Olin Corporation — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. Olin manufactures chlor-alkali products and ammunition through its Chlor Alkali Products and Winchester segments. Q1 2012 includes a full quarter of SunBelt, which Olin acquired in February 2011.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Sales | $507.2 million | $436.0 million |
| Gross margin | $114.3 million; 23% of sales | $76.8 million; 18% of sales |
| Operating income | $69.2 million | $38.6 million |
| Net income | $38.7 million | $133.7 million |
| Diluted EPS | $0.48 | $1.66 |
| Cash from operating activities | $4.4 million | $(20.2) million |
| Capital expenditures | $75.9 million | $25.6 million |
Chlor Alkali Products sales were $359.7 million and segment income was $74.4 million, versus $299.4 million and $45.2 million, respectively, in Q1 2011. Winchester sales were $147.5 million and segment income was $10.8 million, versus $136.6 million and $12.5 million.
At March 31, 2012, cash and cash equivalents were $220.6 million; restricted cash was $34.1 million. Total debt, including current installments, was $535.6 million. Total current assets were $751.9 million and current liabilities were $369.6 million. Shareholders’ equity was $1,016.3 million.
Material changes versus the prior comparable period
- Sales increased 16%, primarily from higher chlor-alkali ECU pricing, full-quarter SunBelt ownership and higher Winchester shipments. Chlor Alkali Products’ ECU netback was about $585, up 11% from about $525.
- Gross margin rose $37.5 million, reflecting higher ECU netbacks, SunBelt and stronger bleach and hydrochloric acid contributions, partly offset by lower Winchester gross margin.
- Net income and EPS fell sharply year over year, but the comparison is distorted by Q1 2011’s $181.4 million pretax gain on remeasurement of Olin’s pre-existing SunBelt interest, with a related $76.0 million deferred tax expense. Q1 2011 reported net income was $133.7 million; the filing’s pro forma Q1 2011 net income excluding specified acquisition effects was $32.4 million.
- Winchester segment income declined 14%, as higher metals and other material costs, manufacturing costs and $7.2 million of relocation transition costs more than offset higher volumes and selling prices.
- Operating cash flow improved by $24.6 million year over year, but working capital increased $71.1 million during Q1 2012. Cash declined $84.2 million during the quarter, mainly reflecting seasonal working-capital needs and elevated capital spending.
Outlook, risks and unusual items
- Management projected Q2 2012 diluted EPS of $0.50–$0.55. Chlor Alkali Products segment earnings were expected to exceed both Q1 2012 and Q2 2011, while Winchester earnings were expected to be comparable with Q2 2011.
- Q2 ECU netbacks were forecast to be comparable to or slightly below Q1. Announced price increases of $45 per ton for caustic soda and $40 per ton for chlorine had uncertain realization; most potential benefit, if achieved, was expected in Q3.
- For full-year 2012, Olin expected capital spending of $215–$245 million, depreciation of $105–$110 million, and an effective tax rate of 36%–37%. It expected environmental investigatory and remediation charges comparable to 2011’s $19.3 million before recoveries.
- Major projects include converting Charleston, Tennessee, from mercury-cell to membrane technology, expanding low-salt bleach capacity, reconfiguring Augusta, Georgia, and relocating Winchester centerfire operations to Mississippi. Management forecast approximately $10 million of 2012 restructuring charges, with further charges expected in subsequent years.
- Environmental liabilities were $163.1 million at quarter-end; management warned that actual costs could increase and adverse outcomes could materially affect financial position or results. Environmental cash outlays were expected at $50–$70 million annually over the next several years, including $20–$40 million for investigation and remediation.
- Legal liabilities, including asbestos-related matters, were $16.8 million; management did not believe these cases were reasonably likely to materially harm near-term results. Other risks include commodity and energy price volatility, cyclical demand and pricing, operational interruptions, pension assumptions, litigation, and debt-service or covenant pressure.
- Olin reported compliance with credit covenants at March 31, 2012. It had $231.5 million available under its then-current $240 million revolver. A new $265 million, five-year revolving facility was signed April 27, 2012, with a $110 million letter-of-credit subfacility and a $50 million Canadian subfacility.
- Q1 included a $2.6 million expense related to the SunBelt earn-out liability and an $18.5 million earn-out payment. Olin paid a $0.20-per-share dividend and repurchased 55,754 shares in March. Management declared another $0.20-per-share dividend for payment in June.
Important facts for investors to verify
- Whether chlor-alkali pricing, operating rates and announced price increases support the forecast segment earnings improvement.
- Whether Winchester’s cost pressures and relocation transition costs remain within management’s expectations.
- Progress, cost and timing of the major capital projects, including the Charleston conversion and Winchester relocation.
- Environmental reserve adequacy, future remediation spending and developments in legal contingencies.
- Cash conversion and working-capital trends relative to planned capital spending, debt maturities and liquidity availability.