Olin Corp, the parent of Winchester, reported second quarter 2018 reported net income was $58.6 million, or 35 cents per share, which compares to the second quarter 2017 net loss of $5.9 million, or 4 cents, a year ago.
Second quarter 2018 adjusted EBITDA of $325.4 million reflects depreciation and amortization expense of $150.7 million, restructuring charges of $6.4 million, information technology integration and other costs of $11.8 million and a non-cash impairment charge of $21.5 million. The second quarter 2018 (losses) earnings from non-consolidated affiliates includes the non-cash impairment charge, which relates to an adjustment in the value of Olin’s minority interest in a natural gas storage business. Second quarter 2017 adjusted EBITDA was $180.3 million. Sales in the second quarter 2018 were $1,728.4 million compared to $1,526.5 million in the second quarter 2017.
John E. Fischer, chairman, president and chief executive officer, said, “The second quarter of 2018 represented the highest level of adjusted EBITDA since the acquisition of the DowDuPont Chlorine Products businesses. Strong performances by both the Chlor Alkali Products and Vinyls and Epoxy businesses contributed to this outcome. We achieved this result while completing the majority of our 2018 planned maintenance turnarounds during the second quarter. We expect the maintenance turnaround expense during the second half of 2018 to decline by approximately $135 million from first half levels. In addition, we expect 2019 maintenance turnaround expenses to decline approximately $30 million to $40 million from 2018 levels.
“Caustic soda prices in Olin’s system increased approximately 5 percent in the second quarter of 2018 compared to the first quarter and domestic caustic soda prices are expected to increase further in the third quarter. Olin continues to believe that caustic soda is in a multi-year positive cycle that began in the middle of 2016. The combination of steady global demand growth, chlor alkali capacity reductions in North America, Europe and China over the last two years, and minimal capacity additions support the continued caustic soda cycle. Our expectation is for further improvement in caustic soda pricing during the next several years.
“The positive supply and demand dynamics in the epoxy resin markets have continued, providing a constructive near term outlook for the Epoxy business. However, higher propylene costs than were experienced in the first half of 2018 are expected to represent a challenge in the second half of 2018.
“Based on the adjusted EBITDA achieved during the second quarter of 2018 and the positive outlook for the business, we are increasing our 2018 adjusted EBITDA forecast to $1.3 billion with upside opportunities of approximately 4 percent and downside risks of approximately 4 percent.”
Segment Reporting
Olin defines segment earnings as income (loss) before interest expense, interest income, other operating income (expense), non-operating pension income and income taxes and includes the (losses) earnings of non-consolidated affiliates in segment results consistent with management’s monitoring of the operating segments.
Chlor Alkali Products and Vinyls
Chlor Alkali Products and Vinyls sales for the second quarter 2018 were $1,018.7 million compared to $865.1 million in the second quarter 2017. The increase in the second quarter sales compared to the prior year was primarily due to increased caustic soda, chlorine and other chlorine-derivatives pricing and higher volumes, partially offset by lower ethylene dichloride pricing. Second quarter 2018 segment earnings of $149.4 million improved compared to $52.8 million in the second quarter 2017, primarily due to higher pricing for caustic soda, chlorine and other chlorine-derivatives, higher volumes, lower maintenance turnaround costs and lower ethylene costs. These items were partially offset by lower ethylene dichloride pricing and higher raw material and freight costs. Chlor Alkali Products and Vinyls second quarter 2018 results included depreciation and amortization expense of $119.4 million compared to $106.6 million in the second quarter 2017.
Second quarter 2018 segment results include a $21.5 million non-cash impairment charge related to an adjustment to the value of Olin’s 9.1 percent limited partnership interest in Bay Gas Storage company, Ltd. (Bay Gas). Bay Gas owns, leases and operates underground gas storage and related pipeline facilities, which are used to provide storage in the McIntosh, AL area and delivery of natural gas. The general partner, Sempra Energy, has made a decision to sell several assets, including its 90.9 percent interest in Bay Gas. The impairment charge adjusts the related assets’ carrying value to an estimated fair value. Olin has no other non-consolidated affiliates.
Epoxy
Epoxy sales for the second quarter 2018 were $543.8 million compared to $492.0 million in the second quarter 2017. The increase in Epoxy sales was primarily due to higher product prices, partially offset by lower volumes. The second quarter 2018 segment income was $24.8 million compared to a segment loss of $8.1 million in the second quarter 2017. The increase in the Epoxy segment earnings was principally due to higher product prices, partially offset by higher raw material costs, primarily benzene and propylene and lower volumes. The second quarter 2018 Epoxy segment earnings reflected $20.8 million of maintenance costs and unabsorbed fixed manufacturing costs from lost sales associated with an approximately two-month planned maintenance turnaround that began in the first quarter at our production facilities in Freeport, TX. Epoxy second quarter 2018 results included depreciation and amortization expense of $25.1 million compared to $22.8 million in the second quarter 2017.
Winchester
Winchester sales for the second quarter 2018 were $165.9 million compared to $169.4 million in the second quarter 2017. The decrease in sales was primarily due to lower sales to commercial customers, partially offset by higher military sales. Second quarter 2018 segment earnings were $11.8 million compared to $19.0 million in the second quarter 2017. The decrease in segment earnings was primarily due to higher commodity and other material costs and a less favorable product mix, partially offset by lower operating costs. Year-over-year commodity and other material costs increased by $6.5 million. Winchester second quarter 2018 results included depreciation and amortization expense of $4.9 million compared to $4.5 million in the second quarter 2017.
Corporate and Other Costs
Second quarter 2018 charges to income for environmental investigatory and remedial activities were $4.4 million compared to $1.8 million in the second quarter 2017. These charges related primarily to remedial and investigatory activities associated with former waste sites and past operations of the legacy Olin businesses.
Other corporate and unallocated costs in the second quarter 2018 increased by $17.7 million compared to the second quarter 2017, primarily due to higher legal and litigation costs and costs associated with the implementation of new enterprise resource planning, manufacturing and engineering systems and related infrastructure costs.
Non-Operating Pension Income
Non-operating pension income reflects the adoption of Accounting Standards Update 2017-07 and includes all components of pension and other post-retirement benefits income (costs) other than service costs, which continue to be included within operating income and are allocated to the operating segments based on their respective census data. Costs of goods sold, selling and administration expense and operating segment results for 2017 have been restated to reflect this accounting change. Non-operating pension income included in the second quarter 2018 was $5.4 million compared to $8.6 million in the second quarter 2017.
Cash and Debt
The cash balance at June 30, 2018 was $144.2 million. During the first six months of 2018, we repaid $80.1 million of debt outstanding using available cash. We are targeting to repay approximately $300 million of debt during 2018. Olin has no required debt repayments in 2018. Olin typically experiences a working capital increase during the first half of the year. The increase in working capital was $118.7 million in the first six months of 2018 compared to $31.6 million in the first six months of 2017. The higher year-over-year working capital increase was primarily due to improved selling prices and higher raw material costs.
During the second quarter 2018, approximately 0.3 million shares of common stock were repurchased at a cost of $9.1 million.
Olin Corporation is a leading vertically-integrated global manufacturer and distributor of chemical products and a leading U.S. manufacturer of ammunition. The chemical products produced include chlorine and caustic soda, vinyls, epoxies, chlorinated organics, bleach and hydrochloric acid. Winchester’s principal manufacturing facilities produce and distribute sporting ammunition, law enforcement ammunition, reloading components, small caliber military ammunition and components and industrial cartridges.
