Olin Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Olin manufactures chlor-alkali products, distributes chemicals, and produces sporting and military ammunition.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $581.2 million | $550.2 million | $1,597.1 million | $1,515.3 million |
| Operating income | $53.5 million | $77.9 million | $193.0 million | $187.2 million |
| Net income | $28.7 million | $47.2 million | $115.0 million | $223.0 million |
| Diluted EPS | $0.35 | $0.58 | $1.42 | $2.76 |
| Gross margin as % of sales | 18% | 21% | 21% | 20% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $158.6 million | $112.4 million |
- Q3 sales rose 6%, but operating income fell 31% and net income fell 39%. Lower chlor-alkali prices and volumes weighed on results; the quarter also included $8.3 million of KA Steel acquisition costs.
- Nine-month sales increased 5% and operating income increased 3%. Net income declined substantially year over year, chiefly because 2011 included a $181.4 million pretax gain from remeasuring Olin’s existing SunBelt interest; the related 2011 tax expense was $76.0 million.
- Nine-month capital expenditures were $210.8 million, and cash used for acquisitions, net of cash acquired, was $312.3 million. Cash and cash equivalents declined $201.7 million to $103.1 million.
- At September 30, total debt, including current installments, was $726.7 million; cash was $103.1 million and restricted cash was $18.5 million. The company reported $233.3 million available under its $265 million revolving credit facility and said it was in compliance with debt covenants.
Segments and material developments
- Chlor Alkali Products: Q3 sales were $364.8 million versus $386.1 million, and segment income was $59.5 million versus $76.7 million. ECU netbacks were approximately $560, down from $595 a year earlier; operating rates were 83% versus 85%. Nine-month segment income increased to $208.9 million from $194.7 million.
- Chemical Distribution: Created following Olin’s August 22 acquisition of KA Steel for $338.5 million cash, subject to adjustments. The acquired business contributed $47.6 million of sales and $1.9 million of segment income after acquisition. Olin issued $200 million of 5.50% senior notes due 2022 to partially finance the transaction. Purchase-price valuations remained preliminary.
- Winchester: Q3 sales increased 3% to $168.8 million and segment income increased 22% to $16.0 million, supported by higher prices and lower commodity costs. Nine-month segment income was $38.7 million versus $37.4 million. Olin said its joint venture was not selected for the Lake City Army Ammunition Plant contract.
- Olin began operating the first new membrane cell room at Charleston, Tennessee, and discontinued mercury-cell chlor-alkali production at Augusta, Georgia. The second Charleston cell room was expected to start in Q4 2012.
Outlook, risks and contingencies
- Management projected Q4 2012 diluted EPS of $0.30–$0.35, versus $0.23 in Q4 2011. Chlor Alkali segment income was expected to increase slightly year over year, while Winchester segment income was expected to more than double from $0.5 million.
- Management forecast 2012 capital spending of $240–$250 million and 2013 spending $100–$140 million below 2012. Depreciation and amortization was expected to be about $110 million in 2012 and $130–$140 million in 2013.
- KA Steel synergies were estimated at $7–$10 million in the first year and about $35 million annually by the end of year three. The tax election was expected to provide cash tax benefits with a net present value of about $60 million.
- Environmental liabilities were $150.5 million at September 30. Management estimated annual environmental-related cash outlays of $50–$70 million over the next several years and warned that uncertain site conditions, regulations, and recoveries from other responsible parties could increase costs. Recorded legal liabilities, including asbestos-related matters, were $15.8 million; management did not expect these matters to materially affect near-term results.
- Other key risks include commodity price and demand cycles, customer outages and seasonal weakness, energy, raw-material and freight costs, manufacturing interruptions, environmental and litigation outcomes, pension assumptions, and debt-service or covenant capacity. Management’s forecasts are forward-looking and subject to these uncertainties.
Investor verification priorities
- Assess whether chlor-alkali pricing and volumes recover, and whether announced caustic soda price increases are realized.
- Track KA Steel integration, preliminary purchase accounting, synergy delivery, and the expected tax benefits.
- Monitor cash generation against elevated investment spending, the increase in debt, and revolving-credit availability.
- Check progress and costs for the Charleston conversion, bleach facilities, and Winchester relocation, including expected startup dates and restructuring charges.
- Review environmental reserve adequacy, future remediation cash outlays, and any changes in legal or tax contingencies.
- Interpret year-over-year nine-month earnings in light of the nonrecurring SunBelt remeasurement gain in 2011.