Business context and reporting period
Olin Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. Its businesses are Chlor Alkali Products and Vinyls, Epoxy, and Winchester (ammunition). Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $1,554.9 | $1,452.7 | $4,648.5 | $4,164.9 |
| Gross margin | $209.3 | $168.3 | $505.1 | $468.2 |
| Operating income | $112.6 | $67.8 | $212.0 | $83.5 |
| Net income (loss) | $52.7 | $17.5 | $60.2 | $(21.4) |
| Diluted earnings (loss) per share | $0.31 | $0.11 | $0.36 | $(0.13) |
- Sales increased 7% in Q3 and 12% in the nine-month period. Gross margin was 13% of sales in Q3 versus 12% a year earlier; it was 11% in both nine-month periods.
- For the nine months, operating cash flow was $455.1, compared with $407.1. Capital expenditures were $210.0; investing cash flow was $(419.3), including a $209.4 payment for ethylene supply rights. Cash at period-end was $255.9, up from $184.5 at year-end 2016.
- At September 30, total debt carrying value, including current installments, was $3,745.2, versus $3,617.6 at December 31, 2016. Total liabilities were $7,068.0 and shareholders’ equity was $2,298.5. The reported debt-to-total-capitalization ratio was 62.0%, up from 61.4% at year-end.
- Liquidity included $461.4 available under the $600 million revolving credit facility. The $250 million receivables financing agreement was fully drawn, with no additional capacity. Olin reported compliance with debt covenants and no event of default.
- The quarterly dividend remained $0.20 per share; the board declared another $0.20 dividend payable in December 2017.
Material changes and segment performance
- Chlor Alkali Products and Vinyls: Q3 sales were $881.2 versus $779.4 and segment income was $129.7 versus $53.7. Nine-month sales were $2,583.2 versus $2,216.7 and segment income was $270.0 versus $152.5. Higher caustic soda prices were the main benefit; outages, higher energy and ethylene costs, and Hurricane Harvey disruption partly offset it.
- Epoxy: Q3 sales rose to $489.9 from $470.1, but the segment reported a $1.7 loss versus $10.3 income. Nine-month sales were $1,549.5 versus $1,380.3, while the segment moved to an $11.0 loss from $18.5 income. Higher benzene and propylene costs and Harvey-related disruption outweighed price and volume improvements.
- Winchester: Q3 sales declined to $183.8 from $203.2 and segment income fell to $17.2 from $36.0. Nine-month sales were $515.8 versus $567.9 and segment income was $61.3 versus $95.9. Lower commercial ammunition demand, less favorable mix, and higher material costs were partly offset by military and law-enforcement shipments.
- Olin refinanced debt in March 2017: it amended and extended its senior credit facility to 2022, issued $500 million of 5.125% senior notes due 2027, and repaid substantial prior borrowings. Interest expense rose year over year, primarily due to higher rates and debt levels.
Outlook, commentary, and risks
- Management projected 2017 diluted EPS of $0.65–$0.80, including approximately $50 million of pretax restructuring and acquisition-integration costs. Q4 earnings were expected to improve sequentially, supported by caustic soda pricing and reduced Harvey impact, partly offset by maintenance turnarounds.
- Management expected 2017 Chlor Alkali Products and Vinyls income to exceed 2016, Epoxy income to be lower, and Winchester income of $75–$80 million versus $120.9 million in 2016. Winchester’s forecast reflected continued weak commercial demand; expected cost savings from the completed Oxford relocation were approximately $45 million for 2017.
- Forecast 2017 capital spending was $300–$325 million and depreciation and amortization was $545–$555 million. A systems implementation expected to run through 2020 was forecast to require $250 million of capital spending and $100 million of associated expenses over the project’s life.
- Olin exercised an additional ethylene-supply option. It paid $209.4 million in 2017 and recorded a long-term asset and liability of $389.2 million for a further estimated payment of $440–$465 million around Q4 2020.
- Hurricane Harvey constrained production at Freeport from late August through mid-October, reducing sales and adding operating and fixed-cost burdens. Commodity pricing, energy and raw-material costs, manufacturing outages, and ammunition demand remain important earnings sensitivities.
- Restructuring charges were $25.9 million for the first nine months of 2017. Olin expected about $25 million of additional charges through 2020 for chlor-alkali capacity reductions and about $4 million through 2018 for the Becancour closure. A related contract-termination arbitration could result in additional losses that were not estimable; an unfavorable outcome could materially affect results.
- Environmental liabilities were $135.3 million at September 30, 2017; management estimated 2017 investigatory and remediation spending of approximately $17 million. The filing cautions that environmental outcomes and costs may change and could materially affect financial position or results.
Important facts for investors to verify
- Reconcile the effective tax-rate disclosures: the tax reconciliation table reports 12.7% for Q3 and (6.5)% for the nine months, while MD&A also cites 23.8% and 24.8% after specified items. The filing text does not present these figures on a directly comparable basis.
- Track whether the announced caustic soda price increases are realized, and whether Harvey-related production and sales recover as expected.
- Monitor Epoxy input costs and turnaround effects, and Winchester commercial demand, product mix, and military shipments against management’s outlook.
- Assess the 2020 ethylene payment obligation, funding needs, debt and interest costs, and availability under receivables and revolving facilities.
- Follow the contract-termination arbitration, environmental reserves and spending, and progress and costs of the systems implementation and restructuring plans.