Olin Corporation — Q2 2020 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2020. Olin manufactures chemicals in Chlor Alkali Products and Vinyls and Epoxy, and ammunition through Winchester. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $1,241.2 | $1,592.9 | $2,666.3 | $3,146.3 |
| Gross margin | $5.5 (about 0% of sales) | $129.2 (8%) | $56.4 (2%) | $335.3 (11%) |
| Operating income (loss) | $(95.8) | $28.5 | $(143.3) | $123.7 |
| Net income (loss) | $(120.1) | $(20.0) | $(200.1) | $21.7 |
| Diluted EPS | $(0.76) | $(0.12) | $(1.27) | $0.13 |
| Operating cash flow | Not provided for quarter | $55.4 | $236.1 |
- Cash and liquidity: Cash was $237.9 at June 30, 2020. The $800 million revolving facility had $799.6 available; the separate $500 million delayed-draw term loan facility was available for draws through November 29, 2020. The $250 million receivables financing facility was $240.7 drawn, with no additional borrowing capacity at period-end.
- Debt: Long-term borrowings, including current installments and finance lease obligations, were $4,075.7, up from $3,340.8 at December 31, 2019. Debt was 65.1% of total capitalization, versus 58.0% year-end 2019. Interest expense was $69.4 in Q2 and $132.5 for the first half.
- Cash uses: First-half capital expenditures were $166.5. Investing cash flow included $461.0 paid under ethylene supply arrangements and $75.8 to resolve a Plaquemine site capital-cost allocation dispute. Olin paid $63.1 in dividends in the first half.
Material changes and segment results
- Q2 sales fell 22% year over year; first-half sales fell 15%. Management attributed the decline chiefly to lower chemical pricing and volumes amid COVID-19 disruption. First-half operating cash flow was $180.7 lower than the prior-year period, primarily due to weaker operating results.
- Chlor Alkali Products and Vinyls: Q2 sales were $651.2 versus $909.2; segment loss was $57.0 versus income of $70.7. First-half segment loss was $91.3 versus income of $191.1. Lower caustic soda and EDC prices and lower volumes were partly offset by lower raw-material and operating costs.
- Epoxy: Q2 sales were $397.4 versus $518.8; segment loss was $13.0 versus income of $3.9. First-half sales were $874.6 versus $1,042.8; segment loss was $1.3 versus income of $14.4. Lower prices and volumes outweighed lower raw-material costs; first-half results also reflected a European phenol supplier force majeure and COVID-related production reductions in Asia.
- Winchester: Q2 sales rose 17% to $192.6 and segment income rose to $16.0 from $10.1. First-half sales rose 18% to $380.6 and segment income increased to $26.5 from $19.2, led by commercial ammunition demand. Lake City contract transition costs were $3.8 in Q2 and $6.6 in the first half.
Outlook, risks and unusual items
- Management expected Q3 2020 results to improve sequentially, citing higher chemical volumes, lower maintenance-turnaround costs and improved caustic soda and EDC pricing. It expected Winchester to benefit from stronger commercial ammunition demand in Q3.
- The Lake City U.S. Army ammunition contract was expected to begin contributing in Q4 2020. Olin forecast $15–$20 million of 2020 transition costs and about $80 million of initial working-capital investment; management estimated annual revenue contribution of $450–$550 million and segment earnings contribution of about $40–$50 million.
- 2020 forecasts included capital spending of $250–$275 million, depreciation and amortization of $550–$575 million, an effective tax rate of 25%–30%, and cash taxes from $(5) million to $5 million. Olin also expected to reduce working capital by about $150 million. Management said COVID-19’s full effects could not be estimated and demand visibility remained limited.
- Olin issued $500 million of 9.50% senior notes due 2025 and amended its secured credit facility, including less restrictive financial covenants. The company said it was covenant-compliant at June 30, 2020; future borrowing availability could nevertheless be constrained by covenant calculations and cash generation.
- Environmental reserves were $138.6; management forecast 2020 environmental expense of $25–$30 million and noted future charges could be material. A chlorine-supply pricing dispute with Oxy and caustic soda antitrust class actions have losses that are not currently estimable; unfavorable outcomes could materially affect results or financial position.
- Olin recorded no goodwill impairment after a Q1 2020 test, but disclosed that certain sensitivity cases did not show estimated fair value above carrying value. Future results below assumptions could lead to impairment charges. Freeport plant closures are expected to be completed by year-end 2020, with about $50 million of additional restructuring charges expected through 2024.
Important facts for investors to verify
- Whether chemical prices, volumes and margins recover as projected, and how sustained COVID-19 effects change customer demand and operations.
- Cash generation and liquidity after the large supply-contract payments; borrowing capacity under the receivables facility and compliance with secured-debt covenants.
- Progress, transition costs, working-capital needs and realized earnings from the Lake City contract.
- Developments and potential exposure in the Oxy pricing dispute, caustic soda litigation and environmental remediation matters.
- Goodwill valuation assumptions and whether weaker market conditions require future impairment testing or charges.