVC fence, decking, windows and patio door profiles. The majority of our plants are strategically located near our Calvert City complex and serve customers throughout the middle United States. The combined capacity of our fabricated product plants is 9151,076 million pounds per year.
We announced in March 2008 that we would open a new PVC pipe plant in Yucca, Arizona to produce pipe for water, sewer, irrigation and related industrial and residential markets in the Western United States. The new plant became operational in the first quarter of 2009 with a capacity of approximately 120 million pounds of PVC pipe annually.
We decided to permanently close our Pawling, New York facility and consolidate manufacturing of window and door components in Calgary, Canada in the first quarter of 2008. In the fourth quarter of 2008, we announced the idling of our PVC pipe plant in Van Buren, Arkansas.
We believe our current facilities and announced expansions are adequate to meet the requirements of our present and foreseeable future operations.
Headquarters
Our principal executive offices are located in Houston, Texas. Our office space is leased, at market rates, from an affiliate under a lease that expires on December 31, 2009.2014. See Note 13 to the audited consolidated financial statements appearing elsewhere in this Form 10-K and “Certain Relationships and Related Transactions” in our proxy statement to be filed with the SEC within 120 days of December 31, 20052008 pursuant to Regulation 14A with respect to our 20062009 annual meeting of stockholders (the “Proxy Statement”).
In October 2003, we filed suit against CITGO Petroleum Corporation in state court in Lake Charles, Louisiana, asserting that CITGO had failed to take sufficient hydrogen under two successive contracts pursuant to which we supplied and we supply to CITGO hydrogen that we generate as a co-product in our ethylene plants in Lake Charles. In December 2003, CITGO responded with an answer and a counterclaim against us, asserting
that CITGO had overpaid us for hydrogen due to our allegedly faulty sales meter and that we are obligated to reimburse CITGO for the overpayments. In January 2004, we filed a motion to compel arbitration of CITGO’s counterclaim and to stay all court proceedings relating to the counterclaim. In May 2004, the parties filed a joint motion with the court to provide for CITGO’s counterclaim to be resolved by arbitration. Our claim against CITGO is approximately $8.1 million plus interest at the prime rate plus two percentage points and attorneys’ fees. CITGO’s claim against us is approximately $7.8 million plus interest at the prime rate plus two percentage points and attorneys’ fees. The parties held a mediation conference in April 2004 at which they agreed to conduct further discovery with a view towards holding another mediation conference to attempt to settle their disputes. Subsequently, the parties have held discussions regarding a settlement. We can offer no assurance that a settlement can be achieved, and if none can be achieved, we intend to vigorously pursue our claim against CITGO and our defense of CITGO’s counterclaim.
Item 3. | Legal Proceedings |
In addition to the matters described above and under Item 1, “Business—Environmental and Other Regulation,” we are involved in various routine legal proceedings incidental to the conduct of our business. We do not believe that any of these routine legal proceedings will have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Executive Officers of the Registrant
James Chao(age 61). Mr. Chao has been our Chairman of the Board since July 2004 and became a director in June 2003. He previously served as our Vice Chairman of the Board since May 1996. Mr. Chao also has responsibility for the oversight of our Vinyls business. Mr. Chao has over 30 years of international experience in the chemical industry. In June 2003, he was named Chairman of Titan Chemicals Corp. Bhd. and previously served as the Managing Director. He has served as a Special Assistant to the Chairman of China General Plastics Group and worked in various financial, managerial and technical positions at Mattel Incorporated, Developmental Bank of Singapore, Singapore Gulf Plastics Pte. Ltd. and Gulf Oil Corporation. Mr. Chao, along with his brother Albert Chao, assisted their father T.T. Chao in founding us and served as our first president from 1985 to 1996. Mr. Chao received his Bachelor of Science degree from the Massachusetts Institute of Technology and an M.B.A. from Columbia University.
Albert Chao(age 56)59). Mr. Chao has been our President since May 1996 and a director since June 2003. Mr. Chao has over 30 years of international experience in the chemical industry. In 1985, Mr. Chao assisted his father T.T. Chao and his brother James Chao in founding us, where he served as Executive Vice President until
he succeeded James as President. He has held positions in the Controller’s Group of Mobil Oil Corporation, in the Technical Department of Hercules Incorporated, in the Plastics Group of Gulf Oil Corporation and has served as Assistant to the Chairman of China General Plastics Group and Deputy Managing Director of a plastics fabrication business in Singapore. He is also a director of Titan Chemicals Corp. Bhd. Mr. Chao received a bachelor’s degree from Brandeis University and an M.B.A. from Columbia University. Mr. Chao is a trustee emeritus of Rice University.
James ChaoM. Steven Bender(age 58)52). Mr. Chao has been our Chairman of the Board since July 2004Bender was promoted to Senior Vice President, Chief Financial Officer and became a directorTreasurer in June 2003. He previouslyFebruary 2008. From February 2007 to February 2008, Mr. Bender served as our Vice ChairmanPresident, Chief Financial Officer and Treasurer and from June 2005 to February 2007, he served as our Vice President and Treasurer. From June 2002 until June 2005, Mr. Bender served as Vice President and Treasurer of KBR, Inc., and from 1996 to 2002 he held the Board since May 1996. Mr. Chao also has responsibilityposition of Assistant Treasurer for the oversight of our Vinyls business. Mr. Chao has over 30 years of international experience in the chemical industry. In June 2003,Halliburton Company. Prior to that, he held various financial positions within that company. Additionally, he was named Chairmanemployed by Texas Eastern Corporation for over a decade in a variety of increasingly responsible audit, finance and treasury positions. Mr. Bender received a Bachelor of Business Administration from Texas A&M University and an M.B.A. from Southern Methodist University. Mr. Bender is also a Certified Public Accountant.
Donald M. Condon, Jr.(age 59). Mr. Condon was appointed Senior Vice President, Olefins and Corporate Business Development in July 2008. From July 2006 to July 2008, Mr. Condon was our Senior Vice President, Corporate Planning and Business Development. Prior to joining us, Mr. Condon served as the Managing Director of Titan Chemicals Corp. Bhd. from July 2003 to June 2006 and President & General Manager of Conoco Energy Ventures from 1998 until July 2003. He previously served as the Managing Director. He has served aswas employed by Conoco and Dupont in a Special Assistant to the Chairmanvariety of China General Plastics Groupmanagement and worked in various financial, managerial and technical positions at Mattel Incorporated, Developmental Bank of Singapore, Singapore Gulf Plastics Pte. Ltd. and Gulf Oil Corporation.executive positions. Mr. Chao, along with his brother Albert Chao, assisted their father T.T. Chao in founding us and served as our first president from 1985 to 1996. Mr. Chao received his Bachelor of Science degreeCondon holds a B.B.A. from the Massachusetts InstituteUniversity of Technology and an M.B.A. from Columbia University.Wisconsin.
David R. Hansen(age 55)58). Mr. Hansen has been our Senior Vice President, Administration, since September 1999 and served as Vice President, Human Resources from 1993 to 1999. From August 2003 until July 2004 he was also our Secretary. Prior to joining us in 1990, Mr. Hansen served as Director of Human Resources & Administration for Agrico Chemical Company and held various human resources and administrative management positions within the Williams Companies. He has 30 years of administrative management experience in the oil, gas, energy, chemicals, pipeline, plastics and computer industries. He received his Bachelor of Science degree in Social Science from the University of Utah and has completed extensive graduate work toward an M.S. in Human Resources Management.
Wayne D. Morse(age 62)65). Mr. Morse has been a Senior Vice President since 1994 and was named Senior Vice President, Vinyls and Manufacturing in January 2003. In July 2004, he was named Senior Vice President, Vinyls. Mr. Morse joined us in 1990 after 23 years of service with Goodrich Corporation. He held the position of Vice President and General Manager of BFG Intermediates Division, which had ethylene, chlor-alkali and EDC/VCM operations. Since joining us, Mr. Morse has had broad executive responsibility for all chemical operations and is the senior manufacturing executive of our company. Mr. Morse earned a B.S. degree in Chemical Engineering from the University of Louisville.
Jeffrey L. Taylor(age 55). Mr. Taylor was promoted to Senior Vice President, Polyethylene in April 2008. From January 2003 to April 2008, Mr. Taylor served as our Vice President, Polyethylene. Mr. Taylor joined us in March 2002 as Manager, Polyethylene Marketing. Mr. Taylor joined us after a 25-year career with Chevron Phillips Chemical Company where he served as the Vice President, Polyethylene, Americas from 2000 to 2001 and Marketing Manager—Polyethylene from 1999 to 2000. During his career, he has held a variety of sales, marketing, operations and general management assignments. He is a graduate of the University of Delaware with a B.S. in Business Administration and a B.A. in Mathematics.
M. Steven BenderAndrew Kenner(age 49) (age 44). Mr. BenderKenner has been our Vice President, and TreasurerManufacturing since June 2005. From June 2002 until June 2005,joining us in July 2008. Prior to joining us, Mr. BenderKenner served as Vice President and TreasurerGeneral Manager of Kellogg, Brown and Root, Inc., a subsidiary of Halliburton Company, andValero Energy Corporation’s Delaware City Refinery from 1996September 2005 to 2002 heJuly 2008. From August 2004 to September
2005, Mr. Kenner held the position of Assistant TreasurerVice President and General Manager of Valero’s Houston Refinery and from August 2003 to August 2004, he served as Operations Director for Halliburton. Prior to that, he held various financial positions within that company. Additionally, he was employed byValero’s Texas Eastern Corporation for overCity Refinery. Mr. Kenner holds a decadeB.S. in a variety of increasingly responsible audit, finance and treasury positions. Mr. Bender received a Bachelor of Business AdministrationAerospace Engineering from Texas A&M University and an M.B.A.a M.S. in Chemical Engineering from Southern Methodist University. Mr. Bender is also a Certified Public Accountant.
the University of Texas at Austin.
George J. Mangieri(age 55)58). Mr. Mangieri has been our Vice President and ControllerChief Accounting Officer since joining us inFebruary 2007. From April 2000.2000 to February 2007, he was Vice President and Controller. Prior to joining us, Mr. Mangieri served as Vice President and Controller of Zurn Industries, Inc. from 1998 to 2000. He previously was employed as Vice President and Controller for Imo Industries, Inc. in New Jersey, and spent over 10 years in public accounting with Ernst & Young LLP, where he served as Senior Manager. He received his Bachelor of Science degree from Monmouth College and is a Certified Public Accountant.
Jeffrey L. Taylor(age 52). Mr. Taylor has been our Vice President, Polyethylene, since January 2003. Mr. Taylor joined us in March 2002 as Manager, PE Marketing. Mr. Taylor joined us after a 25-year career with Chevron Phillips Chemical Company where he served as the Vice President, Polyethylene, Americas from 2000 to 2001 and Marketing Manager—Polyethylene from 1999 to 2000. During his career, he has held a variety of sales, marketing, operations and general management assignments. He is a graduate of the University of Delaware with a B.S. in Business Administration and a B.A. in Mathematics.
Stephen Wallace(age 59) (age 62). Mr. Wallace joined us in December 2003 as our Vice President and General Counsel and was elected Secretary in July 2004. He began his legal career over 20 years ago at the law firm of Baker Botts L.L.P., which he left as a partner in 1993. He subsequently held senior corporate legal positions with Transworld Oil U.S.A., Inc. (1993-1996; 2002-2003), Oman Oil Company Ltd. (1996-1997), and Enron Global Exploration & Production Inc. and its affiliates (1997-2002). Mr. Wallace holds a B.A. from Rice University and a Ph.D. from Cornell University in linguistics, and received his J.D. from the University of Houston.
Warren W. Wilder (age 48). Mr. Wilder has been our Vice President, Olefins and Styrene, since January 2003. Mr. Wilder joined us in January 2000 as Vice President, Planning and Business Development, and in February 2001, he was appointed Vice President, Polyethylene. Prior to joining us, he was an executive with Koch Industries, Inc. for over 10 years where he held positions in planning and business development, finance, operations and general management, including Vice President, Koch Hydrocarbons from 1996 to 1999. Mr. Wilder holds a B.S. in Chemical Engineering from the University of Washington and an M.B.A. from the University of Chicago.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Price Range of Common Stock
As of February 13, 2006,2009, there were 8469 holders of record of our common stock. Our common stock is listed on the New York Stock Exchange under the symbol “WLK.” Set forth below are the high and low closing prices for our common stock, as reported on the New York Stock Exchange composite tape for the periods indicated and the cash dividends declared in these periods.
High | Low | Cash Dividends Declared | High | Low | Cash Dividends Declared | |||||||||||||
Year Ended December 31, 2005 | ||||||||||||||||||
Year Ended December 31, 2008 | ||||||||||||||||||
4th Quarter | $ | 30.50 | $ | 26.16 | $ | 0.02750 | $ | 21.84 | $ | 12.45 | $ | 0.05250 | ||||||
3rd Quarter | 32.97 | 24.55 | 0.02750 | 21.93 | 13.20 | 0.05250 | ||||||||||||
2nd Quarter | 33.26 | 22.29 | 0.02125 | 17.73 | 13.62 | 0.05000 | ||||||||||||
1st Quarter | 37.03 | 30.63 | 0.02125 | 21.94 | 13.01 | 0.05000 | ||||||||||||
Year Ended December 31, 2004 | ||||||||||||||||||
Year Ended December 31, 2007 | ||||||||||||||||||
4th Quarter | $ | 34.02 | $ | 21.76 | $ | 0.02125 | $ | 26.37 | $ | 18.50 | $ | 0.05000 | ||||||
3rd Quarter | 22.75 | 14.65 | N/A | 31.47 | 24.54 | 0.05000 | ||||||||||||
2nd Quarter | N/A | N/A | N/A | 31.05 | 26.69 | 0.04000 | ||||||||||||
1st Quarter | N/A | N/A | N/A | 37.11 | 26.75 | 0.04000 |
We completed the initial public offering of our common stock in August 2004.
Our credit facility and the indenture governing our 6 5/8%senior notes due 2016 restrict our ability to pay dividends or other distributions on our equity securities. We do not currently expect these restrictions to materially limit our ability to pay regular quarterly dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt” for a discussion of the restrictions.
Equity Compensation Plan Information
Securities authorized for issuance under equity compensation plans are as follows:
Plan Category | Number of securities to be issued upon exercise of | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in | ||||
Equity compensation plans approved by security holders | 520,457 | $ | 16.50 | 5,614,914 | |||
Equity compensation plans not approved by security holders | N/A | N/A | N/A | ||||
Total | 520,457 | $ | 16.50 | 5,614,914 |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights(a) | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) | ||||
Equity compensation plans approved by security holders | 910,329 | $ | 24.72 | 4,604,158 | |||
Equity compensation plans not approved by security holders | N/A | N/A | N/A | ||||
Total | 910,329 | $ | 24.72 | 4,604,158 |
Other information regarding our equity compensation plans is set forth in the section entitled “Executive Compensation” in our Proxy Statement, which information is incorporated herein by reference.
Item 6. Selected Financial Data
Item 6. | Selected Financial and Operational Data(1) |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||||||||||||||
(dollars in thousands, except per share and volume data) | (dollars in thousands, except per share and volume data) | |||||||||||||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 2,441,105 | $ | 1,985,353 | $ | 1,423,034 | $ | 1,072,627 | $ | 1,087,033 | $ | 3,692,353 | $ | 3,192,178 | $ | 2,484,366 | $ | 2,441,105 | $ | 1,985,353 | ||||||||||||||||||||
Gross profit (loss) | 443,631 | 303,185 | 121,952 | 80,569 | (29,921 | ) | ||||||||||||||||||||||||||||||||||
Gross profit | 69,368 | 271,400 | 396,483 | 443,631 | 303,185 | |||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 76,598 | 60,238 | 57,014 | 64,258 | 53,203 | 98,908 | 96,679 | 83,232 | 76,598 | 60,238 | ||||||||||||||||||||||||||||||
Gain on sale of assets | — | (2,049 | ) | — | — | — | — | (2,049 | ) | |||||||||||||||||||||||||||||||
Gain on legal settlement | — | — | (3,162 | ) | — | — | ||||||||||||||||||||||||||||||||||
Impairment of long-lived assets(1) | — | 1,830 | 2,285 | 2,239 | 7,677 | |||||||||||||||||||||||||||||||||||
Impairment of long-lived assets(2) | — | — | — | — | 1,830 | |||||||||||||||||||||||||||||||||||
Income (loss) from operations | 367,033 | 243,166 | 65,815 | 14,072 | (90,801 | ) | ||||||||||||||||||||||||||||||||||
(Loss) income from operations | (29,540 | ) | 174,721 | 313,251 | 367,033 | 243,166 | ||||||||||||||||||||||||||||||||||
Interest expense | (23,717 | ) | (39,350 | ) | (38,589 | ) | (35,044 | ) | (35,454 | ) | (33,957 | ) | (18,422 | ) | (16,519 | ) | (23,717 | ) | (39,350 | ) | ||||||||||||||||||||
Debt retirement cost | (646 | ) | (15,791 | ) | (11,343 | ) | — | — | — | — | (25,853 | ) | (646 | ) | (15,791 | ) | ||||||||||||||||||||||||
Other income, net(2) | 2,658 | 2,637 | 7,620 | 6,769 | 8,916 | |||||||||||||||||||||||||||||||||||
Other income, net(3) | 5,475 | 2,658 | 11,670 | 2,658 | 2,637 | |||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 345,328 | 190,662 | 23,503 | (14,203 | ) | (117,339 | ) | |||||||||||||||||||||||||||||||||
Provision for (benefit from) income taxes | 118,511 | 69,940 | 8,747 | (7,141 | ) | (45,353 | ) | |||||||||||||||||||||||||||||||||
(Loss) income before income taxes | (58,022 | ) | 158,957 | 282,549 | 345,328 | 190,662 | ||||||||||||||||||||||||||||||||||
(Benefit from) provision for income taxes | (28,479 | ) | 44,228 | 87,990 | 118,511 | 69,940 | ||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 226,817 | $ | 120,722 | $ | 14,756 | $ | (7,062 | ) | $ | (71,986 | ) | ||||||||||||||||||||||||||||
Net (loss) income | $ | (29,543 | ) | $ | 114,729 | $ | 194,559 | $ | 226,817 | $ | 120,722 | |||||||||||||||||||||||||||||
Earnings per share information(3): | ||||||||||||||||||||||||||||||||||||||||
(Loss) earnings per share information(4): | ||||||||||||||||||||||||||||||||||||||||
Basic | $ | 3.49 | $ | 2.19 | $ | 0.30 | $ | (0.14 | ) | $ | (1.45 | ) | $ | (0.45 | ) | $ | 1.76 | $ | 2.99 | $ | 3.49 | $ | 2.19 | |||||||||||||||||
Diluted | $ | 3.48 | $ | 2.18 | $ | 0.30 | $ | (0.14 | ) | $ | (1.45 | ) | $ | (0.45 | ) | $ | 1.76 | $ | 2.98 | $ | 3.48 | $ | 2.18 | |||||||||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||||||||||||||||||||
Basic | 65,008,253 | 55,230,786 | 49,499,395 | 49,499,395 | 49,499,395 | 65,273,485 | 65,234,828 | 65,133,628 | 65,008,253 | 55,230,786 | ||||||||||||||||||||||||||||||
Diluted | 65,251,109 | 55,355,442 | 49,499,395 | 49,499,395 | 49,499,395 | 65,316,981 | 65,324,326 | 65,254,654 | 65,251,109 | 55,355,442 | ||||||||||||||||||||||||||||||
Balance Sheet Data (end of period): | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 237,895 | $ | 43,396 | $ | 37,381 | $ | 11,123 | $ | 79,095 | $ | 90,239 | $ | 24,914 | $ | 52,646 | $ | 237,895 | $ | 43,396 | ||||||||||||||||||||
Working capital(4) | 597,014 | 421,723 | 197,715 | 158,993 | 138,211 | |||||||||||||||||||||||||||||||||||
Working capital(5) | 586,701 | 650,923 | 527,875 | 597,014 | 421,723 | |||||||||||||||||||||||||||||||||||
Total assets | 1,827,189 | 1,592,453 | 1,370,113 | 1,309,245 | 1,308,858 | 2,286,989 | 2,569,335 | 2,082,098 | 1,827,189 | 1,592,453 | ||||||||||||||||||||||||||||||
Total debt | 266,889 | 298,089 | 537,289 | 533,350 | 540,855 | 510,319 | 511,414 | 260,156 | 266,889 | 298,089 | ||||||||||||||||||||||||||||||
Minority interest | — | — | 22,100 | 22,100 | 22,100 | |||||||||||||||||||||||||||||||||||
Stockholders’ equity | 994,106 | 769,397 | 445,603 | 428,519 | 430,752 | 1,239,060 | 1,286,670 | 1,173,541 | 994,106 | 769,397 | ||||||||||||||||||||||||||||||
Cash dividends declared per share | $ | 0.0975 | $ | 0.02125 | $ | — | $ | — | $ | — | $ | 0.2050 | $ | 0.1800 | $ | 0.1350 | $ | 0.0975 | $ | 0.02125 | ||||||||||||||||||||
Other Operating Data: | ||||||||||||||||||||||||||||||||||||||||
Cash flow from: | ||||||||||||||||||||||||||||||||||||||||
Operating activities | $ | 318,447 | $ | 150,781 | $ | 78,087 | $ | (21,326 | ) | $ | 26,370 | $ | 186,089 | $ | 62,166 | $ | 237,184 | $ | 318,447 | $ | 150,781 | |||||||||||||||||||
Investing activities | (87,590 | ) | (79,963 | ) | (41,581 | ) | (38,686 | ) | (76,500 | ) | (171,952 | ) | (124,805 | ) | (404,336 | ) | (87,590 | ) | (79,963 | ) | ||||||||||||||||||||
Financing activities | (36,358 | ) | (64,803 | ) | (10,248 | ) | (7,690 | ) | 117,696 | 51,188 | 34,907 | (18,097 | ) | (36,358 | ) | (64,803 | ) | |||||||||||||||||||||||
Depreciation and amortization | 81,241 | 81,075 | 87,293 | 88,018 | 81,690 | 111,926 | 103,514 | 86,262 | 81,241 | 81,075 | ||||||||||||||||||||||||||||||
Capital expenditures | 85,760 | 52,710 | 44,931 | 43,587 | 76,500 | 172,561 | 135,725 | 136,258 | 85,760 | 52,710 | ||||||||||||||||||||||||||||||
EBITDA(5) | 450,286 | 311,087 | 149,385 | 108,859 | (195 | ) | ||||||||||||||||||||||||||||||||||
EBITDA(6) | 87,861 | 280,893 | 385,330 | 450,286 | 311,087 | |||||||||||||||||||||||||||||||||||
External Sales Volume (millions of pounds): | ||||||||||||||||||||||||||||||||||||||||
Olefins Segment | ||||||||||||||||||||||||||||||||||||||||
Polyethylene | 1,237 | 1,330 | 1,280 | 1,199 | 1,076 | 2,231 | 2,447 | 1,318 | 1,237 | 1,330 | ||||||||||||||||||||||||||||||
Ethylene, styrene and other | 979 | 1,138 | 861 | 767 | 1,054 | 971 | 948 | 858 | 979 | 1,138 | ||||||||||||||||||||||||||||||
Vinyls Segment | ||||||||||||||||||||||||||||||||||||||||
Fabricated finished products | 854 | 660 | 517 | 543 | 501 | 627 | 756 | 758 | 854 | 660 | ||||||||||||||||||||||||||||||
VCM, PVC, and other | 1,223 | 1,097 | 1,120 | 1,184 | 1,099 | 1,538 | 1,467 | 1,289 | 1,223 | 1,097 |
(1) | The historical selected financial and operational data should be read together with item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and item 8, Financial Statements and Supplementary Data included in this annual report on Form 10-K. |
(2) | The 2004 impairments related to a PVC plant not in service and Olefins segment assets written down to fair market value. |
Other income, net is composed of interest income, insurance proceeds, equity income, management fee income and other gains and losses. |
Does not reflect the issuance of common stock in exchange for preferred stock as part of the internal reorganizations immediately prior to our initial public offering. |
Working capital equals current assets less current liabilities. |
EBITDA (a non-GAAP financial measure) is calculated as net income before interest expense, income taxes, depreciation and amortization. The body of accounting principles generally accepted in the United States is commonly referred to as “GAAP.” For this purpose a non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical and 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. We have included EBITDA in this Form 10-K 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. EBITDA allows for meaningful company-to-company performance comparisons by adjusting for factors such as interest expense, depreciation and amortization and taxes, which often vary from company to company. 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 in this Form 10-K may not be comparable to EBITDA reported by other companies. EBITDA has material limitations as a performance measure because it excludes (1) interest expense, which is a necessary element of our costs and ability to generate revenues because we have borrowed money to finance our operations, (2) depreciation, which is a necessary element of our costs and ability to generate revenues because we use capital assets and (3) income taxes, which is a necessary element of our operations. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. The following table reconciles EBITDA to net (loss) income |
Reconciliation of EBITDA to Net (Loss) Income (Loss) and
to Cash Flow from Operating Activities
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
EBITDA | $ | 450,286 | $ | 311,087 | $ | 149,385 | $ | 108,859 | $ | (195 | ) | $ | 87,861 | $ | 280,893 | $ | 385,330 | $ | 450,286 | $ | 311,087 | |||||||||||||||||||
Less: | ||||||||||||||||||||||||||||||||||||||||
Income tax (provision) benefit | (118,511 | ) | (69,940 | ) | (8,747 | ) | 7,141 | 45,353 | ||||||||||||||||||||||||||||||||
Benefit from (provision for) income taxes | 28,479 | (44,228 | ) | (87,990 | ) | (118,511 | ) | (69,940 | ) | |||||||||||||||||||||||||||||||
Interest expense | (23,717 | ) | (39,350 | ) | (38,589 | ) | (35,044 | ) | (35,454 | ) | (33,957 | ) | (18,422 | ) | (16,519 | ) | (23,717 | ) | (39,350 | ) | ||||||||||||||||||||
Depreciation and amortization | (81,241 | ) | (81,075 | ) | (87,293 | ) | (88,018 | ) | (81,690 | ) | (111,926 | ) | (103,514 | ) | (86,262 | ) | (81,241 | ) | (81,075 | ) | ||||||||||||||||||||
Net income (loss) | $ | 226,817 | $ | 120,722 | $ | 14,756 | $ | (7,062 | ) | $ | (71,986 | ) | ||||||||||||||||||||||||||||
Net (loss) income | (29,543 | ) | 114,729 | 194,559 | 226,817 | 120,722 | ||||||||||||||||||||||||||||||||||
Changes in operating assets and liabilities | 41,438 | (41,156 | ) | 48,245 | (19,137 | ) | 133,779 | 204,818 | (59,830 | ) | 20,200 | 40,940 | (43,076 | ) | ||||||||||||||||||||||||||
Equity in income of unconsolidated subsidiary | (94 | ) | (1,379 | ) | (1,510 | ) | (770 | ) | (1,138 | ) | (621 | ) | (2,796 | ) | (1,766 | ) | (94 | ) | (1,379 | ) | ||||||||||||||||||||
Deferred income taxes | 45,745 | 65,188 | 7,112 | (4,716 | ) | (45,779 | ) | (13,879 | ) | 5,286 | 13,852 | 45,745 | 65,188 | |||||||||||||||||||||||||||
Impairment of long-lived assets | — | 1,830 | 2,285 | 2,239 | 7,677 | — | — | — | — | 1,830 | ||||||||||||||||||||||||||||||
Write-off of debt issuance cost | 646 | 4,153 | 7,343 | — | — | — | — | 3,623 | 646 | 4,153 | ||||||||||||||||||||||||||||||
Loss (gain) from disposition of fixed assets | 4,746 | (218 | ) | (2,903 | ) | (2,259 | ) | — | 4,900 | 724 | 2,848 | 4,746 | (218 | ) | ||||||||||||||||||||||||||
Amortization of debt issue costs | 1,456 | 2,097 | 887 | — | — | 954 | 760 | 850 | 1,456 | 2,097 | ||||||||||||||||||||||||||||||
Provision for doubtful accounts | (2,307 | ) | (456 | ) | 1,872 | 10,379 | 3,817 | |||||||||||||||||||||||||||||||||
Stock-based compensation expense | 4,178 | 2,873 | 1,731 | 498 | 1,920 | |||||||||||||||||||||||||||||||||||
Provision for (recovery of) doubtful accounts | 15,282 | 420 | 1,287 | (2,307 | ) | (456 | ) | |||||||||||||||||||||||||||||||||
Cash flow from operating activities | $ | 318,447 | $ | 150,781 | $ | 78,087 | $ | (21,326 | ) | $ | 26,370 | $ | 186,089 | $ | 62,166 | $ | 237,184 | $ | 318,447 | $ | 150,781 | |||||||||||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
We are a vertically integrated manufacturer and marketer of petrochemicals, polymers and fabricated products. Our two principal business segments are Olefinsolefins and Vinyls.vinyls. We use the majority of our internally-produced basic chemicals to produce higher value-added chemicals and fabricated products.
Consumption of the basic chemicals that we manufacture in the commodity portions of our olefins and vinyls processes has increased significantly over the past 30 years. Our Olefinsolefins and Vinylsvinyls products are some of the most widely used chemicals in the world and are upgraded into a wide variety of higher value-added chemical products used in many end-markets. Petrochemicals are typically manufactured in large volume by a number of different producers using widely available technologies. The petrochemical industry exhibits cyclical commodity characteristics, and margins are influenced by changes in the balance between supply and demand and the resulting operating rates, the level of general economic activity and the price of raw materials. The cycle is generally characterized by periods of tight supply, leading to high operating rates and margins, followed by a decline in operating rates and margins primarily as a result of significant capacity additions. Due to the significant size of new plants, capacity additions are built in large increments and typically require several years of demand growth to be absorbed. We believe thatIn 2003 and 2004, the industry has emerged fromolefins and vinyls markets began a down cyclecyclical recovery and is currently enjoying strong demand and global economic growth in spite of high energy and raw material costs. Currently, no significant new olefins or vinyls capacity additions are expected in North America until the end of 2007. Operatingoperating rates and margins began to improve during 2003, and increasedrose as economic growth improved and excess capacity was absorbed. These factors resulted in increased industry product margins in 2003, 2004, 2005 and 2005.2006. In 2007 and 2008, however, weakness in the housing market contributed to lower demand, and operating margins have declined in our vinyls business. The demand for olefins products remained strong in 2007 largely due to balanced industry supply and demand fundamentals for polyethylene and strong export demand, but margins were lower due to increased feedstock costs. In 2008, olefins margins declined significantly due to a sharp drop in product demand that started in August as customers began to anticipate lower product prices due to a weakened global economy. This was followed by a sharp drop in product prices in the last quarter of 2008, which resulted in continued slow demand, lower operating rates and a significant operating loss in the fourth quarter of 2008.
PVC industry operating rates dropped from peak levels in the third quarter of 2006 to much lower levels in the fourth quarter of 2008. This downturn, which impacts our Vinyls segment, was primarily due to weakness in the construction market which started in September 2006 and continued through 2008. Looking forward, North American PVC capacity is projected to increase in 2009 and 2010. Capacity growth is expected to exceed demand growth and, as a result, operating rates and margins may not improve and could decline further from 2008 levels.
Olefins industry forecasts show a significant increase in worldwide ethylene capacity over the next five years, with the largest increase in the Middle East and Asia. As a result, operating margins may not improve and could decline further in 2009 and 2010.
We purchase significant amounts of ethane and propane feedstock, natural gas, chlorine and salt from external suppliers for use in production of basic chemicals in the olefins and vinyls chains. We also purchase significant amounts of electricity to supply the energy required in our production processes. While we have agreements providing for the supply of ethane and propane feedstocks, natural gas, chlorine, salt and electricity, the contractual prices for these raw materials and energy vary with market conditions and may be highly volatile. Factors whichthat have caused volatility in our raw material prices in the past and which may do so in the future, include:
shortages of raw materials due to increasing demand;
capacity constraints due to construction delays, strike action or involuntary shutdowns;
the general level of business and economic activity; and
the direct or indirect effect of governmental regulation.
Significant volatility in raw material costs tends to put pressure on product margins as sales price increases generally tend tocould lag behind raw material cost increases. Conversely, when raw material costs decrease, customers may seek relief in the form of lower sales prices. These dynamics are particularly pronounced during periods of excess industry capacityWe currently use derivative instruments to reduce price volatility risk on feedstock commodities and contributed to the trough conditions experienced by the chemical industry and us in 2001 and 2002. We typically do not enter into significant hedging arrangements with respect to prices of raw materials.
In 2001 and 2002,lower overall costs. Normally, there is a pricing relationship between a commodity that we experienced two periods of dramatically increased raw material costs. In 2001, natural gas prices spiked to a high of $9.98 per million BTUs, or mmbtu, as compared to a three year average of $3.57 per mmbtu between 1999 and 2001. Prices for natural gas declined, but spiked again in 2002 to a high of $4.14 per mmbtu. As a result of weak industry conditions, in most cases we were unable to fully pass these raw material price increases through to customers and our margins declined. In 2003, we experienced another natural gas price spike with prices averaging $5.50 per mmbtu. In this period, we were able to pass higher feedstock prices through to our customers. As a result, margins improved compared to margins in 2001 and 2002. During 2004, natural gas prices continued to increase, with prices averaging $6.20 per mmbtu. In this period, we were able to pass higher feedstock prices through to our customersprocess and the margins for manyfeedstock from which it is derived. When this pricing relationship deviates from historical norms, we have from time to time entered into derivative instruments and physical positions in an attempt to take advantage of our products
improved. During 2005, natural gas prices continued to increase, with prices averaging $8.62 per mmbtu. In this period, we were again able to pass higher feedstock prices through to our customers and the margins for most of our products improved.
relationship.
Our historical results have been significantly affected by our plant production capacity, our efficient use of the capacity and our ability to increase our capacity. Since our inception, we have followed a disciplined growth strategy that focuses on plant acquisitions, new plant construction and internal expansion. We evaluate each expansion project on the basis of its ability to produce sustained returns in excess of itsour cost of capital and its ability to improve efficiency or reduce operating costs.
In August 2008, we announced that we will construct a new chlor-alkali plant to be located at our vinyls manufacturing complex in Geismar, Louisiana. The new chlor-alkali unit is expected to produce 250,000 ECUs annually upon completion, bringing our total ECU capacity to 525,000 per year, including the chlor-alkali expansion at our Calvert City complex described below. The new plant is expected to improve the vertical integration of our vinyls business from chlorine downstream into VCM and PVC, and increase caustic soda sales. The project is currently estimated to cost between $250 million and $300 million and is targeted for completion in 2011. We expect the project will be partially funded with funds drawn from the proceeds of the issuance of the 6 3/4% revenue bonds of the Louisiana Local Government Environmental Facility and Development Authority, issued in December 2007 for our benefit, which are currently held as restricted cash. The remaining funding will depend on our revolving credit facility, cash flow from operations, and, possibly, our ability to obtain additional financing.
We announced in March 2008 our plans to open a new PVC pipe plant in Yucca, Arizona to produce pipe for water, sewer, irrigation and related industrial and residential markets in the Western United States. The new plant became operational in the first quarter of 2009 and has the capacity to produce approximately 120 million pounds of PVC pipe annually.
We decided to permanently close our Pawling, New York facility and consolidate manufacturing of window and door components in Calgary, Canada in the first quarter of 2008. In addition, during the fourth quarter of 2008, we announced the idling of our Van Buren, Arkansas PVC pipe facility. Asset impairments, severance and other costs recorded in 2008 related to the Pawling plant closure and the idling of the Van Buren plant were approximately $3.9 million.
In October 2007, we announced our plans to expand our chlor-alkali and PVC resin units and build a large diameter PVC pipe plant at our Calvert City complex. The chlor-alkali expansion was completed in the fourth quarter of 2008 and has added 50,000 ECUs of annual capacity. The chlor-alkali expansion is expected to improve the vertical integration of our vinyls business from chlorine downstream into VCM and PVC and increase caustic soda sales. The PVC resin plant expansion was completed in the first quarter of 2009 and increased capacity by 300 million pounds per year, bringing our total PVC capacity to 1.7 billion pounds annually. The expansion is expected to enhance the integration of the vinyls product chain by consuming VCM that was previously sold on the merchant market. During the third quarter of 2008, we also completed construction of a new large diameter PVC pipe facility at the complex with a capacity of approximately 55 million pounds per year of large diameter pipe. Our annual fabricated products capacity increased to approximately 1,076 million pounds with this expansion and the completion of the Yucca plant.
Since 2006 we have been in discussions with the Government of The Republic of Trinidad and Tobago (the “Government”) to develop an ethane-based ethylene, polyethylene and other derivatives project in that country. The project has faced several major constraints, and we and the Government are planningdiscussing how to overcome those challenges. In the interim, we have suspended active work on the project.
We experienced several shut-downs and turnarounds from 2006 to 2008. In 2006, we completed a scheduled major turnaroundsmaintenance turnaround in Calvert City. The ethylene and VCM units at Calvert City were down for 16 days while the chlor-alkali and PVC units were down for a shorter period. Sales continued during the turnaround from inventory on hand. In September 2006, we encountered mechanical problems with a compressor and related equipment at one of our ethylene units in Lake Charles, andLouisiana, resulting in an unscheduled shutdown of that unit. While that unit was down, we completed a maintenance turnaround of that unit that was scheduled for early 2007. During the unit’s shut-down, we also completed portions of our project to upgrade the feedstock flexibility at our ethylene plant designed to reduce energy costs and provide for additional ethylene capacity. The unit was successfully restarted in Calvert Citylate October 2006 and resumed full production. As a result of the Lake Charles outage, we incurred approximately $3.1 million in maintenance expense and $27.4 million in turnaround costs which were capitalized. In 2007, we completed a major turnaround for one of our ethylene units at our Lake Charles facility. The unit was shut down for approximately 30 days to complete the tie-in portion of a project designed to upgrade the feedstock flexibility of the unit in order to reduce energy costs and provide for additional ethylene capacity. The cost of the turnaround of approximately $8.3 million was capitalized. In addition, during 2006.the first and second quarters of 2008 we performed a major turnaround of our styrene plant in Lake Charles. The unit was shut down for a total of 48 days to perform a major maintenance turnaround and revamp project designed to increase energy efficiency and slightly increase capacity. The cost of this turnaround was approximately $17.5 million, which was capitalized. Also, during August and September 2008, we shut down our vinyls facilities at our Geismar, Louisiana complex and our olefins facilities at our Lake Charles, Louisiana complex due to Hurricanes Gustav and Ike. Both complexes sustained minimal damage from the hurricanes; however, the energy and power shortages caused by the hurricanes affected many suppliers and, as a consequence, the Lake Charles facilities were shut down for approximately three weeks due to the two hurricanes, while the Geismar facilities were shut down for approximately one and a half weeks due to Hurricane Gustav. In addition, one of our ethylene units in Lake Charles was idled during December 2008 due to significant customer inventory destocking and resulting weakened demand for our derivative products. A maintenance turnaround initially scheduled for this unit for the first half of 2009 has been brought forward to be performed during this down time, and the facility is expected to last approximately 40 days;resume operations in the one in Calvert City, approximately 16 days. Both turnarounds are planned for the secondfirst quarter of 2006, but the actual timing of each one could differ depending on interim developments. During a turnaround, production at the unit is suspended while work on the unit is performed.2009.
Results of Operations
Segment Data
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(dollars in thousands) | ||||||||||||
Net External Sales | ||||||||||||
Olefins | ||||||||||||
Polyethylene | $ | 697,662 | $ | 601,269 | $ | 481,662 | ||||||
Ethylene, styrene and other | 652,380 | 649,985 | 395,306 | |||||||||
Total olefins | 1,350,042 | 1,251,254 | 876,968 | |||||||||
Vinyls | ||||||||||||
Fabricated finished products | 587,547 | 394,513 | 263,518 | |||||||||
VCM, PVC, and other | 503,516 | 339,586 | 282,548 | |||||||||
Total vinyls | 1,091,063 | 734,099 | 546,066 | |||||||||
Total | $ | 2,441,105 | $ | 1,985,353 | $ | 1,423,034 | ||||||
Intersegment Sales | ||||||||||||
Olefins | $ | 116,822 | $ | 53,668 | $ | 34,665 | ||||||
Vinyls | 1,173 | 553 | 753 | |||||||||
Total | $ | 117,995 | $ | 54,221 | $ | 35,418 | ||||||
Income (Loss) from Operations: | ||||||||||||
Olefins | $ | 195,670 | $ | 179,587 | $ | 55,298 | ||||||
Vinyls | 179,407 | 69,723 | 13,583 | |||||||||
Corporate and other | (8,044 | ) | (6,144 | ) | (3,066 | ) | ||||||
Total | $ | 367,033 | $ | 243,166 | $ | 65,815 | ||||||
Depreciation and Amortization: | ||||||||||||
Olefins | $ | 46,844 | $ | 49,213 | $ | 51,088 | ||||||
Vinyls | 34,343 | 31,671 | 33,118 | |||||||||
Corporate and other | 54 | 191 | 3,087 | |||||||||
Total | $ | 81,241 | $ | 81,075 | $ | 87,293 | ||||||
Other Income (Expense), Net: | ||||||||||||
Olefins | $ | (1,933 | ) | $ | (981 | ) | $ | 3,459 | ||||
Vinyls | 301 | 121 | 629 | |||||||||
Corporate and other(1) | 3,644 | (12,294 | ) | (7,811 | ) | |||||||
Total | $ | 2,012 | $ | (13,154 | ) | $ | (3,723 | ) | ||||
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(dollars in thousands) | ||||||||||||
Net External Sales | ||||||||||||
Olefins | ||||||||||||
Polyethylene | $ | 1,724,671 | $ | 1,545,639 | $ | 783,968 | ||||||
Ethylene, styrene and other | 823,253 | 629,414 | 585,612 | |||||||||
Total olefins | 2,547,924 | 2,175,053 | 1,369,580 | |||||||||
Vinyls | ||||||||||||
Fabricated finished products | 428,461 | 497,610 | 596,461 | |||||||||
VCM, PVC, and other | 715,968 | 519,515 | 518,325 | |||||||||
Total vinyls | 1,144,429 | 1,017,125 | 1,114,786 | |||||||||
Total | $ | 3,692,353 | $ | 3,192,178 | $ | 2,484,366 | ||||||
(Loss) income from operations | ||||||||||||
Olefins | $ | (40,145 | ) | $ | 152,563 | $ | 160,875 | |||||
Vinyls | 17,877 | 29,991 | 157,918 | |||||||||
Corporate and other | (7,272 | ) | (7,833 | ) | (5,542 | ) | ||||||
Total (loss) income from operations | (29,540 | ) | 174,721 | 313,251 | ||||||||
Interest expense | (33,957 | ) | (18,422 | ) | (16,519 | ) | ||||||
Debt retirement costs | — | — | (25,853 | ) | ||||||||
Other income, net | 5,475 | 2,658 | 11,670 | |||||||||
Benefit from (provision for) income taxes | 28,479 | (44,228 | ) | (87,990 | ) | |||||||
Net (loss) income | $ | (29,543 | ) | $ | 114,729 | $ | 194,559 | |||||
(Loss) earnings per diluted share | $ | (0.45 | ) | $ | 1.76 | $ | 2.98 | |||||
2008 | 2007 | |||||||||||
Average Sales Price | Volume | Average Sales Price | Volume | |||||||||
Key product sales price and volume percentage change from prior year period | ||||||||||||
Olefins(1) | +19.6 | % | -2.5 | % | +3.3 | % | +55.5 | % | ||||
Vinyls | +16.5 | % | -4.0 | % | -17.4 | % | +8.6 | % | ||||
Company average | +18.7 | % | -3.0 | % | -4.7 | % | +33.2 | % |
2008 | 2007 | 2006 | ||||
Average industry prices(1) | ||||||
Ethane (cents/lb) | 30.1 | 26.7 | 22.1 | |||
Propane (cents/lb) | 33.4 | 28.6 | 23.9 | |||
Ethylene (cents/lb)(2) | 58.5 | 48.8 | 48.1 | |||
Polyethylene (cents/lb)(3) | 89.4 | 76.3 | 74.4 | |||
Styrene (cents/lb)(4) | 73.2 | 68.2 | 64.8 | |||
Caustic ($/short ton)(5) | 687.5 | 332.1 | 300.6 | |||
Chlorine ($/short ton)(6) | 269.2 | 316.3 | 330.0 | |||
PVC (cents/lb)(7) | 57.0 | 60.0 | 60.3 |
(1) |
(2) | Represents average North American contract prices of ethylene over the period as reported by CMAI. |
(3) | Represents average North American contract prices of polyethylene low density film over the period as reported by CMAI. |
(4) | Represents average North American contract prices of styrene over the period as reported by CMAI. |
(5) | Represents average North American average acquisition prices of caustic soda over the period as reported by CMAI. |
(6) | Represents average North American contract prices of chlorine (into chemicals) over the period as reported by CMAI. |
(7) | Represents North American contract prices of PVC over the period as reported by CMAI. During 2008, CMAI made a 16 cent per pound downward, non-market related adjustment to PVC resin prices. |
2005Summary
For the year ended December 31, 2008, we had a net loss of $29.5 million, or $0.45 per diluted share, on net sales of $3,692.4 million. This represents a decrease of $144.2 million, or $2.21 per diluted share, from the year ended December 31, 2007 net income of $114.7 million, or $1.76 per diluted share, which included a tax benefit of $8.0 million, or $0.12 per diluted share, related to a reduction in deferred taxes due to a change in apportionment ratios upon the reorganization of several subsidiaries. Sales for the year ended December 31, 2008 increased from 2007 sales of $3,192.2 million to $3,692.4 million, primarily due to higher average sales prices for all of the major products. A significant increase in product prices in the first three quarters of 2008 was reversed in the fourth quarter of 2008 as prices fell in response to lower demand and the sharp drop in feedstock costs. The 2008 net loss is largely the result of a $109.6 million net loss in the fourth quarter of 2008, primarily due to the sharp drop in product prices, resulting in a significant negative operating margin. The loss from operations was $29.5 million for the year ended December 31, 2008 as compared to income from operations of $174.7 million for the year ended December 31, 2007. The 2008 results have been negatively impacted by a number of factors, including the sharp drop in operating income in the fourth quarter of 2008 as discussed in the following paragraph, the effects of Hurricanes Gustav and Ike, higher raw material, natural gas and electricity costs, lower PVC pipe sales volume and a loss from trading activities. Our Olefins segment benefited from high operating rates through much of 2008 largely due to balanced industry supply and demand fundamentals for polyethylene; however, this segment experienced a sharp drop in product demand that began in the third quarter of 2008 as customers began to anticipate lower product prices due to a weakened global economy. This was followed by a sharp drop in product prices in the fourth quarter of 2008, which resulted in continued slow demand, lower operating rates and significantly lower operating margins. In addition, Olefins margins were negatively impacted by rising feedstock, natural gas and electricity costs and a trading loss of $9.4 million in 2008 compared to a trading loss of $1.0 million in 2007. Our Vinyls segment results in 2008 were relatively flat compared to 2007 as lower margins and volumes for downstream products, primarily due to the poor construction market, were mostly offset by higher caustic margins.
The fourth quarter 2008 operating loss was $165.8 million as compared to operating income in the fourth quarter of 2007 of $20.0 million, a decrease of $185.8 million. The significant loss in the fourth quarter of 2008 was primarily due to a sharp drop in product prices, a significant drop in sales volumes and operating rates and an increase in the allowance for doubtful accounts. The sharp drop in product prices in the fourth quarter of 2008 was primarily due to a collapse in feedstock prices. For ethane and propane, our two primary raw materials, average industry prices dropped 56.5% and 60.2%, respectively, from September 30, 2008 to December 31, 2008. As a result, polyethylene and PVC resin industry prices dropped 41.4% and 31.3%, respectively, during the same period. It generally takes 60 to 90 days from the time our feedstock is purchased, converted into finished goods, inventoried and sold. As a result of utilizing the first-in, first-out (FIFO) method of inventory accounting, and the rapid drop in feedstock costs and product prices in the fourth quarter, we had very high feedstock costs recorded in cost of sales in the fourth quarter of 2008, while our product sales prices were based on lower market sales prices due to the weakened demand for the products. This resulted in significant inventory losses, inclusive
of transportation and other distribution costs, and $22.0 million of adjustments due to the valuation of inventory at the lower of cost or market prices, in the fourth quarter of 2008. In addition, our plants operated at reduced rates in the fourth quarter of 2008 due to the general weakened demand as a result of the continued deterioration in the U.S. and global economies, and as a reaction to the concurrent sharp drop in product prices. In an effort to manage the build-up of excess inventory, and to control costs, we elected to idle one of our ethylene units in Lake Charles, Louisiana that was scheduled for a major maintenance turnaround in the first quarter of 2009. The maintenance work is being performed early during this downtime and the facility is expected to resume operations in the first quarter of 2009. The fourth quarter of 2008 gross profit was negatively impacted by approximately $168.0 million due to the inventory losses and the expensing of unabsorbed fixed manufacturing costs related to the drop in operating rates. In addition, during the fourth quarter of 2008 we increased the allowance for doubtful accounts by $8.9 million, which is a direct result of the current economic environment.
2008 Compared with 20042007
Net Sales.Net sales increased by $455.7$500.2 million or 23.0%, to $2,441.1$3,692.4 million in 20052008 from $1,985.4$3,192.2 million in 2004. This increase was primarily due to price increases throughout our Olefins and Vinyls segments and higher sales volumes in VCM, PVC resin and PVC pipe. Higher selling prices largely resulted from stronger demand for our products and higher raw material costs that were generally passed through to customers. PVC pipe sales in 2005 were higher than in 2004 due to the August 2004 acquisition of the assets of Bristolpipe Corporation.
Gross Margin.Gross margins increased to 18.2% in 2005 from 15.3% in 2004.2007. This increase was primarily due to higher sellingaverage sales prices throughoutfor all of our Olefins and Vinyls segmentsmajor products and higher sales volumes for VCM, PVC resin, and PVC pipe resulting from increased demand. These increases were partially offset by lower sales volumes for ethylene, polyethylene and styrene, higherPVC pipe. Average sales prices for 2008 increased by 18.7% as compared to 2007. Overall sales volume decreased by 3.0% in 2008 as compared to 2007.
Gross Profit. Gross profit percentage decreased to 1.9% in 2008 from 8.5% in 2007. This decrease was primarily due to the inventory losses and unabsorbed fixed manufacturing costs of approximately $168.0 million recorded in the fourth quarter of 2008. Our raw material costs for ethane, propane and benzene and higher energy costs. Our raw materials costs in both segments normally track industry prices, which experienced according to CMAI, an increase of 24.2%12.7% for ethane 23.3%and 16.8% for propane and 0.7% for benzene in 20052008 as compared to 2004. A fire at our Calvert City ethylene plant also negatively impacted our 2004 gross margin. We estimate that the gross margin impact2007. In addition, we experienced a $9.4 million loss in connection with trading activity for 2008 compared to a $1.0 million loss for 2007, an unfavorable change of the outage in 2004 relating$8.4 million (see Note 10 to the fire was approximately $8.4 million, which was comprised of higher maintenance cost of $3.4 million, lost margin on sales of approximately $4.6 million and a write-off of equipment of $0.4 million.consolidated financial statements).
Selling, General and Administrative Expenses.Selling, general and administrative or SG&A, expenses increased $16.4$2.2 million, or 27.2%2.3%, in 20052008 as compared to 2004.2007. The increase was primarily due to a $10.9 million increase in the allowance for doubtful accounts, directly attributable to the current economic environment. This increase was partially offset by transition costs related to compliance with the Sarbanes-Oxley Act, higher legal and environmental consultant fees, increased sales commissions and increased costs resulting fromacquisition of the Bristolpipe acquisition, partially offset by lower provision for doubtful accounts. SG&A costs in 2005 also increased as compared to 2004 due to the receipt of $1.5 millionLongview facilities incurred in the first quarterfour months of 2004 resulting from2007 and a reduction in legal settlement with a customer.expenses.
Gain on Sale of Asset. During the fourth quarter of 2004, we sold a co-generation unit that was included in the purchase of the Geismar assets. We recognized a $2.0 million gain from the sale of those assets. We did not have any gain or loss on sale of assets in 2005.
Impairment of Long-Lived Assets.Impairment of long-lived assets of $1.8 million in 2004 was related to an idled PVC plant in Pace, Florida in the Vinyls segment ($1.3 million) that was written down to its estimated sales value less commissions and ethylene assets in our Olefins segment ($0.5 million) which were written down to their remaining fair market value. We did not have any impairments of long-lived assets in 2005.
Interest Expense.Interest expense in 2005 decreased2008 increased by $15.7$15.6 million to $23.7$34.0 million from $39.4$18.4 million in 20042007, primarily due to lowerhigher average debt balances, which were partially offset by higher average interest rates. The average monthly debt balance decreased by $198.1 million to $271.7 million in 2005 from $469.8 million in 2004.
Debt Retirement Cost.We recognized $0.6 million in non-operating expense in 2005 resulting fromoutstanding for the period, largely as a write-off in previously capitalized debt issuance cost in connection with the repayment of $30.0 millionresult of our term loan. We recognized $15.8 million in non-operating expense in 2004, consistingissuance of a pre-payment premium on our 8the 6 3/4% senior notes in the fourth quarter of $11.6 million and a write off of $4.2 million in previously capitalized debt cost.2007.
Other Income, Net. Other income, net ofincreased by $2.8 million to $5.5 million in 2008 from $2.7 million in 2005 increased slightly over2007 primarily due to higher interest income from the $2.6restricted cash balance associated with our 6 3/4% senior notes, higher equity income from our joint venture in China and a $0.9 million write-down of a long-term investment in 2004.2007.
Income Taxes.The effective income tax rate was 34.3%49.1% in 20052008 as compared to 36.7%27.8% in 2004.2007. The 2005 effective income2008 tax rate is lower thanwas above the statutory rate of 35% primarily due to Extraterritorial Income (ETI) exclusionstate tax benefitscredits and a reduction of approximately 1.6%,gross unrecognized tax benefit of approximately 1% related to the new domestic manufacturing deduction and other provision adjustmentsbenefits, partially offset by state income taxes, all being applied to a loss before income taxes. The 2004 effective income2007 tax rate is higher thanwas below the statutory rate of 35% primarily due to state tax credits, a reduction in deferred taxes due to a change in apportionment ratios upon the reorganization of several subsidiaries and the domestic manufacturing deduction, partially offset by state income taxes.
Olefins Segment
Net Sales.Net sales increased by $98.7$372.8 million, or 7.9%17.1%, to $1,350.0$2,547.9 million in 20052008 from $1,251.3$2,175.1 million in 2004.2007. This increase was primarily due to price increaseshigher sales prices for all of ourmajor products, partially offset by lower sales volumes for polyethylene. Average sales prices for the Olefins segment products.increased by 19.6% in 2008 from 2007.
Income from Operations.Income from operations decreased by $192.7 million to a loss of $40.1 million in 2008 from income of $152.6 million in 2007. This decrease was primarily due to a loss from operations of $136.3 million in the fourth quarter of 2008 during which lower production, weakened product demand and a sharp drop in industry pricing resulted in negative margins. Industry polyethylene prices fell from September 30, 2008 to December 31, 2008 due to the collapse in energy and feedstock costs in the fourth quarter. As a result of utilizing the FIFO method of inventory accounting and the unprecedented drop in feedstock costs and product prices in the fourth quarter, we had very high feedstock costs recorded in our cost of sales in the fourth quarter of 2008 while our product prices were based on current costs. Other contributing factors for the decrease in 2008 included an increase in feedstock, natural gas and electricity costs in the first nine months of 2008. Due to market conditions, we were unable to increase prices to fully compensate for increased costs. Additionally, the impact of Hurricanes Gustav and Ike, which caused two separate outages at the Lake Charles plant during the third quarter of 2008, lower sales volumes for polyethylene and a trading loss of $9.4 million in 2008 as compared to a trading loss of $1.0 million in 2007. In addition, these decreases in operating income were only partially offset by higher average sales prices in 2008. Results for 2007 were negatively impacted by a major turnaround and an unscheduled outage at our Lake Charles ethylene units.
Vinyls Segment
Net Sales. Net sales increased by $127.3 million, or 12.5%, to $1,144.4 million in 2008 from $1,017.1 million in 2007. This increase was primarily due to higher sales prices for all major products and increased PVC resin sales volumes. Average sales prices for the Vinyls segment increased by 16.5% in 2008 as compared to 2007. These increases were partially offset by lower sales volumes for ethylene, polyethyleneVCM and styrene. Average selling prices for the Olefins segment increased by 18.1% in 2005 as compared to 2004. These increased prices were due primarily to higher industry demand and higher energy and raw material costs that were generally passed through to customers. The decrease in sales volumes resulted primarily from a three week outage caused by Hurricane Rita. In addition, styrene sales volumes decreased due to lower demand and merchant ethylene sales volumes decreased because our internal requirements for ethylene at Geismar increased.fabricated products.
Income from Operations.Operations. Income from operations increaseddecreased by $16.1$12.1 million to $195.7$17.9 million in 20052008 from $179.6$30.0 million in 2004.2007. This increasedecrease was primarily due to price increasesweakness in the construction market, which continues to negatively affect demand and product pricing in our vinyls downstream businesses. In addition, the closure of our Pawling, New York facility in the first quarter of 2008 and the idling of our Van Buren PVC pipe plant in the fourth quarter of 2008 negatively impacted income from operations as severance, asset impairments and other related costs totaled approximately $3.9 million in 2008. Partially offsetting these decreases were higher margins for ethylene, polyethylenecaustic. Results for 2007 were negatively impacted by $6.7 million due to a legal settlement and styrene. These increases were partially offset by lower sales volumes for ethylene, polyethylene and styrene, higher raw material costs for ethane, propane and benzene and higher energy costs.expenses associated with the litigation.
Vinyls Segment2007 Compared with 2006
Net Sales.Net sales increased by $357.0$707.8 million or 48.6%, to $1,091.1$3,192.2 million in 20052007 from $734.1$2,484.4 million in 2004.2006. This increase was primarily due to higher selling prices for all of our Vinyls segment products and higher sales volumes for VCM, PVC resinpolyethylene, ethylene, caustic and PVC pipe. Average selling prices for the Vinyls segment increased by 24.6%resin. Polyethylene sales volumes were significantly higher in 20052007 as compared to 2004. These increases were largely due to stronger industry demand for our products and higher raw material costs for propane and chlorine that were generally passed through to our customers. In addition to strong industry demand, PVC pipe sales volume also increased due to the August 2004 acquisition of the assets of Bristolpipe Corporation.
Income from Operations.Income from operations increased by $109.7 million to $179.4 million in 2005 from $69.7 million in 2004. This increase was2006 primarily due to higher selling prices for all of our Vinyls segment products and higher sales volumes for VCM, PVC resin and PVC pipe, partially offset by higher energy costs and higher raw material costs for propane and chlorine. The earnings for 2004 were adversely impacted by a fire at the Calvert City ethylene plant. We estimate that the impact on income from operations from the outage relating to the fire was approximately $8.4 million.
2004 Compared with 2003
Net Sales.Net sales increased by $562.3 million, or 39.5%, to $1,985.4 million in 2004 from $1,423.0 million in 2003. This increase was primarily due to price increases throughout our Olefins and Vinyls segments and higher sales volumes in ethylene, polyethylene, styrene, PVC pipe and caustic. Higher selling prices largely resulted from stronger demand for our products and higher raw material costs that were passed through to customers. PVC pipe sales were $55.4 million higher due to the acquisition of the assets of Bristolpipe Corporation, which was completed on August 2, 2004. These improvements were partially offset by lower sales volumes for VCM stemming mainly from a fire at our Calvert City ethylene plant in January 2004. The fire resulted in a 19-day outage for repairs and reduced VCM operating rates during that period.
Gross Margin.Gross margins increased to 15.3% in 2004 from 8.6% in 2003. This increase was primarily due to higher selling prices throughout our Olefins and Vinyls segments and higher sales volumes for ethylene, polyethylene, styrene, PVC pipe and caustic.Longview facility. These increases were partially offset by overall lower average sales prices.
Gross Margin. Gross margin percentage decreased to 8.5% in 2007 from 16.0% in 2006. This decrease was primarily due to lower average sales prices for our products and higher cost of raw materials. Our raw material costs for ethane, propane and benzene. Our raw materials costs in both segments normally track industry prices, which experienced according to CMAI, an increase of 26.0%20.8% for ethane 29.2%and 19.7% for propane and 87.0% for benzene in 20042007 as compared to 2003. The increases were also partially offset by the impact2006. In addition, we had a $1.0 million loss in connection with trading activity for 2007 compared to a $18.6 million gain for 2006, a decrease of the fire at the Calvert City ethylene plant. We estimate that the gross margin impact of the outage in 2004 relating$19.6 million (see Note 10 to the fire was approximately $8.4 million, which was comprised of higher maintenance cost of $3.4 million, lost margin on sales of approximately $4.6 million and a write-off of equipment of $0.4 million.consolidated financial statements).
Selling, General and Administrative Expenses.Selling, general and administrative or SG&A, expenses increased $3.2$13.5 million, or 5.7%16.2%, in 20042007 as compared to 2003.2006. The increase was primarily due to transition costs and other operating expenses related to the initial public offering and compliance withacquisition of the Sarbanes-Oxley Act, higher expenses for employee bonuses, increased sales commissionsLongview facility and increased SG&A costs resulting from the Bristolpipe acquisition. These higher costs were partially offset by the receipt of $1.5 million in the first quarter of 2004 resulting from a legal settlement with a customer and lower provisions for doubtful accounts. Provisions for doubtful accounts decreased by $2.3 million in 2004 as compared to 2003.
Gain on Sale of Asset. During the fourth quarter of 2004, we sold a co-generation unit that was included in purchase of the Geismar assets. We recognized a $2.0 million gain from the sale of those assets.
Gain on Legal Settlement. In 2003 we received and recognized $3.2 million in income resulting from a legal settlement with a software vendor.
Impairment of Long-Lived Assets.Impairment of long-lived assets was $1.8 million in 2004 compared to $2.3 million in 2003. The impairment in 2004 wasfees, largely related to an idled PVC plant in Pace, Florida in the Vinyls segment ($1.3 million) that was written down to its estimated sales value less commissionsGoodrich and styrene assets in our Olefins segment ($0.5 million) which were written down to their remaining fair market value. The impairments in 2003 related primarily to idled styrene and ethylene assets charged to the Olefins segment of approximately $1.6 million, which were replaced. An additional $0.7 million charged to the corporate segment relates to equipment held for sale that was adjusted to fair market value.PolyOne litigation.
Interest Expense.Interest expense in 2007 increased $0.8by $1.9 million to $18.4 million from $16.5 million in 2004 compared to 2003. The increase was2006, primarily due to an increase in the average interest rate from 7.1% in 2003 to 7.4% in 2004 and an increase in the amortization of debt issuance costs, which were partially offset by lowerhigher average debt balances.outstanding for the period.
Debt Retirement Cost.As a result of the redemption of $133.0$247.0 million aggregate principal amount of 8 3/4% senior notes due July 15, 2011 and the repayment of $78.0$9.0 million of our term loan, we recognized $15.8$25.9 million in non-operating expense in 2004,the first quarter of 2006, consisting of a pre-payment premium on our 8 3/4% senior notes of $11.6$22.2 million and a write-off of $4.2$3.7 million in previously capitalized debt issuance cost. We recognized $11.3 milliondid not recognize any debt retirement costs in non-operating expense in 2003, which related to our refinancing transaction described below under “—Liquidity and Capital Resources—Debt,” consisting of a $4.0 million make-whole premium in connection with the redemption of senior notes and a write-off of $7.3 million in previously capitalized debt issuance cost.2007.
Other Income, Net.Other income, net decreased by $5.0$9.0 million from income of $7.6to $2.7 million in 2003 to income of $2.62007 from $11.7 million in 2004. The decrease was2006 primarily due to lower interest income associated with lower cash balances and the resultwrite-down of derivative losses of $3.7 million in 2004, lower insurance proceeds of $0.6 million and lower income from unconsolidated subsidiaries.a long-term investment.
Income Taxes.The effective income tax rate was 36.7%27.8% in 20042007 as compared to 37.2%31.1% in 2003.2006. The effective2007 tax rates in 2004 and 2003 are higher thanrate was below the statutory tax rate of 35% primarily due to state tax credits, a reduction in deferred taxes due to a change in apportionment ratios upon the reorganization of several subsidiaries and the domestic manufacturing deduction, partially offset by state income taxes. The 2006 tax rate was below the statutory rate of 35% primarily due to adjustments to state income taxes and the extra-territorial exclusion income benefit.
Olefins Segment
Net Sales.Net sales increased by $374.3$805.5 million, or 42.7%58.8%, to $1,251.3$2,175.1 million in 20042007 from $877.0$1,369.6 million in 2003.2006. This increase was primarily due to price increasesincreased polyethylene and higherethylene volumes. The significant increase in polyethylene sales volumes for ethylene, polyethylene and styrene. Average sellingwas primarily due to increased volume from our Longview facility, which was acquired in the fourth quarter of 2006. In addition, average sales prices for the Olefins segment increased by 28.0%3.3% in 2004 as compared to 2003. These increased prices and sales volumes were primarily due to higher industry demand. Selling prices were also higher largely due to higher raw material costs that were passed through to customers. Ethylene, polyethylene, and styrene sales volumes increased by 39.6%, 3.9%, and 24.7%, respectively, largely due to higher demand.2007 from 2006.
Income from Operations.Income from operations increaseddecreased by $124.3$8.3 million, or 5.2%, to $179.6$152.6 million in 20042007 from $55.3$160.9 million in 2003.2006. This increasedecrease was primarily due to price increases and higher sales volumes for ethylene, polyethylene and styrene, partially offset by highera significant increase in raw material costs and a trading loss of $1.0 million in 2007 as compared to a trading gain of $18.6 million in 2006. These decreases in operating income were almost entirely offset by earnings from our Longview facility which was acquired in November 2006. There were several price increases during 2007 for ethane, propane and benzene.our major olefins products, but margins were still below 2006 levels due to higher feedstock costs. Results for the 2006 period were negatively impacted by an unscheduled outage at our Lake Charles ethylene facility.
Vinyls Segment
Net Sales.Net sales increaseddecreased by $188.0$97.7 million, or 34.4%8.8%, to $734.1$1,017.1 million in 20042007 from $546.1$1,114.8 million in 2003.2006. This increasedecrease was primarily due to price increaseslower selling prices for PVC pipe, PVC resin and VCM andmost of our major vinyls products. The decreased sales prices were partially offset by higher sales volumes for PVC piperesin and caustic. Average selling prices for the Vinyls segment increaseddecreased by 34.4%17.4% in 20042007 as compared to 2003. These increases were largely due to stronger industry demand for our products and higher raw material costs for propane that were passed through to our customers. PVC pipe sales were higher largely due to the acquisition of the assets of Bristolpipe Corporation, which was completed on August 2, 2004. These increases were partially offset by lower sales volumes for VCM. While PVC pipe sales volumes increased by 31.5%, VCM sales volumes decreased by 7.8% primarily due to the outage resulting from the Calvert City plant fire in January 2004.2006.
Income from Operations.Operations. Income from operations increaseddecreased by $56.1$127.9 million, or 81.0%, to $69.7$30.0 million in 20042007 from $13.6$157.9 million in 2003.2006. This increasedecrease was primarily due to higherlower selling prices for PVC pipe, PVC resin and VCMPVC pipe, and higher feedstock costs which was partially offset by higher sales volumes for PVC piperesin and caustic. These increasescaustic soda. Margins and demand in the first nine months of 2006 were partially offset byvery strong due to supply constraints resulting from the impact from Hurricanes Katrina and Rita. Selling prices, margins and sales volumes for PVC
resin and PVC pipe fell dramatically in the fourth quarter of 2006 due to weakness in the fire in our Calvert City ethylene unit. The ethylene unit experienced a 19-day outage for repairs relatingconstruction market, falling energy prices and seasonal slowdowns. These margins remained under pressure during 2007 due to the firecontinued weakness in January 2004.the construction market, higher feedstock costs and the inability to raise prices for our downstream products in response to these higher costs.
Cash Flows
Operating Activities
Operating activities provided cash of $318.4$186.1 million in 20052008 compared to $150.8$62.2 million in 2004.2007. The $167.6$123.9 million increase in cash flows from operating activities in 2005 as compared to 2004 was primarily due to improvementschanges in working capital, partially offset by lower income from operations in 2008 and higher turnaround costs. Changes in components of working capital, which we define for purposes of this cash flow discussion as described above,accounts receivable, inventories, prepaid expense and other current assets less accounts payable and accrued liabilities, provided cash of $126.1 million in 2008, compared to $149.6 million of cash used in 2007, an increase in cash provided of $275.7 million. In 2008, accounts receivable decreased by $148.9 million largely due to lower sales prices and volumes in the fourth quarter of 2008, and inventory decreased by $199.9 million due primarily to lower valuation and an aggressive inventory reduction strategy in the fourth quarter of 2008 that included a significant reduction in operating rates. Accounts payable and accrued liabilities decreased by $230.0 million during 2008 largely as a result of lower feedstock costs and operating rates in the fourth quarter of 2008. The primary reason for the $149.6 million use of cash related to working capital. Incomecapital in 2007 was due to an increase in accounts receivable of $200.7 million and an increase in inventory of $71.6 million, partially offset by an increase in accounts payable and accrued liabilities of $120.8 million.
Operating activities provided cash of $62.2 million in 2007 compared to $237.2 million in 2006. The $175.0 million decrease in cash flows from operating activities was primarily due to lower income from operations increasedin 2007 and unfavorable changes in working capital, partially offset by $123.9$25.9 million of debt retirement costs incurred in 2006 with no equivalent costs in 2007 and a reduction in turnaround costs of $19.8 million in 20052007 as compared to 2004.2006. Changes in components of working capital, which we define for purposes of this cash flow discussion as accounts receivable, inventories, prepaid expense and other current assets less accounts payable and accrued liabilities, used cash of $34.4$149.6 million in 2005,2007, compared to $115.0$17.8 million of cash used in 2004, a decrease2006, an increase in cash use of cash used of $80.6$131.8 million. In 2005, receivables2007, accounts receivable increased by $66.2$200.7 million largely due to higher selling pricesincreased sales while inventory increased by $20.1 million, primarily due to higher feedstock and energy prices.$71.6 million. Accounts payable and accrued liabilities increased by $52.5$120.8 million largely due to higher raw material and energy costs.during 2007. The primary reasonsreason for the $115.0$17.8 million use of cash in 2004 related to working capital components were a $39.3 millionin 2006 was due to an increase in receivables and a $119.1inventory of $47.3 million, increase in inventories, partially offset by a $42.3 million increase in accounts payable and accrued liabilities. The increase in receivables was mainly due to higher average selling prices and sales volumes. The increase in inventories was primarily due to higher feedstock and energy prices. Thean increase in accounts payable and accrued liabilities was primarily due to higher energy and raw material costs.
Operating activities provided cash of $150.8 million in 2004 compared to $78.1 million in 2003. The $72.7 million increase in cash flows from operating activities in 2004 as compared to 2003 was primarily due to improvements in income from operations, as described above, partially offset by unfavorable changes in working capital. Income from operations increased by $177.4 million in 2004 as compared to 2003. Changes in components of working capital, which we define for purposes of this cash flow discussion as accounts receivable, inventories, prepaid expense and other current assets less accounts payable and accrued liabilities, used cash of $115.0 million in 2004, compared to $9.8 million cash used in 2003, an increase of $105.2$43.6 million. In 2004, receivables increased by $39.3 million largely due to higher selling prices and sales volumes while inventory increased by $119.1 million, primarily due to higher feedstock and energy prices. Accounts payable and accrued liabilities increased by $42.3 million. The primary reason for the $9.8 million use of cash in 2003 related to working capital components was a $57.3 million increase in receivables, a $9.9 million increase in inventories partially offset by a $6.3 million decrease in prepaid expenses and an increase of $51.0 million in accounts payable and accrued liabilities. The increase in receivables was mainly due to higher average selling prices and sales volumes. The increase in inventories was primarily due to higher production and higher feedstock and energy prices. The decrease in prepaid expenses related to feedstock purchases made in December 2002. The increase in accounts payable and accrued liabilities was primarily due to higher energy and raw material costs.
Investing Activities
Net cash used infor investing activities during 2008 was $87.6$172.0 million compared to $124.8 million in 2005 as2007. Capital expenditures were $172.6 million in 2008 compared to $80.0$135.7 million in 2004 and $41.6 million in 2003. We made2007. The 2008 capital expenditures in 2005 of $85.8 million. Theseincluded significant expenditures were for technological modificationsrelated to our expansions at our Calvert City complex and the EDCnew PVC pipe plant in Geismar, Louisiana and start up of the VCM and PVC portions of our facilities in Geismar ($16.9 million), and we invested $17.4 million inYucca, Arizona. The 2007 period included significant expenditures related to a project designed to upgrade the feedstock flexibility in one of our ethylene plant and a project to expand our ethylene capacity.units. The remaining capital expenditures of $51.5 million werein 2008 and 2007 primarily related to maintenance, safety and environmental projects. The $1.9 million equity investment represents an additional equity investment in an unconsolidated subsidiary. We made capital expenditures in 2004 of $52.7 million for refurbishment and upgrades related to the January 2004 fire at the Calvert City ethylene plant ($2.6 million), technological modifications at the Geismar facility ($15.5 million) and maintenance capital, safety and environmental related projects ($34.6 million). The acquisitionprojects. A significant percentage of business of $33.3 millionthe 2009 and 2010 estimated amounts are related to equipment replacement and upgrades to maintain environmental compliance. In addition, we received $8.0 million as an adjustment to the acquisitionpurchase price of the assetsLongview facility in 2007.
Net cash used for investing activities during 2007 was $124.8 million compared to $404.3 million in 2006. Capital expenditures were $135.7 million in 2007 compared to $136.3 million in 2006. The 2006 and 2007 periods included significant expenditures related to a project designed to upgrade the feedstock flexibility in one of Bristolpipe Corporation,our ethylene units which was completed on August 2, 2004. These expenditures were partially offset by $3.3 million of proceeds from the disposition of assets and $2.8 million of insurance proceeds. We madeplaced in service in 2007. The remaining capital expenditures in 2003 of $44.9 million 2007 and 2006
primarily related to maintenance capital, safety and environmental projects. These expenditures were partially offset by $3.3projects, the Calvert City expansion projects and a major upgrade to our styrene unit in Lake Charles. In addition, we used $235.7 million in cash to acquire the Longview facility in 2006, and we received $8.0 million as an adjustment to the purchase price of insurance proceeds.
the Longview facility in 2007. The cash settlement of derivative instruments in 2006 related to derivative losses recognized in 2005.
Financing Activities
FinancingNet cash provided by financing activities during 2008 was $51.2 million compared to cash provided by financing activities of $34.9 million during 2007. In 2007, we issued $250.0 million of our 6 3/4% senior notes to evidence and secure our obligations to the Louisiana Local Government Environmental Facility and Development Authority, a political subdivision of the State of Louisiana (the “Authority”), under a loan agreement related to the Authority’s 6 3/4% tax-exempt revenue bonds. During 2007, $48.1 million of the proceeds of this issuance were used to fund capital projects in Louisiana. The balance of the proceeds, net of expenses, from this issuance is classified as restricted cash on the consolidated balance sheets because of $36.4the restricted permitted uses of such proceeds. The 2008 activity was primarily related to $68.2 million in 2005, compared to $64.8 million in 2004 and $10.2 million in 2003. During 2005, we used $31.2 million to repay debt and $6.3 million to pay dividends, which wasdraw-downs of this restricted cash for use for eligible capital expenditures, partially offset by the $13.5 million payment of cash dividends. The remainder of our 2007 financing activities was related to borrowings and payments under our revolving credit facility. We also paid $11.8 million in cash dividends in 2007.
Net cash provided by financing activities during 2007 was $34.9 million compared to cash used by financing activities of $18.1 million during 2006. In 2007, we issued $250.0 million of our 6 3/4% senior notes to evidence and secure our obligations to the Authority, under a loan agreement related to the Authority’s 6 3/4% tax-exempt revenue bonds. $48.1 million of the proceeds of $1.2 millionthis issuance were utilized to fund capital projects in Louisiana. The balance of the proceeds, net of expenses, from this issuance is classified as restricted cash on the exerciseDecember 31, 2007 consolidated balance sheet because of stock options. In August 2004 we completed the initial public offeringrestricted permitted uses of such proceeds. The remainder of our common stock (the “IPO”). Net proceeds from the IPO of $181.2 millionfinancing activities was related to borrowings and cash generated from operating activities were used to repay $244.9 million of debt and affiliate borrowings in 2004. See “Liquidity and Capital Resources” below. In 2003, we incurred $14.1payments under our revolving credit facility. We also paid $11.8 million in costs associated with the refinancing that were capitalized and that will be amortized over the term of the new debt.
cash dividends in 2007.
Liquidity and Capital Resources
Liquidity and Financing Arrangements
Our principal sources of liquidity are from cash and cash equivalents, restricted cash, cash from operations, short-term borrowings under our revolving credit facility and our long-term financing. In August 2008, we announced the construction of a new chlor-alkali plant at our Geismar, Louisiana facility. We expect this project will cost between $250 million and $300 million and will be partially funded with funds drawn from the proceeds of the issuance of the 6 3/4% revenue bonds of the Authority, issued in December 2007 for our benefit, which are currently held as restricted cash. The remaining funding will depend on our revolving credit facility, cash flow from operations and, possibly, our ability to obtain additional financing in the future. We believe that our sources of liquidity as described above will be adequate to fund our normal operations and on-going capital expenditures. In addition, in response to the declining economic conditions, we have increased our focus on cost cutting and working capital reduction to improve our liquidity. Funding of any potential large expansions or any potential acquisitions of third-party assets may depend on our ability to obtain additional financing in the future. As of December 31, 2008, the indenture governing our senior notes restricted us from incurring additional debt, except for specified permitted debt (including borrowings under our credit facility, additional borrowings under one or more term loan facilities in an amount not to exceed $200 million and $100 million of other debt), because our fixed charge coverage ratio fell below 2.0 at December 31, 2008. We may not be able to access additional liquidity at cost effective interest rates due to the volatility of the commercial credit markets. Despite the current economic downturn and the credit crisis, our management believes that our revolving credit facility should be available up to our borrowing capacity, if needed. At December 31, 2008, the borrowing base of our credit facility has declined to $257.9 million, which is below the maximum borrowing capacity of $400 million due to our low carrying amount of accounts receivable and inventory, which make up the borrowing base.
Cash and Restricted Cash
CashTotal cash balances were $237.9$224.6 million at December 31, 2005 compared2008, which included cash and cash equivalents of $90.2 million and restricted cash of $134.4 million. In addition, we have a revolving credit facility available to $43.4 million at December 31, 2004. We believe the December 31, 2005supplement cash levels are adequate to fund our short-term cash requirements.
if needed, as described under “Debt” below.
Debt
As of December 31, 2008, our long-term debt, including current maturities, totaled $510.3 million, consisting of $250.0 million principal amount of 6 5/8% senior notes due 2016 (less the unamortized discount of $0.6 million), $250.0 million of 6 3/4% senior notes due 2032 and a $10.9 million loan from the proceeds of tax-exempt waste disposal revenue bonds (supported by an $11.3 million letter of credit). The 6 3/4% senior notes evidence and secure our obligations to the Authority under a loan agreement relating to the issuance of $250.0 million aggregate principal amount of the Authority’s tax-exempt revenue bonds. Debt outstanding under the tax-exempt waste disposal revenue bonds bears interest at variable rates.
Our present debt structure is used to fund our business operations, and our revolving credit facility is a source of liquidity. On January 6, 2006,September 8, 2008, we amended our senior secured revolving credit facility to, among other things, increase the commitmentlenders’ commitments under the facility from $200.0$300 million to $300.0$400 million. On February 5, 2009, we further amended our revolving credit facility to allow us to make specified distributions when our fixed charge coverage ratio falls below 1.0 but we maintain at least $125 million and generally reduceto $200 million (depending on the interest payable. Afteramount of the amendment asdistribution) of January 6, 2006,borrowing availability, including cash, under the credit facility. At December 31, 2008, we had no borrowings under the revolving credit facility. Subsequent to the latest amendment, any borrowings under the facility borewould bear interest at either LIBOR plus 1.00%3.00% or the prime rate minus .50%plus 1.50%. The revolving credit facility also requires an unused commitment fee ranging from 0.75% to 0.875%, and a 0.25% unused line fee, all of whichdepending on our average daily borrowings. All interest rates under the facility are subject to quarterly grid pricing adjustments based on average daily loan availability. The facility matures on September 8, 2013. As of December 31, 2008, we had outstanding letters of credit totaling $14.2 million and loan availability of $257.9 million under the facility.
On December 13, 2007 the Authority issued $250.0 million of 6 3/4% tax-exempt revenue bonds due November 1, 2032 under the Gulf Opportunity Zone Act of 2005. The bonds are non-callable through November 1, 2017. The bonds are subject to redemption and the holders may require the bonds to be repurchased upon a fixed charge coverage ratio. The maturitychange of control or a change in or loss of the facility was extendedcurrent tax status. In connection with the issuance of the bonds, we entered into a loan agreement with the Authority pursuant to Januarywhich we agreed to pay all of the principal, premium, if any, and interest on the bonds and certain other amounts to the Authority. The proceeds from the bond offering were loaned by the Authority to us. We intend to use the proceeds to expand, refurbish and maintain certain of our facilities in the Louisiana Parishes of Calcasieu and Ascension. To evidence and secure our obligations under the loan agreement, we entered into a second supplemental indenture, by and among us, the subsidiary guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee, and issued $250 million aggregate principal amount of our 6 2011.
3/4% senior notes due 2032 to be held by the trustee pursuant to the terms and provisions of the loan agreement. The 6 3/4% senior notes are unsecured and rank equally in right of payment with other existing and future unsecured senior indebtedness. All domestic restricted subsidiaries that guarantee other debt of ours or of another guarantor of the senior notes in excess of $5.0 million are guarantors of the senior notes. As of December 31, 2008, we had drawn $116.4 million of bond proceeds. The balance of the proceeds, principal plus current and accrued interest income, remains with a trustee, and is classified on our consolidated balance sheet as a non-current asset, restricted cash, until such time as we request reimbursement of amounts used to expand, refurbish and maintain our facilities in Calcasieu and Ascension Parishes.
On January 13, 2006, we issued $250.0 million of new 65/8% unsecuredaggregate principal amount of senior notes due 2016, the proceeds of which, together with cash on hand, were used to redeem our 8 3/4% senior notes due 2011 and repay our term loan as follows:
As a result of the early redemption of the 8 3/4% senior notes due 2011, we expect to recognize $25.7 million in non-operating expense in the first quarter of 2006 consisting of a pre-payment premium on the 8 3/4% senior notes of $22.2 million and a write-off of $3.5 million in previously capitalized debt issuance cost.
2016. The 65/8% senior notes are unsecured.unsecured and were issued with an original issue discount of $0.8 million. There is no sinking fund and no scheduled amortization of the notes prior to maturity. The notes are subject to redemption and the holders may require us to repurchase the notes upon a change of control. All domestic restricted subsidiaries that guarantee other debt of ours or of another guarantor of the senior notes in excess of $5$5.0 million are guarantors of the notes.
The agreements governing the 65/8% and the 6 3/4% senior notes (together the “senior notes”) and the revolving credit facility each contain customary covenants and events of default. Accordingly, these agreements impose significant operating and financial restrictions on us. These restrictions, among other things, provide limitations on incurrence of additional indebtedness, the payment of dividends, certain investments and acquisitions and sales of assets. One such restriction currently restricts us from incurring additional debt, except specified permitted debt (including borrowings under our credit facility), because our fixed charge coverage ratio fell below 2.0 at December 31, 2008. These limitations are subject to a number of important qualifications and exceptions, including, without limitation, an exception for the payment of our regular quarterly dividend of up to $0.20 per share.share (currently $0.0525 per share). The 6 5/8% senior notes indenture does not allow distributions, unless, after giving pro forma effect to the distribution, our fixed charge coverage ratio is at least 2.0 and such payment, together with the aggregate amount of all other distributions after January 13, 2006, is less than the sum of 50% of our consolidated net income for the period from October 1, 2003 to the end of the most recent quarter for which financial statements have been filed, plus 100% of net cash proceeds received after October 1, 2003 as a contribution to our common equity capital or from the issuance or sale of certain securities, plus several other adjustments. The amount allowed under this restriction was $307.8would have been $451.6 million at January 13, 2006.December 31, 2008; however, because our fixed charge coverage ratio was below 2.0, the actual amount allowed was restricted to the payment of our regular quarterly dividend of up to $0.20 per share. The revolving credit facility also restricts dividend paymentsdistributions unless, after giving effect to such payment, our fixed charge coverage ratio is at least 1.0, provided that we may also make specified distributions when our fixed charge coverage ratio falls below 1.0 but we maintain at least between $125 million to $200 million (depending on the availability equals or exceeds $60.0 million. Noneamount of the distributions) of borrowing availability, including cash, under the credit facility. No other agreements require us to maintain specified financial ratios, except that the revolving credit facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 when availability falls below $60.0 million.ratios. In addition, the 6 5/8% senior notes indenture and the revolving credit facility restrict our ability to create liens, to engage in certain affiliate transactions and to engage in sale-leaseback transactions.
AsIn December 1997, we entered into a loan agreement with a public trust established for public purposes for the benefit of December 31, 2005, our long-term debt, including current maturities, totaled $266.9 million, consistingthe Parish of $247.0Calcasieu, Louisiana. The public trust issued $10.9 million principal amount of 8 3/4% senior notes due 2011, a $9.0 million senior secured term loan due in 2010, and a $10.9 million loan from the proceeds of tax-exempt waste disposal revenue bonds (supported(revenue bonds) in order to finance our construction of waste disposal facilities for an ethylene plant. The revenue bonds expire in December 2027 and are subject to redemption and mandatory tender for purchase prior to maturity under certain conditions. Interest on the revenue bonds accrues at a rate determined by a $11.3 million letter of credit). Debt outstanding under the term loanremarketing agent and the tax-exempt bonds boreis payable quarterly. The interest at variable rates.
On August 16, 2004, we completed the IPO. Net proceeds from the IPO were $181.2 million. We used the proceeds from the IPO along with available cash on hand to redeem $133.0 million aggregate principal amount of our 8 3/4% senior notes due July 15, 2011, to repay $28.0 million of our senior secured term loan maturing in July 2010 and to repay in full a $27.0 million bank loan. As a result of the early paymentrate on the 8 3/4% senior notes, we recognized $14.7 million in non-operating expense in the third quarter of 2004 consisting of a pre- payment premium on the 8 3/4% senior notes of $11.6 million and a write-off of $3.0 million in previously capitalized debt issuance cost. In addition, we repaid $50.0 million of our senior secured term loan on December 30, 2004 and incurred an additional $1.1 million of non-operating expense related to the write-off of previously capitalized debt issuance costs.
The 8 3/4% senior notes were unsecured. All domestic restricted subsidiaries were guarantors of the 8 3/4% senior notes. In the first quarter of 2006, these notes were repaid.
At inception, the term loan bore interest at either the Eurodollar Rate plus 3.75% or prime rate plus 2.75%. Quarterly principal payments of $0.3 million were due on the term loan beginning on September 30, 2003, with
the balance due in four equal quarterly installments in the seventh year of the loan. We used the proceeds from the IPO to prepay $28.0 million of the term loan in August 2004, which prepayment was applied to and reduced the final installment of the term loan. Mandatory prepayments were due on the term loan with the proceeds of asset sales and casualty events subject, in some instances, to reinvestment provisions. The term loan also required prepayment with 50% of excess cash flow as determined under the term loan agreement. The term loan was collateralized by our Lake Charles and Calvert City facilities and some related intangible assets. As of September 30, 2004, we and our lenders entered into an amendment to the term loan that reduced the applicable interest rate so that the term loan subsequently bore interest at either the Eurodollar Rate plus 2.25% or prime rate plus 1.25%. The amendment also eliminated the requirement to use excess cash flow to repay the term loan. We repaid $50.0 million of the term loan on December 30, 2004. As described above, all amounts outstanding under the term loan were repaid in the first quarter of 2006.
The revolving credit facility bore interest at either LIBOR plus 2.25% or prime rate plus 0.25%, subject to grid pricing adjustment based on a fixed charge coverage ratio after the first year and subject to a 0.5% unused line fee. The revolving credit agreement was amended on February 24, 2004, June 22, 2004 and November 30, 2004 to, among other things, lower the applicable margin by 0.5% of the pricing grid, modify the termination fee, extend the maturity date by one year, and revise various definitions and covenants to allow the IPO and the Bristolpipe acquisition and to facilitate our operations. The revolving credit facility is collateralized by accounts receivable and contract rights, inventory, chattel paper, instruments, documents, deposit accounts and related intangible assets. We had standby letters of credit outstandingrevenue bonds at December 31, 2005 of $28.3 million2008 and $171.7 million of available borrowing capacity under this facility. In the first quarter of 2006, we amended this facility as described above2007 was 1.08% and extended the maturity to January 6, 2011.
3.69%, respectively.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our liquiditynormal operating needs for the foreseeable future.
Contractual Obligations and Commercial Commitments
In addition to long-term debt, we are required to make payments relating to various types of obligations. The following table summarizes our minimum payments as of December 31, 20052008 relating to long-term debt, operating leases, unconditional purchase obligations and operating leases, other long-term liabilities and interest payments for the next five years and thereafter, after giving effectthereafter. The amounts do not include pension liabilities, post-retirement medical liabilities, deferred charges and other items classified in other liabilities in the consolidated balance sheet due to the refinancing transaction described above.uncertainty of the future payment schedule. Long-term liabilities for pension and post-retirement liabilities totaled $36.9 million as of December 31, 2008. See the discussion in Note 12 to the consolidated financial statements for more information.
Payment Due by Period | |||||||||||||||
Total | 2006 | 2007-2008 | 2009-2010 | Thereafter | |||||||||||
(dollars in millions) | |||||||||||||||
Contractual Obligations | |||||||||||||||
Long-term debt | $ | 266.9 | $ | 6.0 | $ | — | $ | — | $ | 260.9 | |||||
Operating leases | 108.4 | 18.7 | 34.7 | 29.1 | 25.9 | ||||||||||
Unconditional purchase obligations | 62.6 | 12.6 | 20.4 | 16.9 | 12.7 | ||||||||||
Other long-term liabilities included in the balance sheet | 6.3 | 3.1 | 3.2 | — | — | ||||||||||
Interest payments | 186.7 | 21.1 | 33.9 | 33.9 | 97.8 | ||||||||||
Total | $ | 630.9 | $ | 61.5 | $ | 92.2 | $ | 79.9 | $ | 397.3 | |||||
Other Commercial Commitments | |||||||||||||||
Standby letters of credit | $ | 28.3 | $ | 16.3 | $ | 12.0 | $ | — | $ | — | |||||
Payment Due by Period | |||||||||||||||
Total | 2009 | 2010-2011 | 2012-2013 | Thereafter | |||||||||||
(dollars in millions) | |||||||||||||||
Contractual Obligations | |||||||||||||||
Long-term debt | $ | 510.3 | $ | — | $ | — | $ | — | $ | 510.3 | |||||
Operating leases | 133.7 | 29.4 | 46.8 | 24.6 | 32.9 | ||||||||||
Unconditional purchase obligations | 46.9 | 28.0 | 11.6 | 3.9 | 3.4 | ||||||||||
Interest payments | 528.7 | 33.6 | 67.1 | 67.1 | 360.9 | ||||||||||
Total | $ | 1,219.6 | $ | 91.0 | $ | 125.5 | $ | 95.6 | $ | 907.5 | |||||
Other Commercial Commitments | |||||||||||||||
Standby letters of credit | $ | 14.2 | $ | 14.2 | $ | — | $ | — | $ | — | |||||
Long-Term Debt. Long-term debt payments reflectconsists of the refinancing completed in6 5/8% senior notes, the first quarter of 2006.6 3/4% senior notes and the tax-exempt waste disposal revenue bonds.
Operating Leases. We lease various facilities and equipment under noncancelable operating leases (primarily related to rail car leases)leases and land) for various periods.
Unconditional Purchase Obligations. We are party to various unconditional obligations to purchase products and services, primarily including commitments to purchase ethylene, power, nitrogen, oxygen, wastewater treatment services, product storage lease and pipeline usage.
Other Long-Term Liabilities. The amounts representethylene obligation included above is based on a technology license usedDecember 31, 2008 price and is subject to produce LLDPEprice variation in the future. We also have various purchase commitments for materials, supplies and HDPE. The license requires us to make annual payments of $3.1 million through May 2007. The amounts do not include pension liabilities, post-retirement medical liabilities, deferred charges and other items dueservices incident to the uncertaintyordinary conduct of business which may not be unconditional and are not reflected in the future payment schedule. Pension and post-retirement liabilities totaled $18.7 million as of December 31, 2005.table above.
Interest Payments. Interest payments are based on interest rates in effect at December 31, 20052008 and assume contractual amortization payments.
Standby Letters of Credit. This includes (1) our obligation under a $11.3 million letter of credit issued in connection with the $10.9 million tax-exempt waste disposal revenue bonds and (2) other letters of credit totaling $17.0$2.9 million issued to support obligations under our insurance programs, including workers’ compensation claims and other commercial obligations.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
Critical accounting policies are those that are important to our financial condition and require management’s most difficult, subjective, or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. We have evaluated the accounting policies used in the preparation of the accompanying consolidated financial statements and related notes and believe those policies are reasonable and appropriate.
We apply those accounting policies that we believe best reflect the underlying business and economic events, consistent with GAAP. Our more critical accounting policies include those related to long-lived assets, accruals for long-term employee benefits, inventories, accounts receivable and environmental and legal obligations. Inherent in such policies are certain key assumptions and estimates. We periodically update the estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. Our significant accounting policies are summarized in Note 1 to the audited consolidated financial statements appearing elsewhere in this Form 10-K. We believe the following to be our most critical accounting policies applied in the preparation of our financial statements.
Revenue Recognition.Revenue is recognized when title and risk of loss passes to the customer upon delivery under executed customer purchase orders or contracts. For export contracts, the title and risk of loss passes to customers at the time specified by each contract. Provisions for discounts, rebates and returns are provided for in the same period as the related sales are recorded.
Long-Lived Assets. Key estimates related to long-lived assets include useful lives, recoverability of carrying values and existence of any retirement obligations and such estimates could be significantly modified. The carrying values of long-lived assets could be impaired by new technological developments, new chemical industry entrants with significant raw material or other cost advantages, uncertainties associated with the U.S. and world economies, the cyclical nature of the chemical and refining industries and uncertainties associated with governmental actions.
We periodically evaluate long-lived assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and the operational performance of our businesses. Actual impairment losses incurred could vary significantly from amounts estimated. Additionally, future events could cause us to conclude that impairment indicators exist and that associated long-lived assets of our businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
The estimated useful lives of long-lived assets range from three to 25 years. Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled $81.2, $81.1$111.9 million, $103.5 million and $87.3$86.3 million in 2005, 20042008, 2007 and 2003,2006, respectively. If the useful lives of the assets were found to be shorter than originally estimated, depreciation charges would be accelerated.
We defer the costs of major turnaround maintenance and repair activities and amortize the costs over the period until the next expected major turnaround of the affected unit. During 2003, cash expendituresIn 2008, we had a major turnaround at our styrene facility in Lake Charles. In 2007, we had a major turnaround at one of $14.0our ethylene units at our Lake Charles facility. In 2006, we had a major turnaround at our Calvert City facility and at one of our ethylene units in Lake Charles. Total costs deferred on these turnarounds were $16.5 million were deferredin 2008, $13.3 million in 2007 and are being amortized, generally over three to five year periods. There were no major turnarounds$33.1 million in 2005 and 2004.2006. Amortization in 2005, 20042008, 2007 and 20032006 of previously deferred turnaround costs was $5.0$11.2 million, $6.4$10.5 million and $5.1$4.9 million, respectively. As of December 31, 2005,2008, capitalized turnaround costs, net of accumulated amortization, totaled $7.4$43.6 million. Expensing turnaround costs would likely result in greater variability of our quarterly operating results and would adversely affect our financial position and results of operations.
Additional information concerning long-lived assets and related depreciation and amortization appears in NoteNotes 5 and 6 to the audited consolidated financial statements appearing elsewhere in this Form 10-K.
Fair Value Estimates. We develop estimates of fair value to allocate the purchase prices paid to acquire businesses to the assets acquired and liabilities assumed in those acquisitions, to assess impairment of long-lived assets, goodwill and intangible assets and to record derivative instruments and certain other elected assets. Under the purchase method of accounting, the excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. We use all available information to make these fair value determinations, including the
engagement of third-party consultants. As of December 31, 2008, our recorded goodwill was $30.0 million, all of which was associated with the acquisition of our Longview facilities. In addition, we record all derivative instruments and certain inventory balances associated with our trading strategy at fair value. The fair value of these items is determined by quoted market prices or from observable market-based inputs. See Note 10 to the consolidated financial statements for more information.
Long-Term Employee Benefit Costs. Our costs for long-term employee benefits, particularly pension and postretirement medical and life benefits, are incurred over long periods of time and involve many uncertainties over those periods. The net periodic benefit cost attributable to current periods is based on several assumptions about such future uncertainties, and is sensitive to changes in those assumptions. It is our responsibility, often with the assistance of independent experts, to select assumptions that represent the best estimates of those uncertainties. It is also our responsibility to review those assumptions periodically and, if necessary, adjust the assumptions to reflect changes in economic or other factors.
Accounting for employee retirement plans involves estimating the cost of benefits that are to be provided in the future and attempting to match, for each employee, that estimated cost to the period worked. To accomplish this, we rely extensively on advice from actuaries, and assumptions are made about inflation, investment returns, mortality, employee turnover and discount rates that ultimately impact amounts recorded. While we believe that the amounts recorded in the consolidated financial statements appearing elsewhere in this Form 10-K related to these retirement plans are based on the best estimates and judgments available, the actual outcomes could differ from these estimates.
Assumed healthcare trend rates do not have a significant effect on the amounts reported for the healthcare plans because benefits for participants are capped at a fixed amount.
Additional information on the key assumptions underlying these benefit costs appears in Note 12 to the audited consolidated financial statements appearing elsewhere in this Form 10-K.
Inventories. Inventories primarily include product, materials and supplies. Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out, or FIFO, method. The use of other methods, such as LIFO, could result in differing amounts being reported as inventories and cost of sales depending on price changes and sales turnover levels.
Allowance for Doubtful Accounts. In our determination of the allowance for doubtful accounts, and consistent with our accounting policy, we estimate the amount of accounts receivable that we believe are unlikely to be collected and we record an expense of that amount. Estimating this amount requires us to analyze the financial strength of our customers, and, in our analysis, we combine the use of historical experience, our accounts receivable aged trial balance and specific collectibility analysis. We review our allowance for doubtful accounts quarterly. Balances over 90 days past due and accounts determined by our analysis of financial strength of customers to be high risk are reviewed individually for collectibility. By its nature, such an estimate is highly subjective and it is possible that the amount of accounts receivable that we are unable to collect may be different than the amount initially estimated.
Income Taxes. We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets or liabilities are recorded based upon temporary differences between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. Deferred tax expense or benefit is the result of changes in the deferred tax assets and liabilities during the period. Valuation allowances are recorded against deferred tax assets when it is considered more likely than not that the deferred tax assets will not be realized.
Environmental and Legal Obligations. We consult with various professionals to assist us in making estimates relating to environmental costs and legal proceedings. We accrue an expense when we determine that it is probable that a liability has been incurred and the amount is reasonably estimable. While we believe that the
amounts recorded in the accompanying consolidated financial statements related to these contingencies are based on the best estimates and judgments available, the actual outcomes could differ from our estimates. Additional information about certain legal proceedings and environmental matters appears in Note 1617 to the audited consolidated financial statements appearing elsewhere in this Form 10-K.
Recent Accounting Pronouncements
See Note 1 ofto the audited consolidated financial statements for a full description of recent accounting pronouncements, including expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Commodity Price Risk
A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate with changes in the business cycle. We try to protect against such instability through various business strategies. Our strategies include ethylene product feedstock flexibility and moving downstream into the olefins and vinyls products where pricing is more stable. We use derivative instruments in certain instances to reduce price volatility risk on feedstocks and products. Based on our open derivative positions at December 31, 2005,2008, a hypothetical $1.00$0.10 increase in the price of an mmbtua gallon of ethane would have decreased our income before taxes by $1.8 million and a hypothetical $0.10 increase in the price of a MMbtu of natural gas would have decreased our income before taxes by $1.3$0.1 million. Additional information concerning derivative commodity instruments appears in Note 10 to the consolidated financial information appearing elsewhere in this report.
statements.
Interest Rate Risk
We are exposed to interest rate risk with respect to fixed and variable rate debt. At December 31, 2005,2008, we had variable rate debt of $19.9$10.9 million outstanding. All of the debt outstanding under our revolving credit facility tax exempt(none was outstanding at December 31, 2008) and tax-exempt waste disposal revenue bonds and term loan wasis at variable rates. As part of our refinancing in January 2006, the term loan was repaid in full. The remaining variable rate debt balance is $10.9 million. We do not currently hedge our variable interest rate debt, but we may do so in the future. The average variable interest rate for our remaining variable rate debt of $10.9 million as of December 31, 20052008 was 3.65%1.08%. A hypothetical 100 basis point increase in the average interest rate on our variable rate debt would increase our annual interest expense by approximately $0.1 million. Also, at December 31, 2005,2008, we had $247.0$500.0 million principal amount of fixed rate debt which has been paid in full and replaced with $250.0 million of fixed rate debt in January 2006.debt. We are subject to the risk of higher interest cost if and when this debt is refinanced. If interest rates are 1% higher at the time of refinancing, our annual interest expense would increase by approximately $2.5$5.0 million.
Item 8. Financial Statements and Supplementary Data
Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
Page | ||
Management’s Report on Internal Control over Financial Reporting | ||
Consolidated Financial Statements: | ||
Consolidated Balance Sheets as of December 31, | ||
Financial Statement Schedule II—Valuation and Qualifying Accounts |
Financial statement schedules not included in this Form 10-K have been omitted because they are not applicable or because the required information is shown in the financial statements or notes thereto.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Westlake Chemical Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Westlake’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Westlake management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005.2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control—Integrated Framework. Based on its assessment, Westlake’s management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 20052008 based on those criteria.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has also audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, and the effectiveness of internal control over financial reporting as of December 31, 20052008 as stated in their report that appears on the following page.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Westlake Chemical Corporation:
We have completed an integrated audit of Westlake Chemical Corporation’s 2005 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index on page 39 present fairly, in all material respects, the financial position of Westlake Chemical Corporation and its subsidiaries at December 31, 20052008 and 2004,2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20052008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial statements and financial statement schedule arereporting as of December 31, 2008, based on criteria established inInternal Control—Integrated Framework issued by the responsibilityCommittee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management. Our responsibilitymanagement is to express an opinion onresponsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting located on page 45 in this Annual Report on Form 10-K. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reportingopinions.
Also,As discussed in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing on page 39, thatNote 1 to the consolidated financial statements, the Company maintained effective internal control overelected to change the manner in which it accounts for the fair value of certain financial reporting as of December 31, 2005 based on criteria establishedassets and financial liabilities inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
2008.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Houston, Texas
February 23, 200619, 2009
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2005 | 2004 | |||||||
(in thousands of dollars, except par values and share amounts) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 237,895 | $ | 43,396 | ||||
Accounts receivable, net | 302,779 | 234,247 | ||||||
Inventories, net | 339,870 | 319,816 | ||||||
Prepaid expenses and other current assets | 9,306 | 8,689 | ||||||
Deferred income taxes | 13,013 | 65,790 | ||||||
Total current assets | 902,863 | 671,938 | ||||||
Property, plant and equipment, net | 863,232 | 855,052 | ||||||
Equity investment | 20,042 | 18,082 | ||||||
Other assets, net | 41,052 | 47,381 | ||||||
Total assets | $ | 1,827,189 | $ | 1,592,453 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 199,777 | $ | 146,890 | ||||
Accrued liabilities | 104,872 | 102,125 | ||||||
Current portion of long-term debt | 1,200 | 1,200 | ||||||
Total current liabilities | 305,849 | 250,215 | ||||||
Long-term debt | 265,689 | 296,889 | ||||||
Deferred income taxes | 221,088 | 235,161 | ||||||
Other liabilities | 40,457 | 40,791 | ||||||
Total liabilities | 833,083 | 823,056 | ||||||
Commitments and contingencies (Notes 8 and 16) | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, nonvoting, noncumulative, no par value; no shares issued and outstanding | — | — | ||||||
Common stock, $0.01 par value, 150,000,000 shares authorized; 65,121,850 and 64,896,489 shares issued and outstanding in 2005 and 2004, respectively | 651 | 649 | ||||||
Additional paid-in capital | 424,537 | 420,124 | ||||||
Retained earnings | 569,164 | 348,689 | ||||||
Minimum pension liability, net of tax | (1,976 | ) | (1,739 | ) | ||||
Unearned compensation on restricted stock | (971 | ) | — | |||||
Cumulative translation adjustment | 2,701 | 1,674 | ||||||
Total stockholders’ equity | 994,106 | 769,397 | ||||||
Total liabilities and stockholders’ equity | $ | 1,827,189 | $ | 1,592,453 | ||||
December 31, | ||||||||
2008 | 2007 | |||||||
(in thousands of dollars, except par values and share amounts) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 90,239 | $ | 24,914 | ||||
Accounts receivable, net | 347,323 | 507,463 | ||||||
Inventories, net | 327,967 | 527,871 | ||||||
Prepaid expenses and other current assets | 6,838 | 14,232 | ||||||
Deferred income taxes | 26,622 | 17,705 | ||||||
Total current assets | 798,989 | 1,092,185 | ||||||
Property, plant and equipment, net | 1,197,452 | 1,126,212 | ||||||
Equity investment | 30,107 | 29,486 | ||||||
Restricted cash | 134,432 | 199,450 | ||||||
Other assets, net | 126,009 | 122,002 | ||||||
Total assets | $ | 2,286,989 | $ | 2,569,335 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 112,833 | $ | 314,951 | ||||
Accrued liabilities | 99,455 | 126,311 | ||||||
Total current liabilities | 212,288 | 441,262 | ||||||
Long-term debt | 510,319 | 511,414 | ||||||
Deferred income taxes | 280,486 | 287,965 | ||||||
Other liabilities | 44,836 | 42,024 | ||||||
Total liabilities | 1,047,929 | 1,282,665 | ||||||
Commitments and contingencies (Notes 7 and 17) | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock, $0.01 par value, 150,000,000 shares authorized; 65,658,142 and 65,487,119 shares issued and outstanding in 2008 and 2007, respectively | 657 | 655 | ||||||
Additional paid-in capital | 435,581 | 431,197 | ||||||
Retained earnings | 814,873 | 857,872 | ||||||
Accumulated other comprehensive income | ||||||||
Benefits liability, net of tax | (13,339 | ) | (9,234 | ) | ||||
Cumulative translation adjustment | 1,288 | 6,180 | ||||||
Total stockholders’ equity | 1,239,060 | 1,286,670 | ||||||
Total liabilities and stockholders’ equity | $ | 2,286,989 | $ | 2,569,335 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands of dollars except per share data) | ||||||||||||
Net sales | $ | 2,441,105 | $ | 1,985,353 | $ | 1,423,034 | ||||||
Cost of sales | 1,997,474 | 1,682,168 | 1,301,082 | |||||||||
Gross profit | 443,631 | 303,185 | 121,952 | |||||||||
Selling, general and administrative expenses | 76,598 | 60,238 | 57,014 | |||||||||
Gain on sale of assets | — | (2,049 | ) | — | ||||||||
Gain on legal settlement | — | — | (3,162 | ) | ||||||||
Impairment of long-lived assets | — | 1,830 | 2,285 | |||||||||
Income from operations | 367,033 | 243,166 | 65,815 | |||||||||
Other income (expense) | ||||||||||||
Interest expense | (23,717 | ) | (39,350 | ) | (38,589 | ) | ||||||
Debt retirement cost | (646 | ) | (15,791 | ) | (11,343 | ) | ||||||
Other income, net | 2,658 | 2,637 | 7,620 | |||||||||
Income before income taxes | 345,328 | 190,662 | 23,503 | |||||||||
Provision for income taxes | 118,511 | 69,940 | 8,747 | |||||||||
Net income | $ | 226,817 | $ | 120,722 | $ | 14,756 | ||||||
Earnings per common share: | ||||||||||||
Basic | $ | 3.49 | $ | 2.19 | $ | 0.30 | ||||||
Diluted | $ | 3.48 | $ | 2.18 | $ | 0.30 | ||||||
Weighted average shares outstanding: | ||||||||||||
Basic | 65,008,253 | 55,230,786 | 49,499,395 | |||||||||
Diluted | 65,251,109 | 55,355,442 | 49,499,395 |
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in thousands of dollars except per share data) | ||||||||||||
Net sales | $ | 3,692,353 | $ | 3,192,178 | $ | 2,484,366 | ||||||
Cost of sales | 3,622,985 | 2,920,778 | 2,087,883 | |||||||||
Gross profit | 69,368 | 271,400 | 396,483 | |||||||||
Selling, general and administrative expenses | 98,908 | 96,679 | 83,232 | |||||||||
(Loss) income from operations | (29,540 | ) | 174,721 | 313,251 | ||||||||
Other income (expense) | ||||||||||||
Interest expense | (33,957 | ) | (18,422 | ) | (16,519 | ) | ||||||
Debt retirement cost | — | — | (25,853 | ) | ||||||||
Other income, net | 5,475 | 2,658 | 11,670 | |||||||||
(Loss) income before income taxes | (58,022 | ) | 158,957 | 282,549 | ||||||||
(Benefit from) provision for income taxes | (28,479 | ) | 44,228 | 87,990 | ||||||||
Net (loss) income | $ | (29,543 | ) | $ | 114,729 | $ | 194,559 | |||||
(Loss) earnings per common share: | ||||||||||||
Basic | $ | (0.45 | ) | $ | 1.76 | $ | 2.99 | |||||
Diluted | $ | (0.45 | ) | $ | 1.76 | $ | 2.98 | |||||
Weighted average shares outstanding: | ||||||||||||
Basic | 65,273,485 | 65,234,828 | 65,133,628 | |||||||||
Diluted | 65,316,981 | 65,324,326 | 65,254,654 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
Common Stock | Accumulated Other Comprehensive Income (Loss) | Common Stock | Additional Paid-in Capital | Retained Earnings | Unearned Compensation | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Number of Shares | Amount | Additional Paid in Capital | Retained Earnings | Unearned Compensation | Minimum Pension Liability Net of Tax | Cumulative Foreign Currency Exchange | Total | Number of Shares | Amount | Benefits Liability Net of Tax(1) | Cumulative Foreign Currency Exchange | ||||||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2002 | $ | 12,000 | 49,499,395 | $ | 495 | $ | 205,011 | $ | 214,590 | $ | — | $ | (2,006 | ) | $ | (1,571 | ) | $ | 428,519 | |||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2005 | 65,121,850 | 651 | 424,537 | 569,164 | (971 | ) | (1,976 | ) | 2,701 | 994,106 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 194,559 | — | — | — | 194,559 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (258 | ) | (441 | ) | (699 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | 193,860 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised | 124,253 | 1 | 1,848 | — | — | — | — | 1,849 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation, net of tax on exercised stock | 22,482 | 1 | 1,508 | — | 971 | — | — | 2,480 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Adoption of SFAS 158 | — | — | — | — | — | (9,952 | ) | — | (9,952 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | (8,802 | ) | — | — | — | (8,802 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2006 | 65,268,585 | 653 | 427,893 | 754,921 | — | (12,186 | ) | 2,260 | 1,173,541 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 14,756 | — | — | — | 14,756 | — | — | — | 114,729 | — | — | — | 114,729 | |||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 459 | 1,869 | 2,328 | — | — | — | — | — | 2,952 | 3,920 | 6,872 | |||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | — | 17,084 | 121,601 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2003 | 12,000 | 49,499,395 | 495 | 205,011 | 229,346 | — | (1,547 | ) | 298 | 445,603 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 120,722 | — | — | — | 120,722 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive (loss) income | — | — | — | — | — | — | (192 | ) | 1,376 | 1,184 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | — | 121,906 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock exchange | (12,000 | ) | 2,005,881 | 20 | 34,080 | — | — | — | — | 22,100 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issuance | — | 13,391,213 | 134 | 181,033 | — | — | — | — | 181,167 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised | 21,874 | — | 328 | — | — | — | — | 328 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation, net of tax on exercised stock | 196,660 | 2 | 2,976 | — | — | — | — | 2,978 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | — | (1,379 | ) | — | — | — | (1,379 | ) | — | — | — | (11,778 | ) | — | — | — | (11,778 | ) | |||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2004 | — | 64,896,489 | 649 | 420,124 | 348,689 | — | (1,739 | ) | 1,674 | 769,397 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 226,817 | — | — | — | 226,817 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive (loss) income | — | — | — | — | — | — | (237 | ) | 1,027 | 790 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2007 | 65,487,119 | 655 | 431,197 | 857,872 | — | (9,234 | ) | 6,180 | 1,286,670 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (29,543 | ) | — | — | — | (29,543 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (4,105 | ) | (4,892 | ) | (8,997 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | — | 227,607 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive loss | (38,540 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised | — | 81,694 | 1 | 1,183 | — | — | — | — | 1,184 | 14,899 | — | 208 | — | — | — | — | 208 | |||||||||||||||||||||||||||||||||||||||||||
Restricted stock grants | — | 143,667 | 1 | 1,610 | — | (971 | ) | — | — | 640 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tax benefit on equity compensation | — | — | 1,620 | 1,620 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation, net of tax on exercised stock | 156,124 | 2 | 4,176 | — | — | — | — | 4,178 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | — | (6,342 | ) | — | — | — | (6,342 | ) | — | — | — | (13,456 | ) | — | — | — | (13,456 | ) | |||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2005 | $ | — | 65,121,850 | $ | 651 | $ | 424,537 | $ | 569,164 | $ | (971 | ) | $ | (1,976 | ) | $ | 2,701 | $ | 994,106 | |||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2008 | 65,658,142 | $ | 657 | $ | 435,581 | $ | 814,873 | $ | — | $ | (13,339 | ) | $ | 1,288 | $ | 1,239,060 | ||||||||||||||||||||||||||||||||||||||||||||
(1) | Includes minimum pension liability, net of tax in 2005. |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands of dollars) | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 226,817 | $ | 120,722 | $ | 14,756 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Depreciation and amortization | 81,241 | 81,075 | 87,293 | |||||||||
Provision for (recovery of) doubtful accounts | (2,307 | ) | (456 | ) | 1,872 | |||||||
Amortization of debt issue costs | 1,456 | 2,097 | 887 | |||||||||
Loss (gain) from disposition of fixed assets | 4,746 | (218 | ) | (2,903 | ) | |||||||
Write-off of debt issuance cost | 646 | 4,153 | 7,343 | |||||||||
Impairment of long-lived assets | — | 1,830 | 2,285 | |||||||||
Deferred income taxes | 45,745 | 65,188 | 7,112 | |||||||||
Equity in income of joint venture | (94 | ) | (1,379 | ) | (1,510 | ) | ||||||
Changes in operating assets and liabilities | ||||||||||||
Accounts receivable | (66,225 | ) | (39,315 | ) | (57,270 | ) | ||||||
Inventories | (20,054 | ) | (119,056 | ) | (9,894 | ) | ||||||
Prepaid expenses and other current assets | (617 | ) | 1,055 | 6,303 | ||||||||
Accounts payable | 49,718 | 30,816 | 25,197 | |||||||||
Accrued liabilities | 2,747 | 11,487 | 25,828 | |||||||||
Other, net | (5,372 | ) | (7,218 | ) | (29,212 | ) | ||||||
Total adjustments | 91,630 | 30,059 | 63,331 | |||||||||
Net cash provided by operating activities | 318,447 | 150,781 | 78,087 | |||||||||
Cash flows from investing activities | ||||||||||||
Additions to property, plant and equipment | (85,760 | ) | (52,710 | ) | (44,931 | ) | ||||||
Additions to equity investments | (1,867 | ) | — | — | ||||||||
Acquisition of business | — | (33,294 | ) | — | ||||||||
Proceeds from disposition of assets | 37 | 3,256 | — | |||||||||
Proceeds from insurance claims | — | 2,785 | 3,350 | |||||||||
Net cash used for investing activities | (87,590 | ) | (79,963 | ) | (41,581 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Proceeds from issuance of common stock, net | — | 181,167 | — | |||||||||
Proceeds from exercise of stock options | 1,184 | — | — | |||||||||
Dividends paid | (6,342 | ) | (1,379 | ) | — | |||||||
Proceeds from affiliate borrowings | — | 336 | 32 | |||||||||
Repayments of affiliate borrowings | — | (5,727 | ) | (370 | ) | |||||||
Proceeds from borrowings | — | — | 723,975 | |||||||||
Repayments of borrowings | (31,200 | ) | (239,200 | ) | (719,783 | ) | ||||||
Capitalized debt costs | — | — | (14,102 | ) | ||||||||
Net cash used for financing activities | (36,358 | ) | (64,803 | ) | (10,248 | ) | ||||||
Net increase in cash and cash equivalents | 194,499 | 6,015 | 26,258 | |||||||||
Cash and cash equivalents at beginning of the year | 43,396 | 37,381 | 11,123 | |||||||||
Cash and cash equivalents at end of the year | $ | 237,895 | $ | 43,396 | $ | 37,381 | ||||||
Supplemental cash flow information | ||||||||||||
Interest paid | $ | 22,978 | $ | 40,330 | $ | 20,849 | ||||||
Income taxes paid | $ | 78,263 | $ | 4,188 | $ | 566 |
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in thousands of dollars) | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net (loss) income | $ | (29,543 | ) | $ | 114,729 | $ | 194,559 | |||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Depreciation and amortization | 111,926 | 103,514 | 86,262 | |||||||||
Provision for doubtful accounts | 15,282 | 420 | 1,287 | |||||||||
Amortization of debt issue costs | 954 | 760 | 850 | |||||||||
Stock-based compensation expense | 4,178 | 2,873 | 1,731 | |||||||||
Loss from disposition of fixed assets | 4,900 | 724 | 2,848 | |||||||||
Write-off of debt issuance cost | — | — | 3,623 | |||||||||
Deferred income taxes | (13,879 | ) | 5,286 | 13,852 | ||||||||
Equity in income of joint venture | (621 | ) | (2,796 | ) | (1,766 | ) | ||||||
Changes in operating assets and liabilities | ||||||||||||
Accounts receivable | 148,852 | (200,657 | ) | (7,411 | ) | |||||||
Inventories | 199,904 | (71,595 | ) | (47,275 | ) | |||||||
Prepaid expenses and other current assets | 7,394 | 1,854 | (6,724 | ) | ||||||||
Accounts payable | (202,865 | ) | 77,441 | 59,150 | ||||||||
Accrued liabilities | (27,183 | ) | 43,313 | (15,549 | ) | |||||||
Other, net | (33,210 | ) | (13,700 | ) | (48,253 | ) | ||||||
Net cash provided by operating activities | 186,089 | 62,166 | 237,184 | |||||||||
Cash flows from investing activities | ||||||||||||
Additions to property, plant and equipment | (172,561 | ) | (135,725 | ) | (136,258 | ) | ||||||
Additions to equity investments | — | (308 | ) | (4,574 | ) | |||||||
Acquisition of business | — | 8,043 | (235,674 | ) | ||||||||
Purchases of short-term investments | — | — | (216,510 | ) | ||||||||
Sales and maturities of short-term investments | — | — | 216,510 | |||||||||
Settlements of derivative instruments | (199 | ) | 2,995 | (28,052 | ) | |||||||
Proceeds from disposition of assets | 808 | 190 | 222 | |||||||||
Net cash used for investing activities | (171,952 | ) | (124,805 | ) | (404,336 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Proceeds from exercise of stock options | 208 | 328 | 1,849 | |||||||||
Dividends paid | (13,456 | ) | (11,778 | ) | (8,802 | ) | ||||||
Proceeds from borrowings | 851,635 | 326,584 | 249,185 | |||||||||
Repayments of borrowings | (852,812 | ) | (325,407 | ) | (256,000 | ) | ||||||
Utilization of restricted cash | 68,248 | 48,124 | — | |||||||||
Capitalized debt issuance costs | (2,635 | ) | (2,944 | ) | (4,329 | ) | ||||||
Net cash provided by (used for) financing activities | 51,188 | 34,907 | (18,097 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | 65,325 | (27,732 | ) | (185,249 | ) | |||||||
Cash and cash equivalents at beginning of the year | 24,914 | 52,646 | 237,895 | |||||||||
Cash and cash equivalents at end of the year | $ | 90,239 | $ | 24,914 | $ | 52,646 | ||||||
Supplemental cash flow information | ||||||||||||
Interest paid | $ | 33,622 | $ | 19,077 | $ | 21,449 | ||||||
Income taxes paid | $ | 42,683 | $ | 16,190 | $ | 90,886 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. Description of Business and Significant Accounting Policies
BasisDescription of Financial StatementsBusiness
Westlake Chemical Corporation (the “Company”) operates as an integrated petrochemical manufacturer and plastics fabricator.marketer of basic chemicals, vinyls, polymers and fabricated products. These products include some of the most widely used chemicals in the world, which are fundamental to many diverse consumer and industrial markets, including flexible and rigid packaging, automotive products, coatings, residential and commercial construction as well as other durable and non-durable goods. The Company’s customers range from large chemical processors and plastics fabricators to small construction contractors, municipalities and supply warehouses primarily throughout North America. The petrochemical industry is subject to price fluctuations and volatile feedstock pricing typical of a commodity-based industry, the effects of which may not be rapidlyimmediately passed along to all customers.
During the third quarter of 2004, the Company consummated a reorganization designed to simplify its ownership structure. Westlake Polymer & Petrochemical, Inc. (“WPPI”) and Gulf Polymer & Petrochemical, Inc. (“GPPI”), the Company’s former direct and indirect parent companies, respectively, both merged into the Company, which survived the mergers, effective August 6, 2004 and August 4, 2004, respectively (collectively, the “Transactions”).
In the mergers, all of the common and preferred stock of the Company, GPPI and WPPI outstanding prior to the mergers, as well as the preferred stock of a subsidiary of GPPI outstanding prior to the mergers, was exchanged for common stock of the Company. Additionally, effective August 7, 2004, the Company executed a stock split of its common stock in conjunction with the mergers. The preferred shares of WPPI were classified as minority interest. TTWF LP, a Delaware limited partnership, became the sole stockholder of the restructured Westlake Chemical Corporation, and various Chao family trusts and other entities, which were the stockholders of the Company, WPPI and GPPI prior to the mergers, now own all of the partnership interests in TTWF LP. Thereafter, on August 16, 2004, the Company completed an initial public offering of its common stock.
The accompanying consolidated financial statements reflect the mergers and the stock split described above (but not the exchange of preferred stock for common stock) as if they had occurred prior to January 1, 2003. The “Company” refers to the legal entity resulting from the Transactions.
Company’s customers.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and subsidiaries in which the Company directly or indirectly owns more than a 50% voting interest. Investments in entities in whichinterest and exercises a controlling financial interest or the Company hasentity meets the definition of a significant ownershipvariable interest generally 20% to 50%, and in entities in which the Company has greater than 50% ownership, but due to contractual agreement or otherwise does not exercise control, are accounted for using the equity method. Intercompany balances and transactions are eliminated.entity. The Company owns a 43%59% interest in a PVC joint venture in China.China, but it accounts for the investment using the equity method of accounting because the entity does not meet the definition of a variable interest entity under FIN 46R, “Consolidation of Variable Interest Entities (revised December 2003) an interpretation of ARB No. 51,” and because contractual arrangements allowing certain substantive participatory rights to minority shareholders prevent the Company from exercising a controlling financial interest over this entity. Undistributed earnings from the joint venture included in retained earnings is $3,793were $6,124 as of December 31, 2005. This joint venture is accounted for using the equity method.
2008.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily convertible into cash and have a maturity of three months or less at the date of acquisition.
Allowance for Doubtful Accounts
The determination of the allowance for doubtful accounts is based on estimation of the amount of accounts receivable that the Company believes are unlikely to be collected. Estimating this amount requires analysis of the financial strength of the Company’s customers, the use of historical experience, the Company’s accounts
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
receivable aged trial balance, and specific collectibility analysis. The allowance for doubtful accounts is reviewed quarterly. Past due balances over 90 days and high risk accounts as determined by the analysis of financial strength of customers are reviewed individually for collectibility.
Inventories
Inventories primarily include product, material and supplies. Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) or average method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, net of accumulated depreciation. Cost includes expenditures for improvements and betterments that extend the useful lives of the assets and interest capitalized on significant capital projects. Capitalized interest was $1,172$3,198, $2,181 and $143$3,593 in 20052008, 2007 and 2004, respectively. No interest was capitalized2006,
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in 2003.thousands, except per share data)
respectively. Repair and maintenance costs are charged to operations as incurred. Effective January 1, 2003, the Company adopted SFAS No. 143,Accounting “Accounting for Asset Retirement Obligations,. SFAS No. 143, issued in June 2001,” requires the recording of liabilities equal to the fair value of asset retirement obligations and corresponding additional asset costs. The obligations included are those for which there is a legal asset retirement obligation as a result of existing or enacted law, statute or contract. Based on the Company’s evaluation, at this time it has been determined that the Company’s assets have indeterminate lives and no significant conditional asset retirement obligations. Therefore, no material asset retirement obligations have been recorded.
Depreciation is provided by utilizing the straight-line method over the estimated useful lives of the assets as follows:
Classification | Years | |
Buildings and improvements | 25 | |
Plant and equipment | 25 | |
Ethylene pipeline | 35 | |
Other | 3-10 |
Fair Value Estimates.
The Company develops estimates of fair value to allocate the purchase prices paid to acquire businesses to the assets acquired and liabilities assumed in those acquisitions, to assess impairment of long-lived assets, goodwill and intangible assets and to record derivative instruments and certain other elected assets. Under the purchase method of accounting, the excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The Company uses all available information to make these fair value determinations, including the engagement of third-party consultants. In addition, the Company records all derivative instruments and certain inventory balances associated with the Company’s trading strategy at fair value. The fair value of these items is determined by quoted market prices or from observable market-based inputs. See Note 10 for more information on the determination of fair value.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144,Accounting “Accounting for the Impairment or Disposal of Long-Lived AssetsAssets” (“SFAS 144”), the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. Assets are considered to be impaired if the carrying amount of an asset exceeds the future undiscounted cash flows. The impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell.
Impairment of Intangible Assets
In accordance with SFAS No. 142, Goodwill “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived intangible assets are tested for impairment at least annually. Other intangible assets with finite lives are amortized over their estimated useful life and reviewed for impairment in accordance with the provisions of SFAS No. 144,Accounting144. As of December 31, 2008, the Company’s recorded goodwill was $29,990, all of which was associated with the acquisition of the Company’s Longview facilities, which is reflected in the Olefins segment. The annual impairment testing for the Impairment or Disposalrecorded goodwill was performed as of Long-Lived Assets. The Company has no reported goodwill at DecemberOctober 31, 20052008 and 2004.did not result in an impairment.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
Restricted cash
Restricted cash, which is restricted as to withdrawal or usage, is classified separately from the cash and cash equivalents category on the Company’s balance sheet. As indicated in Note 7, the Company issued 6 3/4% senior notes, the proceeds of which, along with their accrued interest income, remain with a trustee, and are classified on the Company’s balance sheet as a non-current asset until such time as the Company submits a request for reimbursement of qualifying amounts spent for facilities in Louisiana.
Turnaround Costs
Turnaround costs are deferred at the time of the turnaround and amortized (within depreciation and amortization) on a straight-line basis until the next planned turnaround, which ranges from 3-52-6 years. Deferred turnaround costs are presented as a component of other assets, net.
Exchanges
The Company enters into inventory exchange transactions with third parties, which involve fungible commodities. These exchanges are settled in like-kind quantities and are valued at lower of cost or market. Cost is determined using the FIFO method. As of December 31, 20052008 and 2004,2007, the net exchange balances payablebalance receivable of $3,202$9,398 and $2,668, respectively, are$13,825 was included in accrued liabilities.
accounts receivable, net.
Income Taxes
The Company utilizes the liability method of accounting for deferred income taxes. Under the liability method, deferred tax assets or liabilities are recorded based upon temporary differences between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. Deferred tax expense or benefit is the result of changes in the deferred tax assets and liabilities during the period. Valuation allowances are recorded against deferred tax assets when it is considered more likely than not that the deferred tax assets will not be realized.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated to U.S. dollars at the exchange rate as of the end of the year. Statement of operations items are translated at the average exchange rate for the year. The resulting translation adjustment is recorded as a separate component of stockholders’ equity.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of risk consist principally of trade receivables from customers engaged in manufacturing polyethylene products, polyvinyl chloride products and polyvinyl chloride pipe products. The Company performs periodic credit evaluations of the customers’ financial condition and generally does not require collateral. The Company maintains reservesallowances for potential losses.
Revenue Recognition
Revenue is recognized when title and risk of loss passes to the customer upon delivery under executed customer purchase orders or contracts. For export contracts, the title and risk of loss passes to customers at the time specified by each contract. Provisions for discounts, rebates and returns are provided for in the same period as the related sales are recorded.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
Earnings per Share
The Company applies the provisions of Financial Accounting Standards Board SFAS No. 128, Earnings Per Share (EPS), which requires companies to present basic earnings per share and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
Price Risk Management
The Company has adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138. SFAS No. 133 requires that the Company recognize all derivative instruments on the balance sheet at fair value, and changes in the derivative’s fair value must be currently recognized in earnings or comprehensive income, depending on the designation of the derivative. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in comprehensive income and is recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings currently.
The Company utilizes commodity price swaps to reduce price risks by entering into price swaps with counterparties and by purchasing or selling futures on established exchanges.exchanges, and the Company assesses counter party nonperformance risk. The Company takes both fixed and variable positions, depending upon anticipated future physical purchases and sales of these commodities. The fair value of derivative financial instruments is estimated using currentquoted market quotes from external sources.prices in active markets and observable market-based inputs or unobservable inputs that are corroborated by market data when active markets are not available. See Note 10 for a summary of the carrying value and fair value of derivative instruments.
During 2005, 20042008, 2007 and 2003, due to the short-term nature of the commitments and associated derivative instruments,2006, the Company did not designate any of its commodity derivative instruments as hedges under the provisions of SFAS No. 133. Consequently, gains and losses from changes in the fair value of all the commodity derivative instruments used in 2005, 20042008, 2007 and 20032006 were included in earnings.
During 2006, the Company entered into a foreign currency hedge to minimize foreign exchange risk on a firm commitment, and the settlement of this hedge occurred in 2007. This hedge had no significant impact on the Company’s results of operations in 2007 or 2006.
Environmental Costs
Environmental costs relating to current operations are expensed or capitalized, as appropriate, depending on whether such costs provide future economic benefits. Remediation liabilities are recognized when the costs are considered probable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and undiscounted site-specific costs. Environmental liabilities in connection with properties that are sold or closed are realized upon such sale or closure, to the extent they are probable and estimable and not previously reserved. In assessing environmental liabilities, no off-set is made for potential insurance recoveries. Recognition of any joint and several liabilities is based upon the Company’s best estimate of its final pro rata share of the liability.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash equivalents, receivables, and accounts payable approximate their fair value due to the short maturities of these instruments. The fair value of the Company’s debt as of December 31, 20052008 differs from the carrying value due to the issuance of fixed rate senior
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
notes in 2003.2006 and 2007. See Note 10 for a summary of financial instruments where fair value differs from carrying amounts. The fair value of financial instruments is estimated using currentquoted market quotes from external sources.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollarsprices in thousands, except per share data)
active markets and observable market-based inputs or unobservable inputs that are corroborated by market data when active markets are not available.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Other
Amortization of debt issuance costs is computed on a basis which approximates the interest method over the term of the related debt. Certain other assets (see Note 7)6) are amortized over periods ranging from 2 to 15 years using the straight-line method.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”) to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of January 1, 2007, as required. The Company recognized no adjustments in the liability for unrecognized income tax benefits upon the adoption of FIN 48. See Note 11 to the consolidated financial statements for more detail.
In December 2004,September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to nonrecurring, nonfinancial assets and nonfinancial liabilities. Nonrecurring, nonfinancial assets and nonfinancial liabilities for which the Company has not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, asset retirement obligations initially measured at fair value, and those initially measured at fair value in a business combination. The adoption of SFAS 157 has not had a material impact on the Company’s financial position or results of operations. In addition, the adoption of this statement with respect to nonrecurring, nonfinancial assets and liabilities in the future is not expected to have a material impact on the Company’s financial position or results of operations.
Relative to SFAS 157, the FASB issued FASB Staff PositionPositions (“FSP”) No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes,157-1 and 157-2. FSP 157-1 amends SFAS 157 to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” On October 22, 2004, the American Jobs Creation Act of 2004 (the “AJCA”) was signed into law. The AJCA provides a new deduction for certain qualified domestic production activities. FSP No. 109-1 clarifies that such deduction should be accounted for as a special deduction, not as a tax rate reduction, underexclude SFAS No. 109,13, “Accounting for Income Taxes,” no earlier thanLeases”, and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the year in which the deduction is reported on the tax return. The Company has recognized this tax benefit in 2005.
FSP No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004” (“FSP No. 109-2”), provides guidance under FASB Statement No. 109, “Accounting for Income Taxes,” with respect to recording the potential impacteffective date of the repatriation provisionsapplication of the AJCA on enterprises’ income tax expenseSFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and deferred tax liability. FSP No. 109-2 states an enterprise is allowed time beyondnonfinancial liabilities that are recognized or disclosed at fair value in the financial reporting period of enactment to evaluate the effect of the AJCAstatements on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company was not impacted by the provision because the Company did not repatriate earnings during 2005.
In May 2004, the FASB issued FSP No. 106-2 (“FSP No. 106-2”), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Medicare Act”). The Medicare Act was enacted December 8, 2003. FSP No. 106-2 supersedes FSP No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Act, Improvement and Modernization Act of 2003,” and provides authoritative guidance on accounting for the federal subsidy specified in the Medicare Act. The Medicare Act provides for a federal subsidy equal to 28% of certain prescription drug claims for sponsors or retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D, beginning in 2006. FSP No. 106-2 did not have a significant effect on the Company’s consolidated results of operations or financial position. Through December 31, 2005, the accumulated post retirement benefit obligation and the net periodic post retirement benefit costs reflect any potential benefit associated with the subsidy.
EITF Issue No. 04-10 “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds” (“EITF Issue No. 04-10”) was ratified in October 2004 and requires that operating segments that do not meet the quantitative thresholdsnonrecurring basis, as defined in SFAS No. 131, “Disclosures About Segments of Enterprise and Related Information” (“SFAS 131”) can be aggregated only if aggregation is consistent with the objective and basic principles of SFAS 131, the segments have similar economic characteristics and the segments are similar in a majority of the aggregation criteria listed in SFAS 131. EITF Issue No. 04-10 was effective for fiscal years ending after September 15, 2005 and had no impact on the segment reporting for the Company.discussed above.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
In November 2004,September 2006, the FASB also issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). SFAS 158 requires an enterprise to recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a defined benefit postretirement plan’s underfunded status. In addition, each entity must recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. This statement is effective for fiscal years ending after December 15, 2006, and the Company has adopted this standard for its annual financial statements. The impact of the adoption of this statement in 2006 was a reduction in stockholders’ equity of $9,952.
Also in September 2006, the FASB issued SFASFASB Staff Position No. 151, “Inventory Costs—An AmendmentAUG AIR-1, “Accounting for Planned Major Maintenance Activities” (“FSP No. AUG AIR-1”). FSP No. AUG AIR-1 prohibits the use of ARBthe accrue-in-advance method of accounting for planned major maintenance turnarounds because it causes the recognition of a liability in a period prior to the occurrence of the transaction or obligation. The Company accounts for its turnarounds utilizing the deferral method of accounting, so FSP No. 43, Chapter 4”AUG AIR-1 does not impact the Company’s consolidated results of operations or financial position.
The Securities and Exchange Commission released Staff Accounting Bulletin (“SAB”) No. 108 in September 2006. This bulletin provides guidance regarding the methodology of quantifying the dollar amounts of errors in determining the materiality of those errors. These methods are required to be implemented for annual financial statements covering the first fiscal year ending after November 15, 2006 and had no impact on the Company’s consolidated financial statements.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 151”159”). SFAS 151 amends159 allows entities the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,”option to clarify the accounting for abnormal amountsmeasure eligible financial instruments at fair value as of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight and rehandling costsspecified dates. Such election, which may be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally,applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151159 is effective for fiscal years beginning after JuneNovember 15, 20052007. Although we have made such election with respect to some inventory related to trading activity, it has not had a significant impact on the Company’s financial position and is required to be adopted by the Company in the first quarter of 2006. The Company is currently evaluating the effect the adoption of SFAS 151 will have on its consolidated results of operations and financial position but does not expect SFAS 151 to have a material impact.
operations.
In December 2004,2007, the FASB issued SFAS No. 123141 (revised 2004)2007), “Share-Based Payment”“Business Combinations” (“SFAS 123R”141R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.141, “Business Combinations.” SFAS 123R requires141R retains the fundamental requirements in Statement 141 that the purchase method of accounting be used for all share-based paymentsbusiness combinations. This statement further establishes principals and requirements for how the acquiring entity recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also determines what information to employees, including grantsdisclose to enable users of employee stock options, to be recognized in the financial statements based on their fair values beginning withto evaluate the first interim or annual period after June 15, 2005, with early adoption encouraged. In April 2005, the Securitiesnature and Exchange Commission postponed the effective date of SFAS 123R until the issuer’s first fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and transition method to be used at the date of adoption. The transition method alternatives include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either aseffects of the beginning ofbusiness combination. SFAS 141R applies prospectively to business combinations for which the year of adoptionacquisition date is on or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock atafter the beginning of the first quarter of adoption of SFAS 123R, whileannual reporting period beginning on or after December 15, 2008, and the retroactive method would require compensation expense to be recorded for all unvested stock options and restricted stock beginning with the first period restated. The Company is currently evaluating the method of adoption, the effect of adoption, and whether the adoption will result in amounts similar to the current pro forma disclosures under SFAS 123.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do notcannot estimate any impact this statement may have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and was required to be adopted in the third quarter of 2005. The adoption of SFAS 153 did not have a significant impact on the Company’s consolidated results of operations andor financial position.position as any potential business combinations after the implementation date are unknown.
EITF Issue No. 03-13 “ApplyingIn December 2007, the Condition in Paragraph 42 of FASB No. 144, “Accounting for the Impairment on Disposal of Long-Lived Assets,” in Determining Whether to Report Discontinued Operations” (“EITF Issue No. 03-13”), ratified in November 2004, provides application guidance on paragraph 42 ofissued SFAS No. 144 “Accounting160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 addresses the accounting and reporting for entities that consolidate a noncontrolling interest, sometimes called a minority interest. SFAS 160 is effective for fiscal years beginning after December 15, 2008, but is not expected to have any impact on the Impairment or Disposal of Long-Lived Assets” in determining whether to report discontinued operations. Specifically EITF Issue No. 03-13 addresses which cash flows are to be considered and what forms of involvement constitute significant continuing involvement in an asset,Company’s consolidated financial statements as well as specifying athe Company does not currently consolidate any noncontrolling interest entities.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
period for reassessment. EITF Issue No. 03-13 was effective for fiscal periods beginning after December 15, 2004 and it did not have a significant impact on the Company’s consolidated results of operations, cash flows or financial position.
In March 2005, The FASB issued FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB Statement No. 143” (“FIN 47”), with the purpose of clarifying that the term conditional asset retirement obligation, as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated when incurred or at the first moment it becomes reasonably certain. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. The interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The Company adopted FIN 47, and based on the Company’s evaluation, at this time it has been determined that these assets have indeterminate lives and no significant conditional asset retirement obligations. Therefore, the Company has not recorded any asset retirement obligations.
In May 2005,2008, the FASB issued SFAS No. 154, “Accounting Changes161, “Disclosures about Derivative Instruments and Error Corrections”Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 154”161”). SFAS 154 replaces APB Opinion No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements—An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance onThis statement does not change the accounting for derivatives but will require enhanced disclosures about derivative strategies and reportingaccounting practices. SFAS 161 requires greater transparency related to the reasons the Company uses derivative instruments, how derivative instruments are accounted for and how they affect the Company’s financial position and consolidated results of accounting changes and error corrections. It establishes retrospective application as the required method of reporting a change in accounting principle and the reporting of an error in most instances.operations. SFAS 154161 is effective for accounting changes and corrections of errors made in fiscal years beginning after DecemberJanuary 15, 20052008, and is required to be adopted by the Company in the first quarter of 2006.
EITF Issue No. 04-13 “Accounting for Purchases and Sales of Inventorywill comply with the Same Counterparty,” (“EITF Issue No. 04-13”) was ratified in September 2005 and requires “buy/sell” contractual arrangements entered into after March 15, 2006, or modifications or renewals of existing arrangements after that date, to be reported on a net basis in the results of operations and accounted for as non-monetary transactions. The Company does not expect this to have a significant impact on the Company’s consolidated results of operations orany necessary disclosure requirements beginning with its 2009 interim financial position.
In November 2005, the FASB issued FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005 and is required to be adopted in 2006. The Company is currently evaluating the effect that the adoption of FSP 115-1 will have on its consolidated results of operations and financial position but does not expect it to have a material impact.
statements.
2. Stock-Based Compensation
In connection with the Transactions described in Note 1, the board of directors of the Company adopted, and the stockholders approved, the Westlake Chemical Corporation 2004 Omnibus Incentive Plan (the “2004 Plan”). The 2004 Plan became effective upon the closing of the initial public offering of the Company’s common stock (“IPO”).
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
Under the 2004 Plan, all employees of the Company, as well as individuals who have agreed to become the Company’s employees prior to six months of the date of grant, are eligible for awards. Shares of common stock may be issued as authorized in the 2004 Plan. At the discretion of the administrator of the 2004 Plan, employees and non-employee directors may be granted awards in the form of stock options, stock appreciation rights, stock awards or cash awards (any of which may be a performance award). Awards under the 2004 Plan may be granted singly, in combination, or in tandem.
The Company granted 156,800 restricted stock units, valued at $14.50 per unit, in the third quarter of 2004 to employees. After forfeitures, the remaining 149,500 units vested in the first quarter of 2005. The Company also granted options to purchase 475,716 shares of common stock in the third quarter of 2004. The exercise price of the options is the IPO price ($14.50). These options become exercisable in equal amounts on the first, second and third anniversaries of the grant date and expire on the tenth anniversary of the grant date. The Company also granted and issued 42,874 shares of restricted stock during the third quarter of 2005, valued at $27.22 per share. These shares will vest equally on the first, second and third anniversaries of the grant date. During the vesting period, the participants have voting rights and receive dividends, but the shares may not be sold, assigned, transferred, pledged or otherwise encumbered. The fair value of the restricted shares on the date of the grant is being amortized over the vesting period. In addition, the Company granted options to purchase 83,635 shares of common stock during the third quarter of 2005. The exercise price of these options is the market price on the date of the grant ($27.22). These options become exercisable on the first, second, third and fourth anniversaries of the grant date and expire on the tenth anniversary of the grant date.
A summary of the status of the Company’s stock option grants as of December 31, 2005 and activity since the inception of the 2004 plan is presented below:
2005 | 2004 | |||||||||
Shares | Weighted Avg. Exercise Price | Shares | Weighted Avg. Exercise Price | |||||||
Outstanding at beginning of year | 471,226 | 14.50 | — | |||||||
Granted | 86,907 | 27.15 | 475,716 | 14.50 | ||||||
Exercised | (81,694 | ) | 14.50 | — | — | |||||
Canceled | (37,676 | ) | 16.01 | (4,490 | ) | 14.50 | ||||
Outstanding at end of year | 438,763 | 16.88 | 471,226 | 14.50 | ||||||
Options exercisable at end of year | 72,668 | — | ||||||||
Shares available for grant at end of year | 5,614,914 | 5,855,774 |
For options outstanding at December 31, 2005, the options had the following range of exercise prices:
Range of Prices | Options Outstanding | Weighted Average Remaining Contractual Life (Years) | ||
$14.50 | 356,326 | 8.6 | ||
$25.42 - $27.22 | 82,437 | 9.7 |
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and complies with SFAS No. 123, “Accounting for Stock-Based Compensation,” for disclosure purposes. Under these provisions, no compensation expense has been recognized for the 2004 Plan. For SFAS No. 123 purposes, the fair value of each stock option has been estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2005 Options | 2004 Options | |||||
Risk-free interest rate | 4.3 | % | 4.0 | % | ||
Expected life in years | 8 | 10 | ||||
Expected volatility | 36.5 | % | 28.1 | % | ||
Expected dividend yield | 0.4 | % | 0.6 | % |
Using the above assumptions, additional compensation expense for stock option grants under the fair value method prescribed by SFAS No. 123 would be:
December 31, 2005 | December 31, 2004 | |||||
Compensation expense | $ | 1,573 | $ | 655 | ||
Provision for income taxes | 540 | 240 | ||||
Total, net of taxes | $ | 1,033 | $ | 415 | ||
Had compensation expense been determined consistently with the provisions of SFAS 123, utilizing the assumptions previously detailed, the Company’s net income and earnings per common share would have been the following pro forma amounts:
December 31, 2005 | December 31, 2004 | |||||
Net income | ||||||
As reported | $ | 226,817 | $ | 120,722 | ||
Pro forma | $ | 225,784 | $ | 120,307 | ||
Basic and diluted earnings per share | ||||||
As reported: | ||||||
Basic | $ | 3.49 | $ | 2.19 | ||
Diluted | $ | 3.48 | $ | 2.18 | ||
Pro forma: | ||||||
Basic | $ | 3.47 | $ | 2.18 | ||
Diluted | $ | 3.46 | $ | 2.17 |
3.(Loss) Earnings per Share
The following table reconciles the denominator for the basic and diluted (loss) earnings per share computations shown in the consolidated statements of operations:
December 31, | ||||||
2005 | 2004 | 2003 | ||||
Weighted average common shares—basic | 65,008 | 55,231 | 49,499 | |||
Plus incremental shares from assumed conversion: | ||||||
Options | 221 | 67 | — | |||
Restricted stock units | 22 | 57 | — | |||
Weighted average common shares—diluted | 65,251 | 55,355 | 49,499 | |||
2008 | 2007 | 2006 | ||||
Weighted average common shares—basic | 65,273 | 65,235 | 65,134 | |||
Plus incremental shares from assumed conversion: | ||||||
Options | 26 | 79 | 107 | |||
Restricted stock | 18 | 10 | 14 | |||
Weighted average common shares—diluted | 65,317 | 65,324 | 65,255 | |||
There are no adjustments to “Net (loss) income” for the diluted earnings per share computations.
3. Accounts Receivable
Accounts receivable consist of the following at December 31:
2008 | 2007 | |||||||
Trade customers | $ | 293,318 | $ | 498,073 | ||||
Affiliates | 1,226 | 1,365 | ||||||
Allowance for doubtful accounts | (14,438 | ) | (3,546 | ) | ||||
280,106 | 495,892 | |||||||
Federal and state taxes | 54,886 | 7,932 | ||||||
Other | 12,331 | 3,639 | ||||||
Accounts receivable, net | $ | 347,323 | $ | 507,463 | ||||
4. Inventories
Inventories consist of the following at December 31:
2008 | 2007 | |||||||
Finished products | $ | 173,982 | $ | 332,882 | ||||
Feedstock, additives, and chemicals | 119,881 | 164,832 | ||||||
Materials and supplies | 42,415 | 38,058 | ||||||
336,278 | 535,772 | |||||||
Allowance for inventory obsolescence | (8,311 | ) | (7,901 | ) | ||||
Inventories, net | $ | 327,967 | $ | 527,871 | ||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
4. Accounts Receivable
Accounts receivable consistAt December 31, 2008, the Company elected to measure $9,917 of feedstock inventory at fair value pursuant to SFAS 159 as this inventory is being held as part of a trading strategy to reduce feedstock price volatility risk. The fair value is determined using market-based pricing for this commodity. The consolidated statement of operations for 2008 reflects a loss of $1,966 from changes in the following at December 31:
2005 | 2004 | |||||||
Accounts receivable—trade | $ | 301,091 | $ | 230,554 | ||||
Accounts receivable—affiliates | 845 | 966 | ||||||
Allowance for doubtful accounts | (3,460 | ) | (6,106 | ) | ||||
298,476 | 225,414 | |||||||
Accounts receivable—other | 4,303 | 8,833 | ||||||
Accounts receivable, net | $ | 302,779 | $ | 234,247 | ||||
fair value of this inventory in cost of sales and the net effect on the Company’s deferred tax liability was $730.
5. Inventories
Inventories consist of the following at December 31:
2005 | 2004 | |||||||
Finished Products | $ | 186,241 | $ | 172,056 | ||||
Feedstock, additives, and chemicals | 133,949 | 129,715 | ||||||
Materials and supplies | 27,790 | 26,552 | ||||||
347,980 | 328,323 | |||||||
Allowance for inventory obsolescence | (8,110 | ) | (8,507 | ) | ||||
Inventory, net | $ | 339,870 | $ | 319,816 | ||||
6. Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31:
2005 | 2004 | |||||||
Land | $ | 12,217 | $ | 12,049 | ||||
Buildings and improvements | 81,685 | 80,129 | ||||||
Plant and equipment | 1,364,715 | 1,321,086 | ||||||
Other | 85,686 | 82,902 | ||||||
1,544,303 | 1,496,166 | |||||||
Less: Accumulated depreciation | (741,254 | ) | (674,547 | ) | ||||
803,049 | 821,619 | |||||||
Construction in progress | 60,183 | 33,433 | ||||||
Property, plant and equipment, net | $ | 863,232 | $ | 855,052 | ||||
2008 | 2007 | |||||||
Land | $ | 12,358 | $ | 12,358 | ||||
Building and improvements | 109,544 | 100,847 | ||||||
Plant and equipment | 1,800,178 | 1,674,141 | ||||||
Other | 97,291 | 89,053 | ||||||
2,019,371 | 1,876,399 | |||||||
Less: Accumulated depreciation | (927,910 | ) | (866,481 | ) | ||||
1,091,461 | 1,009,918 | |||||||
Construction in progress | 105,991 | 116,294 | ||||||
Property, plant and equipment, net | $ | 1,197,452 | $ | 1,126,212 | ||||
Depreciation expense on property, plant and equipment of $69,130, $68,028,$93,137, $85,421, and $73,868$74,879 is included in cost of sales in the consolidated statements of operations in 2008, 2007 and 2006, respectively.
6. Other Assets
Other assets consist of the following:
2008 | 2007 | Weighted Average Life | ||||||||||||||||||||
Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |||||||||||||||||
Intangible Assets: | ||||||||||||||||||||||
Technology licenses | $ | 44,533 | $ | (34,507 | ) | $ | 10,026 | $ | 43,487 | $ | (31,940 | ) | $ | 11,547 | 14 | |||||||
Patents | 6,503 | (1,355 | ) | 5,148 | 6,503 | (704 | ) | 5,799 | 10 | |||||||||||||
Customer relationships | 17,649 | (2,828 | ) | 14,821 | 17,649 | (1,471 | ) | 16,178 | 13 | |||||||||||||
Goodwill | 29,990 | — | 29,990 | 29,990 | �� | — | 29,990 | |||||||||||||||
Other | 1,161 | — | 1,161 | 1,161 | — | 1,161 | ||||||||||||||||
Total intangible assets | 99,836 | (38,690 | ) | 61,146 | 98,790 | (34,115 | ) | 64,675 | ||||||||||||||
Note receivable from affiliate | 5,529 | — | 5,529 | 5,529 | — | 5,529 | ||||||||||||||||
Turnaround costs | 73,001 | (29,383 | ) | 43,618 | 56,527 | (18,157 | ) | 38,370 | 5 | |||||||||||||
Debt issuance cost | 12,967 | (4,262 | ) | 8,705 | 10,332 | (3,308 | ) | 7,024 | 9 | |||||||||||||
Other, net | 12,046 | (5,035 | ) | 7,011 | 10,860 | (4,456 | ) | 6,404 | 2 | |||||||||||||
Total other assets | $ | 203,379 | $ | (77,370 | ) | $ | 126,009 | $ | 182,038 | $ | (60,036 | ) | $ | 122,002 | ||||||||
Amortization expense on other assets of $19,743, $18,853 and $12,233 is included in the consolidated statement of operations in 2005, 20042008, 2007 and 2003,2006, respectively.
During 2005, 2004 and 2003, the Company recognized impairments of plant and equipment amounting to $0, $1,830 and $2,285, respectively. The impairments have been reflected in the consolidated statements of operations. The impairments represented the amount necessary to adjust the carrying value of certain plant and
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
equipment to its net realizable value. The impairments in 2003 related primarily to idled styrene and ethylene assets charged to the Olefins segment of approximately $1,544, which were replaced. An additional $741 charged to the corporate segment was related to equipment held for sale that was adjusted to fair market value. In 2004, the Company recognized a $1,314 impairment charge in the Vinyls segment related to a polyvinyl chloride plant that was not in service and was written down to its estimated fair market value less commission as determined by third party valuation. Also in 2004, the Company recognized a $516 impairment charge relating to an adjustment to fair market value of certain Olefins segment assets.
Insurance recoveries related to casualty losses at the Company’s Olefins and Vinyls facilities amounted to $0, $2,785 and $3,350 in 2005, 2004 and 2003, respectively. These insurance recoveries net of related property costs have been recorded in other income, net in the consolidated statements of operations.
7. Other Assets
Other assets consist of the following:
December 31, 2005 | December 31, 2004 | |||||||||||||||||||||
Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | Weighted Average Life | ||||||||||||||||
Intangible Assets: | ||||||||||||||||||||||
Technology Licenses | $ | 42,932 | $ | (27,090 | ) | $ | 15,842 | $ | 42,618 | $ | (24,715 | ) | $ | 17,903 | 14 | |||||||
Other | 1,220 | — | 1,220 | 1,539 | — | 1,539 | ||||||||||||||||
Total Intangible Assets | 44,152 | (27,090 | ) | 17,062 | 44,157 | (24,715 | ) | 19,442 | ||||||||||||||
Note receivable from affiliate | 5,529 | — | 5,529 | 5,100 | — | 5,100 | ||||||||||||||||
Turnaround Costs | 21,531 | (14,141 | ) | 7,390 | 22,771 | (11,652 | ) | 11,119 | 4 | |||||||||||||
Debt Issuance Cost | 8,484 | (3,500 | ) | 4,984 | 9,251 | (2,227 | ) | 7,024 | 6 | |||||||||||||
Other, net | 12,491 | (6,404 | ) | 6,087 | 7,782 | (3,086 | ) | 4,696 | 2 | |||||||||||||
Total Other Assets | $ | 92,187 | $ | (51,135 | ) | $ | 41,052 | $ | 89,061 | $ | (41,680 | ) | $ | 47,381 | ||||||||
Amortization expense on other assets of $13,567, $15,144 and $14,312 is included in the consolidated statement of operations in 2005, 2004 and 2003, respectively.
Scheduled amortization of intangible assets for the next five years is as follows: $2,254, $2,254, $2,254, $2,254$4,637, $4,595, $4,092, $2,648 and $2,211$2,643 in 2006, 2007, 2008, 2009, 2010, 2011, 2012 and 2010,2013, respectively.
8. Long-Term7. Debt
IndebtednessLong-term debt consists of the following at December 31:
2005 | 2004 | |||||||
8 3/4% senior notes due in 2011 | $ | 247,000 | $ | 247,000 | ||||
Term loan | 9,000 | 40,200 | ||||||
Loan related to tax-exempt revenue bond | 10,889 | 10,889 | ||||||
$ | 266,889 | $ | 298,089 | |||||
Less: Current portion of long-term debt | (1,200 | ) | (1,200 | ) | ||||
$ | 265,689 | $ | 296,889 | |||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
2008 | 2007 | |||||
6 5/8% senior notes due 2016 | $ | 249,430 | $ | 249,348 | ||
Revolving line of credit due 2013 | — | 1,177 | ||||
6 3/4% senior notes due 2032 | 250,000 | 250,000 | ||||
Loan related to tax-exempt waste disposal revenue bond due 2027 | 10,889 | 10,889 | ||||
$ | 510,319 | $ | 511,414 | |||
On January 6, 2006,September 8, 2008, the Company amended its senior secured revolving credit facility to, among other things, increase the commitmentlenders’ commitments under the facility from $200,000$300,000 to $300,000 and generally reduce$400,000. On February 5, 2009, the interest payable. After the amendment, as of January 6, 2006,Company further amended the revolving credit facility boreto allow the Company to make specified distributions when the fixed charge coverage ratio falls below 1.0 but the Company maintains at least $125 million to $200 million (depending on the amount of distributions) of borrowing availability, including cash, under the credit facility. At December 31, 2008, the Company had no borrowings under the revolving credit facility. Subsequent to the latest amendment, any borrowings under the facility would bear interest at either LIBOR plus 1.00%3.00% or the prime rate minus ..50%plus 1.50%. The revolving credit facility also requires an unused commitment fee ranging from 0.75% to 0.875%, and a 0.25% unused line fee, all of whichdepending on the average daily borrowings. All interest rates under the facility are subject to quarterly grid pricing adjustments based on average daily loan availability. The revolving credit facility matures on September 8, 2013. At December 31, 2008, the Company had outstanding letters of credit under the revolving credit facility totaling $14,172 and loan availability of $257,925 under the facility.
On December 13, 2007, the Louisiana Local Government Environmental Facilities and Community Development Authority (the “Authority”) issued $250,000 of 6 3/4% tax-exempt revenue bonds due November 1, 2032 under the Gulf Opportunity Zone Act of 2005. The bonds are non-callable through November 1, 2017. The bonds are subject to redemption and the holders may require the bonds to be repurchased upon a fixed charge coverage ratio. The maturitychange of control or a change in or loss of the facility was extendedcurrent tax status. In connection with the issuance of the bonds, the Company entered into a loan agreement with the Authority pursuant to Januarywhich the Company agreed to pay all of the principal, premium, if any, and interest on the bonds and certain other amounts to the Authority. The proceeds from the bond offering were loaned by the Authority to the Company. The Company intends to use the proceeds to expand, refurbish and maintain certain of the Company’s facilities in the Louisiana Parishes of Calcasieu and Ascension. To evidence and secure the Company’s obligations under the loan agreement, the Company entered into a second supplemental indenture, by and among the Company, the subsidiary guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee, and issued $250,000 aggregate principal amount of the Company’s 6 2011. 3/4% senior notes due 2032 to be held by the trustee pursuant to the terms and provisions of the loan agreement. The 6 3/4% senior notes are unsecured and rank equally in right of payment with other existing and future unsecured senior indebtedness. All domestic restricted subsidiaries that guarantee other debt of the Company or of another guarantor of the senior notes in excess of $5,000 are guarantors of the senior notes. As of December 31, 2008, the Company had drawn $116,372 of bond proceeds. The balance of the proceeds, principal plus current and accrued interest income, remains with a trustee, and is classified on the Company’s consolidated balance sheet as a non-current asset, restricted cash, until such time as the Company requests reimbursement of amounts used to expand, refurbish and maintain the Company’s facilities in Calcasieu and Ascension Parishes.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
On January 13, 2006, the Company issued $250,000 of new 6 5/8% unsecuredaggregate principal amount of senior notes due 2016, the proceeds of which, together with cash on hand, were used to redeem the Company’s 8 3/4% senior notes due 2011 and repay the Company’s term loan as follows:
As a result of the early redemption of the 8 3/4% senior notes due 2011, the Company will recognize $25,751 in non-operating expense in the first quarter of 2006 consisting of a pre-payment premium on the 8 3/4% senior notes of $22,230 and a write-off of $3,521 in previously capitalized debt issuance cost.
2016. The 6 5/8% senior notes are unsecured.unsecured and were issued with an original issue discount of $815. There is no sinking fund and no scheduled amortization of the notes prior to maturity. The notes are subject to redemption and the holders may require the Company to repurchase the notes upon a change of control. All domestic restricted subsidiaries that guarantee other debt of the Company or of another guarantor of the senior notes in excess of $5,000 are guarantors of the notes.
The agreements governing the 6 5/8% and the 6 3/4% senior notes (together the “senior notes”) and the revolving credit facility each contain customary covenants and events of default. Accordingly, these agreements impose significant operating and financial restrictions on the Company. These restrictions, among other things, provide limitations on incurrence of additional indebtedness, the payment of dividends, certain investments and acquisitions and sales of assets. One such restriction currently restricts the Company from incurring additional debt, except specified permitted debt (including borrowings under the Company’s credit facility), because the Company’s fixed charge coverage ratio fell below 2.0 at December 31, 2008. These limitations are subject to a number of important qualifications and exceptions, including, without limitation, an exception for the payment of the Company’s regular quarterly dividend of up to $0.20 per share.share (currently $0.0525 per share). The 6 5/8% senior notes indenture does not allow distributions, unless, after giving pro forma effect to the distribution, the Company’s fixed charge coverage ratio is at least 2.0 and such payment, together with the aggregate amount of all other distributions after January 13, 2006, is less than the sum of 50% of the Company’s consolidated net income for the period from October 1, 2003 to the end of the most recent quarter for which financial statements have been filed, plus 100% of net cash proceeds received after October 1, 2003 as a contribution to the Company’s common equity capital or from the issuance or sale of certain securities, plus several other adjustments. The amount allowed under this restriction would have been $451,634 at December 31, 2008; however, because the Company’s fixed charge coverage ratio was $307,800 at January 13, 2006.below 2.0, the actual amount allowed was restricted to the payment of the Company’s regular quarterly dividend of up to $0.20 per share. The revolving credit facility also restricts dividend paymentsdistributions unless, after giving effect to such payment, the availability equals or exceeds $60,000. Neitherfixed charge coverage ratio is at least 1.0, provided that the Company may also make specified distributions when the fixed charge coverage ratio falls below 1.0 but the Company maintains at least between $125 million to $200 million (depending on the amount of the distributions) of borrowing availability, including cash, under the credit facility. No other agreements requiresrequire the Company to maintain specified financial ratios, except that the revolving credit facility requires the Company to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 when availability falls below $60,000.ratios. In addition, the 6 5/8% senior notes indenture and the revolving credit facility restrict the Company’s ability of the Company to create liens, to engage in certain affiliate transactions and to engage in sale-leaseback transactions.
On August 16, 2004 the Company completed the IPO. Net proceeds from the IPO were $181,167. The Company used the proceeds from the IPO along with available cash on hand to redeem $133,000 aggregate principal amount of its 8 3/4% senior notes due July 15, 2011, to repay $28,000 of its senior secured term loan
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
maturing in July 2010 and to repay in full a $27,000 bank loan. As a result of the early payment on the 8 3/4% senior notes, the Company recognized $14,685 in non-operating expense in the third quarter of 2004 consisting of a pre-payment premium on the notes of $11,637 and a write-off of $3,047 in previously capitalized debt issuance cost. In addition, in the fourth quarter of 2004, the Company repaid an additional $50,000 of its senior term loan and incurred an additional $1,106 of non-operating expense related to the write-off of previously capitalized debt issuance costs.
The 8 3/4% senior notes were unsecured. All domestic restricted subsidiaries were guarantors of the senior notes. In the first quarter of 2006, these notes were repaid.
At inception, the term loan bore interest at either the Eurodollar Rate plus 3.75% or prime rate plus 2.75%. Quarterly principal payments of $300 were due on the term loan beginning on September 30, 2003, with the balance due in four equal quarterly installments in the seventh year of the loan. The Company used the proceeds from the IPO to prepay $28,000 of the term loan in August 2004, which prepayment was applied to and reduced the final installment of the term loan. Mandatory prepayments were due on the term loan with the proceeds of asset sales and casualty events subject, in some instances, to reinvestment provisions. The term loan also required prepayment with 50% of excess cash flow as determined under the term loan agreement. The term loan was collateralized by the Company’s Lake Charles and Calvert City facilities and some related intangible assets. As of September 30, 2004, the Company and its lenders entered into an amendment to the term loan that reduced the applicable interest rate so that the term loan subsequently bore interest at either the Eurodollar Rate plus 2.25% or prime rate plus 1.25%. The amendment also eliminated the requirement to use excess cash flow to repay the term loan. As described above, all amounts outstanding under the term loan were repaid in the first quarter of 2006.
The revolving credit facility bore interest at either LIBOR plus 2.25% or prime rate plus 0.25%, subject to grid pricing adjustment based on the Company’s fixed charge coverage ratio after the first year and subject to a 0.5% unused line fee. The revolving credit agreement was amended on February 24, 2004, June 22, 2004 and November 30, 2004 to, among other things, lower the applicable margin by 0.5% of the pricing grid, modify the termination fee, extend the maturity date by one year, and revise various definitions and covenants to allow the IPO and the Bristolpipe acquisition and to facilitate the Company’s operations. The revolving credit facility is collateralized by accounts receivable and contract rights, inventory, chattel paper, instruments, documents, deposit accounts and related intangible assets. The Company had standby letters of credit outstanding at December 31, 2005 of $28,318 and $171,682 of available borrowing capacity under this facility. In the first quarter of 2006, the Company has amended this facility as described above and extended the maturity to January 6, 2011.
The agreements governing the 8 3/4% senior notes and the term loan each contained customary covenants and events of default. Accordingly, these agreements imposed significant operating and financial restrictions on the Company. These restrictions, among other things, provided limitations on incurrence of additional indebtedness, the payment of dividends, significant investments and sales of assets. These limitations were subject to a number of important qualifications and exceptions. The 8 3/4% senior notes indenture and the term loan did not allow distributions unless, after giving pro forma effect to the distribution, the Company’s fixed charge coverage ratio was at least 2.0 and such payment, together with the aggregate amount of all other restricted payments since July 31, 2003, was less than the sum of 50% of the Company’s consolidated net income for the period from the fourth quarter of 2003 to the end of the most recent quarter for which financial statements had been delivered (which percentage will be increased to 100% so long as the 8 3/4% senior notes are rated investment grade), plus 100% of net cash proceeds received after July 31, 2003 as a contribution to the Company’s common equity capital or from the issuance or sale of equity securities, plus $25,000. The amount under this restriction was $376,382 at December 31, 2005. Neither of the agreements required the Company to
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
maintain specified financial ratios. In addition, the 8 3/4% senior notes indenture, the term loan and the revolving credit facility restricted the ability of the Company to create liens, to engage in certain affiliate transactions and to engage in sale-leaseback transactions.
In December 1997, the Company entered into a loan agreement with a public trust established for public purposes for the benefit of the Parish of Calcasieu, Louisiana. The public trust issued $10,889 inprincipal amount of tax-exempt waste disposal revenue bonds (revenue bonds) in order to finance the Company’s construction of waste disposal facilities for its newan ethylene plant. The revenue bonds expire in December 2027 and are subject to redemption and mandatory tender for purchase prior to maturity under certain conditions. Interest on the revenue bonds accrues at a rate determined by a remarketing agent and is payable quarterly. The interest rate on the revenue bonds at December 31, 20052008 and 20042007 was 3.65%1.08% and 2.1%3.69%, respectively. In conjunction with the loan agreement, the Company entered into a letter of credit reimbursement agreement and obtained a letter of credit from a bank in the amount of $11,268. The letter of credit, as amended, will expire in July 2008.
The weighted average interest rate on the borrowingsall long-term debt was 6.6% at both December 31, 20052008 and 2004 was 8.5% and 7.9%, respectively.2007.
As a result of the refinancing in January 2006, thereThere are no maturities of long-term debt overuntil 2016, except for maturities of borrowings under the next five years.
revolving credit facility.
9.8. Stockholders’ Equity
In the third quarter of 2004, the Company completed the IPO. The net proceeds from the stock offering of $181,167, after deducting underwriting fees and offering expenses, together with cash on hand, were used to pay debt.
As described in Note 1 “Basis of Financial Statements”, the Company consummated a reorganization and a stock split during the third quarter of 2004. The reorganization included the exchange of preferred stock for common stock, including the preferred stock of a subsidiary of the Company which was previously classified as minority interest.
Since November 11, 2004, the Company’s board of directors has declared a regular quarterly dividend to holders of its common stock aggregating approximately $6,342$13,456, $11,778 and $1,379$8,802 in 20052008, 2007 and 2004,2006, respectively.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
Common Stock
Each share of common stock entitles the holder to one vote on all matters on which holders are permitted to vote, including the election of directors. There are no cumulative voting rights. Accordingly, holders of a majority of the total votes entitled to vote in an election of directors will be able to elect all of the directors standing for election. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of the common stock will share equally on a per share basis any dividends when, as and if declared by the board of directors out of funds legally available for that purpose. If the Company is liquidated, dissolved or wound up, the holders of the Company’s common stock will be entitled to a ratable share of any distribution to stockholders, after satisfaction of all the Company’s liabilities and of the prior rights of any outstanding class of the Company’s preferred stock. The Company’s common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Company’s common stock.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
Preferred Stock
In connection with the mergers described in Note 1, theThe Company’s charter has been amended to authorizeauthorizes the issuance of shares of preferred stock. The Company’s board of directors has the authority, without shareholder approval, to issue preferred shares from time to time in one or more series, and to fix the number of shares and terms of each such series. The board may determine the designations and other terms of each series including dividend rates, whether dividends will be cumulative or non-cumulative, redemption rights, liquidation rights, sinking fund provisions, conversion or exchange rights and voting rights.
9. Stock-Based Compensation
Under the Westlake Chemical Corporation 2004 Omnibus Incentive Plan (the “2004 Plan”), all employees and nonemployee 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 2004 Plan. At the discretion of the administrator of the 2004 Plan, employees and non-employee directors may be granted awards in the form of stock options, stock appreciation rights, stock awards or cash awards (any of which may be a performance award). Outstanding stock option awards have a ten year term and vest either (1) ratably on an annual basis over a three to five year period or (2) in one-half increments on the five year and nine and one-half year anniversaries of the award date. Current outstanding restricted stock awards also vest either (1) ratably on an annual basis over a three or five year period, (2) at the end of a three year period or (3) in one-half increments on the five year and nine and one-half year anniversaries of the award date. The total recognized compensation expense related to the 2004 Plan was $4,178, $2,873 and $1,731 during 2008, 2007 and 2006, respectively.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method. Under this transition method, stock-based compensation expense for the year ended December 31, 2006 includes compensation expense of all stock-based compensation awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS 123. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs on a straight-line basis over the requisite service period of the award for only those shares expected to vest.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
Option activity and changes during 2008 were as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | Aggregate Intrinsic Value | ||||||||
Outstanding at December 31, 2007 | 677,243 | $ | 26.43 | ||||||||
Granted | 259,021 | 19.40 | |||||||||
Exercised | (14,899 | ) | 14.50 | ||||||||
Cancelled | (11,036 | ) | 18.53 | ||||||||
Outstanding at December 31, 2008 | 910,329 | 24.72 | 7.8 | $ | 308 | ||||||
Exercisable at December 31, 2008 | 279,965 | 20.56 | 6.2 | 308 | |||||||
For options outstanding at December 31, 2008, the options had the following range of exercise prices:
Range of Prices | Options Outstanding | Weighted Average Remaining Contractual Life (Years) | ||
$14.50 – $20.83 | 431,226 | 7.8 | ||
$25.42 – $36.10 | 479,103 | 7.8 |
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2008. This amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised during 2008, 2007 and 2006 was $98, $290 and $2,046, respectively.
As of December 31, 2008, $4,446 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 3.0 years.
The Company used the Black-Scholes option pricing model to value its options. The table below presents the weighted average value and assumptions used in determining each option’s fair value. Volatility was calculated using historical trends of the Company’s common stock price.
2008 Options | 2007 Options | 2006 Options | ||||||||||
Weighted average fair value | $ | 7.52 | $ | 14.15 | $ | 14.87 | ||||||
Risk-free interest rate | 5.0 | % | 4.5 | % | 4.8 | % | ||||||
Expected life in years | 6 – 7 | 6 – 10 | 6 – 7 | |||||||||
Expected volatility | 35.0 | % | 33.2 | % | 34.0 | % | ||||||
Expected dividend yield | 1.0 | % | 0.5 | % | 0.3 | % |
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
Non-vested restricted stock awards as of December 31, 2008 and changes during 2008 were as follows:
Number of Shares | Weighted Average Grant Date Fair Value | |||||
Non-vested at December 31, 2007 | 228,761 | $ | 31.45 | |||
Granted | 158,311 | 19.32 | ||||
Forfeited | (2,187 | ) | 25.00 | |||
Vested | (21,453 | ) | 29.98 | |||
Non-vested at December 31, 2008 | 363,432 | 26.32 | ||||
As of December 31, 2008, there was $5,566 of unrecognized stock-based compensation expense related to non-vested restricted stock awards. This cost is expected to be recognized over a weighted-average period of 2.8 years. The total fair value of shares vested during 2008, 2007 and 2006 was $376, $592 and $407, respectively.
10. Derivative Commodity Instruments and Fair Value of Financial Instruments
The Company uses derivative instruments, in conjunction with certain physical commodity positions, to reduce price volatility risk on commodities, primarily natural gas and ethane, from time to time. Usually, such derivatives are for terms of less than one year. In 2005, 20042008, 2007 and 2003,2006, due to the short-term nature of the commitments and associated derivative instruments, the Company did not designate any of its commodity derivative instruments as hedges under the provisions of SFAS 133. Consequently,As such, gains and losses from changes in the fair value of all the derivative instruments used in 2005, 20042008, 2007 and 20032006 were included in earnings.
During 2006, the Company entered into a foreign currency hedge to minimize foreign currency risk on a firm purchase commitment, and the settlement of this hedge occurred in 2007. This hedge had no significant impact on the Company’s results of operations in 2007 or 2006.
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 case, 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 securities (as such improvements would accrue to the benefit of the counterparty).
The Company had a net loss of $3,818$9,386 in connection with trading activity for the year ended December 31, 20052008 compared to a net loss of $3,750$1,022 and a net gain of $36$18,643 for the years ended December 31, 20042007 and 2003,2006, respectively. All of the 2008 net loss was related to derivative losses. Of the 20052007 net loss, $29,755$7,710 related to derivative losses, partially offset by $27,884$6,688 in gains on the sale of related physical feedstock positions. The resulting $1,871 loss is recordedOf the 2006 net gain, $13,842 related to derivative gains and $4,801 related to the sale of related feedstock positions. Gains and losses in connection with trading activity are included in cost of sales due to the relationshipsales. The fair value of the derivatives to the physical feedstock positions sold. The remaining 2005 loss of $1,947 is classified in other income, net. Derivative trading activity accounted for all of the 2004 net loss and 2003 net gain, which are classified in other income, net. Risk management asset balances of $-0- and $50 were included in “Accounts receivable, net,” and risk management liability balances of $31,891$5,327 and $3,765$6,415 were included in current liabilities in the Company’s consolidated balance sheets as of December 31, 20052008 and December 31, 2004,2007, respectively. Under SFAS 157, 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.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
AtThe following table summarizes the classification of inventory held as part of a trading strategy and net trading liabilities by fair value measurement level at December 31, 2005, the fair value of the natural gas futures and propane forward contracts were obtained from a third party. 2008:
Level 1 | Level 2 | Total | |||||||||
Inventory (See Note 4) | $ | — | $ | 9,917 | $ | 9,917 | |||||
Net risk management liabilities | $ | (6,002 | ) | $ | 675 | $ | (5,327 | ) |
The fair and carrying value of the Company’s derivative commodity instruments and financial instruments as of December 31, 2008 and December 31, 2007 is summarized below:
December 31, 2005 | December 31, 2004 | 2008 | 2007 | |||||||||||||||||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||
Commodity Instruments: | ||||||||||||||||||||||||||||||||
Natural gas futures contracts | $ | (31,891 | ) | $ | (31,891 | ) | $ | (3,721 | ) | $ | (3,721 | ) | $ | 1,346 | $ | 1,346 | $ | 1,244 | $ | 1,244 | ||||||||||||
Other options/futures contracts | 0 | 0 | 6 | 6 | ||||||||||||||||||||||||||||
Crude oil futures contracts | (7,348 | ) | (7,348 | ) | (7,349 | ) | (7,349 | ) | ||||||||||||||||||||||||
Other forward/futures contracts | 675 | 675 | (310 | ) | (310 | ) | ||||||||||||||||||||||||||
Financial Instruments: | ||||||||||||||||||||||||||||||||
8 3/4% senior notes due 2011 | $ | 247,000 | $ | 265,525 | $ | 247,000 | $ | 278,493 | ||||||||||||||||||||||||
6 3/4% senior notes due 2032 | $ | 250,000 | $ | 136,325 | $ | 250,000 | $ | 248,750 | ||||||||||||||||||||||||
6 5/8% senior notes due 2016 | 249,430 | 137,500 | 249,348 | 237,188 |
11. Income Taxes
The Company adopted the provisions of FIN 48 on January 1, 2007. The Company recognized no adjustments upon adoption in the liability for unrecognized income tax benefits.
The gross unrecognized tax benefits as of December 31 are as follows:
2008 | 2007 | |||||||
Beginning balance | $ | 9,472 | $ | 9,637 | ||||
Additions based on tax position related to current year | — | 300 | ||||||
Reductions due to tax settlements | (2,198 | ) | — | |||||
Reductions due to statutes of limitations expiring | (2,220 | ) | (465 | ) | ||||
Ending balance | $ | 5,054 | $ | 9,472 | ||||
Management anticipates reductions to the total amount of gross unrecognized tax benefits of an additional $1,570 within the next twelve months due to expiring statutes of limitations.
The Company recognizes penalties and interest accrued related to unrecognized tax benefits in income tax expense. As of January 1, 2008, the Company had approximately $3,289 of accrued gross interest and penalties related to uncertain tax positions. The Company increased the accrued interest and penalties by approximately $762 during 2008. There was also a reduction in interest and penalties of $2,969 due to the settlement of tax audits and expiring statutes of limitations resulting in a net decrease of $2,207 for 2008.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
11. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by tax authorities before the year 2001. During the second quarter of 2008, the Internal Revenue Service completed the audit of the Company for the tax years 2005 and 2006.
The components of (loss) income before taxes for the years ended December 31 are as follows:
2005 | 2004 | 2003 | |||||||
Domestic | $ | 344,515 | $ | 186,372 | $ | 19,744 | |||
Foreign | 813 | 4,290 | 3,759 | ||||||
$ | 345,328 | $ | 190,662 | $ | 23,503 | ||||
2008 | 2007 | 2006 | ||||||||
Domestic | $ | (53,488 | ) | $ | 157,234 | $ | 277,521 | |||
Foreign | (4,534 | ) | 1,723 | 5,028 | ||||||
$ | (58,022 | ) | $ | 158,957 | $ | 282,549 | ||||
The Company’s income tax (benefit) provision for the years ended December 31 consists of the following:
2005 | 2004 | 2003 | 2008 | 2007 | 2006 | ||||||||||||||||||
Current | |||||||||||||||||||||||
Federal | $ | 72,151 | $ | 2,936 | $ | 642 | $ | (13,990 | ) | $ | 38,081 | $ | 76,268 | ||||||||||
State | 766 | 1,245 | 163 | 308 | 1,266 | (2,536 | ) | ||||||||||||||||
Foreign | (151 | ) | 571 | 830 | (918 | ) | (405 | ) | 406 | ||||||||||||||
72,766 | 4,752 | 1,635 | (14,600 | ) | 38,942 | 74,138 | |||||||||||||||||
Deferred | |||||||||||||||||||||||
Federal | 27,719 | 60,421 | 6,602 | (8,920 | ) | 18,104 | 13,267 | ||||||||||||||||
State | 17,971 | 5,284 | 347 | (4,330 | ) | (12,530 | ) | 148 | |||||||||||||||
Foreign | 55 | (517 | ) | 163 | (629 | ) | (288 | ) | 437 | ||||||||||||||
45,745 | 65,188 | 7,112 | (13,879 | ) | 5,286 | 13,852 | |||||||||||||||||
Total provision | $ | 118,511 | $ | 69,940 | $ | 8,747 | |||||||||||||||||
Total (benefit) provision | $ | (28,479 | ) | $ | 44,228 | $ | 87,990 | ||||||||||||||||
An analysisA reconciliation of taxes computed at the statutory rate to the Company’s income tax expense for each of the Company’s effective income tax rate for the years ended December 31indicated is as follows:
2005 | 2004 | 2003 | 2008 | 2007 | 2006 | |||||||||||||||||||
Provision for federal income tax at statutory rate | $ | 120,865 | $ | 66,722 | $ | 8,226 | ||||||||||||||||||
(Benefit) provision for federal income tax at statutory rate | $ | (20,308 | ) | $ | 55,635 | $ | 98,892 | |||||||||||||||||
State income tax provision net of federal income tax effect | 7,925 | 4,244 | 306 | (693 | ) | 1,114 | 3,608 | |||||||||||||||||
Tax benefit | (1,636 | ) | (8,000 | ) | — | |||||||||||||||||||
Foreign tax | (96 | ) | 54 | 993 | (1,547 | ) | (693 | ) | 843 | |||||||||||||||
Foreign earnings | (285 | ) | (1,587 | ) | (1,391 | ) | 1,587 | (603 | ) | (1,760 | ) | |||||||||||||
Extra-territorial exclusion income benefit | (5,391 | ) | — | — | ||||||||||||||||||||
Extra-territorial income exclusion benefit | — | — | (1,050 | ) | ||||||||||||||||||||
Manufacturing deduction | (2,870 | ) | — | — | — | (1,995 | ) | (2,380 | ) | |||||||||||||||
Tax exempt interest income | (1,040 | ) | (522 | ) | (2,519 | ) | ||||||||||||||||||
Contingent tax liability | (5,418 | ) | 76 | (6,538 | ) | |||||||||||||||||||
Other, net | (1,637 | ) | 507 | 613 | 576 | (784 | ) | (1,106 | ) | |||||||||||||||
$ | 118,511 | $ | 69,940 | $ | 8,747 | $ | (28,479 | ) | $ | 44,228 | $ | 87,990 | ||||||||||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
The 2008 and 2007 tax benefits resulted from a reduction in deferred taxes due to a change in apportionment ratios upon the reorganization of several subsidiaries. The 2008 contingent tax liability is for federal and state contingent liabilities released due to the related statutes of limitations expiring and audit settlements. The 2006 contingent tax liability is for federal and state contingent liabilities released due to the related statutes of limitations expiring and audit settlements.
The tax effects of the principal temporary differences between financial reporting and income tax reporting at December 31 are as follows:
2005 | 2004 | 2003 | ||||||||||
Net operating loss carryforward | $ | 15,503 | $ | 22,717 | $ | 89,065 | ||||||
AMT credit carryforward | — | 31,881 | 28,537 | |||||||||
Accruals | 12,052 | 10,078 | 7,431 | |||||||||
Allowance for doubtful accounts | 1,463 | 2,571 | 2,617 | |||||||||
Inventory | 5,645 | 5,549 | — | |||||||||
Investments | — | — | 1,125 | |||||||||
Other | 5,680 | 3,778 | 3,008 | |||||||||
Deferred taxes assets—total | 40,343 | 76,574 | 131,783 | |||||||||
Property, plant and equipment | (241,188 | ) | (245,753 | ) | (258,764 | ) | ||||||
Inventory | — | — | (1,464 | ) | ||||||||
Other | (3,647 | ) | (192 | ) | — | |||||||
Deferred tax liabilities—total | (244,835 | ) | (245,945 | ) | (260,228 | ) | ||||||
Valuation allowance | (3,583 | ) | — | — | ||||||||
Total net deferred tax liabilities | $ | (208,075 | ) | $ | (169,371 | ) | $ | (128,445 | ) | |||
2008 | 2007 | 2006 | ||||||||||
Net operating loss carryforward | $ | 13,900 | $ | 11,450 | $ | 10,307 | ||||||
Credit carryforward | 1,952 | 2,376 | 406 | |||||||||
Accruals | 19,999 | 16,764 | 16,742 | |||||||||
Allowance for doubtful accounts | 850 | 1,131 | 1,141 | |||||||||
Inventories | 19,350 | 8,414 | 8,478 | |||||||||
Other | 5,034 | 4,313 | 2,725 | |||||||||
Deferred taxes assets—total | 61,085 | 44,448 | 39,799 | |||||||||
Property, plant and equipment | (294,832 | ) | (296,698 | ) | (287,560 | ) | ||||||
Turnaround costs | (16,281 | ) | (14,408 | ) | (14,137 | ) | ||||||
Other | 812 | 368 | (387 | ) | ||||||||
Deferred tax liabilities—total | (310,301 | ) | (310,738 | ) | (302,084 | ) | ||||||
Valuation allowance | (4,648 | ) | (3,970 | ) | (3,667 | ) | ||||||
Total net deferred tax liabilities | $ | (253,864 | ) | $ | (270,260 | ) | $ | (265,952 | ) | |||
Balance sheet classifications | ||||||||||||
Current deferred tax asset | $ | 26,622 | $ | 17,705 | $ | 15,876 | ||||||
Deferred tax liability | (280,486 | ) | (287,965 | ) | (281,828 | ) | ||||||
Total net deferred tax liabilities | $ | (253,864 | ) | $ | (270,260 | ) | $ | (265,952 | ) | |||
At December 31, 2005,2008, the Company had federala foreign net operating loss and state net operating loss carryforwardscarryforward of approximately $427$2,735 and $321,714,$316,967, respectively, which will expire in varying amounts between 20102009 and 20252029 and are subject to certain limitations on an annual basis. Management believes the Company will realize the full benefit of the majority of the net operating loss carryforwards before they expire. Toexpire, but to the extent that the full benefit may not be realized, a state net operating loss valuation allowance has been set up againstrecorded. The valuation allowance of $3,667 was recorded in 2006 and then increased by $303 in 2007 due to state net operating losses. The extra-territorial income exclusion benefit of $5,391 includes a current year benefit of $1,295, and the remaining benefit of $4,096 is a one-time benefitlaw changes related to amended returns. apportionment and by $678 in 2008 due to additional state losses. During 2006, the Company acquired the Longview facility as discussed in Note 14. The deferred tax liabilities of $47,536 associated with the acquisition of the Longview facility are included in total net deferred tax liabilities at December 31, 2006. During the second quarter of 2007, the Company received $8,043 to settle the working capital adjustment. The working capital adjustment along with other adjustments resulted in a decrease in deferred tax liabilities of $2,568 associated with the acquisition. The final adjustment resulted in a final deferred tax liability balance of $44,968 being included in total net deferred tax liabilities at December 31, 2007.
Applicable U.S. deferred income taxes and related foreign dividend withholding taxes have not been provided on approximately $5,676$6,124 of undistributed earnings and profits of the Company’s foreign corporate joint venture and foreign subsidiaries. The Company considers such earnings to be permanently reinvested outside the United States. It is not practical to estimate the amount of deferred income taxes associated with these unremitted earnings.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
12. Employee Benefits
The Company has a defined contribution savings plan covering all regular full-time and part-time employees whereby eligible employees may elect to contribute up to 100% of their annual compensation. TheThrough 2007, the Company matched 50% of an employee’s contribution up to 6% of such employee’s compensation. Beginning January 1, 2008, the Company matches 100% of an employee’s contribution up to the first 6%4% of such employee contributions at rates that vary by subsidiary.employee’s compensation. The Company may, at its discretion, make an additional contribution in an amount as the board of directors may determine. For the years ended December 31, 2005, 20042008, 2007 and 2003,2006, the Company charged approximately $2,447, $2,102$4,591, $3,266 and $1,875,$2,693, respectively, to expense for these contributions.
Further, within the defined contribution savings plan, the Company also makes an annual retirement contribution to substantially all employees of one subsidiary and certain employees of another subsidiary who have completed one year of service. The Company’s contributions to the plan are determined as a percentage of employees’ base and overtime pay. For the years ended December 31, 2005, 20042008, 2007 and 2003,2006, the Company charged approximately $2,658, $2,225$4,016, $3,459 and $2,002,$2,641, respectively, to expense for these contributions.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
The Company has noncontributory defined benefit pension plans that cover substantially allcertain eligible salaried and all wage employees of one subsidiary. Benefits for salaried employees under these plans are based primarily on years of service and employees’ pay near retirement. Benefits for wage employees are based upon years of service and a fixed amount as periodically adjusted. The Company recognizes the years of service prior to the Company’s acquisition of the facilities for purposes of determining vesting, eligibility and benefit levels for certain employees of the subsidiary and for determining vesting and eligibility for certain other employees of the subsidiary. The measurement date for these plans is December 31. The Company’s funding policy is consistent with the minimum funding requirements of federal law and regulations. In 2006,regulations, and based on preliminary estimates, the Company expects to contribute $2,480 to these plans.make contributions of approximately $1,400 for the salaried plan and $100 for the wage plan in 2009. The accumulated benefit obligation was $29,875, $27,162$37,860, $36,707 and $22,099$34,213 at December 31, 2005, 20042008, 2007 and 2003,2006, respectively. The aggregate benefit obligation in excess of the aggregate fair value of the plan assets resulted in an unfunded benefit obligation of $3,726, $7,436 and $4,866 at December 31, 2005, 2004 and 2003, respectively.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
The Company also provides post-retirement healthcare benefits to the employees of threetwo subsidiaries who meet certain minimum age and service requirements. The Company has the right to modify or terminate some of these benefits.
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
Change in benefit obligation | ||||||||||||||||||||||||
Benefit obligation, beginning of year | $ | 32,071 | $ | 27,342 | $ | 21,689 | $ | 20,961 | $ | 19,070 | $ | 21,396 | ||||||||||||
Service cost | 1,050 | 1,029 | 830 | 360 | 381 | 401 | ||||||||||||||||||
Interest cost | 1,798 | 1,736 | 1,529 | 414 | 420 | 398 | ||||||||||||||||||
Actuarial (gain) loss | 737 | 1,104 | 3,937 | 1,363 | 1,649 | (2,456 | ) | |||||||||||||||||
Benefits paid | (877 | ) | (732 | ) | (643 | ) | (501 | ) | (559 | ) | (669 | ) | ||||||||||||
Plan amendment | — | 1,592 | — | — | — | — | ||||||||||||||||||
Benefit obligation, end of year | $ | 34,779 | $ | 32,071 | $ | 27,342 | $ | 22,597 | $ | 20,961 | $ | 19,070 | ||||||||||||
Change in plan assets | ||||||||||||||||||||||||
Fair value of plan assets beginning of year | 19,726 | 17,233 | 13,074 | — | — | — | ||||||||||||||||||
Actual return | 1,226 | 1,555 | 2,387 | — | — | — | ||||||||||||||||||
Employer contribution | 6,074 | 1,670 | 2,415 | 501 | 559 | 669 | ||||||||||||||||||
Benefit paid | (877 | ) | (732 | ) | (643 | ) | (501 | ) | (559 | ) | (669 | ) | ||||||||||||
Fair value of plan assets end of year | $ | 26,149 | $ | 19,726 | $ | 17,233 | $ | — | $ | — | $ | — | ||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
Reconciliation of funded status | ||||||||||||||||||||||||
Funded status | $ | (8,630 | ) | $ | (12,344 | ) | $ | (10,109 | ) | $ | (22,597 | ) | $ | (20,961 | ) | $ | (19,070 | ) | ||||||
Unrecognized net actuarial loss | 7,141 | 5,966 | 5,403 | 6,187 | 5,160 | 3,751 | ||||||||||||||||||
Unamortized transition obligation | — | — | — | 684 | 797 | 911 | ||||||||||||||||||
Unamortized prior period service cost | 1,220 | 1,539 | 223 | 1,627 | 1,893 | 2,160 | ||||||||||||||||||
Net amount recognized | $ | (269 | ) | $ | (4,839 | ) | $ | (4,483 | ) | $ | (14,099 | ) | $ | (13,111 | ) | $ | (12,248 | ) | ||||||
Amount recognized in the statement of financial position consist of | ||||||||||||||||||||||||
Accrued benefit liability | $ | (4,626 | ) | $ | (9,138 | ) | $ | (7,161 | ) | $ | (14,099 | ) | $ | (13,111 | ) | $ | (12,248 | ) | ||||||
Intangible assets | 1,220 | 1,539 | 223 | — | — | — | ||||||||||||||||||
Accumulated other comprehensive loss before taxes | 3,137 | 2,760 | 2,455 | — | — | — | ||||||||||||||||||
$ | (269 | ) | $ | (4,839 | ) | $ | (4,483 | ) | $ | (14,099 | ) | $ | (13,111 | ) | $ | (12,248 | ) | |||||||
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||
Service cost | $ | 1,050 | $ | 1,029 | $ | 830 | $ | 360 | $ | 381 | $ | 401 | ||||||||||||
Interest cost | 1,798 | 1,736 | 1,529 | 414 | 420 | 398 | ||||||||||||||||||
Expected return on plan assets | (1,928 | ) | (1,419 | ) | (1,258 | ) | — | — | — | |||||||||||||||
Net amortization | 584 | 680 | 459 | 715 | 621 | 581 | ||||||||||||||||||
Net periodic benefit cost | $ | 1,504 | $ | 2,026 | $ | 1,560 | $ | 1,489 | $ | 1,422 | $ | 1,380 | ||||||||||||
Weighted average assumptions as of year end | ||||||||||||||||||||||||
Discount rate | 5.5 | % | 5.8 | % | 6.0 | % | 4.9 | % | 5.0 | % | 5.0 | % | ||||||||||||
Expected return on plan assets | 8.0 | % | 8.0 | % | 8.0 | % | — | — | — | |||||||||||||||
Rate of compensation increase | 4.0 | % | 4.0 | % | 5.0 | % | — | — | — |
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
Pension | Other | |||||
Estimated future benefit payments: | ||||||
Year 1 | $ | 1,018 | $ | 517 | ||
Year 2 | $ | 1,182 | $ | 533 | ||
Year 3 | $ | 1,356 | $ | 550 | ||
Year 4 | $ | 1,504 | $ | 567 | ||
Year 5 | $ | 1,667 | $ | 585 | ||
Year 6 to 10 | $ | 10,965 | $ | 3,220 |
Details of the pension and post-retirement healthcare plans are as follows:
Pension Benefits | Post-retirement Healthcare | |||||||||||||||||||||||
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
Change in benefit obligation | ||||||||||||||||||||||||
Benefit obligation, beginning of year | $ | 42,001 | $ | 39,344 | $ | 34,779 | $ | 20,609 | $ | 24,448 | $ | 22,597 | ||||||||||||
Service cost | 986 | 1,041 | 1,066 | 101 | 283 | 361 | ||||||||||||||||||
Interest cost | 2,374 | 2,228 | 1,885 | 1,096 | 584 | 512 | ||||||||||||||||||
Actuarial loss (gain) | (1,613 | ) | 580 | 2,630 | (485 | ) | (3,660 | ) | 1,533 | |||||||||||||||
Benefits paid | (1,433 | ) | (1,192 | ) | (1,016 | ) | (1,176 | ) | (1,046 | ) | (555 | ) | ||||||||||||
Benefit obligation, end of year | $ | 42,315 | $ | 42,001 | $ | 39,344 | $ | 20,145 | $ | 20,609 | $ | 24,448 | ||||||||||||
Change in plan assets | ||||||||||||||||||||||||
Fair value of plan assets beginning of year | 31,448 | 30,541 | 26,149 | — | — | — | ||||||||||||||||||
Actual return | (7,160 | ) | 2,099 | 2,910 | — | — | — | |||||||||||||||||
Employer contribution | 1,395 | — | 2,498 | 1,176 | 1,046 | 555 | ||||||||||||||||||
Benefits paid | (1,433 | ) | (1,192 | ) | (1,016 | ) | (1,176 | ) | (1,046 | ) | (555 | ) | ||||||||||||
Fair value of plan assets end of year | $ | 24,250 | $ | 31,448 | $ | 30,541 | $ | — | $ | — | $ | — | ||||||||||||
Funded status, end of year | $ | (18,065 | ) | $ | (10,553 | ) | $ | (8,803 | ) | $ | (20,145 | ) | $ | (20,609 | ) | $ | (24,448 | ) | ||||||
Reconciliation of funded status | ||||||||||||||||||||||||
Funded status | $ | (18,065 | ) | $ | (10,553 | ) | $ | (8,803 | ) | $ | (20,145 | ) | $ | (20,609 | ) | $ | (24.448 | ) | ||||||
Net amount recognized | $ | (18,065 | ) | $ | (10,553 | ) | $ | (8,803 | ) | $ | (20,145 | ) | $ | (20,609 | ) | $ | (24,448 | ) | ||||||
Amounts recognized in the statement of financial position | ||||||||||||||||||||||||
Current liabilities | $ | — | $ | — | $ | — | $ | (1,305 | ) | $ | (1,249 | ) | $ | (572 | ) | |||||||||
Noncurrent liabilities | (18,065 | ) | (10,553 | ) | (8,803 | ) | (18,840 | ) | (19,360 | ) | (23,876 | ) | ||||||||||||
Net amount recognized | $ | (18,065 | ) | $ | (10,553 | ) | $ | (8,803 | ) | $ | (20,145 | ) | $ | (20,609 | ) | $ | (24,448 | ) | ||||||
Amounts recognized in accumulated other comprehensive income (OCI) | ||||||||||||||||||||||||
Net loss | $ | 16,492 | $ | 9,010 | $ | 8,663 | $ | 2,594 | $ | 3,257 | $ | 7,393 | ||||||||||||
Transition obligation | — | — | — | 342 | 456 | 569 | ||||||||||||||||||
Prior service cost | 265 | 584 | 902 | 828 | 1,040 | 1,361 | ||||||||||||||||||
Total before tax(1) | $ | 16,757 | $ | 9,594 | $ | 9,565 | $ | 3,764 | $ | 4,753 | $ | 9,323 | ||||||||||||
(1) | For 2008, after-tax totals for pension benefits and post-retirement healthcare benefits were $10,892 and $2,447, respectively. The sum of these amounts ($13,339) is reflected in stockholders’ equity as OCI. For 2007, after-tax totals for pension benefits and post-retirement healthcare benefits were $6,144 and $3,090, respectively. The sum of these amounts ($9,234) is reflected in stockholders’ equity as OCI. For 2006, the after-tax totals for pension benefits and post-retirement healthcare benefits were 6,171 and 6,015, respectively. The sum of these amounts ($12,186) is reflected in stockholders’ equity as OCI. |
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
Pension Benefits | Post-retirement Healthcare | |||||||||||||||||||||||
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||
Service cost | $ | 986 | $ | 1,041 | $ | 1,066 | $ | 101 | $ | 283 | $ | 361 | ||||||||||||
Interest cost | 2,374 | 2,228 | 1,885 | 1,096 | 584 | 512 | ||||||||||||||||||
Expected return on plan assets | (2,483 | ) | (2,396 | ) | (2,201 | ) | — | — | — | |||||||||||||||
Net amortization | 866 | 848 | 717 | 504 | 910 | 707 | ||||||||||||||||||
Net periodic benefit cost | $ | 1,743 | $ | 1,721 | $ | 1,467 | $ | 1,701 | $ | 1,777 | $ | 1,580 | ||||||||||||
Other changes in plan assets and benefit obligation recognized in OCI | ||||||||||||||||||||||||
Net loss (gain) emerging | $ | 8,030 | $ | 877 | $ | 5,925 | $ | (485 | ) | $ | (3,660 | ) | $ | 7,720 | ||||||||||
Transition obligation | — | — | — | — | — | 683 | ||||||||||||||||||
Prior service cost | — | — | — | — | — | 1,627 | ||||||||||||||||||
Amortization of net loss | (548 | ) | (530 | ) | (399 | ) | (178 | ) | (476 | ) | (327 | ) | ||||||||||||
Amortization of transition obligation | — | — | — | (114 | ) | (114 | ) | (114 | ) | |||||||||||||||
Amortization of prior service cost | (318 | ) | (318 | ) | (318 | ) | (212 | ) | (320 | ) | (266 | ) | ||||||||||||
Total recognized in OCI | $ | 7,164 | $ | 29 | $ | 5,208 | $ | (989 | ) | $ | (4,570 | ) | $ | 9,323 | ||||||||||
Total net periodic benefit cost and OCI | $ | 8,907 | $ | 1,750 | $ | 6,675 | $ | 712 | $ | (2,793 | ) | $ | 10,903 | |||||||||||
The estimated prior service cost and net loss for the defined benefit plans that will be amortized from other comprehensive income into net periodic benefit cost during 2009 are expected to be $318 and $1,406, respectively. The estimated transition obligation, prior service cost and net loss for the post-retirement healthcare benefit plans that will be amortized from other comprehensive income into net periodic benefit cost during 2009 are expected to be $114, $212 and $112, respectively.
Weighted average assumptions as of year end | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||
Discount rate | 6.0 | % | 5.8 | % | 5.8 | % | 5.8 | % | 5.5 | % | 4.7 | % | ||||||
Expected return on plan assets | 8.0 | % | 8.0 | % | 8.0 | % | — | — | — | |||||||||
Rate of compensation increase | 4.0 | % | 4.0 | % | 4.0 | % | — | — | — |
Pension | Post- retirement Healthcare | |||||
Estimated future benefit payments: | ||||||
Year 1 | $ | 1,587 | $ | 1,305 | ||
Year 2 | $ | 1,784 | $ | 1,482 | ||
Year 3 | $ | 1,994 | $ | 1,672 | ||
Year 4 | $ | 2,188 | $ | 1,845 | ||
Year 5 | $ | 2,441 | $ | 1,981 | ||
Year 6 to 10 | $ | 15,056 | $ | 9,463 |
With an average rate of return below 8.0%8% for 2005,2008, the Company has decided to leave the return on asset assumption at 8.0%8% as of January 1, 2006.2009. This decision is based on input from the Company’s third-party independent actuary and the pension fund trustee, projecting near-term returnstrustee. The discount rate is based on representative published high quality bond indices which indicate the general level of 8%rates. Beginning in 2008, the discount rate was determined using a benchmark pension discount curve and applying spot rates from the curve to 12% from equities, and 4%each year of expected benefit payments to 6% from fixed income investments.determine the appropriate discount rate for the Company.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
Assumed healthcare trend rates do not have a significant effect on the amounts reported for the healthcare plans because benefits for participants are capped at a fixed amount.
Pension Benefit— Salaried | Pension Benefit— Wage | |||||||||||||||||
2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||
Asset allocation for years ended: | ||||||||||||||||||
Cash | 2 | % | 1 | % | 1 | % | 2 | % | 1 | % | 1 | % | ||||||
Fixed income | 39 | % | 38 | % | 38 | % | 39 | % | 38 | % | 38 | % | ||||||
Equity | 59 | % | 61 | % | 61 | % | 59 | % | 61 | % | 61 | % | ||||||
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||
Pension Benefit— Salaried | Pension Benefit— Wage | |||||||||||||||||
Asset allocation for years ended: | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||
Cash | 3 | % | 0 | % | 0 | % | 3 | % | 0 | % | 0 | % | ||||||
Fixed income | 36 | % | 39 | % | 40 | % | 36 | % | 39 | % | 40 | % | ||||||
Equity | 61 | % | 61 | % | 60 | % | 61 | % | 61 | % | 60 | % | ||||||
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||
The Company adopted a “balanced” asset allocation model (investment policy) of 50% equities and 50% fixed income in response to the market downturn during 2001 and 2002. As the market improved during subsequent years, the pension fund investment policy allowed the pension fund trustee a 10% discretionary range in the asset allocation model, shifting towith a target of approximately 60% equities and 40% fixed income. The Company expects the 60/40 investment policy to remain for the near future.
13. Related Party and Affiliate Transactions
The Company leases office space for management and administrative services from an affiliated party. For the years ended December 31, 2005, 20042008, 2007 and 2003,2006, the Company incurred and paid lease payments of approximately $1,241, $1,434$1,495, $1,390 and $1,409,$1,269, respectively.
The Company utilized Peerless Agency, Inc. (“Peerless”), an affiliated party, as an insurance agent and paid Peerless $93 for the year ended December 31, 2003. The arrangement was terminated in 2003.
In March 2000, the Company loaned an affiliated party $2,000.$2,000 to Suzhou Huasu Plastics Company, Ltd., a Chinese joint venture company in which the Company owns a 59% equity stake. Interest on the debt accrues at LIBOR plus 2%. Previously, the Company loaned this same affiliate $5,150. No interest or principal payments were received from the original loan from 1997 through 2001. Principal payments totaling $763 and $858 were received from the affiliated party in 2005 and 2004, respectively. The remaining balance is scheduled to be repaid beginning in 2010. Interest2008 or 2007, but interest payments of $246, $517 and $847$161 were received in 2005, 20042006 and 2003, respectively, andare included in other income, net in the consolidated statement of operations. The Company and the affiliate have agreed to defer all interest and principal payments under these loans until 2010. The loan amounts are included in other assets, net in the accompanying consolidated balance sheet.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
During the years ended December 31, 2005, 20042008, 2007 and 2003,2006, the Company and subsidiaries charged affiliates $838, $1,231$676, $678 and $1,389,$955, respectively, for management services incurred on their behalf. The amounts are included in other income, net in the accompanying consolidated statements of operations. Amounts due for such services and other expenses of $757, $889$332 and $926$729 as of December 31, 2005, 20042008 and 2003,2007, respectively, are included in accounts receivable in the accompanying consolidated balance sheets.
The Company issued various promissory notes to Gulf United Investments Corporation, an affiliate of the Company, totaling $5,391. The balances of these notes, as well as the associated interest charged at the prime rate, were paid in December 2004.
14. Acquisitions
On August 2, 2004,November 30, 2006, the Company completed the acquisition of substantially all of theacquired Eastman Chemical Company’s polyethylene business, related assets of Bristolpipe Corporation. Bristolpipe Corporation, headquartered in Elkhart, Indiana, operated three manufacturing plants located in Indiana, Pennsylvania and Georgia with a combined estimated pipe production capacity of 300 million pounds per year and primarily produced PVC pipe products200 mile, 10 inch pipeline from Mont Belvieu, Texas to Longview, Texas for a wide range of applications, including domestic and commercial drainage, waste and venting; underground water; sewer pipe; and telecommunications cable ducting. The acquisition contributed $55,366 net sales to the Company in 2004. The purchase price of $235,028, subject to further adjustment based on final values of working capital at the assets was $33,294. Becausepurchase date. During the Bristolpipe acquisitionsecond quarter of 2007, the Company received $8,043 to settle the working capital adjustment. The adjustment resulted in a final purchase price of $226,985. This adjustment, along with other purchase price adjustments, has resulted in a goodwill balance of $29,990 at December 31, 2008.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
The following unaudited consolidated pro forma information is immaterialprovided with respect to the Company’s consolidated financial statements, noacquisition assuming it occurred on January 1, 2006:
2006 | |||
Net sales | $ | 3,185,332 | |
Income before income taxes | 345,839 | ||
Net income | 234,875 | ||
Earnings per common share: | |||
Basic | 3.61 | ||
Diluted | 3.60 |
The pro forma disclosures are required.
net earnings above assumes an income tax provision at the Company’s estimated federal and state income tax rate for the respective year. The information is presented for illustrative purposes only and is not necessarily indicative of results that would have been achieved if the acquisition had occurred as of January 1, 2006 or of future operating performance.
15. Plant Closures
The Company decided to permanently close the Pawling, New York facility and consolidate manufacturing of window and door components in Calgary, Canada in the first quarter of 2008. During the fourth quarter of 2008, the Company announced the idling of the PVC pipe plant in Van Buren, Arkansas, which had an annual capacity of 47 million pounds. Asset impairments, severance and other costs recorded in 2008 related to these closures were $3,850.
16. Other Income, net
Other income, net consists of the following for the years ended December 31:
2005 | 2004 | 2003 | |||||||||
Management services | $ | 838 | $ | 1,231 | $ | 1,389 | |||||
Interest income | 4,317 | 971 | 1,123 | ||||||||
Insurance proceeds, net | — | 2,785 | 2,961 | ||||||||
Equity in income of unconsolidated subsidiary | 94 | 1,379 | 1,510 | ||||||||
Derivative gain (loss) | (1,947 | ) | (3,750 | ) | 36 | ||||||
Other | (644 | ) | 21 | 601 | |||||||
$ | 2,658 | $ | 2,637 | $ | 7,620 | ||||||
2008 | 2007 | 2006 | ||||||||||
Management services | $ | 902 | $ | 678 | $ | 955 | ||||||
Interest income | 4,560 | 2,892 | 10,074 | |||||||||
Franchise taxes | (549 | ) | (1,689 | ) | (1,128 | ) | ||||||
Equity in income of unconsolidated subsidiary | 621 | 2,796 | 1,766 | |||||||||
Write-down of long-term investment | — | (923 | ) | — | ||||||||
Other | (59 | ) | (1,096 | ) | 3 | |||||||
$ | 5,475 | $ | 2,658 | $ | 11,670 | |||||||
16.17. Commitments and Contingencies
Environmental Matters
The Company is subject to environmental laws and regulations that can impose civil and criminal sanctions and that may require it to remove or mitigate the effects of contamination caused by the release or disposal or release of chemicalhazardous substances at various sites.into the environment. Under some of these laws and regulations, a current or previousone law, an owner or operator of property may be held strictly liable for the costs of removal or remediation of hazardous substances on, under, or in its property,remediating contamination without regard to whether the owner or operator knew of, orthat person caused the presence of the contaminants,contamination, and regardless ofwithout 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 laws and regulationsrequirements will have on the Company in the future. As is typical for chemical businesses, soil and groundwater contamination has occurred in the past at some of the Company’s sites and might occur or be discovered at other sites in the future. The Company has typically conducted extensive soil and groundwater assessments either prior toCompany.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
acquisitions or in connection with subsequent permitting requirements. The Company’s investigations have not revealed any contamination caused by the Company’s operations that would likely require the Company to incur material long-term remediation efforts and associated liabilities.
Calvert City
Contract LitigationDisputes with Goodrich and PolyOne.In connection with the 1990 and 1997 acquisitions of the Goodrich Corporation (“Goodrich”) chemical manufacturing complex in Calvert City, Kentucky, Goodrich agreed to indemnify the Company for any liabilities related to preexisting contamination at the site. In addition,complex. For its part, the Company agreed to indemnify Goodrich for post-closing contamination attributable tocaused by the ownership, use or operation of the plant after the closing dates.Company’s operations. The soil and groundwater at the manufacturing complex, which does not include the Company’s polyvinyl chloridenearby PVC facility, in Calvert City, had been extensively contaminated by Goodrich’s operations. In 1993, the Geon Corporation wasGoodrich spun off from Goodrich,the predecessor of PolyOne Corporation (“PolyOne”), and Geonthat predecessor assumed the responsibility to operate the site-wide remediation system and Goodrich’s indemnification obligations for any liabilities arising fromrelating to preexisting contamination at the site. Subsequently, Geon’s name was changed to PolyOne. Part of the former Goodrich facility, which the Company did not acquire and on which it does not operate and that it believes is still owned by either Goodrich orcontamination. PolyOne is listed onnow coordinating the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA. The investigation and remediation of contamination at the Company’s manufacturing complex is currently being coordinated by PolyOne.complex.
GivenIn 2003, litigation arose among the scopeCompany, Goodrich and extentPolyOne with respect to the allocation of the underlying contamination at the Company’s manufacturing complex, the remediation will likely take a numbercost of years. The costs incurred to treat contaminated groundwater collected from beneath the site were $4,556 in 2005, and the Company expects this level of expenditures to continue for the life of the remediation. For the past several years, PolyOne has asserted that the Company’s actions after its acquisition of the complex have contributed to or otherwise exacerbated theremediating contamination at the site. The Company denied those allegations. Goodrich has also asserted claims similarparties 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 those of PolyOne. In addition, Goodrich has asserted thatenvironmental issues at the Calvert City site from August 1, 2007 forward; (2) either the Company is responsible foror PolyOne might, from time to time in the future (but not more than once every five years), institute a portionproceeding 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 the ongoing costsPolyOne of treating contaminated groundwater being pumped from beneathcertain environmental remediation services at the site. In May 2003, Goodrich began withholding payment of 45% ofThe current environmental remediation activities at the monthlyCalvert City complex do not have a specified termination date but are expected to last for the foreseeable future. The costs incurred by PolyOne to provide the Company to operate certain pollution control equipment owned by Goodrich at the site.
In October 2003, the Company filed suit against Goodrichenvironmental remediation services were $3,790 in the United States District Court for the Western District of Kentucky for breach of contract to recover unpaid invoices related to the Company’s operation of groundwater treatment equipment. Goodrich filed an answer and counterclaim in which it alleged that the Company was responsible for contamination at the facility. The Company denied those allegations and filed a motion to dismiss Goodrich’s counterclaim. By order dated April 9, 2004, the court dismissed part of Goodrich’s counterclaim while retaining the remainder. Goodrich also filed a third-party complaint against PolyOne. PolyOne in turn filed motions to dismiss, filed counterclaims against Goodrich and filed cross-claims against the Company in which it alleged breach of contract and that Goodrich and the Company had conspired to defraud PolyOne. On June 8, 2004, the Company filed a motion for summary judgment on its breach of contract claim against Goodrich. On June 16, 2004, the Company filed a motion to dismiss PolyOne’s cross-claims. By order dated March 9, 2005, the court granted the Company’s motion to dismiss PolyOne’s cross-claims. On March 29, 2005, the court granted the Company’s motion for summary judgment on the Company’s breach of contract claim against Goodrich. On April 12, 2005, Goodrich filed a motion for reconsideration of the order granting summary judgment. On July 5, 2005, Goodrich and the Company entered a Non-Waiver Agreement pursuant to which Goodrich paid the Company all past due amounts, including interest, in the amount of $3,132. This reimbursement is reflected in the consolidated statement of operations for the year ended December 31, 2005 resulting in a $2,606 reduction of selling, general and administrative expenses and $526 of interest income. Goodrich further agreed to make all future payments for services on a timely basis. Pursuant to the Non-Waiver Agreement, both parties retained all rights and
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
legal arguments, including Goodrich’s right to pursue its motion for reconsideration. The granting of such motion could result in the Company being required to repay Goodrich for the amounts paid by Goodrich under the Non-Waiver Agreement. The case is continuing with respect to Goodrich’s counterclaims against the Company, and Goodrich’s third-party claims against PolyOne and PolyOne’s counterclaims against Goodrich. Extensive discovery is ongoing and the trial is set for December 2006.
2008.
Administrative Proceedings and Related LitigationProceedings.. In addition, thereThere are several administrative proceedings in Kentucky involving the Company, Goodrich and PolyOne. On September 23,PolyOne related to the same manufacturing complex in Calvert City. In 2003, the Kentucky StateEnvironmental and Public Protection Cabinet (“Cabinet”) re-issued Goodrich’s Resource Conservation and Recovery Act, or RCRA, permit which requires Goodrich to remediate contamination at the Calvert City manufacturing complex. Goodrich was named as the sole permittee. Both Goodrich and PolyOne have challenged that determination. Goodrich filedvarious terms of the permit in an appeal (Goodrich I) of that permit on October 23, 2003, and PolyOne filed a separate challenge (PolyOne I) on November 13, 2003. In both proceedings, Goodrich and PolyOne are seekingattempt to shift Goodrich’s cleanup responsibilitiesclean-up obligations under Goodrich’s RCRAthe permit to other parties, including the Company. The Company has either intervened directly or been named as a party in both of these proceedings. Mediation was conducted in these proceedings during 2004 but was unsuccessful. On September 27, 2004, the Kentucky State Cabinet sent PolyOne a determination requiring PolyOne to be added to the Goodrich RCRA permit due to PolyOne’s operation of the site remediation system. On October 22, 2004, PolyOne filed an appeal (PolyOne II). In this second proceeding, PolyOne is challenging the State’s determination that PolyOne is required to submit an application for a major modification of the Goodrich permit and assume the regulatory status of an operator under the permit. PolyOne makes a number of charges against the Company that, if proven, might cause the Kentucky State Cabinet to demand that the Company also be added to the Goodrich permit. Goodrich and PolyOne have alleged in Goodrich I and PolyOne I that Goodrich cannot be held responsible for contamination on property they do not own. Both Goodrich and PolyOne have also alleged that the Company is responsible for contamination at the manufacturing complex, which the Company has denied.
On January 24, 2005, Goodrich filed a challenge (Goodrich II) to the Kentucky State Cabinet’s determination which had rejected a Goodrich proposal to perform a particular soil remediation procedure. The Company’s motion to intervene in PolyOne II and Goodrich II was subsequently granted.
On March 18, 2005, the Goodrich I and II and PolyOne I and II proceedings were consolidated and the hearing for the consolidated case was set for September 12, 2006. Subsequently, the Kentucky State Cabinet agreed to allow Goodrich to perform a test of the soil remediation procedure. Goodrich then withdrew its complaint and the Goodrich II proceeding was dismissed. By order dated January 19, 2006, the hearing for the consolidated administrative proceedings was rescheduled to April 3, 2007.
On March 22, 2005, after the court had dismissed PolyOne’s cross-claims against the Company, PolyOne filed a separate RCRA citizen suit against the Company in the United States District Court for the Western District of Kentucky, which covers the same issues raised in the Goodrich and PolyOne administrative proceedings. On May 23, 2005 the Company filed a motion to dismiss the PolyOne complaint, which PolyOne responded to on June 7, 2005. The Company filed its reply to PolyOne’s response on June 21, 2005, and the motion is pending.
In January 2004, the Kentucky State Cabinet notified the Company by letter that due to itsthe Company’s ownership of a closed landfill (known as former Pond 4) at the manufacturing complex, the Company would be requiredrequires it to submit a post-closurean application for its own permit application under RCRA. This could require the Company to bear the responsibility and cost of performing remediation work at former Pond 4 and solid waste management unitsadjacent areas at the complex. The Company challenged the Cabinet’s January 2004 order and areashas obtained several extensions to submit the required permit application. In October 2006, the Cabinet notified Goodrich and the Company that both were “operators” of concern located on property adjacent toformer Pond 4 thatunder RCRA, and ordered them to jointly submit an application for a RCRA permit. Goodrich and the Company have both challenged the Cabinet’s October 2006 order.
All of these administrative proceedings have been consolidated, and the case is owned bypending before the Company. The Company acquired Pond 4 from Goodrich in 1997 as part ofCabinet.
Litigation Related to the acquisition of other facilities. Under the 1997 contract, theAdministrative Proceedings.The Company has the contractual right to reconvey
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
title to former Pond 4 back to Goodrich, whichand the Company has tendered. Ontendered former Pond 4 back to Goodrich under this provision. In March 21, 2005, the Company filed suit againstsued Goodrich in the United States District Court for the Western District of Kentucky to require Goodrich to accept the tendered reconveyance and to indemnify the Company for its costs the Company incurred in connection with former Pond 4. On May 20, 2005, Goodrich filed a motion to dismiss portions of the Company’s complaint. On June 27, 2005, the Company filed a response in opposition to Goodrich’s motion to dismiss, and Goodrich filed its reply on July 18, 2005. In addition, on June 6, 2005, Goodrichsubsequently filed a third-party complaint against PolyOne, seeking to hold PolyOne responsible for any of Goodrich’s former Pond 4 liabilities to the Company. PolyOneGoodrich moved to dismiss Goodrich’s third-party complaint on August 30, 2005. Goodrich responded to PolyOne’s motion on October 7, 2005, and PolyOne filed its reply on October 21, 2005. Finally,the Company’s suit against it, the Company filed a motion for partial summary judgment on Goodrich’s liability for the Company’s costs incurred in connection with Pond 4 on August 9, 2005. Goodrich responded to the Company’s motion on September 6, 2005, and the Company replied on September 27, 2005. The motion is now pending.
The Company has also filed an appeal with the Kentucky State Cabinet regarding its January 2004 letter.against Goodrich, and PolyOne have both filed motionsmoved to intervene in this appeal. On July 1, 2004, the Company notified the Kentucky State Cabinet that the Company would prefer to conduct a clean-closure equivalency determination, or CCED, of Pond 4 rather than pursue a post-closure care RCRA permit. The proposal to conduct the CCED was rejected by the Kentucky State Cabinet. By letter dated, December 21, 2004, the Kentucky State Cabinet directed the Company to file a post-closure permit application for Pond 4. On February 23, 2005, the Company filed a motion for stay of the order requiring the Company to file the permit application. On February 18, 2005, the Company also sent a letter to the Kentucky State Cabinet demanding that it enforce the Goodrich RCRA permit against Goodrich since the RCRA permit requires Goodrich to address Pond 4. On March 25, 2005, the Kentucky State Cabinet granted the Company an extension until September 26, 2005 to file the permit application. On August 19, 2005, the Kentucky Cabinet granted an additional extension until March 25, 2006 to file the permit application.
Monetary Relief. None of the parties involved in the proceedings relating to the disputes with Goodrich and PolyOne and the Kentucky State Cabinet described above has formally quantified the amount of monetary relief that they are seeking from the Company, nor has the court or the Kentucky State Cabinet proposed or established an allocation of the costs of remediation among the various participants. Any monetary liabilities that the Company might incur with respect to the remediation of contamination at the manufacturing complex in Calvert City would likely be spread out over an extended period. While the Company has denied responsibility for any such remediation costs and is actively defending its position, the Company is not in a position at this time to state what effect, if any, these proceedings could have on the Company’s financial condition, results of operations, or cash flows.
Environmental Investigations. In March and June 2002, the EPA’s National Enforcement Investigations Center, or NEIC, conducted an environmental investigation of the Company’s manufacturing complex in Calvert City consisting of the ethylene dichloride (“EDC”)/vinyl chloride monomer (“VCM”), ethylene and chlor-alkali plants. In May 2003, the Company received a report prepared by the NEIC summarizing the results of that investigation. Among other things, the NEIC concluded that the requirements of several regulatory provisions had not been met. The Company analyzed the NEIC report and identified areas where it believed that erroneous factual or legal conclusions, or both, may have been drawn by the NEIC. The Company held a number of discussions with the EPA concerning its conclusions. In February 2004, representatives of the EPA orally informed the Company that the agency proposed to assess monetary penalties against it and to require it to implement certain injunctive relief to ensure compliance. In addition, the EPA’s representatives informed the Company that the EPA, the NEIC and the Kentucky State Cabinet would conduct an inspection of its polyvinyl chloride (“PVC”) facility in Calvert City, which is separate from the manufacturing complex and was not visited during the 2002 inspection. That additional inspection took place in late February 2004. The Company has notdismiss Goodrich’s third-party complaint
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
yet received a written report fromagainst it. In March 2007, the agencies regardingcourt granted Goodrich’s motion to dismiss the actionsCompany’s claim that they proposeGoodrich is required to takeaccept the tendered reconveyance. Although the Company’s motion for partial summary judgment was denied then, the Company’s claim for indemnification of its costs incurred in response to that visit. The EPA submittedconnection with Pond 4 is still pending before the court.
Monetary Relief. Except as noted above, with respect to the Company an information request under Section 114settlement of the Clean Air Actcontract litigation among the Company, Goodrich and issued a Notice of Violation, both pertaining toPolyOne, neither the inspectioncourt nor the Cabinet has established any allocation of the EDC/VCM plant. The Noticecosts of Violation does not propose any specific penalties. The EPA also issued toremediation among the Company information requests under Section 3007 of RCRAvarious parties that are involved in the judicial and Section 114 of the Clean Air Act regarding the PVC plant inspection. The Company and the EPA met in June 2004 and have continued to hold settlement discussions pursuant to which the EPA has indicated it will impose monetary penalties and will require plant modifications that will require capital expenditures. The Company expects that, based on the EPA’s past practices, the amount of any monetary penalties would be reduced by a percentage of the expenditures that the Company would agree to make for certain “supplemental environmental projects.”administrative proceedings discussed above. The Company is not in a position at this time to state what effect, if any, the resolution of these proceedings could have on the Company’s financial condition, results of operations or cash flows. However,flows in 2008 and later years. Any cash expenditures that the Company might incur in the future with respect to the remediation of contamination at the complex 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.
Environmental Investigations. In 2002, the National Enforcement Investigations Center, or NEIC, of the U.S. Environmental Protection Agency, or EPA, investigated the Company’s manufacturing complex in Calvert City. In early 2004, the NEIC investigated the Company’s nearby PVC plant. The EPA subsequently submitted information requests to the Company under the Clean Air Act and RCRA. The Company and the EPA met in 2004 to attempt to voluntarily resolve the notices of violation that were issued to the Company for the 2002 investigation and to voluntarily resolve any issues raised at the PVC plant in the 2004 investigation. Since then, the parties have continued to engage in settlement discussions. The EPA has indicated that it will impose monetary penalties and require plant modifications that will involve capital expenditures. The Company has recorded an accrual for a probable loss related to monetary penalties.penalties and other items to be expensed. Although the ultimate amount of liability is not ascertainable, the Company believes that any amounts exceeding the recorded accruals should not materially affect the Company’s financial condition. It is possible, however, that the ultimate resolution of this matter could result in a material adverse effect on the Company’s results of operations or cash flows for a particular reporting period.
Legal MattersEPA Audit of Ethylene Units in Lake Charles.
In October 2003,During 2007, the Company filed suit against CITGO Petroleum Corporation in state courtEPA conducted an audit of the Company’s ethylene units in Lake Charles, Louisiana, asserting that CITGO had failed to take sufficient hydrogen under two successive contracts pursuant to whichwith a focus on leak detection and repair, or LDAR. In January 2008, the U.S. Department of Justice, or DOJ, notified the Company has supplied and the Company supplies to CITGO hydrogen that the Company generates asEPA had referred the matter to the DOJ to bring a co-product in its ethylene plants in Lake Charles. In December 2003, CITGO responded with an answer and a counterclaimcivil case against the Company asserting that CITGO had overpaidalleging violations of various environmental laws and regulations. The DOJ informed the Company for hydrogen due to the Company’s allegedly faulty sales meterthat it would seek monetary penalties and thatrequire the Company is obligated to reimburse CITGOimplement an “enhanced LDAR” program for the overpayments. In January 2004, the Company filed a motion to compel arbitration of CITGO’s counterclaim and to stay all court proceedings relating to the counterclaim. In May 2004, the parties filed a joint motionethylene units. The Company’s representatives met with the court to provide for CITGO’s counterclaim to be resolved by arbitration. The Company’s claim against CITGO is approximately $8,100 plus interest at the prime rate plus two percentage points and attorneys’ fees. CITGO’s claim against the Company is approximately $7,800 plus interest at the prime rate plus two percentage points and attorneys’ fees. The parties held a mediation conferenceEPA in April 2004 at which they agreedFebruary 2008 to conduct further discovery with a view towards holding another mediation conference to attempt to settle their disputes. Subsequently,initial settlement discussions. While the parties have held discussions regarding a settlement. The Company can offer no assurance that a settlement can be achieved, and if no settlement is achieved,as to an outcome, the Company intends to vigorously pursue its claim against CITGO and its defense against CITGO’s counterclaim.
believes that the resolution of this matter will not have a material adverse effect on the Company’s financial condition, cash flows or results of operations.
In addition to the matters described above, in both “Environmental Matters” and “Legal Matters,” the Company is involved in various routine legal proceedings incidental to the conduct of its business. The Company does not believe that any of these routine legal proceedings will have a material adverse effect on its financial condition, results of operations or cash flows.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
Other Commitments
The Company is obligated under various long-term and short-term noncancelable operating leases, primarily related to rail car leases. Several of the leases provide for renewal terms. At December 31, 2005,2008, future minimum lease commitments were as follows:
2006 | $ | 18,685 | |
2007 | 17,992 | ||
2008 | 16,690 | ||
2009 | 15,422 | ||
2010 | 13,651 | ||
Thereafter | 25,957 | ||
$ | 108,397 | ||
2009 | $ | 29,379 | |
2010 | 26,659 | ||
2011 | 20,128 | ||
2012 | 14,199 | ||
2013 | 10,385 | ||
Thereafter | 32,912 | ||
$ | 133,662 | ||
Rental expense, net of railcar mileage credits, was approximately $27,691, $20,790$41,765, $39,432 and $17,530$32,461 for the years ended December 31, 2005, 20042008, 2007 and 2003,2006, respectively.
In addition, in 1996 a subsidiary of the Company entered into an agreement with INEOS (successor to BP Chemicals Ltd.) to license technology used to produce LLDPE and HDPE. Under the agreement the Company makes annual payments to INEOS of $3,140 through May 2007. As of December 31, 2005 and 2004, the net present value of these payments was $5,881 and $8,488, of which $3,058 and $5,881 is classified as other long-term liabilities and $2,823 and $2,607 is classified as accrued expenses, respectively.
The Company has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business. Such commitments are at prices not in excess of market prices. Certain feedstock purchase commitments require taking delivery of minimum volumes at market-determined prices.
17.18. Segment and Geographic Information
Segment Information
The Company operates in two principal business 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.
The Company’s Olefins segment manufactures and markets ethylene, polyethylene, styrene monomer and various ethylene co-products. The majority of the Company’s ethylene production is used in the Company’s polyethylene, styrene and VCM operations. The remainder of the Company’s ethylene is sold to external customers. In addition, the Company sells itsmakes ethylene co-products to external customers. The Company’s primary ethylene co-products aresuch as propylene, crude butadiene and hydrogen.
hydrogen that are sold to external customers.
The majority of sales in the Company’s Olefins business are made under long-term agreements where contract volumes are established within a range (typically, more than one year). Earlier terminations may occur if the parties fail to agree on price and deliveries are suspended for a period of several months. In most cases, these contracts also contemplate extension of the term unless specifically terminated by one of the parties. During 2005 and 2004,2006, one customer accounted for 11.5% and 10.9%11.1% of net sales in the Olefins segment. No single external Olefins customer accounted for more than 10.0%10% of net segment sales in 2003.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollarsthe Olefins segment in thousands, except per share data)
2008 or 2007.
The Company’s Vinyls businesssegment manufactures and markets PVC, VCM, chlorine, caustic soda and ethylene. The Company also manufactures and sells products fabricated from PVC that the Company produces, including pipe, window and patio door profiles and fence. The Company’s main manufacturing complex is located in Calvert City, Kentucky. It includes an ethylene plant, a chlor-alkali plant, a VCM plant and a PVC plant. The Company also operates a PVC and VCM manufacturing facility in Geismar, Louisiana. In addition, the Company owns a 43%59% interest in a PVC joint venture in China.
The Company uses a majority of its chlorine, VCM and PVC production to manufacture fabricated products at the Company’s eleven regional plants. The remainder of the VCM production is sold pursuant to a contract that requires the Company to supply a minimum of 400 million pounds of VCM per year. During 2005, 2004 and 2003, one2008, no single customer accounted for 16.3%, 16.8% and 18.9%, respectively,more than 10% of net sales in the Vinyls segment. During 2007, two customers in the Company’s Vinyls segment accounted for 27.6% of segment net sales, one accounting for 16.4% and one accounting for 11.2%. In 2006, two customers accounted for 26.4% of Vinyls segment sales, one accounting for 13.4% and one accounting for 13.0%.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
The accounting policies of the individual segments are the same as those described in Note 1.
Year Ended December 31, | ||||||||||||||||||||||||
2005 | 2004 | 2003 | 2008 | 2007 | 2006 | |||||||||||||||||||
Net external sales | ||||||||||||||||||||||||
Olefins | ||||||||||||||||||||||||
Polyethylene | $ | 697,662 | $ | 601,269 | $ | 481,662 | $ | 1,724,671 | $ | 1,545,639 | $ | 783,968 | ||||||||||||
Ethylene, styrene and other | 652,380 | 649,985 | 395,306 | 823,253 | 629,414 | 585,612 | ||||||||||||||||||
Total olefins | 1,350,042 | 1,251,254 | 876,968 | 2,547,924 | 2,175,053 | 1,369,580 | ||||||||||||||||||
Vinyls | ||||||||||||||||||||||||
Fabricated finished products | 587,547 | 394,513 | 263,518 | $ | 428,461 | $ | 497,610 | $ | 596,461 | |||||||||||||||
VCM, PVC, and other | 503,516 | 339,586 | 282,548 | 715,968 | 519,515 | 518,325 | ||||||||||||||||||
Total vinyls | 1,091,063 | 734,099 | 546,066 | 1,144,429 | 1,017,125 | 1,114,786 | ||||||||||||||||||
$ | 2,441,105 | $ | 1,985,353 | $ | 1,423,034 | $ | 3,692,353 | $ | 3,192,178 | $ | 2,484,366 | |||||||||||||
Intersegment sales | ||||||||||||||||||||||||
Olefins | $ | 116,822 | $ | 53,668 | $ | 34,665 | $ | 95,156 | $ | 83,091 | $ | 131,277 | ||||||||||||
Vinyls | 1,173 | 553 | 753 | 2,120 | 1,152 | 1,077 | ||||||||||||||||||
$ | 117,995 | $ | 54,221 | $ | 35,418 | $ | 97,276 | $ | 84,243 | $ | 132,354 | |||||||||||||
Income (loss) from operations | ||||||||||||||||||||||||
(Loss) income from operations | ||||||||||||||||||||||||
Olefins | $ | 195,670 | $ | 179,587 | $ | 55,298 | $ | (40,145 | ) | $ | 152,563 | $ | 160,875 | |||||||||||
Vinyls | 179,407 | 69,723 | 13,583 | 17,877 | 29,991 | 157,918 | ||||||||||||||||||
Corporate and other | (8,044 | ) | (6,144 | ) | (3,066 | ) | (7,272 | ) | (7,833 | ) | (5,542 | ) | ||||||||||||
$ | 367,033 | $ | 243,166 | $ | 65,815 | $ | (29,540 | ) | $ | 174,721 | $ | 313,251 | ||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||
Olefins | $ | 46,844 | $ | 49,213 | $ | 51,088 | $ | 78,227 | $ | 67,948 | $ | 51,741 | ||||||||||||
Vinyls | 34,343 | 31,671 | 33,118 | 33,501 | 35,419 | 34,391 | ||||||||||||||||||
Corporate and other | 54 | 191 | 3,087 | 198 | 147 | 130 | ||||||||||||||||||
$ | 81,241 | $ | 81,075 | $ | 87,293 | $ | 111,926 | $ | 103,514 | $ | 86,262 | |||||||||||||
Other income (expense), net | ||||||||||||||||||||||||
Olefins | $ | (1,933 | ) | $ | (981 | ) | $ | 3,459 | $ | 8 | $ | 155 | $ | (12 | ) | |||||||||
Vinyls | 301 | 121 | 629 | 162 | 234 | 216 | ||||||||||||||||||
Corporate and other | 4,290 | 3,497 | 3,532 | 5,305 | 2,269 | 11,466 | ||||||||||||||||||
2,658 | 2,637 | 7,620 | 5,475 | 2,658 | 11,670 | |||||||||||||||||||
Debt retirement cost | (646 | ) | (15,791 | ) | (11,343 | ) | — | — | (25,853 | ) | ||||||||||||||
$ | 2,012 | $ | (13,154 | ) | $ | (3,723 | ) | $ | 5,475 | $ | 2,658 | $ | (14,183 | ) | ||||||||||
Capital expenditures | ||||||||||||||||||||||||
Olefins | $ | 40,865 | $ | 15,905 | $ | 23,457 | $ | 54,947 | $ | 75,248 | $ | 92,360 | ||||||||||||
Vinyls | 42,741 | 35,745 | 21,182 | 115,030 | 55,253 | 41,028 | ||||||||||||||||||
Corporate and other | 2,154 | 1,060 | 292 | 2,584 | 5,224 | 2,870 | ||||||||||||||||||
$ | 85,760 | $ | 52,710 | $ | 44,931 | $ | 172,561 | $ | 135,725 | $ | 136,258 | |||||||||||||
Total assets | ||||||||||||||||||||||||
Olefins | $ | 1,275,762 | $ | 1,612,146 | ||||||||||||||||||||
Vinyls | 651,678 | 664,745 | ||||||||||||||||||||||
Corporate and other | 359,549 | 292,444 | ||||||||||||||||||||||
$ | 2,286,989 | $ | 2,569,335 | |||||||||||||||||||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
Year Ended December 31, | ||||||
2005 | 2004 | |||||
Total assets | ||||||
Olefins | $ | 961,742 | $ | 958,493 | ||
Vinyls | 573,709 | 486,197 | ||||
Corporate and other | 291,738 | 147,763 | ||||
$ | 1,827,189 | $ | 1,592,453 | |||
A reconciliation of total segment income from operations to consolidated income before taxes is as follows:
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Income from operations for reportable segments | $ | 367,033 | $ | 243,166 | $ | 65,815 | ||||||
Interest expense | (23,717 | ) | (39,350 | ) | (38,589 | ) | ||||||
Debt retirement cost | (646 | ) | (15,791 | ) | (11,343 | ) | ||||||
Other income, net | 2,658 | 2,637 | 7,620 | |||||||||
Income before taxes | $ | 345,328 | $ | 190,662 | $ | 23,503 | ||||||
2008 | 2007 | 2006 | ||||||||||
(Loss) income from operations for reportable segments | $ | (29,540 | ) | $ | 174,721 | $ | 313,251 | |||||
Interest expense | (33,957 | ) | (18,422 | ) | (16,519 | ) | ||||||
Debt retirement cost | — | — | (25,853 | ) | ||||||||
Other income, net | 5,475 | 2,658 | 11,670 | |||||||||
�� | ||||||||||||
(Loss) income before taxes | $ | (58,022 | ) | $ | 158,957 | $ | 282,549 | |||||
Geographic Information
Year Ended December 31, | |||||||||
2005 | 2004 | 2003 | |||||||
Sales to external customers(a) | |||||||||
United States | $ | 2,068,500 | $ | 1,678,421 | $ | 1,185,624 | |||
Foreign | |||||||||
Canada | 324,053 | 244,959 | 192,611 | ||||||
Bahamas | 18,822 | 25,083 | 23,895 | ||||||
Other | 29,730 | 36,890 | 20,904 | ||||||
$ | 2,441,105 | $ | 1,985,353 | $ | 1,423,034 | ||||
Long-lived assets | |||||||||
Unites States | $ | 850,280 | $ | 845,314 | $ | 873,240 | |||
Foreign | 12,952 | 9,738 | 6,448 | ||||||
$ | 863,232 | $ | 855,052 | $ | 879,688 | ||||
2008 | 2007 | 2006 | |||||||
Sales to external customers(a) | |||||||||
United States | $ | 3,275,860 | $ | 2,816,744 | $ | 2,219,164 | |||
Foreign | |||||||||
Canada | 318,969 | 290,654 | 230,567 | ||||||
Singapore | 25,235 | 25,314 | 191 | ||||||
Other | 72,289 | 59,466 | 34,444 | ||||||
$ | 3,692,353 | $ | 3,192,178 | $ | 2,484,366 | ||||
Long-lived assets | |||||||||
United States | 1,184,078 | $ | 1,113,365 | $ | 1,065,965 | ||||
Foreign | 13,374 | 12,847 | 10,938 | ||||||
$ | 1,197,452 | $ | 1,126,212 | $ | 1,076,903 | ||||
(a) | Revenues are attributed to countries based on location of customer. |
18.19. Subsequent EventEvents
On February 17, 2006,5, 2009, the Company amended its revolving credit facility. See Note 7 for additional information regarding this amendment.
On February 13, 2009 the Company’s board of directors declared a quarterly dividend of $0.0275$0.0525 per share of common stock payable on March 10, 200623, 2009 to holders of record on February 28, 2006March 9, 2009 aggregating approximately $1,791.
$3,450.
19.20. Guarantor Disclosures
The Company’s payment obligations under its 8 3/4%the senior notes term loan and revolving credit facility as of December 31, 2005 wereare fully and unconditionally guaranteed by each of its current and future domestic restricted subsidiaries that guarantee other debt of the Company or of another guarantor of the senior notes in excess of $5,000 (the “Guarantor Subsidiaries”). The Company’s 6 5/8% senior notes are also fully and unconditionally guaranteed by the Guarantor Subsidiaries. Each Guarantor Subsidiary is 100% owned by the
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
parent company.Westlake Chemical Corporation. 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 Guarantor Subsidiaries and the remaining subsidiaries that did not guarantee the 8 3/4% senior notes and do not guarantee the 6 5/8 senior notes (the “Non-Guarantor Subsidiaries”), together with consolidating adjustments necessary to present the Company’s results on a consolidated basis.
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(dollars in thousands, except per share data)
Condensed Consolidating Financial Information for the Year Endedas of December 31, 20052008
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 231,957 | $ | 151 | $ | 5,787 | $ | — | $ | 237,895 | $ | 88,368 | $ | 69 | $ | 1,802 | $ | — | $ | 90,239 | ||||||||||||||
Accounts receivable, net | 60,697 | 290,749 | 98 | (48,765 | ) | 302,779 | 145,598 | 286,941 | (2,241 | ) | (82,975 | ) | 347,323 | |||||||||||||||||||||
Inventories, net | — | 331,867 | 8,003 | — | 339,870 | — | 317,312 | 10,655 | — | 327,967 | ||||||||||||||||||||||||
Prepaid expenses and other current assets | 10 | 9,007 | 289 | — | 9,306 | 763 | 5,830 | 245 | — | 6,838 | ||||||||||||||||||||||||
Deferred income taxes | 12,398 | — | 615 | — | 13,013 | 26,388 | — | 234 | — | 26,622 | ||||||||||||||||||||||||
Total current assets | 305,062 | 631,774 | 14,792 | (48,765 | ) | 902,863 | 261,117 | 610,152 | 10,695 | (82,975 | ) | 798,989 | ||||||||||||||||||||||
Property, plant and equipment, net | — | 850,280 | 12,952 | — | 863,232 | — | 1,184,078 | 13,374 | — | 1,197,452 | ||||||||||||||||||||||||
Equity investment | 1,163,403 | 15,300 | 20,042 | (1,178,703 | ) | 20,042 | 1,621,068 | 23,250 | 30,107 | (1,644,318 | ) | 30,107 | ||||||||||||||||||||||
Restricted cash | 134,432 | — | — | — | 134,432 | |||||||||||||||||||||||||||||
Other assets, net | 43,235 | 28,017 | 5,830 | (36,030 | ) | 41,052 | 44,735 | 111,332 | 5,971 | (36,029 | ) | 126,009 | ||||||||||||||||||||||
Total assets | $ | 1,511,700 | $ | 1,525,371 | $ | 53,616 | $ | (1,263,498 | ) | $ | 1,827,189 | $ | 2,061,352 | $ | 1,928,812 | $ | 60,147 | $ | (1,763,322 | ) | $ | 2,286,989 | ||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||||
Accounts payable | 18,705 | 181,093 | (21 | ) | — | 199,777 | $ | 20,052 | $ | 91,626 | $ | 1,155 | $ | — | $ | 112,833 | ||||||||||||||||||
Accrued liabilities | 4,509 | 99,042 | 1,266 | 55 | 104,872 | 15,872 | 83,263 | 324 | (4 | ) | 99,455 | |||||||||||||||||||||||
Current portion of long-term debt | 1,200 | — | — | — | 1,200 | |||||||||||||||||||||||||||||
Total current liabilities | 24,414 | 280,135 | 1,245 | 55 | 305,849 | 35,924 | 174,889 | 1,479 | (4 | ) | 212,288 | |||||||||||||||||||||||
Long-term debt | 254,800 | 90,597 | 5,142 | (84,850 | ) | 265,689 | 499,430 | 127,798 | 2,094 | (119,003 | ) | 510,319 | ||||||||||||||||||||||
Deferred income taxes | 219,802 | — | 1,286 | — | 221,088 | 280,395 | — | 91 | — | 280,486 | ||||||||||||||||||||||||
Other liabilities | 18,578 | 21,880 | — | (1 | ) | 40,457 | 6,543 | 38,293 | — | — | 44,836 | |||||||||||||||||||||||
Stockholders’ equity | 994,106 | 1,132,759 | 45,943 | (1,178,702 | ) | 994,106 | 1,239,060 | 1,587,832 | 56,483 | (1,644,315 | ) | 1,239,060 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,511,700 | $ | 1,525,371 | $ | 53,616 | $ | (1,263,498 | ) | $ | 1,827,189 | $ | 2,061,352 | $ | 1,928,812 | $ | 60,147 | $ | (1,763,322 | ) | $ | 2,286,989 | ||||||||||||
Condensed Consolidating Financial Information as of December 31, 2007
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
Balance Sheet | |||||||||||||||||
Current assets | |||||||||||||||||
Cash and cash equivalents | $ | 16,173 | $ | 96 | $ | 8,645 | $ | — | $ | 24,914 | |||||||
Accounts receivable, net | 183,723 | 492,974 | (2,307 | ) | (166,927 | ) | 507,463 | ||||||||||
Inventories, net | — | 515,465 | 12,406 | — | 527,871 | ||||||||||||
Prepaid expenses and other current assets | 10 | 13,867 | 355 | — | 14,232 | ||||||||||||
Deferred income taxes | 17,344 | — | 361 | — | 17,705 | ||||||||||||
Total current assets | 217,250 | 1,022,402 | 19,460 | (166,927 | ) | 1,092,185 | |||||||||||
Property, plant and equipment, net | — | 1,113,365 | 12,847 | — | 1,126,212 | ||||||||||||
Equity investment | 1,671,979 | 23,250 | 29,486 | (1,695,229 | ) | 29,486 | |||||||||||
Restricted cash | 199,450 | — | — | — | 199,450 | ||||||||||||
Other assets, net | 43,053 | 109,302 | 5,677 | (36,030 | ) | 122,002 | |||||||||||
Total assets | $ | 2,131,732 | $ | 2,268,319 | $ | 67,470 | $ | (1,898,186 | ) | $ | 2,569,335 | ||||||
Current liabilities | |||||||||||||||||
Accounts payable | $ | 29,319 | $ | 284,658 | $ | 974 | $ | — | $ | 314,951 | |||||||
Accrued liabilities | 16,654 | 108,702 | 1,055 | (100 | ) | 126,311 | |||||||||||
Total current liabilities | 45,973 | 393,360 | 2,029 | (100 | ) | 441,262 | |||||||||||
Long-term debt | 500,525 | 213,647 | 102 | (202,860 | ) | 511,414 | |||||||||||
Deferred income taxes | 286,603 | — | 1,362 | — | 287,965 | ||||||||||||
Other liabilities | 11,961 | 30,063 | — | — | 42,024 | ||||||||||||
Stockholders’ equity | 1,286,670 | 1,631,249 | 63,977 | (1,695,226 | ) | 1,286,670 | |||||||||||
Total liabilities and stockholders’ equity | $ | 2,131,732 | $ | 2,268,319 | $ | 67,470 | $ | (1,898,186 | ) | $ | 2,569,335 | ||||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
Condensed Consolidating Financial Information for the Year Ended December 31, 20042008
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
Balance Sheet | |||||||||||||||||
Current assets | |||||||||||||||||
Cash and cash equivalents | $ | 39,312 | $ | 70 | $ | 4,014 | $ | — | $ | 43,396 | |||||||
Accounts receivable, net | 378,436 | 218,523 | 4,698 | (367,410 | ) | 234,247 | |||||||||||
Inventories, net | — | 311,789 | 8,027 | — | 319,816 | ||||||||||||
Prepaid expenses and other current assets | 10 | 7,331 | 1,348 | — | 8,689 | ||||||||||||
Deferred income taxes | 65,790 | — | — | — | 65,790 | ||||||||||||
Total current assets | 483,548 | 537,713 | 18,087 | (367,410 | ) | 671,938 | |||||||||||
Property, plant and equipment, net | 41 | 845,273 | 9,738 | — | 855,052 | ||||||||||||
Equity investment | 814,248 | 15,300 | 18,082 | (829,548 | ) | 18,082 | |||||||||||
Other assets, net | 44,982 | 32,406 | 6,022 | (36,029 | ) | 47,381 | |||||||||||
Total assets | $ | 1,342,819 | $ | 1,430,692 | $ | 51,929 | $ | (1,232,987 | ) | $ | 1,592,453 | ||||||
Current liabilities | |||||||||||||||||
Accounts payable | 16,302 | 129,916 | 672 | — | 146,890 | ||||||||||||
Accrued liabilities | 21,114 | 79,788 | 1,377 | (154 | ) | 102,125 | |||||||||||
Current portion of long-term debt | 1,200 | — | — | — | 1,200 | ||||||||||||
Total current liabilities | 38,616 | 209,704 | 2,049 | (154 | ) | 250,215 | |||||||||||
Long-term debt | 286,000 | 408,899 | 5,275 | (403,285 | ) | 296,889 | |||||||||||
Deferred income taxes | 235,968 | (1,406 | ) | 599 | — | 235,161 | |||||||||||
Other liabilities | 12,838 | 27,953 | — | — | 40,791 | ||||||||||||
Stockholders’ equity | 769,397 | 785,542 | 44,006 | (829,548 | ) | 769,397 | |||||||||||
Total liabilities and stockholders’ equity | $ | 1,342,819 | $ | 1,430,692 | $ | 51,929 | $ | (1,232,987 | ) | $ | 1,592,453 | ||||||
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Statement of Operations | ||||||||||||||||||||
Net sales | $ | — | $ | 3,653,091 | $ | 46,182 | $ | (6,920 | ) | $ | 3,692,353 | |||||||||
Cost of sales | — | 3,584,253 | 45,652 | (6,920 | ) | 3,622,985 | ||||||||||||||
— | 68,838 | 530 | — | 69,368 | ||||||||||||||||
Selling, general and administrative expenses | 2,523 | 90,435 | 5,950 | — | 98,908 | |||||||||||||||
Loss from operations | (2,523 | ) | (21,597 | ) | (5,420 | ) | — | (29,540 | ) | |||||||||||
Interest expense | (12,056 | ) | (21,655 | ) | (246 | ) | — | (33,957 | ) | |||||||||||
Other (expense) income, net | (21,279 | ) | 282 | 1,132 | 25,340 | 5,475 | ||||||||||||||
Income (loss) before income taxes | (35,858 | ) | (42,970 | ) | (4,534 | ) | 25,340 | (58,022 | ) | |||||||||||
Benefit from income taxes | (6,315 | ) | (20,617 | ) | (1,547 | ) | — | (28,479 | ) | |||||||||||
Net (loss) income | $ | (29,543 | ) | $ | (22,353 | ) | $ | (2,987 | ) | $ | 25,340 | $ | (29,543 | ) | ||||||
Condensed Consolidating Financial Information for the Year Ended December 31, 20052007
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
Statement of Operations | ||||||||||||||||||||||||||||||||||||||||
Net sales | $ | — | $ | 2,412,321 | $ | 41,798 | $ | (13,014 | ) | $ | 2,441,105 | $ | — | $ | 3,153,061 | $ | 47,435 | $ | (8,318 | ) | $ | 3,192,178 | ||||||||||||||||||
Cost of sales | (125 | ) | 1,972,280 | 38,333 | (13,014 | ) | 1,997,474 | — | 2,882,695 | 46,401 | (8,318 | ) | 2,920,778 | |||||||||||||||||||||||||||
125 | 440,041 | 3,465 | — | 443,631 | — | 270,366 | 1,034 | — | 271,400 | |||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 2,068 | 71,358 | 3,172 | — | 76,598 | 1,534 | 92,257 | 2,888 | — | 96,679 | ||||||||||||||||||||||||||||||
Impairment of long-lived assets | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Income (loss) from operations | (1,943 | ) | 368,683 | 293 | — | 367,033 | (1,534 | ) | 178,109 | (1,854 | ) | — | 174,721 | |||||||||||||||||||||||||||
Interest expense | (3,001 | ) | (20,715 | ) | (1 | ) | — | (23,717 | ) | 733 | (19,155 | ) | — | — | (18,422 | ) | ||||||||||||||||||||||||
Other income (expense), net | 227,838 | (879 | ) | 521 | (225,468 | ) | 2,012 | 115,074 | (1,555 | ) | 3,578 | (114,439 | ) | 2,658 | ||||||||||||||||||||||||||
Income (loss) before income taxes | 222,894 | 347,089 | 813 | (225,468 | ) | 345,328 | 114,273 | 157,399 | 1,724 | (114,439 | ) | 158,957 | ||||||||||||||||||||||||||||
Provision for (benefit from) income taxes | (3,923 | ) | 122,531 | (97 | ) | — | 118,511 | (456 | ) | 45,377 | (693 | ) | — | 44,228 | ||||||||||||||||||||||||||
Net income (loss) | $ | 226,817 | $ | 224,558 | $ | 910 | $ | (225,468 | ) | $ | 226,817 | $ | 114,729 | $ | 112,022 | $ | 2,417 | $ | (114,439 | ) | $ | 114,729 | ||||||||||||||||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
Condensed Consolidating Financial Information for the Year Ended December 31, 20042006
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Statement of Operations | ||||||||||||||||||||
Net sales | $ | — | $ | 1,962,160 | $ | 31,327 | $ | (8,134 | ) | $ | 1,985,353 | |||||||||
Cost of sales | — | 1,663,358 | 26,944 | (8,134 | ) | 1,682,168 | ||||||||||||||
— | 298,802 | 4,383 | — | 303,185 | ||||||||||||||||
Selling, general and administrative expenses | 3,650 | 54,905 | 1,683 | — | 60,238 | |||||||||||||||
Gain on sale of assets | — | (2,049 | ) | — | — | (2,049 | ) | |||||||||||||
Impairment of long-lived assets | — | 1,830 | — | — | 1,830 | |||||||||||||||
Income (loss) from operations | (3,650 | ) | 244,116 | 2,700 | — | 243,166 | ||||||||||||||
Interest expense | (16,380 | ) | (22,969 | ) | (1 | ) | — | (39,350 | ) | |||||||||||
Other income (expense), net | 127,300 | 134 | 1,868 | (142,456 | ) | (13,154 | ) | |||||||||||||
Income (loss) before income taxes | 107,270 | 221,281 | 4,567 | (142,456 | ) | 190,662 | ||||||||||||||
Provision for (benefit from) income taxes | (13,452 | ) | 83,236 | 156 | — | 69,940 | ||||||||||||||
Net income (loss) | $ | 120,722 | $ | 138,045 | $ | 4,411 | $ | (142,456 | ) | $ | 120,722 | |||||||||
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Statement of Operations | |||||||||||||||||||
Net sales | $ | — | $ | 2,445,236 | $ | 49,557 | $ | (10,427 | ) | $ | 2,484,366 | ||||||||
Cost of sales | — | 2,054,820 | 43,490 | (10,427 | ) | 2,087,883 | |||||||||||||
— | 390,416 | 6,067 | — | 396,483 | |||||||||||||||
Selling, general and administrative expenses | 1,648 | 77,995 | 3,589 | — | 83,232 | ||||||||||||||
Income (loss) from operations | (1,648 | ) | 312,421 | 2,478 | — | 313,251 | |||||||||||||
Interest expense | (3,123 | ) | (13,396 | ) | — | — | (16,519 | ) | |||||||||||
Other income (expense), net | 139,589 | 356 | 2,551 | (156,679 | ) | (14,183 | ) | ||||||||||||
Income (loss) before income taxes | 134,818 | 299,381 | 5,029 | (156,679 | ) | 282,549 | |||||||||||||
Provision for (benefit from) income taxes | (59,741 | ) | 146,887 | 844 | — | 87,990 | |||||||||||||
Net income (loss) | $ | 194,559 | $ | 152,494 | $ | 4,185 | $ | (156,679 | ) | $ | 194,559 | ||||||||
Condensed Consolidating Financial Information for the Year Ended December 31, 20032008
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Statement of Operations | |||||||||||||||||||
Net sales | $ | — | $ | 1,401,441 | $ | 27,548 | $ | (5,955 | ) | $ | 1,423,034 | ||||||||
Cost of sales | — | 1,284,304 | 22,733 | (5,955 | ) | 1,301,082 | |||||||||||||
— | 117,137 | 4,815 | — | 121,952 | |||||||||||||||
Selling, general and administrative expenses | 1,647 | 53,150 | 2,217 | — | 57,014 | ||||||||||||||
Gain on legal settlement | — | (3,162 | ) | — | — | (3,162 | ) | ||||||||||||
Impairment of long-lived assets | — | 2,285 | — | — | 2,285 | ||||||||||||||
Income (loss) from operations | (1,647 | ) | 64,864 | 2,598 | — | 65,815 | |||||||||||||
Interest expense | (37,445 | ) | (21,908 | ) | — | 20,764 | (38,589 | ) | |||||||||||
Other income (expense), net | 43,209 | 5,453 | 2,125 | (54,510 | ) | (3,723 | ) | ||||||||||||
Income (loss) before income taxes | 4,117 | 48,409 | 4,723 | (33,746 | ) | 23,503 | |||||||||||||
Provision for (benefit from) income taxes | (10,639 | ) | 18,018 | 1,368 | — | 8,747 | |||||||||||||
Net income (loss) | $ | 14,756 | $ | 30,391 | $ | 3,355 | $ | (33,746 | ) | $ | 14,756 | ||||||||
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Statement of Cash Flows | ||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||
Net (loss) income | $ | (29,543 | ) | $ | (22,353 | ) | $ | (2,987 | ) | $ | 25,340 | $ | (29,543 | ) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||||||||||||||
Depreciation and amortization | 954 | 108,557 | 3,369 | — | 112,880 | |||||||||||||||
Provision for (recovery of) doubtful accounts | — | 15,380 | (98 | ) | — | 15,282 | ||||||||||||||
Stock-based compensation expense | — | 4,034 | 144 | — | 4,178 | |||||||||||||||
Loss from disposition of fixed assets | — | 4,900 | — | — | 4,900 | |||||||||||||||
Deferred income taxes | (12,921 | ) | — | (958 | ) | — | (13,879 | ) | ||||||||||||
Equity in income of joint venture | — | — | (621 | ) | — | (621 | ) | |||||||||||||
Net changes in working capital and other | (21,338 | ) | 142,773 | (3,203 | ) | (25,340 | ) | 92,892 | ||||||||||||
Net cash (used for) provided by operating activities | (62,848 | ) | 253,291 | (4,354 | ) | — | 186,089 | |||||||||||||
Cash flows from investing activities | ||||||||||||||||||||
Additions to property, plant and equipment | — | (170,032 | ) | (2,529 | ) | — | (172,561 | ) | ||||||||||||
Additions to equity investments | — | — | — | — | — | |||||||||||||||
Acquisition of business | — | — | — | — | — | |||||||||||||||
Settlements of derivative instruments | — | (199 | ) | — | — | (199 | ) | |||||||||||||
Proceeds from deposition of assets | — | 808 | — | — | 808 | |||||||||||||||
Net cash used for investing activities | — | (169,423 | ) | (2,529 | ) | — | (171,952 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Intercompany financing | 83,855 | (83,895 | ) | 40 | — | — | ||||||||||||||
Proceeds from exercise of stock options | 208 | — | — | — | 208 | |||||||||||||||
Dividends paid | (13,456 | ) | — | — | — | (13,456 | ) | |||||||||||||
Proceeds from borrowings | 851,635 | — | — | — | 851,635 | |||||||||||||||
Repayments of borrowings | (852,812 | ) | — | — | — | (852,812 | ) | |||||||||||||
Utilization of restricted cash | 68,248 | — | — | — | 68,248 | |||||||||||||||
Capitalized debt issuance costs | (2,635 | ) | — | — | — | (2,635 | ) | |||||||||||||
Net cash provided by (used for) financing activities | 135,043 | (83,895 | ) | 40 | — | 51,188 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 72,195 | (27 | ) | (6,843 | ) | — | 65,325 | |||||||||||||
Cash and cash equivalents at beginning of the year | 16,173 | 96 | 8,645 | — | 24,914 | |||||||||||||||
Cash and cash equivalents at end of the year | $ | 88,368 | $ | 69 | $ | 1,802 | $ | — | $ | 90,239 | ||||||||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
Condensed Consolidating Financial Information for the Year Ended December 31, 20052007
Westlake Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
Statement of Cash Flows | ||||||||||||||||||||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 226,817 | $ | 224,558 | $ | 910 | $ | (225,468 | ) | $ | 226,817 | $ | 114,729 | $ | 112,022 | $ | 2,417 | $ | (114,439 | ) | $ | 114,729 | ||||||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 1,456 | 78,613 | 2,628 | 82,697 | 760 | 100,416 | 3,098 | — | 104,274 | |||||||||||||||||||||||||||||||
Recovery of doubtful accounts | — | (2,294 | ) | (13 | ) | (2,307 | ) | — | 127 | 293 | — | 420 | ||||||||||||||||||||||||||||
Loss (gain) from disposition of fixed assets | — | 4,767 | (21 | ) | 4,746 | |||||||||||||||||||||||||||||||||||
Write off of debt issuance cost | 646 | — | — | 646 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | 2,772 | 101 | — | 2,873 | |||||||||||||||||||||||||||||||||||
Loss from disposition of fixed assets | — | 724 | — | — | 724 | |||||||||||||||||||||||||||||||||||
Deferred income taxes | (3,923 | ) | 49,613 | 55 | 45,745 | 5,574 | — | (288 | ) | — | 5,286 | |||||||||||||||||||||||||||||
Equity in income of joint venture | — | — | (94 | ) | — | (94 | ) | — | — | (2,796 | ) | — | (2,796 | ) | ||||||||||||||||||||||||||
Net changes in working capital and other | (314,822 | ) | 43,754 | 5,797 | 225,468 | (39,803 | ) | (77,657 | ) | (202,871 | ) | 2,745 | 114,439 | (163,344 | ) | |||||||||||||||||||||||||
Net cash provided by (used for) operating activities | (89,826 | ) | 399,011 | 9,262 | — | 318,447 | ||||||||||||||||||||||||||||||||||
Net cash provided by operating activities | 43,406 | 13,190 | 5,570 | — | 62,166 | |||||||||||||||||||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||||||||||||||||
Additions to property, plant and equipment | — | (80,286 | ) | (5,474 | ) | — | (85,760 | ) | — | (133,203 | ) | (2,522 | ) | — | (135,725 | ) | ||||||||||||||||||||||||
Additions to equity investments | — | — | (1,867 | ) | — | (1,867 | ) | — | — | (308 | ) | — | (308 | ) | ||||||||||||||||||||||||||
Acquisition of business | 8,043 | — | — | — | 8,043 | |||||||||||||||||||||||||||||||||||
Settlements of derivative instruments | — | 2,995 | — | — | 2,995 | |||||||||||||||||||||||||||||||||||
Proceeds from deposition of assets | — | 37 | — | — | 37 | — | 190 | — | — | 190 | ||||||||||||||||||||||||||||||
Net cash used for investing activities | — | (80,249 | ) | (7,341 | ) | — | (87,590 | ) | ||||||||||||||||||||||||||||||||
Net cash provided by (used for) investing activities | 8,043 | (130,018 | ) | (2,830 | ) | — | (124,805 | ) | ||||||||||||||||||||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||||||||||||||||||||
Intercompany financing | 318,829 | (318,681 | ) | (148 | ) | — | — | (116,853 | ) | 116,833 | 20 | — | — | |||||||||||||||||||||||||||
Proceeds from exercise of stock options | 1,184 | — | — | — | 1,184 | 328 | — | — | — | 328 | ||||||||||||||||||||||||||||||
Dividends paid | (6,342 | ) | — | — | — | (6,342 | ) | (11,778 | ) | — | — | — | (11,778 | ) | ||||||||||||||||||||||||||
Proceeds from borrowings | 326,584 | — | — | — | 326,584 | |||||||||||||||||||||||||||||||||||
Repayments of borrowings | (31,200 | ) | — | — | — | (31,200 | ) | (325,407 | ) | — | — | — | (325,407 | ) | ||||||||||||||||||||||||||
Utilization of restricted cash | 48,124 | — | — | — | 48,124 | |||||||||||||||||||||||||||||||||||
Capitalized debt issuance costs | (2,944 | ) | — | — | — | (2,944 | ) | |||||||||||||||||||||||||||||||||
Net cash used for financing activities | 282,471 | (318,681 | ) | (148 | ) | — | (36,358 | ) | ||||||||||||||||||||||||||||||||
Net increase in cash and cash equivalents | 192,645 | 81 | 1,773 | — | 194,499 | |||||||||||||||||||||||||||||||||||
Net cash provided by (used for) financing activities | (81,946 | ) | 116,833 | 20 | — | 34,907 | ||||||||||||||||||||||||||||||||||
Net (decrease) increase in cash and cash equivalents | (30,497 | ) | 5 | 2,760 | — | (27,732 | ) | |||||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of the year | 39,312 | 70 | 4,014 | — | 43,396 | 46,670 | 91 | 5,885 | — | 52,646 | ||||||||||||||||||||||||||||||
Cash and cash equivalents at end of the year | $ | 231,957 | $ | 151 | $ | 5,787 | $ | — | $ | 237,895 | $ | 16,173 | $ | 96 | $ | 8,645 | $ | — | $ | 24,914 | ||||||||||||||||||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
Condensed Consolidating Financial Information for the Year Ended December 31, 20042006
Westlake Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
Statement of Cash Flows | ||||||||||||||||||||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 120,722 | $ | 138,045 | $ | 4,411 | $ | (142,456 | ) | $ | 120,722 | $ | 194,559 | $ | 152,494 | $ | 4,185 | $ | (156,679 | ) | $ | 194,559 | ||||||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 2,097 | 78,738 | 2,337 | — | 83,172 | 850 | 83,085 | 3,177 | — | 87,112 | ||||||||||||||||||||||||||||||
Recovery of doubtful accounts | — | (145 | ) | (311 | ) | — | (456 | ) | — | 1,287 | — | — | 1,287 | |||||||||||||||||||||||||||
Impairment of long-lived assets | — | 1,830 | — | — | 1,830 | |||||||||||||||||||||||||||||||||||
Gain from disposition of fixed assets | — | (218 | ) | — | — | (218 | ) | |||||||||||||||||||||||||||||||||
Loss from disposition of fixed assets | — | 2,848 | — | — | 2,848 | |||||||||||||||||||||||||||||||||||
Write off of debt issuance cost | — | 3,623 | — | — | 3,623 | |||||||||||||||||||||||||||||||||||
Deferred income taxes | (13,452 | ) | 79,157 | (517 | ) | — | 65,188 | 13,415 | — | 437 | — | 13,852 | ||||||||||||||||||||||||||||
Equity in income of joint venture | — | — | (1,379 | ) | — | (1,379 | ) | — | — | (1,766 | ) | — | (1,766 | ) | ||||||||||||||||||||||||||
Net changes in working capital and other | (184,531 | ) | (74,821 | ) | (1,182 | ) | 142,456 | (118,078 | ) | (135,078 | ) | (83,921 | ) | (2,011 | ) | 156,679 | (64,331 | ) | ||||||||||||||||||||||
Net cash provided by (used for) operating activities | (75,164 | ) | 222,586 | 3,359 | — | 150,781 | ||||||||||||||||||||||||||||||||||
Net cash provided by operating activities | 73,746 | 159,416 | 4,022 | — | 237,184 | |||||||||||||||||||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||||||||||||||||
Additions to property, plant and equipment | — | (47,945 | ) | (4,765 | ) | — | (52,710 | ) | — | (133,878 | ) | (2,380 | ) | — | (136,258 | ) | ||||||||||||||||||||||||
Acquisition of operations | — | (33,294 | ) | — | — | (33,294 | ) | |||||||||||||||||||||||||||||||||
Proceeds from disposition of assets | — | 3,256 | — | — | 3,256 | |||||||||||||||||||||||||||||||||||
Proceeds from insurance claims | — | 2,785 | — | — | 2,785 | |||||||||||||||||||||||||||||||||||
Additions to equity investments | — | — | (4,574 | ) | — | (4,574 | ) | |||||||||||||||||||||||||||||||||
Acquisition of business | (235,674 | ) | — | — | — | (235,674 | ) | |||||||||||||||||||||||||||||||||
Purchases of short-term investments | (216,510 | ) | — | — | — | (216,510 | ) | |||||||||||||||||||||||||||||||||
Sales and maturities of short-term investments | 216,510 | — | — | — | 216,510 | |||||||||||||||||||||||||||||||||||
Settlements of derivative instruments | — | (28,052 | ) | — | — | (28,052 | ) | |||||||||||||||||||||||||||||||||
Proceeds from deposition of assets | — | 222 | — | — | 222 | |||||||||||||||||||||||||||||||||||
Net cash used for investing activities | — | (75,198 | ) | (4,765 | ) | — | (79,963 | ) | (235,674 | ) | (161,708 | ) | (6,954 | ) | — | (404,336 | ) | |||||||||||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||||||||||||||||||||
Intercompany financing | 147,178 | (147,362 | ) | 184 | — | — | (5,262 | ) | 2,232 | 3,030 | — | — | ||||||||||||||||||||||||||||
Proceeds from issuance of stock | 181,167 | — | — | — | 181,167 | |||||||||||||||||||||||||||||||||||
Proceeds from exercise of stock options | 1,849 | — | — | — | 1,849 | |||||||||||||||||||||||||||||||||||
Dividends paid | (1,379 | ) | — | — | — | (1,379 | ) | (8,802 | ) | — | — | — | (8,802 | ) | ||||||||||||||||||||||||||
Proceeds from affiliate borrowings | 336 | — | — | — | 336 | |||||||||||||||||||||||||||||||||||
Repayments of affiliate borrowings | (5,727 | ) | — | — | — | (5,727 | ) | |||||||||||||||||||||||||||||||||
Proceeds from borrowings | 249,185 | — | — | — | 249,185 | |||||||||||||||||||||||||||||||||||
Repayments of borrowings | (239,200 | ) | — | — | — | (239,200 | ) | (256,000 | ) | — | — | — | (256,000 | ) | ||||||||||||||||||||||||||
Capitalized debt issuance costs | (4,329 | ) | — | — | — | (4,329 | ) | |||||||||||||||||||||||||||||||||
Net cash used for financing activities | 82,375 | (147,362 | ) | 184 | — | (64,803 | ) | (23,359 | ) | 2,232 | 3,030 | — | (18,097 | ) | ||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 7,211 | 26 | (1,222 | ) | — | 6,015 | ||||||||||||||||||||||||||||||||||
Net increase in cash and cash equivalents | �� | (185,287 | ) | (60 | ) | 98 | — | (185,249 | ) | |||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of the year | 32,101 | 44 | 5,236 | — | 37,381 | 231,957 | 151 | 5,787 | — | 237,895 | ||||||||||||||||||||||||||||||
Cash and cash equivalents at end of the year | $ | 39,312 | $ | 70 | $ | 4,014 | $ | — | $ | 43,396 | $ | 46,670 | $ | 91 | $ | 5,885 | $ | — | $ | 52,646 | ||||||||||||||||||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Continued
(dollars in thousands, except per share data)
Condensed Consolidating Financial Information for the Year Ended December 31, 2003
Westlake Chemical Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Statement of Cash Flows | ||||||||||||||||||||
Net income (loss) | $ | 14,756 | $ | 30,391 | $ | 3,355 | $ | (33,746 | ) | $ | 14,756 | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||||||||||||||
Depreciation and amortization | 3,457 | 82,472 | 2,251 | — | 88,180 | |||||||||||||||
Provision for doubtful accounts | — | 1,872 | — | — | 1,872 | |||||||||||||||
Impairment of long-lived assets | — | 2,285 | — | — | 2,285 | |||||||||||||||
Gain from disposition of fixed assets | — | (2,903 | ) | — | — | (2,903 | ) | |||||||||||||
Deferred income taxes | (10,636 | ) | 17,941 | (193 | ) | — | 7,112 | |||||||||||||
Equity in income of joint venture | — | — | (1,510 | ) | — | (1,510 | ) | |||||||||||||
Net changes in working capital and other | (41,069 | ) | (26,427 | ) | 2,045 | 33,746 | (31,705 | ) | ||||||||||||
Net cash provided by (used for) operating activities | (33,492 | ) | 105,631 | 5,948 | — | 78,087 | ||||||||||||||
Additions to property, plant and equipment | — | (42,425 | ) | (2,506 | ) | — | (44,931 | ) | ||||||||||||
Proceeds from insurance claims | — | 3,350 | — | — | 3,350 | |||||||||||||||
Net cash used for investing activities | — | (39,075 | ) | (2,506 | ) | — | (41,581 | ) | ||||||||||||
Intercompany financing | 67,522 | (66,819 | ) | (703 | ) | — | — | |||||||||||||
Proceeds from affiliate borrowings | 32 | — | — | — | 32 | |||||||||||||||
Repayments of affiliate borrowings | — | (117 | ) | (253 | ) | — | (370 | ) | ||||||||||||
Proceeds from borrowings | 723,975 | — | — | — | 723,975 | |||||||||||||||
Repayments of borrowings | (719,783 | ) | — | — | — | (719,783 | ) | |||||||||||||
Capitalized debt costs | (14,102 | ) | — | — | — | (14,102 | ) | |||||||||||||
Net cash used for financing activities | 57,644 | (66,936 | ) | (956 | ) | — | (10,248 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 24,152 | (380 | ) | 2,486 | — | 26,258 | ||||||||||||||
Cash and cash equivalents at beginning of the year | 7,949 | 424 | 2,750 | — | 11,123 | |||||||||||||||
Cash and cash equivalents at end of the year | $ | 32,101 | $ | 44 | $ | 5,236 | $ | — | $ | 37,381 | ||||||||||
WESTLAKE CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(dollars in thousands, except per share data)
20.21. Quarterly Financial Information (Unaudited)
Three Months Ended | ||||||||||||
March 31, 2005 | June 30, 2005 | September 30, 2005 | December 31, 2005 | |||||||||
Net sales | $ | 618,616 | $ | 580,659 | $ | 605,391 | $ | 636,439 | ||||
Gross profit | 119,783 | 99,480 | 89,264 | 135,104 | ||||||||
Income from operations | 101,708 | 82,763 | 70,062 | 112,500 | ||||||||
Net income | 61,143 | 48,526 | 43,526 | 73,622 | ||||||||
Basic earnings per common share | $ | 0.94 | $ | 0.75 | $ | 0.67 | $ | 1.13 | ||||
Diluted earnings per common share(1) | $ | 0.94 | $ | 0.74 | $ | 0.67 | $ | 1.13 | ||||
Three Months Ended | ||||||||||||
March 31, 2004 | June 30, 2004 | September 30, 2004 | December 31, 2004 | |||||||||
Net sales | $ | 400,894 | $ | 449,359 | $ | 572,031 | $ | 563,069 | ||||
Gross profit | 38,807 | 81,529 | 84,511 | 98,338 | ||||||||
Income from operations | 26,915 | 65,911 | 68,940 | 81,400 | ||||||||
Net income | 10,685 | 34,394 | 28,317 | 47,326 | ||||||||
Basic and diluted earnings per common share(1) | $ | 0.22 | $ | 0.69 | $ | 0.50 | $ | 0.73 |
Three Months Ended | |||||||||||||
March 31, 2008 | June 30, 2008 | September 30, 2008 | December 31, 2008(1) | ||||||||||
Net sales | $ | 915,061 | $ | 1,106,449 | $ | 1,073,735 | $ | 597,108 | |||||
Gross profit (loss) | 36,704 | 96,460 | 71,787 | (135,583 | ) | ||||||||
Income from operations | 13,859 | 73,576 | 48,788 | (165,763 | ) | ||||||||
Net income (loss) | 5,387 | 47,273 | 27,364 | (109,567 | ) | ||||||||
Basic and diluted earnings (loss) per common share(2) | $ | 0.08 | $ | 0.72 | $ | 0.42 | $ | (1.68 | ) | ||||
Three Months Ended | |||||||||||||
March 31, 2007 | June 30, 2007 | September 30, 2007 | December 31, 2007(1) | ||||||||||
Net sales | $ | 718,802 | $ | 782,664 | $ | 840,160 | $ | 850,552 | |||||
Gross profit | 57,889 | 84,431 | 86,060 | 43,020 | |||||||||
Income from operations | 32,666 | 62,279 | 59,755 | 20,021 | |||||||||
Net income | 19,672 | 37,890 | 38,341 | 18,826 | |||||||||
Basic and diluted earnings per common share | $ | 0.30 | $ | 0.58 | $ | 0.59 | $ | 0.29 |
(1) |
(2) | Basic and diluted earnings (loss) per common share (“EPS”) for each quarter is computed using the weighted average shares outstanding during that quarter, while EPS for the year is computed using the |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. Controls and Procedures
Item 9A. | Controls and Procedures |
Disclosure, Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our principal executive officer) and our Senior Vice President, Chief Financial Officer and Treasurer (our principal financial officer), of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Form 10-K. In the course of this evaluation, management considered certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. Based upon that evaluation, our President and Chief Executive Officer and our Senior Vice President, Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective as of December 31, 2005 with respect2008 to the recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, ofprovide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20052008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Internal Control Over Financial Reporting
Westlake’s management’s report on internal control over financial reporting appears on page 3945 of this Annual Report on Form 10-K. In addition, PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has also audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005,2008, as stated in their report that appears on page 4046 of this Annual Report on Form 10-K.
Item 9B. | Other Information |
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 10. | Directors, Executive Officers and Corporate Governance. |
Pursuant to Item 401(b) of Regulation S-K, the information required by this item with respect to our executive officers is set forth in Part I of this Form 10-K.
Item 11. Executive Compensation.
Item 11. | Executive Compensation. |
On February 16, 2006,12, 2009, the Compensation Committee of the Board of Directors of Westlake set 20062009 base salaries and bonus targets for certain executive officers of the Company (and determined the amount of 20052008 bonuses payable in 20062009 to such executive officers). Exhibit 10.23 to this Annual Report on Form 10-K, which is incorporated herein by reference, sets forth the 2006 base salary and target bonus amounts (and the 2005 bonuses payable) to such executive officers.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Item 13. Certain Relationships and Related Transactions.
Item 13. | Certain Relationships and Related Transactions, Director Independence. |
Item 14. Principal Accounting Fees and Services.
Item 14. | Principal Accountant Fees and Services. |
The information required by Items 10, 11, 12, 13 and 14 is incorporated by reference to the Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act within 120 days of December 31, 2005.2008.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) The financial statements listed in the Index to Consolidated Financial Statements in Item 8 of this Form 10-K are filed as part of this Form 10-K.
(a)(1) | The financial statements listed in the Index to Consolidated Financial Statements in Item 8 of this Form 10-K are filed as part of this Form 10-K. |
(a)(2) The following schedule is presented as required. All other schedules are omitted because the information is not applicable, not required, or has been furnished in the Consolidated Financial Statements or Notes thereto in Item 8 of this Form 10-K.
(a)(2) | The following schedule is presented as required. All other schedules are omitted because the information is not applicable, not required, or has been furnished in the Consolidated Financial Statements or Notes thereto in Item 8 of this Form 10-K. |
Financial Statement Schedule
VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
Accounts Receivable | Balance at Beginning of Year | Charged to Expense(2) | Additions/ (Deductions)(1) | Balance at End of Year | ||||||||||
2005 | $ | 6,106 | $ | (2,307 | ) | $ | (339 | ) | $ | 3,460 | ||||
2004 | 6,901 | (456 | ) | (339 | ) | 6,106 | ||||||||
2003 | 13,382 | 1,872 | (8,353 | ) | 6,901 |
Accounts Receivable Allowance for Doubtful Accounts | Balance at Beginning of Year | Charged to Expense | Additions/ (Deductions)(1) | Balance at End of Year | |||||||||
2008 | $ | 3,546 | $ | 15,282 | $ | (4,390 | ) | $ | 14,438 | ||||
2007 | $ | 3,287 | $ | 420 | $ | (161 | ) | $ | 3,546 | ||||
2006 | $ | 3,460 | $ | 1,287 | $ | (1,460 | ) | $ | 3,287 |
Inventory Allowance for Inventory Obsolescence | Balance at Beginning of Year | Charged to Expense | Additions/ (Deductions)(2) | Balance at End of Year | |||||||||
2008 | $ | 7,901 | $ | 2,063 | $ | (1,653 | ) | $ | 8,311 | ||||
2007 | $ | 7,940 | $ | 177 | $ | (216 | ) | $ | 7,901 | ||||
2006 | $ | 8,110 | $ | 43 | $ | (213 | ) | $ | 7,940 |
(1) |
(2) |
Inventory Allowance for Inventory Obsolescence | Balance at Beginning of Year | Charged to Expense | Additions/ (Deductions)(1) | Balance at End of Year | |||||||||
2005 | $ | 8,507 | $ | 377 | $ | (774 | ) | $ | 8,110 | ||||
2004 | 8,289 | 886 | (668 | ) | 8,507 | ||||||||
2003 | 8,742 | 1,206 | (1,659 | ) | 8,289 |
Inventory written off during the |
(a)(3) Exhibits
Exhibit | Exhibit | |
2.1 | Acquisition Agreement dated as of October 9, 2006 by and between Westlake Longview Corporation (formerly Westlake NG II Corporation) and Eastman Chemical Company (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on October 12, 2006). | |
Certificate of Incorporation of Westlake as filed with the Delaware Secretary of State on August 6, | ||
Bylaws of | ||
Indenture dated as of | ||
4.2 | First Supplemental Indenture dated as of January 13, 2006 by and among Westlake, the subsidiary guarantors party thereto and JPMorgan Chase Bank, National Association, as Trustee (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on January 13, 2006). | |
4.3 | Form of 6 | |
Second Supplemental Indenture, dated as of |
Form of 6 | ||
Supplemental Indenture, dated as of December 31, 2007, among the Company, WPT LLC, Westlake Polymers LLC, Westlake Petrochemicals LLC, Westlake Styrene LLC, the other subsidiary guarantors party thereto and The Bank of New York Trust Company, N.A. related to the 65/8% senior notes (incorporated by reference to Exhibit 4.6 to Westlake’s Annual Report on Form 10-K for the year ended December 31, 2007). | ||
4.7 | Supplemental Indenture, dated as of December 31, 2007, among the Company, WPT LLC, Westlake Polymers LLC, Westlake Petrochemicals LLC, Westlake Styrene LLC, the other subsidiary guarantors party thereto and The Bank of New York Trust Company, N.A. related to the 6 3/4% senior notes (incorporated by reference to Exhibit 4.7 to Westlake’s Annual Report on Form 10-K for the year ended December 31, 2007). | |
10.1 | Amended and Restated Credit Agreement dated as of | |
Westlake Chemical Corporation, | ||
First amendment to the Revolving Credit Agreement, dated February 5, 2009, by and among Westlake Chemical Corporation, certain of its domestic subsidiaries, Bank of America, N.A. in its capacity as agent for lenders, and lenders party thereto (incorporated by reference to Westlake’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 9, 2009). |
Exhibit No. | Exhibit | |
10.3+ | Westlake Group Performance Unit Plan effective January 1, 1991 (incorporated by reference to Westlake’s Registration Statement on Form S-4, filed on September 22, 2003). | |
10.4+ | EVA Incentive Plan (incorporated by reference to Westlake’s Registration Statement on Form S-4, filed on September 22, 2003). | |
10.5+ | Agreement with Stephen Wallace dated November 5, 2003 (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2003, filed on March 26, 2004). | |
10.6+ | Agreement with Wayne D. Morse effective January 1, 2004 (incorporated by reference to Westlake’s Registration Statement on Form S-1, filed on May 24, 2004). | |
10.7+ | Westlake Chemical Corporation 2004 Omnibus Incentive Plan (incorporated by reference to Westlake’s Registration Statement on Form S-1/A, filed on August 9, 2004). | |
10.8 | Form of Registration Rights Agreement between Westlake and TTWF LP (incorporated by reference to Westlake’s Registration Statement on Form S-1/A, filed on July 2, 2004 ). | |
10.9+ | Form of Employee Nonqualified Option Award Letter Agreement (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.10+ | Form of Employee Nonqualified Option Award (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.11+ | Form of Director Option Award Letter (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.12+ | Form of Director Option Award (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.13+ | Form of Restricted Stock Unit Award (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.15+ | Form of Restricted Stock Award letter granted effective as of August 31, 2005, to Directors (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on September 15, 2005). | |
10.16+ | Form of Restricted Stock Award letter granted effective as of August 31, 2005, to Named Executive | |
Form of Award letter for stock options granted effective as of August 31, 2005, to Named Executive | ||
10.19+ | Form of Award Letter for Stock Options granted effective as of March 15, 2006, to Named Executive Officers (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on March 22, 2006). | |
10.20+ | Form of Award Letter for Stock Options granted effective as of August 21, 2006, to Non-Management Directors (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on August 24, 2006). |
Exhibit No. | Exhibit | |
10.21+ | Form of Restricted Stock Award granted effective as of August 21, 2006, to Non-Management Directors (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on August 24, 2006). | |
10.22+ | Form of Restricted Stock Award Letter for Special February 2007 Awards (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on March 1, 2007). | |
10.23+ | Form of Stock Option Award Letter for Special February 2007 Awards (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on March 1, 2007). | |
10.24 | Loan Agreement, dated as of November 1, 2007, by and between the Company and the Louisiana Local Government Environmental Facilities and Community Development Authority (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on December 18, 2007). | |
21† | Subsidiaries of Westlake. | |
Consent of PricewaterhouseCoopers LLP. | ||
Rule 13a-14(a) / 15d-14(a) Certification (Principal Executive Officer). | ||
Rule 13a-14(a) / 15d-14(a) Certification (Principal Financial Officer). | ||
Section 1350 Certification (Principal Executive Officer and Principal Financial Officer). |
+ | Management contract, compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WESTLAKE CHEMICAL CORPORATION | ||||
Date: February | 19, 2009 | / | ||
Albert Chao, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/ Albert Chao | President and Chief Executive Officer | February | ||
/ M. Steven Bender | Senior Vice President, Chief Financial Officer and Treasurer | February | ||
/ George J. Mangieri | Vice President and | February | ||
/ James Chao | Chairman of the Board of Directors | February | ||
/ Albert Chao | Director | February | ||
/s/ E. W E. William Barnett | Director | February 19, 2009 | ||
/s/ ROBERT T. BLAKELY Robert T. Blakely | Director | February | ||
/ Dorothy C. Jenkins | Director | February | ||
/ Max L. Lukens | Director | February | ||
/s/ H. J
| Director | February |
Exhibit Index
Exhibit | Exhibit | |
2.1 | Acquisition Agreement dated as of October 9, 2006 by and between Westlake Longview Corporation (formerly Westlake NG II Corporation) and Eastman Chemical Company (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on October 12, 2006). | |
Certificate of Incorporation of Westlake as filed with the Delaware Secretary of State on August 6, | ||
Bylaws of | ||
Indenture dated as of | ||
4.2 | First Supplemental Indenture dated as of January 13, 2006 by and among Westlake, the subsidiary guarantors party thereto and JPMorgan Chase Bank, National Association, as Trustee (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on January 13, 2006). | |
4.3 | Form of 6 | |
Second Supplemental Indenture, dated as of | ||
Form of 6 | ||
Supplemental Indenture, dated as of December 31, 2007, among the Company, WPT LLC, Westlake Polymers LLC, Westlake Petrochemicals LLC, Westlake Styrene LLC, the other subsidiary guarantors party thereto and The Bank of New York Trust Company, N.A. related to the 65/8% senior notes (incorporated by reference to Exhibit 4.6 to Westlake’s Annual Report on Form 10-K for the year ended December 31, 2007). | ||
4.7 | Supplemental Indenture, dated as of December 31, 2007, among the Company, WPT LLC, Westlake Polymers LLC, Westlake Petrochemicals LLC, Westlake Styrene LLC, the other subsidiary guarantors party thereto and The Bank of New York Trust Company, N.A. related to the 6 3/4% senior notes (incorporated by reference to Exhibit 4.7 to Westlake’s Annual Report on Form 10-K for the year ended December 31, 2007). | |
10.1 | Amended and Restated Credit Agreement dated as of | |
Westlake Chemical Corporation, | ||
|
| |
First amendment to the Revolving Credit Agreement, dated February 5, 2009, by and among Westlake Chemical Corporation, certain of its domestic subsidiaries, Bank of America, N.A. in its capacity as agent for lenders, and lenders party thereto (incorporated by reference to Westlake’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 9, 2009). |
Exhibit No. | Exhibit | |
10.3+ | Westlake Group Performance Unit Plan effective January 1, 1991 (incorporated by reference to Westlake’s Registration Statement on Form S-4, filed on September 22, 2003). | |
10.4+ | EVA Incentive Plan (incorporated by reference to Westlake’s Registration Statement on Form S-4, filed on September 22, 2003). | |
10.5+ | Agreement with Stephen Wallace dated November 5, 2003 (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2003, filed on March 26, 2004). | |
10.6+ | Agreement with Wayne D. Morse effective January 1, 2004 (incorporated by reference to Westlake’s Registration Statement on Form S-1, filed on May 24, 2004). | |
10.7+ | Westlake Chemical Corporation 2004 Omnibus Incentive Plan (incorporated by reference to Westlake’s Registration Statement on Form S-1/A, filed on August 9, 2004). | |
10.8 | Form of Registration Rights Agreement between Westlake and TTWF LP (incorporated by reference to Westlake’s Registration Statement on Form S-1/A, filed on July 2, 2004 ). | |
10.9+ | Form of Employee Nonqualified Option Award Letter Agreement (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.10+ | Form of Employee Nonqualified Option Award (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.11+ | Form of Director Option Award Letter (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.12+ | Form of Director Option Award (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.13+ | Form of Restricted Stock Unit Award (incorporated by reference to Westlake’s Annual Report on Form 10-K for 2004, filed on March 16, 2005). | |
10.15+ | Form of Restricted Stock Award letter granted effective as of August 31, 2005, to Directors (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on September 15, 2005). | |
10.16+ | Form of Restricted Stock Award letter granted effective as of August 31, 2005, to Named Executive | |
Form of Award letter for stock options granted effective as of August 31, 2005, to Named Executive | ||
10.19+ | Form of Award Letter for Stock Options granted effective as of March 15, 2006, to Named Executive Officers (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on March 22, 2006). | |
10.20+ | Form of Award Letter for Stock Options granted effective as of August 21, 2006, to Non-Management Directors (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on August 24, 2006). |
Exhibit No. | Exhibit | |
10.21+ | Form of Restricted Stock Award granted effective as of August 21, 2006, to Non-Management Directors (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on August 24, 2006). | |
10.22+ | Form of Restricted Stock Award Letter for Special February 2007 Awards (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on March 1, 2007). | |
10.23+ | Form of Stock Option Award Letter for Special February 2007 Awards (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on March 1, 2007). | |
10.24 | Loan Agreement, dated as of November 1, 2007, by and between the Company and the Louisiana Local Government Environmental Facilities and Community Development Authority (incorporated by reference to Westlake’s Current Report on Form 8-K, filed on December 18, 2007). | |
21† | Subsidiaries of Westlake. | |
Consent of PricewaterhouseCoopers LLP. | ||
Rule 13a-14(a) / 15d-14(a) Certification (Principal Executive Officer). | ||
Rule 13a-14(a) / 15d-14(a) Certification (Principal Financial Officer). | ||
Section 1350 Certification (Principal Executive Officer and Principal Financial Officer). |
+ | Management contract, compensatory plan or arrangement. |
9092