Business context and reporting period
Olin Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, with comparisons to 2019. Olin manufactures chemicals through Chlor Alkali Products and Vinyls and Epoxy, and ammunition through Winchester. COVID-19 disrupted demand and pricing in its Chemicals businesses; all facilities were operating except those undergoing planned maintenance turnarounds.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $1,437.6 million | $1,576.6 million | $4,103.9 million | $4,722.9 million |
| Gross margin | $130.2 million; 9% | $219.0 million; 14% | $186.6 million; 5% | $554.3 million; 12% |
| Operating income (loss) | $(683.8) million | $103.4 million | $(827.1) million | $227.1 million |
| Net income (loss) | $(736.8) million | $44.2 million | $(936.9) million | $65.9 million |
| Diluted EPS | $(4.67) | $0.27 | $(5.94) | $0.40 |
Q3 and nine-month losses included a $699.8 million noncash goodwill impairment charge: $557.6 million for Chlor Alkali Products and Vinyls and $142.2 million for Epoxy. The impairment followed a sustained decline in Olin’s share price and reduced cash-flow projections amid COVID-19 disruption.
- Segments, Q3 / nine months: Chlor Alkali Products and Vinyls sales were $755.1 million / $2,166.2 million, with segment income of $37.8 million / loss of $53.5 million. Epoxy sales were $476.1 million / $1,350.7 million, with income of $14.9 million / $13.6 million. Winchester sales were $206.4 million / $587.0 million, with income of $21.0 million / $47.5 million.
- Cash flow: Nine-month operating cash flow was $305.3 million versus $416.6 million in 2019. Capital expenditures were $223.3 million versus $271.8 million. Investing cash outflow included $461.0 million paid under an ethylene supply arrangement and $75.8 million to resolve a site-cost allocation dispute.
- Liquidity and debt: Cash was $282.7 million at September 30. Debt and finance lease borrowings were approximately $3,960.7 million; total debt to total capitalization was 72.9%, up from 58.0% at year-end 2019. Olin reported $799.6 million available under its revolving facility and $115.8 million of additional receivables-facility capacity, and said it was in covenant compliance.
- Other: Interest expense rose to $74.6 million in Q3 from $63.9 million, primarily due to higher debt and interest rates. Environmental reserves were $146.7 million. Olin paid $94.7 million in dividends during the first nine months and declared a further $0.20-per-share dividend for December 2020.
Material changes versus the prior comparable period
- Q3 sales fell 9% and nine-month sales fell 13%. Lower caustic soda and EDC prices and weaker volumes drove much of the decline; Chemicals gross margins contracted substantially.
- Chlor Alkali Products and Vinyls nine-month segment results swung from $303.8 million income to a $53.5 million loss. Epoxy earnings also declined. Winchester improved, with nine-month segment income rising to $47.5 million from $33.1 million, supported by commercial ammunition demand and pricing.
- Cash from operations declined by $111.3 million year over year, while cash increased to $282.7 million, supported in part by debt financing and working-capital reductions. Shareholders’ equity fell to $1,469.1 million from $2,417.5 million at year-end, substantially reflecting the impairment and losses.
Outlook, commentary, and risks
- Management said economic uncertainty remained high and could not estimate COVID-19’s full effects. It forecast Q4 2020 Chemicals results below Q3, with lower volumes partly offset by higher selling prices; customer year-end inventory reductions were expected to weigh on volumes. Announced caustic soda and chlorine price increases were still being implemented, with realization uncertain.
- Management expected improved Winchester commercial ammunition pricing in Q4 and benefits from the Lake City contract. It estimated the contract could add $450–$550 million in annual revenue and about $50 million in segment earnings; 2020 transition costs were estimated at $15 million and initial working capital investment at $75 million. Winchester assumed operational control on October 1, 2020.
- 2020 forecasts included capital spending of about $275 million, depreciation and amortization of about $575 million, environmental expense of $20–$25 million, and an effective tax rate around 25% excluding the goodwill impairment. Management expected working capital to decline by approximately $150 million, including the Lake City investment.
- After quarter-end, Olin drew $500 million under its delayed-draw term facility and used $114.6 million of cash to redeem $600 million of 9.75% notes due 2023, paying a $14.6 million premium.
- Key risks include continued COVID-19 and cyclical market weakness, commodity-price and demand volatility, substantial indebtedness and covenant headroom, possible further goodwill impairment, environmental remediation costs, and unresolved chlorine-supply pricing and caustic soda antitrust litigation. The potential outcomes of the two principal disputes were not estimable; an adverse outcome could be material.
Important facts for investors to verify
- Whether announced chemical price increases were achieved and whether Q4 volumes and margins matched management’s expectations.
- Lake City contract ramp-up, actual transition costs, working-capital needs, and realized revenue and earnings contribution.
- Debt, liquidity, covenant capacity, and interest costs following the October note redemption and delayed-draw borrowing.
- Goodwill valuation assumptions and whether further sustained share-price weakness or operating deterioration could trigger additional impairment.
- Developments in the chlorine contract dispute, caustic soda litigation, and environmental remediation estimates.