Olin Corporation — Q2 2019 Form 10-Q
Business and period. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition through its Chlor Alkali Products and Vinyls, Epoxy, and Winchester segments. This unaudited report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales | $1,592.9 million | $1,728.4 million | $3,146.3 million | $3,438.7 million |
| Gross margin | $129.2 million (8% of sales) | $267.7 million (15%) | $335.3 million (11%) | $449.3 million (13%) |
| Operating income | $28.5 million | $150.7 million | $123.7 million | $235.6 million |
| Net income (loss) | $(20.0) million | $58.6 million | $21.7 million | $79.5 million |
| Diluted EPS | $(0.12) | $0.35 | $0.13 | $0.47 |
| Operating cash flow | — | $236.1 million | $264.3 million |
- Q2 sales declined 8%; six-month sales declined 9%. Q2 gross margin fell to 8% from 15%, reflecting weaker segment results and higher environmental costs.
- Segment income: Chlor Alkali Products and Vinyls was $70.7 million in Q2 and $191.1 million for six months; Epoxy was $3.9 million and $14.4 million; Winchester was $10.1 million and $19.2 million, respectively.
- Cash and equivalents were $126.9 million at June 30, 2019. Debt, including current installments and capital lease obligations, was approximately $3.234 billion; debt to total capitalization was 53.9%. Cash less debt was approximately $3.107 billion net debt.
- Six-month capital expenditures were $191.3 million, so operating cash flow less capital expenditures was approximately $44.8 million. Dividends paid were $65.7 million and share repurchases were $26.7 million.
- At June 30, Olin reported $596.5 million available under its revolving credit facility and $100 million additional borrowing capacity under its receivables financing agreement. These arrangements were subsequently changed, as described below.
Material changes and drivers
- Lower caustic soda prices were the primary drag on Chlor Alkali Products and Vinyls: segment income fell 53% in Q2 and 32% for the first half versus 2018. Lower caustic soda pricing also reduced segment sales; higher EDC, chlorine and derivative pricing partly offset the impact.
- Epoxy Q2 segment income fell from $24.8 million to $3.9 million as lower selling prices outweighed lower raw-material costs. First-half income improved from $2.7 million to $14.4 million, aided by lower raw-material and maintenance costs.
- Winchester first-half sales and segment income declined 4% and 19%, respectively, mainly due to lower military, law-enforcement and commercial ammunition sales, weaker mix and pricing; lower material costs provided a partial offset.
- Q2 included $17.2 million of net environmental expense, versus $4.4 million a year earlier. The 2019 amount included a $20 million increase in remediation estimates at a former manufacturing site following agency action, partly offset by $4.8 million of insurance-related recoveries.
- Six-month results included an $11.2 million pretax gain on the sale of Olin’s Bay Gas interest. The comparable 2018 period included a $21.5 million noncash impairment of that investment and an $8.0 million insurance recovery for a prior business interruption.
- Information Technology Project costs increased: first-half expense was $35.6 million and capital spending was $39.3 million. The project is expected to be substantially completed in 2020.
Outlook, risks and unusual items
- Management expected stronger results across segments in the second half of 2019 and Q3 earnings above Q2, citing higher volumes or operating rates, lower planned maintenance costs, and seasonal ammunition demand. Management forecast approximately $40 million lower total maintenance turnaround costs in Q3.
- For full-year 2019, management expected Chlor Alkali Products and Vinyls segment income below 2018’s $637.1 million, Epoxy above 2018’s $52.8 million, and Winchester similar to 2018’s $38.4 million. It gave no numerical consolidated earnings forecast.
- Management forecast 2019 environmental expense of $30–$40 million, excluding the $4.8 million insurance-related gain; restructuring costs of about $15 million; capital spending of $350–$400 million, including about $80 million for the IT project; depreciation and amortization of $590–$610 million; and effective and cash tax rates of approximately 25%.
- Environmental reserves were $144.4 million at June 30, 2019. Management cautioned that remediation estimates may change and that adverse outcomes could materially affect results or financial position.
- Olin disclosed a Plaquemine, Louisiana contract arbitration scheduled for Q4 2019, with any additional loss not currently estimable. It also faced caustic-soda price-fixing class-action lawsuits seeking unspecified damages and injunctive relief; Olin said it would defend its position. The filing states that adverse outcomes in either matter could be material.
- On July 16, 2019, after quarter-end, Olin issued $750 million of 5.625% notes due 2029 and used proceeds to repay the remaining $493 million term-loan balance and $150 million receivables-facility borrowing. It also established a new $2 billion credit facility, including an $800 million revolver and up to $1.2 billion in delayed-draw term loans. Management expected delayed-draw proceeds to fund redemption of its 9.75% notes due 2023 and 10.00% notes due 2025 around October 2020.
- Olin adopted lease accounting on January 1, 2019, recording $291.9 million of operating lease assets and liabilities and an $11.2 million after-tax retained-earnings adjustment. The adoption did not affect reported operating results, cash flows or debt-covenant compliance.
Key facts for investors to verify
- Whether the announced caustic soda price increase and stabilization in market prices translated into the expected second-half earnings improvement.
- Progress against segment outlook, including the expected $40 million Q3 reduction in turnaround costs and full-year segment forecasts.
- Environmental remediation developments, reserve adequacy, and the effect of the agency-driven estimate increase.
- Terms and execution of the July refinancing, including the planned redemption of the high-coupon 2023 and 2025 notes and ongoing covenant headroom.
- Developments in the Plaquemine arbitration and caustic soda litigation, for which potential losses were not estimable in this filing.
- IT project spending, implementation milestones, and internal-control changes during the transition; management reported disclosure controls effective at quarter-end.