Olin Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and Winchester ammunition. The October 2015 acquisition of Dow’s chlor-alkali, vinyls, chlorinated-organics and epoxy businesses substantially changed the company’s scale; 2015 year-over-year comparisons generally exclude those acquired operations.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $1,364.0 million | $535.4 million | $2,712.2 million | $1,053.4 million |
| Gross margin | $127.1 million; 9% of sales | $89.9 million; 17% | $299.9 million; 11% | $174.7 million; 17% |
| Operating income | $23.1 million | $81.2 million | $15.7 million | $107.2 million |
| Net income (loss) | $(1.0) million | $42.3 million | $(38.9) million | $55.4 million |
| Diluted EPS | $(0.01) | $0.54 | $(0.24) | $0.70 |
| Operating cash flow | — | $186.2 million | $48.1 million |
Sales rose sharply primarily because the acquired businesses were included in 2016, rather than because of comparable organic growth. Gross margin percentage fell; Olin cited lower prices in legacy chlor-alkali products and weaker Winchester results, as well as the prior-year Becancour insurance recovery. Q2 interest expense rose to $47.6 million from $18.2 million, principally reflecting acquisition-related debt.
Segments and material changes
- Chlor Alkali Products and Vinyls: Q2 sales were $733.0 million and segment income $30.7 million, versus $341.2 million and $27.4 million. Acquired-business contributions and lower costs were partly offset by weaker prices and the prior-year insurance benefit. Six-month segment income was $98.8 million versus $51.5 million.
- Epoxy: Q2 sales were $450.0 million with break-even segment income; six-month sales were $910.2 million and segment income $8.2 million.
- Winchester: Q2 sales of $181.0 million and segment income of $31.2 million declined from $194.2 million and $33.9 million. Lower prices, shipments and higher operating costs were partly offset by lower materials costs.
- Olin recorded $101.0 million of first-half restructuring charges, including $76.6 million of noncash impairment, after announcing closures or capacity cuts totaling 433,000 tons across Henderson, Niagara Falls and Freeport. Further charges of about $45 million are expected through 2020.
Cash, debt and liquidity
- Cash was $66.6 million at June 30, 2016, down from $392.0 million at year-end 2015. First-half operating cash flow was $186.2 million; investing and financing cash outflows were $287.1 million and $224.9 million, respectively.
- Capital expenditures were $137.4 million. Other significant investing uses included $85.0 million for low-cost electricity arrangements and $69.5 million of acquisition-related payments.
- Debt, including current installments and capital leases, was $3,695.8 million, compared with $3,848.8 million at year-end. $2,272.1 million was variable-rate debt; debt was 61.3% of total capitalization. The company reported covenant compliance.
- Olin reported $481.9 million available under its $500 million revolving facility at quarter-end, after letters of credit issued under that facility. Management said existing cash, operating cash flow and revolver access should cover expected needs.
Outlook, risks and unusual items
- Management projected Q3 2016 diluted EPS of $0.10–$0.20, including about $5 million of restructuring charges, $15 million of acquisition integration costs and $40 million of acquisition step-up depreciation and amortization. It expected improvement in all three segments versus Q2, citing caustic soda prices and volumes, lower epoxy outage costs, and seasonal Winchester demand.
- Full-year 2016 capital spending guidance was $280–$320 million, including about $30 million of synergy-related spending; depreciation and amortization was estimated at $515–$535 million, including about $160 million of acquisition step-up expense. Management expected about $50 million of acquisition integration costs and approximately $15 million of environmental expense for 2016.
- Olin expects additional payments of about $210 million in 2017 under an exercised ethylene-supply option; exercising the remaining option could require $425–$465 million in 2020. Electricity arrangements also require about $90 million of additional payments in Q3 2016.
- Environmental liabilities were $138.9 million; environmental spending for 2016 was estimated at about $20 million. Recorded liabilities for legal actions, including asbestos matters, were $22.1 million. Management cautioned that environmental outcomes and remediation costs are uncertain.
- Key business risks include commodity-price and demand cyclicality, substantial debt and interest-rate exposure, integration and synergy execution, raw-material and energy costs, environmental obligations, and potential manufacturing interruptions. About 65% of debt was variable rate, though Olin had entered interest-rate swaps.
- The first-half tax benefit and reported effective tax rates were affected by pretax losses, permanent tax differences and tax-return adjustments; management said the 2016 effective tax rate was not meaningful.
Investor verification points
- Separate acquired-business contributions from legacy-business performance when assessing sales and earnings trends.
- Track whether restructuring, integration and acquisition-related depreciation costs, along with expected synergies, develop as management projected.
- Review liquidity and debt-service capacity against low quarter-end cash, variable-rate exposure, maturities and future supply-contract payments.
- Monitor chlor-alkali pricing, epoxy profitability and Winchester demand, as well as environmental reserves and remediation costs.
- Confirm the preliminary acquisition purchase-price allocation, tax uncertainties and the timing and terms of future ethylene and electricity payments.