Olin Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition through its Chlor Alkali Products and Vinyls, Epoxy, and Winchester segments. Figures below are in U.S. dollars unless noted.
Financial performance and liquidity
- Q2 revenue: $1,526.5 million, up 12% from $1,364.0 million. Gross profit was $122.4 million versus $127.1 million; gross margin declined to about 8% from 9%. Operating income increased to $29.8 million from $23.1 million.
- Q2 earnings: Net loss of $5.9 million, or $0.04 per diluted share, compared with a $1.0 million loss, or $0.01 per share. Interest expense rose to $52.5 million from $47.6 million. The quarter included a $15.9 million income-tax benefit.
- First-half revenue and earnings: Revenue was $3,093.6 million, up 14%. Gross profit was $295.8 million versus $299.9 million, with gross margin about 10% versus 11%. Operating income was $99.4 million versus $15.7 million. Net income was $7.5 million, or $0.04 diluted EPS, compared with a $38.9 million net loss, or $0.24 loss per share.
- Cash flow: First-half operating cash flow was $227.4 million versus $186.2 million. Capital expenditures were $150.9 million, implying operating cash flow less capex of $76.5 million. Cash ended at $184.5 million, unchanged from year-end 2016.
- Debt and liquidity: Long-term borrowings, including current installments and capital leases, were $3,600.6 million; cash less this debt was approximately $3,416 million. Current assets were $1,691.0 million and current liabilities $1,006.4 million. The company reported covenant compliance and $547.1 million of maximum additional borrowing capacity under leverage restrictions.
- Capital returns: Olin paid $0.40 per share in dividends during the first half. The board declared a further $0.20-per-share dividend for September 2017.
Material changes and segment performance
- Chlor Alkali Products and Vinyls: Q2 segment income rose to $52.8 million from $30.7 million; first-half income increased to $140.3 million from $98.8 million. Higher caustic soda and EDC prices and volumes helped, while turnarounds, outages, maintenance, and higher energy and ethylene costs weighed on results.
- Epoxy: Q2 segment loss was $8.1 million versus breakeven; first-half loss was $9.3 million versus income of $8.2 million. Higher benzene and propylene costs more than offset pricing and volume gains.
- Winchester: Q2 segment income fell to $19.0 million from $31.2 million; first-half income fell to $44.1 million from $59.9 million. Commercial ammunition demand and product mix weakened, partly offset by increased military shipments.
- First-half restructuring charges fell to $16.7 million from $101.0 million, which included a $76.6 million non-cash asset write-off in 2016. Acquisition integration costs also declined, to $11.4 million from $26.5 million. The prior-year comparison included an $11.0 million insurance recovery.
- Interest expense increased to $104.9 million for the first half from $96.1 million, despite lower debt outstanding, reflecting higher rates and a $2.7 million write-off of deferred debt issuance costs.
Outlook, risks, and unusual items
- Management projected 2017 diluted EPS of $0.70–$1.15, including approximately $50 million of pretax restructuring and acquisition-integration costs. It expected second-half earnings to improve from first-half levels.
- Management forecast 2017 segment income of $95–$105 million for Winchester, above 2017 first-half results but below 2016’s $120.9 million. It expected Chlor Alkali Products and Vinyls income to exceed 2016’s $224.9 million, while Epoxy income was expected to be equal to or slightly below 2016’s $15.4 million.
- Other 2017 expectations included capital spending of $300–$350 million, $209.4 million of long-term supply-contract payments, and an effective tax rate of 25%–30%. Management estimated an average debt interest rate of about 5% and anticipated no domestic qualified pension-plan contributions.
- Olin refinanced in March 2017: it amended its senior credit facility, extending maturity to March 2022, and issued $500 million of 5.125% senior notes due 2027. About 30% of debt was at variable rates, including swaps; management estimated a 100-basis-point LIBOR increase would raise annual interest expense by $17.2 million before applicable offsets.
- Receivables programs are significant to liquidity and cash-flow interpretation. First-half receivables sales under factoring facilities totaled $777.6 million; $148.4 million of sold receivables remained outstanding and serviced by Olin. Separately, $210 million was drawn under the receivables financing agreement, with $32.3 million of additional capacity reported.
- Olin had $135.7 million in environmental reserves. It warned that environmental costs could be material. A disputed contract termination is in arbitration; the potential additional loss is not estimable and could materially affect results if resolved unfavorably. Other litigation liabilities were $15.9 million; management did not expect those matters to materially adversely affect results.
- Restructuring actions included chlor-alkali capacity reductions; Olin expected about $25 million of further charges through 2020, plus about $5 million through 2018 for the Becancour closure. The capacity-reduction estimate excludes potential charges from the disputed contract termination.
- A $9.5 million IRS settlement benefit affected 2017 taxes. Commodity prices, cyclical demand, outages, energy and raw-material costs, debt service and covenant capacity, and integration/synergy execution remain important risks.
Most important facts for investors to verify
- Whether the projected second-half improvement and $0.70–$1.15 full-year diluted EPS outlook were achieved, and how much depended on pricing, lower turnaround activity, and anticipated cost savings.
- Whether caustic soda price increases were implemented and sustained, and whether Epoxy’s benzene and propylene costs and Winchester’s commercial demand improved as forecast.
- How much operating cash flow depended on receivables sales and financing, and whether working-capital needs, capital spending, and the $209.4 million supply-contract payment affected liquidity.
- Debt levels, interest costs, covenant headroom, refinancing obligations, and sensitivity to variable rates.
- Developments in the contract-arbitration dispute, environmental reserves and spending, and remaining restructuring costs.