Olin Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Olin manufactures chlor-alkali products, distributes chemicals, and produces ammunition through Chlor Alkali Products, Chemical Distribution, and Winchester.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales | $570.4 million | $652.2 million | $1,147.8 million | $1,282.2 million |
| Gross margin | $106.8 million; 19% of sales | $121.1 million; 19% | $208.8 million; 18% | $246.7 million; 19% |
| Operating income | $63.4 million | $73.7 million | $120.6 million | $148.1 million |
| Continuing operations income | $36.6 million | $43.7 million | $66.1 million | $84.2 million |
| Net income | $37.3 million | $43.7 million | $66.8 million | $84.2 million |
| Diluted EPS | $0.47 | $0.54 | $0.83 | $1.04 |
| Cash from operations | Not presented by quarter | $37.4 million | $91.8 million |
- Q2 sales fell 13%; first-half sales fell 10%. Lower chlor-alkali prices and Chemical Distribution caustic soda volumes were major contributors. Winchester also had lower Q2 demand for shotshell and rifle ammunition.
- First-half gross margin declined by $37.9 million, with Chlor Alkali Products accounting for most of the reduction. Cost savings partially offset price and volume pressure.
- Q2 net income includes $0.7 million after tax from discontinued operations: a favorable resolution of Metals-sale indemnity matters generated a $4.6 million pretax gain, partly offset by tax expense.
- Dividends were $0.20 per share in Q2; the board declared another $0.20 dividend payable in September 2014.
Segments and material changes
- Chlor Alkali Products: Q2 segment income was $40.8 million versus $50.2 million; first-half income was $75.1 million versus $108.7 million. Q2 ECU netbacks were about $510, down 11% year over year; the operating rate improved to 86% from 84%. Lower caustic soda and hydrochloric acid prices were partly offset by lower operating costs.
- Chemical Distribution: Q2 segment income was approximately breakeven versus $2.2 million; first-half results were a $0.8 million loss versus $6.3 million income. Lower caustic soda volumes were the principal pressure.
- Winchester: Q2 segment income declined to $33.1 million from $37.1 million, reflecting weaker shotshell and rifle demand. First-half income rose to $71.4 million from $68.4 million, which management described as the strongest first half in at least two decades. Pistol and rimfire commercial demand remained strong, but backlog declined to $345.3 million from $496.9 million at year-end 2013.
- First-half selling and administration expense declined 12%, mainly from lower incentive compensation and legal-related expenses. Restructuring charges were $3.3 million for the half-year, versus $2.5 million.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $245.6 million, down from $307.8 million at year-end 2013. Current assets were $879.0 million and current liabilities $394.3 million.
- Operating cash flow was $37.4 million for the first half, down $54.4 million year over year, primarily because of lower earnings and a larger working-capital increase. Receivables rose $61.1 million and inventories rose $34.4 million from year-end.
- Capital expenditures were $32.5 million. Net cash used in investing was $28.1 million; net cash used in financing was $71.5 million, including $29.7 million of share repurchases, $31.7 million of dividends, and a $14.8 million SunBelt earn-out payment classified as financing.
- Total borrowings, including current installments, were $689.2 million. The company entered a new five-year $415 million credit facility: a $265 million revolver and a $150 million delayed-draw term loan intended to refinance its 2019 Notes. Revolver availability was $247.3 million after letters of credit. Olin reported covenant compliance and no borrowing restrictions at quarter-end.
- Olin gave notice that it intended to redeem $150 million of 8.875% senior notes on August 15, 2014. It forecast about $9.5 million of Q3 pretax redemption and debt-cost write-off expense, with approximately $10 million of interest savings in the first year after redemption.
- The board authorized repurchases of up to 8 million shares over three years. By June 30, 0.5 million shares had been repurchased under the new authorization, with 7.5 million remaining.
Outlook, risks, and unusual items
- Management projected Q3 2014 net income of $0.30–$0.35 per diluted share, including the expected $9.5 million pretax note-redemption expense.
- Q3 chlor-alkali segment income was expected to be below Q3 2013, although ECU netbacks were forecast slightly above Q2 2014. A $60-per-ton caustic soda price increase had been announced; success was uncertain, and most benefit, if achieved, was expected in Q4.
- Management expected 2014 capital spending of $80–$90 million, depreciation and amortization of $135–$140 million, an effective tax rate of 35%–37%, environmental charges of $10–$15 million, and restructuring charges of $5–$6 million. Winchester’s centerfire relocation was forecast to deliver $22–$26 million of 2014 operating-cost savings and to be completed in 2016.
- Environmental liabilities were $142.3 million at June 30, including $124.3 million classified as noncurrent. Management expected environmental charges to remain material; estimates are subject to site, regulatory, and remediation uncertainties.
- Recorded liabilities for legal actions, including asbestos-related matters, were $23.8 million. Olin did not believe these cases were reasonably likely to materially harm its financial position, cash flows, or results, but noted litigation uncertainty. Separately, the EPA issued a violation notice concerning alleged lead-emissions permit violations at the East Alton facility; potential resolution costs were not then estimable.
- Other risks include commodity-price and demand cycles, energy and raw-material costs, operational interruptions, pension assumptions, and the ability to comply with debt covenants if industry conditions weaken. Olin stated disclosure controls were effective and reported no material quarterly change in internal controls.
Important facts for investors to verify
- Whether the planned note redemption closed as expected, the actual Q3 charge, and realized interest savings.
- Whether caustic soda pricing and ECU netbacks improved, and whether the announced price increase translated into Q4 results.
- Whether Winchester demand, backlog, and the Oxford relocation savings tracked management’s expectations.
- Actual operating cash generation as working capital normalizes, alongside planned capital spending, dividends, and share repurchases.
- Developments in environmental remediation reserves, the EPA lead-emissions matter, and legal contingencies.