Olin Corporation — Q2 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2013. Olin operates Chlor Alkali Products, Chemical Distribution, and Winchester. Chemical Distribution reflects the KA Steel acquisition completed in August 2012, making year-over-year comparisons less directly comparable.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $652.2 million | $508.7 million | $1,282.2 million | $1,015.9 million |
| Gross margin | $121.1 million; 18.6% | $117.3 million; 23.0% | $246.7 million; 19.2% | $231.6 million; 22.8% |
| Operating income | $73.7 million | $70.3 million | $148.1 million | $139.5 million |
| Net income | $43.7 million | $47.6 million | $84.2 million | $86.3 million |
| Diluted EPS | $0.54 | $0.59 | $1.04 | $1.07 |
- Q2 sales grew 28%, while net income declined about 8%. Six-month sales rose 26%, but net income fell about 2%.
- For the six months, operating cash flow was $91.8 million, versus $68.4 million a year earlier. Investing cash outflow was $47.4 million, including $54.6 million of capital expenditures; financing cash outflow was $68.0 million. Cash ended the period at $141.6 million.
- At June 30, cash was $141.6 million and total debt, including current installments, was $701.3 million. The company reported $233.4 million available under its revolving credit facility and said it was in compliance with debt covenants. Current assets were $793.9 million and current liabilities were $437.0 million.
- Quarterly dividend was $0.20 per share; $32.1 million of dividends were paid in the first half. Olin repurchased 0.6 million shares for $14.7 million in that period.
Material changes and segment performance
- Chlor Alkali Products: Q2 segment income fell to $50.2 million from $75.0 million; first-half income fell to $108.7 million from $149.4 million. Management cited planned maintenance and start-up costs, higher electricity costs associated with natural gas prices, lower product prices (particularly hydrochloric acid), and lower volumes. Q2 operating rate was 84%, compared with 79% a year earlier.
- Winchester: Q2 segment income increased to $37.1 million from $11.9 million; first-half income rose to $68.4 million from $22.7 million. Higher commercial shipments and selling prices drove the improvement. Commercial backlog reached $523.0 million at June 30, versus $138.3 million at December 31, 2012.
- Chemical Distribution: Segment income was $2.2 million in Q2 and $6.3 million for the first half, including acquisition-related depreciation and amortization. Olin expects approximately $35 million in annual synergies by the end of three years after acquiring KA Steel.
- Consolidated gross margin as a percentage of sales fell to 18.6% from 23.0% in Q2, as Winchester and the acquired distribution business did not fully offset lower Chlor Alkali profitability and the changed sales mix.
- Interest expense increased to $9.7 million in Q2 from $5.8 million, mainly because of higher debt and lower capitalized interest. The company repaid $11.4 million of 6.5% notes in January 2013.
Outlook, risks and unusual items
- Management projected Q3 2013 diluted EPS of $0.65–$0.70, versus $0.35 in Q3 2012. It expected Chlor Alkali earnings to improve year over year, including an approximately $10 million favorable customer-contract settlement, and Winchester earnings to be slightly below Q2 because of planned maintenance.
- Olin expected higher-than-normal Winchester commercial demand to continue at least through Q4 2013. It also noted that realization of a further $40-per-ton caustic soda price increase was uncertain; most benefit, if achieved, would affect Q4.
- For 2013, management expected capital spending of $100–$120 million, depreciation and amortization of $135–$140 million, and an effective tax rate of 35%–37% before favorable adjustments. It forecast $9–$12 million of environmental expense and approximately $7 million of restructuring charges for the year.
- Environmental liabilities were $144.5 million at June 30, including $123.5 million classified as noncurrent. Management said environmental charges could remain material and that adverse outcomes or higher remediation costs could materially affect results or financial position. Legal-action liabilities, including asbestos matters, were $15.1 million; management did not believe those actions were reasonably likely to have a material adverse effect.
- Other exposures include cyclical Chlor Alkali pricing, volatile energy and raw-material costs, manufacturing interruptions, pension assumptions, and debt-service and covenant risks. Gross unrecognized tax benefits were $41.0 million; management said approximately $11.1 million could decrease over the next twelve months.
- Subsequent to quarter-end, Olin reported a customer-contract settlement expected to generate an approximately $10 million pretax Q3 gain and a railcar sale/leaseback that generated approximately $33 million in proceeds. These are not included in Q2 results.
Important facts for investors to verify
- Whether the announced caustic soda price increases are realized and improve Chlor Alkali margins, and whether higher energy and maintenance costs persist.
- Whether Winchester’s unusually high backlog converts to shipments and earnings, and how demand develops after the stated period of elevated demand.
- Progress toward KA Steel’s projected synergies and the segment’s profitability after acquisition-related amortization.
- Environmental reserve adequacy and the ultimate cost and timing of remediation, as well as resolution of the KA Steel multi-employer pension withdrawal liability.
- Working-capital cash needs, especially receivables, planned capital spending, and ongoing capacity to fund dividends, repurchases, and debt service.