UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
For the quarterly period ended June 30, 2005
or
For the Transition Period from to
Commission File No. 001-32260
Westlake Chemical Corporation
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2801 Post Oak Boulevard, Suite 600
Houston, Texas 77056
(Address of principal executive offices, including zip code)
(713) 960-9111
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes ¨ No x
The number of shares outstanding of the registrant’s sole class of common stock, as of August 5, 2005, was 64,995,129.
INDEX
Item
PART I. FINANCIAL INFORMATION
1) Financial Statements
2) Management’s Discussion and Analysis of Financial Condition and Results of Operations
3) Quantitative and Qualitative Disclosures about Market Risk
4) Controls and Procedures
PART II. OTHER INFORMATION
1) Legal Proceedings
4) Submission of Matters to a Vote of Security Holders
6) Exhibits
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Item 1. Financial Statements
WESTLAKE CHEMICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30,
2005
December 31,
2004
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property, plant and equipment, net
Equity investment
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Accrued liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt
Other liabilities
Total liabilities
Commitments and Contingencies (Notes 10 and 13)
Stockholders’ equity
Preferred stock, nonvoting, noncumulative, $0.01 par value, 50,000,000 shares authorized
Common stock, $0.01 par value, 150,000,000 shares authorized; 64,995,129 and 64,896,489 shares issued and outstanding in 2005 and 2004, respectively
Additional paid-in capital
Retained earnings
Minimum pension liability, net of tax
Cumulative translation adjustment
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Impairment of long-lived assets
Income from operations
Interest expense
Debt retirement cost
Other expense, net
Income before income taxes
Provision for income taxes
Net income
Earnings per common share
Basic
Diluted
Weighted average shares outstanding:
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Recovery of bad debts
Amortization of debt issue costs
Loss (gain) from disposition of fixed assets
Deferred tax expense
Equity loss (income) of unconsolidated subsidiary
Write off of debt retirement costs
Changes in operating assets and liabilities
Accounts receivable
Inventories
Other, net
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities
Additions to property, plant and equipment
Proceeds from disposition of assets
Net cash used for investing activities
Cash flows from financing activities
Dividends paid
Repayments of borrowings
Net cash used for financing activities
Net increase in cash
Cash balance at the beginning of the period
Cash balance at the end of the period
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands of dollars, except per share data)
1. Basis of Financial Statements
The accompanying unaudited consolidated interim financial statements were prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. Certain information and footnotes required for complete financial statements under generally accepted accounting principles in the United States have not been included pursuant to such rules and regulations. These interim consolidated financial statements should be read in conjunction with the December 31, 2004 financial statements and notes thereto of Westlake Chemical Corporation (the Company) included in the annual report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 16, 2005. These financial statements have been prepared in conformity with the accounting principles and practices as disclosed in the notes to the consolidated financial statements of the Company for the fiscal year ended December 31, 2004.
In the opinion of the Company’s management, the accompanying unaudited interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial position as of June 30, 2005, the results of operations for the three months and six months ended June 30, 2005 and 2004 and the changes in its cash position for the six months ended June 30, 2005 and 2004.
Results of operations and changes in cash position for the interim periods presented are not necessarily indicative of the results that will be realized for the year ending December 31, 2005 or any other interim period. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
2. Accounts Receivable
Accounts receivable consist of the following:
Accounts receivable — trade
Accounts receivable — affiliates
Allowance for doubtful accounts
Taxes receivable
Accounts receivable — other
3. Inventories
Inventories consist of the following:
Finished product
Feedstock, additives and chemicals
Materials and supplies
Allowance for inventory obsolescence
Net inventory
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4. Property, Plant and Equipment
Depreciation expense on property, plant and equipment of $17,720 and $17,594 is included in cost of sales in the consolidated statement of operations for the three months ended June 30, 2005 and 2004, respectively, and $35,894 and $35,077 for the six months ended June 30, 2005 and 2004, respectively. During the second quarter of 2004, the Company recognized a $1,314 impairment charge in the Vinyls segment related to a PVC plant that was not in service and was written down to its estimated sales value less commissions, as determined by third party valuation.
5. Other Assets
Amortization expense on other assets of $3,096 and $3,801 is included in the consolidated statement of operations for the three months ended June 30, 2005 and 2004, respectively, and $6,393 and $7,767 for the six months ended June 30, 2005 and 2004, respectively.
6. Derivative Commodity Instruments
The Company uses derivative instruments 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 and 2004, due to the short-term nature of the commitments and associated derivative instruments, the Company did not designate any of its derivative instruments as hedges under the provisions of SFAS 133. As such, gains and losses from changes in the fair value of the derivative instruments used in 2005 and 2004 were included in earnings.
The Company had a net loss of $1,947 in connection with commodity derivatives for the six months ended June 30, 2005 compared to a net loss of $3,085 for the six months ended June 30, 2004. Derivative losses recorded in the second quarter totaled $2,222 and $1,921, respectively, for 2005 and 2004. Risk management asset balances of $-0- and $825 were included in “Prepaid expenses and other current assets,” and risk management liability balances of $1,941 and $3,765 were included in “Accrued liabilities” in the Company’s balance sheets as of June 30, 2005 and December 31, 2004, respectively.
7. Earnings per Share
There are no adjustments to “Net income” for the diluted earnings per share computations.
The following table reconciles the denominator for the basic and diluted earnings per share computations shown in the consolidated statements of operations:
Weighted average common shares—basic
Plus incremental shares from assumed conversions:
Options
Restricted stock units
Weighted average common shares—diluted
8. Stock Based Compensation
The Company’s 2004 Omnibus Incentive Plan (the Plan) authorizes the Board of Directors to make stock option awards to executives and other key employees. The Plan also provides for the granting of stock awards, restricted stock and stock units to employees and directors that consist of grants of common stock or units denominated in common stock. The Company granted 156,800 restricted stock units, valued at $14.50 per unit, in the third quarter of 2004 to employees. These 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 was the market price on the date of grant ($14.50). The 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.
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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 Company’s stock option 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:
Risk-free interest rate
Expected life in years
Expected volatility
Expected dividend yield
Using the above assumptions, additional compensation expense for stock option grants under the fair value method prescribed by SFAS No. 123 would be:
Three Months Ended
June 30, 2005
Compensation expense
Total, net of taxes
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:
Six Months Ended
As reported
Pro forma compensation expense, net of taxes
Pro forma
Basic and diluted earnings per share
As reported:
Pro forma:
In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual period after June 15, 2005. The Company will adopt SFAS No. 123R in the first quarter of 2006 and does not expect the impact to be significant.
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9. Pension and Post Retirement Benefits
Components of Net Periodic Costs are as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of prior service cost
Amortization of net loss
Net periodic benefit cost
The Company contributed $0 and $390 to the Salaried and Wage pension plans during the quarters ended June 30, 2005 and 2004, respectively, and $6,074 and $780 to the Salaried and Wage pension plans for the six months ended June 30, 2005 and 2004, respectively. The Company is not scheduled to contribute any additional funds to the pension plans during the fiscal year ending December 31, 2005.
10. Commitments and Contingencies
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.
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 the disposal or release of chemical substances at various sites. Under some of these laws and regulations, a current or previous owner or operator of property may be held liable for the costs of removal or remediation of hazardous substances on, under, or in its property, without regard to whether the owner or operator knew of, or caused the presence of the contaminants, and regardless of 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 regulations 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 to 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 Litigation with Goodrich and PolyOne. In connection with the 1990 and 1997 acquisitions of the Goodrich Corporation chemical manufacturing complex in Calvert City, Goodrich agreed to indemnify the Company for any liabilities related to preexisting contamination at the site. In addition, the Company agreed to indemnify Goodrich for contamination attributable to the ownership, use or operation of the plant after the closing dates. The soil and groundwater at the manufacturing complex, which does not include the Company’s polyvinyl chloride facility in Calvert City, had been extensively contaminated by Goodrich’s operations. In 1993, the Geon Corporation was spun off from Goodrich, and Geon assumed the responsibility to operate the site-wide remediation system and the indemnification obligations for any liabilities arising from 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 or PolyOne, is listed on 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.
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Given the scope and extent of the underlying contamination at the Company’s manufacturing complex, the remediation will likely take a number of years. The costs incurred to treat contaminated groundwater collected from beneath the site were $2,836 in 2004, and the Company expects this level of expenditures to continue for the life of the remediation. For the past several years, PolyOne has suggested that the Company’s actions after its acquisition of the complex have contributed to or otherwise exacerbated the contamination at the site. The Company denied those allegations and has retained technical experts to evaluate its position. Goodrich has also asserted claims similar to those of PolyOne. In addition, Goodrich has asserted that the Company is responsible for a portion of the ongoing costs of treating contaminated groundwater being pumped from beneath the site and, since May 2003, has withheld payment of 45% of the costs that the Company incurs to operate Goodrich’s pollution control equipment located on the property.
In October 2003, the Company filed suit against Goodrich in the United States District Court for the Western District of Kentucky for unpaid invoices related to the groundwater treatment, which totaled approximately $2,606 as of June 30, 2005. 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 third-party claims against the Company in which it alleged that both Goodrich and the Company had conspired to defraud PolyOne. On June 8, 2004, the Company filed a motion for summary judgment on its contract claim against Goodrich. On June 16, 2004, the Company filed a motion to dismiss PolyOne’s claim. Discovery in the case commenced on July 15, 2004. By order dated February 24, 2005, the court extended the procedural schedule, with the trial date set for June 2006. By order dated March 9, 2005, the court granted the Company’s motion to dismiss both of PolyOne’s cross-claims against the Company. On March 29, 2005, the court granted the Company’s motion for summary judgment on the Company’s claims 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 was reflected in the consolidated statement of operations for the three months ended June 30, 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 legal arguments, including Goodrich’s 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 will continue with respect to Goodrich’s counterclaims against the Company, Goodrich’s third-party claims against PolyOne and PolyOne’s counterclaims against Goodrich.
Administrative Proceedings and Related Litigation. In addition, there are several administrative proceedings in Kentucky involving Goodrich and PolyOne. On September 23, 2003, the Kentucky State 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 filed 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 seeking to shift Goodrich’s cleanup responsibilities under Goodrich’s RCRA 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. The Company filed a motion on December 14, 2004 to intervene in that proceeding (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.
On January 24, 2005, Goodrich filed a challenge (Goodrich II) to the Kentucky State Cabinet’s determination which rejected a Goodrich proposal to perform a particular soil remediation procedure. The Company has moved to intervene in PolyOne II and Goodrich II.
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. Discovery in Goodrich I and PolyOne I is just beginning.
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.
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On March 22, 2005, PolyOne filed a 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.
In January 2004, the Kentucky State Cabinet notified the Company by letter that, due to its ownership of a closed landfill (known as Pond 4) at the manufacturing complex, the Company would be required to submit a post-closure permit application under RCRA. This could require the Company to bear the responsibility and cost of performing remediation work on the pond and solid waste management units and areas of concern located on property adjacent to the pond that is owned by the Company. The Company acquired Pond 4 from Goodrich in 1997 as part of the acquisition of other facilities. Under the contract, the Company has the right to reconvey title to Pond 4 back to Goodrich, which the Company has done. On March 21, 2005, the Company filed suit against Goodrich in the United States District Court for the Western District of Kentucky to require Goodrich to accept the reconveyance. On May 20, 2005, Goodrich filed a motion to dismiss portions of the Company’s complaint. On June 6, 2005, Goodrich filed a third-party complaint against PolyOne, seeking to hold PolyOne responsible for any of Goodrich’s Pond 4 liabilities to the Company. 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.
The Company has also filed an appeal with 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, 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 permit. The proposal to conduct the CCED has been rejected by the Kentucky State Cabinet. By letter dated, December 21, 2004, the Kentucky 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 granted 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.
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 believes that erroneous factual or legal conclusions, or both, may have been drawn by the NEIC. The Company has 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 not yet received a written report from the agencies regarding the actions that they propose to take in response to that visit. The EPA has submitted to the Company an information request under Section 114 of the Clean Air Act and has 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 Company met with the EPA on June 8 and 9, 2004 and is continuing to have settlement discussions with the agency. The EPA has also issued to the Company information requests under Section 3007 of RCRA and Section 114 of the Clean Air Act regarding the PVC plant inspection. It is likely that monetary penalties will be imposed, that capital expenditures for installation of environmental controls will be required, or that other relief will be sought, or all or some combination of the preceding, by either the EPA or the Kentucky State Cabinet as a result of the environmental investigations in Calvert City. In such case, 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.” 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. However, the Company has
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recorded an accrual for a probable loss related to monetary penalties. 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 for a particular reporting period.
Legal Matters
In October 2003, the Company 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 the Company has supplied and the Company supplies to CITGO hydrogen that the Company generates as a co-product in its ethylene plants in Lake Charles. In December 2003, CITGO responded with an answer and a counterclaim against the Company, asserting that CITGO had overpaid the Company for hydrogen due to the Company’s allegedly faulty sales meter and that the Company is obligated to reimburse CITGO 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 motion 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 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 high-level executive discussions regarding a settlement. The Company can offer no assurance that a settlement can be achieved, and if no settlement is achieved, the Company intends to vigorously pursue its claim against CITGO and its defense of CITGO’s counterclaim.
In addition to the matters described above, 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.
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11. 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.
Net sales to external customers
Olefins
Polyethylene
Ethylene, styrene and other
Total olefins
Vinyls
Fabricated finished goods
VCM, PVC and other
Total vinyls
Intersegment sales
Income (loss) from operations
Corporate and other
Other income (expense), net
Capital expenditures
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A reconciliation of total segment income from operations to consolidated income before taxes is as follows:
Income (loss) before taxes
Total Assets
12. Comprehensive Income Information
Other comprehensive income (loss):
Change in foreign currency translation
Comprehensive income
13. Long-Term Debt
Long-term indebtedness consists of the following:
8 3/4% Senior notes due 2011
Term loan
Loan related to tax-exempt revenue bonds
Total debt
Less current portion
In the six months ended June 30, 2005, the Company repaid $30,600 of its senior term loan and incurred an additional $646 of non-operating expense related to the write off of previously capitalized debt issuance costs.
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14. Guarantor Disclosures
The Company’s payment obligations under its 8 3/4% senior notes are fully and unconditionally guaranteed by each of its current and future restricted subsidiaries (the “Guarantor Subsidiaries”). Each Guarantor Subsidiary is 100% owned by the parent company. These guarantees are the joint and several obligations of the Guarantor Subsidiaries. The following unaudited condensed consolidating financial information presents the financial condition, results of operations and cash flows of Westlake Chemical Corporation, the Guarantor Subsidiaries and the remaining subsidiaries that do not guarantee the notes (the “Non-Guarantor Subsidiaries”), together with consolidating adjustments necessary to present the Company’s results on a consolidated basis.
Condensed Consolidating Financial Information as of June 30, 2005
Westlake
Chemical
Corporation
Guarantor
Subsidiaries
Non-Guarantor
Balance Sheet
Current assets Cash and cash equivalents
Current liabilities Accounts payable
Note payable inter-company
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Condensed Consolidating Financial Information as of December 31, 2004
Condensed Consolidating Financial Information for the Three Months Ended June 30, 2005
Statement of Operations
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
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Condensed Consolidating Financial Information for the Three Months Ended June 30, 2004
Condensed Consolidating Financial Information for the Six Months Ended June 30, 2005
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Condensed Consolidating Financial Information for the Six Months Ended June 30, 2004
18
Statement of Cash Flows
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Gain from disposition of fixed assets
Equity loss of unconsolidated subsidiary
Net changes in working capital and other
Net cash provided by (used for) operating activities
Other
Intercompany financing
Cash balance at beginning of period
Cash balance at end of period
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Equity income of unconsolidated subsidiary
Net cash provided by (used for) investing activities
Net increase (decrease) in cash
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis should be read in conjunction with information contained in the accompanying unaudited consolidated interim financial statements of Westlake Chemical Corporation and the notes thereto and the December 31, 2004 financial statements and notes thereto of Westlake Chemical Corporation included in Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The following discussion contains forward-looking statements. Please read “Forward-Looking Statements” for a discussion of limitations inherent in such statements.
Westlake Chemical Corporation is a vertically integrated manufacturer and marketer of petrochemicals, polymers and fabricated products. Our two principal business segments are Olefins and Vinyls. We use the majority of our internally-produced basic chemicals to produce higher value-added chemicals and fabricated products.
RECENT DEVELOPMENTS
Geismar Start-Up
We are continuing the start-up of our facilities in Geismar, Louisiana. We acquired the EDC, VCM and PVC plants at Geismar in December 2002 and have been operating the EDC plant since November 2003. The VCM and PVC plants each have an estimated rated capacity of 600 million pounds per year. The PVC plant is comprised of two trains. The PVC and VCM start-up, which commenced in December 2004, is scheduled to be completed in the third quarter of 2005. The majority of the initial production of the PVC plant is being consumed internally primarily as a result of the August 2004 acquisition of three PVC pipe plants from Bristolpipe Corporation. In addition, we have invested in technological modifications in the EDC plant at Geismar. These technological modifications are expected to expand total EDC capacity by an estimated 25%. The cost of capital expenditures and pre-operating expenses in connection with the start-up was approximately $17.8 million in 2004 and is expected to be approximately $15.7 million in 2005.
RESULTS OF OPERATIONS
Second Quarter 2005 Compared with Second Quarter 2004
Net Sales. Net sales increased by $131.3 million, or 29.2%, to $580.7 million in the second quarter of 2005 from $449.4 million in the second quarter of 2004. This increase was primarily due to price increases throughout our Olefins and Vinyls segments and higher sales volumes in styrene, VCM, caustic, PVC resin and PVC pipe. 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 higher due to strong-end markets and the acquisition of the assets of Bristolpipe Corporation, which was completed on August 2, 2004.
Gross Margin. Gross margins decreased to 17.1% in the second quarter of 2005 from 18.1% in the second quarter of 2004. This decrease was primarily due to higher raw material costs for ethane, propane and benzene, higher energy costs and lower sales volumes for ethylene and polyethylene. Our raw material cost in both segments normally track industry prices, which experienced an increase of 15.5% for ethane, 26.2% for propane and 26.8% for benzene as compared to the second quarter of 2004. This increase in raw material cost was partially offset by higher selling prices throughout our Olefins and Vinyls segments and higher sales volumes for styrene, VCM, caustic, PVC resin and PVC pipe.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2.4 million, or 16.9%, in the second quarter of 2005 as compared to the second quarter of 2004. The increase was primarily due to costs related to compliance with the Sarbanes-Oxley Act, higher compensation expenses, and increased costs resulting from the Bristolpipe acquisition, which were partially offset by a decrease in the provision for doubtful accounts related to the Goodrich agreement.
Interest Expense. Interest expense in the second quarter of 2005 decreased by $5.5 million to $5.9 million from $11.4 million in the second quarter of 2004 due to lower average debt balances, which were partially offset by slightly higher average interest rates. The average quarterly debt balance decreased by $269.2 million to $267.7 million as of June 30, 2005 from $536.9 million as of June 30, 2004.
Other Expense, Net. Other expense of $1.3 million was essentially unchanged from the second quarter of 2004 to the second quarter of 2005. Higher interest income of $1.1 million was offset by higher derivative losses of $0.3 million, lower management fees of $0.2 million and lower income from unconsolidated subsidiaries of $0.4 million.
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Income Taxes. The effective income tax rate was 35.8% in the second quarter of 2005 as compared to 35.4% in the second quarter of 2004. The second quarter of 2005 rate is higher than the statutory rate primarily due to state income taxes and reflects a tax benefit of approximately 1% related to the new domestic manufacturing deduction.
Olefins Segment
Net Sales. Net sales increased by $46.2 million, or 17.0%, to $317.4 million in the second quarter of 2005 from $271.2 million in the second quarter of 2004. This increase was primarily due to price increases for ethylene, polyethylene and styrene and higher sales volumes for styrene, partially offset by reduced ethylene and polyethylene sales volumes. Average selling prices for the Olefins segment increased by 24.5% in the second quarter of 2005 as compared to the second quarter of 2004. These increased prices and sales volumes were mainly due to higher industry demand. Selling prices were also higher due to higher raw material costs that were largely passed through to customers.
Income from Operations. Income from operations decreased by $6.5 million to $32.0 million in the second quarter of 2005 from $38.5 million in the second quarter of 2004. This decrease was primarily due to higher raw material costs for ethane, propane and benzene, higher energy costs and lower sales volumes for ethylene and polyethylene. This was partially offset by higher selling prices for ethylene, polyethylene and styrene and higher styrene sales volume.
Vinyls Segment
Net Sales. Net sales increased by $85.1 million, or 47.8%, to $263.3 million in the second quarter of 2005 from $178.2 million in the second quarter of 2004. This increase was primarily due to higher selling prices for all of our vinyls products and higher sales volumes for caustic, VCM, PVC resin and PVC pipe. Average selling prices for the Vinyls segment increased by 19.7% in the second quarter of 2005 as compared to the second quarter of 2004. These increases were largely due to stronger industry demand for our products. PVC pipe sales volume increased due to strong-end markets and the August 2004 acquisition of the assets of Bristolpipe Corporation.
Income from Operations. Income from operations increased by $22.9 million, or 81.7%, to $51.0 million in the second quarter of 2005 from $28.1 million in the second quarter of 2004. This increase was primarily due to higher selling prices and volumes for all of our vinyls products. These increases were partially offset by higher energy costs and higher raw material costs.
Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004
Net Sales. Net sales increased by $349.0 million, or 41.0%, to $1,199.3 million in the first six months of 2005 from $850.3 million in the first six months of 2004. This increase was primarily due to price increases throughout our Olefins and Vinyls segments and higher sales volumes in styrene, VCM, caustic, PVC resin and PVC pipe. These increases were partially offset by slightly lower sales volumes for ethylene and polyethylene. 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 higher due to the August 2004 acquisition of the assets of Bristolpipe Corporation.
Gross Margin. Gross margins increased to 18.3% in the first six months of 2005 from 14.2% in the first six months of 2004. This increase was primarily due to higher selling prices throughout our Olefins and Vinyls segments and higher sales volumes for styrene, VCM, caustic, PVC resin and PVC pipe. These increases were partially offset by slightly lower sales volumes for ethylene and polyethylene and higher raw material costs for ethane, propane and benzene. Our raw materials cost in both segments normally track industry prices, which experienced an increase of 18.4% for ethane, 22.9% for propane and 44.5% for benzene as compared to the first six months of 2004.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $8.6 million, or 32.8%, in the first six months of 2005 as compared to the first six months of 2004. The increase was primarily due to costs related to compliance with the Sarbanes-Oxley Act, higher compensation expenses, increased sales commissions and increased costs resulting from the Bristolpipe acquisition, partially offset by lower provision for doubtful accounts relating to the Goodrich agreement. The first six months of 2005 costs also increased as compared to the first six months of 2004 due to the receipt of $1.5 million in the first quarter of 2004 resulting from a legal settlement with a customer.
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Interest Expense. Interest expense in the first six months of 2005 decreased by $10.1 million to $12.0 million from $22.1 million in the first six months of 2004 due to lower average debt balances, which were partially offset by slightly higher average interest rates. The average monthly debt balance decreased by $260.8 million to $276.2 million as of June 30, 2005 from $537.0 million as of June 30, 2004.
Debt Retirement Cost. We recognized $0.6 million in non-operating expense in the first six months of 2005 resulting from a write-off in previously capitalized debt issuance cost in connection with the repayment of $30.0 million of our term loan.
Other Expense, Net. Other expense, net decreased by $0.8 million from an expense of $1.4 million in the first six months of 2004 to an expense of $0.6 million in the first six months of 2005. The decrease was primarily due to an increase in interest income of $1.2 million and lower derivative losses of $1.1 million which were partially offset by lower income from unconsolidated subsidiaries of $1.0 million and lower management fees of $0.4 million.
Income Taxes. The effective income tax rate was 36.0% in the first six months of 2005 as compared to 35.0% in the first six months of 2004. The first six months of 2005 rate is higher than the statutory rate primarily due to state income taxes and reflects a tax benefit of approximately 1% related to the new domestic manufacturing deduction.
Net Sales. Net sales increased by $163.0 million, or 30.7%, to $694.1 million in the first six months of 2005 from $531.1 million in the first six months of 2004. This increase was primarily due to price increases for ethylene, polyethylene and styrene and higher sales volumes for styrene. These increases were partially offset by slightly lower sales volumes for ethylene and polyethylene. Average selling prices for the Olefins segment increased by 21.6% in the first six months of 2005 as compared to the first six months of 2004. These increased prices and sales volumes were mainly due to higher industry demand. Selling prices were also higher due to higher raw material costs that were largely passed through to customers.
Income from Operations. Income from operations increased by $24.9 million to $94.4 million in the first six months of 2005 from $69.5 million in the first six months of 2004. This increase was primarily due to price increases for ethylene, polyethylene and styrene and higher sales volumes for styrene. These increases were partially offset by lower sales volumes for ethylene and polyethylene, higher raw material costs for ethane, propane and benzene and higher energy costs.
Net Sales. Net sales increased by $186.0 million, or 58.3%, to $505.2 million in the first six months of 2005 from $319.2 million in the first six months of 2004. This increase was primarily due to higher selling prices and volumes for all of our vinyls products. Average selling prices for the Vinyls segment increased by 32.3% in the first six months of 2005 as compared to the first months of 2004. 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 volume increased due to the August 2004 acquisition of the assets of Bristolpipe Corporation.
Income from Operations. Income from operations increased by $67.8 million to $92.6 million in the first six months of 2005 from $24.8 million in the first six months of 2004. This increase was primarily due to higher selling prices and volumes for all of our vinyls products. These increases were partially offset by higher energy costs and higher raw material costs. The first six months of 2004 earnings were adversely impacted by a fire at the Calvert City ethylene plant. We estimate that the impact on operating income from the outage relating to the fire was approximately $8.4 million.
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CASH FLOW DISCUSSION FOR SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Cash Flows
Operating Activities
Operating activities provided cash of $143.7 million in the first six months of 2005 compared to $39.0 million in the same period in 2004. The $104.7 million increase in cash flows from operating activities was primarily due to improvements in income from operations, as described above, and favorable changes in working capital. Income from operations increased by $91.6 million in the first six months of 2005 as compared to the first six months of 2004. 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 $ 22.4 million in the first six months of 2005, compared to $71.4 million of cash used in the first six months of 2004, a decrease in cash use of $49.0 million. In the first six months of 2005, accounts receivable increased by $20.3 million largely due to higher selling prices and sales volumes while inventory decreased by $11.6 million. Accounts payable and accrued liabilities decreased by $13.8 million during the first six months of 2005. The primary reason for the $71.4 million use of cash in the first six months of 2004 related to working capital components was a $52.2 million increase in inventories and a $19.4 million increase in accounts receivable. This was partially offset by an increase of accounts payable and accrued liabilities of $4.1 million. The increase in inventories was primarily due to higher production and higher feedstock and energy prices. The increase in accounts receivable was primarily due to higher selling prices and volumes.
Investing Activities
Net cash used in investing activities was $44.1 million in the first six months of 2005 as compared to $18.4 million in the first six months of 2004. Capital expenditures in the first six months of 2005 and 2004 were $44.1 million and $19.4 million, respectively. The increase in capital expenditures was primarily due to the start-up of the VCM and PVC portions of our facilities in Geismar, Louisiana and investing in technological modifications in the EDC plant at Geismar, with the remaining capital expenditures relating to maintenance, safety and environmental projects. Capital spending during the first six months of 2004 was primarily related to maintenance, safety and environmental projects and was partially offset by $1.0 million of proceeds from the disposition of assets.
Financing Activities
Net cash used by financing activities during the first six months of 2005 was $33.4 million. During the first six months of 2005 we used $30.6 million to repay debt and $2.8 million to pay dividends. In the first six months of 2004, net cash used by financing activities was $0.6 million, which was used to repay debt.
Liquidity and Capital Resources
Liquidity and Financing Arrangements
Our principal sources of liquidity are from cash and cash equivalents, cash from operations, short-term borrowings under our revolving credit facility and our long-term financing.
Cash
Cash balances were $109.7 million at June 30, 2005 compared to $43.4 million at December 31, 2004. We believe the June 30, 2005 cash levels are adequate to fund our short-term cash requirements.
Debt
Our present debt structure is used to fund our business operations, and our revolving credit facility is a source of liquidity. At June 30, 2005, our long-term debt, including current maturities, totaled $267.5 million, consisting of $247.0 million principal amount of 8 3/4% senior notes due 2011, a $9.6 million senior secured term loan due in 2010 and a $10.9 million loan from the proceeds of tax-exempt revenue bonds (supported by a $11.3 million letter of credit). Debt outstanding under the term loan and the tax-exempt bonds bore interest at variable rates. In the first six months of 2005, we recognized $0.6 million in non-operating expense resulting from the write off in previously capitalized debt issuance costs in connection with the repayment of $30.0 million of our term loan.
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On August 16, 2004 we completed our initial public offering (“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 payment 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 repayment premium on the notes of $11.6 million and a write-off of $3.1 million in previously capitalized debt issuance cost.
On July 31, 2003, we completed a refinancing of substantially all of our outstanding long-term debt. As a result of the refinancing, we recognized $11.3 million in non-operating expense in the first quarter of 2004 consisting of the $4.0 million make-whole premium and a write off of $7.3 million in previously capitalized debt issuance expenses.
The refinancing consisted of:
We incurred approximately $14.1 million in costs associated with the refinancing that were capitalized and that will be amortized over the term of the new debt.
The 8 3/4% senior notes are unsecured. There is no sinking fund and no scheduled amortization of the notes prior to maturity. The notes are subject to redemption and holders may require us to repurchase the notes upon a change of control. All restricted subsidiaries are guarantors of the senior notes.
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 are 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 are 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 is collateralized by our Lake Charles and Calvert City facilities and some related intangible assets. Effective 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 now bears 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.
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 facility is also subject to a termination fee if terminated during the first two years. The revolving credit agreement was amended February 24, 2004, June 22, 2004 and November 30, 2004 to, among other things, lower the applicable interest rate by 0.5% on 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. The revolving credit facility matures in 2008. We had standby letters of credit outstanding at June 30, 2005 of $14.4 million. We had $185.6 million of available borrowing capacity at June 30, 2005 under this facility.
The agreements governing the 8 3/4% senior notes, the term loan, 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, limit incurrence of additional indebtedness, payment of dividends, significant investments and sales of assets. These limitations are subject to a number of important qualifications and exceptions. The 8¾ senior notes indenture and the term loan do not allow distributions unless, after giving pro forma effect to the distribution, our fixed charge coverage ratio is at least 2.0 and such distribution, together with the aggregate amount of all other restricted payments since July 31, 2003 is less than the sum of 50% of our consolidated net income for the period from the fourth quarter of 2003 to the end of the most recent quarter for which financial statements have been delivered (the percentage will be increased to 100% if and for so long as the 8¾% senior notes are rated investment grade), plus 100% of net cash proceeds received after July 31, 2003 as a contribution to our common equity capital or
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from the issuance or sale of equity securities, plus $25 million. The amount under this restriction was $321.5 million at June 30, 2005. Our revolving credit facility also restricts dividend payments unless, after giving effect to such payment, the availability equals or exceeds $100 million. None of the credit agreements require us to generally maintain specified financial ratios, except that our revolving credit facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 when availability falls below $50 million for three consecutive business days, or below $35 million at any time.
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 liquidity needs for the foreseeable future.
OUTLOOK
We saw continued strength in our Vinyls segment during the second quarter. However, we did see price and margin erosion in the Olefins segment in that quarter, which we believe was largely due to global inventory corrections. We have already begun to see some signs of improvement in Olefins late in the second quarter. Short term results, however, remain vulnerable to raw material and energy price spikes, quarterly inventory adjustments, global economic swings, political tensions and regional weather conditions. Industry conditions lead us to believe an improving supply/demand balance that began in 2003 will continue in the near term.
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 report are forward-looking statements. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These include such matters as:
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. These statements are subject to a number of assumptions, risks and uncertainties, including those described in “Risk Factors” in Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and the following:
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Many of these 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.
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Item 3. 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 June 30, 2005, a hypothetical $1.00 increase in the price of a MMBTU of natural gas would have decreased our income before taxes by $3.9 million and a hypothetical $1.00 increase in the price of a gallon of crude oil would have decreased our income before taxes by $0.2 million. Additional information concerning derivative commodity instruments appears in the consolidated financial information appearing elsewhere in this report.
Interest Rate Risk
We are exposed to interest rate risk with respect to fixed and variable rate debt. At June 30, 2005, we had variable rate debt of $20.5 million outstanding. All of the debt under our credit facility, tax exempt revenue bonds, and term loan is at variable rates. 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 variable rate debt of $20.5 million as of June 30, 2005 was 3.98%. A hypothetical 100 basis point increase in the average interest rate on our variable rate debt would increase our annual interest expense by approximately $0.2 million. Also, at June 30, 2005, we had $247.0 million of fixed rate debt. As a result, 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 million.
Item 4. 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 and our Senior Vice President and Chief 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 report. 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 and Chief Financial Officer concluded that our disclosure controls and procedures are effective with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act.
There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Beginning with the year ending December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management with our Annual Report on Form 10-K. The internal control report must contain (1) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for our company, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal control over financial reporting is effective, and (4) a statement that our registered independent public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting. In order to achieve compliance with Section 404 within the prescribed period, management has formed an internal control steering committee, engaged outside consultants and adopted a detailed project work plan to assess the adequacy of our internal control over financial reporting, remediate any control weaknesses that may be identified, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. As a result of this initiative, we may make changes in our internal control over financial reporting from time to time during the period prior to December 31, 2005.
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Item 1. Legal Proceedings
Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 16, 2005, contained a description of various legal proceedings in which we are involved, including environmental proceedings at our facilities in Calvert City, Kentucky. See Note 10 to Consolidated Financial Statements for an update of certain of those proceedings, which information is incorporated by reference herein.
Item 4. Submission of Matters to a Vote of Security Holders
The Company’s 2005 annual meeting of stockholders was held on May 19, 2005. Two matters were voted upon by the Company’s stockholders at such meeting: (1) three members of the board of directors were re-elected and (2) the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2005 was ratified. The following tabulation sets forth the number of votes cast for, against or withheld and the number of broker non-votes.
Election of Directors
Votes For
Votes Withheld
Ruth I. Dreessen
Dorothy C. Jenkins
Max L. Lukens
Ratification of
PricewaterhouseCoopers LLP
Votes Against
Votes to Abstain
Broker Non-Votes
Item 6. Exhibits
Exhibit
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SIGNATURES
Pursuant to the requirements 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.
Date: August 5, 2005
By:
/s/ Albert Chao
Albert Chao
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ruth I. Dreessen
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
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