Olin Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in millions of dollars except per-share data. The results cover Olin’s pre-acquisition businesses; the acquired Dow businesses are not included.
Business context
Olin operated Chlor Alkali Products, Chemical Distribution and Winchester. On October 5, 2015, after quarter-end, Olin closed its acquisition of Dow’s U.S. chlor alkali and vinyl, global chlorinated organics and global epoxy businesses. Dow shareholders received approximately 87.5 million Olin shares, representing about 53% of post-merger shares.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $533.6 | $593.6 | $1,587.0 | $1,741.4 |
| Gross margin | $73.6 | $101.3 | $248.3 | $310.1 |
| Gross margin as % of sales | 14% | 17% | 16% | 18% |
| Operating income | $22.9 | $57.3 | $130.1 | $178.0 |
| Net income | $5.9 | $26.1 | $61.3 | $92.9 |
| Diluted EPS | $0.08 | $0.33 | $0.78 | $1.16 |
| Operating cash flow | — | — | $115.1 | $99.5 |
- Q3 sales declined 10%; nine-month sales fell 9%. Lower chlor alkali prices and volumes and lower Winchester shipments were the main pressures. Chemical Distribution segment income improved, but did not offset declines in the other businesses.
- Q3 operating income included $14.5 of acquisition-related costs; nine-month operating income included $35.4 of such costs. Nine-month other operating income included a $42.3 insurance gain. The company also recorded $52.2 of total Becancour insurance recoveries in the nine-month period, including reimbursements recorded in cost of goods sold and selling and administration.
- Cash and cash equivalents were $254.0 at September 30, 2015. Current assets were $868.4 and current liabilities $585.2. Pre-acquisition debt, including current installments, was $670.2; $302.2 was variable-rate. The filing reported $257.8 available under the then-existing revolving credit facility. Cash decreased $2.8 over the nine months.
- Capital expenditures were $79.7 for nine months, versus $49.7 a year earlier. Dividends paid were $46.5, or $0.60 per share.
Material changes and acquisition financing
- The acquisition purchase price was approximately $5,069.8, subject to post-closing adjustments, comprising cash and debt transferred to Dow, Olin shares valued at approximately $1,527.4, and assumed pension liabilities and long-term debt. Purchase accounting was incomplete at filing.
- At closing, the company reported $3,170.0 of new debt: $1,350.0 in term loans under senior credit facilities, an $800.0 Sumitomo term loan and $1,220.0 of senior notes bearing 9.75% due 2023 and 10.00% due 2025. Olin guarantees the notes. The new facilities carry covenants, including leverage and interest-coverage tests. On November 3, Olin amended the Sumitomo facility to provide for a further $200.0 borrowing, expected November 5.
- Olin expected at least $200 of annual synergies within three years, with potential additional annual synergies of up to $100 if it expands sales to third parties and enters new markets. It expected $100–$150 of transition costs and $200 of incremental capital spending during the first three years.
Outlook, risks and unusual items
- Management projected a Q4 2015 net loss of $0.25–$0.30 per diluted share, including approximately $75 of acquisition-related costs, $11 of acquisition financing expenses and $30 of estimated acquisition-related step-up depreciation and amortization. It estimated full-year environmental charges of approximately $15 and expected Q4 capital spending of about $60, including the acquired business.
- Q4 ECU netbacks were forecast slightly above Q3’s approximately $490. A $65-per-ton caustic soda price increase had been announced, but its realization was uncertain; most benefit, if achieved, was expected in Q1 2016. Management expected Q4 hydrochloric acid contribution to decline approximately $8 versus Q4 2014. Winchester Q4 segment income was expected to exceed the prior-year $17.4.
- Environmental liabilities were $139.9 at September 30; environmental provisions were $13.1 for nine months. The company cautioned that remediation estimates are uncertain and outcomes could materially affect results or financial position. Recorded liabilities for legal actions, including asbestos matters, were $22.7; management did not believe these matters were reasonably likely to have a material adverse effect.
- Key risks include cyclical commodity prices and demand, feedstock and energy costs, environmental and litigation exposure, manufacturing and transportation disruptions, interest-rate and refinancing risk, and the execution, cost and timing of acquisition integration and expected synergies. Tax-related covenants also restrict certain actions for two years after the distribution.
Most important facts for investors to verify
- How the acquisition’s final purchase-price allocation, assumed liabilities and post-close debt affect reported earnings, leverage, interest expense and liquidity.
- Whether the projected synergies are achieved on schedule and exceed the associated transition costs and incremental capital spending.
- Whether the Q4 loss outlook and the expected caustic soda, hydrochloric acid and Winchester trends materialized.
- Whether environmental reserves prove adequate and whether commodity, operating or integration risks change the company’s ability to meet debt covenants.
- The company reported effective disclosure controls as of September 30, 2015; confirm subsequent filings for acquisition accounting updates and post-merger results.