Olin Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Olin operates Chlor Alkali Products and Vinyls, Epoxy, and Winchester businesses.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales | $1,710.3 million | $1,567.1 million |
| Gross margin | $181.6 million; 11% of sales | $169.6 million; 11% of sales |
| Operating income | $84.9 million | $61.1 million |
| Net income | $20.9 million; diluted EPS $0.12 | $13.4 million; diluted EPS $0.08 |
| Operating cash flow | $80.9 million | $99.9 million |
| Capital expenditures | $89.5 million | $83.0 million |
| Cash at quarter end | $109.1 million | $168.5 million |
Sales rose 9% and net income rose 56% year over year. Cash flow from operations less capital expenditures was negative $8.6 million, versus positive $16.9 million in Q1 2017. Management attributed lower operating cash flow mainly to increased working capital, including a $102.5 million increase in receivables from year-end.
At March 31, 2018, total debt was approximately $3,535 million and shareholders’ equity was $2,763 million; debt was 56.1% of total capitalization. Of debt, $1,139.6 million was at variable rates. Cash plus reported unused capacity was supported by $594.9 million available under the revolving facility and $19.7 million under the receivables financing agreement. The company reported compliance with debt covenants.
Segment results and material changes
- Chlor Alkali Products and Vinyls: Sales of $936.1 million, up 12%; segment income of $130.5 million, up 49%. Higher prices, principally caustic soda, drove improvement, partly offset by lower volumes, lower EDC pricing, and higher costs.
- Epoxy: Sales of $603.3 million, up 6%, but segment loss widened to $22.1 million from $1.2 million. Planned maintenance turnarounds, including at Freeport, drove $42.5 million of additional maintenance, fixed-cost underabsorption, and lost-sales impacts; higher raw-material costs also weighed on results.
- Winchester: Sales of $170.9 million, up 5%; segment income fell to $12.0 million from $25.1 million. Higher material costs, lower selling prices, and less favorable mix outweighed lower operating costs.
Q1 included an $8.0 million insurance recovery for a 2017 Freeport facility interruption. Interest expense increased $11.3 million, partly reflecting higher rates and $3.9 million of accretion on a future ethylene payment. Restructuring charges were $4.0 million, compared with $8.2 million a year earlier.
Outlook, risks, and contingencies
- Management projected 2018 net income of $1.40–$1.95 per diluted share, including approximately $20 million of pretax restructuring charges. Q2 earnings were expected to improve from Q1, which management described as the weakest quarter, partly because Q1 included approximately $92 million of planned maintenance-turnaround costs.
- Management expected 2018 Chlor Alkali Products and Vinyls income to exceed 2017, Epoxy results to improve from its 2017 loss, and Winchester income not to exceed its 2017 level. These expectations depend on pricing, volumes, costs, maintenance, and market demand.
- 2018 capital spending was forecast at $375–$425 million, including approximately $100 million for the multi-year IT project; depreciation and amortization was forecast at $570–$580 million. The IT project was expected to continue through 2020.
- Management estimated a 2018 effective tax rate of approximately 25%. Accounting for the 2017 Tax Act remained incomplete; further adjustments during 2018 could affect results.
- Environmental liabilities were $131.2 million at quarter end; 2018 environmental expense was forecast at $15–$20 million, and investigatory/remediation spending at approximately $26 million. The filing warns that environmental outcomes and costs are uncertain and could materially affect results.
- Legal accruals, including asbestos-related matters, were $13.3 million; management did not believe these matters were reasonably likely to materially adversely affect financial position, cash flows, or results. The filing identifies commodity-price cycles, feedstock and logistics costs, operational interruptions, substantial debt, interest-rate and foreign-exchange exposure, and IT implementation as risks.
- On April 26, 2018, after quarter end, the board authorized a share repurchase program of up to $500 million and declared a $0.20-per-share dividend. The company also had a future $440–$465 million payment due to DowDuPont around Q4 2020 under an ethylene supply arrangement.
Important facts for investors to verify
- Whether announced caustic soda price increases are implemented and sustained, and how pricing and volumes affect Chlor Alkali Products and Vinyls earnings.
- Epoxy recovery after planned maintenance, including actual turnaround costs, lost sales, and raw-material pricing.
- Cash conversion and working-capital trends, especially receivables, alongside the planned capital-spending and IT-project commitments.
- Debt-service capacity, variable-rate exposure, access to receivables financing, and the timing and funding of the 2020 ethylene payment.
- Final 2017 Tax Act accounting and changes in environmental, litigation, or other contingent liabilities.
- Use and timing of the newly authorized share repurchase program; no purchases were reported during Q1.