Olin Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts are unaudited and in millions of dollars, except per-share data. Olin acquired Dow’s chlor alkali, vinyls, chlorinated organics and epoxy businesses on October 5, 2015; accordingly, 2016 includes those operations while the Q3 2015 reported results do not. Year-over-year consolidated comparisons therefore reflect a substantially different business mix.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $1,452.7 | $533.6 | $4,164.9 | $1,587.0 |
| Gross margin | $168.3 | $73.6 | $468.2 | $248.3 |
| Gross margin as % of sales | 12% | 14% | 11% | 16% |
| Operating income | $67.8 | $22.9 | $83.5 | $130.1 |
| Net income (loss) | $17.5 | $5.9 | $(21.4) | $61.3 |
| Diluted EPS | $0.11 | $0.08 | $(0.13) | $0.78 |
| Operating cash flow | Not provided separately | Not provided separately | $407.1 | $115.1 |
Q3 sales rose by $919.1, including $912.0 from the acquired businesses. Operating income increased, but interest expense also rose substantially, primarily because acquisition financing increased debt. For the first nine months, operating income fell despite the larger combined business; results included significant restructuring charges and lower legacy chlor alkali prices, as well as prior-year insurance recoveries. The 2016 nine-month net loss included $76.6 of noncash asset impairment charges and $106.2 of restructuring charges. Acquisition-related costs were $13.1 in Q3 and $39.6 year to date.
Segments and material changes
- Chlor Alkali Products and Vinyls: Q3 sales were $779.4 and segment income $53.7; nine-month sales were $2,216.7 and segment income $152.5. Acquired operations and lower freight costs supported income, partly offset by lower prices and volumes. Olin announced reductions totaling 433,000 tons of chlor alkali capacity; $105.0 of related charges were recorded through September, including $76.6 of noncash impairments.
- Epoxy: Q3 sales were $470.1 and segment income $10.3; nine-month sales were $1,380.3 and segment income $18.5.
- Winchester: Q3 sales were $203.2 and segment income $36.0, compared with $181.8 and $30.1 a year earlier. Higher volumes and lower materials costs were partly offset by lower prices and higher operating costs. Nine-month segment income was $95.9 versus $93.8.
Cash, debt and liquidity
Cash and equivalents were $127.0 at September 30, down $265.0 from year-end 2015. Nine-month operating cash flow of $407.1 was more than offset by investing outflows of $397.2 and financing outflows of $275.6. Investing included $199.4 of capital expenditures, $175.7 paid for long-term low-cost electricity arrangements and $69.5 of acquisition-related payments, partly offset by $40.4 of sale-leaseback proceeds. Receivables factoring also supported operating cash flow: $236.7 of receivables were sold year to date, with $85.0 outstanding at quarter-end.
Long-term borrowings, including current installments and capital lease obligations, were $3,677.8; cash-adjusted net debt was approximately $3,550.8. Approximately $2,255.3 of borrowings were at variable rates. Olin reported $483.5 available under its $500.0 revolving facility after letters of credit, and stated it was in compliance with debt covenants at quarter-end. Debt represented 61.2% of total capitalization. The company paid $99.1 in dividends during the first nine months, or $0.60 per share.
Outlook, commentary and risks
- Management projected Q4 2016 diluted EPS of $(0.05) to $0.05, including about $20 of restructuring and acquisition integration costs and about $40 of acquisition step-up depreciation and amortization.
- For Q4, Chlor Alkali Products and Vinyls income was expected to be slightly below Q3, Epoxy income similar to Q3, and Winchester income below Q3 due primarily to seasonal demand. Management forecast full-year capital spending of $270–$290 and depreciation and amortization of $530–$540, including about $160 of acquisition step-up expense.
- Management expected approximately $50 of acquisition integration costs for full-year 2016. It forecast full-year environmental charges of about $10 and Q4 restructuring charges of about $10. It expected no further domestic qualified pension contributions in 2016 and less than $5 of international contributions.
- Olin cited commodity-market cyclicality and limited pricing influence, sensitivity to caustic soda, chlorine and EDC prices, raw-material and energy costs, acquisition integration and synergy execution, substantial debt and floating-rate exposure, covenant risk, and environmental and litigation uncertainty. Environmental reserves were $137.5; legal-action liabilities were $22.9. Management cautioned that environmental estimates may change and adverse outcomes could materially affect results or financial position.
- One ethylene-supply option was exercised, requiring approximately $210 of additional payments to TDCC in 2017. Exercising the remaining option could require another $425–$465 in 2020. The board declared a $0.20-per-share dividend payable in December 2016; future dividends remain discretionary.
Key facts for investors to verify
- Assess underlying performance excluding the acquisition’s contribution and one-time items; reported year-over-year sales are not directly comparable.
- Track chlor alkali and epoxy pricing, volumes, margins, and whether announced capacity actions and expected synergies deliver benefits.
- Review debt service, variable-rate exposure, covenant headroom and liquidity, including the impact of planned supply-contract payments and receivables factoring.
- Compare actual Q4/full-year results with management’s EPS, capital spending, integration-cost, restructuring and environmental-charge outlook.
- Monitor environmental reserves, litigation exposures, tax-position developments and the uncertain timing and cost of remediation.