Olin Corporation — Q2 2011 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2011; comparisons are with Q2 and the first six months of 2010. Olin operates Chlor Alkali Products and Winchester. On February 28, 2011, it acquired PolyOne’s remaining 50% interest in SunBelt, bringing ownership to 100%; SunBelt’s results have been consolidated since acquisition.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $529.1 million | $405.7 million | $965.1 million | $767.7 million |
| Gross margin | $115.4 million (about 22% of sales) | $58.0 million (about 14%) | $192.2 million (about 20%) | $107.5 million (about 14%) |
| Operating income | $70.7 million | $22.1 million | $109.3 million | $41.8 million |
| Net income | $42.1 million | $16.9 million | $175.8 million | $31.0 million |
| Diluted EPS | $0.52 | $0.21 | $2.18 | $0.39 |
- Q2 segment income: Chlor Alkali Products $72.8 million versus $26.1 million; Winchester $11.8 million versus $21.1 million.
- First-half cash from operations was $17.5 million versus cash used of $6.3 million. Investing used $176.9 million, including $123.4 million net cash paid for SunBelt and $63.4 million of capital expenditures. Financing used $22.7 million. Cash and cash equivalents fell to $276.5 million from $458.6 million at year-end 2010.
- At June 30, cash was $276.5 million and restricted cash was $97.8 million. Total debt, including current installments, was $582.8 million; the revolving facility had $231.4 million available. Current assets were $842.3 million and current liabilities $454.2 million.
- Quarterly dividend was $0.20 per share. First-half dividends paid were $32.0 million.
Material changes versus comparable periods
- Q2 sales rose 30%, driven mainly by Chlor Alkali Products: SunBelt added $51.7 million of sales, alongside higher ECU prices and volumes. Chlor Alkali sales excluding SunBelt increased 27%; Winchester sales rose 1%.
- Chlor Alkali segment income increased with better ECU netbacks, volumes, and SunBelt contribution. Olin’s Q2 ECU netback excluding SunBelt was about $550, up from $470 a year earlier; SunBelt’s was about $610. Operating rates increased to 85% from 83%.
- Winchester segment income fell 44% in Q2, as higher metal, materials, and manufacturing costs outweighed higher selling prices. Shipment volumes were broadly comparable with the prior-year quarter.
- Reported first-half income includes a one-time, noncash $181.4 million pretax gain from remeasuring Olin’s previously held SunBelt interest, with a related $76.0 million deferred tax expense. Thus, reported six-month net income and EPS are not a clean indicator of recurring performance. The filing’s pro forma six-month 2011 results, which eliminate the gain and present SunBelt as owned from January 1, show sales of $991.4 million and net income of $74.5 million.
- Environmental recoveries improved reported results: third-party recoveries were $9.0 million in Q2 and $9.5 million in the first half, offsetting current-period environmental charges.
Outlook, commentary, and risks
- Management projected Q3 2011 net income of $0.50–$0.55 per diluted share. Chlor Alkali segment income was expected to exceed both Q2 2011 and Q3 2010, supported by higher netbacks, bleach volumes, and full SunBelt ownership. Customer outages and softer chlorine demand were expected to pressure shipments late in Q3.
- Management expected Winchester Q3 segment income to decline from the prior-year quarter due to higher metal costs and less favorable mix, partly offset by higher selling prices. The Oxford, Mississippi centerfire relocation was expected to reduce 2011 segment income by $4–$5 million; the completed relocation is forecast to save about $30 million annually.
- For 2011, management forecast capital spending of $235–$255 million, depreciation of about $100 million, an effective tax rate of 36%–37%, and environmental investigatory and remediation charges of $20–$25 million before recoveries. Winchester relocation grants were expected to provide about $31 million.
- Major projects include converting Charleston, Tennessee, from mercury-cell to membrane technology and relocating Winchester centerfire operations. The Charleston conversion was expected to finish by end-2012; additional restructuring charges were anticipated for both programs.
- Environmental liabilities were $168.0 million at June 30; annual environmental-related cash outlays were expected to be approximately $50–$70 million over the next several years. Olin cautioned that uncertain site conditions, regulatory changes, and recoveries from other responsible parties could lead to additional costs and materially affect results.
- Other risks include cyclical chlor-alkali pricing and demand, commodity and energy cost volatility, manufacturing interruptions, pension exposure, litigation, and the ability to maintain credit-facility covenants. Olin reported covenant compliance at quarter-end. Legal-action liabilities, including asbestos matters, were $17.0 million; management did not expect a material near-term adverse effect.
- On July 21, 2011, after quarter-end, the board authorized repurchases of up to 5 million shares over three years and declared a $0.20-per-share dividend payable September 9, 2011.
Important facts for investors to verify
- Separate recurring operating performance from the SunBelt remeasurement gain and related tax expense; compare reported and pro forma results on a consistent basis.
- Track whether announced caustic soda and chlorine price increases are realized, and monitor ECU netbacks, volumes, freight costs, and operating rates.
- Assess Winchester’s ability to recover metal-cost inflation through pricing and the cost, schedule, and savings of its Oxford relocation.
- Monitor operating cash generation and working-capital needs: first-half receivables increased $95.5 million and inventories increased $22.4 million from year-end.
- Review SunBelt’s earn-out liability, debt service, and integration benefits; acquisition goodwill was $327.1 million and the earn-out fair value was $43.2 million at June 30.
- Follow environmental spending, reserve adequacy, restructuring charges, and progress on the Charleston conversion and bleach-facility project.