Olin Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition through its Chlor Alkali Products and Vinyls, Epoxy, and Winchester segments. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $2,340.1 million | $1,437.6 million | $6,480.2 million | $4,103.9 million |
| Gross margin | $660.3 million; 28% of sales | $130.2 million; 9% | $1,664.4 million; 26% | $186.6 million; 5% |
| Operating income (loss) | $549.0 million | $(683.8) million | $1,325.2 million | $(827.1) million |
| Net income (loss) | $390.7 million | $(736.8) million | $990.1 million | $(936.9) million |
| Diluted EPS | $2.38 | $(4.67) | $6.07 | $(5.94) |
| Cash from operations | — | $1,251.7 million | $305.3 million |
Q3 sales rose 63% year over year; nine-month sales rose 58%. Profit improved across all three segments, while the 2020 comparison included a $699.8 million noncash goodwill impairment. Q3 interest expense was $54.0 million, down from $74.6 million; nine-month interest expense was $204.4 million versus $207.1 million, including 2021 debt redemption and related charges.
- Chlor Alkali Products and Vinyls: Q3 sales of $1,062.4 million and segment income of $263.0 million, versus $755.1 million and $37.8 million. Nine-month segment income was $703.0 million versus a $53.5 million loss.
- Epoxy: Q3 sales of $877.7 million and segment income of $215.2 million, versus $476.1 million and $14.9 million. Nine-month segment income was $445.7 million versus $13.6 million.
- Winchester: Q3 sales of $400.0 million and segment income of $115.3 million, versus $206.4 million and $21.0 million. Nine-month segment income was $310.3 million versus $47.5 million.
At September 30, cash was $306.1 million. Total debt shown on the balance sheet was $3,024.6 million, down from $3,863.8 million at December 31, 2020. Shareholders’ equity was $2,387.9 million, up from $1,450.8 million. Nine-month capital expenditures were $135.8 million; cash dividends paid were $95.8 million and share repurchases were $68.3 million.
Material changes, liquidity, and unusual items
- All three businesses benefited principally from improved pricing; Winchester also benefited from higher sales volumes, including production under the Lake City ammunition plant contract. Higher input costs partly offset gains, notably in Epoxy and Winchester.
- Winter Storm Uri halted or disrupted several facilities in early 2021. Management reported a net pretax favorable impact of $99.9 million across segments for the nine-month period, including a $121.4 million benefit in Chlor Alkali Products and Vinyls and a $21.5 million adverse impact in Epoxy.
- Operating cash flow increased $946.4 million year over year. Higher receivables and inventories contributed to a $212.3 million working-capital increase. Investing cash outflow was $135.8 million; financing cash outflow was $998.4 million, reflecting net debt repayment, premiums, dividends, and repurchases.
- Olin repaid $851.1 million of debt net of borrowings during the first nine months. At quarter-end, $799.6 million was available under its $800 million revolving facility and $150 million under its $300 million receivables financing facility. The company reported compliance with debt covenants and no borrowing restrictions at quarter-end.
- The company released a $103.8 million German deferred-tax-asset valuation allowance in Q2. Nine-month results also included $47.6 million of debt-extinguishment loss, including redemption premiums and write-offs.
- Cash-flow presentation correction: the filing says the 2021 quarterly cash-flow statement was corrected for debt-extinguishment and premium classification, increasing operating cash flow and decreasing financing cash flow by $18.7 million. A correction to the 2020 annual cash-flow statement was also planned.
Outlook, risks, and contingencies
Management expected Q4 2021 operating income to be comparable to, or slightly below, Q3’s $549.0 million. It expected Chlor Alkali Products and Vinyls results to increase sequentially, with Epoxy and Winchester results to decline seasonally. Full-year targets included capital spending of about $200 million, depreciation and amortization of about $575 million, an effective tax rate of 20%–25% excluding the German valuation-allowance release, and cash taxes of 10%–15%.
On October 21, 2021, Olin announced it would close the remaining 200,000 tons of diaphragm-grade chlor-alkali capacity at McIntosh, Alabama, with completion expected by Q3 2022. It estimated about $40 million of pretax restructuring costs, none expected in 2021. Earlier closures and restructuring actions also carry estimated future costs.
Environmental reserves were $147.7 million at quarter-end; management cautioned that remediation estimates are uncertain and future charges could arise. Caustic-soda price-fixing class actions in the U.S. and Canada seek unspecified damages; Olin said potential losses were not currently estimable and an unfavorable outcome could materially affect results, cash flows, or financial position. Other highlighted risks include commodity and energy costs, supply and production interruptions, market demand and pricing, debt and covenant capacity, foreign exchange and interest rates, environmental obligations, and Lake City contract performance.
Important facts for investors to verify
- How much of the sharp earnings improvement reflects sustainable pricing and volumes versus storm-related effects, tax benefits, and the unusually weak 2020 comparison.
- Whether Q4 guidance and full-year capital-spending, tax, and cash-tax expectations were achieved.
- Debt reduction, variable-rate exposure, covenant headroom, and availability under revolving and receivables facilities.
- Actual costs and timing of the McIntosh closure and other restructuring plans, alongside environmental and antitrust developments.
- Working-capital needs and the effect of receivables factoring on reported operating cash flow.