Olin Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Olin manufactures chlor-alkali products and distributes chemicals, and produces ammunition through Winchester. Comparisons below are with Q1 2014 unless noted.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales | $518.0 million | $577.4 million |
| Gross margin | $84.8 million; 16% of sales | $102.0 million; 18% of sales |
| Operating income | $26.0 million | $57.2 million |
| Net income | $13.1 million | $29.5 million |
| Diluted EPS | $0.17 | $0.37 |
| Operating cash flow | $(9.6) million | $(6.9) million |
| Capital expenditures | $23.3 million | $18.6 million |
| Cash and cash equivalents, March 31 | $196.8 million | $242.9 million |
Cash declined $60.0 million during Q1 2015. Operating cash use reflected lower earnings and a $52.7 million increase in working capital, including a $40.7 million receivables increase. Cash used for operations less capital expenditures was $32.9 million. Total debt, including current installments, was $673.3 million; $304.0 million was variable-rate debt. Olin reported $257.7 million available under its revolving facility and compliance with credit covenants. The quarterly dividend was $0.20 per share.
- Chlor Alkali Products: Sales were $292.7 million versus $328.3 million; segment income was $23.1 million versus $34.3 million. Lower chlorine and caustic soda volumes and prices hurt results; lower operating costs partly offset the decline. Capacity utilization was 81% versus 79%.
- Chemical Distribution: Sales were $69.8 million versus $69.2 million; segment income was $1.0 million versus a $0.8 million loss, primarily on increased potassium hydroxide and hydrochloric acid shipments.
- Winchester: Sales were $178.7 million versus $200.6 million; segment income was $29.8 million versus $38.3 million. Lower domestic commercial demand for pistol, shotshell and rifle ammunition was partly offset by lower materials and operating costs.
Material changes and unusual items
- Consolidated sales fell 10%; operating income declined by $31.2 million. Results included $10.4 million of acquisition costs, compared with $0.2 million a year earlier. Selling and administration expense increased 8%, including higher stock-based compensation and mark-to-market adjustments.
- Q1 2014 Chlor Alkali operating costs included $5.5 million of unusual winter-weather costs, making the year-over-year comparison less favorable for 2015.
- Olin recorded $1.2 million of restructuring charges in Q1 2015, principally related to the Becancour facility closure and Winchester’s manufacturing relocation. The remaining accrued restructuring balance was $12.9 million, expected to be paid through 2016.
- Environmental liabilities were $136.0 million at March 31, 2015. Management expects 2015 environmental charges of $15 million to $20 million and estimated environmental spending of about $20 million. The filing cautions that ultimate costs are uncertain.
Merger, outlook and risks
Olin agreed to acquire specified Dow Chemical chlor-alkali and downstream businesses through a Reverse Morris Trust transaction. Under the announced terms, former Dow shareholders would receive approximately 80.6 million Olin shares, representing about 50.5% of the combined company; an additional approximately 6.9 million shares could be issued if certain joint-venture interests transfer. The transaction remained subject to regulatory, shareholder, tax, financing and other conditions. Dow was to receive a distribution valued at approximately $2.0 billion, including $875 million in cash. Olin also agreed to make an upfront payment of just over $300 million for long-term ethylene supply upon closing.
- Olin reported $14.3 million of deferred debt issuance costs for bridge financing in Q1 and had commitments for $3.4 billion of bridge financing. It expected 2015 transaction-related costs of $40 million–$45 million in professional fees, about $50 million for change-in-control deferred compensation costs, and $25 million–$30 million in financing fees.
- For Q2 2015, management projected diluted EPS of $0.10–$0.15, including about $8 million in pretax acquisition costs and $10 million in financing expenses. Chlor Alkali segment income was expected to be similar to Q1, with higher netbacks and seasonal bleach improvement offset by lower hydrochloric acid contribution and planned maintenance.
- Management forecast Winchester full-year 2015 segment income above 2014’s $127.3 million, citing lower Oxford operating costs; it also expected Q2 segment income to be similar to Q2 2014. Chemical Distribution Q2 segment income was expected to improve from Q1.
- Full-year 2015 expectations included capital spending of $120 million–$130 million, depreciation and amortization of $140 million–$145 million, and an effective tax rate of 34%–37%. Olin expected no domestic qualified pension contributions and about $1 million of Canadian plan contributions.
- Key risks include merger delays or failure, financing availability and transaction costs (including a possible $100 million termination fee or reimbursement of up to $50 million under specified circumstances), integration and synergy uncertainty, cyclical chlor-alkali pricing and demand, ammunition demand, environmental and litigation exposure, commodity and energy costs, and interest-rate and pension risks. Olin noted commodity and operating volatility; it estimated a $10-per-ECU price change could alter annual revenue and pretax profit by about $14 million at full capacity, all else equal.
Investor verification priorities
- Track merger closing conditions, financing terms, final cash-and-debt distribution, share issuance and the ethylene-supply payment.
- Compare realized chlorine and caustic soda price increases and ECU netbacks with management’s Q2 expectations.
- Monitor segment volumes, Winchester demand and Oxford relocation savings against full-year forecasts.
- Reconcile cash use, working-capital movements, debt and revolving-credit availability in subsequent quarters.
- Assess environmental reserve adequacy and actual remediation charges and spending against estimates.