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Equity Valuation of Olin Corporation
Umang Patel
Spencer Buckner
James Burns
Chris Cash
Caleb Robertson
Aaron Fleitman
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Contents Executive summary ....................................................................................................................................... 6
Analyst Recommendation: Buy (Undervalued)............................................................................................. 6
Company overview: .................................................................................................................................. 7
Industry overview ..................................................................................................................................... 8
Accounting Analysis ................................................................................................................................ 10
Financial Analysis .................................................................................................................................... 11
Valuation analysis ................................................................................................................................... 12
Company Overview ..................................................................................................................................... 14
Structure ................................................................................................................................................. 14
Financial Characteristics ......................................................................................................................... 16
Industry Overview ....................................................................................................................................... 19
Five Forces Model ....................................................................................................................................... 20
Rivalry Among Existing Firms: High ..................................................................................................... 21
Threat of New Entrants for all Subsidiaries: Low ................................................................................ 26
Threat of Substitute Products for all Subsidiaries: Medium ............................................................... 29
Bargaining Power of Buyers: Medium ................................................................................................ 31
Bargaining Power of Suppliers: Low ................................................................................................... 36
Competitive Advantage and Value Creation ............................................................................................... 39
Key Accounting Policies .............................................................................................................................. 41
Type I Accounting Policies ....................................................................................................................... 41
Economies of Scale ............................................................................................................................. 41
Low Input Costs ................................................................................................................................... 44
Product Mix ......................................................................................................................................... 45
Vertical Integration ............................................................................................................................. 47
Type II Accounting Policies ...................................................................................................................... 48
Operating Leases ................................................................................................................................. 48
Goodwill .............................................................................................................................................. 49
Conclusion ........................................................................................................................................... 51
Assessing Accounting Flexibility .............................................................................................................. 51
Capitalization of Operating Leases ......................................................................................................... 51
Goodwill .................................................................................................................................................. 52
Conclusion ............................................................................................................................................... 53
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Actual Accounting Strategy: ........................................................................................................................ 53
Goodwill: ................................................................................................................................................. 54
Goodwill .................................................................................................................................................. 55
Research and Development: ................................................................................................................... 56
Operating Leases: .................................................................................................................................... 56
Conclusions ............................................................................................................................................. 58
Quality of Financial Disclosures .................................................................................................................. 58
Firm’s Strategy and Economic Consequences ........................................................................................ 59
Quality of Disclosure of Type 1 Accounting Policies ............................................................................... 60
Economies of Scale ............................................................................................................................. 60
Input Costs .......................................................................................................................................... 61
Product Mix ......................................................................................................................................... 61
Cost Distribution ................................................................................................................................. 61
Quality of Disclosure on Type 2 Key Accounting Policies ....................................................................... 62
Quality of Disclosure on Explaining Current Performance ..................................................................... 63
Quality of Disclosure on Business Segments .......................................................................................... 64
Conclusion ............................................................................................................................................... 64
Identifying Potential Red Flags ................................................................................................................... 64
Unusual Increases in Inventory in Relation to Sales Increases ............................................................... 65
Changes in Accounting Methods ............................................................................................................ 67
Conclusion ............................................................................................................................................... 68
Undoing Accounting Distortions ................................................................................................................. 69
Goodwill .................................................................................................................................................. 69
Operating Leases ..................................................................................................................................... 70
Financial Restatements ........................................................................................................................... 71
Conclusion ............................................................................................................................................... 72
Financial Analysis ........................................................................................................................................ 72
Liquidity Ratios ............................................................................................................................................ 73
Current Ratio ........................................................................................................................................... 73
Quick Ratio .............................................................................................................................................. 75
Liquidity Ratios Conclusion ..................................................................................................................... 76
Operating Efficiency Ratios ......................................................................................................................... 76
Inventory Turnover ................................................................................................................................. 77
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Accounts Receivable Turnover................................................................................................................ 78
Working Capital Turnover ....................................................................................................................... 81
Days Sales of Inventory ........................................................................................................................... 82
Days Sales Outstanding ........................................................................................................................... 83
Cash to Cash Cycle .................................................................................................................................. 84
Efficiency Conclusion .............................................................................................................................. 86
Profitability Ratios ....................................................................................................................................... 86
Gross Profit Margin ................................................................................................................................. 86
Operating Profit Margin .......................................................................................................................... 87
Net Profit Margin .................................................................................................................................... 88
Asset Turnover ........................................................................................................................................ 89
Return on Assets (ROA) ........................................................................................................................... 91
Return on Equity (ROE) ........................................................................................................................... 92
Internal Growth Rate .............................................................................................................................. 93
Sustainable Growth Rate ........................................................................................................................ 94
Capital Structure Ratios .............................................................................................................................. 94
Debt to Equity Ratio (D/E) ....................................................................................................................... 95
Times Interest Earned ............................................................................................................................. 96
Debt Service Margin ................................................................................................................................ 97
Altman’s Z-score ..................................................................................................................................... 98
Capital structure Conclusion ................................................................................................................. 100
Financial Forecasting ................................................................................................................................. 100
Income Statement ................................................................................................................................ 100
Dividends Forecasting ........................................................................................................................... 102
Balance Sheet ........................................................................................................................................ 102
Statement of Cash Flows ...................................................................................................................... 103
Cost of Capital Estimation ......................................................................................................................... 104
Cost of Debt .......................................................................................................................................... 105
Cost of Equity ........................................................................................................................................ 106
Backdoor Cost of Equity ........................................................................................................................ 107
R Squared Summary .............................................................................................................................. 110
Regression Beta Summary .................................................................................................................... 110
WACC .................................................................................................................................................... 112
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Method of Comparable Valuation ............................................................................................................ 112
Price to Earnings (P/E) Trailing .............................................................................................................. 113
Price to Earnings (P/E) Forecast ............................................................................................................ 113
Price to Book ......................................................................................................................................... 114
Dividends to Price ................................................................................................................................. 115
Price to Earnings Growth (P.E.G) .......................................................................................................... 116
Price to EBITDA ..................................................................................................................................... 116
Price to Free Cash Flow Per Share ........................................................................................................ 117
Enterprise Value to EBITDA ................................................................................................................... 117
Price to Sales ......................................................................................................................................... 118
Conclusion ............................................................................................................................................. 118
Intrinsic Valuation Models ........................................................................................................................ 119
Discounted Dividends Model ................................................................................................................ 120
Discounted Free Cash Flow Model ....................................................................................................... 121
Residual Income Model ........................................................................................................................ 122
Residual Income Perpetuity Valuation Model ...................................................................................... 123
Intrinsic Valuation Model Conclusion ................................................................................................... 125
Appendix ................................................................................................................................................... 126
Works Cited ............................................................................................................................................... 175
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Executive summary
Analyst Recommendation: Buy (Undervalued)
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Company overview:
Our team did a company valuation on Olin Corporation. Olin was founded in
1892 as a gunpowder and explosive powder manufacturer. It expanded into cartridge
production in 1898 and to fight the big companies such as Winchester and Remington
they started acquiring facilities to manufacture all parts of their business in house to
reduce costs. Olin Grew dramatically during World War 1 because of its government
contracts for the war. After the war Olin bought Winchester and continued to grow.
After World War 2 Olin moved into the Chemical space where the majority of their
business is done now. Olin operates mainly in the special chemicals industry with a few
subsidiaries such as KA Steel and Winchester. Olin Corporation is primarily focused on
Chlor Alkali production. Pre-merger with DOW, this section of the business comprised of
59% of the entire company, Winchester is about 37% and KA Steel is at 4% of the
entire Corporation. Post-merger, Olin now is roughly doubled in size with the Chlor
Alkali sector almost tripling. Winchester, develops and produces small caliber
ammunition for sale to retailers, law enforcement, and for military application. This
portion of Olin is a steady area due to its Government contracts. KA Steel is the
smallest portion of Olin with it being the distributor for all of Olin’s Chemicals and
supplies for production. Olin in the past has expanded horizontally by acquiring firms or
facilities to keep all production and processes in house. Now with the new merger of
DOW, Olin has increased its vertical span making it the largest producer of Chlor Alkali
products in the world. This vertical expansion will all Olin to capture more of the market
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while keeping most costs in house.
Industry overview
Olin Corporation operates in the highly competitive commodities industry. As Olin
is the fourth largest player in the market, it has only three major competitors. Dow
Chemical Company (Dow), Occidental Petroleum Corporation (Oxy), and Axiall
Corporation. Olin is the smallest of the competitors in assets, however Olin is located in
a small niche area of high quality caustic soda. In terms of market positioning, Olin
positioned itself strategically by acquiring other companies to expand its market share
and increase its breadth of services. Through this strategy Olin was able to grow into
the largest caustic soda distributor, a subset of chlorine production.
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Five forces Model:
Olin’s Industry Aspect Threat level
Threat of New Entrants Low
Threat of Substitute Product Medium
Bargaining Power of Suppliers Medium
Bargaining Power of Buyers High
Rivalry Among Existing Firms High
The threat associated with new entrants is LOW based on mostly due to the fact
that the cost of entering the market is high. High entrance costs are associated with
legal barriers, distribution access, and large required capital investments. There is a
MEDIUM threat against substitute products. The largest factor in the determination of
threat posed was based on the quality of product produced. The quality of products
produced by Olin and its subsidiaries are above industry averages and command a
demand premium. Bargaining power of suppliers is MEDIUM due to low switching costs,
product quality, and customer bases. As most of the products produced by Olin is
commodities, customers are easily and cheaply able to switch to other products.
Additionally, Olin’s high quality products bring the threat level to medium. Bargaining
power of Buyers is HIGH mostly due to the fact that Olin’s products are of a commodity
nature and are very price sensitive. This coupled with customers’ ability to change
producers on a moment's notice, increases to high. Rivalry among Existing Firms is
HIGH mostly due to how close each industry competitor is and how easily customers
are able to change purchasing avenues. Differentiation along with economies of scale
put Olin in a very competitive position in such a highly competitive environment
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Accounting Analysis
In order to accurately value a company, we as analysts must first look at the
level of control that a firm's accounting policies allow for. The accounting policies allow
for a significant amount of flexibility. The flexibility is taken advantage of the most in
the capitalization of operating leases, and goodwill impairment. Research and
development is also an aspect that must be taken into consideration. Since Olin is
mostly a commodity firm, it does not spend enough cash on research and development
to necessitate a closer look into its strategy.
Olin’s Accounting Strategies are much more aggressive than its competitors and
they use this strategy to boost the company's value and Net Income. This strategy is
much different than its competitors due to its acquisitions of companies that expand
Olin’s economies of scale. We have impaired Goodwill and Operating Leases because
we feel it will give us a more firm number to calculate the true value of Olin.
Goodwill has never been impaired which is a sign that management believes that
the intangibles brought to the table through the purchase of other firms has been
beneficial to the output of Olin. However, impairing this gives investors and people on
the outside of the firm a better view of Olin’s value. Olin has historically created much
of its value by absorbing other value adding entities. Through purchasing other
organizations, goodwill has increased through each purchase. Now, Olin has amassed a
large amount of accumulated goodwill which must be impaired to find a more realistic
value.
Operating leases were also capitalized. Although they did not have as large an
effect as Goodwill did when it comes to Net Income, they still created a large enough
discrepancy to change the overall value of Olin.
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Financial Analysis
Determining the value of a firm requires several forms of financial analysis which
include ratio analysis, financial forecasting, and estimating the firm’s cost of capital.
Ratio Analysis involves taking certain items in a firm’s financial statements and
combining them into ratios that show how those items work together.
In terms of liquidity ratios, Olin’s current ratio is 2, which on par with the
industry for all of the past 5 years. A current ratio of 2 means that a firm can cover
their current liabilities with current assets 2 times over. Over the last 5 years Olin’s
quick ratio maintained above industry value, ranging from 1.8 to 1.6. This indicates that
Olin is more financially solvent than the industry on average.
Operating efficiency ratios are as the following; are inventory turnover, accounts
receivable turnover, working capital turnover, day’s sales of inventory, day’s sales
outstanding, and cash to cash cycle.
Inventory turnover for Olin stayed at an average of 9 for the 5 year period. This
was consistently lower than the industry which indicates that sales are slowing due to a
variety of factors. Accounts Receivable Turnover trending around 8.5 which indicates
Olin is extending credit on par with the industry. Working Capital Turnover was slightly
below the industry average. The Working Capital Turnover ratio was diminished by
cyclical pricing and acquisitions. Day’s sales of inventory historically trended above the
industry average at a value of 40 days. This shows that Olin takes longer than the
industry to convert inventory into sales. This could be brought on by numerous factors,
we have determined that Olin is most likely forecasting sales differently than the
industry. Days Sales Outstanding has trended less than its competitors in 4 out of the
last 5 years. This is a good sign in terms that Olin is able to collect on accounts
receivable quicker than the industry.
Another important aspect to valuing a company is analyzing a firm's profitability
ratios. The profitability ratios that will be examined are gross profit margin, operating
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profit margin, net profit margin, return on assets, and return on equity. Gross Profit
margin and operating profit margin are below the market average which could be
indicated by the higher cost attributed to higher quality products. Return on assets and
return on equity are both below the industry average. The reason for both ratios being
under the industry average because of some of the aggressive accounting policies
employed in Olin.
Capital structure ratios are also a good assessment used in valuation. This metric
is important because the ratios provide an analyst with a view of the firm’s current and
future risk. This section will provide an analysis of the following ratios: Debt to Equity
Ratio, Times Interest Earned, Debt Service Margin, and Altman’s Z Score. The Debt to
Equity ratio trends above the market average. We have determined that the reason for
this could be due to the change in capital structure policy, changed to favor debt rather
than equity. Times interest Earned trends below the industry average, this is a good
sign as it shows that Olin uses less debt in comparison to its cash flows. Debt service
margins did not have enough data to be used. The Altman's Z-score generally stayed
around a 2 value which indicates that Olin could be headed for bankruptcy.
Valuation analysis
The quantitative valuation section is the most important aspect used in the buy
sell recommendation. This section will help give insight into whether Olin is over or
undervalued relevant to its peers. By comparing each value from each different
valuation model to the current share price, our team of analysts will be able to make a
buy or sell recommendation. In terms of comparable valuations we used 9 metrics. A
list of all of the metrics used are as follows as well as the price returned. The prevailing
trend based on the November 1st price of $19.18, is that most ratios return an
undervalued number.
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In terms of intrinsic valuations models, we used 4 models; the discounted
dividends, free cash flow, residual income and long run return on equity/residual
income perpetuity model. We chose to base our opinion more heavily on these models
because they offered a more realistic value on the firm instead of simple ratios such as
forward P/E, Price to sales and other similar ratios. Many of these model use either
historical or forecasted items, this does increase the ability for error, however we
believe that the true value of the firm cannot be found in a simple ratio.
The discounted dividends model is a foundational model that only takes into
account dividend payments, leaving out growth opportunities for the company. The
discounted dividends model returned a fair value of $14.00 per share. The free cash
flow model is similar to the DDM in that it discounts forecasted cash that the firm will
generate in the future. However, this model does not strictly require that the cash to be
used for paying dividends. The discounted cash flow model returned a value of $29.53
per share. The third model used is the Residual Income Model which is useful because
it incorporates risk into the price. The model analyzes the differences between what the
company should make to adequately compensate shareholders for their risk and what
the company’s actual earnings during the period are. This model returns a price of
$21.11 per share. The last model used is the Residual Income Perpetuity Valuation
Model. This model is useful in that it does not rely on the initial forecasted financial but
rather goes straight to a perpetuity model. This model still examines how the company
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will increase or decrease shareholder’s wealth through value creation through the given
initial inputs. This model returned a value of $22.61 per share.
Company Overview
The purpose of the company overview is to explain Olin Corporation’s operations
in a way that is adequate for determining the extent to which their business strategy
corresponds with the value driving key factors within the industries Olin Corporation is a
part of. In this section, there will be an overview of Olin’s segments along with
examining the company’s financial characteristics. First, it will give insight on Olin
Corporation’s corporate structure and an overview of the company’s individual
segments on how they operate. Next, a rundown of how and where the operations take
place. Finally, the financial characteristics that are associated with Olin Corporation’s
performance from the previous 5 accounting periods will be discussed. These financial
characteristics include sales and growth, total asset value, and stock price performance.
Structure
Founded in 1892, originally as a blasting and gunpowder producer, Olin
Corporation is now a producer of specialty chemicals and ammunition based out of
Clayton, Missouri. Recently the company has undergone a merger with a spinoff of Dow
Chemical Company’s chlorine products division in a “Reverse Morris Trust” in which Olin
acquires the division in return for 50.5% of Olin’s shares outstanding. This now makes
Olin Corporation the largest producer of Chlor-Alkali in the world and in essence, a
subsidiary of Dow Chemical Company. Following the acquisition, the company is
comprised of the following divisions: Chlor-Alkali & Vinyl production, Chemical
Distribution, Global Chlorinated Organics (newly acquired), Epoxy production (newly
acquired), and Winchester. See Diagram below for a visual of the corporate structure of
Olin.
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Chlor-Alkali and Vinyl
Olin Corporation produces specialty chemicals, specifically the Chlor Alkali
segment. The Chlor Alkali segment takes salt (NaCl) and through the process of
electrolysis is able to separate out the Chlorine. They also produce Caustic Soda, known
as Sodium Hydroxide, a byproduct of the electrolysis process. This segment operates
eight facilities between the United States and Canada that have the capacity to produce
1.9 million ECUs (Electrochemical unit). According to Olin Corporation’s 10-K, an ECU is
what the specialty chemicals industry refers to for production rates of 1.0 ton of
Chlorine to 1.1 tons of 0.03 tons of hydrogen. In 2014, Olin Corporation averages $505
per ECU; down from the $560 average in 2013. Also, with the acquisition of the Dow
Chemical spin off, Olin’s Chlor-Alkali division will more than triple in size.
Chemical Distribution
In August of 2012, Olin Corporation completed the $328 million purchase of K.A.
Steel Chemicals, one of the largest chemical distribution companies in the United
States. It is now Olin Corporation’s chemical distribution segment. This acquisition
allowed Olin Corporation to expand their ability to market and sell the specialty
chemicals the Chlor-Alkali segment produces, according the 10-K. K.A. Steel operates
twenty-five facilities in strategic locations throughout the United States from which Olin
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Corporation is able to ship manufactured chemicals as well as receive raw materials
from suppliers.
Global Chlorinated Organics
With the acquisition of Dow Chemical Company’s spin off, Olin Corporation added
the Global Chlorinated Organics division which is a leader in supplying chlorinated
organic products and solutions for uses such as to produce electronics, agricultural
products and non-ozone depleting refrigerants, according to Dow’s 10-K.
Epoxy Production
The epoxy production division was another division that Olin Corporation added
as a result of the acquisition of Dow Chemical’s spin off. According to Dow’s 10-K, this
epoxy division is a global supplier of epoxy resins, curing agents, and other epoxy
related products for use in numerous industries including consumer goods as well as
electrical laminates to name a few.
Winchester
Aside from the specialty chemicals, Olin Corporation also has the Winchester
segment. Winchester develops and produces small caliber ammunition for sale to
retailers, law enforcement, and for military application. According to their 10-K, in 2014,
Winchester was awarded 2 contracts, worth up to $78 million in sales, to produce
training ammunition for the United States Department of Homeland Security, U.S Air
Force, and U.S Coast Guard and Navy. As stated in Olin Corporation’s 10-K, the
Winchester segment has been given numerous awards by retailers for service and
performance as a vendor and the National Defense Industrial Association for their
commitment and contribution to the U.S Air Force. The Winchester segment operates 2
facilities, 1 in the United States and 1 in Australia, which produce small-caliber
ammunition for sporting and military applications.
Financial Characteristics
The following tables show figures for sales and growth, total asset value, and
stock price performance for Olin Corporation and its competitors: Axiall Corporation,
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Occidental Petroleum, and Smith and Wesson. Olin Corporation’s revenue growth is
mostly similar to its competitors. Some of the competitors have larger sales volumes
than Olin Corporation and some have smaller, resulting in somewhat skewed
comparables. Out of these competitors it looks as though Axiall Corporation is the
closest in sales volume to that of Olin Corporation. However, all of the following
companies have negative growths and positives growths in the same years. So, to that
regard, Olin Corporation is on par with the competitors. The graph below is the
comparison of Olin Corporation’s sales and growth to its competitors.
The comparison table depicted below is Olin Corporation’s Total Asset Value to
that of its competitors. It shows that Occidental Petroleum is an obvious outlier in terms
of total asset value, being at least 10 times larger than any other company depicted. In
comparison to Axiall, the closest competitor in size although still larger than Olin, it can
be seen that Olin achieves somewhat similar growth even though it’s the smaller of the
two firms.
The following graph, taken from the company’s 10-K, shows Olin Corporation’s
returns in comparison to the S&P 1000 and 2 peer groups. This shows that Olin
Corporation had been maintaining a return that had movements on par with the S&P
1000 and its peer groups up until the most recent year where it experienced a loss of
about 14%.
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The following table compares Olin Corporation’s fixed costs to their variable
costs. The purpose of this is to determine the cost structure of Olin. The figures for Olin
show that most of the company’s costs are variable costs which is to be expected due
to the nature of the specialty chemicals business.
Olin Corporation operates business with a market capitalization of 3.16 Billion as
of November 1st 2015. The top three competitor’s market capitalizations are as follows.
Smith and Wesson has a market capitalization of 964 million dollars. Occidental
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Petroleum Corporation (Oxy) has a market capitalization of 58.2 Billion dollars. Lastly,
Axiall Corporation has a market capitalization of 1.41 Billion dollars.
Company Market Cap ($)
Olin 3.16 Billion
Axiall 1.41 Billion
Occidental Petroleum 58.2 Billion
Smith & Wesson 964 Million
Industry Overview
The majority of Olin Corporation’s business is driven by their specialty chemicals
divisions and more specifically, their chlorine production also known as Chlor-
Alkali. Chlorine is a widely used commodity for uses such as household cleaning
products, for making various textiles, medicine, and plastics. It’s also used in the
purification process for drinking water, which makes it a very important and valuable
product. The specialty chemicals industry is a very difficult industry to be in due to the
large amounts of capital as well as rigorous regulations and permitting that firms would
be subject to. Also, due to chlorine being a commodity, firms in this industry are subject
to cyclical pricing and have to compete on the quality of their product.
Production of chlorine is a very standardized process in this industry. What this
means is that, at least for the time being, all the firms in the industry use the same
process to produce chlorine. Chlorine is produced through a process that uses
electrolysis of salt brine (salt saturated water) which separates out the chlorine.
Following the merger with Dow Chemical’s spinoff, Olin Corporation will be the
industry leading producer of chlorine in the United States. Competitors in the market for
Olin Corporation are Occidental Petroleum and Axiall Corporation.
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Olin Corporation is also in the ammunition industry under their ammunition
company called, Winchester. This is a very competitive industry as there are a large
number of firms both domestic and foreign. Firms in this industry compete on factors
such as price, performance, product innovation and recognition, and also quality. The
main competitor of Olin’s Winchester division is Smith and Wesson.
Five Forces Model
In order to analyze the industry, we have chosen to use Porter's Five forces
model, displayed in Figure A. We have chosen this model because we believe that it will
provide a well-rounded unbiased representation of the attractiveness of the industry as
a whole. This model uses five key points to aid in the analysis. The level of ease to
which rival firms can enter the space. How easily customers can find substitute
products. The price leverage posed by customers and suppliers. And finally the level of
competition comprising the industry as a whole.
In order to analyze Olin Corporation’s competitiveness, we must first examine
each subsidiary that comprises the corporation separately. For simplicity, we are
focusing on the subsidiaries that Olin already contained prior to the merger with Dow.
Chlor alkali represents 56% of Olin’s revenue and thus will be analyzed first. Chlor Alkali
competes based on quality and commands a premium market price according to IHS.
IHS is a global information consulting firm that generates opinions on a variety of
industries such as the chemical production industry.
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Olin’s Industry Aspect Threat level
Rivalry Among Existing Firms High
Threat of New Entrants Low
Threat of Substitute Product Medium
Bargaining Power of Buyers Medium
Bargaining Power or Suppliers Low
Figure B. Industry Threat Levels
Rivalry Among Existing Firms: High
Identifying and knowing about your competitors is a very important step when
evaluating a business. Knowing what your rival’s competitive advantages are and how
they are competing against you is key to staying ahead of the competition. Also
understanding the industry such as the commodities industry where most sectors are
Price Takers which would lack bargaining power over customers. With this information
it is often that companies to come up with a cost reduction strategy to increase profits.
It is important that a firm understands what value drivers are specific to its industry so
to shape strategies to fit those industry wide value drivers. Below we will explain factors
that influence rivalry among existing firms.
Industry Growth
When discussing industry growth for the growth rates to be meaningful we have
to have the industry comparison. For example, if a firm has a 10% growth rate in a bull
market where the industry average growth rate is 13% it makes the firm now look
weak in comparison to the industry’s rivals. A firm's strategy changes depending on the
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industry growth and in channeled growth time’s rivals are often entering into price wars
to try to win an advantage.
Although the Chlor Alkali industry is seasonal in nature due to demand from the co-
produced products (Chlorine & Caustic Soda), the growth rate from both products has
increased steadily for the past 10 years. The compound annual growth rate for bleach
products (Chlor Alkali) increased on average by 22% yearly (8K). With this growth, Olin
has also converted 10% of its’ total ECUs into higher margin bleach, and has the
capacity to convert 20% of its ECU’s to Bleach. Olin as a whole has been growing at an
average of 8.57% since 2009. Between years 2013 and 2014 the industry took a dip
and Olin had a negative sales growth of -10.89%. With Competitors such as Oxy, Axiall,
and Smith and Wesson having Average Growth Rates of 7.89%, 19.47%, and 10.39%
respectively over the past 5 years the industry is growing in a similar fashion as Olin.
Exhibit A. Sales Revenue in million
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Concentration
The number of firms in an industry and the amount of market share a certain
group of firms holds is what determines Industry Concentration. For Example, A high
Concentration is resembled by a monopoly industry from, or one firm holding majority
of market share, or Oligopoly industry form, or a few firms holding majority of market
share. A low concentration is where no one firm holds the majority or a large portion of
market share but many firms hold small portions of market share. There is a high
amount of concentration in the Chlor Alkali industry, with the industry market being
held majority by just a few firms. The following chart displays many of the major
players in the Chlorine-Based products segment. This chart also displays the new leader
that Olin has become with the merger with DOW chemical (DCP1).
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Differentiation
Differentiation in products is a strategy that can be used to separate a product
from the rest of the industry to attract more customers and gain a competitive
advantage over the rest of the industry. In a market such as commodities where there
is a certain standard where product differentiation is difficult to obtain firms have to
compete on production, process, and distribution to cut costs. Olin’s Chlor Alkali
industry competes on horizontal and now vertical integration because of the commodity
based industry. Chlor Alkali is used to produce Chlorine based products and Sodium
Hydroxide which has standard that all production has to meet. Olin originally
differentiates itself by expanding horizontally acquiring firms that allow them to control
all aspects of the production and process of their products allowing higher quality and
decreasing in house costs to produce. Olin more recently has just decided to integrate
vertically and merge with Dow which will make Olin the Largest producer of Chlor Alkali
products in the world which will also allow them to cut costs due to economies of scale.
Fixed Cost/ Variable Cost Ratios
Fixed to Variable Costs ratios can be a good way to analyze a firm’s level of risk
to its profitability. A firm with a lot more fixed cost usually would tend to be a more
risky firm and profits a lot more in a bull market than a firm who has higher variable
costs. Often times when the firm is more risky they are the ones leading on price wars
because to cover their higher fixed costs they need to increase sales. If a firm with a
higher variable cost were to get into price battle they would be less profitable as
compared to a more leveraged firm because as the increase in sales goes up so does
the marginal cost of a unit because there variable costs are higher. The Chlor Alkali
industry usually keeps a medium Fixed to variable cost ratio with most of its fixed cost
coming from installation of equipment, the management salaries, buildings, and rent.
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The majority of Variable costs come from the raw materials, hourly labor, and
utilities.
Exhibit B. Fixed Cost/Variable Cost Ratio by years
Exit Barriers
Exit barriers exist when a firm decides to leave an industry. Exit barriers are
often things like the layoff of workers, disposal of assets, finishing out any leases or
contractual obligations the firm had. For example, Olin will face harsh penalties if they
decide to exit out of their defense contracts earlier than its contracted end date. They
will also face harsh penalties with their suppliers if they were to opt out of contracts
with their raw material suppliers.
Conclusion
The rivalry among firms is highly competitive in this large industry. With firms
having to compete on effective cost reduction and vertical and horizontal integration its
Rivalry is quickly becoming who is the biggest firm. Olin having acquired firms that
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allow them to manage, control, and grow their scope of the industry have allowed them
to take a front seat in the industry. The acquired firms allow Olin the ability to drive
down costs while controlling all aspects of the production and process. The acquisitions
also allow Olin the ability to keep the necessary quality of products at the same lower
price. Olin has now also merged with Dow Chemical which has tripled the size of Olin’s
Chlor Alkali sector making them the largest producer of Chlor Alkali products in the
world.
Threat of New Entrants for all Subsidiaries: Low
Scale Economies
Scale economies refers to producing at higher levels which in turn reduces the
cost of production. The Chlor Alkali segment of Olin has seen great change in the past
few years and now will see its greatest transformation in Q4 of this year. In March of
2015, it was announced that Dow was spinning off its’ Chlor Alkali segment to Olin
Corporation through the use of a Reverse Morris Trust. With this merge, Olin will go
from the 4th largest global chlorine producer to the 1st, by surpassing its next closest
competitor Oxy by almost two times. Through this merge, Olin will also take over all of
DOW’s Chlor Alkali plants around the world extending their reach to Europe, Latin
America and Asia. With this larger reach, Olin will have further end uses of Chlorine
based products from 3 to 19. Overall, with this large merge, the synergies and
geographic diversity establishes Olin as the premier Chlor Alkali Company in the world.
With the acquisition of KA Steel a few years back, Olin Corporation has been able
to increase the scale of their bleach production. The significant number of distribution
facilities that KA Steel has are located throughout the continental United States which
allows Olin to now ship these products in greater quantities at a lower cost. As
mentioned above, the DOW merger will also increase the scope that KA Steel and Olin
will control in the market.
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The scale economies of Winchester is highly adaptable and easily ramped up or
down based on market conditions and demand. Over the last 5 years, demand volatility
has been high and forced Winchester to stay sensitive to the market. Winchester is able
to stay this way by keeping a large portion of its revenue through private distribution
channels. Since private consumer sales represent 88% of its revenue stream, changes
in demand will quickly be absorbed by Winchester as they rapidly try to reduce or
produce to meet demand.
Distribution Access
Distribution Access is the ability for a company to create strong barriers to entry
for competitor firms. Before the acquisition of KA Steel, Olin used traditional means for
the transportation of its’ specialty chemicals. However, with the acquisition, the
strategic geographic locations of Olin’s plants have created a distribution channel with
KA Steel that has allowed it to become the nation’s largest distributor of caustic soda.
By pursuing incremental expansion options, the reach of customers is expanded greatly.
Winchester has a large distribution channel based on two factors; retail floor
space with big box retailers, and contracts with governmental agencies. First,
Winchester has obtained accounts with Cabela’s and Academy Sports and Outdoors
among many other large retailers. This creates an immense distribution access to retail
customers and ultimately drives a large part of Winchester's sales.
Relationships
Relationships with customers and distributors, in retrospect, are important for
companies. This is because there are high costs associated with developing these
relationships, which prove to be a barrier in the market. The relationships Olin and KA
Steel hold together helps solidify their position in the market. Additionally, the buyout of
KA Steel helps keep the cost structure low which in turn strengthens the relationship
that Olin and KA Steel have with each respective buyer.
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Winchester has two key relationships within the munitions industry that create
value. Firstly, Winchester's relationship with governmental agencies. And secondly, the
relationship that Winchester has with big box retailers. As stated above, Winchester has
relationships with some of the biggest retailers in the nation which aids in market
exposure. Additionally, relationships with the FBI, DHS, USAF, and Law Enforcement
agencies help how the market views Winchester.
Legal Barriers
The Chemical industry is tightly regulated and is subject to heavy environmental
costs. The EPA and the TSCA are the primary regulatory authorities, both agencies pose
a significant regulatory weight upon the chemical industry as a whole. Based upon the
above paragraph, it is our opinion that the chemical manufacturing industry is hostile,
and therefore the threat of new entrants is low.
In the chemical distribution industry, there is little to no barriers to entry such as
large capital requirements. There are however large legal barriers to entry such as
regulation from the Federal Motor Carrier Safety Administration (FMCSA). The FMCSA
specifies the specific requirements for chemical transportation that companies must
follow. This adds a large burden to the companies that occupy the space.
The Winchester segment of Olin Corp. is in a highly regulated industry with many
barriers to entry. All ammunition in the United States must pass strict guidelines set in
the Consumer Product Safety Act, also the transportation of ammunition must meet
guidelines set by the Department of Transportation. The transportation of firearms are
also under high scrutiny from the Federal Aviation Administration on the shipping and
packaging of weapons. Finally, one of the most important regulating bodies is the
Sporting Arm and Ammunition Manufacturers’ Institute (SAAMI). This regulating body
founded in 1926, helps create safety and reliability standards for the design,
manufacture, transportation, storage and use of firearms, ammunition and components.
All of these together create tough regulations that foster a low threat of new entrants.
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Conclusion
The current state of Olin creates strong barriers for competitor firms to enter
their space. The acquisition of KA steel and the DOW spinoff helps to solidify Olin’s
Chlor Alkali products in the specialty chemicals industry. We have based this
determination upon the large capital requirements necessitated, legal barriers,
distribution access, and industry relationships formed.
While the threat for new entrants into the specialty chemicals is low, the
Winchester brand has a smaller barrier to entry than the Chlor Alkali segment. Although
the barrier is still high for the industry as a whole, the protection is not as absolute
compared to the chemicals division. Large distribution channels have aided Winchesters
ability to meet changing demand. Respectively, $83 million in revenue is provided by
governmental agencies. This places Winchester in a good position as most of its
governmental contracts are on a revolving 5 years bases. This will allow for a 0
probability of rival firms outbidding Winchester. This is important as changing regulation
has had a profound effect on munitions demand over the past 5 years. This also
provides Winchester with a solidified position in the munitions market. This is based on
the entry costs associated with government regulations, industry relationships,
distribution channels, and the economies of scale affecting price and outreach.
Threat of Substitute Products for all Subsidiaries: Medium
Relative Price and Performance
The threat of substitutes depends on price and performance of competing
products in the market as well as the customer’s perception of whether or not those
products are substitutes for each other. For Olin Corporation’s Chlor Alkali & KA Steel
segments, which are both commodity businesses, all of the products within their market
are similar and can be used for the same purpose. This means that the criterion for
which customers will choose a supplier will be based upon price and quality of the
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product, or service in the case of KA Steel. As stated in Olin Corporation’s 10-K, they
raised their chlorine and caustic soda prices in the first quarter of 2014 each by $50 per
ton. This move wasn’t successful, showing that these commodities are in a buyer’s
market.
In terms of relative pricing and performance, we found that Smith & Wesson
produces a cheaper form of ammunition. The cheaper form of ammunition is also
accompanied by a lower price. We went to Cabela’s, one of the highest selling retailers
of outdoor products and compared ammunition from both Winchester and Smith &
Wesson. Based on our findings we found that Smith & Wesson generally produces
munitions that are 50% lower in quality which is accompanied by a 60% lower price.
This would indicate that the market is not as concerned with price as it is with quality.
Buyer's Willingness to Switch
The buyer’s willingness to switch is how hard the decision is for your current
customers to seek out your competitors when cost, timeliness, and quality are some of
their top requirements. The Chlor Alkali industry is a highly competitive one that as
mentioned above is a buyers’ market. With seasonal demand in the chemicals market,
buyers are almost incentivized to switch to the highest quality, low cost producer
available geographically. This is where Olin stands out from the rest of it’s’ competitors.
Although it is not as large as some of its larger competitors, Olin lives in a niche market
of extremely high quality caustic soda products. Approximately 60% of the caustic soda
produced is of a high purity membrane grade.
Buyer's willingness to switch producers can be seen as the ease to which
customers are able to change producers. The closest competitor to Winchester is Smith
& Wesson. In the munitions industry, switching is both easy and difficult, depending on
which point of view you are looking at. In terms of governmental agencies, the buyer's
ability to switch producers is close to zero. Governmental agencies are locked into five
year increments and are obligated to purchase from Winchester until the next bidding
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opportunity. In the context of civilian retail sales, the buyer’s ability to switch is very
high. Retail customers are very sensitive to changes in price and quality.
Conclusion
The threat of substitute products in the chemical industry is medium, so
differentiating yourself from the competition is where Olin stands out from its’
competition. By producing higher quality caustic soda and bleach, Olin separates itself
from their closest rivals in quality. Although the demand is seasonal as mentioned
above with all of its chemicals, Olin has increased its’ prices steadily for the past few
years. Almost all of these price increases have been unsuccessful, and this has been
mainly due to the fact that the chemical market is a buyers’ market.
For Winchester, the threat of substitute products is greater than that of Olin’s
Chemical division in the retail space. There are several ammo and firearm dealers in the
United States that consumers can decide to purchase from. Although we believe from
our analysis that Winchester has some of the highest quality ammunition available, the
price may be a constraint on some consumers. With the current defense contracts,
Winchester is able to lock in 5 year agreements which helps reduce unexpectedness
with cash flows. By having a higher quality ammunition product, Winchester is able to
procure more of these government contracts. Together the Chlor Alkali and Winchester
divisions produce higher quality products that cause difficulties for competitors trying to
gain traction in this competitive space. This gives the threat of substitute products a
medium rating.
Bargaining Power of Buyers: Medium
Switching Costs
Switching costs for buyers are the costs associated with your current customers
from your current business to one of your competitors. Switching costs for buyers of
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Olin’s chlor-alkali products and their invested segment in KA Steel are low. Currently
being the fourth largest producer of Chlor Alkali in the world doesn't give Olin the
incentive to put some kind of high switching costs on its customers. These customers
can choose which company to purchase their Chlor Alkali from based on the best price
available or simply go the closest producer of this chemical to make their purchase.
Also, for the KA Steel distribution segment of Olin, customers can order from the
nearest caustic soda and bleach distributor, again, leaving the customers with low
switching costs.
In terms of the ability for buyers to switch purchasing to rival firms, Winchester
is in a good position. We will base our opinion on two aspects; the costs that a
customer encounters when switching between producers, and the respective difference
in quality.
Differentiation. As stated in relative price and performance section, we compared
ammunition from Winchester with Smith & Wesson. We found that for a modicum
reduction in price, there was a much larger reduction in quality. This indicates that the
market views Winchester as the better deal in terms of cost and quality.
Differentiation
Differentiation is the ability that your business is able to separate itself from the
competitors with either cost, quality, or innovation. To understand the threat of
differentiated products, we need to understand the difference between Chlor alkali
products and products from the rival competitors. Chlor Alkali produces primarily
Caustic soda, hydrogen, and bleach. 60% of the caustic soda is of a high purity
membrane which aids in the product differentiation in the market. Furthermore, Chlor
alkali is the largest North American producer of bleach.
Based on the facts that Chlor Alkali is the largest producer of bleach and is
differentiated in the market in terms of ECU production, we believe that the possible
threat of differentiated products is low.
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Winchester has a unique market position. Winchester has strong relationships
with large volume retailers as well as long contracts to governmental agencies. Both of
these factors play a large role in how easily customers can change products, purchasing
from other manufacturers. There are three key factors that play into this threat. First,
how the market views Winchester as a company. Secondly, the market's opinion of the
quality of goods produced by Winchester and its willingness to switch. Finally, the
relative price and performance of the next best alternative product.
The first aspect needed to understand the risk posed by substitute products is
how the market views Winchester as a producer. In the last 3 years, Winchester has
received at least 8 awards from various prestigious organizations recognizing quality
and customer service. The amount and nature of such awards lends itself towards an
opinion that the market views Winchester as a leader in terms of quality and
consistency. Therefore in terms of product quality, the market would not easily switch
to substitute products.
Finally, the next best competitor’s prices and performance must be analyzed. We
have chosen Smith & Wesson as the next best large volume producer of munitions.
Through our realization of firearm ammunition between the two companies, we have
found a few key differences. First we have found that Smith & Wesson produces a
cheaper form of ammunition, and thus charges a lower price. Through our analysis we
found that Smith & Wesson generally produces munitions that are 50% lower in quality
which is accompanied by a 60% lower price. This would indicate that the market is not
as concerned with price as it is with quality and thus would indicate a threat of
substitute products is low.
Importance of Product for Costs and Quality
In the chemical producing industry, little varies between the chemicals produced
from different companies. However, 60% of Olin’s caustic soda is of a high purity
membrane grade. Olin’s competitors do not have this higher quality product which
allows Olin to sell this particular product at a premium compared to others in the
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chemicals industry. This higher quality product is vital in a wide variety of industries
such as water treatment, soaps and detergents. With this being said, a higher quality
product produced by Olin is accompanied by a higher price which customers are willing
to pay.
Winchester produced ammunition differentiates itself based on quality. One of
the avenues by which ammunition quality is evaluated in the industry is by grain count.
According to luckygunner.com, Grain as a unit of measure, measures the mass of the
projectile itself; the higher the grain count, the larger the bullet (luckygunner).
Winchester ammunition generally produces ammunition with a grain count of 200.
Higher grain count has helped Winchester differentiate its’ product line, and establish
itself as the premier producer.
Diverse Customer Base
Having a diverse customer base is important because the larger number of
different consumers that is available to your business the greater number of ways that
your company can create new revenue streams. The chlorine and caustic soda created
by Olin are used congruently in a variety of end uses of product. As you can see below,
our excerpt from Olin’s 8-K, both chlorine (top diagram in Figure C) and caustic soda
(bottom diagram in Figure C) consist of things such as water treatment, inorganic
chemicals, and organic chemicals. This shows that the Chlor Alkali and chlorine
segments of Olin have a diverse customer base and sell to an array of different areas.
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Figure C. Olin Customer Base
Winchester commands a diverse customer base. Firearm sales have increased by
8 million between 2008 and 2012, 4 million of that coming between 2011 and 2012
(Olin 8-K). This is partly due to the volatility in the firearm industry because of the
potential regulation that could ensue. Additionally, the customer base is getting younger
with more women starting to own and shoot firearms. According to Olin’s 8-K, 66% of
new shooters are between the ages of 18 and 34, and 37% of new shooters are
female. In summary, in the last few years the firearms industry has seen an enormous
increase in the number of individuals buying guns, with most of these being younger
people and females.
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Conclusion
The bargaining powers of buyers remains medium in all three of Olin’s segments
today. With low switching costs in both the Chlor Alkali and the Winchester (retail)
segments, buyers are free to choose from a collection of competitors on price and
quality. Differentiation is where Olin believes it stands out though in securing those
buyers to commit to Olin’s Chlor Alkali and Winchester brands. With the chemical
segment able to produce higher quality caustic soda than it’s’ competition, Olin stands
ahead in quality. In the same cut, the ability for its’ Winchester brand to achieve high
grain count and multiple awards only stands to support Winchesters stance in the
community as the premier high quality ammunition destination. With the different
segments though comes the large customer base. Olin does a good job of not
increasing one buyer to become a large percentage of their total sales per segment. For
example, in the chemicals division, in both caustic soda and chlorine, no buyer type
consists of more than 34% chemicals sold. With an average of ~13% per buyer in
chlorine and ~14% per buyer in the caustic soda market. With all of this information we
are lead to give Olin a Medium rating in the bargaining power of buyers.
Bargaining Power of Suppliers: Low
Switching Costs
The switching costs related to Olin here are the costs that they would incur if
they switched their raw materials supplier. There are two main raw materials used in
the making of chlorine and caustic soda and those are electricity and salt. The largest
portion of their raw materials is electricity which they get from “utilities that primarily
utilize coal, hydroelectric, natural gas, and nuclear power” (Olin 10-K). With few utilities
being available for Olin to potentially switch to, their switching costs are extremely high
because they would have to generate their own electricity if they were to do away with
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any utility company. Their other raw material, salt, is easily accessible through many
suppliers and the switching costs related here would be relatively low. However, after
the acquisition of DOW’s Chlor Alkali segment, “80% of the salt brine requirements will
be supplied from owned and operated mines that are connected to manufacturing
facilities”(Olin 8-K).
Winchester purchases raw materials such as copper, aluminum case cups, and
lead for production requirements. The above referenced products are all commodities.
Commodities producers command no control over customers as prices are usually fixed
and readily available. Winchester can easily change raw materials providers and suffer
little to no opportunity costs.
Differentiation
There is little differentiation between electricity producers since there are only a
handful of these utilities companies to choose from. On the other hand, salt has a wide
variety of suppliers that could be differentiated on price and also on how close these
suppliers are in relation to Olin’s chemical plants that need the salt for production.
Therefore, a supplier that is within a close proximity to an Olin plant would have some
bargaining power.
Winchesters’ suppliers have little to no differentiation in terms of quality or
pricing. Commodities producers are price takers and therefore have no control over
pricing.
Importance of Products for Costs and Quality
The cost of electricity to make Chlor Alkali is a very seasonal variable cost with
the quality of electricity being the same everywhere. However, the quality of salt used
in the making of these chemicals is a crucial part to Olin’s Chlor Alkali segment. With a
higher quality of salt needing to be used, the price may be higher for this type of raw
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material. For Olin to produce its higher quality chemicals it needs the better raw
materials provided by certain suppliers.
The importance of the costs and qualities of raw materials are paramount in the
munitions industry. Winchester competes mainly on quality, however pricing can have a
detrimental effect on sales. Any incremental increases in raw materials pricing will be
simply transferred to the customer, who is very price sensitive. The effects of quality
degradation or pricing increases could have a profoundly negative effect on retail sales.
Number of Suppliers and Volume per Supplier
The number of suppliers for a company is important because without a steady
supply of the required raw materials needed for the manufacturing of a product, the
company would have to halt production. Also, if there is a spike in demand in the
product there will be a need for a greater supply of raw materials, therefore it’s
necessary to be able to have multiple suppliers that can supply raw materials on an as
needed basis.
For Olin Corporation’s Chlor Alkali the principal raw materials include salt (a
portion of which is produced internally), electricity, potassium chloride, sulfur dioxide,
and hydrogen (10-K). Olin Corporation, however, does not specify their suppliers but
does mention that all of their raw materials are purchased through multi-year contracts.
For KA Steel, the supplier is Olin Corporation’s Chlor Alkali segment. Therefore,
KA Steel’s chemical distribution fluctuates with the production capacity of that segment.
Winchester purchases its raw materials through contractually generated
agreements over multi year periods. This Raw materials pricing strategy allows for
pricing volatility to have a diminished effect on end user prices. Winchester generally
sources its raw materials purchases to minimal commodities producers.
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Conclusion
The bargaining supply of suppliers that is contracted with is a very important
part of Olin’s Corp’s success. The future of Olin depends on what prices they are able to
haggle with these suppliers. Luckily for Olin, the types of products that they are buying
are mostly all commodities. The good thing about commodities from Olin’s perspective
is that it is a buyer's market. They are able to dictate what the prices will be, and can
overall bring costs down for both the chemical and ammunition segments. For all
segments of Olin, the bargaining of suppliers is low. This is due in part to the
mentioned above buyer's market that exists in commodities.
Competitive Advantage and Value Creation
Product Differentiation
All three segments of Olin Corporation compete mainly on product
differentiation. Chlor Alkali is able to compete on quality as more than half of the
production of caustic soda is of a high purity membrane. High quality production along
with an efficient cost structure helps Chlor Alkali compete on quality and price. With the
merger, Olin now has the ability to produce epoxy and vinyls, widening the products
they offer for sale. This allows them to not only take advantage of product
differentiation but also product variety.
The second segment of Olin Corporation is KA Steel. KA Steel was acquired in
2012 for its distribution qualities. KA Steel at its core is a chemical distribution company
that also manufactures caustic soda and other chlorine derivative products. This allows
KA Steel to compete on product differentiation as it allows Chlor Alkali to compete as
the lower cost producer.
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The third and final segment of Olin Corporation is Winchester. Winchester was
acquired to diversify Olin’s market placement. Winchester Competes on a predominantly
quality focused environment by producing high grain munitions.
Economies of Scale
With the addition of DOW’s Chlor Alkali segment, Olin is forecasted to increase
its total market scope by approximately 100%. Currently, Olin is the 4th largest Chlor
Alkali producer in the United States. However, with this merger, they will now be the
top producer of Chlor Alkali and produce more than two times its next closest
competitor; OXY. With this merge, we have forecasted Olin to become the Chlorine
products leader with approximately $7 Billion in revenue and $1 Billion in pre-synergy
EBITDA (8K).
Synergies
Synergies refer to cooperation of two or more organizations with a combined
production effect greater than if they worked separately. For Olin Corporation’s Chlor
Alkali segment, the acquisition of KA Steel allowed for a greater production capacity for
bleach as well as an in house distributor which gave them expanded the capability to
market and sell products from the Chlor Alkali segment. Also, with the acquisition of
Dow Chemical Company’s chlorine products segment, Olin’s Chlor Alkali segment will be
able to secure stable and low cost raw materials. 80% of the salt brine, which is
required for the electrolysis process to produce chlorine, will then be “supplied from
owned and operated mines that are connected to manufacturing facilities by pipeline”
(8-K).
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Conclusion
Competitive advantages are integral to a growing business and the above
success factors, we believe, are pertinent to the sustained successes of Olin
Corporation. Differentiation in product quality, economies of scale with the DOW
spinoff, and the synergies from all of these together are the three factors that set Olin
above its’ competitors
Key Accounting Policies
The accounting policies used by companies can change the observable value of a
firm. With companies being allowed a vague amount of flexibility when developing and
executing accounting policies, they can affect the perception of readers of financial
statements and how they perceive a company’s value. Because of this, an analyst
should examine carefully the type of accounting policies the particular company uses.
There are two categories of accounting policies: Type One and Type Two. Type One
accounting policies are those that are related to the value-added business activities the
firm has in place and the firm’s key success factors. Type Two policies are those that
can materially distort a reader’s estimation of a firm’s value by affecting different items
on the Income Statement and the Balance Sheet. First, this section will analyze Olin’s
Type One policies to their competitors. These include economies of scale, low input
costs, product mix and vertical integration. Next in this section, we will develop an
understanding of Olin’s Type Two policies which include goodwill, lease accounting, and
pensions.
Type I Accounting Policies
Economies of Scale
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Economies of scale can be described as the cost advantages that arise because
of size, scale, or output that a business possesses over its competition. These cost
advantages are the decreased per unit costs the company encounters because the fixed
costs are spread over more output units. Smaller firms will not see these cost
advantages due to the fact they only produce a small number of units and cannot
allocate a smaller portion of fixed cost to each unit. A firm’s ability to obtain economies
of scale has many contributing factors such as production factors, organizational
factors, and input factors. Production factors are the methods the company uses to
design and manufacture their output. They may have a lower cost way to produce their
products compared to their competitors. Organizational factors are those directly
related to the firm. A firm may be able to cut its administrative costs more efficiently
than another company. Also, a firm that is vertically integrated has more of an
advantage than a firm that needs to purchase all of its raw materials and ship its
finished product. Lastly are the input factors which are the benefits that larger
companies have that over smaller companies that allow them to purchase raw materials
in bulk which reduces input costs. These factors are usually obtainable only by large
firms because they tend to demand a great amount of capital and require a production
volume that is very large.
With a few big players in the Chlor Alkali industry, the use of certain cost metrics
can help determine and compare these players and help measure the existence of
economies of scale, which include: fixed asset turnover, operating ratio, net fixed asset
growth, and utilization rate. These ratios provide support for what degree companies
achieve economies of scale, even though the data that can be derived from these ratios
is compelled to an extent by different economic and company strategies that may arise.
When analyzing an industry, such as the commodity chemicals industry where price
competition is high, these ratios provide insight into how particular companies within
that industry are driven to attain economies of scale.
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The inputs for these ratios were readily available through each company’s
financial statements. One ratio that stood out was the fixed asset turnover. This metric
is used to evaluate how easily a company can generate sales from fixed-asset
investments. The higher and more steady the ratio shows the company’s effectiveness
at using its fixed assets to generate sales revenue. As shown below, the ratios for Olin
are above two and remain steady throughout the five years. Unlike its competitors, Oxy
and Axiall.
Fixed Asset Turnover 2010 2011 2012 2013 2014
Olin 2.35 2.21 2.11 2.55 2.41
Axiall 4.31 5.03 5.22 2.81 2.74
Oxy 0.52 0.52 0.46 0.36 0.49
Another key metric used to compare companies is their utilization rates. This was
actually a harder number to find than expected because most of the competitors’ ratios
were not as evident as Olin’s. Olin’s utilization rates are provided in the table and are
compared to the industry average (found in Oxy’s 10-k). These rates are used to
measure a company’s ability to meet potential output levels. With a higher utilization
rate they are showing they are close to meeting a desired 100% utilization of their
production. As shown below, Olin has consistently been at and around the industry
average for the past 3 years almost utilizing their full production.
Average Utilization Rates 2012 2013 2014
Olin 80% 84% 80%
Industry Average 81% 84% 79%
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Low Input Costs
In an industry where all competitors are attempting to execute a low-cost
strategy, the price that firms can buy their raw materials for their products is critical.
Everyone wants the lowest cost inputs in order to achieve a higher gross profit. One
metric used to evaluate whether a firm has low input costs is gross margin. The table
below shows the gross margins for Olin and its competitors.
Gross Margin 2010 2011 2012 2013 2014
Olin 15.45% 19.74% 20.37% 19.54% 17.68%
Axiall 9.74% 9.41% 13.84% 15.89% 10.96%
Oxy 48.81% 51.62% 46.07% 44.15% 39.86%
From the table above, Oxy was able to attain the highest gross margins. This
means they were, able to reach the lowest level of input costs relative to their sale
price. This was more than likely due to the fact that the main portion of their operations
is in the oil and gas industry which allows them to allocate those input costs to more
revenue coming in from that segment. Other factors can however affect these numbers
which in turn can change the value of the data. Because of this, an analyst must now
resort to the company’s 10-k to find out more information about the different input
costs associated with a business. The annual reports of Olin show no real data on how
much their input costs actually are, but only that there a few inputs that go into making
caustic soda: electricity and salt. Their competitors are the same way and show no real
information on how much they are paying for raw materials.
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Product Mix
The Chlor Alkali industry is very volatile when it comes to the pricing of their
goods and the prices of their raw materials. It is a seasonal industry and relies heavily
on buyer demand. As you can see from the table below, the selling prices of an ECU
have gone down over the past 3 years.
Average ECU price/yr 2012 2013 2014
Olin $575 $560 $505
This is due a decline in caustic soda price which is driven by an increase in new Chlor
Alkali capacity. With this being said, in order for a company such as Olin to maintain its
market share and to stay competitive based on sales revenue they are diversified into
two other segments: Winchester and chemical distribution. The Winchester segment
provides Olin with a different revenue stream that is not chemical related like the Chlor
Alkali segment. Winchester has its own supply and demand factors that affect its prices,
but recently with the threat of potential regulation regarding gun ownership and
ammunition purchases has people going out and purchasing guns when they can afford
to and buying as much ammunition as possible. This threat from the government has
caused an increase sales revenue over the past couple of years as shown in the table
below.
Sales(Winchester)
in millions $
2010 2011 2012 2013 2014
Winchester $549.3 $572 $617.6 $777.6 $738.4
A huge increase in sales from 2012 to 2013 was due to the initial threat to ban
assault rifles. This enticed many people to go out and purchase all of these types of
46
guns off the shelves before it was illegal to do so. Obviously that threat never became
an actual rule or law so the sales dropped off from 2013 to 2014.
The other segment of Olin is their chemical distribution area. In 2012 Olin
acquired KA Steel which provides them a way to ship their products in-house to cut out
costs from a shipping company. Also, they “manufacture and sell bleach in the Midwest”
(2014 10-k). As stated in the 2014 10-k, “The Chemical Distribution segment gives us
the expanded capability to market and sell caustic soda, bleach...as well as, gives us
the geographic diversification the KA Steel locations provide us…” This segment makes
up only 4% of Olin as shown in the chart below. The associated revenues with this
segment are provided in the table below.
Revenue $ in millions 2012 2013 2014
Chemical Distribution $156.3 $406.4 $293.8
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This diversification into different segments have been beneficial to Olin’s success
because it allows for them to have different revenue streams that are unrelated to take
out the potential volatility of being only invested in one specific business.
Vertical Integration
Vertical integration is achieved when a company owns its entire supply chain,
from raw material production to shipping finished goods. Achieving vertical integration
through mergers and acquisitions or through adding a division to an existing business
allows companies to reduce costs. Also, it improves efficiency through reducing
turnaround times and shipping costs. Olin is in the Chlor Alkali industry to make caustic
soda which is used in making bleach and other cleaning products. There are few raw
materials, as mentioned before, that go into making the finished chemicals. Salt and
electricity being the main raw materials are easy to come by but still a significant cost
for the production of chemicals. Shipping costs are also an important component when
figuring out total cost. Olin has to be able to ship its products to its customers in a
timely and cost affordable manner. For most companies, vertical integration is hard to
achieve because it can be extremely costly and require a complete overhaul of the
existing business model of some companies. Olin however, has found a way to reach
vertical integration that best suites them.
Olin acquired KA Steel back in 2012. KA Steel was a big producer of bleach
products and also had a way to distribute their finished products to its customers. Olin
found this to be a very valuable type of company and chose to acquire them for the
reason of potentially becoming vertically integrated. Since the acquisition, Olin now has
the ability to ship its chemicals to its customers instead of contracting it out or hiring a
shipping company outright. This portion of vertical integration will save them
tremendously in shipping costs because they are not having to outsource to various
shipping companies.
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Another huge factor that has allowed Olin to become vertically integrated is its’
acquisition of DOW Chemical’s Chlor Alkali business. In the end of the fourth quarter of
2015 the deal will have been finalized and Olin will have possession of all of DOW’s
Chlor Alkali assets. Among these assets, Olin will now own various salt mines that DOW
had for its’ business activities. Because salt is a one of the two main raw materials Olin
uses to make its products, the ownership of these mines has the potential to
significantly lower their raw materials cost. Olin will no longer have to purchase a large
amount of their raw materials from different suppliers, but will now be able to attain
these raw materials in house, again, significantly reducing input costs. With this
acquisition, Olin will become even more vertically integrated and will grow into the
leading producer of Chlor Alkali products in the world.
Type II Accounting Policies
Operating Leases
An operating lease is the lease of an asset from a lessor, where the lessor is able
to record on their balance sheet a fixed asset even though they may not have
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possession of the item. A capital lease is a little different in that the lessor doesn’t
record anything on their financial statements, but instead the lessee recognizes the
item as an asset on their books. In order to understand this, one must realize the
difference between the two types of leases, and, from an accounting standpoint,
comprehend the way you record each lease whether you’re the lessor or lessee. For an
operating lease the lessor (person leasing out the property) records this lease as a fixed
asset and depreciates it as necessary. The lessee in this case does not have to record
an operating lease on its balance sheet. Even though many companies do this, their
financial statements should be restated. Restating these lease amounts should provide
an analyst with greater insight into a company’s payment obligations.
The table below shows the amount of operating lease payments that Olin and
their competitors have. Compared to Property, Plant and Equipment, Olin and their
competitors do not utilize their operating leases to an extent that is worthy of altering
their debt and assets.
Future Operating Lease
Obligations ($ in millions)
2015 2016 2017 2018 2019 After
2019
Olin $60.5 $50.2 $45.3 $39.1 $31.1 $75.3
Oxy $192 $165 $165 $136 $136 $592
Axiall $39.6 $32.6 $27.3 $17.6 $11.9 $32.5
Smith & Wesson $2.4 $1.9 $1.9 $1.7 $1.7 $5.9
Goodwill
Goodwill is an intangible asset that comes about because one company bought
another for a premium. These things are intangible items that a purchased company
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has such as, a good customer base and customer relations, brand name or image, good
employees, and patents. This value is calculated as the price paid for the business
minus the fair market value of the net assets. This amount is then inserted into the
intangible assets portion of the balance sheet and recorded as Goodwill. According to
GAPP, the amounts for goodwill and other intangible assets does not have to be
amortized over a certain number years. It could be 2 or it could be 30, it all just
depends on what a company feels they need to take away from that past year’s
amount. This act of writing intangible assets down to their fair value each year is called
impairment, and is then expensed on the income statement. Managers and the
individuals responsible for deciding how much to impair each year have a difficult task.
Impairment of an asset has effects to other financial statements. If goodwill is for some
reason overestimated, the firm’s net income and equity would be overstated, leaving
expenses understated. As you can see, future investors do not want not want to see a
company’s goodwill and intangible assets that is greater than their tangible assets.
Olin would normally perform impairment tests during the 4th quarter of the year.
However, recently, they have not impaired any goodwill as you can see from the table
below. This is partly due to the fact they believe that the assets they have acquired
over the years have not gone down in value. It hasn't risen either because they haven't
purchased any companies recently. The most recent being KA Steel back in 2012 which
raised their goodwill from $627.4 million to $747.1 million, also shown below. With Olin
acquiring DOW’s Chlor Alkali segment this year, expect to see a significant increase in
goodwill and all other assets in the 2015 10-k.
Goodwill Amounts
($ in millions)
2011 2012 2013 2014
Olin $627.4 $747.1 $747.1 $747.1
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Conclusion
Analysts need to be aware of what the different accounting policies are and be
able to understand them in order to determine fair value of a company. To gain a
greater understanding of Olin and its operations, the key accounting policies mentioned
above provide a clear picture of what Olin is trying to convey in their books. In order to
forecast future earnings, these policies must be executed.
Assessing Accounting Flexibility
The big success factors that firms are trying to achieve in the commodity
chemical industry are economies of scale, low input costs, and vertical integration.
Many expenses for these companies are located in broad items such as “Cost of goods
sold” or “Selling, general, and administrative” which makes it hard to recognize an
actual level that these firms are able to achieve those factors. Analysts gain valuable
insight into a company by looking at additional disclosed items instead of looking just at
those areas that require a minimum level of disclosure by accounting standards. The
capitalization of operating leases and goodwill are also areas in which a company has
some flexibility in recording, which can have a great impact on that company's financial
statements.
Capitalization of Operating Leases
There is a substantial difference between operating leases and capital leases
when it comes to financial statement areas. Managers see a flexible opportunity when
accounting for leases. When a company incurs an operating lease over a capital lease
many benefits arise. The major benefit in choosing an operating lease over a capital
lease is that the company does not have record a debt obligation on its balance sheet.
This advantage is especially beneficial when a company it is at or approaching a debt
covenant that they may have on a loan from a bank. A lease will be classified as a
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capital lease if one or more of these items is met under FAS 13, if not then it is
categorized as an operating lease.
1) The lease transfers ownership of the property to the lessee by the end of the
lease term;
2) The lease contains a bargain purchase option;
3) The lease term is equal to 75% or more of the estimated economic life of the
leased property; or
4) The present value at the beginning of the lease term of the minimum lease
payments equals or exceeds 90% of the excess of the fair value of the leased
property to the lessor.
Goodwill
Goodwill is recorded on the balance sheet of the purchaser of the company. The
amount is calculated as the amount paid for the company minus the fair value of the
purchased company’s assets. If there is an excess amount here that is what is recorded
as goodwill. Goodwill is an intangible asset and should amortized out over an adequate
amount of time. Doing this gives the potential investor or person analyzing the
company a reasonable view of the company's assets. In the past, before 2001, a
company could amortize goodwill over a period of 40 years. In 2001 however, the FAS
issued rule 142 which requires companies to reevaluate the fair value of goodwill on
their books each year. The process for doing this involves comparing discounted future
cash flows to the book value of that company’s assets. When and if management finds
that the value of goodwill exceeds the discounted cash flow, an impairment to goodwill
needs to be made. This impairment has to equal up goodwill and fair value of the
discounted cash flows. Managers are given a significant amount of flexibility when
calculating the impairment, and because of that, sometimes a company’s earnings may
be overstated because the impairment wasn’t accounted for correctly. This what
analysts need to watch out for and why they may need to restate a company’s
financials.
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Conclusion
Olin has a significant amount of flexibility when it comes to accounting for
goodwill and operating leases. Goodwill has never been impaired which is a sign that
management believes that the intangibles brought to the table through the purchase of
other firms has been beneficial to the output of Olin. However, impairing this gives
investors and people on the outside of the firm a better assumption of Olin’s books.
Likewise, operating leases have their own benefits to a company’s financial statements
which Olin has taken advantage of as well.
Actual Accounting Strategy:
Accounting Strategies play a huge role in the way Companies portray their
financial information. Olin allows for management to utilize a lower level of disclosure
relating to accounting policies. This could be cause for concern as it allows for two
strategies in which companies could take. Either a conservative strategy or an
aggressive strategy. Each strategy will have an opposite effect on the financial
statements depending what the company wants to portray to the public. Olin uses an
aggressive strategy, which usually leads to an understatement of value which if
analyzed correctly will lead investors to a lower risk on the company's portrayed value.
If the company uses a more aggressive strategy on their Accounting techniques the
company's value has more of a chance to be overvalued. This can be due to certain
manipulations in the financial statements and write-offs to make numbers look more
impressive than actual. The information disclosed in the financial statements must meet
minimum GAAP requirements but, it is up to management of the company if they wish
to disclose any more than the minimum required by GAAP. Investors have to be weary
of these techniques and learn to analyze these type 2 accounting policies such as
Goodwill, Research and Development, and Capital operating leases to make an
informed decision on the earnings and value of the firm being analyzed.
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Goodwill:
Olin Corporation has a good amount of goodwill on their balance sheets due to
acquisitions they have made of other companies and they do not write it off. Olin takes
a very aggressive strategy when it comes to type 2 accounting strategies. Olin impairs
no goodwill cost even though they have very high numbers for goodwill. Olin’s Goodwill
ratios compared to the Total Assets and Net Fixed Assets are very high and worrisome
to investors. Olin compared to its competitors has much higher ratios with the exception
of Axiall that has just recently experienced high Goodwill to Fixed Assets ratios over the
past 2 years due to its merger with Georgia Gulf in 2013. S&W along with OXY both
have no goodwill they have reported and therefore have a 0% for the ratio. Olin’s
strategy to not impair goodwill in its financial statements has huge effects in the overall
returns and value of the company and through the restated financial statements later
on you will see the differences in the values if goodwill were to be impaired.
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2014 2013 2012 2011 2010
OLIN Goodwill 747.1 747.1 747.1 627.4 300.3
% Total Assets 27.69% 26.66% 26.90% 25.61% 14.66%
%Net Fixed Assets 80.25% 75.63% 72.23% 70.86% 44.49%
Axiall Goodwill 1,741.0 1,763.2 217.2 213.6 209.6
% Total Assets 30.68% 30.00% 12.06% 12.99% 12.59%
%Net Fixed Assets 104.52% 106.30% 34.06% 33.33% 32.10%
S&W Goodwill 75.4 0.0 0.0 0.0 0.0
% Total Assets 15.24% 0.00% 0.00% 0.00% 0.00%
%Net Fixed Assets 56.35% 0.00% 0.00% 0.00% 0.00%
Oxy Goodwill 0.0 0.0 0.0 0.0 0.0
% Total Assets 0.0 0.0 0.0 0.0 0.0
%Net Fixed Assets 0 0 0 0 0
Goodwill Percentages
Goodwill
Goodwill is recorded on the balance sheet of the purchaser of the company. The
amount is calculated as the amount paid for the company minus the fair value of the
purchased company’s assets. If there is an excess amount here that is what is recorded
as goodwill. Goodwill is an intangible asset and should amortized out over an adequate
amount of time. Doing this gives the potential investor or person analyzing the
company a reasonable view of the company's assets. In the past, before 2001, a
company could amortize goodwill over a period of 40 years. In 2001 however, the FAS
issued rule 142 which requires companies to reevaluate the fair value of goodwill on
their books each year. The process for doing this involves comparing discounted future
cash flows to the book value of that company’s assets. When and if management finds
that the value of goodwill exceeds the discounted cash flow, an impairment to goodwill
needs to be made. This impairment has to equal up goodwill and fair value of the
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discounted cash flows. Managers are given a significant amount of flexibility when
calculating the impairment, and because of that, sometimes a company’s earnings may
be overstated because the impairment wasn’t accounted for correctly. This what
analysts need to watch out for and why they may need to restate a company’s
financials. The following is a table depicting the amount impaired for the previous five
years depicting a Goodwill useful life of five years.
2010 2011 2012 2013 2014 2015 2016 2017
Original GW (2009) 60.06 60.06 60.06 60.06 60.06
2010 - - - - -
2011 65.42 65.42 65.42 65.42 65.42
2012 23.94 23.94 23.94 23.94 23.94
2013 - - - -
2014 - - -
Total Amount Amortized 60.06 60.06 125.48 149.42 149.42 89.36 89.36 23.94
Goodwill Impairment Table
Research and Development:
Research and Development are expenses incurred in hopes for future revenues,
but that cannot be capitalized as assets because it has not yet produced any revenue.
Investors often look at this as an investment in itself and usually when restating
financial statements makes an asset account for Research and Development and
amortize it out to factor in the value of that research. Olin does not have enough
Research and Development expense for there to make a difference in its financial
statements and value so there is no need for restating the R&D expenses.
Operating Leases:
There are two types of ways to utilize leases in ways that are similar to Goodwill.
The first alternative is more conservative, and the other allows for much more flexibility
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in how reporting is treated within the respective financial statements. The more
conservative approach to leases is capitalizing lease structure. This method does not
greatly alter your debt and is a more honest and open way to report to investors and
the public. The alternative way is structuring leases as operating leases. This
accounting method allows for a much more flexible approach for firms and often can
inflate asset values. Olin takes the more flexible approach and has hardly any
capitalized leases. Olin reports almost all leases as operating leases. Although it only
increases non-current liabilities by roughly 10%, as stated in the restatements. We feel
it was necessary to restate operating leases due to the fact we feel Olin was doing it to
make the value of the firm look stronger.
This Graph of operating leases over the past 4 years and 4 forecasted years shows how
operating leases in Olin Corp are increasing over time. Olin has never impaired
operating leases and since it was increasing, we decided it was better to impair it to
find a more true value. The following table is the present value of the expected future
leases for each respective year. These numbers were then used to undo accounting
discrepancies.
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Olin Operating Leases PV
2010 163.55
2011 168.07
2012 210.62
2013 189.90
2014 243.00
Conclusions
Olin’s Accounting Strategies are much more aggressive than its competitors and
they use this strategy to boost the company's value and Net Income. This strategy is
much different than its competitors due to its acquisitions of companies that expand
Olin’s economies of scale. We have impaired Goodwill and Operating Leases because
we feel it will give us a more firm number to evaluate the true value of Olin.
Quality of Financial Disclosures
Understanding the quality of disclosures is important because they directly relate
to understanding and evaluating the financial statements of a firm. In order for our
team to reasonably understand the condition of Olin’s financial statements, we must
first create a framework for our analysis. Our framework will concentrate on 4 key
components measuring different aspects of the financial statements. The framework will
be as follow; type 1 and 2 key accounting disclosures, and identifying any potential
accounting red flags.
Financial statements are the easiest avenue to understand the strengths and
weakness of a company's. However, if a firm's managers are deceitful and intentionally
include or are disinclined to release information, this can lead to a false sense of reality
of the firm. From an analyst's perspective, this is very dangerous. If we as the team of
59
analysts use manipulated information, it could have a detrimental effect on a firm's
valuation.
Another important point in terms of financial disclosures is how the managers of
a firm interpret the materiality of financial information. Take for example a company
that such as Olin Corporation. As the financial information is being written into Olin’s
form 10-K, a malicious manager may decide not to impair goodwill if he is intentionally
trying to prop up the firm's stock price. A decision such as this would undoubtable
manipulate an analyst's valuation of the firm and lead to misinformation being
disseminated into the market.
The financial managers at Olin Corporation hold an enormous burden in terms of
materiality. Each time a manager chooses to include or not to include information, it
allows for speculation of others into his or her motives. In our opinion, we have
determined that the disclosures on the forms 10K and 8K, Olin’s managers disclose a
reasonable amount of information.
Firm’s Strategy and Economic Consequences
Firm strategies, along with the economic consequences of poor decisions making
play a large role in determining a firm's longevity within an industry. The firm's
managers depict what they have done, what they are doing and the possibility of risk in
the future.
As shown in the form 10-K, Olin reasonably outlines its strategies and economic
consequences for each segment of the firm and the firm as a whole. In the
management's discussion and analysis of the financial condition of Olin, the firm will
continue to reduce costs wherever it can. Olin is in the process of reducing and
restructuring its senior outstanding debt.
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However, on the risk side, Olin has stated that abrupt price swings can have a
detrimental effect on profitability. The firm is however is continuing to diversify its
holdings and increase its market share through the Dow chemical merger.
Quality of Disclosure of Type 1 Accounting Policies
Analyzing the first set of accounting policies is extremely important in terms of
firm valuation. We, as the equities analysts have developed a structure to easily and
accurately gauge a firm's level of disclosure on certain topics. Our structured analysis
will consist of looking at: economies of scale, input costs, product mix, and distribution.
We will analyze each of the above topics respective sections in the financial disclosure
forms.
Economies of Scale
Olin Corporation consists of high upfront capital requirements. This creates a
need of financial security that a large organization provides. This is why economies of
scale are so important, a large capitalized organization provides a layer of protection to
each smaller subset of the firm. With this in mind, it is imperative that the financial
statements outlining Olin’s economies of scale be correct and true. We must decide if
the supplied financial statements can provide an adequate level of understanding to us
as outsiders.
The form 10-K provides great detail as to what facilities the firm uses for
operations, even going into detail as to what is owned or leased. Each major subsidiary
under the control of Olin has its own respective section listing what that plant produces,
how much it produces and the raw materials required during production. Each section
also describes in detail the shipping to and from each facility and the facilities location.
Through understanding of these statements we have determined that the level in which
economies of scale are described are sufficient for our analysis and will provide a fair
and true addition to the valuation.
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Input Costs
As Olin is a leading producer of chemicals and other products, input costs are
very relevant when it comes to valuations. The financial statements go into sufficient
detail as to the fluctuating trends and market changes to raw materials pricing.
However since Olin has substantial upfront costs associated with chemical production
and asset acquisition, sufficient evidence on these subjects will be needed. Olin failed to
provide sufficient evidence on these subjects, which will make cost of goods sold
difficult to understand.
Product Mix
Since Olin a vertically integrated company, it products a diverse set of products
and services. Products ranging from production of caustic soda all the way to small
arms manufacture. In order to understand the full effect that the product mix has on
Olin, sufficient information must be disclosed. Olin discloses adequate information
relating to each major subsidiary as well as production outputs for each year.
Furthermore, the financial statements also include information pertaining to business
environment as well as possible risk factors associated with each. The information
relating to the product mix meets our criteria for a full and clear understanding of
production.
Cost Distribution
Cost distribution is a very important factor when it comes to the success of any
vertically integrated company. Most firms in any industry are hard pressed to keep
distribution costs to a minimum. As Olin is a low cost leader in the caustic soda space,
chemical distribution costs are of great concern when understanding the strength of the
firm and its subsequent value.
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KA Steel is the transportation arm of the firm and is a value added component.
Olin acquired KA steel in 2012 for the purpose of reducing distribution costs. Since KA
Steel acts as a distribution line, Olin was able to reduce product transportation costs
significantly. The form 10-K showed that most of the product is transported on trucks.
Further the KA portion of the 10-K described well where each of the distribution
facilities are located as well as the strategies and risks associated to the subsidiary.
Quality of Disclosure on Type 2 Key Accounting Policies
The quality of disclosure of type 2 accounting policies is very important when
understanding how the financials of the firm work. This segment will analyze how
different accounting practices affect how the company reports expense and revenues. If
the firm uses different accounting practices than what is normal for the industry, we
must understand why. This section will looks at 4 key factors that we will use to
reasonably understand if the accounting and how it affects the financials. The 3 key
factors that we will analyze are as follows; revenue recognition, goodwill impairment,
and operating leases depreciation.
Understanding how the firm recognizes revenue is an important factor because it
directly pertains to the creation of earnings. The revenue recognition section located on
page 57 of the form 10-K adequately describes how the firm's revenue is recognized.
Sales and discounts are estimated by various market data and historical trends, which is
a very ambiguous statements. Given the ambiguity of how the sales and discounts are
calculated, this will make the cost of goods sold difficult to analyze. However given the
above statements, we believe the information that describes the revenue recognition to
be reasonable and acceptable.
Goodwill is also a very important factor in valuing a firm because it directly flows
into net income. Net income is very important because that is one of the largest factor
in valuing a firm. Olin does not impaired its goodwill. The 10-K uses an impairment test
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that is very undescriptive in nature. We have determined that the information regarding
goodwill impairment is inadequate and should be restated.
The operating lease depreciation is lightly discussed in the “off balance sheet
activities” section and the subsequent description is lacking and therefore needs to be
restated. We have determined that capitalizing these expenses is necessary because
they have to recognize the liability of the future cash outflows.
Quality of Disclosure on Explaining Current Performance
Understanding the current financial performance section of the 10-K is very
important for an analyst's opinion of the company. The current performance section
describes facts about how the company is performing within each year. The financial
tables in this section help with understanding how the company is working
benchmarked from previous years. A well written section will contain footnotes and
extensive descriptions of the scenarios that each year's numbers and line items are
derived from.
Olin Corporation created segmented current performance sections for each
subsidiary. Each subsidiary contained qualitative footnotes describing different instances
within the quantitative data table. Most of the line items are linked to a corresponding
footnote describing what factors led to the corresponding numbers. These footnotes
allow us, as valuation analysts, to sufficiently understand each line item.
Olin could be more specific in terms of the level of transparency with its
footnotes. The environmental expenses have decreased dramatically in each year,
however Olin provides no explanation of factors leading to the reduction in costs. A
higher level of description would be better, however we understand that too much
disclosure can aid in a firm's loss of its competitive advantage. Based upon the above
statements we have determined that the level of disclosure pertaining to the current
performance section of each subsidiary is sufficient to be used in our analysis.
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Quality of Disclosure on Business Segments
Disclosure statements based on each business segment is important because it
allows for a higher level of description based on a given segment of the firm.
Consolidated financial statements are useful when trying to evaluate how the firm is
doing as a whole. However, each business segment is faced with a variety of different
factors to contribute to success. A well written and reasonably transparent company will
have consolidated financial data as well as segmented financials sections.
Olin has a highly descriptive section of segmented financial information. Each
section describes the segments strategy, risk factors as well as financial information
associated with each segment. Further, for each section, Olin has extensive information
based on competition and any off balance sheet activities, all which contribute to a high
level of transparency
Given that each subsidiary has a high level of transparency, we have determined
that the quality of disclosure of each business segment is sufficient to be used in our
analysis.
Conclusion
Based on all the research above, we have determined that the level of
description in the financial statements is an acceptable level of transparency. However,
there are some areas of the firm that are ambiguous and need to be analyzed more
closely and subsequently be restated. Specifically, how goodwill is treated within the
firm and the capitalization of operating leases.
Identifying Potential Red Flags
When reviewing financial statements, analysts should look for “red flags” which
point out questionable accounting policies. Red flags, although reason for concern, are
a basis for analysis as opposed to a conclusion. This is because red flags usually have
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multiple interpretations, some of which could have justified business reasons. After
examining Olin Corporation’s financial statements, we determined that potential red
flags include the following: (1) unusual increases in inventory in relation to sales
increases; and, (2) changes in accounting methods. The following analysis will look at
these possibly questionable accounting practices and decide if it would impact the value
of Olin Corporation.
Unusual Increases in Inventory in Relation to Sales Increases
Unusual increases in inventory in relation to sales increases are a red flag that is
cause to gather more information related to this subject. This red flag may suggest
that the demand for the company’s product is slowing down, which could force the
company to cut prices or write down inventory. On the other hand, if it is a buildup of
raw materials, it could mean that there are manufacturing inefficiencies, which would
cause lower margins through increased cost of goods sold. However, it could also mean
that managers expect an increase in sales, which would be a positive thing.
While reviewing Olin Corporation’s income statements we noticed that there was a year
in which Olin Corporation had an unusually high increase in inventory in relation to
sales, which had actually taken a plunge (Shown in the above figure). Between
accounting periods of 2013 and 2014 sales decreased about $274 million and inventory
increased by about $24 million. This raised some concerns because it indicated the
possibility that Olin Corporation losing demand.
To better understand the situation, we decided to read further into Olin
Corporation’s 10-K to hopefully discover the cause of this and determine whether or not
66
it is an object for concern. What we found was that there are a couple of factors that
have a direct effect on these two things. Olin Corporation’s management specifically
states all of their segments are subject to seasonality in demand. In other words, the
level of demand for products made by Olin Corporation can fluctuate in demand
depending on the time of the year. For example, the Winchester segment produces
small caliber ammunition for which the demand can dramatically increase during
hunting season and then fall following it. We concluded that there could be points in a
given accounting period where sales take a plunge, which if unexpected, results in an
increase in ending inventory over the previous period.
Products manufactured by Olin Corporation’s Chlor Alkali segment are
commodities in nature they have fluctuating prices per unit, which are measured in
ECUs in this industry. Olin Corporation stated in their 10-K that for every $10 per ECU
change there is a $14 million change in revenue.
Shown in the above figure taken from Olin Corporation’s 10-K are the quarterly
prices per ECU between 2013 and 2014. There is a noticeable difference in pricing from
quarter to quarter, which we believed most likely account for the lower sales figure for
2014.
We learned that the increase in inventory was a direct result of sales from the
2013 accounting period for the Winchester segment. Further digging into the 10-K
revealed that the Winchester segment had an unexpected increase in sales that took
out a large portion of the inventory they had. This inventory was eventually returned to
“normal” at some point in the 2014 accounting period, which Olin Corporation’s financial
statements say is the cause for the $23.6 million dollar increase in inventory.
Olin Corporation triggered a red flag with unusual increases in inventory in
relation to sales. We determined that sales figures decreased as a result of the lower
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price per ECU for which Olin Corporation’s Chlor Alkali could charge its customers and
the increase in inventory was due to the Winchester segment returning to normal levels
of inventory following a demand spike in the previous period. Analysis determined that
this red flag provided a greater understanding of Olin Corporation’s operation and
although it didn’t reveal a cause for concern, because the company knows there is
cyclical pricing in this industry that they do account for, it is something that should be
monitored as it affects profitability.
Changes in Accounting Methods
Changes in accounting methods refer to when managers of a company changes
aspects of their reporting practices, usually when performance is poor, to “dress up”
financial statements. Although this is usually legal, it raises a red flag and is reason to
gather more information.
During 2012, Olin Corporation adopted ASU 2012-02, which allows a firm to
perform a qualitative test to determine impairment of indefinite-lived intangible asset’s
fair value prior to doing a quantitative test. Some of the circumstances that could be
considered as part of a qualitative test include: substantial changes in the environment
of the business, adverse government action, and significant decline in stock prices. In
other words it gives Olin Corporation the discretion to decide whether or not their
goodwill has been impaired.
This change to the accounting policy was done around the same time as Olin
Corporation’s acquisition of private chemical distributing company KA Steel. This could
be a questionable accounting policy because Olin Corporation realized goodwill on the
acquisition of KA Steel, which is considered an indefinite-lived intangible asset. Also,
Olin Corporation has not impaired any of the goodwill on their balance sheet since the
acquisition, causing this concern. Goodwill is classified as an asset and creditors use
assets and liabilities in various ratios to determine credit worthiness.
Further analysis of Olin Corporation’s financial statements showed greater
understanding of why there hasn’t been any impairment and if this is done financing
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purposes. In Olin Corporation’s financial statements, they state that impairment tests
are done, at a minimum, in the fourth quarter of every third accounting period. This
would explain why goodwill from the KA Steel acquisition has yet to be impaired as it
hadn’t been 3 years since the acquisition for Olin Corporation to perform impairment
tests. Also, Olin Corporation firmly believes that the fair value of the goodwill greatly
exceeds the carrying value that is listed on their balance sheet. Olin Corporation also
performed sensitivity analyses with hypothetical decreases in fair value and hypothetical
increases in weighted-average costs of capital and they claim that in all of the
scenarios, fair value was greater than carrying value.
Olin Corporation 10-K 2014
“In all cases, the estimated fair value of the Chlor Alkali Products reporting unit derived
in these sensitivity calculations exceeded the carrying value by a substantial amount. In
these sensitivity calculations, the estimated fair value of the Chemical Distribution
reporting unit also exceeded the carrying value by approximately 10%.”
We deemed the adoption of this accounting policy by Olin Corporation a red flag.
We believed that there could have been the possibility that Olin Corporation was
intentionally trying to overstate the assets by not impairing goodwill, which could have
been done for financing reasons. After further analysis and gathering of information we
determined that at this time it could not be deemed a questionable accounting policy as
it is in the company’s practice to do impairment tests in the fourth quarter every third
accounting period. Although this accounting policy has been deemed not questionable,
the next period’s 10-K may provide more information into this matter as it may or may
not include goodwill impairment and financing information.
Conclusion
The analysis, on what we had determined were red flags in Olin Corporation’s
10-K, provided insight into the company’s operations. It was determined that because
of Olin Corporation’s three different segments, increases and decreases in inventory and
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sales might not just be from the same segment and that complexity of Olin Corporation
makes analyzing and gathering information slightly more difficult. Olin Corporation’s
adoption of an accounting policy, which proved to be beneficial when done in tandem
with their acquisition, was deemed to not be a questionable accounting policy at this
time. However, it is something to continue monitoring. Overall, we believe that Olin
Corporation is acting responsibly in their financial reporting because these were some of
the only red flags that we could find.
Undoing Accounting Distortions
Undoing accounting manipulations can give an investor a better sense of the true
financial health of the company. By restating certain aspects of the Balance Sheet and
the Income Statement, it allows us to look objectively at how some numbers can be
highly inflated to their true numerical value. Through our analysis, we have decided to
restate the financials related to Goodwill and Operating Leases.
Goodwill
We have restated Goodwill because Olin has not impaired Goodwill in the last 5
years, and the recent acquisition of KA Steel has over inflated the value of Goodwill on
the Balance Sheet. The adjustment of Goodwill was impaired over a period of 5 years.
We used a cumulative approach when looking at Goodwill so the adjusting balances
from older years are then rolled over to the next year to calculate a rolling ending
balance. This is important because by doing this for every year, we can see a snowball
effect on the true ending balance the net income. The following is the amortization
schedule that we have used in creating the financial restatements.
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Original Goodwill Change in Goodwill
2009 300.3
2010 300.3 0
2011 627.4 327.1
2012 747.1 119.7
2013 747.1 0
2014 747.1 0
New Goodwill
2010 2011 2012 2013 2014 2015 2016 2017
Original GW (2009) 60.06 60.06 60.06 60.06 60.06
2010 - - - - -
2011 65.42 65.42 65.42 65.42 65.42
2012 23.94 23.94 23.94 23.94 23.94
2013 - - - -
2014 - - -
Should Impair 60.06 60.06 125.48 149.42 149.42 89.36 89.36 23.94
Did Impair 0 0 0 0 0 0 0 0
Adjust 60.06 60.06 125.48 149.42 149.42 89.36 89.36 23.94
Balance Sheet 300.3 240.24 507.28 501.5 352.08 202.66 113.3 23.94
New GW 0 327.1 119.7 0 0
Did Impair 0 0 0 0 0
Should Impair 60.06 60.06 125.48 149.42 149.42 89.36 89.36 23.94
Adjusted Ending Blance 240.24 507.28 501.5 352.08 202.66 113.3 23.94 0
The following is the Accounting entries that were made for the restatements
based on the findings from the above table.
2014 Goodwill Impairment Charge 149.42
Goodwill 149.42
2013 Goodwill Impairment Charge 149.42
Goodwill 149.42
2012 Goodwill Impairment Charge 125.48
Goodwill 125.48
2011 Goodwill Impairment Charge 60.06
Goodwill 60.06
2010 Goodwill Impairment Charge 60.06
Goodwill 60.06
Operating Leases
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Operating Leases are important to capitalize because they can drastically change
the net income for a company. As stated above, we feel that the operating leases
should be capitalized because of the change in net income that occurs and the increase
of non-current liabilities that occurs when capitalized. When figuring out what rate to
use as the discount rate, we decided to use the cost of debt. Although Olin does not
show what the overall rate they pay, they do disclose the current long-term debts that
they are obligated to pay. We then used this information to calculate an average cost of
debt for each year. We were then able to use these rates to calculate the expected
average PV and interest payments expected for the following years.
The following table shows the present value of the future Capital Operating Leases for
each respective year. We then used this information to restate the balance and income
statements to provide a more accurate look on the net change in Net Income
Olin Operating Leases PV
2010 163.55
2011 168.07
2012 210.62
2013 189.90
2014 243.00
Financial Restatements
Now that the Goodwill and Operating Lease accounting decisions have been
disclosed. We need to present the fixed restatements for the years 2010-2014. We
started with the balance sheet, and added in the changes due the Goodwill. We found
this to be the largest factor in the change of Total Assets. As stated before, Olin has not
impaired Goodwill in the previous five years. This has led to a large buildup that is
currently >50% of total Net Fixed Assets. By amortizing and fixing this, Total Assets
steadily decreases every year by the cumulative amortization. The Operating leases
also had the opposite effect on total assets. While the first year total assets increased
due to the leases being higher than the total goodwill amount changed, the cumulative
amount of goodwill overtakes the operating leases and decreases the total assets.
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The Income Statement had the largest change to accounting manipulations. With
the Goodwill Impairment charge and the depreciation and interest expense from leases,
Net Income took a serious drop. From the year 2011 and on, the company was not
profitable under these new accounting rules employed.
Conclusion
After the restatements have been calculated, we can see that through
their accounting policies, Olin has been able to inflate their net income by the tune of
approximately $400 Million over the last 5 years. This is largely due to the fact that Olin
has not impaired any Goodwill for the past 5 years, nor have they capitalized operating
leases. By fixing both of these discrepancy’s in their Balance Sheet and Income
Statement, we have revalued their statements to give investors a true sense of Olin’s
financial health.
Financial Analysis
Determining the value of a firm requires several forms of financial analysis which
include ratio analysis, financial forecasting, and estimating the firm’s cost of capital.
Ratio Analysis involves taking certain items in a firm’s financial statements and
combining them into ratios that show how those items work together. This is done to
assess the overall sustainability of a firm and is also required for financial forecasting.
Several years’ worth of ratios, for the firm as well as its competitors and the industry as
a whole, will be used to track trends and for comparative purposes. After the ratio
analysis, we will perform the financial forecasting, which will be the basis for the
valuation of this company. Finally, the cost of capital will be calculated.
Fiscal Year Ending
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The fiscal year ending differ between Olin and some competitors so we have
included a chart that details each year of analysis and when the data was reported by
the company. Since the majority of competitors and Olin have fiscal year endings on
December 31 of each year, the charts used for ratio analysis display December 31 fiscal
year endings, with Smith and Wesson being assumed to end on April 30 of the next
year.
Liquidity Ratios
A firm’s liquidity is its ability to pay its bills. The degree to which this is possible
is referred to as the firm’s solvency. Firms that have high financial solvency are usually
in great financial standing. At the other end of the spectrum firms can have low
solvency or can be insolvent. This means that the firm may be unable to pay the
current portions of its debt using current liabilities and could be on the verge, if not
already, of bankruptcy. For this reason, liquidity ratios are very important and allow
analysts to determine the financial health of a firm. For the purpose of determining Olin
Corporation’s solvency in relation to that of some of its competitors, we will examine
the current ratio and the quick ratio.
Current Ratio
The current ratio determines the extent to which a firm is able to pay off its
short-term liabilities. The current ratio is determined by dividing the firm’s current
assets by its current liabilities. For the most part, current ratios lower than 1 mean that
a firm is unable to pay off debt due in the next year. On the other hand, if the firm has
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a current ratio that is too high in comparison to its competitors, it could mean that the
firm isn’t doing a good job of managing inventory and accounts receivable.
Analysis showed that the companies in this industry have an average current
ratio of about 2 from year to year. This means that these companies are able to cover
their current debt with their current assets of about two times over. When analyzing
Olin Corporation’s current ratios over the previous 5 periods we found that Olin
Corporation maintains a current ratio on par with most of its competitors. This is a good
sign from Olin Corporation as they are, for the most part, keeping up with the trend of
the industry as well as maintaining their financial solvency. The company’s current ratio
drops a little further below 2 than normal in 2012, this could be due to a couple of
factors: Olin took on more debt due to its acquisition of KA Steel resulting in a greater
current portion of debt; and, Olin Corporation decided to begin repurchasing shares
between 2011 and 2012 which doesn’t affect current portion of debt, but does have an
effect on the company’s cash. Also, it was noted that Occidental Petroleum Corp was
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somewhat of an outlier as they have the lowest current ratio on average out of the four
companies being around 1.5, which could indicate impending financial insolvency for
company.
Quick Ratio
The quick ratio is similar to the current ratio in that it measures the ability for a
firm to pay its current liabilities with current assets. The key difference with this ratio is
its conservativeness as it takes into account that certain current assets aren’t as liquid
or as easily converted into cash as others. A firm’s quick ratio is calculated by dividing
the sum of cash, short-term investments, and accounts receivable by its current
liabilities. The quick ratio is an indicator of proportionality. If the firm’s current ratio is
considerably higher than its quick ratio in a given period, which indicates that inventory
and or other illiquid current assets comprise a sizeable portion of the current ratio.
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Analysis showed that the industry averaged a quick ratio of around 1.3 over the
span of the last five accounting periods. Olin Corporation maintained a higher quick
ratio than the industry and the company’s competitors four of the past five periods. This
could be an indication that Olin Corporation’s financial solvency. The quick ratio is also a
measure of proportionality. It was noted that Olin Corporation’s quick ratio figures were
relatively close to the company’s current ratio figures as opposed to the industry and
the competitors. This means Olin Corporation’s current ratio is composed of less
inventory than its competitors. Again, this is a good indication of the company’s
financial solvency. There are two periods in which the quick ratio dips to lower than
normal, but as said before under the current ratio section, it could be due to an
increase in the current portion of debt taken on by the KA Steel acquisition and or the
repurchasing of shares with cash.
Liquidity Ratios Conclusion
Liquidity ratios are a measure of a firm’s solvency. Olin Corporation’s current
ratio showed that the firm is operating among the industry average for this ratio, which
is a good sign of the firm’s solvency. The quick ratio numbers for Olin Corporation were
higher than the industry average showing that Olin’s current assets are comprised of as
much of inventory as its competitors. This means that most of the current assets are
the most liquid accounts. Overall, the liquidity ratios showed that Olin is a firm with an
above average solvency in the short run.
Operating Efficiency Ratios
Operating efficiency ratios are telling of how well a firm is able to make use of
their assets and manage their liabilities in a given period. These ratios are essential
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because they give valuable insight into the structure of a company and the extent to
which they are handling change within the industry. In this section the following
operating efficiency ratios will be analyzed: inventory turnover, accounts receivable
turnover, working capital turnover, day’s sales of inventory, day’s sales outstanding,
and cash to cash cycle.
Inventory Turnover
The inventory turnover ratio indicates the number of times inventory is sold and
replenished over a given period, usually a year. This provides more information about
the firm’s performance in comparison to its competitors and the industry. Low inventory
turnover numbers, compared to the industry, could indicate poor sales and thus, too
much inventory. This could be a result of unanticipated slowing of demand, anticipated
increases in price, or anticipated shortages in the market. In comparison to the
industry, exceptionally high inventory turnover numbers could indicate that the firm has
inadequate levels of inventory which could result in a loss of business due to stock
shortages. However, high inventory turnover also could indicate that a firm has low
inventory holding costs which could increase net income so long as the revenue from
selling each item remains the same. A firm’s inventory turnover is calculated by dividing
its cost of goods sold by inventory.
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Analysis showed that Olin Corporation had lower inventory turnover numbers
than the industry and most of the competitors. This would normally be cause for
concern, however, the commodity nature of Olin’s principal goods and the company
currently having a lower market share in the industry are likely the culprits. Although
this isn’t seen as a cause for concern as of yet, it is important that these figures be
monitored going forward because if they drop any lower, it could indicate that
management is doing a poor job of finding ways to increase sales. It was also noted
that Occidental Petroleum Corp had exceptionally high inventory turnover, which we
thought could indicate that they carry inadequate levels of inventory or that there could
be ways in which Olin could improve their operation.
Accounts Receivable Turnover
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Sometimes firms sell to their customers on credit, which moves the sale into
accounts receivable. In other words, the company will go ahead and supply their
customers with goods and those customers promise to pay the firms back usually
without having to pay interest. Due to the principle of time value of money, it is
important to monitor the efficiency of a firm in extending credit and collecting debt.
This is because the firm loses money the longer it takes to collect that debt. To
measure the efficiency, the accounts receivable turnover ratio is used. It is calculated
by dividing sales by accounts receivable. This ratio indicates the number of times per
year that a firm collects on the accounts receivable. High levels of accounts receivable
turnover may indicate that a firm is operating on a cash basis or that firm is efficiently
collecting on accounts receivable. However, this could mean that the firm has a tight
policy regarding the extension of credit. In this scenario the firm either has a good filter
for customers that take too long to pay or that the firm is turning away customers,
which could give business to their competitors. Low levels of accounts receivable
turnover indicate that the firm is “too lax” on its credit policy and may want to reassess
it.
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We performed an analysis of Olin Corporation’s accounts receivable turnover
ratio in comparison to the industry as well as the company’s competitors. What we
found was that Olin Corporation held an accounts receivable turnover on par with the
industry, at around 8.5. This means that Olin Corporation is extending credit on par
with the industry as well as collecting on those receivables relatively well. We
determined that Olin Corporation’s drop in the 2012 accounts receivable turnover was
due to the firm having an unusual increase in accounts receivable which could indicate
that customers took longer to pay or that Olin was extending more credit. This went
back to normal levels within the next accounting cycle due to a higher amount of sales
and likely a higher rate of collection on receivables which resulted in a lower accounts
receivable over the previous year. All in all, Olin Corporation maintains an adequate
inventory turnover ratio which is a good sign.
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Working Capital Turnover
This metric is used to see how effectively the company uses its working capital.
This equation is sales for the period over the working capital; or current assets minus
current liabilities. This ratio is gives an analyst a view of how effective the company is
at managing money to fund operations. A higher ratio indicates a firm was able to
create more sales while investing less money in the process.
For this metric, we found that Olin Corporation is slightly below the industry
average and also most of their competitors. While analyzing this slight deviation, we
discovered that it could be due to a combination of the following: the lower sales
figures, likely a result of the cyclical pricing of most of Olin’s products; and, higher
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current portions of debt due to various acquisitions that Olin has made. In conclusion
we deemed that Olin Corporation’s deviation from the industry average isn’t a cause for
concern.
Days Sales of Inventory
Days Sales of Inventory (DSI) is a useful measure for managers and investors to
know how long it takes for the firm to convert its inventory into sales. A lower DSI ratio
is better because it indicates a shorter time for inventory to be sold. Inversely a larger
ratio indicates that the firm takes longer to convert finished goods to sales, and thus is
being managed inefficiently. This is calculated by dividing the inventory by cost of sales
and multiplying that figure by 365.
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On average, Olin Corporation has a Days Supply of Inventory of around 40 days.
What this means is that it takes them roughly 40 days to convert their finished goods
into sales. The DSI figures for Olin Corporation are just about the industry average and
in the middle of the pack for the comparison with its competitors. These figures are
higher than a lot of other industries, but analysis showed that this could be due to the
seasonality of the specialty chemicals of the Chlor Alkali division and the ammunition of
the Winchester division, which could mean that Olin isn’t doing a good job of adapting
to or foreseeing changes in the industry.
Days Sales Outstanding
The Days Sales Outstanding (DSO) ratio is a measure of how many days it takes
for a firm to collect on accounts receivable. A Low DSO ratio is generally a good sign
indicating that the firm is able to collect from its debtors in a timely fashion whereas a
high ratio could indicate that the firm needs to tighten up its credit policy. This figure is
calculated by dividing accounts receivable by the total amount of credit sales and
multiplying by the number of days in the period.
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Olin Corporation has maintained a days sales outstanding lower than the industry
in 4 of the previous 5 years. The year where it was higher than the industry average
was 2012. As mentioned previously, Olin had an unusual increase in the amount of
accounts receivable to end the fiscal year. This could have been a result of a
combination of Olin extending credit to new customers or that Olin’s customers were
taking longer to pay. Also it was noted that Olin was on par with its competitors when
excluding the outlier, Occidental. All in all, when compared with the industry, Olin
Corporation proved to be collecting on its debtors relatively quickly.
Cash to Cash Cycle
The cash to cash cycle ratio is defined by how long it takes for a firm to
recapture its outlayed cash in normal operations. Specifically the ratio shows the length
of time between the moment that cash is converted into inventory and then sold. A firm
with a smaller cash to cash cycle ratio demonstrates that the firm is running efficiently,
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and conversely the larger the ratio depicts a more inefficiently run company. This ratio
is a good way to gauge a firm's operational efficiency because it incorporates three
other efficiency ratios into the calculation: (DSO) days sales outstanding, (DIO) Days
inventory outstanding, and (DPO) Days payable outstanding. The formula is depicted
below.
Cash-Cash Cycle = DSI + DSO
In the analysis of the Cash to Cash cycle of Olin Corporation, we discovered that
Olin has about the industry average for this metric. In the most recent period, we found
that Olin is actually on the better end of the spectrum both for the given year, when
compared with the competitors and the industry, and also when compared with its own
cash to cash cycle figures over the past five years. This likely means that they are doing
a better job, than their previous years, of taking investing in the production of goods
and eventually converting that into cash and are now just about on par with the
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industry. In conclusion, this metric showed that Olin Corporation is operating at a level
of average efficiency.
Efficiency Conclusion
Operating efficiency refers to how well a firm is doing utilizing their assets and
managing their liabilities. We used various operating efficiency ratios which gave
valuable insight into the firm’s efficiency. In the analysis of Olin Corporation’s operating
efficiency ratios, we determined that Olin is operating at a level of efficiency on par with
the industry and most of its competitors. However, there are certain areas in which Olin
could improve, such as, doing a better job at collecting on their receivables in timely
manner. Overall, Olin Corporation seems to be operating as efficient as most of the
firms in the industry.
Profitability Ratios
This section will analyze five aspects pertaining to Olin’s profitability. The
profitability ratios that will be examined are gross profit margin, operating profit margin,
net profit margin, return on assets, and return on equity.
Gross Profit Margin
Gross profit margin is defined as the portion of every dollar that is left over after
producing a product. This ratio is used to help a manager or investor understand the
overall financial health of a firm. Gross profit margin is calculated as
Gross Revenue - Cost of Goods Sold / Gross Revenue.
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In terms of Gross Profit Margin, Olin trends consistently below the market
average. This is partly due to occidental which could be considered an outlier in this
metric. We, as the team of analysts, looking at Olin’s gross profit margin have
determined that this trend is mostly due to Olin’s chief business segments operating in
the commodities market. Thus have little control over pricing. Low pricing control, most
likely, is the driving factor in the below market average gross profit margin. Occidental
was an outlier in the gross profit margin analysis and was omitted.
Operating Profit Margin
Operating profit margin is the amount left over after the sale of a product in
relation to the net sales price. Operating profit margin can be derived from dividing
operating income into net sales. The ratio is formatted as a percentage, the higher the
percentage the better. A higher Ratio indicates that a company is able to keep a higher
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portion of every dollar sold. Conversely, a lower ratio indicates that the company retains
a smaller portion of every dollar coming in.
Operating profit for Olin trends slightly below the market average for the past
five years. After Olin’s financial statements are restated the operating profit margin
increased due to the capitalization of operating leases. Capitalizing operating leases
lowered total operating expenses and thus increased the operating profit margin. A
restated higher operating profit margin is a good sign and shows improvement even.
Net Profit Margin
A company's net profit margin tells you how much after-tax profit the business
makes for every $1 it generates in revenue or sales. The Net Profit Margin is used by
investors and managers to determine how efficient the company operates and the
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margins it makes on profit compared to Revenue. Net Profit Margin can be derived
from the following equation: Net Profit/Total Revenue = Net Profit Margin
After being restated, Net Profit Margin was reduced. Before the restatements,
the metric was trending below the market average and now is trending further below.
The major cause of this reduction in Net Profit Margin is likely due to the increase in net
profits with the same revenue which would the net profit margin lower. A lowering net
profit margin causes concern from any viewpoint.
Asset Turnover
The Asset Turnover is a ratio that show investors and managers how efficiently
the assets are being used to produce sales. Usually a company with a lower profit
margin has a higher asset turnover and vis versa. This can be derived from Sales or
Total Revenue / Total assets. Generally the higher the Asset Turnover Ratio the better
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the efficiency of the company because more revenue is being produced with less
assets.
Asset turnover consistently trends below the market average. In 2014 the
industry as a whole took a downturn and Olin was able to resist that trend. This
sustainment against the market trends is most likely attributed to Olin’s ability to
manage its assets efficiently in coordination with its revenue. Although Olin’s assets
could have been viewed as underperforming, it would seem as though Olin’s managers
foresaw a market downturn and lowered their market exposure. In the future this could
be viewed as positive. Historically, though, asset turnover is viewed as
underperforming.
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Return on Assets (ROA)
Return on Assets is a measure of how efficient management is at using its assets
to make a profit. It is calculated by taking Net Income/Total Assets. It allows managers
to see how well the capital is being used within the company to produce a profit.
Return on Assets ratio trends lower than the average for the industry for each of
the past four years. The reduction in ROA is most likely caused by the impairment of
goodwill as goodwill has a profound effect on the asset side of the balance sheet. A
lower return on assets could also indicate that the firm's assets are not being utilized as
efficiently as rivals in terms of how much cash flows they generate. A significant
reduction in return on assets is viewed in a very negative.
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Return on Equity (ROE)
The Return on Equity is defined as the amount of net income returned as a
percentage of Stockholders Equity. Managers can use this percentage to see how much
the shareholders investments have returned. This can be calculated by taking
Net Income / Stockholders Equity.
Olin is slightly below the industry average before restating. After the
restatements Olin’s Return on Equity falls much farther below the industry average.
This could be because of the aggressive accounting strategies it uses in its accounting
statements such as choosing not to impair goodwill or not amortizing operating leases.
A potential investor views a decreasing return on equity as a red flag in the investment
decision criteria.
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Internal Growth Rate
Internal growth rate is defined as the highest rate that a company can grow at
without raising outside capital. This is sometimes referred to as the organic growth. The
internal growth rate can be calculated by taking Total Assets and dividing them into
Retained Earnings. A higher Internal Growth rate is better as it indicates a higher ability
to grow without increasing the probability of financial distress. However the lower the
internal growth rate, the slower a company can organically grow.
The internal growth rate for Olin trends below the industry average. Even after
the restatement of the financial statements Olin internal growth rate trends even lower.
The prevailing reason behind the reduction of internal growth rate is most likely
attributed to the decrease in retained earnings. This could be brought on by the
impairment of goodwill. A decreasing internal growth rate is a red flag in an investment
decision.
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Sustainable Growth Rate
Sustainable growth rate is defined as the maximum possible growth rate without
utilizing any additional outside capital. A higher sustainable growth rate would indicate
that a company can growth faster versus a lower growth rate denoting a firm grows
slower.
Olin has a declining sustainable growth rate. The growth rate stays consistently
below the industry average which shows cause for concern from an investor's
viewpoint. After Olin’s financial statements were restated, growth rates decrease at an
even higher pace. Lower than industry average growth rates indicate that Olin is
underperforming the market in terms of operational efficiency
Capital Structure Ratios
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Capital structure ratios provide assessment for the source of funds that a
company uses to finance its assets and growth. This metric is important because they
are important for determining a firm’s current and future risk. This section will provide
an analysis of the following ratios: Debt to Equity Ratio, Times Interest Earned, Debt
Service Margin, and Altman’s Z Score.
Debt to Equity Ratio (D/E)
Debt to equity is a ratio that describes a firm's level of financial leverage. The
ratio indicates how much debt is used in relation to how much equity used for financing
of business activities. The ratio is calculated by Total Liabilities divided by Shareholders
Equity
Olin’s Debt to Equity ratio is considerably higher than its rivals. During the years
2013 and 2014, the Debt to Equity ratio increases dramatically. The prevailing reason
for an increasing ratio is that during the last four years, changing its capital structure
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policy to favor debt rather than equity. Debt generally commands a lower risk premium
which translates into lower costs, and is therefore usually preferable. This reduction in
equity could be attributed to equity investors’ changing their opinions about the risk of
the firm and demanding a higher return.
Times Interest Earned
The times interest earned ratio describes the ability for a company to repay its
debts. A higher ratio indicates that a company is leveraged higher. Generally a higher
ratio is preferable for a financially sound firm. However a times interest earned ratio
that is too high indicates that a firm should obtain outside financing from equity, as
equity could come at a lower cost. Times interest earned ratio is calculated by operating
income divided by interest expense in the same year.
Olin’s time’s interest earned ratio trends below the industry average for all of the
last 5 years. This is a positive element when compared to the industry because it shows
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that Olin utilizes less debt in comparison to its cash flows. Since Olin is utilizing a
smaller amount of its cash flows to cover its debt expense. A lower than industry times
interest earned ratio also shows that the firm has a lower probability of becoming
financially distressed.
Debt Service Margin
The debt service margin ratio shows how much of a firm's net cash flows are
used to pay debt payments. A higher ratio indicates that a higher percentage of a firm's
cash flows are allocated to pay interest payments for debt.
The debt service margin for Olin’s competitors could not be calculated for
enough years to make an accurate comparison. Smith and Wesson and Occidental did
not have any current portion of long term notes. Axiall only had values for 2011 and
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2014, which were not enough points for comparison. Olin’s debt service margin
increase after 2011, because current portion of interest due decrease from $78 million
to between $12 and $24 million for the rest of the years. Debt service margin for Olin
was small in 2011 because there was an abnormally large amount of long-term debt
maturing as compared to other years.
Altman’s Z-score
The Altman’s Z-score is a score that measures a company's likelihood of
Bankruptcy. It is calculated by adding 5 different ratios:
1. Working Capital/Total Assets
2. Retained Earnings/Total Assets
3. Earnings Before Interest & Tax/Total Assets
4. Market Value of Equity/Total Liabilities
5. Sales/Total Assets
A Z-score of 1.8 or below is highly likely that the company is headed for Bankruptcy. A
score between 1.8-3.0 indicates that the company might be headed for bankruptcy but
is ok. A company with a score above 3.0 means the company is financially stable.
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We calculated the Altman’s Z Score for Olin Corporation, its competitors, and the
industry. For the purpose of analysis we calculated Olin Corporation’s Z Score on an As
Stated and Restated basis. On an As Stated basis, Olin Corporation had a Z Score that
stayed constant around 2. This is within that 1.8-3.0 range which indicates that Olin
could be headed for bankruptcy, therefore it should be monitored. On a restated basis,
we see that Olin’s bankruptcy risk increased from 2010 to 2012 and then decreased
since then. This could indicate that Olin’s bankruptcy risk is falling, which is a good sign,
but to draw that conclusion we would need to see another year or two of data.
Comparing both sets of Olin’s Altman’s Z Score with its competitors and the industry, it
was noted that Olin has higher bankruptcy risk than the industry as well as its
competitors excluding Axiall in the more recent periods. It was noted that Olin’s
Altman’s Z Score doesn’t trend with the movement of the industry. As stated earlier,
Olin Corporation’s bankruptcy risk is “ok” and seems to be trending lower, a good sign,
the firm should reconsider its structure and try to find ways to lower this risk.
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Capital structure Conclusion
Overall, Olin relies more heavily upon debt instead of equity. This increases the
probability of bankruptcy and financial strain. However, debt comes with a significantly
lower cost, which increases the incremental cash flows and thus renders the profitability
of projects more attractive. The times interest earned, Altman’s Z-score, and debt
service margin all trend at less than favorable levels than the industry. This could
indicate Olin is head towards financial distress.
Financial Forecasting
Financial forecasting is an integral part of company valuation. A financial forecast
uses different discount rates to form a basis for a few valuation models. Projections and
assumptions that are unrealistic could lead to misinterpretations of a firm’s value. In
forecasting, the further out one tries to predict or estimate, the lower the accuracy of
the predicted forecast. This estimation implies that the forecasting project is an
individual's or group’s opinion of how the company is going to do in the future. By using
past performances of the companies and economic conditions related to that industry,
one can estimate a firm’s financial statements to find a relative value for the firm
(Balance sheet values were cross checked with the most recent condensed pro-forma
8K). In this section, we will forecast out the financial statements of Olin for ten years.
Income Statement
Forecasting the Income Statement is the most predictable segment of the whole
forecasting process, and is used as the basis for forecasting the balance sheet and the
statement of cash flows. In order to have valid numbers for the forecasted financials,
the projected inputs for the income statement have to be reasonable. To make
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predictions and assumptions that are reasonable, one must look at and review the
overall historical performance of the firm, the current economic environment, and must
have some type of perspective of the outlook of the firm.
Future sales growth is the first item needed to forecast the income statement.
Since 2010, Olin’s sales growth per year has fluctuated quite substantially. This was
primarily due to the cyclicality of the Chlor Alkali industry. Also, Olin is a price taker,
which leads to variability in the price they can sell their goods for. However, with the
acquisition of DOW’s Chlor Alkali segment, it is hard to use historical data to forecast
into the future. So instead of averaging out the prior 5 years sales growth we predicted
the sales growth would rise around 51.55% in 2015 and 106.09% in 2016. We came to
the 2015 rate by predicting sales for the year (Q1+Q2+Q3+ (Estimate Merger Sales/4)
and subtracting sales of the previous year and dividing by sales of 2014. The estimated
merger sales was then determined to be the 2016 sales. In the 9 years following, we
predicted that sales growth would be around 6.5%. We figured that with Olin now
being the U.S. leader in the Chlor Alkali and Epoxy industry, they will not be growing at
a higher rate like they were doing before. We feel Olin will not be able to find many
more areas to grow in which will cause their growth rate to be slightly lower than
before.
Next we needed to forecast gross profit. Historically, gross profit had been rising
since 2010 and dipped a little in 2014. We predicted the gross profit margin to remain
roughly the same from 2015 to 2017 at 18.21% and then to stair step up through 2025.
We are assuming that since Olin is now post-merger, synergies will take place and save
Olin money over the forecasted years. We used these percentages to calculate an
actual dollar figure for gross profit and could take that out of sales to get to cost of
goods sold.
Operating income rose for the past 5 years which we predict will continue into
the future. The average Operating Profit margin for the trailing five years was 9.63%,
and we do not see that changing as that metric has been relatively stable for Olin in the
past. Net income also rose over the past 5 years and will continue for the next 10
years. Although Olin averaged a Net Profit margin of roughly 7.02% for the past five
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years, we believe that with the DOW merger, maintaining a high net profit margin is
unreasonable. With sales growth already being hurt by economies of scales, we have
net profit starting at roughly 4% and stair stepping upwards through the forecasted
years as more synergies are realized from the merger.
Dividends Forecasting
Olin’s dividends per share have not changed in over 10 years and has stayed
right at $0.80 per share. Olin’s payout ratio averages at 53% of Net Income throughout
this time. However, with the acquisition, Olin’s Net Income will rise substantially within
the next 10 years. This will mean that dividends paid to stockholders, to keep up with
the 53% average dividend payout ratio upheld for the past decade or more, will
increase in the forecasted 10 years.
Although we forecast that there will be a dividend drop of roughly $.30 for the
2015 Q4 (Due to the number of total shares outstanding doubling with merger), we
forecast that the dividend will increase roughly by $.19 per year for the next 9 years
starting in 2016. This is a roughly 25% increase in dividend payment per year.
Balance Sheet
Forecasting the balance sheet becomes available after forecasting the income
statement and dividends, just by using those outputs and the forecasted ratios. The
essential first step is to predict total assets. Asset turnover is the key ratio in forecasting
that links the income statement and the balance sheet together. The major item to
forecast on the balance sheet is total assets. The asset turnover of Olin decreased in
2010 to 2012 and then increased for 2013 and 2014. To forecast this for the next 10
years we took the average of these previous five numbers and arrived at 72.32% asset
turnover for the next 10 years. After calculating total assets, we can find current assets
and non-current assets by dividing current assets by total assets, and non-current
assets by total assets respectively. In 2010, Olin’s current assets were high and began
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to drop off from 2010 to 2012 due to the purchase of KA Steel. Unlike the current
assets, the non-current assets increased from 2010 to 2013 and then dropped off in
2014. With the acquisition leaving Olin with negative cash, we see current assets
increasing by 2% per year to increase Olin to a similar financial position before the
acquisition.
Accounts receivable was projected on the basis of accounts receivable turnover.
This number was relatively stable for the years leading up to 2015, so we took the
average of these numbers and arrived at 8.31 and used that as the accounts receivable
turnover for the next 10 years. Like the accounts receivable, Inventory can be projected
on the basis of inventory turnover. We, again, took the averages of these inventory
turns and arrived at 9.19 which we used to forecast inventory turnover in the future.
Estimating total equity was the next step in the forecasting process. Olin has
been repurchasing a portion of its shares for the past few years, and with the DOW
merger increasing total outstanding shares to 165 million outstanding (~$3.3 Billion
additional Paid-In-Capital), Olin has more than doubled their previous Shareholders
Equity from $1.01 Billion to ~$2.55 Billion. While also considering the projected
dividends paid for 2015, we have estimated this to be an accurate representation of
Shareholder’s Equity. Since balance sheets must balance, we can take total equity out
of total assets to back out total liabilities.
Statement of Cash Flows
The final segment of forecasting is the projection of the statement of cash flows.
The projections given in the section will provide a look into Olin’s expected future cash
flows are. Even though this is a very essential segment to forecasting, it is very difficult
to predict future cash flows to the firm because of the volatile and irregular cash flow
nature.
Cash flow from operations can be estimated by using three ratios: Net
Income/CFFO, Sales/CFFO, and Operating Income/CFFO. However, because
CFFO/Operating Income is the least unstable of the three and has a smaller standard
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deviation than the other two, we are using it as our basis for forecasting Olin’s cash
flow from operating activities. Operating Income/CFFO averaged .95 over the last 5
years, which is what we used to forecast out the cash flows from operations for the
next 10 years.
The next section to forecast is CAPEX. This is important to forecast because it
gives an approximate estimation of what Olin will spend on Property, Plant, and
Equipment over the next few years. We used Sales (lag)/CAPEX to estimate a ratio of
correlation. Once we found out that average five year ratio, we used that average to
calculate an approximate average for all of the forecasted years.
Cash flow from investing activities can be predicted with reasonable accuracy by
taking the average cash flow from investing from the past 5 years and multiplying it by
one plus the sales growth rate for the given year. We used this formula because it takes
into account the previous period's Cash flow from investing and increases by the sales
growth rate each year. By doing this, we were able to predict a reasonable estimate for
the cash flow from investing activities.
Cost of Capital Estimation
To understand the value of the company, an appropriate discount rate must be
applied to current and forecasted data to achieve an appropriate present value. The
discount rate that is used for this purpose is the weighted average cost of capital or
WACC. For a company to grow it must have access to an appropriate amount of capital,
however it is management’s decision on the appropriate mix of debt and equity capital
for the firm to maximize shareholder’s wealth. The WACC uses debt costs from financial
documents released by the company, Olin, as well as market returns to calculate the
cost of equity. Two versions of WACC can be calculated, before taxes and after taxes
which accounts for the tax benefit from interest payments. To calculate WACC, the
percentage of debt and equity used to finance assets must be calculated and then
multiplied by the cost of debt and equity derived from financial data.
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Cost of Debt
The cost of debt is a weighted average of what the firm is currently paying for
their debt. Only non-current liabilities that have a regular interest rate were included in
the calculation for cost of debt. A company must pay interest on debt and follow debt
covenants before equity holders can be compensated. Therefore, debt holders generally
have a lower risk compared to equity holders and demand a lower rate of return. The
cost of debt calculated for Olin is only a snapshot of the current period’s interest rates
and are subject to change if interest rate conditions change.
To calculate the cost of debt for Olin, each interest bearing non-current liability
was weighted against the sum of them to give a respective percentage that is made up
of all debt. Each piece of debt’s weight was multiplied by its respective interest rate
which was provided in Olin’s 10-K, and was summed to give the cost of debt (Kd). The
cost of debt can then be multiplied by one minus the tax rate to give an after tax cost
of debt. The tax rate reported in Olin’s 10-K for fiscal year ending 2014 was 35.5%.
Olin uses interest rate swaps to change the net interest rates that they pay on
debt. At December 31, 2014, Olin had $161.5 million of interest rate swaps. Although
this does change the interest cost for the business, interest rates on market traded debt
instruments provided a better analysis for cost of debt. The calculated cost of debt for
Olin at December 31, 2014 was 3.985%.
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Cost of Equity
The rate used to determine equity cost is less defined than the cost of debt.
Shareholders face a greater risk than the bondholders, which makes the cost of equity
higher than cost of debt. To estimate the cost of equity, a market risk premium was
necessary for CAPM calculations. We chose to use 8% for the market risk premium
because it is a longer run view of the market without interest rate distortions.
Furthermore, because a majority of Olin’s operations are in commodity businesses,
which are longer run, it gives a more accurate perspective on the cost of equity.
The cost of equity calculation can be broken down into three components, risk
free return, beta of the firm, and market risk premium. Risk free rate come from
government debt securities such as treasury bills, notes, and bonds. Historical rates for
these instruments were gathered from the FRED database. Beta is calculated using
regression analysis of monthly stock returns for Olin and the monthly market risk
premium, market risk premium is given by return on the market minus risk free rate.
To estimate the beta of Olin and understand how well CAPM explains the
volatility of returns, we ran regressions for multiple time periods using Olin’s returns,
S&P 500 returns, and five points on the yield curve for risk free rates. The regressions
were then analyzed to compile an average beta, upper boundary beta, and lower
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boundary beta. The boundaries were used because it is difficult to get an exact
measure of the relative risk of Olin as compared to the market, however the boundaries
give a 95% confidence level for the range of the actual beta. A longer run market risk
premium was selected of 8%. A size premium adjustment was also necessary when
calculating the cost of equity to account for historical risk given different size
companies. This rate was derived from the size decile table in the textbook give the
market capitalization of Olin. The specific size premium for Olin given its market
capitalization of approximately $3.2 billion is 1.8%
Backdoor Cost of Equity
An alternative method for calculating the cost of equity without regressions is by
using the back door method. The back door cost of equity uses the market based
multiple of price of book as well as forecasted financial trends in return on equity and
the growth in book value of equity. Having market based information in the calculation
allows us to find a cost of equity that is currently supported by the market given our
forecast. This alternative calculation for cost of equity allows us to verify our results
using regression and CAPM, and allowing us to address variations in the two results.
The back door cost of equity for Olin, given November 1, 2015 stock information, is
12.23% or about 1% lower than the regression/CAPM method of 13.47%. As the price
to book ratio increases, or the just the price increases, the cost of equity should
increase all other things being the same. This supports our undervalued conclusion for
Olin. The following formula is used to calculate the back door cost of equity.
(P/B-1) = (ROE-Ke)/(Ke-BVEg)
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Regression Summary with Cost of Equity, Ke, Calculation
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Generally as the number of periods in the regression decreased, the r squared
decreased as well, which would somewhat be expected as returns are more volatile
when examining over the short run.
R Squared Summary
The R Squared value is explains what percentage of the returns for Olin are
produced by the market. Approximately 25% of the returns for Olin are explained by
systematic or market risk. This is somewhat expected because the beta is above the
market.
Regression Beta Summary
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The beta is calculated using regression and is average over the multiple periods in which the regressions were ran.
Beta is typically how an individual security’s returns will follow the market returns. The beta calculated by the regressions
is Olin’s beta is 1.27, which is higher than the market. A beta of 1.27 means that Olin’s stock can be thought of as 27%
more volatile than the market (S&P 500).
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WACC
After calculating estimates for cost of equity and cost of debt, the WACC can be calculated. The WACC breaks
down how assets the company owns were purchased and multiplied by the respective costs. Book values for total assets,
liabilities, and shareholder’s equity on December 31, 2014 were used in the calculation. WACC is calculated on a before
tax and after tax basis to show a benefit from interest costs. The before tax WACC for Olin is 7.547% with a 95%
confidence that it is between 5.287% and 9.770%. The after tax WACC for Olin is 6.663% with a 95% confidence that it
is between 4.403% and 8.886%.
Method of Comparable Valuation
Using valuation comparables can help give insight into whether a firm is over or undervalued relevant to its peers.
By comparing these multiples, investors can quickly determine whether a company is priced correctly. With the ability to
calculate these quickly though, comes the unreliability of it’s’ accuracy. Many of these multiples use either historical or
forecasted items, which makes replicating past results near impossible.
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Price to Earnings (P/E) Trailing
The trailing price to earnings ratio explains how much an investor is willing to
invest to receive $1 of the firm's earnings. This is calculated by dividing current share
price by the Net Income of the trailing 12 months. Olin has a 12 month trailing P/E of
16.82. The lower the P/E ratio the better, investors like to receive higher return on their
investment. In Olin’s case, an investor is willing to pay $16.82 per $1 of net income
generated. To calculate an estimated share price, we multiply the current EPS by the
P/E ratio to receive a share price of $21.81. This multiple suggests that Olin is
undervalued currently.
Price to Earnings (P/E) Forecast
The Price to Earnings forecast ratio is similar to the trailing P/E ratio, the only
difference being that instead of current and historical information, forecasted
information is used. This is where the multiples provide more uncertain outcomes. For
the forecasted P/E, Olin investors are willing to pay $13.69 for every $1 of future Net
Income (forecasted). Once it is known how much investors are willing to pay,
multiplying that number by expected future EPS (1.8), will give us an expected future
stock price. Olin is calculated to be roughly $24.65 one year from now using the
forecasted numbers. Using the forward P/E, Olin is undervalued. Occidental was
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excluded from calculation of an industry average due to their Forward P/E being 40, far
outside of the other competitor average.
Price to Book
The Price to Book ratio compares the market value observed to the accounting
book value. Investors use this ratio to determine what book value they receive
nominally for every $1 invested. For Olin, an investor is currently paying about $2.41 for
every $1 of book value. Value investors like low Price to Book ratios when they believe
the firm's current historical costs are worth more than its book value. Using a Price to
book Ratio for Olin, we have found their share price should be roughly $15.29. This
place Olin in an overvalued consideration. We believe this is primarily due to the merger
with DOW chemical. Until more information is learned and quarterly results are shown
post-merger, there is some uncertainty. The following is how we calculated the Price to
Book ratio.
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Dividends to Price
The Dividends to Price ratio, commonly known as the dividend yield, is a
comparable that shows roughly how much firms pay out in dividends relative to current
share price. Calculating an industry average with Olin’s competitors gives a payout
industry average of $0.02395 per share. Dividing Olin’s current dividend per year ($.80)
by this industry average, we calculate a share price of roughly $33.40. This places Olin
as severely undervalued. This multiplier is not the most reliable though when it comes
to accuracy, there are several specialty chemical competitors to Olin not listed that can
have a major effect on the industry average. Also, with the merger, it is not exactly
known what the future dividends are going to be, which would provide a better multiple
of calculating a proper current share price.
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Price to Earnings Growth (P.E.G)
The price to earnings growth (P.E.G.) ratio is similar to the forward price to
earnings ratio but does not take in the forecasted earnings directly but rather the
growth in earnings. To calculate the P.E.G. ratio the current price to earnings ratio is
divided by the annual earnings per share growth. The industry average P.E.G. ratio is
3.30 with Smith and Wesson being lower and Axiall being higher. Using the industry
P.E.G. ratio with Olin’s information the estimated price is $29.84. Occidental was
excluded from the industry average calculation because it was negative.
Price to EBITDA
The price to ebitda ratio is similar to the price to earnings ratio but adds back in
depreciation, amortization, taxes and interests. Price to EBITDA measures how much an
investor is paying for one dollar of EBITDA. The EBITDA allows for comparisons before
debt, large infrastructure investments, and differences in tax rates. The industry
average is 13.65 leading to an estimated price for Olin of $16.81. Since this multiple
uses backward looking information it should change after the new Olin has earning
announcements.
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Price to Free Cash Flow Per Share
The price to free cash flow measures how much investors are currently paying
for a dollar of free cash flow. Free cash flow is the cash after payments required to
maintain the assets of the company, calculated by operating cash flow minus capital
expenditures. Free cash is important for a company because it allows management to
explore new opportunities for expanding shareholder wealth. Currently the industry
average price to free cash flow is 18.52 for a price of $5.53. This lower price could be a
signal that Olin is not generating operating income or utilizing capital expenditures as
efficiently as the industry.
Enterprise Value to EBITDA
The enterprise value to ebitda examines the value an investor put on a dollar of
ebitda, and is calculated by dividing the enterprise value by ebitda. Enterprise value is
calculated by adding common stock outstanding times the market price plus debt
outstanding plus preferred shares outstanding times price minus cash and investments.
A lower value for enterprise value to ebitda could signal an undervalued company and
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an investment opportunity. Using the industry average of 8.55 Olin is valued at $25.90
per share. This signal significant undervalue and a potential opportunity.
Price to Sales
The price to sales ratio compares how much investors are willing to pay for a
dollar of revenue per share. Price to sales is useful for comparing competitors in the
same industry to examine differences that investors are willing to pay for each
company. A company that has a lower price to sales ratio could indicate that the
company is undervalued as compared to the industry. The industry average price to
sales ratio is 2.0 with Occidental being higher and Axiall being lower than the average,
leading to a calculated price for Olin of $26.46.
Conclusion
Using market multiples can be a very good tool when quickly determining how a
firm stacks up to its closest peers. Although not always accurate, these tools will let
investors know how over or under valued they are relatively. Using these nine metrics,
we have concluded that six of the nine lead to the firm being undervalued. While three
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of the nine say the firm is currently overvalued. Computing an average share price for
all nine comparables leads to an average Olin share price of roughly $22.19. This share
price is roughly 16% higher than the observed price on November 1st of $19.18. Using
these comparables, we are concluding that the share price is relatively undervalued, but
to gauge a more accurate picture, we will need to move onto the intrinsic models that
rely more heavily on forecasts to determine a more accurate estimated share price.
Intrinsic Valuation Models
The intrinsic valuation models are comprised of more information than market
based valuation given them more value. The financial forecast data discussed earlier is
used in the development of these models. Opportunities for forecast errors are higher in
intrinsic models as the include forecast data which is prone to errors, however the
models follow important financial theory which provides academically tested value when
making investment decisions. Each intrinsic model develops the value of the company
as a going concern, meaning that the company’s life is indefinite, using the discounted
growing perpetuity after the forecast data. The models discussed in this section include
discounted dividends, free cash flow, residual income and residual income perpetuity
valuation model
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Discounted Dividends Model
A company has a number of ways to provide value to shareholders, one such
way valued in this model is dividend payments. The discounted dividends model (DDM)
is a foundational model that only takes into account dividend payments, leaving out
growth opportunities for the company. However, this information is valuable because it
shows what percentage of the company’s value is derived from future dividend
payments. An additional weakness of the DDM is dividends growing at a constant rate
each period to infinity. A heavier weight is placed on forecasted data as the discounted
dividend payments get closer to zero in present value dollars. In the sensitivity analysis
for the DDM, we chose to use growth rate near the inflation rate because historically
Olin has not increased dividends on a regular basis. With the new Olin formation,
dividends may begin to increase on a regular basis at least at the inflation rate. This
conservative analysis lead to the model price signaling generally overvalued. To
calculate a DDM model price of Olin we used 13.47% for cost of equity and 2.5% for
the perpetuity growth rate. We discounted the forecasted dividends back using the cost
of equity and construct a perpetuity using both the cost of equity and growth rate for a
price of $14.00.
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Discounted Free Cash Flow Model
The discounted free cash flow model (DCF) is similar to the DDM in that it
discounts forecasted cash that the firm will generate in the future available to increase
shareholder’s wealth. However, the cash flow model does not strictly require that the
cash be used for paying dividends. The cash in the free cash flow model is available for
paying dividends but can also be used to increase the rate of debt reduction or to
acquire new assets to increase revenue. Similar to the DDM the DCF is subject for
forecast errors because we cannot predict large variations in capital expenditures.
Additionally, as the DCF includes a perpetuity, the growth from year 11 to infinity can
be skewed by early forecasting errors. We used 10 years of forecasted cash flows from
operating and capital expenditures discounted using WACC to get the year by year
present value of free cash flows. Then using year 11, we created a perpetuity using
WACC and a growth rate. For our analysis we used 3.5% as the perpetuity growth rate
because the new Olin’s free cash flows should be able to grow at a higher rate for a
short period of time due to synergies between the companies, then it should flatten out
towards a more reasonable rate of 3.5%. With those assumptions the model resulted in
a price of $29.53 per share. Approximately 25% of the value comes from the year by
year free cash flows and 75% from the perpetuity. This is expected because most of
the value in a healthy company should come from later years.
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Residual Income Model
The residual income model analyzes the differences between what the company
should make to adequately compensate shareholders for their risk and what the
company’s actual earnings during the period were. The book value of equity is
increased each year by the net income minus dividend. Previous year’s book value of
equity is multiplied by the cost of equity to find the normal income or benchmark
income for shareholders. This benchmark is subtracted from the net income for the
period to find the residual income. Over the long run companies should not be able to
outperform and generally underperform their benchmark, leaving an expected earnings
rate over time of the book value of equity times to cost of equity. A positive residual
income adds value to the firm which increases shareholder’s wealth beyond their
demands. Conversely a negative residual income subtracts from shareholder’s wealth
which could put management’s employment at risk. Residual income of zero means that
the company is meeting the required returns for shareholders. Just like the other
models, residual income is subject to forecasting errors in net income and dividends,
which also affects the book value of equity, however these metrics have a lower
likelihood of error as compared to cash flow estimates.
Before Olin’s acquisition of Dow’s chlorine business it would make sense to have
a negative growth rate on the residual income perpetuity because there were no new
drivers of value for the firm. However, because so many other models point towards
undervalued, it is necessary to consider a positive growth rate for residual income as
the new company will increase in value through new opportunities in cost savings and
market opportunities. Given the cost of equity of 13.47% derived from regressions, an
8% growth rate was used for calculating the residual income perpetuity in year 11
(2025). An 8% growth rate was chosen because in the forecasted financial data, Olin
was able to achieve many year of 8% or higher return on equity. The modeled price for
Olin was $21.11 per share. Of the $21.11 per share, approximately 81% of the value
came from the present book value of equity, -8.5% from the year by year forecasted
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residual income and 27% from the residual income perpetuity. The negative year by
year residual income is caused by a forecasted loss in net income for 2015, which
carries a heavier weight because of less discounting.
Residual Income Perpetuity Valuation Model
The long run residual income perpetuity model follows similar ideas to the
residual income model but does not rely on the initial forecasted financial but rather
goes straight to a perpetuity model. This model still examines how the company will
increase or decrease shareholder’s wealth through value creation through the given
initial inputs. The inputs for the model are current book value of equity, average return
on equity, cost of equity and a growth rate. Three sensitivity analysis are conducted
holding return on equity, growth, and cost of equity constant in their respective
analysis. Holding them individually constant allows us to examine how other factors
affect the value when one is held constant. The initial assumptions used in created the
models were 13.47% for cost of equity, 8% growth rate and 16% for return on equity.
Through the forecasting data, Olin’s return on equity increases with the years to 17%,
spending a number of years at 15-17%. As the new Olin matures it should see return
on equity stabilize at a higher level because of the size of the new organization. The
124
8% growth rate is achievable given the calculations made on the growth rates of Olin’s
return on equity. Each of the sensitivity analysis centers on a value of $22.61 per
share.
The formula for the residual income perpetuity valuation model is:
125
Intrinsic Valuation Model Conclusion
All of the intrinsic valuation models results in an undervalued conclusion for
Olin’s share price except the discounted dividends model. The discounted dividends
models does not take into account the growth possibilities of the company. A conclusion
that can be drawn from the models and the new Olin is that the merger undervalued
the company and new growth possibilities currently exist. Although these models rely
on forecasted data instead of market observed multiples, each has a strength in
signaling whether a particular value creation aspect of the company is being
undervalued or overvalued in the market. A majority of the models in this analysis point
toward Olin being undervalued by more than the 10% hurdle rate.
126
Appendix
Thereafter: 66.5
Discount Rate: 8.06%
2010 10-K
Operating Lease Payment PV Factor Present Value Beginning Balance Accrued Interest Payment Ending Balance Depreciation
1 2011 40 0.9254 37.02 2011 163.55 13.18 40 136.73 18.17
2 2012 35.5 0.8564 30.40 2012 136.73 11.02 35.5 112.26 18.17
3 2013 31.4 0.7925 24.88 2013 112.26 9.05 31.4 89.91 18.17
4 2014 26 0.7334 19.07 2014 89.91 7.25 26 71.15 18.17
5 2015 21.9 0.6787 14.86 2015 71.15 5.74 21.9 54.99 18.17
6 2016 16.63 0.6280 10.44 2016 54.99 4.43 16.625 42.80 18.17
7 2017 16.63 0.5812 9.66 2017 42.80 3.45 16.625 29.62 18.17
8 2018 16.63 0.5378 8.94 2018 29.62 2.39 16.625 15.38 18.17
9 2019 16.63 0.4977 8.27 2019 15.38 1.24 16.625 0.00 18.17
PV 163.55
Cost of Debt calculation for Olin
2010 Discount Rate Outstanding Debt Weighted Average
($ in Millions)
Interest Rate Swap Due 20119.125% 77.80$ 7.10
Due 2013 6.50% 11.40$ 0.74
Due 2016 6.75% 129.60$ 8.75
Due 2019 8.88% 148.90$ 13.21
Industrial/Development 6.63% 11.30$ 0.75
Total 379.00$ 30.55$
Discount Rate: 8.06%
2010 Book OL Rights 163.55
Cap Ol Liab 163.55
127
Thereafter: 63.2
Discount Rate: 7.66%
2011 10-K
Operating Lease Payment PV Factor Present Value Beginning Balance Accrued Interest Payment Ending Balance Depreciation
1 2012 40.3 0.9288 37.43 2012 168.07 12.88 40.3 140.65 21.01
2 2013 36.6 0.8628 31.58 2013 140.65 10.77 36.6 114.83 21.01
3 2014 31.3 0.8014 25.08 2014 114.83 8.80 31.3 92.32 21.01
4 2015 27.2 0.7443 20.25 2015 92.32 7.07 27.2 72.19 21.01
5 2016 23.1 0.6914 15.97 2016 72.19 5.53 23.1 54.62 21.01
6 2017 21.1 0.6422 13.53 2017 54.62 4.18 21.07 37.74 21.01
7 2018 21.1 0.5965 12.57 2018 37.74 2.89 21.07 19.57 21.01
8 2019 21.1 0.5540 11.67 2019 19.57 1.50 21.07 0.00 21.01
PV 168.07
2011 Discount Rate Outstanding Debt Weighted Average
($ in Millions)
Due 2011 9.125% -$ 0.00
Due 2013 6.50% 11.40$ 0.74
Due 2016 6.75% 135.50$ 9.15
Due 2019 8.88% 149.00$ 13.22
SunBelt Belt Notes Due 2012-20177.23% 76.60$ 5.54
Industrial/Development 6.63% 10.90$ 0.72
Total 383.40$ 29.37
Discount Rate: 7.66%
2011 Book Ol Rights 168.07
Cap Ol Liab 168.07
2011 Book Interest Expense 13.18
Op Lease Liab 26.82
Cash 40
Dep Lease Exp 18.17
Ol Rights 18.17
128
Thereafter: 66.8
2012 10-K Discount Rate: 7.08%
Operating Lease Payment PV Factor Present Value Beginning Balance Accrued Interest Payment Ending Balance Depreciation
1 2013 54.7 0.9339 51.08 2013 210.62 14.91 54.7 170.83 26.33
2 2014 46.6 0.8722 40.64 2014 170.83 12.09 46.6 136.32 26.33
3 2015 40.3 0.8145 32.83 2015 136.32 9.65 40.3 105.67 26.33
4 2016 32.5 0.7607 24.72 2016 105.67 7.48 32.5 80.65 26.33
5 2017 28 0.7104 19.89 2017 80.65 5.71 28 58.35 26.33
6 2018 22.3 0.6635 14.77 2018 58.35 4.13 22.26667 40.22 26.33
7 2019 22.3 0.6196 13.80 2019 40.22 2.85 22.26667 20.79 26.33
8 2020 22.3 0.5787 12.88 2020 20.79 1.47 22.26667 0.00 26.33
PV 210.62
2012 Discount Rate Outstanding Debt Weighted Average
($ in Millions)
Due 2022 5.50% 200.00$ 11.00
Due 2013 6.50% 11.40$ 0.74
Due 2016 6.75% 133.40$ 9.00
Sun Belt Notes Due 2013-20177.23% 639.00$ 46.20
Due 2019 8.88% 149.10$ 13.23
0.00
Total 1,132.90$ 80.18
Discount Rate: 7.08%
2012 Book Ol Rights 210.62
Cap Ol Liab 210.62
2012 Book Interest Expense 12.88
Op Lease Liab 27.42
Cash 40.3
Dep Lease Exp 21.01
Ol Rights 21.01
129
Thereafter: 44.4
Discount Rate: 6.92%
2013 10-K
Operating Lease Payment PV Factor Present Value Beginning Balance Accrued Interest Payment Ending Balance Depreciation
1 2014 52.8 0.9353 49.38 2014 189.90 13.15 52.8 150.25 23.74
2 2015 44.7 0.8747 39.10 2015 150.25 10.40 44.7 115.95 23.74
3 2016 39 0.8181 31.91 2016 115.95 8.03 39 84.98 23.74
4 2017 31.1 0.7651 23.80 2017 84.98 5.88 31.1 59.76 23.74
5 2018 25 0.7156 17.89 2018 59.76 4.14 25 38.90 23.74
6 2019 14.8 0.6693 9.91 2019 38.90 2.69 14.8 26.79 23.74
7 2020 14.8 0.6259 9.26 2020 26.79 1.85 14.8 13.84 23.74
8 2021 14.8 0.5854 8.66 2021 13.84 0.96 14.8 0.00 23.74
PV 189.90
2013 Discount Rate Outstanding Debt Weighted Average
Rate ($ in Millions)
Due 2022 5.50% 200.00$ 11.00
Due 2013 6.50% -$ 0.00
Due 2016 6.75% 131.10$ 8.85
Sun Belt Notes Due 2013-20177.23% 50.70$ 3.67
Due 2019 8.88% 149.20$ 13.24
0.00
Total 531.00$ 36.76
Discount Rate: 6.92%
2013 Book Ol Rights 189.90
Cap Ol Liab 189.90
2013 Book Interest Expense 14.91
Op Lease Liab 39.79
Cash 54.7
Dep Lease Expense 26.33
OL Rights 26.33
130
2014 10K
Future Value PV Factor Present Value Beginning Balance Accrued Interest Payment Ending Balance Depreciation
1 2015 60.5 0.9424 57.01 2015 243.00 14.87 60.5 197.36 30.37
2 2016 50.2 0.8880 44.58 2016 197.36 12.07 50.2 159.24 30.37
3 2017 45.3 0.8368 37.91 2017 159.24 9.74 45.3 123.68 30.37
4 2018 39.1 0.7886 30.83 2018 123.68 7.57 39.1 92.14 30.37
5 2019 31.1 0.7431 23.11 2019 92.14 5.64 31.1 66.68 30.37
6 2020 25 0.7003 17.51 2020 66.68 4.08 25 45.76 30.37
7 2021 25 0.6599 16.50 2021 45.76 2.80 25 23.56 30.37
8 2022 25 0.6219 15.55 2022 23.56 1.44 25 (0.00) 30.37
PV 243.00
2014 Discount Rate Outstanding Debt Weighted Average
Rate ($ in Millions)
Due 2022 5.50% 200.00$ 11.00
Due 2016 6.75% 128.70$ 8.69
Sun Belt Notes Due 2013-20177.23% 37.80$ 2.73
Due 2019 8.88% -$ 0.00
0.00
Total 366.50$ 22.42
Discount Rate: 6.12%
2014 Book Ol Rights 243.00
Cap Ol Liab 243.00
2014 Book Interest Expense 13.15
Op Lease Liab 39.65
Cash 52.8
Dep Lease Exp 23.74
OL Rights 23.74
131
As Stated Restated
At December 31: 2010 Dr Cr 2010
Balance Sheet
AssetsCurrent Assets
Cash and Cash Equivalents 458.60$ 458.60$
Recievable, net:
Trade 167.90$ 167.90$
Other 19.00$ 19.00$
Income Taxes Recievable 6.10$ 6.10$
Inventories 155.60$ 155.60$
Current deferred Income Taxes 46.00$ 46.00$
Other Current Assets 29.60$ 29.60$
Total Current Assets 882.80$ 882.80$
Non Current Assets
Property, Plant and Equipment, net 675.00$ 675.00$
Prepaid Pension Costs 16.30$ 16.30$
Restricted Cash 102.00$ 102.00$
Cap OL Rights 163.55$ 163.55$
Accumulated Depr. Of OL Assets -$
Net Operating Lease Asset Rights -$ 163.55$
Deferred Income Taxes -$ -$
Other Assets 72.30$ 72.30$
Goodwill 300.30$ 60.06$ 240.24$
Total Non Current Assets 1,165.90$ 1,269.39$
Total Assets 2,048.70$ 2,152.19$
Liabilities and Shareholders' Equity
Current Liabilities
Current installments of long-term debt 77.80$ 77.80$
Accounts Payable 115.50$ 115.50$
Income Taxes Payable - -
Accrued Liabilities 197.70$ 197.70$
Total Current Liabilities 391.00$ 391.00$
Non Current Liabilities
Long Term Debt 418.20$ 418.20$
Capital Lease Obligations -$ -$
Capitalized Operating Lease Liabilities 163.55$ 163.55$
Reduction of Lease Liability Amortized
Accrued Pension Liaiblity 58.60$ 58.60$
Deferred Income Taxes 23.50$ 23.50$
Other Liabilities 327.10$ 327.10$
Total Non Current Liabilities 827.40$ 990.95$
Total Liabilities 1,218.40$ 1,381.95$
Shareholders' Equity
Common Stock, par value $1 per share:
Authorized, 120.0 shares;
Issued and outstanding 79.60$ 79.60$
Additional Paid in Capital 842.30$ 842.30$
Accumulated other Comprehensive Income(Loss) (261.80)$ (261.80)$
Retained Earnings 170.20$ 60.06$ 110.14$
Total Shareholders' Equity 830.30$ 770.24$
Total Liabilities and Shareholders Equity 2,048.70$ 2,152.19$
132
Income Statement
Sales 1,585.90$ 1,585.90$
Cost of Goods Sold 1,349.90$ 1,349.90$
Gross Profit 236.00$ 236.00$
Operating Expenses
Selling and Administration 134.40$ 134.40$
Restructuring Charges 34.20$ 34.20$
Acquisition costs - -
Operating Expense Total 168.60$ 168.60$
Other Operating Income 2.50$ 2.50$
Operating Income 69.90$ 69.90$
Goodwill Impairment Charge (Adjustment) 60.06$ 60.06$
Depreciation of Capitalized Asset Leases
Earnings of non-consolidated affiliates 29.90$ 29.90$
Interest Expense from Lease
Interest Expense 25.40$ 25.40$
Interest Income 1.00$ 1.00$
Other Income (Expense) 1.50$ 1.50$
Income from continuing operations before taxes (EBT) 76.90$ 16.84$
Income Tax Provision 12.10$ 12.10$
Income from Continuing Operations 64.80$ 4.74$
Income from Discontinued Oerations, net -$
Net Income 64.80$ 4.74$
Income Summary 60.06
Total Debits and Credits 283.67$ 283.67$
Difference in Net Income (60.06)$
133
Carryover As Stated Restated
At December 31: 2011 Dr Cr 2011
Balance Sheet
AssetsCurrent Assets
Cash and Cash Equivalents 304.80$ 304.80$
Recievable, net:
Trade 220.60$ 220.60$
Other 16.50$ 16.50$
Income Taxes Recievable 0.70$ 0.70$
Inventories 176.60$ 176.60$
Current deferred Income Taxes 50.90$ 50.90$
Other Current Assets 10.20$ 10.20$
Total Current Assets 780.30$ 780.30$
Non Current Assets
Property, Plant and Equipment, net 885.40$ 885.40$
Prepaid Pension Costs 19.20$ 19.20$
Restricted Cash 51.70$ 51.70$
Cap OL Rights 163.55$ 163.55$ 168.07$ 163.55$ 168.07$
Accumulated Depr. Of OL Assets -$ 18.17$ (18.17)$
Net Operating Lease Asset Rights 163.55$ 163.55$ 149.90$
Deferred Income Taxes -$ -$
Other Assets 85.60$ 85.60$
Goodwill 240.24$ 627.40$ 120.12$ 507.28$
Total Non Current Assets 1,832.85$ 1,699.08$
Total Assets 2,613.15$ 2,479.38$
Liabilities and Shareholders' Equity
Current Liabilities
Current installments of long-term debt 12.20$ 12.20$
Accounts Payable 149.70$ 149.70$
Income Taxes Payable -$ -$
Accrued Liabilities 237.20$ 237.20$
Total Current Liabilities 399.10$ 399.10$
Non Current Liabilities
Long Term Debt 524.20$ 524.20$
Capital Lease Obligations -$ -$
Capitalized Operating Lease Liabilities 163.55$ 163.55$ 163.55$ 168.07$ 168.07$
Reduction of Lease Liability Amortized 26.82$ (26.82)$
Accrued Pension Liaiblity 59.10$ 59.10$
Deferred Income Taxes 99.60$ 99.60$
Other Liabilities 381.80$ 381.80$
Total Non Current Liabilities 1,228.25$ 1,205.96$
Total Liabilities 1,627.35$ 1,605.06$
Shareholders' Equity
Common Stock, par value $1 per share:
Authorized, 120.0 shares;
Issued and outstanding 80.10$ 80.10$
Additional Paid in Capital 852.00$ 852.00$
Accumulated other Comprehensive Income(Loss) (294.20)$ (294.20)$
Retained Earnings 347.90$ 111.48$ 236.42$
Total Shareholders' Equity 985.80$ 874.32$
Total Liabilities and Shareholders Equity 2,613.15$ 2,479.38$
134
Income Statement
Sales 1,961.10$ 1,961.10$
Cost of Goods Sold 1,573.90$ 1,573.90$
Gross Profit 387.20$ 387.20$
Operating Expenses
Selling and Administration 161.40$ 161.40$
Restructuring Charges 10.70$ 10.70$
Acquisition costs -$ -$
Operating Expense Total 172.10$ 40.00$ 132.10$
Other Operating Income 8.80$ 8.80$
Operating Income 223.90$ 263.90$
Goodwill Impairment Charge (Adjustment) 60.06$ 120.12$ 120.12$
Depreciation of Capitalized Asset Leases 18.17$ 18.17$
Earnings of non-consolidated affiliates 9.60$ 9.60$
Interest Expense from Lease 13.18$ 13.18$
Interest Expense 30.40$ 30.40$
Interest Income 1.20$ 1.20$
Other Income (Expense) 175.10$ 175.10$
Income from continuing operations before taxes (EBT) 379.40$ 267.92$
Income Tax Provision 137.70$ 137.70$
Income from Continuing Operations 241.70$ 130.22$
Income from Discontinued Oerations, net -$ -$
Net Income 241.70$ 130.22$
Income Summary 111.48$
Total Debits and Credits 621.39$ 621.39$
Difference in Net Income (111.48)$
135
Carryover As Stated Restated
At December 31: 2012 Dr Cr 2012
Balance Sheet
AssetsCurrent Assets
Cash and Cash Equivalents 165.20$ 165.20$
Recievable, net:
Trade 279.20$ 279.20$
Other 19.80$ 19.80$
Income Taxes Recievable 8.20$ 8.20$
Inventories 195.10$ 195.10$
Current deferred Income Taxes 61.30$ 61.30$
Other Current Assets 20.30$ 20.30$
Total Current Assets 749.10$ 749.10$
Non Current Assets
Property, Plant and Equipment, net 1,034.30$ 1,034.30$
Prepaid Pension Costs 2.10$ 2.10$
Restricted Cash 11.90$ 11.90$
Cap OL Rights 168.07$ 168.07$ 210.62$ 168.07$ 210.62$
Accumulated Depr. Of OL Assets 18.17$ 39.18$ (39.18)$
Net Operating Lease Asset Rights 149.90$ 171.44$
Deferred Income Taxes 9.10$ 9.10$
Other Assets 224.10$ 224.10$
Goodwill 120.12$ 747.10$ 245.60$ 501.50$
Total Non Current Assets 2,196.67$ 1,954.44$
Total Assets 2,945.77$ 2,703.54$
Liabilities and Shareholders' Equity
Current Liabilities
Current installments of long-term debt 23.60$ 23.60$
Accounts Payable 174.30$ 174.30$
Income Taxes Payable 7.60$ 7.60$
Accrued Liabilities 228.50$ 228.50$
Total Current Liabilities 434.00$ 434.00$
Non Current Liabilities
Long Term Debt 690.10$ 690.10$
Capital Lease Obligations -$ -$
Capitalized Operating Lease Liabilities 168.07$ 168.07$ 168.07$ 210.62$ 210.62$
Reduction of Lease Liability Amortized 26.82$ 54.24$ (54.24)$
Accrued Pension Liaiblity 164.30$ 164.30$
Deferred Income Taxes 110.40$ 110.40$
Other Liabilities 380.50$ 380.50$
Total Non Current Liabilities 1,513.37$ 1,501.68$
Total Liabilities 1,947.37$ 1,935.68$
Shareholders' Equity
Common Stock, par value $1 per share:
Authorized, 120.0 shares;
Issued and outstanding 80.20$ 80.20$
Additional Paid in Capital 856.10$ 856.10$
Accumulated other Comprehensive Income(Loss) (371.30)$ (371.30)$
Retained Earnings 433.40$ 230.54$ 202.86$
Total Shareholders' Equity 998.40$ 767.86$
Total Liabilities and Shareholders Equity 2,945.77$ 2,703.54$
136
Income Statement
Sales 2,184.70$ 2,184.70$
Cost of Goods Sold 1,748.00$ 1,748.00$
Gross Profit 436.70$ 436.70$
Operating Expenses
Selling and Administration 168.60$ 168.60$
Restructuring Charges 8.50$ 8.50$
Acquisition costs 8.30$ 8.30$
Operating Expense Total 40.00$ 185.40$ 80.30$ 105.10$
Other Operating Income 7.60$ 7.60$
Operating Income 258.90$ 339.20$
Goodwill Impairment Charge (Adjustment) 120.12$ 245.60$ 245.60$
Depreciation of Capitalized Asset Leases 18.17$ 39.18$ 39.18$
Earnings of non-consolidated affiliates 3.00$ 3.00$
Interest Expense from Lease 13.18$ 26.06$ 26.06$
Interest Expense 26.40$ 26.40$
Interest Income 1.00$ 1.00$
Other Income (Expense) (11.30)$ (11.30)$
Income from continuing operations before taxes (EBT) 225.20$ (5.34)$
Income Tax Provision 75.60$ 75.60$
Income from Continuing Operations 149.60$ (80.94)$
Income from Discontinued Oerations, net -$ -$
Net Income 149.60$ (80.94)$
Income Summary 230.54$
Total Debits and Credits 974.32$ 974.32$
Difference in Net Income (230.54)$
137
Carryover As Stated Restated
At December 31: 2013 Dr Cr 2013
Balance Sheet
AssetsCurrent Assets
Cash and Cash Equivalents 307.80$ 307.80$
Recievable, net:
Trade 266.50$ 266.50$
Other 13.60$ 13.60$
Income Taxes Recievable 1.90$ 1.90$
Inventories 186.50$ 186.50$
Current deferred Income Taxes 50.40$ 50.40$
Other Current Assets 13.20$ 13.20$
Total Current Assets 839.90$ 839.90$
Non Current Assets
Property, Plant and Equipment, net 987.80$ 987.80$
Prepaid Pension Costs 1.70$ 1.70$
Restricted Cash 4.20$ 4.20$
Cap OL Rights 210.62$ 210.62$ 189.90$ 210.62$ 189.90$
Accumulated Depr. Of OL Assets 39.18$ 65.51$ (65.51)$
Net Operating Lease Asset Rights 171.44$ 124.40$
Deferred Income Taxes 9.00$ 9.00$
Other Assets 213.10$ 213.10$
Goodwill 245.60$ 747.10$ 395.02$ 352.08$
Total Non Current Assets 2,173.52$ 1,692.28$
Total Assets 3,013.42$ 2,532.18$
Liabilities and Shareholders' Equity
Current Liabilities
Current installments of long-term debt 12.60$ 12.60$
Accounts Payable 148.70$ 148.70$
Income Taxes Payable 1.70$ 1.70$
Accrued Liabilities 244.50$ 244.50$
Total Current Liabilities 407.50$ 407.50$
Non Current Liabilities
Long Term Debt 674.30$ 674.30$
Capital Lease Obligations 4.10$ 4.10$
Capitalized Operating Lease Liabilities 210.62$ 210.62$ 210.62$ 189.90$ 189.90$
Reduction of Lease Liability Amortized 54.24$ 94.03$ (94.03)$
Accrued Pension Liaiblity 115.40$ 115.40$
Deferred Income Taxes 117.60$ 117.60$
Other Liabilities 382.80$ 382.80$
Total Non Current Liabilities 1,504.82$ 1,390.07$
Total Liabilities 1,912.32$ 1,797.57$
Shareholders' Equity
Common Stock, par value $1 per share:
Authorized, 120.0 shares;
Issued and outstanding 79.40$ 79.40$
Additional Paid in Capital 838.80$ 838.80$
Accumulated other Comprehensive Income(Loss) (365.10)$ (365.10)$
Retained Earnings 548.00$ 366.50$ 181.50$
Total Shareholders' Equity 1,101.10$ 734.60$
Total Liabilities and Shareholders Equity 3,013.42$ 2,532.18$
138
Income Statement
Sales 2,515.00$ 2,515.00$
Cost of Goods Sold 2,033.70$ 2,033.70$
Gross Profit 481.30$ 481.30$
Operating Expenses
Selling and Administration 190.00$ 190.00$
Restructuring Charges 5.50$ 5.50$
Acquisition costs -$ -$
Operating Expense Total 80.30$ 195.50$ 135.00$ 60.50$
Other Operating Income 0.70$ 0.70$
Operating Income 286.50$ 421.50$
Goodwill Impairment Charge (Adjustment) 245.60$ 395.02$ 395.02$
Depreciation of Capitalized Asset Leases 39.18$ 65.51$ 65.51$
Earnings of non-consolidated affiliates 2.80$ 2.80$
Interest Expense from Lease 26.06$ 40.97$ 40.97$
Interest Expense 38.60$ 38.60$
Interest Income 0.60$ 0.60$
Other Income (Expense) (1.30)$ (1.30)$
Income from continuing operations before taxes (EBT) 250.00$ (116.50)$
Income Tax Provision 71.40$ 71.40$
Income from Continuing Operations 178.60$ (187.90)$
Income from Discontinued Oerations, net -$ -$
Net Income 178.60$ (187.90)$
Income Summary 366.50$
Total Debits and Credits 1,362.55$ 1,362.55$
Difference in Net Income (366.50)$
139
Carryover As Stated Restated
At December 31: 2014 Dr Cr 2014
Balance Sheet
AssetsCurrent Assets
Cash and Cash Equivalents 256.80$ 256.80$
Recievable, net:
Trade 241.90$ 241.90$
Other 21.20$ 21.20$
Income Taxes Recievable 21.60$ 21.60$
Inventories 210.10$ 210.10$
Current deferred Income Taxes 54.20$ 54.20$
Other Current Assets 10.30$ 10.30$
Total Current Assets 816.10$ 816.10$
Non Current Assets
Property, Plant and Equipment, net 931.00$ 931.00$
Prepaid Pension Costs -$ -$
Restricted Cash -$ -$
Cap OL Rights 189.90$ 189.90$ 243.00$ 189.90$ 243.00$
Accumulated Depr. Of OL Assets 65.51$ 89.25$ (89.25)$
Net Operating Lease Asset Rights 124.40$ 153.75$
Deferred Income Taxes 12.50$ 12.50$
Other Assets 191.40$ 191.40$
Goodwill 395.02$ 747.10$ 544.44$ 202.66$
Total Non Current Assets 2,071.90$ 1,491.31$
Total Assets 2,888.00$ 2,307.41$
Liabilities and Shareholders' Equity
Current Liabilities
Current installments of long-term debt 16.40$ 16.40$
Accounts Payable 146.80$ 146.80$
Income Taxes Payable 0.20$ 0.20$
Accrued Liabilities 214.30$ 214.30$
Total Current Liabilities 377.70$ 377.70$
Non Current Liabilities
Long Term Debt 655.10$ 655.10$
Capital Lease Obligations 3.60$ 3.60$
Capitalized Operating Lease Liabilities 189.90$ 189.90$ 189.90$ 243.00$ 243.00$
Reduction of Lease Liability Amortized 94.03$ 133.69$ (133.69)$
Accrued Pension Liaiblity 182.00$ 182.00$
Deferred Income Taxes 107.10$ 107.10$
Other Liabilities 359.30$ 359.30$
Total Non Current Liabilities 1,497.00$ 1,416.41$
Total Liabilities 1,874.70$ 1,794.11$
Shareholders' Equity
Common Stock, par value $1 per share:
Authorized, 120.0 shares;
Issued and outstanding 77.40$ 77.40$
Additional Paid in Capital 788.30$ 788.30$
Accumulated other Comprehensive Income(Loss) (443.10)$ (443.10)$
Retained Earnings 590.70$ 500.00$ 90.70$
Total Shareholders' Equity 1,013.30$ 513.30$
Total Liabilities and Shareholders Equity 2,888.00$ 2,307.41$
140
Income Statement
Sales 2,241.20$ 2,241.20$
Cost of Goods Sold 1,853.20$ 1,853.20$
Gross Profit 388.00$ 388.00$
Operating Expenses
Selling and Administration 170.40$ 170.40$
Restructuring Charges 15.70$ 15.70$
Acquisition costs -$ -$
Operating Expense Total 135.00$ 186.10$ 187.80$ (1.70)$
Other Operating Income 1.50$ 1.50$
Operating Income 203.40$ 391.20$
Goodwill Impairment Charge (Adjustment) 395.02$ 544.44$ 544.44$
Depreciation of Capitalized Asset Leases 65.51$ 89.25$ 89.25$
Earnings of non-consolidated affiliates 1.70$ 1.70$
Interest Expense from Lease 40.97$ 54.11$ 54.11$
Interest Expense 43.80$ 43.80$
Interest Income 1.30$ 1.30$
Other Income (Expense) 0.10$ 0.10$
Income from continuing operations before taxes (EBT) 162.70$ (337.30)$
Income Tax Provision 57.70$ 57.70$
Income from Continuing Operations 105.00$ (395.00)$
Income from Discontinued Oerations, net 0.70$ 0.70$
Net Income 105.70$ (394.30)$
Income Summary 500.00$
Total Debits and Credits 1,754.39$ 1,754.39$
Difference in Net Income (500.00)$
141
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Sales Growth (YOY) 3.52% 23.66% 11.40% 15.12% -10.89% 8.56% 51.55% 106.09% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 7.06% 7.66%
Sales $3,396.60 $7,000.00 $71,319.00 $77,425.43 $84,054.69 $91,251.56 $99,064.63 $107,546.67 $116,754.95 $126,751.66 $137,604.30
Gross Profit Margin 14.88% 19.74% 19.99% 19.14% 17.31% 18.21% 18.21% 18.21% 18.50% 18.50% 18.75% 18.75% 19.00% 19.00% 19.50% 19.50% 20.00%
Operating Profit Margin 4.41% 11.42% 11.85% 11.39% 9.08% 9.63% 9.63% 9.63% 10.00% 10.00% 10.25% 10.25% 10.50% 10.50% 10.75% 10.75% 11.00%
Net Profit Margin 4.09% 12.32% 6.85% 7.10% 4.72% 7.02% -1.18% 4.00% 4.00% 4.50% 4.50% 5.00% 5.00% 5.50% 5.50% 6.00% 6.00%
Dividend Payout Ratio 98.77% 26.81% 43.32% 36.28% 60.55% 53.14% -202.56% 53.14% 53.14% 53.14% 53.14% 53.14% 53.14% 53.14% 53.14% 53.14% 53.14%
Asset Turnover (LAG) 74.78% 60.69% 66.57% 72.50% 87.08% 72.32% 72.32% 72.32% 72.32% 72.32% 72.32% 72.32% 72.32% 72.32% 72.32% 72.32% 72.32%
Current Assets/Total Assets 43.09% 29.86% 25.43% 27.87% 28.26% 30.90% 16.00% 18.00% 20.00% 22.00% 24.00% 26.00% 28.00% 30.00% 30.00% 30.00% 30.00%
Current Ratio 2.26 1.96 1.73 2.06 2.16 2.03 2.03 2.03 2.03 2.03 2.03 2.03 2.03 2.03 2.03 2.03 2.03
Days Supply Inventory 42.07 40.95 40.74 33.47 41.38 39.72 39.72 39.72 39.72 39.72 39.72 39.72 39.72 39.72 39.72 39.72 39.72
Days Sales Outstanding 43.02 44.13 49.95 40.65 42.85 43.91 43.91 43.91 43.91 43.91 43.91 43.91 43.91 43.91 43.91 43.91 43.91
Inventory Turnover 8.68 8.91 8.96 10.90 8.82 9.19 9.19 9.19 9.19 9.19 9.19 9.19 9.19 9.19 9.19 9.19 9.19
A/R Turns 8.49 8.27 7.31 8.98 8.52 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31
Cash to Cash Cycle 85.09 85.08 90.69 74.12 84.23 83.84 83.64 83.64 83.64 83.64 83.64 83.64 83.64 83.64 83.64 83.64 83.64
Sales to CAPEX -18.27 -8.83 -8.11 -25.88 -33.12 -18.84
Olin Shares outstanding 80,000,000.00 81,000,000.00 81,000,000.00 81,000,000.00 80,000,000.00 165,110,000.00 165,110,000.00 165,110,000.00 165,110,000.00 165,110,000.00 165,110,000.00 165,110,000.00 165,110,000.00 165,110,000.00 165,110,000.00 165,110,000.00
Yearly dividend payment $0.80 $0.80 $0.80 $0.80 $0.80 $0.49 $0.90 $0.96 $1.15 $1.22 $1.45 $1.54 $1.81 $1.93 $2.25 $2.42
Total Payout (In Millions) $64.00 $64.80 $64.80 $64.80 $64.00 $81.02 $148.80 $158.48 $189.87 $202.22 $239.29 $254.84 $298.55 $317.95 $371.34 $399.78
Actual Financial Statements Forecasted Financial StatementsAverageOLIN Forecasts
142
OLIN Balance Sheet2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
AssetsCurrent Assets
Cash and Cash Equivalents 458.60$ $304.80 $165.20 $307.80 $256.80 (25.00)$
Recievable, net: $698.00 842.14 896.88 955.18 1017.27 1083.39 1153.81 1228.81 1308.68 1401.03 1508.36
Trade 167.90$ $220.60 $279.20 $266.50 $241.90
Other 19.00$ $16.50 $19.80 $13.60 $21.20
Income Taxes Recievable 6.10$ $0.70 $8.20 $1.90 $21.60 $42.00
Inventories 155.60$ $176.60 $195.10 $186.50 $210.10 $615.00 $761.83 $811.35 $864.08 $920.25 $980.07 $1,043.77 $1,111.62 $1,183.87 $1,267.41 $1,364.50
Current deferred Income Taxes 46.00$ $50.90 $61.30 $50.40 $54.20 $58.00
Other Current Assets 29.60$ $10.20 $20.30 $13.20 $10.30 $16.00
Total Current Assets 882.80$ $780.30 $749.10 $839.90 $816.10 $1,404.00 $1,742.14 $2,061.53 $2,415.08 $2,805.88 $3,237.29 $3,712.92 $4,236.71 $4,512.09 $4,830.49 $5,200.54
Non Current Assets
Property, Plant and Equipment, net 675.00$ $885.40 $1,034.30 $987.80 $931.00 $4,343.00
Prepaid Pension Costs 16.30$ $19.20 $2.10 $1.70 $0.00
Restricted Cash 102.00$ $51.70 $11.90 $4.20 $0.00 $26.00
Intanglibles, Net $1,428.00
Deferred Income Taxes -$ $0.00 $9.10 $9.00 $12.50 $13.00
Other Assets 72.30$ $85.60 $224.10 $213.10 $191.40 $107.00
Goodwill 300.30$ $627.40 $747.10 $747.10 $747.10 $1,667.00
Total Non Current Assets 1,165.90$ $1,832.85 $2,196.67 $2,173.52 $2,071.90 $7,584.00 $7,936.40 $8,246.11 $8,562.56 $8,885.30 $9,213.82 $9,547.51 $9,885.65 $10,528.22 $11,271.15 $12,134.60
Total Assets 2,048.70$ $2,613.15 $2,945.77 $3,013.42 $2,888.00 $8,988.00 $9,678.54 $10,307.64 $10,977.64 $11,691.18 $12,451.11 $13,260.43 $14,122.36 $15,040.31 $16,101.64 $17,335.14
Liabilities and Shareholders' EquityCurrent Liabilities
Current installments of long-term debt 77.80$ $12.20 $23.60 $12.60 $16.40 $206.00
Accounts Payable 115.50$ $149.70 $174.30 $148.70 $146.80 $516.00
Income Taxes Payable - $0.00 $7.60 $1.70 $0.20 $11.00
Accrued Liabilities 197.70$ $237.20 $228.50 $244.50 $214.30 $212.00
Total Current Liabilities 391.00$ $399.10 $434.00 $407.50 $377.70 $968.00 $857.28 $1,014.45 $1,188.43 $1,380.74 $1,593.03 $1,827.08 $2,084.83 $2,220.34 $2,377.02 $2,559.12
Non Current Liabilities
Long Term Debt 418.20$ $524.20 $690.10 $674.30 $655.10 $3,489.00
Accrued Pension Liaiblity 58.60$ $59.10 $164.30 $115.40 $182.00 $529.00
Deferred Income Taxes 23.50$ $99.60 $110.40 $117.60 $107.10 $1,093.00
Other Liabilities 327.10$ $381.80 $380.50 $382.80 $359.30 $357.00
Total Non Current Liabilities 827.40$ $1,228.25 $1,513.37 $1,504.82 $1,497.00 $5,468.00 $5,840.45 $5,855.71 $5,804.57 $5,743.09 $5,601.17 $5,442.07 $5,185.93 $5,052.13 $4,886.71 $4,786.07
Total Liabilities 1,218.40$ $1,627.35 $1,947.37 $1,912.32 $1,874.70 $6,436.00 $6,697.73 $6,870.16 $6,993.00 $7,123.83 $7,194.20 $7,269.15 $7,270.76 $7,272.47 $7,263.73 $7,345.19
Shareholders' Equity
Common Stock, par value $1 per share:
Authorized, 120.0 shares;
Issued and outstanding 79.60$ $80.10 $80.20 $79.40 $77.40 $165.00
Additional Paid in Capital 842.30$ $852.00 $856.10 $838.80 $788.30 $2,234.00
Accumulated other Comprehensive Income(Loss) (261.80)$ (294.20)$ (371.30)$ (365.10)$ (443.10)$ (413.00)$
Retained Earnings 170.20$ $347.90 $433.40 $548.00 $590.70 $566.00 $764.98 $914.37 $1,113.18 $1,303.81 $1,551.85 $1,792.09 $2,099.02 $2,398.76 $2,779.53 $3,160.45
Total Shareholders' Equity 830.30$ $985.80 $998.40 $1,101.10 $1,013.30 $2,552.00 $2,980.80 $3,437.48 $3,984.64 $4,567.36 $5,256.91 $5,991.28 $6,851.60 $7,767.84 $8,837.91 $9,989.95
Total Liabilities and Shareholders Equity 2,048.70$ $2,613.15 $2,945.77 $3,013.42 $2,888.00 $8,988.00 $9,678.54 $10,307.64 $10,977.64 $11,691.18 $12,451.11 $13,260.43 $14,122.36 $15,040.31 $16,101.64 $17,335.14
Actual Financial Statements Forecasted Financial Statements
143
OLIN Income Statement2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Sales 1,585.90$ 1,961.10$ 2,184.70$ 2,515.00$ 2,241.20$ $3,396.60 $7,000.00 $7,455.00 $7,939.58 $8,455.65 $9,005.26 $9,590.61 $10,214.00 $10,877.91 $11,645.51 $12,537.64
Cost of Goods Sold 1,349.90$ 1,573.90$ 1,748.00$ 2,033.70$ 1,853.20$ $2,777.99 $5,725.30 $6,075.83 $6,470.75 $6,870.21 $7,316.78 $7,768.39 $8,273.34 $8,756.71 $9,374.64 $10,030.11
Gross Profit 236.00$ 387.20$ 436.70$ 481.30$ 388.00$ $618.61 $1,274.70 $1,379.18 $1,468.82 $1,585.43 $1,688.49 $1,822.22 $1,940.66 $2,121.19 $2,270.87 $2,507.53
Operating Expenses
Selling and Administration 134.40$ 161.40$ 168.60$ 190.00$ 170.40$ $150.00
Restructuring Charges 34.20$ 10.70$ 8.50$ 5.50$ 15.70$ $5.00
Acquisition costs - -$ 8.30$ -$ -$ $15.00
Operating Expense Total 168.60$ 172.10$ 185.40$ 195.50$ 186.10$ $170.00
Other Operating Income 2.50$ 8.80$ 7.60$ 0.70$ 1.50$ -0.1
Operating Income 69.90$ 223.90$ 258.90$ 286.50$ 203.40$ $448.51 $673.99 $745.50 $793.96 $866.70 $923.04 $1,007.01 $1,072.47 $1,169.37 $1,251.89 $1,379.14
Earnings of non-consolidated affiliates 29.90$ 9.60$ 3.00$ 2.80$ 1.70$
Interest Expense 25.40$ 30.40$ 26.40$ 38.60$ 43.80$
Interest Income 1.00$ 1.20$ 1.00$ 0.60$ 1.30$
Other Income (Expense) 1.50$ 175.10$ (11.30)$ (1.30)$ 0.10$
Income from continuing operations before taxes (EBT) 76.90$ 379.40$ 225.20$ 250.00$ 162.70$
Income Tax Provision 12.10$ 137.70$ 75.60$ 71.40$ 57.70$
Income from Continuing Operations 64.80$ 241.70$ 149.60$ 178.60$ 105.00$
Income from Discontinued Oerations, net -$ -$ -$ -$ 0.70$
Net Income 64.80$ 241.70$ 149.60$ 178.60$ 105.70$ (40.00)$ $280.00 $298.20 $357.28 $380.50 $450.26 $479.53 $561.77 $598.28 $698.73 $752.26
Internal Growth Rate 0.04% 8.63% 3.25% 3.86% 1.38% -4.19% 1.46% 1.44% 1.62% 1.62% 1.80% 1.80% 1.99% 1.99% 2.18% 2.19%
Sustainable Growth Rate 0.10% 22.89% 9.57% 10.57% 3.94% -14.76% 4.74% 4.33% 4.47% 4.16% 4.27% 3.99% 4.09% 3.84% 3.97% 3.80%
Actual Financial Statements Forecasted Financial Statements
144
OLIN Statement of Cash Flows Average
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Operating Activities
Net Income 64.80$ 241.70$ 149.60$ 178.60$ 105.70$ (40.00)$ 280.00$ 298.20$ 357.28$ 380.50$ 450.26$ 479.53$ 561.77$ 598.28$ 698.73$ 752.26$
Adjustments to reconcile net earnings to cash flows from operating activities:
Gain on remeasurement of investment in SunBelt - (181.40) -
Earnings of non-consolidated affiliates (29.90) (9.60) (3.00) (2.80) (1.70)
Gains on disposition of non-consilidated affiliate (6.50) -
Gains on disposition of property, plant and equipment (1.10) (6.20) (2.10) (0.40) (1.10)
Stock-based compensation 6.70 5.80 6.20 8.80 5.10
Depreciation and amortization 86.90 99.30 110.90 135.30 139.10
Deferred taxes 11.20 92.60 42.50 12.40 31.00
Write-off of equipment and facility in restructuring charges 17.50 - - - 3.30
Qualified pension plan contributions (9.80) (0.90) (0.90) (1.00) (0.80)
Qualified pension plan income (21.60) (26.40) (24.80) (24.10) (28.50)
Change in assets and liabilities:
Recievables (3.60) (26.20) 1.20 18.90 25.80
Income taxes recieveable / payable 13.30 5.00 0.10 0.40 (27.80)
Inventories (31.80) (17.00) 17.90 8.60 (23.60)
Other current assets (1.70) 0.60 (0.10) 0.70 1.70
Accounts payable and accrued liabilities 14.10 15.60 (0.70) 1.00 (38.50)
Other assets 2.00 (0.20) 0.30 1.30 5.20
Outher noncurrent liabilities (2.00) 25.60 (17.90) (14.50) (33.20)
Net cash flows from operating activities $115.50 $215.90 $279.20 $317.00 $159.20 214.06$ 472.02$ 709.32$ 784.58$ 835.57$ 912.13$ 971.42$ 1,059.80$ 1,128.69$ 1,230.67$ 1,317.51$
Sales/CFFO 13.26 7.35 7.02 6.89 15.80 10.06
Operating Income / CFFO 0.61 1.04 0.93 0.90 1.28 0.95
Net Income / CFFO 0.56 1.12 0.54 0.56 0.66 0.69
Investing Activities
Capital expenditures (85.30) (200.90) (255.70) (90.80) (71.80) (88.00) (180.27) (371.52) (395.67) (421.38) (448.77) (477.94) (509.01) (542.10) (577.33) (618.07)
Business acquired in purchase transaction, net of cash acquired - (123.40) (310.40) - -
Proceeds from sale/leaseback of equipment - 3.20 4.40 35.8 -
Proceeds from disposition of property, plant and equipment 3.10 7.90 8.60 4.60 5.60
Distributions from affiliated companies, net 23.60 1.90 1.30 1.50 -
Restricted cash activity, net (102.00) 50.30 39.80 7.70 4.20
Other investing activities 0.90 1.40 (0.40) (2.60) 0.30
Net cash used by investing activities (159.70)$ (259.60)$ (512.40)$ (43.80)$ (61.70)$ (207.44)$ (314.38)$ (647.90)$ (690.02)$ (734.87)$ (782.63)$ (833.51)$ (887.68)$ (945.38)$ (1,006.83)$ (1,077.88)$ (1,160.45)$
Financing Activities
Long-term debt:
Borrowings 117.00 36.00 200.00 - 150
Repayments (20.70) (87.20) (19.90) (23.70) (162.40)
Earn out payment - SunBelt - - (15.30) (17.10) -14.8
Issuance of common stock 9.20 - 0.00
Common stock repurchased and retired 0.00 (4.20) (3.10) -36.2 -64.8
Stock options excercised 2.90 8.30 1.30 8.80 6.60
Excess tax benefits from stock-based compensation 0.20 1.00 0.70 1.60 1.10
Dividends to shareholders $64.00 $64.80 $64.80 $64.80 $64.00 $81.02 $148.80 $158.48 $189.87 $202.22 $239.29 $254.84 $298.55 $317.95 $371.34 $399.78
Dividend per share 0.80 0.80 0.80 0.80 0.80 0.49 0.90 0.96 1.15 1.22 1.45 1.54 1.81 1.93 2.25 2.42
Deferred debt issuance costs (1.00) - (6.00) - (1.20)
Net cash used by financing activities 44.3 (110.10) 93.6 (130.60) (148.50) 3333.20
Actual Financial Statements Forecasted Financial Statements
145
OLIN Balance Sheet2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
AssetsCurrent Assets
Cash and Cash Equivalents 22.4% 11.7% 5.6% 10.2% 8.9% -0.3%
Recievable, net: 7.8% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%
Trade 8.2% 8.4% 9.5% 8.8% 8.4%
Other 0.9% 0.6% 0.7% 0.5% 0.7%
Income Taxes Recievable 0.3% 0.0% 0.3% 0.1% 0.7% 0.5%
Inventories 7.6% 6.8% 6.6% 6.2% 7.3% 6.8% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9%
Current deferred Income Taxes 2.2% 1.9% 2.1% 1.7% 1.9% 0.6%
Other Current Assets 1.4% 0.4% 0.7% 0.4% 0.4% 0.2%
Total Current Assets 43.1% 29.9% 25.4% 27.9% 28.3% 15.6% 18.0% 20.0% 22.0% 24.0% 26.0% 28.0% 30.0% 30.0% 30.0% 30.0%
Non Current Assets
Property, Plant and Equipment, net 32.9% 33.9% 35.1% 32.8% 32.2% 48.3%
Prepaid Pension Costs 0.8% 0.7% 0.1% 0.1% 0.0%
Restricted Cash 5.0% 2.0% 0.4% 0.1% 0.0% 0.3%
Intanglibles, Net 15.9%
Deferred Income Taxes 0.0% 0.0% 0.3% 0.3% 0.4% 0.1%
Other Assets 3.5% 3.3% 7.6% 7.1% 6.6% 1.2%
Goodwill 14.7% 24.0% 25.4% 24.8% 25.9% 18.5%
Total Non Current Assets 56.9% 70.1% 74.6% 72.1% 71.7% 84.4% 82.0% 80.0% 78.0% 76.0% 74.0% 72.0% 70.0% 70.0% 70.0% 70.0%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Liabilities and Shareholders' EquityCurrent Liabilities
Current installments of long-term debt 3.80% 0.47% 0.80% 0.42% 0.57% 2.29%
Accounts Payable 5.64% 5.73% 5.92% 4.93% 5.08% 5.74%
Income Taxes Payable 0.00% 0.26% 0.06% 0.01% 0.12%
Accrued Liabilities 9.65% 9.08% 7.76% 8.11% 7.42% 2.36%
Total Current Liabilities 19.09% 15.27% 14.73% 13.52% 13.08% 10.77% 8.86% 9.84% 10.83% 11.81% 12.79% 13.78% 14.76% 14.76% 14.76% 14.76%
Non Current Liabilities
Long Term Debt 20.41% 20.06% 23.43% 22.38% 22.68% 38.82%
Accrued Pension Liaiblity 2.86% 2.26% 5.58% 3.83% 6.30% 5.89%
Deferred Income Taxes 1.15% 3.81% 3.75% 3.90% 3.71% 12.16%
Other Liabilities 15.97% 14.61% 12.92% 12.70% 12.44% 3.97%
Total Non Current Liabilities 40.39% 47.00% 51.37% 49.94% 51.84% 60.84% 60.34% 56.81% 52.88% 49.12% 44.99% 41.04% 36.72% 33.59% 30.35% 27.61%
Total Liabilities 59.5% 62.3% 66.1% 63.5% 64.9% 71.6% 69.2% 66.7% 63.7% 60.9% 57.8% 54.8% 51.5% 48.4% 45.1% 42.4%
Shareholders' Equity
Common Stock, par value $1 per share:
Authorized, 120.0 shares;
Issued and outstanding 3.9% 3.1% 2.7% 2.6% 2.7% 1.8%
Additional Paid in Capital 41.1% 32.6% 29.1% 27.8% 27.3% 24.9%
Accumulated other Comprehensive Income(Loss) -12.8% -11.3% -12.6% -12.1% -15.3% -4.6%
Retained Earnings 8.3% 13.3% 14.7% 18.2% 20.5% 6.3% 7.9% 8.9% 10.1% 11.2% 12.5% 13.5% 14.9% 15.9% 17.3% 18.2%
Total Shareholders' Equity 40.5% 37.7% 33.9% 36.5% 35.1% 28.4% 30.8% 33.3% 36.3% 39.1% 42.2% 45.2% 48.5% 51.6% 54.9% 57.6%
Total Liabilities and Shareholders Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Actual Financial Statements Forecasted Financial Statements
146
OLIN Income Statement2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 85.1% 80.3% 80.0% 80.9% 82.7% 81.8% 81.8% 81.5% 81.5% 81.3% 81.3% 81.0% 81.0% 80.5% 80.5% 80.0%
Gross Profit 14.9% 19.7% 20.0% 19.1% 17.3% 18.2% 18.2% 18.5% 18.5% 18.8% 18.8% 19.0% 19.0% 19.5% 19.5% 20.0%
Operating Expenses
Selling and Administration 8.5% 8.2% 7.7% 7.6% 7.6% 4.4%
Restructuring Charges 2.2% 0.5% 0.4% 0.2% 0.7% 0.1%
Acquisition costs 0.0% 0.0% 0.4% 0.0% 0.0% 0.4%
Operating Expense Total 10.6% 8.8% 8.5% 7.8% 8.3% 5.0%
Other Operating Income 0.2% 0.4% 0.3% 0.0% 0.1% 0.0%
Operating Income 4.4% 11.4% 11.9% 11.4% 9.1% 13.2% 9.6% 10.0% 10.0% 10.3% 10.3% 10.5% 10.5% 10.8% 10.8% 11.0%
Earnings of non-consolidated affiliates 1.9% 0.5% 0.1% 0.1% 0.1%
Interest Expense 1.6% 1.6% 1.2% 1.5% 2.0%
Interest Income 0.1% 0.1% 0.0% 0.0% 0.1%
Other Income (Expense) 0.1% 8.9% -0.5% -0.1% 0.0%
Income from continuing operations before taxes (EBT) 4.8% 19.3% 10.3% 9.9% 7.3%
Income Tax Provision 0.8% 7.0% 3.5% 2.8% 2.6%
Income from Continuing Operations 4.1% 12.3% 6.8% 7.1% 4.7%
Income from Discontinued Oerations, net 0.0% 0.0% 0.0% 0.0% 0.0%
Net Income 4.1% 12.3% 6.8% 7.1% 4.7% -1.2% 4.0% 4.0% 4.5% 4.5% 5.0% 5.0% 5.5% 5.5% 6.0% 6.0%
Actual Financial Statements Forecasted Financial Statements
147
OLIN Statement of Cash Flows2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Operating Activities
Net Income 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Adjustments to reconcile net earnings to cash flows from operating activities:
Gain on remeasurement of investment in SunBelt -84.0%
Earnings of non-consolidated affiliates -25.9% -4.4% -1.1% -0.9% -1.1%
Gains on disposition of non-consilidated affiliate -2.1%
Gains on disposition of property, plant and equipment -1.0% -2.9% -0.8% -0.1% -0.7%
Stock-based compensation 5.8% 2.7% 2.2% 2.8% 3.2%
Depreciation and amortization 75.2% 46.0% 39.7% 42.7% 87.4%
Deferred taxes 9.7% 42.9% 15.2% 3.9% 19.5%
Write-off of equipment and facility in restructuring charges 15.2% 2.1%
Qualified pension plan contributions -8.5% -0.4% -0.3% -0.3% -0.5%
Qualified pension plan income -18.7% -12.2% -8.9% -7.6% -17.9%
Change in assets and liabilities:
Recievables -3.1% -12.1% 0.4% 6.0% 16.2%
Income taxes recieveable / payable 11.5% 2.3% 0.0% 0.1% -17.5%
Inventories -27.5% -7.9% 6.4% 2.7% -14.8%
Other current assets -1.5% 0.3% 0.0% 0.2% 1.1%
Accounts payable and accrued liabilities 12.2% 7.2% -0.3% 0.3% -24.2%
Other assets 1.7% -0.1% 0.1% 0.4% 3.3%
Outher noncurrent liabilities -1.7% 11.9% -6.4% -4.6% -20.9%
Net cash flows from operating activities 178.2% 89.3% 186.6% 177.5% 150.6% -535.2% 168.6% 237.9% 219.6% 219.6% 202.6% 202.6% 188.7% 188.7% 176.1% 175.1%
Investing Activities
Capital expenditures 53.4% 77.4% 49.9% 207.3% 116.4% 28.0% 27.8% 53.8% 53.8% 53.8% 53.8% 53.8% 53.8% 53.8% 53.6% 53.3%
Business acquired in purchase transaction, net of cash acquired 47.5% 60.6%
Proceeds from sale/leaseback of equipment -1.2% -0.9% -81.7%
Proceeds from disposition of property, plant and equipment -1.9% -3.0% -1.7% -10.5% -9.1%
Distributions from affiliated companies, net -14.8% -0.7% -0.3% -3.4%
Restricted cash activity, net 63.9% -19.4% -7.8% -17.6% -6.8%
Other investing activities -0.6% -0.5% 0.1% 5.9% -0.5%
Net cash used by investing activities -246.5% -107.4% -342.5% -24.5% -58.4% 786.0% -231.4% -231.4% -205.7% -205.7% -185.1% -185.1% -168.3% -168.3% -154.3% -154.3%
Financing Activities
Long-term debt:
Borrowings 264.1% -32.7% 213.7% -101.0%
Repayments -46.7% 79.2% -21.3% 18.1% 109.4%
Earn out payment - SunBelt -16.3% 13.1% 10.0%
Issuance of common stock 20.8% 0.0% 0.0% 0.0%
Common stock repurchased and retired 0.0% 3.8% -3.3% 27.7% 43.6%
Stock options excercised 6.5% -7.5% 1.4% -6.7% -4.4%
Excess tax benefits from stock-based compensation 0.5% -0.9% 0.7% -1.2% -0.7%
Dividends to shareholders 144.5% -58.9% 69.2% -49.6% -43.1% -202.6% 53.1% 53.1% 53.1% 53.1% 53.1% 53.1% 53.1% 53.1% 53.1% 53.1%
Deferred debt issuance costs -2.3% -6.4% 0.8%
Net cash used by financing activities 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
^Dividends relative to Net Income^
Actual Financial Statements Forecasted Financial Statements
^Operating Activities Relative to Net Income^
^CAPEX relative to Investing Activities^
^Investing Activities relative to Net Income^
148
Using 20 year Treasury Bond
149
150
151
152
153
Using 10 Year Treasury Note
154
155
156
157
Using 7 Year Treasury Note
158
159
160
161
162
Using 2 Year Treasury Note
163
164
165
166
167
Using 1 Year Treasury Bill
168
169
170
171
172
173
Discounted Dividend Model
Free Cash Flow Model
Residual Income Model
Discounted Dividends Approach WACC(AT) 6.63% Kd 3.99% Ke 13.47%
Perp
Relevant Valuation Item 0 1 2 3 4 5 6 7 8 9 10 11
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Total Dividends 81.02 148.80 158.48 189.87 202.22 239.29 254.84 298.55 317.95 371.34 399.78
PV Factor 88.13% 77.67% 68.45% 60.32% 53.16% 46.85% 41.29% 36.39% 32.07% 28.26%
71.40 115.57 108.47 114.54 107.50 112.11 105.22 108.63 101.96 104.94
Total PV YBY Div (12/31/2014) 6.36$
PV of Terminal Value Perp 6.24$ Perp--------> 3,644.33
Model Price (12/31/2014) 12.60$
Time Consistent Model Price (11/1/2015) 14.00$
Over/Under Valued -27%
Observed Share Price $19.18
Initial Cost of Equity 13.47%
Perpetuity Growth Rate (g) 2.50%
Discounted Free Cash Flow WACC(BT) 7.55% Kd 3.99% Ke 13.47%
WACC(AT) 6.63% Kd 3.99% Ke 13.47% Perp
0 1 2 3 4 5 6 7 8 9 10 11
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Cash Flow From Operations (Millions) 214 472 709 785 836 912 971 1060 1129 1231 1318
Cash Flow From Investing Activities (CAPEX) -88 -180 -372 -396 -421 -449 -478 -509 -542 -577 -618
FCF Firm's Assets 126.06 291.75 337.81 388.91 414.19 463.36 493.48 550.79 586.59 653.34 699
PV Factor (WACC) 92.96% 86.42% 80.34% 74.69% 69.43% 64.54% 60.00% 55.78% 51.85% 48.20%
PV YBY Free Cash Flows 117.19 252.13 271.39 290.46 287.57 299.07 296.09 307.22 304.17 314.94
Total PV YBY FCF 2,740.24 25%
FCF Perp 8,284.09 75% Perp-------> 17,185.29
Value based on FCF Model 11,024.33 100%
Book Value Debt & Preferred Stock $6,436
Market Value of Equity $4,588
Divided by Shares to Get PPS at 12/31/14 $27.79
Time consistent Price (11/1/15) $29.53
Oberved Share Price (11/1/15) 19.18
Over/Under Valued 44.89%
WACC(BT) 7.6%
Perp Growth Rate 3.5%
174
ROE -2% 12% 12% 13% 13% 15% 15% 16% 16% 17% 17%
All Items in Millions of Dollars % change ROE 1.0% 13.6% 0.3% 11.4% -0.4% 9.6% -1.0% 8.7% -0.4%
0 1 2 3 4 5 6 7 8 9 10 11
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Dividends 81.02 148.80 158.48 189.87 202.22 239.29 254.84 298.55 317.95 371.34 399.78
Net Income (40.00) 280.00 298.20 357.28 380.50 450.26 479.53 561.77 598.28 698.73 752.26
Book Value Equity (Millions) 2,552.00 2,430.98 2,562.17 2,701.90 2,869.30 3,047.59 3,258.56 3,483.25 3,746.47 4,026.80 4,354.20 4,706.67
Annual Normal Income (Benchmark) 343.75 327.45 345.12 363.95 386.50 410.51 438.93 469.19 504.65 542.41 586.51
Annual Residual Income (383.75) (47.45) (46.92) (6.66) (5.99) 39.75 40.60 92.58 93.64 156.32 165.75
PV Factor 88.1% 77.7% 68.4% 60.3% 53.2% 46.9% 41.3% 36.4% 32.1% 28.3%
YBY PV RI (338.20) (36.86) (32.12) (4.02) (3.18) 18.62 16.76 33.69 30.03 44.18
Percent Change in Residual Income -88% -1% -86% -10% -764% 2% 128% 1% 67%
Book Value Equity (Millions) 2552 81.35%
Total PV of YBY RI (271.10) -8.64%
Terminal Value Perpetuity 856.35 27.30% Perp---------> 3,030.13
MVE 12/31/14 3,137.25 100.00%
Divided by Shares to Get PPS at 12/31/14 165.11
Model Price on 12/31/14 19.00
Time Consistent Price (11/1/2015) 21.11
Over/Under Valued 10.07%
Observed Share Price (11/1/2015) $19.18 $3,166.81
Initial Cost of Equity 13.47%
Perpetuity Growth Rate (g) 8.00%
175
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