Olin Corporation (OLN) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparisons are to the corresponding 2021 periods unless stated otherwise. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition through its Chlor Alkali Products and Vinyls, Epoxy, and Winchester segments. Figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $2,616.1m | $2,221.3m | $5,077.5m | $4,140.1m |
| Gross margin | $664.7m; 25% of sales | $509.1m; 23% | $1,318.6m; 26% | $1,004.1m; 24% |
| Operating income | $565.4m | $395.0m | $1,111.9m | $776.2m |
| Net income | $422.1m | $355.8m | $815.1m | $599.4m |
| Diluted EPS | $2.76 | $2.17 | $5.24 | $3.69 |
| Cash from operations | — | $959.2m | $707.6m |
Q2 sales increased 18%; first-half sales increased 23%. Higher pricing drove much of the growth, while higher raw-material, energy, and operating costs and lower volumes offset some benefits. First-half operating results improved across all three segments. Q2 improvement in Chlor Alkali Products and Vinyls and Winchester was partly offset by weaker Epoxy results.
Segments
- Chlor Alkali Products and Vinyls: Q2 sales were $1,403.5m and segment income was $346.5m, versus $967.3m and $168.9m. First-half income was $675.1m versus $440.0m. Higher prices more than offset increased costs and lower volumes; the prior-year first half included a $121.4m benefit from Winter Storm Uri.
- Epoxy: Q2 sales were $772.7m and income was $139.9m, versus $850.0m and $165.3m. First-half income rose to $277.9m from $230.5m. Q2 was pressured by weaker demand and lower volumes, alongside higher input and operating costs.
- Winchester: Q2 sales were $439.9m and income was $119.3m, versus $404.0m and $109.9m. First-half income rose to $238.2m from $195.0m, primarily on higher commercial ammunition pricing, partly offset by higher costs.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $304.6m, up from $180.5m at year-end 2021. Current assets were $2,666.5m and current liabilities $1,856.6m.
- Six-month operating cash flow of $959.2m was partly offset by $103.9m of capital expenditures, $689.7m of share repurchases, and $60.9m of dividends. Receivables and inventories increased $228.5m and $90.4m, respectively, reflecting higher sales and working-capital needs.
- Debt and borrowings, including current installments and finance lease obligations, totaled $2,780.7m; $805.9m was variable-rate debt. The company reported $799.6m available under its $800m revolving facility; its $300m receivables financing facility was fully drawn. It reported compliance with debt covenants and no borrowing restrictions at quarter-end.
- Management said current cash, operating cash flow, and available facilities should be sufficient for near- and long-term needs. However, future borrowing capacity could be constrained by the net-leverage covenant if operating performance weakens.
- Olin repurchased 12.6m shares for $689.7m during the first half. The board authorized an additional $2.0bn repurchase program on July 28, 2022, after quarter-end, and declared a $0.20-per-share dividend payable in September.
Outlook, developments, and risks
- Management expected Q3 2022 operating income to be below Q2’s $565.4m. It anticipated lower chemicals results from reduced participation in chlorine-derivative markets, lower operating rates, and higher energy and other costs; Winchester results were also expected to decline sequentially on higher costs.
- For full-year 2022, management forecast capital spending of $200m–$250m, depreciation and amortization of $575m–$600m, environmental expense of $25m–$30m, non-operating pension income of about $40m, and effective and cash tax rates of approximately 25%. No full-year operating-income or revenue target was provided.
- An unplanned April outage at Plaquemine, Louisiana returned about half the facility to operation in June; the remainder was expected back in early August. Olin also announced temporary production suspensions at epoxy facilities in Freeport, Texas and Guaruja, Brazil, and at a significant portion of EDC and related chlor-alkali production in Freeport, citing demand, market quality, energy costs, and operating conditions.
- Olin ceased sales to and purchases from Russia in Q1. Russia represented less than 0.5% of 2021 sales; management said the direct operating impact had not been significant but the broader effects of the invasion and sanctions remained uncertain.
- Environmental reserves were $148.9m at June 30. The filing warns that remediation estimates and timing are uncertain and additional charges could be material. Pending U.S. and Canadian caustic-soda antitrust class actions seek damages and other relief; potential losses were not estimable and an unfavorable outcome could materially affect results, cash flows, or financial position.
- Restructuring charges were $6.7m in the first half. Olin expected additional charges of about $35m for the McIntosh plan, $20m for the Freeport 2021 plan, and $40m for the Freeport 2019 plan over the stated future periods.
Material comparisons and unusual items
- Q2 interest expense fell to $34.5m from $65.9m; first-half expense fell to $67.4m from $150.4m. 2021 included debt-extinguishment charges of $15.4m for Q2 and $38.9m for the first half; excluding those items, management attributed the remaining decrease mainly to lower debt and average interest rates.
- Q2 2021 income taxes included a net $93.9m tax benefit, versus a net $8.5m benefit in Q2 2022. First-half 2021 included a net $95.2m tax benefit, versus a net $10.8m benefit in 2022. These items affect comparability of reported net income.
- Olin’s total debt-to-capitalization ratio was 50.8%, compared with 51.2% at December 31, 2021. Shareholders’ equity rose to $2,696.1m from $2,652.2m at year-end.
Investor verification points
- Check whether the expected Q3 earnings decline and production restarts or suspensions developed as management anticipated.
- Monitor segment pricing, demand, volumes, energy and feedstock costs, particularly in Epoxy and Chlor Alkali Products and Vinyls.
- Assess cash conversion and working-capital requirements against continued repurchases, dividends, capital spending, and the new $2.0bn authorization.
- Verify debt availability and covenant headroom, including the fully drawn receivables facility and variable-rate exposure.
- Track environmental reserve changes, remediation spending, restructuring cash costs, and developments in caustic-soda antitrust litigation.
- Consider tax-rate comparability in light of the unusually large 2021 tax benefits and compare future results with management’s 2022 expense and tax-rate outlook.