Westlake generates $109.5 mn in cash flow from operating activities
Westlake Chemical Corporation reported a net loss of $109.6 million, or $1.68 per diluted share, on sales of $597.1 million for the fourth quarter of 2008. This compares to fourth quarter of 2007 net income of $18.8 million, or $0.29 per diluted share, on sales of $850.6 million.
The fourth quarter of 2008 gross profit was negatively impacted by approximately $168.0 million (pre-tax) due to inventory losses and the expensing of unabsorbed fixed manufacturing costs related to a drop in operating rates. The global recession caused reduced demand, which in turn caused average industry prices for ethane and propane to fall over 50% in the fourth quarter of 2008, contributing to a fall in polyethylene and PVC resin prices by approximately 40% and 30%, respectively.
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 of 2008, Westlake had high feedstock costs flowing through cost of sales in the fourth quarter of 2008, while the product sales prices were based on lower market sales prices due to the weakened demand for the products.
This resulted in the significant inventory losses, inclusive of transportation and other distribution costs, in the fourth quarter. The fourth quarter of 2008 selling, general and administrative expenses were higher than the prior year period, primarily due to a $8.9 million increase in the allowance for doubtful accounts, which was directly related to the current economic conditions.
The $109.6 million loss in the fourth quarter of 2008 was a decrease of $137.0 million, or $2.10 per diluted share, from the net income of $27.4 million in the third quarter of 2008. Net sales decreased by $476.6 million in the fourth quarter from the $1,073.7 million reported in the third quarter of 2008. The decrease in net income was primarily due to inventory losses and the expensing of unabsorbed fixed manufacturing costs resulting from sharp reductions in product prices, which were led by falling raw material costs and lower sales volumes due to weakened demand and customer destocking.
For the year ended December 31, 2008 net loss was $29.5 million, or $0.45 per diluted share, compared to net income of $114.7 million, or $1.76 per diluted share, for the year ended December 31, 2007. Net sales increased $500.2 million, or 15.7%, to $3,692.4 million for the year ended December 31, 2008 from the $3,192.2 million reported for the year ended December 31, 2007.
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 increase in net sales was primarily due to higher sales prices for all of the major olefins and vinyls products, partially offset by lower sales volumes for polyethylene and PVC pipe.
The significant increase in product prices in the first nine months of 2008 was reversed in the fourth quarter as prices fell in response to lower demand and the sharp drop in feedstock costs. The 2008 net loss is the result of the $109.6 million net loss in the fourth quarter of 2008. In addition to the sharp drop in prices in the fourth quarter of 2008, operating rates and production volumes were lower as a result of weakened demand.