OLIN Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparison is with the three months ended March 31, 2021 unless stated otherwise. Olin operates Chlor Alkali Products and Vinyls, Epoxy, and Winchester. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $2,461.4 | $1,918.8 | +28% |
| Gross margin | $653.9 | $495.0 | +$158.9; 27% vs. 26% of sales |
| Operating income | $546.5 | $381.2 | +$165.3 |
| Income before taxes | $523.6 | $306.1 | +$217.5 |
| Net income | $393.0 | $243.6 | +61% |
| Diluted EPS | $2.48 | $1.51 | +$0.97 |
| Cash from operations | $353.5 | $269.8 | +$83.7 |
| Capital expenditures | $47.3 | $51.2 | −$3.9 |
Gross margin was approximately 26.6% of sales versus 25.8%; operating margin was approximately 22.2% versus 19.9%. Selling and administration costs were $104.3 million, down $2.6 million. Interest expense fell to $32.9 million from $84.5 million; Q1 2021 included $23.5 million of debt-extinguishment loss, and the remaining decrease reflected lower debt and average interest rates. The 2022 effective tax rate was 25.4% versus 20.8%.
Segments and material changes
| Segment | Sales, Q1 2022 | Segment income, Q1 2022 | Key comparison |
|---|---|---|---|
| Chlor Alkali Products and Vinyls | $1,245.2 | $328.6 | Sales +44%; higher chlorine, caustic soda and EDC pricing, partly offset by lower volumes and higher costs. |
| Epoxy | $789.5 | $138.0 | Sales +19%; higher pricing offset in part by lower volumes and higher input and operating costs. |
| Winchester | $426.7 | $118.9 | Sales +10%; improved commercial pricing and mix, partly offset by costs and lower military sales. |
Management attributed the improvement across segments primarily to pricing. The prior-year comparison is affected by Winter Storm Uri: Olin reported a net pretax favorable impact of $99.9 million in Q1 2021, comprising a $121.4 million benefit in Chlor Alkali Products and Vinyls and a $21.5 million adverse impact in Epoxy. Excluding those storm effects, management said segment results improved year over year in all three businesses.
Cash, debt and liquidity
Cash and cash equivalents were $197.9 million at March 31, 2022, up $17.4 million from year-end. Operating cash flow was $353.5 million; working capital increased $195.5 million during the quarter, reflecting seasonality and higher raw material costs. Investing cash outflow was $47.3 million, primarily capital expenditures. Financing cash outflow was $289.0 million, including $263.2 million of share repurchases and $30.8 million of dividends.
Total borrowings, including current installments and finance lease obligations, were $2,780.1 million, of which $805.9 million bore variable rates. The balance sheet reported current and long-term debt of $201.2 million and $2,578.9 million, respectively. Olin had $799.6 million available under its $800 million revolving credit facility and had drawn the full $300 million receivables financing facility, with no additional capacity under that facility. The company reported compliance with debt covenants and said no borrowing restrictions applied at quarter-end. It stated that available cash, operating cash flow and borrowing sources were sufficient for expected liquidity needs.
Debt to total capitalization was 49.9%, down from 51.2% at December 31, 2021. Olin repurchased 5.2 million shares for $263.2 million in Q1. The 2018 $500 million authorization was completed; $789.0 million remained authorized under the 2021 $1 billion program. The quarterly dividend was $0.20 per share.
Outlook, risks and unusual items
- Management expected 2022 operating results to improve across all segments compared with 2021 and Q2 operating income to exceed Q1’s $546.5 million. Expected higher pricing was forecast to more than offset higher raw material and operating costs, including energy.
- For Q2, Chlor Alkali Products and Vinyls results were expected to improve despite an unplanned Plaquemine, Louisiana outage, with lost volumes, maintenance and other costs. Epoxy was expected to face weak resin demand and low operating rates; Winchester results were expected to be comparable with Q1.
- 2022 outlook included capital spending of $200–$250 million, depreciation and amortization of $575–$600 million, an effective and cash tax rate of 25%–30%, and environmental expense of $25–$30 million. Management expected no domestic qualified pension contributions and less than $5 million of international pension contributions.
- Environmental reserves totaled $149.5 million at quarter-end; management estimated 2022 investigation and remediation spending of approximately $25 million and warned that charges could be material. Estimates are subject to significant uncertainties.
- Olin and other producers face U.S. and Canadian purported class actions alleging caustic soda price-fixing and related conduct. Claimed losses were not estimable; an unfavorable outcome could materially affect financial position, cash flows or results.
- Russia sales were less than 0.5% of 2021 sales and minimal in Q1 2022. Olin ceased sales to and purchases from Russia during Q1; the future effect of the war and sanctions was uncertain.
- Other exposures include energy and raw material price volatility, production interruptions, inflation, demand and pricing changes, substantial debt, environmental and regulatory matters, and foreign exchange and interest-rate risk. Olin uses derivatives for risk management, not speculation.
- Restructuring charges were $3.1 million in Q1. Olin expected additional charges associated with facility closures, including approximately $35 million for the McIntosh plan through 2026.
Investor verification points
- Confirm how much segment improvement reflects sustainable pricing versus volume, cost inflation, and the unusual Winter Storm Uri comparison.
- Track the Plaquemine outage, Epoxy demand and operating rates, and the company’s Q2 and full-year outlook against subsequent results.
- Review operating cash conversion and working-capital needs, particularly receivables, inventories, and payment timing.
- Monitor debt, variable-rate exposure, facility availability, covenant headroom, and the pace of share repurchases relative to cash generation.
- Assess environmental reserve adequacy and developments in the caustic soda litigation, where potential losses were not estimable.