Olin Corporation — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition through Chlor Alkali Products and Vinyls, Epoxy, and Winchester. Results include the businesses acquired from Dow Chemical on October 5, 2015; consequently, reported year-over-year comparisons are not like-for-like. For context, unaudited Q1 2015 pro forma results assuming the acquisition had occurred earlier showed sales of $1.439 billion and a net loss of $39.5 million.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Sales | $1,348.2 million | $518.0 million |
| Gross profit / margin | $172.8 million / 12.8% | $84.8 million / 16.4% |
| Operating income (loss) | $(7.4) million | $26.0 million |
| Net income (loss) | $(37.9) million | $13.1 million |
| Diluted EPS | $(0.23) | $0.17 |
| Operating cash flow | $47.0 million | $(9.6) million |
| Capital expenditures | $76.1 million | $23.3 million |
Q1 2016 sales rose $830.2 million, primarily reflecting $856.1 million of acquired-business sales. Gross margin percentage fell, with acquired-business contribution partly offset by weaker legacy chlor-alkali pricing and volumes. Operating results included $92.8 million of restructuring charges, $10.2 million of acquisition-related costs, and an $11.0 million insurance recovery. Interest expense rose to $48.5 million from $7.1 million, primarily due to acquisition financing.
Segment sales and income: Chlor Alkali Products and Vinyls, $704.3 million and $68.1 million; Epoxy, $460.2 million and $8.2 million; Winchester, $183.7 million and $28.7 million. Chlor Alkali results benefited from acquired operations and lower costs, partly offset by lower prices. Winchester income declined 4%, as higher operating costs and lower prices outweighed lower material costs, increased volumes, and favorable mix.
Liquidity, debt, and balance sheet
At March 31, 2016, cash was $315.6 million, total debt including current installments was $3,833.0 million, and shareholders’ equity was $2,372.8 million. Approximately $2,289.0 million of debt was variable-rate. Olin reported $484.9 million available under its $500 million revolving facility, after letters of credit. It was in compliance with credit-agreement covenants and stated that available cash, operating cash flow, and revolver capacity were sufficient for anticipated needs. Total debt to capitalization was 61.8%, versus 61.4% at year-end 2015.
Cash declined $76.4 million during the quarter. Operating cash flow improved year over year, but included substantial noncash impairment and depreciation add-backs; working capital increased $98.1 million. Investing cash use was $73.8 million, including $76.1 million of capital spending. Financing cash use was $50.1 million, including $17.1 million of debt repayments and $33.0 million of dividends. The quarterly dividend was $0.20 per share.
Material changes, outlook, and risks
- Olin announced closure or reduction of 433,000 tons of chlor-alkali capacity across Henderson, Niagara Falls, and Freeport. Q1 charges were $92.2 million for these actions, including $76.6 million of noncash asset impairments; approximately $45 million of additional charges are expected through 2020.
- Management projected Q2 2016 diluted EPS of $0.10–$0.20, including about $8 million of restructuring charges, $10 million of acquisition integration costs, and $35 million of acquisition step-up depreciation and amortization. It expected Chlor Alkali Products and Vinyls and Winchester segment income to improve from Q1, and Epoxy segment income to decline.
- For full-year 2016, management expected capital spending of $300–$340 million, depreciation and amortization of $490–$500 million, acquisition-related integration costs of about $40 million, environmental charges of $15–$20 million, and an effective tax rate of 35%–38%. Approximately $205 million of debt was expected to mature and be repaid using available cash.
- Environmental reserves were $139.2 million; management said environmental charges could be material in 2016 and noted uncertainty in estimating remediation costs. Recorded liabilities for legal actions, including asbestos matters, were $22.1 million; management did not expect these matters to materially adversely affect results.
- Other risks include commodity-price and demand cyclicality, acquisition integration and synergy execution, substantial debt and variable-rate exposure, energy and raw-material costs, manufacturing interruptions, pension obligations, and foreign-exchange movements. Purchase-price allocation for the acquisition remained preliminary; management expected to complete it within one year of closing.
Important facts for investors to verify
- Whether post-acquisition operating performance and expected synergies offset lower commodity pricing, integration expenses, and acquisition-related depreciation and interest costs.
- Progress and costs of the chlor-alkali capacity reductions and Winchester relocation, including the timing of expected savings and remaining restructuring charges.
- Cash generation after working-capital needs and planned capital spending, debt maturities, and dividend payments; also monitor variable-rate debt and covenant headroom.
- Whether environmental remediation estimates, preliminary acquisition valuations, and other contingencies change materially as additional information becomes available.