Olin Corporation — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Olin manufactures chemicals through Chlor Alkali Products and Vinyls and Epoxy, and ammunition through Winchester.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Sales | $1,918.8 million | $1,425.1 million |
| Gross margin | $495.0 million; 26% of sales | $50.9 million; 4% of sales |
| Operating income (loss) | $381.2 million | $(47.5) million |
| Net income (loss) | $243.6 million | $(80.0) million |
| Diluted EPS | $1.51 | $(0.51) |
| Operating cash flow | $251.1 million | $(47.9) million |
| Capital expenditures | $51.2 million | $95.9 million |
Sales rose 35%. Segment income was $271.1 million for Chlor Alkali Products and Vinyls (versus a $34.3 million loss), $65.2 million for Epoxy (versus $11.7 million), and $85.1 million for Winchester (versus $10.5 million). Winchester sales more than doubled, reflecting higher commercial and military volumes, including Lake City production, and increased commercial pricing.
Cash and equivalents were $259.9 million at March 31, 2021, versus $189.7 million at year-end 2020. Total assets were $8.45 billion and shareholders’ equity was $1.70 billion. Long-term debt, including current installments and finance lease obligations, was $3.75 billion; $1.10 billion was variable-rate debt. The company reported $799.6 million available on its $800 million revolver and $125 million additional capacity under its receivables facility. It was in compliance with debt covenants at quarter-end. Total debt to capitalization was 68.8%, down from 72.7% at December 31, 2020.
Operating cash flow improved by $299.0 million year over year, largely with higher operating results, but was partly offset by working-capital needs. Receivables increased $207.1 million from year-end, primarily due to higher sales. Interest expense was $84.5 million, up $21.4 million; it included $18.7 million of redemption premiums and $4.8 million of debt-cost and swap-loss write-offs. The reported effective tax rate was 20.8%.
Material changes and unusual items
- Winter Storm Uri disrupted production across several facilities; operations had returned by March 31. Olin reported a net favorable pretax impact of $99.9 million from hedges and contracts, partly offset by unabsorbed fixed costs and storm-related maintenance. The impact included a $121.4 million benefit in Chlor Alkali Products and Vinyls and a $21.5 million adverse impact in Epoxy.
- Excluding the storm effect, chemical segment results benefited from higher product pricing and, in Chlor Alkali Products and Vinyls, lower raw-material and operating costs. Epoxy faced higher benzene and propylene costs. Q1 2020 results had also been affected by COVID-related Asian operating reductions and a European phenol supplier force majeure.
- Olin redeemed the remaining $120 million of 9.75% notes due 2023 and $315 million of 10.00% notes due 2025, paying premiums. It drew a $315 million delayed-draw term loan for the latter redemption and amended its secured credit facility, reducing applicable pricing. On April 14, it announced plans to redeem the remaining $185 million of 2025 notes, with an expected $9.3 million premium.
- Restructuring charges were $6.9 million. The company permanently closed 200,000 tons of diaphragm-grade chlor alkali capacity at McIntosh and announced planned closures of two Freeport facilities. Additional charges expected through 2022–2025 are approximately $73 million across the disclosed plans.
- The quarterly dividend was $0.20 per share; the board declared another $0.20 dividend payable in June 2021. No shares were repurchased in the quarter.
Outlook, risks and contingencies
- For 2021, management expects year-over-year improvement in Chlor Alkali Products and Vinyls and Epoxy results, continued ECU pricing improvement versus 2020, and productivity-related lower operating costs. It expects lower volumes in chemicals as it selectively avoids less attractive markets.
- Winchester segment income is expected to improve from 2020’s $92.3 million, supported by commercial pricing and volumes, including Lake City output.
- Management forecast 2021 capital spending of about $200 million; depreciation and amortization of $575–$600 million; an effective tax rate of 20%–25%; cash taxes of 10%–15%; environmental expense of $20–$25 million; and non-operating pension income of $30–$35 million. It targeted approximately $1 billion of debt reduction using operating cash generation.
- Environmental reserves were $147.2 million; estimated 2021 investigation and remediation spending was about $19 million. Olin cautioned that changing site conditions, regulation, and other uncertainties could increase costs and adversely affect results or financial position.
- U.S. and Canadian putative class actions allege caustic-soda price fixing and seek unspecified damages and other relief. Olin said it will defend the cases; potential losses were not estimable and an unfavorable outcome could materially affect results, cash flows, or financial position.
- Other disclosed risks include commodity and foreign-exchange volatility, variable-rate debt and covenant capacity, supply or production interruptions, market and pricing changes, COVID-19, environmental and litigation exposure, and risks under the Lake City government contract. Management stated that liquidity was sufficient for expected needs based on current projections; future borrowing capacity may depend on cash generation and covenant compliance.
Important facts for investors to verify
- How much of the strong chemical profitability reflects the nonrecurring Winter Storm Uri hedge benefit, and whether pricing and margins persist as volumes normalize.
- Progress against the approximately $1 billion debt-reduction target, the planned 2025-note redemption, and interest costs after refinancing.
- Whether receivables, working capital, and operating cash conversion improve as sales and production conditions change.
- Delivery against segment outlook, particularly chemical pricing and volumes and Winchester demand and Lake City performance.
- Developments in caustic-soda litigation and environmental remediation estimates, including any material change in exposure.