Olin Corp. reported net income for the third quarter ended September 30 of $195.1 million, or $1.16 per diluted share, which compares to third quarter 2017 net income of $52.7 million, or 31 cents per diluted share. The company beat Wall Street estimates by 43 cents.
Third quarter 2018 adjusted EBITDA of $398.3 million excludes restructuring charges of $3.3 million, information technology integration and other costs of $9.6 million and $88.5 million of insurance recoveries for environmental costs incurred and expensed in prior periods, net of related legal costs incurred in 2018. Third quarter 2017 adjusted EBITDA was $265.5 million. Sales in the third quarter 2018 were $1,872.4 million compared to $1,554.9 million in the third quarter 2017 and beating estimates by $70 million.
John E. Fischer, chairman, president and CEO, said, “During the third quarter, Olin achieved the highest adjusted EBITDA level since the acquisition of the DowDuPont Chlorine Products businesses. Olin benefited from strong operating performances by both the Chlor Alkali Products and Vinyls and Epoxy businesses as well as improved chlorine, ethylene dichloride and other chlorine-derivatives pricing. We also made significant progress on our de-leveraging initiatives, repaying $170 million during the third quarter, thereby reducing debt by $250 million during the first nine months of 2018.
“Fourth quarter 2018 adjusted EBITDA is forecast to decline from the third quarter levels reflecting:
- Seasonally weaker demand for chlorine derivatives, epoxy resins and commercial ammunition;
- Higher ethylene costs, due to increased ethane pricing and
- Lower caustic soda prices.
We now believe full year 2018 adjusted EBITDA will be approximately $1.26 billion with upside opportunities and downside risks of approximately 2 percent. This reflects higher-than-previously-anticipated ethylene costs, resulting from increased ethane prices, of approximately $25 million, lower expected caustic soda pricing of approximately $45 million and lower Winchester results due to decreased commercial ammunition demand of approximately $15 million. ”
“Going forward, we remain confident about the outlook for our chemicals businesses and believe Olin is uniquely positioned in these markets,” said Fischer.
Despite near-term declines in caustic soda prices, Olin continues to believe that the long-term supply and demand fundamentals for caustic soda remain positive. Long-term caustic soda demand growth from alumina, pulp and paper and inorganic chemicals is forecast to exceed long-term chlorine growth from PVC, water treatment, urethanes and refrigerants. 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 a favorable caustic soda outlook. Olin expects continued improvement in caustic soda pricing during the next several years.
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 third quarter 2018 were $1,051.1 million compared to $881.2 million in the third quarter 2017. The increase in the third quarter sales compared to the prior year was primarily due to increased caustic soda, chlorine, ethylene dichloride and other chlorine-derivatives pricing. Third quarter 2018 segment earnings of $210.8 million improved compared to $129.7 million in the third quarter 2017 primarily due to higher pricing for caustic soda, chlorine, ethylene dichloride and other chlorine-derivatives. The higher pricing was partially offset by higher raw material costs, primarily higher ethylene costs, due to increased ethane prices and increased freight costs. The third quarter 2017 Chlor Alkali Products and Vinyls segment earnings were affected by $24.0 million of additional costs and unabsorbed fixed manufacturing costs associated with Hurricane Harvey. Chlor Alkali Products and Vinyls’ third quarter 2018 results included depreciation and amortization expense of $122.3 million compared to $106.8 million in the third quarter 2017.
Epoxy sales for the third quarter 2018 were $647.3 million compared to $489.9 million in the third quarter 2017. The increase in Epoxy sales was due to higher product prices and volumes. The third quarter 2018 segment income was $31.1 million compared to a segment loss of $1.7 million in the third 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. The third quarter 2017 Epoxy segment earnings were affected by $18.7 million of additional costs and unabsorbed fixed manufacturing costs associated with Hurricane Harvey. Epoxy third quarter 2018 results included depreciation and amortization expense of $25.2 million compared to $24.4 million in the third quarter 2017.
Winchester sales for the third quarter 2018 were $174 million compared to $183.8 million in the third quarter 2017. The decrease in sales was primarily due to lower shipments to commercial customers. Third-quarter 2018 segment earnings were $10.3 million compared to $17.2 million in the third quarter 2017. The decrease in segment earnings was primarily due to higher commodity and other material costs, lower commercial ammunition volumes, a less favorable product mix and lower selling prices partially offset by lower operating costs. Year-over-year third quarter commodity and other material costs increased by $4.2 million. Winchester third quarter 2018 results included depreciation and amortization expense of $4.9 million compared to $4.8 million in the third quarter 2017.
Corporate and Other Costs
During third quarter 2018, Olin settled certain disputes with respect to insurance coverage for costs at various environmental remediation sites for $120 million. Olin recognized a pretax gain of $110 million to the environmental provision, which was net of estimated liabilities of $10.0 million associated with claims by subsequent owners of certain of the settled environmental sites. Olin incurred legal costs of $10.5 million and $21.5 million in the third quarter and year-to-date 2018, respectively, related to the aforementioned insurance recoveries. Adjusted EBITDA excludes $88.5 million of the environmental insurance recoveries (net of legal costs incurred).
Other corporate and unallocated costs in the third quarter 2018 increased by $14.3 million compared to the third quarter 2017, primarily due to higher legal costs related to the environmental insurance recoveries and higher 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 third quarter 2018 was $5.4 million compared to $8.4 million in the third quarter 2017.
Cash and Debt
The cash balance at September 30, 2018 was $156.7 million. During the first nine months of 2018, the company repaid approximately $250 million of debt outstanding using available cash. Olin had no required debt repayments in 2018. Working capital increased $192.9 million in the first nine months of 2018 compared to a decrease of $11.4 million in the first nine months of 2017. The year-over-year working capital increase was partially due to improved selling prices and higher raw material costs. The $120 million receivable for the environmental insurance recoveries was collected in early October 2018.
During 2018, approximately 0.5 million shares of common stock were repurchased at a cost of $16.8 million.
On October 24, 2018, Olin’s Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on December 10, 2018, to shareholders of record at the close of business on November 9, 2018. This will be the 368th consecutive quarterly dividend to be paid by the company.
Photo courtesy Winchester