Olin Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are to the corresponding 2017 periods unless stated otherwise. Olin manufactures chemicals in Chlor Alkali Products and Vinyls and Epoxy, and ammunition through Winchester. Figures are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $1,728.4 million | $1,526.5 million | $3,438.7 million | $3,093.6 million |
| Gross margin | $267.7 million; 15% of sales | $118.6 million; 8% | $449.3 million; 13% | $288.2 million; 9% |
| Operating income | $150.7 million | $21.2 million | $235.6 million | $82.3 million |
| Net income (loss) | $58.6 million | $(5.9) million | $79.5 million | $7.5 million |
| Diluted EPS | $0.35 | $(0.04) | $0.47 | $0.04 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $264.3 million | $227.4 million |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $176.0 million | $150.9 million |
- Quarterly sales rose 13%; six-month sales rose 11%. Higher chemical selling prices were the main driver. Operating income improved substantially, while interest expense increased to $61.1 million for Q2 and $124.8 million for the first half.
- Q2 segment income: Chlor Alkali Products and Vinyls $149.4 million (2017: $52.8 million); Epoxy $24.8 million (2017: loss of $8.1 million); Winchester $11.8 million (2017: $19.0 million). First-half results were $279.9 million, $2.7 million and $23.8 million, respectively, versus $140.3 million, a loss of $9.3 million and $44.1 million.
- Chlor Alkali Products and Vinyls and Epoxy benefited mainly from higher prices. Winchester earnings fell on higher material costs and less favorable product mix. Epoxy’s first-half results were burdened by $45.6 million of turnaround and unabsorbed fixed manufacturing costs.
- First-half operating cash flow increased $36.9 million year over year, but working capital use rose to $118.7 million, largely reflecting higher selling prices and raw-material costs. Cash after capital expenditures was $88.3 million for the half, calculated from reported cash flow and capex.
Financial position and liquidity
- At June 30, 2018, cash was $144.2 million; total debt, including current installments, was approximately $3,513.5 million; and shareholders’ equity was $2,763.1 million. Debt to total capitalization was 56.0%, down from 56.7% at year-end 2017.
- Olin issued $550 million of 5.00% senior notes due 2030 and used proceeds to repay $550 million of term-loan debt. The filing reports $594.9 million available under its $600 million revolving facility, after letters of credit. The $250 million receivables financing agreement was fully drawn at June 30.
- Olin reported compliance with debt covenants and stated it believed cash, operating cash flow and available revolver capacity would meet its needs. It also factors receivables under facilities with a $294 million maximum; $188.6 million of sold receivables remained outstanding at period-end.
- Quarterly dividends were $0.20 per share. A $500 million repurchase authorization was approved in April; $9.1 million had been used by June 30.
Outlook, commentary and risks
- Management projected 2018 net income of $1.50–$2.00 per diluted share, including approximately $20 million of pretax restructuring charges and the $21.5 million non-cash BayGas investment impairment. Management forecast Q3 earnings to improve sequentially and expected second-half 2018 turnaround costs to decline about $135 million from first-half levels.
- Management expected 2018 Chlor Alkali Products and Vinyls income to exceed 2017, and Epoxy results to improve from its 2017 loss. Winchester income was not expected to exceed 2017’s $72.4 million, with higher costs and lower commercial sales partly offset by military demand.
- Other 2018 expectations included capital spending of $375–$425 million, including about $100 million for the Information Technology Project; depreciation and amortization of $590–$610 million; an effective tax rate of about 25%; and environmental expense of $15–$20 million.
- Unusual and nonrecurring items included a $21.5 million non-cash impairment charge on Olin’s BayGas interest and an $8.0 million insurance recovery for a 2017 Freeport facility interruption. The 2018 results also included $18.0 million of Information Technology Project expense in the first half. Management said the project was expected to cost about $50 million in 2018, with completion anticipated in 2020.
- Olin recorded $132.5 million in environmental liabilities and $14.0 million in accrued liabilities for legal matters, including asbestos-related claims. Management did not expect the legal actions to materially adversely affect results, but warned environmental estimates are uncertain and future charges could be material.
- Additional exposures include volatile commodity prices, cyclical chemical markets, raw-material and freight costs, manufacturing outages, foreign exchange and interest rates, substantial debt, and execution risks from the IT systems project. Olin had not completed its accounting for the 2017 Tax Act and said further adjustments could materially affect financial statements.
Important facts for investors to verify
- Whether caustic soda, chlorine and other product-price gains persist, and how EDC pricing and volumes develop.
- Whether Q3 and full-year EPS guidance is achieved, including the expected reduction in turnaround costs and the remaining impact of Epoxy maintenance.
- How Winchester’s commercial demand, military sales, product mix and material costs affect its outlook.
- Working-capital and receivables-facility trends, available borrowing capacity, debt service and the planned $440–$465 million ethylene-related payment due around Q4 2020.
- Final 2017 Tax Act accounting, environmental remediation costs and liabilities, and the costs and execution of the IT Project and share repurchase program.