Olin Corporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Olin manufactures Chlor Alkali Products and Winchester ammunition and related products. Amounts are in millions except per-share data.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales | $432.8 | $397.0 | $1,200.5 | $1,180.6 |
| Gross margin | $66.3; 15% of sales | $80.6; 20% | $173.8; 14% | $246.0; 21% |
| Operating income | $33.3 | $50.6 | $75.1 | $146.4 |
| Net income | $31.8 | $39.4 | $62.8 | $113.9 |
| Diluted EPS | $0.40 | $0.50 | $0.79 | $1.46 |
| Operating cash flow | Not presented by quarter | $41.1 | $100.2 |
- Q3 segment performance: Chlor Alkali sales were $275.3 and segment income was $44.0, versus $228.8 and $3.9 in Q3 2009. Winchester sales were $157.5 and segment income was $18.8, versus $168.2 and $23.0.
- Nine-month segment performance: Chlor Alkali segment income fell to $80.7 from $120.2; Winchester segment income was $59.4 versus $59.1.
- Cash and debt at September 30: Cash and equivalents were $393.4. Debt was $386.9, including $1.8 current and $385.1 long-term. Total current assets were $852.8 and current liabilities $299.2.
- Liquidity and capital: $227.4 was available under the $240 revolving credit facility; Olin reported compliance with credit covenants. Debt to total capitalization was 31.1%, down from 32.6% at year-end 2009. Dividends were $0.20 per share per quarter.
Changes versus comparable periods
- Q3 sales rose 9% year over year, driven by Chlor Alkali pricing and volume; Winchester sales declined 6%. Nine-month sales increased 2%.
- Q3 gross margin declined $14.3, principally because environmental recoveries from third parties were $44.1 lower than in Q3 2009. Nine-month gross margin fell $72.2, including a $39.5 adverse impact from lower environmental recoveries.
- Chlor Alkali improved sharply in Q3: operating rate was 91% versus 74% a year earlier, and the segment cited higher ECU netbacks, volumes, lower costs, and stronger affiliate earnings. For the nine months, lower ECU netbacks and affiliate earnings more than offset higher volumes.
- Winchester Q3 earnings declined 18%, reflecting lower volumes, less favorable product mix, and higher material costs. Nine-month segment income was broadly unchanged as improved pricing and lower input costs offset mix and operating-cost pressure.
- Nine-month operating cash flow fell $59.1 to $41.1, primarily due to lower earnings. Working capital increased $63.9; receivables rose $47.8 and inventories $33.5 from December 31, 2009.
- Interest expense increased to $6.4 in Q3 from $1.9 and to $19.5 for nine months from $5.2, reflecting higher debt and less capitalized interest, partly offset by lower interest rates in the nine-month comparison.
Outlook, commentary, and notable items
- Management projected Q4 2010 net income of breakeven to $0.05 per diluted share, compared with $0.28 in Q4 2009. The prior-year quarter included $37.0 of pretax environmental recoveries.
- Q4 Chlor Alkali segment earnings were expected to improve substantially from Q4 2009 but decline sequentially from Q3 2010. Seasonal demand and planned maintenance outages at four plants were expected to weigh on results; outages were forecast to reduce Q4 segment earnings by $4–$6 million. The operating rate was forecast in the mid-70% range.
- Management anticipated Q4 ECU netbacks would improve sequentially, but noted that the success and timing of announced caustic soda price increases were uncertain. Winchester Q4 segment earnings were expected around breakeven due to typical seasonal weakness and higher commodity prices.
- 2010 capital spending was forecast at $70–$80, versus $137.9 in 2009; depreciation was forecast at $85–$90. A low-salt, high-strength bleach project at McIntosh was expected to cost $17–$20 and be completed in 2011.
- In October 2010, Olin arranged up to $70 of tax-exempt bonds due 2024 and drew $15. Proceeds are restricted to McIntosh capital projects; the borrowing rate fluctuates with LIBOR. Olin also redeemed $18.9 of industrial revenue bonds in September and expected to redeem another $1.8 in Q4.
- Environmental reserves were $170.5 at September 30, including $146.5 classified as noncurrent. Management expected 2010 environmental charges of about $20 and annual environmental-related cash outlays of approximately $50–$70 over the next several years. Estimates and recoveries are uncertain, and adverse outcomes could materially affect results or financial position.
- Other exposures include cyclical commodity pricing and demand, energy and freight costs, plant outages, environmental and asbestos-related litigation, and pension and interest-rate risks. Olin guaranteed $48.8 of SunBelt notes; payment could be required if SunBelt cannot meet its obligations.
- Tax items materially affected reported rates: the Q3 reported effective tax rate was 18.0%, while management cited 36.9% excluding specified favorable tax adjustments. The nine-month reported rate was 20.7%, versus 35.5% after specified favorable items. Gross unrecognized tax benefits were $42.4; about $9.6 was expected to decrease over the next 12 months.
Important facts for investors to verify
- Whether Chlor Alkali price increases translated into realized netbacks and earnings, and whether fourth-quarter outages and seasonal weakness matched management’s forecasts.
- Whether the sharp year-over-year comparison in environmental recoveries obscures underlying operating trends; review reserve adequacy and timing of any further recoveries.
- Whether working-capital needs and cash generation improved, given nine-month operating cash flow of $41.1 and the $63.9 working-capital increase.
- Whether Winchester demand, product mix, and the proposed evaluation of relocating approximately 1,000 East Alton jobs affected future costs or operations.
- Debt and liquidity after the October bond draw, floating-rate exposure, revolving-facility availability and covenants, and the SunBelt guarantee.
- Potential revisions to environmental estimates, tax contingencies, and pension assumptions; the filing states these matters involve material uncertainty.