Business context and reporting period
Olin Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011. The company operates Chlor Alkali Products and Winchester. Results reflect Olin’s acquisition of PolyOne’s remaining 50% interest in SunBelt on February 28, 2011; SunBelt has been consolidated since then, limiting direct comparability with 2010.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $550.2 million | $432.8 million | $1,515.3 million | $1,200.5 million |
| Gross margin | $117.5 million (21% of sales) | $66.3 million (15%) | $309.7 million (20%) | $173.8 million (14%) |
| Operating income | $77.9 million | $33.3 million | $187.2 million | $75.1 million |
| Net income | $47.2 million | $31.8 million | $223.0 million | $62.8 million |
| Diluted EPS | $0.58 | $0.40 | $2.76 | $0.79 |
| Operating cash flow | — | $112.4 million | $41.1 million |
Q3 sales rose 27% year over year; nine-month sales rose 26%. Nine-month net income includes a one-time, noncash $181.4 million pretax gain from remeasuring Olin’s pre-existing SunBelt stake, partly offset by a $76.0 million discrete deferred tax expense. Accordingly, reported nine-month earnings are not a straightforward measure of recurring performance.
Q3 Chlor Alkali Products sales were $386.1 million and segment income was $76.7 million, versus $275.3 million and $44.0 million, respectively, in Q3 2010. Winchester sales were $164.1 million and segment income $13.1 million, versus $157.5 million and $18.8 million.
At September 30, 2011, cash and cash equivalents were $318.3 million; restricted cash was $71.6 million. Current assets were $838.8 million and current liabilities $455.0 million. Debt, including current installments, totaled $589.6 million, up from $496.0 million at year-end 2010, largely reflecting SunBelt debt consolidation. Olin reported $231.5 million available under its $240 million revolving facility and said it was in compliance with debt covenants. The facility expires in October 2012. Nine-month capital expenditures were $128.4 million; dividends paid were $48.0 million.
Material changes versus prior comparable periods
- Chlor Alkali Products benefited from SunBelt consolidation and stronger ECU netbacks. Excluding SunBelt, ECU netbacks were approximately $590 in Q3 2011 versus $465 in Q3 2010; segment income also benefited from improved pricing.
- Chlor Alkali operating rates were 85% in Q3, down from 91% a year earlier, amid planned customer outages and weaker chlorine demand. Nine-month operating rates were 83% in both years.
- Winchester segment income fell 30% in Q3 and 37% for the nine months, reflecting higher metal, materials and manufacturing costs, relocation costs, and less favorable product mix, partly offset by higher selling prices.
- Operating cash flow improved from the prior-year period, but working capital increased $70.9 million and cash tax payments rose $40.0 million. Cash declined $140.3 million during the nine months, principally due to the SunBelt acquisition, capital spending, and seasonal working-capital needs.
Outlook, commentary, risks and unusual items
Management projected Q4 2011 net income of $0.15–$0.20 per diluted share. Chlor Alkali segment income was expected to improve year over year, but decline sequentially from Q3; operating rates were forecast in the mid-70% range. Winchester segment income was expected to be near break-even, with lower commercial volumes and higher metal costs pressuring results.
Management forecast 2011 capital spending of approximately $255 million and depreciation of approximately $100 million. Projects include converting Charleston, Tennessee, from mercury-cell to membrane technology and relocating Winchester centerfire operations to Oxford, Mississippi. The Winchester relocation is forecast to reduce annual operating costs by about $30 million once completed, with meaningful savings expected in the second half of 2013. Management also anticipated 2011 environmental charges of about $20 million and an effective tax rate of 36%–37%.
Key exposures include cyclical chlor-alkali pricing and demand, volatile energy and metals costs, weaker ammunition demand, execution and costs of major facility projects, and environmental and litigation liabilities. Environmental reserves were $164.6 million at quarter-end; the company cautioned that actual remediation costs could differ materially. Recorded liabilities for legal matters, including asbestos claims, were $16.1 million. SunBelt’s three-year earn-out had a reported fair value of $44.9 million and no guaranteed minimum or maximum. Commodity hedges had a $14.3 million pretax loss if settled at quarter-end values; approximately $11.7 million of deferred losses were expected to be reclassified to earnings over the next 12 months if prices remained at those levels.
Important facts for investors to verify
- Separate recurring operating performance from the $181.4 million SunBelt remeasurement gain and its related tax impact; review the acquisition pro forma disclosures.
- Track ECU pricing, chlorine demand, operating rates, and whether the announced caustic soda price increase was realized.
- Assess Winchester’s metal-cost exposure, commercial demand, relocation spending, and timing of projected savings.
- Monitor liquidity, the October 2012 revolving-credit-facility expiry, debt maturities, and covenant compliance.
- Review environmental reserve adequacy and actual spending, restructuring costs, and SunBelt earn-out valuation and payments.