Olin Corporation (NYSE: OLN) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparison periods are the corresponding 2018 periods. Olin manufactures chemicals through Chlor Alkali Products and Vinyls and Epoxy, and ammunition through Winchester. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $1,576.6 | $1,872.4 | $4,722.9 | $5,311.1 |
| Gross margin | $219.0; 14% of sales | $430.7; 23% | $554.3; 12% | $880.0; 17% |
| Operating income | $103.4 | $314.5 | $227.1 | $550.1 |
| Net income | $44.2 | $195.1 | $65.9 | $274.6 |
| Diluted EPS | $0.27 | $1.16 | $0.40 | $1.63 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $416.6 | $586.3 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $271.8 | $274.5 |
Q3 interest expense was $63.9, versus $59.2 a year earlier. Nine-month interest expense was $179.2, down from $184.0. Cash and equivalents were $177.4 at September 30, 2019. Debt, including current installments and finance-lease obligations, was $3,340.1; debt to total capitalization was 55.6%, up from 53.3% at December 31, 2018. Olin reported $796.5 of availability under its $800 million revolving facility and said it was in compliance with debt covenants.
Cash flow from operations less capital expenditures was approximately $144.8 for the first nine months, compared with $311.8 in 2018. This simple measure is not the company’s reported free-cash-flow metric.
Material changes and drivers
- Q3 sales fell 16% year over year and nine-month sales fell 11%. Lower caustic soda pricing was the principal pressure on Chlor Alkali Products and Vinyls; lower prices and volumes affected Epoxy. Foreign exchange also reduced Epoxy sales.
- Chlor Alkali Products and Vinyls segment income was $112.7 in Q3, down 47%, and $303.8 for nine months, down 38%. Management cited lower caustic soda prices and volumes, partly offset by lower raw-material and operating costs.
- Epoxy segment income was $24.2 in Q3, down 22%; nine-month income rose to $38.6 from $33.8, helped by lower raw-material and maintenance costs despite lower prices.
- Winchester segment income increased to $13.9 from $10.3 in Q3 on higher commercial volumes and lower costs. Nine-month income was $33.1 versus $34.1.
- 2018 results included $110.0 of environmental insurance recoveries, a substantial favorable comparison item. 2019 nine-month results included an $11.2 gain on the sale of Olin’s Bay Gas interest; 2018 included a $21.5 noncash impairment of that investment.
- Information Technology Project expense rose to $60.1 for the first nine months, from $25.5, weighing on corporate costs. The project is expected to continue through 2020.
Outlook, liquidity and notable items
- Management forecast Q4 2019 earnings below Q3: lower Chlor Alkali Products and Vinyls pricing, lower Epoxy pricing and seasonal volume declines, and the weakest seasonal quarter for Winchester commercial ammunition.
- For full-year 2019, management expected Chlor Alkali Products and Vinyls and Epoxy segment income below 2018, while Winchester was expected to be similar. A $30-per-ton caustic soda price increase announced in August was being implemented; timing and realization were uncertain, with most potential benefit expected in Q4 2019 and Q1 2020.
- 2019 outlook included capital spending of $350–$400, depreciation and amortization of $590–$610, environmental expense of $25–$30 excluding the $4.8 insurance-related settlement gain, and an income-tax benefit of $21 to zero. The company expected cash taxes of $30–$35.
- Olin issued $750 of 5.625% senior notes due 2029 and used proceeds in part to repay the remaining $493 term loan and $150 drawn under its receivables financing agreement. It established a new $2 billion credit facility, including an $800 revolving facility and up to $1.2 billion in delayed-draw term loans. Management expected the delayed-draw proceeds to fund redemption of 9.75% notes due 2023 and 10.00% notes due 2025 around October 2020.
- Olin had a $493 million maximum future payment to Dow for an ethylene arrangement, expected around Q4 2020. It stated available liquidity was sufficient for operating needs, debt service, capital spending and this payment, based on current and projected cash flows.
- Olin repurchased $135.6 of shares in the first nine months and paid $98.5 in dividends. A $100 million accelerated repurchase was settled in October, bringing total shares repurchased under that agreement to approximately 5.7 million. The board declared a $0.20-per-share dividend payable in December.
- Environmental reserves were $140.1 at September 30, including a $20 increase in estimated remediation costs at a former site. Management noted environmental charges could be material in 2020.
Risks and contingencies
Results are exposed to cyclical chemical markets, caustic soda and other commodity pricing, supply-demand changes, feedstock, energy and transportation costs, manufacturing interruptions, foreign exchange, pension assumptions, substantial debt service, and execution and control risks from the multi-year IT systems transition. Key unresolved matters include a Plaquemine contract arbitration, a chlorine-supply pricing dispute with Oxy Vinyls, and direct and indirect purchaser class actions alleging caustic soda price-fixing. Olin said potential losses in these matters were not currently estimable and an unfavorable outcome could materially affect results, cash flows or financial position. Environmental remediation estimates also carry significant uncertainty.
Important facts for investors to verify
- Whether the announced caustic soda price increase is implemented and offsets continued pricing and volume pressure.
- Whether Q4 and full-year segment outlooks, capital spending, environmental costs and tax expectations are achieved.
- Execution and cost of the IT systems project, including its effect on financial controls during implementation.
- Progress and final terms for the planned 2020 redemption of high-coupon notes, and the resulting debt and interest burden.
- Developments in remediation estimates and the Plaquemine, Oxy Vinyls and caustic soda antitrust matters.
- Cash generation and liquidity, including the effect of receivables factoring, share repurchases, dividends and the future Dow ethylene payment.