Olin Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Olin operates Chlor Alkali Products, Chemical Distribution, and Winchester. Results include KA Steel, acquired in August 2012; comparisons with 2012 are therefore affected by the additional period of ownership in 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $670.7 million | $581.2 million | $1,952.9 million | $1,597.1 million |
| Gross margin | $142.2 million; 21% of sales | $105.4 million; 18% | $388.9 million; 20% | $337.0 million; 21% |
| Operating income | $103.7 million | $53.5 million | $251.8 million | $193.0 million |
| Net income | $69.7 million | $28.7 million | $153.9 million | $115.0 million |
| Diluted EPS | $0.86 | $0.35 | $1.90 | $1.42 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $241.7 million | $156.7 million |
- Cash, debt, and liquidity: September 30 cash was $283.8 million. Debt, including current installments, was $703.0 million, or approximately $419 million net of cash. The current ratio was approximately 2.1 (current assets $877.1 million; current liabilities $426.1 million). Olin reported $233.7 million available under its revolving credit facility and compliance with debt covenants.
- Cash uses and investment: Nine-month capital expenditures were $70.4 million; dividends were $48.1 million; share repurchases were $28.8 million. Cash increased $118.6 million from year-end 2012. Management expected full-year 2013 capital spending of approximately $100 million.
- Interest and taxes: Q3 interest expense was $9.9 million versus $6.0 million; nine-month expense was $28.7 million versus $18.3 million. Reported effective tax rates were 25.1% for Q3 and 29.9% year to date, including tax benefits; excluding specified Q3 benefits, management cited a 36.6% rate.
Material changes and segment results
- Q3 sales rose 15%, while nine-month sales increased 22%. Chemical Distribution growth largely reflects the additional ownership period for KA Steel; Winchester also grew substantially. Chlor Alkali sales were broadly flat.
- Winchester: Segment income rose to $40.7 million in Q3 from $16.0 million and to $109.1 million for nine months from $38.7 million. Higher commercial ammunition volumes and prices, plus lower costs, drove the improvement. Commercial backlog reached $438.9 million, versus $138.3 million at year-end 2012.
- Chlor Alkali Products: Q3 segment income increased to $64.4 million from $59.5 million, including an $11.0 million favorable contract settlement. Nine-month income declined to $173.1 million from $208.9 million, reflecting higher operating and electricity costs, lower prices and lower volumes, partly offset by that settlement.
- Chemical Distribution: Segment income was $3.4 million for Q3 and $9.7 million year to date, compared with $1.9 million in each comparable 2012 period. Management expected approximately $35 million in annual KA Steel synergies by the end of three years.
- Q3 net income also benefited from a $13.9 million recovery of legacy legal costs recorded as a reduction to selling and administrative expense. Together, the contract settlement and legal-cost recovery are significant non-routine contributors to reported Q3 results.
Outlook, risks, and unusual items
- Management projected Q4 2013 diluted EPS of $0.25–$0.30, including an expected pretax gain of approximately $5 million on the bleach joint-venture interest sale and approximately $5 million of favorable tax adjustments. The October sale agreement was expected to produce a roughly $4 million tax benefit in addition to the gain.
- Management expected Q4 Chlor Alkali earnings to decline year over year because of lower ECU pricing and reduced chlorine and caustic soda shipments. Q4 ECU netbacks were forecast below Q3; the announced $30-per-ton caustic soda price increase had not been successful as of the filing.
- Winchester earnings were expected below Q3 levels because of seasonal weakness, but above Q4 2012. Management expected unusually high commercial demand to continue into the first half of 2014. The Oxford, Mississippi relocation was expected to be completed by 2016 and ultimately reduce annual operating costs by approximately $35–$40 million.
- Environmental liabilities were $143.0 million at September 30, 2013. Management expected full-year environmental charges of $9–$12 million and warned that remediation estimates are uncertain and could change materially. It also expected approximately $15 million of 2013 environmental spending.
- Other risks include cyclical chemical prices and demand, energy and raw-material costs, operating interruptions, litigation, environmental obligations, pension exposures, and debt-market or interest-rate changes. The filing reported no material changes in internal control over financial reporting.
Key facts for investors to verify
- How much of Q3 earnings growth is repeatable after excluding the $11.0 million contract settlement, $13.9 million legal-cost recovery, and tax benefits?
- Whether Winchester’s unusually large commercial backlog converts to shipments and earnings as expected, and how long elevated demand persists.
- Whether Chlor Alkali pricing, product volumes, and energy costs improve or weaken against management’s Q4 expectations.
- Progress toward KA Steel synergies and Winchester relocation savings, alongside planned capital spending.
- Environmental reserve adequacy, remediation spending, and the company’s ability to maintain liquidity and covenant compliance through seasonal and cyclical working-capital swings.