Olin Corporation — Q1 2020 Form 10-Q
Business context and reporting period
Olin manufactures chemicals and ammunition through Chlor Alkali Products and Vinyls, Epoxy, and Winchester. This unaudited report covers the three months ended March 31, 2020, with comparisons to Q1 2019. The quarter unfolded amid the COVID-19 pandemic; Olin said it had not significantly affected consolidated results in Q1, though it reduced Epoxy segment earnings by approximately $3 million.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparator |
|---|---|---|
| Sales | $1,425.1 million | $1,553.4 million; down 8% |
| Gross margin | $50.9 million; 4% of sales | $206.1 million; 13% of sales |
| Operating income (loss) | $(47.5) million | $95.2 million |
| Net income (loss) | $(80.0) million | $41.7 million |
| Diluted EPS | $(0.51) | $0.25 |
| Operating cash flow | $(47.9) million | $104.3 million |
| Capital expenditures | $95.9 million | $102.2 million |
Interest expense was $63.1 million, versus $57.4 million. At March 31, cash and equivalents were $194.5 million; total debt, including current installments and finance lease obligations, was $3,491.5 million. Debt was 60.4% of total capitalization, compared with 58.0% at December 31, 2019. The current ratio was approximately 1.1, based on reported current assets of $1,739.3 million and current liabilities of $1,565.9 million. Current liabilities included a $480.8 million Dow ethylene-related payment liability reclassified to accrued liabilities.
Olin reported $799.6 million available under its $800 million revolving credit facility at quarter-end and $150 million drawn under its receivables financing agreement, with no additional capacity then available. It borrowed a further $100 million under that agreement in April. Operating cash flow was negative while capital spending and dividends totaled $127.4 million.
Material changes and segment results
- Chlor Alkali Products and Vinyls: Sales fell 13% to $759.9 million; segment results swung to a $34.3 million loss from $120.4 million income. Management attributed the decline mainly to lower caustic soda and EDC prices, higher turnaround and operating costs, and a Canadian rail disruption that led to a ten-day facility shutdown.
- Epoxy: Sales declined 9% to $477.2 million, while segment income rose to $11.7 million from $10.5 million, principally due to lower operating costs. Lower prices, reduced volumes, supplier force majeure, and Asia COVID-related interruptions weighed on results.
- Winchester: Sales increased 20% to $188.0 million and segment income rose to $10.5 million from $9.1 million, reflecting higher commercial and military volumes and lower costs. Results included $2.8 million of Lake City contract transition costs.
The overall deterioration was driven primarily by Chlor Alkali Products and Vinyls. Q1 2019 also included an $11.2 million gain from the sale of an affiliate interest, which did not recur.
Outlook, risks and unusual items
- Management said the pandemic’s full duration and financial effects could not be estimated. It expected weaker near-term demand for Chlor Alkali Products and Vinyls and Epoxy; Q2 Chlor Alkali volumes were expected to be meaningfully lower sequentially, with sequential caustic soda price improvement and lower EDC prices. Epoxy faced weaker automotive and industrial coatings demand.
- 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 approximately $150 million.
- For the Lake City U.S. Army ammunition contract, management expected approximately $25 million of transition costs and $80 million of initial working capital investment in 2020. The contract was expected to add $450–$550 million in annual revenue and approximately $40–$50 million in segment earnings; benefits were expected to begin in Q4.
- Olin expected to pay Dow up to $493 million for an ethylene supply arrangement around Q4 2020. It expected to use delayed-draw term-loan proceeds to redeem 9.75% notes due 2023 and 10.00% notes due 2025 around October 2020.
- Environmental reserves were $139.1 million at March 31; 2020 environmental spending was estimated at approximately $17 million, and annual environmental expense at $25–$30 million. Olin cautioned that remediation costs could exceed estimates.
- Material unresolved matters included a pricing dispute with Oxy over a long-term chlorine supply contract and caustic soda price-fixing class actions. Potential losses were not estimable; adverse outcomes could materially affect results, cash flows, or financial position.
- Olin performed a Q1 goodwill impairment test after identifying adverse business and cash-flow indicators; it recorded no impairment. A hypothetical 10% decrease in Chlor Alkali Products and Vinyls reporting-unit fair value left fair value only modestly above carrying value, and management warned future impairment could result if assumptions are not met.
- Olin remained compliant with credit covenants at March 31 and said no restrictions then limited its borrowing ability. However, weaker cash flows could constrain future covenant headroom and borrowing access. The board declared a $0.20-per-share dividend payable June 10, 2020; future dividends remain subject to board discretion.
Important facts for investors to verify
- Whether caustic soda price increases announced in Q1 and April were implemented and offset continued weakness in Chlor Alkali Products and Vinyls.
- COVID-19 effects on demand, operations, working capital, and the Q2 outlook, particularly in Chlor Alkali Products and Vinyls and Epoxy.
- Cash generation and liquidity after the April receivables borrowing, the expected Dow payment, capital spending, and Lake City working-capital investment.
- Debt levels, covenant headroom, and execution of the planned 2020 refinancing/redemption of the high-coupon notes.
- Progress and economics of the Lake City contract, including transition costs, working-capital needs, and expected earnings contribution.
- Developments in the Oxy pricing dispute, caustic soda litigation, environmental obligations, and goodwill impairment assumptions.