Olin Corporation — Q1 2023 Form 10-Q
Business context and reporting period
Olin is a vertically integrated chemical manufacturer and distributor and a U.S. ammunition manufacturer, operating through Chlor Alkali Products and Vinyls, Epoxy, and Winchester. This unaudited quarterly report covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Blue Water Alliance, a 51%-owned joint venture with Mitsui, began operations in January 2023 and is consolidated by Olin.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Sales | $1,844.3 million | $2,461.4 million |
| Gross margin | $402.6 million; 22% of sales | $653.9 million; 27% of sales |
| Operating income | $230.4 million | $546.5 million |
| Net income attributable to Olin | $156.3 million | $393.0 million |
| Diluted earnings per share | $1.16 | $2.48 |
| Cash from operating activities | $37.5 million | $353.5 million |
| Capital expenditures | $61.4 million | $47.3 million |
Consolidated net income was $154.0 million, including a $2.3 million net loss attributable to noncontrolling interests; Olin-attributable net income was $156.3 million. Sales fell 25%, and gross margin percentage declined to 22% from 27%. Operating income was approximately 12.5% of sales, compared with 22.2% a year earlier.
- Segment results: Chlor Alkali Products and Vinyls sales were $1,117.1 million and segment income $245.9 million, versus $1,245.2 million and $328.6 million. Epoxy sales were $360.7 million and segment income $21.4 million, versus $789.5 million and $138.0 million. Winchester sales were $366.5 million and segment income $61.0 million, versus $426.7 million and $118.9 million.
- Cash and working capital: Cash was $176.0 million at quarter-end, down from $194.0 million at year-end 2022. Operating cash flow fell primarily because of lower earnings and a $244.4 million working-capital increase, including inventory build ahead of planned maintenance and seasonal needs. Inventory rose $148.0 million from year-end.
- Debt and liquidity: Debt including current installments and finance leases was $2,774.2 million; total debt to capitalization was 52.3%, up from 50.4% at year-end. Olin had $1,059.6 million available on its $1.2 billion revolving facility and $70.0 million of additional capacity under its receivables financing agreement. It was in compliance with credit covenants at March 31, 2023.
- Capital returns: Olin repurchased 3.6 million shares for $206.1 million and paid $26.2 million in dividends. The quarterly dividend was $0.20 per share. $1,497.2 million remained under the $2.0 billion repurchase authorization.
Material changes and unusual items
Results declined across all three segments. Chlor Alkali and Vinyls’ lower volumes more than offset higher pricing on most products. Epoxy was affected by weak demand, lower volumes and pricing, including record Asian exports into Europe and North America; lower raw-material and operating costs provided a partial offset. Winchester’s lower commercial ammunition volumes and higher costs weighed on results, partly offset by higher military and law-enforcement sales.
Q1 restructuring charges were $60.9 million, primarily related to Epoxy footprint changes. Olin ceased operations at its Cumene facility in Terneuzen and solid epoxy resin production at facilities in Gumi and Guaruja; the closures were completed in Q1. The company expects about $30 million of additional charges through 2026 for these actions. The filing also reports a $44.1 million cash contribution from Mitsui’s noncontrolling interest in Blue Water Alliance.
Outlook, risks and contingencies
- Olin expects challenging global conditions and lower 2023 operating results across all segments compared with 2022. It expects Q2 chemical-business results to be slightly below Q1, Winchester results to improve sequentially, and overall Q2 results to decline slightly from Q1.
- 2023 outlook includes capital spending of $200–$250 million; payments under long-term supply contracts of $50–$100 million; environmental expenses of $25–$30 million; effective tax rate of 25%–30%; and cash tax rate of 30%–35%. Management expects pension income of $20–$25 million and international pension contributions below $5 million.
- Environmental reserves were $146.7 million at March 31. Olin estimates about $25 million of 2023 environmental investigation and remediation spending and notes that future charges could be material.
- Olin and other producers face U.S. and Canadian class-action lawsuits alleging caustic soda price-fixing and related conduct. The company says it will defend its positions; potential losses are not currently estimable and an unfavorable outcome could materially affect results, cash flows or financial position.
- Other key exposures include volatile chemical and energy inputs, foreign exchange and interest rates, weak demand and pricing, manufacturing interruptions, debt and covenant capacity, and legal, environmental and regulatory developments. A 100-basis-point change in SOFR would affect annual interest expense by an estimated $10 million at the reported variable-debt level.
Important facts for investors to verify
- Whether demand, pricing and volumes stabilize in the chemical businesses, particularly Epoxy, and whether Winchester’s commercial volumes recover.
- Progress and remaining costs from the Epoxy closures, including the expected additional restructuring charges and cash payments.
- Cash conversion and working-capital normalization after the inventory build, alongside planned maintenance and capital spending.
- Debt levels, covenant headroom and continued access to revolving and receivables-based financing if operating cash flow weakens.
- Developments in caustic soda antitrust litigation and environmental remediation estimates; the filing does not provide a clear estimate of potential antitrust losses.
- Execution of the 2023 outlook, including tax payments, environmental spending, and the balance between share repurchases, dividends and liquidity needs.