Olin Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Olin manufactures chlor-alkali products, distributes chemicals, and produces ammunition through its Chlor Alkali Products, Chemical Distribution, and Winchester segments. Figures are unaudited and in millions of dollars unless noted.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Sales | $577.4 | $630.0; down 8% |
| Gross margin | $102.0; 17.7% of sales | $125.6; 19.9% of sales |
| Operating income | $57.2 | $74.4 |
| Net income / diluted EPS | $29.5 / $0.37 | $40.5 / $0.50 |
| Operating cash flow | $(6.9) | $(1.2) |
| Capital expenditures | $18.6 | $30.2 |
| Cash and cash equivalents | $242.9 | $93.0 at March 31, 2013; $307.8 at December 31, 2013 |
| Total debt, including current installments | $690.1 | $701.5 at March 31, 2013 |
| Shareholders’ equity | $1,107.6 | $1,024.6 at March 31, 2013 |
Interest expense was $9.7, versus $9.1 a year earlier. The effective tax rate was 38.8%, including $1.6 of expense from increased valuation allowances on certain state tax credit carryforwards; excluding that item, management reported a 35.5% rate. The quarterly dividend was $0.20 per share.
Cash declined $64.9 during the quarter. Working capital increased $67.9, including a $50.9 rise in receivables and a $13.2 decrease in accounts payable and accrued liabilities. Management attributed operating cash use to lower earnings and higher cash tax payments, partly offset by a smaller working-capital increase than in Q1 2013.
At March 31, cash was $242.9, restricted cash was $3.6, and $235.2 was available under the $265 revolving credit facility. Total borrowings were $690.1, of which $155.9 was at variable rates. Olin reported compliance with credit covenants and no borrowing restrictions at quarter-end.
Changes versus the prior-year quarter
- Chlor Alkali Products: Sales were $328.3 versus $348.9 and segment income was $34.3 versus $58.5. Lower caustic soda and hydrochloric acid prices, reduced chlorine and caustic soda volumes, and $5.5 of unusual winter-weather costs weighed on results. The operating rate fell to 79% from 85%; two facilities had multi-day weather-related electricity curtailments. ECU netbacks were approximately $520, down 8% year over year.
- Chemical Distribution: Sales fell to $69.2 from $110.4 and the segment recorded a $0.8 loss versus $4.1 income. Lower caustic soda volumes and margins and weather-related operating costs contributed to the decline.
- Winchester: Sales rose to $200.6 from $188.0 and segment income increased to $38.3 from $31.3. Higher volumes and selling prices drove improvement. Commercial demand remained elevated, though backlog declined to $421.2 from $496.9 at December 31, 2013.
- Consolidated sales fell $52.6, while lower selling and administrative expenses and improved Winchester results partly offset weakness in the chemical segments. Q1 2013 included $2.2 of SunBelt earn-out expense that did not recur in Q1 2014.
Outlook, risks and unusual items
- Management projected Q2 2014 net income of $0.40–$0.45 per diluted share, compared with $0.54 in Q2 2013. Chlor Alkali segment earnings were expected below the prior-year quarter; Chemical Distribution earnings were expected to be similar to Q2 2013’s $2.2.
- Management expected Q2 2014 Winchester earnings below Q2 2013’s $37.1, citing more typical seasonal shotshell demand and reduced pistol, rifle, and rimfire inventory. It anticipated elevated commercial demand through Q3 2014.
- Announced chlorine and caustic soda price increases were $50 per ton each; success was uncertain, and most benefit, if realized, was expected in Q3. Q2 ECU netbacks were forecast above Q1 levels, reflecting expected caustic soda improvement partly offset by lower chlorine prices.
- Full-year 2014 outlook included capital spending of $85–$95, depreciation and amortization of $135–$140, an effective tax rate of 35%–37%, and environmental expense of $15–$20. Management expected Winchester relocation savings of $22–$26 in 2014 and approximately $35–$40 annually once the relocation is complete, forecast for 2016.
- Environmental reserves were $144.9 at March 31; Q1 environmental charges were $3.5, and management expected these costs to remain material. The filing cautions that remediation estimates are uncertain and unfavorable outcomes could materially affect results or financial position.
- Accrued liabilities for legal actions, including asbestos-related proceedings, were $19.3. Management did not believe those matters were reasonably likely to materially adversely affect financial position, cash flows, or results.
- Other items to monitor include $9.8 of remaining restructuring accruals, approximately $2 of additional chlor-alkali restructuring charges expected through 2014, and approximately $5 of Winchester relocation-related restructuring charges expected through 2016. A $10.0 contingent liability was recorded for withdrawal from a multi-employer pension plan related to the KA Steel acquisition.
- Commodity prices, energy and transportation costs, operating disruptions, cyclicality and supply-demand changes, environmental and litigation costs, pension assumptions, and access to capital are identified risks. Olin uses derivatives to manage commodity and interest-rate exposures and states that it does not use them for speculative purposes.
Important facts for investors to verify
- Whether announced caustic soda and chlorine price increases took effect and improved subsequent ECU netbacks and segment earnings.
- Whether weather-related disruptions and costs abated, and whether Chlor Alkali operating rates and Chemical Distribution volumes recovered.
- Whether Winchester demand, backlog, and earnings followed management’s seasonal and Q3 expectations, and whether relocation savings and timing remained on plan.
- Actual operating cash flow, working-capital movements, capital expenditures, and availability under the revolving credit facility.
- Changes in environmental reserves, remediation spending, legal exposure, and the KA Steel multi-employer pension liability.
- Execution of the April 24, 2014 authorization for repurchases of up to 8 million shares and the sustainability of the $0.20 quarterly dividend.