Olin Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales | $1,553.4 | $1,710.3 |
| Gross margin | $206.1; 13% of sales | $181.6; 11% of sales |
| Operating income | $95.2 | $84.9 |
| Income before taxes | $53.1 | $27.5 |
| Net income | $41.7 | $20.9 |
| Diluted earnings per share | $0.25 | $0.12 |
| Cash provided by operations | $104.3 | $80.9 |
| Capital expenditures | $102.2 | $89.5 |
| Cash and cash equivalents at quarter-end | $105.7 | $109.1 |
Sales fell 9%, while gross margin rose to 13% from 11%. Higher earnings primarily reflected improved Epoxy results and an $11.2 million pretax gain on the Bay Gas investment sale. The gain was unusual and should be distinguished from recurring operating performance. Q1 cash decreased $73.1 million, mainly reflecting debt repayments and capital spending.
At March 31, 2019, total debt carrying value, including current installments and finance leases, was $3,193.3 million; $773.9 million was variable-rate debt. Debt declined from $3,230.3 million at December 31, 2018. Olin reported $596.5 million available under its revolving credit facility and $125.0 million additional capacity under its receivables financing agreement; it said it was in compliance with debt covenants. The filing states management believes available liquidity is sufficient for near- and long-term needs.
Segment results and changes
- Chlor Alkali Products and Vinyls: Sales were $872.2 million, down 7%; segment income was $120.4 million versus $130.5 million. Lower caustic soda pricing was partly offset by stronger pricing for EDC, chlorine and derivatives, and lower input and turnaround costs.
- Epoxy: Sales were $524.0 million, down 13%; segment income was $10.5 million versus a $22.1 million loss. Improvement largely reflected lower maintenance and under-absorption costs than during the prior-year Freeport turnaround, as well as lower raw-material costs. Lower prices and volumes weighed on sales.
- Winchester: Sales were $157.2 million, down 8%; segment income fell to $9.1 million from $12.0 million. Lower sales volumes, less favorable mix and lower prices were partly offset by lower material costs.
Interest expense declined to $57.4 million from $63.7 million, principally due to lower debt outstanding, partly offset by higher interest rates. Selling and administration expense increased to $107.0 million, including higher Information Technology Project costs. Prior-year results included an $8.0 million insurance recovery in other operating income.
Outlook, risks and unusual items
- Management projected 2019 net income of approximately $1.60 per diluted share, including about $80 million of pretax IT integration and restructuring costs and the $11.2 million Bay Gas sale gain.
- Q2 earnings were forecast below Q1, with approximately $40 million of higher maintenance turnaround costs; management expected Q2 to be the weakest quarter and the second half stronger than the first.
- For 2019, management expected Chlor Alkali Products and Vinyls segment income comparable to 2018, Epoxy results to improve, and Winchester segment income similar to 2018. Caustic soda prices were expected to begin recovering during Q2 and continue improving in the second half; realization of announced price increases was uncertain.
- 2019 capital spending was forecast at $375–$425 million, including about $80 million for the IT Project; depreciation and amortization was forecast at $590–$610 million. Olin targeted $250–$300 million of debt repayments for the year and expected an effective and cash tax rate of about 25%.
- Environmental expense was forecast at $30–$40 million for 2019, versus $7.3 million in 2018 excluding prior-period insurance recoveries. Recorded environmental liabilities were $125.5 million; management cautioned that estimates and outcomes remain uncertain.
- Six purported caustic soda price-fixing class actions name Olin and other producers; claimed damages are unspecified and potential losses are not estimable. Olin disputes the allegations. A separate Plaquemine, Louisiana contract arbitration, scheduled for Q4 2019, also has unestimable potential additional losses that could be material if resolved adversely.
- Olin adopted lease accounting in January 2019, recording $291.9 million of operating lease assets and liabilities at adoption and an $11.2 million after-tax retained-earnings adjustment. Prior periods were not restated.
Investor verification priorities
- Track caustic soda pricing and whether announced increases are achieved, given their material effect on Chlor Alkali results and the outlook.
- Assess whether Epoxy improvement persists beyond the prior-year turnaround comparison, and monitor volumes, prices and input costs across all segments.
- Compare the $1.60-per-share outlook with recurring earnings, separating the Bay Gas gain from expected IT, restructuring and maintenance costs.
- Monitor cash generation, working-capital movements, planned debt repayment, capital spending and liquidity availability.
- Follow developments and potential financial exposure in the caustic soda lawsuits, Plaquemine arbitration and environmental matters.