Olin Corporation (OLN) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition through its Chlor Alkali Products and Vinyls, Epoxy, and Winchester segments. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Sales | $2,221.3 | $1,241.2 | $4,140.1 | $2,666.3 |
| Gross margin | $509.1; 23% of sales | $5.5; approximately 0% | $1,004.1; 24% of sales | $56.4; 2% of sales |
| Operating income (loss) | $395.0 | $(95.8) | $776.2 | $(143.3) |
| Net income (loss) | $355.8 | $(120.1) | $599.4 | $(200.1) |
| Diluted earnings (loss) per share | $2.17 | $(0.76) | $3.69 | $(1.27) |
| Operating cash flow | Not separately stated | Not separately stated | $707.6 | $55.4 |
Q2 sales rose 79% year over year; first-half sales rose 55%. The turnaround reflected stronger pricing and volumes across the businesses, as well as Winchester’s expanded Lake City ammunition operations. First-half results also included a net favorable $99.9 million pretax impact from Winter Storm Uri, with a $121.4 million benefit in Chlor Alkali Products and Vinyls partly offset by a $21.5 million adverse impact in Epoxy.
Segments and balance sheet
- Q2 segment income: Chlor Alkali Products and Vinyls $168.9 million, versus a $57.0 million loss; Epoxy $165.3 million, versus a $13.0 million loss; Winchester $109.9 million, versus $16.0 million.
- Cash and liquidity: Cash was $272.8 million at June 30, 2021. Current assets were $2,218.1 million and current liabilities $1,345.7 million. Olin reported $799.6 million available under its $800 million revolving facility and $125 million available under its $250 million receivables facility.
- Debt: Long-term debt, including current installments, was $3,382.9 million. First-half net debt repayments were $490.2 million. Debt to total capitalization fell to 62.0% from 72.7% at year-end 2020. The company reported compliance with credit-facility covenants.
- Cash uses and equity: First-half capital expenditures were $86.4 million; dividends paid were $63.7 million. Shareholders’ equity was $2,074.7 million at quarter-end.
Changes, outlook, and notable items
- Sales, margins, and earnings improved sharply from pandemic-affected 2020 comparisons. Higher prices drove much of the chemical segment improvement; higher raw-material costs partially offset gains, especially in Epoxy. Winchester benefited from higher commercial and military volumes and pricing, including Lake City production.
- Olin targeted approximately $1 billion of debt reduction in 2021 using operating cash flow. Management said it expected sufficient liquidity for operating, investment, and debt-service needs.
- Management expected year-over-year improvement in both chemical segments, with ECU pricing gains partly offset by higher raw-material costs, principally benzene and propylene. Winchester income was expected to improve from 2020’s $92.3 million.
- 2021 outlook included capital spending of about $200 million; depreciation and amortization of $575–$600 million; environmental expense of $20–$25 million; non-operating pension income of $30–$35 million; an effective tax rate of 20%–25% excluding the German valuation-allowance release; and cash taxes of 10%–15%.
- Tax item: Olin released a $103.8 million valuation allowance on German deferred tax assets in Q2. The filing reports a $93.9 million net tax benefit from the listed Q2 tax factors; the income statement shows an $18.5 million income-tax benefit overall. Realizability depends on future taxable income in Germany.
- Restructuring: Q2 charges were $14.0 million, including a productivity plan and chemical-facility closures. Olin permanently closed 225,000 tons of diaphragm-grade chlor-alkali capacity at Plaquemine and 200,000 tons at McIntosh; additional charges are expected for several closure plans.
- Risks and contingencies: Environmental reserves were $148.4 million. Caustic-soda price-fixing class actions in the U.S. and Canada seek unspecified damages; Olin says potential losses are not currently estimable and an unfavorable outcome could materially affect results, cash flows, or financial position. The filing also highlights commodity and energy costs, supply and operating interruptions, debt and covenant exposure, market conditions, environmental matters, and Lake City contract risks.
- Cash-flow presentation: The filing disclosed a correction to the previously issued Q1 2021 cash-flow statement, increasing operating cash flow and reducing financing cash flow by $18.7 million. A correction to the 2020 annual cash-flow presentation was also expected.
Investor verification points
- Assess how much of the earnings improvement reflects sustained pricing and demand versus Winter Storm Uri effects, favorable tax items, and unusually weak 2020 comparisons.
- Track execution of the 2021 debt-reduction target, liquidity availability, and compliance with secured leverage and interest-coverage covenants.
- Verify that German deferred tax assets remain realizable and monitor the unrecognized tax benefits and related audit discussions.
- Monitor raw-material and energy costs, environmental spending and reserves, plant-closure charges, and developments in the caustic-soda litigation.
- Review the cash-flow classification correction and the expected correction to the 2020 annual cash-flow statement.