Olin Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Olin manufactures Chlor Alkali Products and Winchester ammunition and related products. Figures are unaudited; amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Sales | $405.7 | $383.0 | $767.7 | $783.6 |
| Gross margin | $58.0; 14% of sales | $71.0; 19% | $107.5; 14% | $165.4; 21% |
| Operating income | $22.1 | $35.1 | $41.8 | $95.8 |
| Net income | $16.9 | $27.8 | $31.0 | $74.5 |
| Diluted EPS | $0.21 | $0.36 | $0.39 | $0.96 |
| Operating cash flow | Not stated by quarter | $(6.3) | $30.8 |
- Q2 sales grew 6% year over year, but gross margin fell 18% and net income fell 39%. For the first half, sales declined 2%, gross margin fell 35%, and net income fell 58%.
- Reported effective tax rates were 32.9% for Q2 and 23.3% for the first half. Management also presents adjusted rates of 36.5% and 33.7%, respectively, after specified tax adjustments; see investor verification items below.
- At June 30, cash was $388.4, long-term debt was $402.3, and total liabilities were $1,110.0. Cash was $458.5 at December 31, 2009; debt was $398.4 then and $251.4 at June 30, 2009.
- Current assets were $840.1 and current liabilities $300.9. The company reported $224.2 available under its $240 revolving facility, but covenant limits reduced maximum additional borrowing capacity to approximately $147.0. Olin was in compliance with its credit covenants.
- Six-month cash decreased $70.1 to $388.4. Cash used in investing was $39.9 and cash used in financing was $23.9; operating cash use and dividends were significant cash demands.
Segments and material changes
- Chlor Alkali Products: Q2 sales increased 6% to $258.0, while segment income fell 45% to $26.1. Lower ECU netbacks outweighed higher volumes. The six-month segment income fell 68% to $36.7 as ECU netbacks declined 32% year over year; operating rates improved to 79% for the half from 67%.
- Winchester: Q2 sales increased 5% to $147.7 and segment income rose 10% to $21.1. First-half sales increased 2% to $279.1 and segment income rose 12% to $40.6. Higher military, law-enforcement and international shipments offset weaker domestic commercial demand.
- Interest expense rose to $6.2 in Q2 from $1.7 and to $13.1 for the half from $3.3, reflecting higher debt and reduced capitalized interest after completion of the St. Gabriel expansion. Equity earnings from affiliates, principally SunBelt, declined to $11.2 for the half from $25.8.
- Capital expenditures were $41.7 in the first half, down from $87.6. Inventory increased $39.2 and receivables increased $28.5 from year-end, contributing to working-capital use.
Outlook, risks and unusual items
- Management forecast Q3 2010 diluted EPS of $0.35–$0.40, compared with $0.50 in Q3 2009; the prior-year quarter included $44.3 of pretax environmental recoveries.
- Management expected Q3 Chlor Alkali earnings to improve sequentially with higher ECU netbacks and operating rates in the low-to-mid 80% range. Announced chlorine and caustic price increases were not assured; anticipated benefits, if realized, would begin in Q4.
- Winchester Q3 segment earnings were expected to decline from the prior-year record because of higher commodity costs. Management expected above-normal commercial demand to continue at least through Q3, but potentially not beyond it.
- Full-year 2010 capital spending was forecast at $70–$80, with depreciation of $85–$90. A high-strength bleach project was expected to cost $15–$20 and be completed in 2011.
- Environmental liabilities were $165.8, including $141.8 classified as noncurrent. Management expected full-year environmental charges, excluding prior-period recoveries, to be 15%–20% below 2009; timing and amounts of further recoveries were uncertain. Environmental exposures could materially affect results or financial position.
- Olin guaranteed $48.8 of SunBelt debt at June 30. Other risks include cyclical chlor-alkali prices and demand, commodity and energy costs, pension exposures, litigation, and the ability to maintain credit-covenant compliance. The company reported no material change in internal controls.
- Olin terminated its unused $75 accounts-receivable securitization facility during Q2. The board declared a $0.20-per-share dividend payable in September 2010.
Important facts for investors to verify
- Reconcile the reported Q2 and first-half effective tax rates of 32.9% and 23.3% with MD&A’s adjusted rates of 36.5% and 33.7%, including the tax benefits from statute expirations and valuation-allowance changes.
- Assess whether announced caustic soda and chlorine price increases were realized and whether ECU netbacks continued to improve after Q2.
- Track operating cash flow, seasonal working-capital needs, borrowing availability under leverage covenants, and the impact of dividends and planned capital spending.
- Review environmental reserve adequacy, expected remediation cash outlays, third-party recoveries, and the contingent SunBelt guarantee.
- Consider the difference between the strong Winchester results and management’s warning about commodity-cost pressure and possible normalization of commercial ammunition demand.