Olin Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition through its Chlor Alkali Products and Vinyls, Epoxy, and Winchester segments. Amounts below are in millions of dollars, except per-share data.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $1,872.4 | $1,554.9 | $5,311.1 | $4,648.5 |
| Gross margin | $430.7 (23% of sales) | $205.6 (13%) | $880.0 (17%) | $493.8 (11%) |
| Operating income | $314.5 | $104.2 | $550.1 | $186.5 |
| Net income | $195.1 | $52.7 | $274.6 | $60.2 |
| Diluted EPS | $1.16 | $0.31 | $1.63 | $0.36 |
| Operating cash flow | — | $586.3 | $455.1 | |
| Capital expenditures | — | $274.5 | $210.0 |
Q3 sales rose 20% year over year; nine-month sales rose 14%. Operating margins were approximately 16.8% and 10.4% for Q3 and the nine-month period, respectively, versus 6.7% and 4.0% in the comparable 2017 periods. Interest expense was $59.2 for Q3 and $184.0 year to date, up from $53.1 and $158.0. Dividends were $0.20 per share in Q3 and $0.60 year to date.
At September 30, cash was $156.7; current assets were $1,938.3 and current liabilities $1,073.7. Long-term debt was $3,336.4, with total borrowings including current installments and capital lease obligations reported at $3,337.3. Debt to total capitalization was 53.3%, down from 56.7% at year-end 2017. Operating cash flow less capital expenditures was $311.8 for the nine months. Cash declined $61.7 during the period to $156.7.
Material changes and segment performance
- Chlor Alkali Products and Vinyls: Q3 sales of $1,051.1 and segment income of $210.8, compared with $881.2 and $129.7. Nine-month segment income rose to $490.7 from $270.0, mainly on higher caustic soda, chlorine, EDC and derivative prices. Higher input, freight, operating and depreciation costs, lower volumes and less favorable mix offset some gains.
- Epoxy: Q3 sales rose to $647.3 from $489.9; segment income was $31.1 versus a $1.7 loss. Nine-month income was $33.8 versus an $11.0 loss. Higher prices helped, but raw-material costs and $41.6 of maintenance and unabsorbed fixed costs weighed on year-to-date results.
- Winchester: Q3 sales declined to $174.0 from $183.8 and segment income to $10.3 from $17.2. Nine-month income fell to $34.1 from $61.3, reflecting higher material costs, weaker commercial sales, unfavorable mix and lower prices.
- Results included a $110.0 pretax environmental insurance recovery in Q3 and year to date, net of estimated $10.0 liabilities; the underlying settlement was $120.0 and was collected in October. Year-to-date results also included an $8.0 insurance recovery for a 2017 Freeport business interruption and a $21.5 noncash impairment of the BayGas investment.
Outlook, liquidity, and risks
- Management projected 2018 net income of $1.80–$2.05 per diluted share, including the environmental recovery, BayGas impairment and approximately $20 of restructuring charges. It forecast Q4 earnings to decline sequentially due to seasonality, lower caustic soda pricing and higher raw-material costs.
- Management expected Chlor Alkali Products and Vinyls and Epoxy full-year segment results to improve versus 2017, while Winchester results were expected to decline. A caustic soda price increase announced in August was still being implemented; realization and timing of benefits were uncertain.
- 2018 capital spending was forecast at $375–$425, including approximately $100 for the multiyear Information Technology Project. Project costs were expected to total $250 of capital spending and $100 of expense through its planned 2020 completion. The company cited higher project and legal costs as drivers of increased corporate expense.
- Olin issued $550 of 5.00% senior notes due 2030 and used the proceeds to redeem $550 of term-loan debt; total debt repayments exceeded borrowings by $253.7 year to date. At quarter-end, $596.5 was available under the revolving facility and $70.0 under the receivables financing agreement. The company said it was in covenant compliance and believed liquidity was sufficient.
- Environmental liabilities were $129.0 at quarter-end; management estimated 2018 investigatory and remediation spending of about $15. Environmental outcomes remain uncertain and could adversely affect results. Other contingencies include asbestos-related matters and a Plaquemine contract arbitration; additional losses on that dispute were not estimable.
- Market and operating risks include cyclical chemical prices and demand, raw-material, energy and freight costs, manufacturing outages, foreign exchange and interest rates, substantial debt, and execution or disruption risks associated with the IT systems project. Management warned that weaker markets could affect covenant compliance.
Important facts for investors to verify
- How much of reported earnings improvement reflects sustainable segment performance versus the $110.0 environmental recovery and other unusual items.
- Whether the caustic soda price increase is achieved and whether Q4 seasonal weakness and higher input costs develop as forecast.
- Cash conversion and working-capital trends: receivables increased substantially, and the $120.0 insurance settlement was collected after quarter-end.
- Debt and liquidity developments, including variable-rate exposure, covenant headroom, and the $440–$465 ethylene-related payment expected around Q4 2020.
- Potential changes in environmental remediation estimates, the outcome of the Plaquemine arbitration, and remaining restructuring costs; the filing says the additional arbitration loss cannot currently be estimated.
- Progress, cost and operational risks for the IT Project, and the effect of ongoing share repurchases and dividends on capital allocation.