Olin Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Olin manufactures chlor alkali products, distributes chemicals, and sells ammunition through Winchester. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $535.4 | $570.4 | $1,053.4 | $1,147.8 |
| Gross margin | $89.9 | $106.8 | $174.7 | $208.8 |
| Operating income | $81.2 | $63.5 | $107.2 | $120.7 |
| Net income | $42.3 | $37.3 | $55.4 | $66.8 |
| Diluted EPS | $0.54 | $0.47 | $0.70 | $0.83 |
- Q2 sales fell 6%; first-half sales fell 8%. Gross margin declined 16% in both comparisons, with gross margin as a share of sales down to 17% from 19% in Q2 and 18% for the first half.
- Q2 operating income and net income increased year over year despite lower sales and gross margin, largely reflecting a $42.3 million insurance gain in other operating income. Olin reported $52.2 million of total Becancour insurance recoveries in Q2, including reimbursements recorded as reductions to cost of goods sold and selling and administration.
- First-half operating income and net income decreased year over year. First-half results included $20.9 million of acquisition-related costs and $12.0 million of acquisition financing expense.
- By segment, Q2 income was $25.0 million for Chlor Alkali Products (down from $40.8 million), $2.4 million for Chemical Distribution (versus break-even), and $33.9 million for Winchester (up from $33.1 million). First-half income was $48.1 million, $3.4 million, and $63.7 million, respectively; Winchester and Chlor Alkali declined from the prior year, while Chemical Distribution improved.
Cash flow, debt and liquidity
- For the first half, operating cash flow was $48.1 million, investing cash outflow was $23.1 million, and financing cash outflow was $49.4 million. Capital expenditures were $51.1 million. Cash decreased $24.4 million to $232.4 million.
- At June 30, total debt, including current installments, was $672.1 million, compared with $675.1 million at December 31, 2014. Debt to total capitalization was 39.0%, versus 40.0% at year-end. Of total borrowings, $303.1 million was at variable rates.
- Olin reported $258.7 million available under its existing $265 million revolving facility, after letters of credit, and stated that it was in compliance with debt covenants. Current assets were $844.3 million and current liabilities were $509.0 million.
- Dividends were $0.20 per share quarterly. Share repurchases were restricted pending the proposed merger; none were made in the first half.
Material changes and management outlook
- Chlor Alkali Products’ weaker results reflected lower chlorine and caustic soda volumes and prices, maintenance outages, and capacity reductions. Q2 operating rate was 84%, versus 86% a year earlier. Chemical Distribution benefited from improved caustic soda margins and shipments; Winchester’s Q2 earnings benefited from lower material and operating costs, while first-half results were hurt by lower volumes and less favorable product mix.
- Management forecast Q3 2015 diluted EPS of $0.05–$0.10, including about $17 million of acquisition-related costs and $8 million of acquisition financing expense. Chlor Alkali segment income was expected below Q3 2014, while Winchester segment income was expected similar to Q3 2014. Management expected full-year Winchester segment income above 2014.
- Management projected 2015 capital spending of $105–$115 million, depreciation and amortization of about $140 million, an effective tax rate of 34%–37%, and environmental charges of $15–$20 million. Full-year environmental cash spending was estimated at about $20 million. Winchester’s relocation to Oxford, Mississippi was expected to generate about $35 million in 2015 cost savings and be completed by the end of 2016.
Acquisition, contingencies and risks
- The proposed Reverse Morris Trust acquisition of specified Dow Chemical businesses remained pending at June 30. The transaction contemplated issuing approximately 87.5 million Olin shares, representing about 52.7% of the combined company, and a $2.03 billion cash-and-debt distribution to Dow, including $875 million in cash. New five-year facilities included a $1.05 billion Spinco term loan and an Olin/Spinco credit facility of up to $1.85 billion. Regulatory milestones and an IRS ruling occurred after quarter-end; shareholder and other closing conditions remained relevant.
- Olin expected substantial transaction costs: $55–$60 million of professional and integration fees, about $50 million of change-in-control deferred-compensation costs, and $25–$30 million of financing fees. If the merger fails, Olin could owe a $100 million termination fee or reimburse up to $50 million of Dow’s expenses, depending on circumstances; incurred transaction costs would remain payable.
- Environmental liabilities were $137.9 million, including $118.9 million classified as noncurrent. Olin said environmental charges were expected to be material in 2015 and that estimates could change; adverse outcomes could materially affect financial position or results. Recorded liabilities for legal matters, including asbestos claims, were $22.4 million; management did not believe these matters were reasonably likely to have a material adverse effect.
- Other notable risks include commodity-price and demand cyclicality, production outages, energy and raw-material costs, pension assumptions, financing and covenant capacity, merger completion and integration, and the acquired business’s potential litigation exposure.
Important facts for investors to verify
- How much of reported Q2 operating income and segment performance was attributable to the Becancour insurance recoveries, and whether the chlorine price increase was realized.
- Final merger consideration, financing drawn and resulting leverage, transaction and integration costs, and completion of remaining shareholder, tax, and other closing conditions.
- Trends in Chlor Alkali volumes, prices and operating rates, and Winchester demand, product mix, backlog and relocation savings.
- Changes in environmental remediation estimates, cash spending, and the timing and amount of any additional charges.
- Whether management’s Q3 and full-year outlook was achieved; the filing provides forecasts, not guaranteed results.