Olin Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and Winchester ammunition. Results include businesses acquired from Dow in October 2015.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $1,567.1 million | $1,348.2 million |
| Gross profit / margin | $173.4 million / 11% | $172.8 million / 13% |
| Operating income (loss) | $69.6 million | ($7.4 million) |
| Net income (loss) | $13.4 million | ($37.9 million) |
| Diluted earnings (loss) per share | $0.08 | ($0.23) |
| Operating cash flow | $99.9 million | $47.0 million |
| Capital expenditures | $83.0 million | $76.1 million |
Revenue rose 16%, but gross margin percentage fell as higher input and energy costs offset sales growth. Operating results improved substantially, aided by restructuring charges falling to $8.2 million from $92.8 million. Q1 2016 also included an $11.0 million insurance recovery. Interest expense increased $3.9 million to $52.4 million, including a $2.7 million debt-cost write-off. Reported effective tax rate was 25.1%.
- Chlor Alkali Products and Vinyls: Sales of $836.9 million, up 19%; segment income of $87.5 million versus $68.1 million. Improved caustic soda and EDC prices and volumes were partly offset by electricity, ethylene, and operating costs.
- Epoxy: Sales of $567.6 million, up 23%; segment loss of $1.2 million versus income of $8.2 million. Higher benzene and propylene costs outweighed pricing, volume, and cost improvements.
- Winchester: Sales of $162.6 million, down 11%; segment income of $25.1 million versus $28.7 million. Lower commercial ammunition demand was partly offset by lower operating costs.
Liquidity, debt, and balance sheet
Cash was $168.5 million at quarter-end, down from $184.5 million at year-end 2016. Operating cash flow less capital expenditures was $16.9 million, compared with negative $29.1 million in Q1 2016. Working capital increased $65.1 million, primarily reflecting higher receivables and inventory. Current assets were $1,669.7 million and current liabilities $985.4 million.
Long-term borrowings, including current installments and capital leases, were $3,612.6 million; total debt was approximately 61.4% of total capitalization. On March 9, Olin refinanced debt with a new five-year facility, including a $1,375 million term loan and a $600 million revolving facility, and issued $500 million of 5.125% senior notes due 2027. The credit-facility maturity was extended to March 2022. The company reported covenant compliance; leverage restrictions limited additional borrowing capacity to $500.6 million. It also had $210 million drawn under its receivables financing agreement and $34.1 million of additional capacity.
Outlook, risks, and unusual items
- Management forecast 2017 diluted EPS of $0.70–$1.15, including approximately $50 million of pretax restructuring and acquisition-integration costs. Q2 earnings were expected to improve sequentially; the filing provides no assurance that announced price increases will be realized.
- For 2017, management expected Chlor Alkali Products and Vinyls and Epoxy segment income to exceed 2016 levels, while Winchester income was expected to decline. Forecasts also included capital spending of $300–$350 million, environmental expense of $15–$20 million, depreciation and amortization of $530–$540 million, and an effective tax rate of 25%–30%.
- Management identified commodity pricing, energy and feedstock costs, demand cycles, manufacturing interruptions, substantial indebtedness, covenant capacity, and acquisition-integration execution as significant risks. A 100-basis-point change in LIBOR was estimated to affect annual interest expense by $17.4 million before swap offsets.
- Environmental liabilities were $136.6 million; management said related charges could be material to 2017 operating results. A contract-termination arbitration seeks damages greater than Olin believes it owes; any additional loss is not estimable and could materially affect results if resolved unfavorably. Other legal liabilities, including asbestos matters, were $13.3 million, and management did not expect those matters to have a material adverse effect.
- Olin exercised its remaining option for future ethylene supply, with a payment of $425–$465 million expected around Q4 2020. It also expected to pay $209.4 million under supply contracts in 2017. The quarterly dividend remained $0.20 per share; the board declared another $0.20 dividend payable in June 2017.
Important facts for investors to verify
- Whether caustic soda and EDC price improvements are implemented and offset energy and feedstock inflation.
- Epoxy’s ability to recover higher benzene and propylene costs through pricing and operating improvements.
- Winchester demand trends, planned capital spending, and realization of projected savings and acquisition synergies.
- Debt covenant headroom, interest-rate exposure, receivables-financing and factoring activity, and cash needs for capital and supply-contract commitments.
- Developments in the contract arbitration and environmental matters, including whether estimated reserves remain adequate.
- How reported Q1 tax rate and management’s 2017 tax-rate outlook reconcile; the filing reports a 25.1% effective rate for Q1 and forecasts 25%–30% for 2017.