Olin Corporation — Q2 2012 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2012. Olin operates Chlor Alkali Products and Winchester. Comparisons are with the same 2011 periods unless noted.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $508.7 million | $529.1 million | $1,015.9 million | $965.1 million |
| Operating income | $70.3 million | $70.7 million | $139.5 million | $109.3 million |
| Net income | $47.6 million | $42.1 million | $86.3 million | $175.8 million |
| Diluted EPS | $0.59 | $0.52 | $1.07 | $2.18 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $68.4 million | $17.5 million |
- Gross margin was $117.3 million in Q2 and $231.6 million for the first half; gross margin as a share of sales was 23% in both periods, versus 22% and 20%, respectively, in 2011.
- Q2 segment income: Chlor Alkali Products $75.0 million (up from $72.8 million); Winchester $11.9 million (up from $11.8 million). First-half segment income was $149.4 million for Chlor Alkali (up from $118.0 million) and $22.7 million for Winchester (down from $24.3 million).
- First-half investing cash use was $115.6 million, including $145.8 million of capital expenditures. Financing cash use was $59.0 million. Cash declined $106.2 million during the half to $198.6 million.
- At June 30, cash was $198.6 million and restricted cash $25.4 million. Debt, including current installments, was $527.5 million. The company reported $232.3 million available under its revolving facility and said it was in compliance with debt covenants. Debt to total capitalization was 33.5%.
- Quarterly dividend was $0.20 per share; $32.0 million was paid in the first half. The company repurchased 0.2 million shares for $3.1 million during the half.
Material changes versus prior periods
- Q2 sales fell 4%, mainly on lower Chlor Alkali volumes; higher ECU netbacks and bleach and hydrochloric acid contributions helped lift gross margin. Chlor Alkali operating rate was 79%, versus 85% a year earlier.
- First-half sales rose 5%, helped by higher ECU pricing and a full six months of consolidated SunBelt results. Chlor Alkali ECU netbacks increased 7% year over year for the half.
- First-half net income fell sharply from 2011, which included a $181.4 million pretax gain on remeasurement of Olin’s prior SunBelt interest and a related $76.0 million deferred tax expense. The 2012 first-half results included no comparable gain.
- Winchester’s first-half income declined 7% as higher commodity and material costs, manufacturing costs, and centerfire relocation transition costs outweighed higher prices.
Outlook, commentary and risks
- Management forecast Q3 2012 diluted EPS of $0.40–$0.45, versus $0.58 in Q3 2011. The forecast excludes the proposed KA Steel acquisition and transaction costs.
- Q3 Chlor Alkali segment income was expected to decline from both Q2 2012 and Q3 2011, reflecting about $8 million of plant-outage and startup costs, seasonal electricity costs, and slightly lower ECU netbacks. Winchester income was expected to improve seasonally.
- Olin announced a $60-per-ton caustic soda price increase in Q2; management said the success was uncertain and most potential benefit would affect Q4. Third-quarter ECU netbacks were forecast slightly below Q2, partly due to lower chlorine prices.
- 2012 guidance included capital spending of about $240 million, depreciation of $105–$110 million, an effective tax rate of 34%–35%, and environmental charges of $10–$15 million. Management expected approximately $2 million of Q3 restructuring charges and about $8 million for 2012 restructuring related to the mercury-cell exit and Winchester relocation.
- On July 17, 2012, Olin agreed to acquire KA Steel for $328 million cash, subject to adjustments, regulatory approval, and other conditions; closing was expected by the end of Q3. The company expected to use cash and borrowings under its $265 million revolver.
- Strategic projects include converting Charleston from mercury-cell to membrane technology, reconfiguring Augusta, and expanding concentrated bleach capacity. Winchester’s centerfire relocation to Oxford was expected to reduce annual operating costs by about $30 million when completed; completion was forecast by the end of 2015.
- Environmental liabilities were $154.0 million at June 30, including $123.0 million classified as noncurrent. Olin estimated environmental-related cash outlays of $50–$70 million annually over the next several years and cautioned that remediation estimates are uncertain and adverse outcomes could materially affect results or financial position.
- Legal-action liabilities, including asbestos matters, were $19.6 million. Management did not believe these actions were reasonably likely to materially adversely affect near-term results or financial position. Other risks include commodity price and demand cycles, outages, energy and freight costs, litigation, environmental requirements, and debt-service or covenant pressures.
Important facts for investors to verify
- Whether the $328 million KA Steel acquisition closes as expected, its final financing mix, and its effect on debt and liquidity.
- Whether the announced caustic soda increase is realized and how ECU prices, volumes, and operating rates develop.
- Delivery, startup timing, costs, and expected savings from the Charleston, Augusta, bleach-capacity, and Winchester relocation projects.
- Environmental reserve adequacy and actual remediation spending, given the stated uncertainty and potential for future charges.
- How much of first-half earnings and the tax rate reflects the Section 45O credit, which was scheduled to expire December 31, 2012.