Olin Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless stated otherwise. Olin operates Chlor Alkali Products, Chemical Distribution, and Winchester. Chemical Distribution includes KA Steel, acquired in August 2012, so reported revenue growth includes an acquisition-related contribution.
Financial performance and liquidity
- Sales: $630.0 million, up 24% from $507.2 million. The new Chemical Distribution segment contributed $110.4 million; Chlor Alkali sales declined 3%, while Winchester sales increased 27%.
- Profit: Operating income was $74.4 million versus $69.2 million; net income was $40.5 million versus $38.7 million. Diluted EPS was $0.50 versus $0.48. Interest expense rose $2.6 million to $9.1 million, primarily due to higher debt.
- Margins: Gross margin was $125.6 million, or 20% of sales, compared with $114.3 million, or 23%. The filing attributes the percentage decline largely to lower Chlor Alkali prices and volumes, despite stronger Winchester results and the acquired distribution business.
- Cash flow: Operating cash flow was negative $1.2 million, versus positive $4.4 million. Working capital increased $83.4 million; receivables rose $65.7 million from year-end, primarily reflecting higher first-quarter sales. Capital expenditures were $30.2 million, and cash declined $72.2 million to $93.0 million.
- Debt and liquidity: Long-term borrowings, including current installments, were $701.5 million at March 31, 2013, versus $713.7 million at year-end 2012. Cash was $93.0 million and restricted cash was $10.7 million. Olin reported $228.8 million available under its $265 million revolving facility and compliance with its debt covenants. The 2013 Notes of $11.4 million were repaid in January.
- Capital returns: The quarterly dividend was $0.20 per share; $16.0 million was paid. Olin repurchased 0.2 million shares for $4.6 million during the quarter.
Material changes and segment results
- Chlor Alkali Products: Segment income fell to $58.5 million from $74.4 million, mainly due to lower prices and volumes. ECU netbacks were approximately $565, down about 3% year over year. Operating rate was 85%, compared with 80%, reflecting capacity reductions made in late 2012.
- Chemical Distribution: Segment income was $4.1 million, including $3.8 million of depreciation and amortization, primarily related to KA Steel acquisition accounting. Olin cited $2.9 million of realized synergies transferred to the segment.
- Winchester: Segment income rose to $31.3 million from $10.8 million, supported by stronger commercial and law-enforcement shipments, higher prices, and lower costs associated with the Oxford, Mississippi operation. Commercial backlog was $495.5 million at March 31, versus $138.3 million at December 31, 2012; some orders may be canceled.
- Acquisition and restructuring: KA Steel was acquired for $336.6 million cash; the filing reports $119.7 million of goodwill and a preliminary $10.0 million contingent pension-withdrawal liability. Q1 restructuring charges were $2.3 million. Olin expected approximately $5 million of additional Chlor Alkali restructuring charges through 2013 and approximately $9 million through 2016 for the Winchester relocation.
Outlook, risks, and contingencies
- Near-term outlook: Management projected Q2 2013 diluted EPS of $0.45–$0.50, versus $0.59 in Q2 2012. Chlor Alkali earnings were expected to decline year over year, while Chemical Distribution earnings were expected to improve seasonally and Winchester earnings were expected to be similar to Q1.
- Full-year expectations: Olin forecast 2013 capital spending of $100–$130 million, depreciation and amortization of $135–$140 million, and an effective tax rate of 35%–37%. It anticipated more than $10 million of KA Steel synergies in 2013 and approximately $35 million annually by the end of three years. Winchester’s elevated commercial demand was expected to continue at least into Q4 2013, subject to demand and backlog conversion.
- Environmental exposure: Environmental reserves were $145.5 million at March 31, 2013. Management expected 2013 environmental charges of $15–$20 million and estimated approximately $21 million of 2013 investigatory and remediation spending. The filing warns estimates are uncertain and adverse outcomes could materially affect results or financial position.
- Other risks: Results are exposed to cyclical Chlor Alkali supply, demand, and pricing; commodity, energy, freight, and interest-rate movements; plant outages and execution of restructuring projects; litigation; and pension and financing risks. Recorded liabilities for legal actions, including asbestos matters, were $14.6 million; management did not believe these matters were reasonably likely to have a material adverse effect.
Important facts for investors to verify
- Whether announced $50-per-ton caustic soda and $60-per-ton chlorine price increases were realized, and how ECU netbacks and Chlor Alkali profitability developed.
- Whether Winchester’s unusually large commercial backlog converted to shipments and earnings, including the extent of cancellations and sustainability of demand.
- Actual KA Steel synergy realization, integration costs, and any final adjustment to the acquisition-related pension-withdrawal liability.
- Environmental reserve adequacy and actual remediation charges and cash outlays relative to management’s estimates.
- Working-capital and operating cash-flow trends, capital spending, and debt and revolver capacity as seasonal needs fluctuate.