Olin Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Olin manufactures chlor-alkali products, distributes chemicals, and produces ammunition through its Chlor Alkali Products, Chemical Distribution, and Winchester segments.
Financial performance
- Third quarter: Sales were $593.6 million, down 11% from $670.7 million a year earlier. Gross margin was $101.3 million (17% of sales), versus $142.2 million (21%). Operating income fell to $57.3 million from $103.7 million; net income was $26.1 million versus $69.7 million, and diluted EPS was $0.33 versus $0.86.
- First nine months: Sales were $1,741.4 million, down 11% from $1,952.9 million. Gross margin was $310.1 million (18% of sales), versus $388.9 million (20%). Operating income was $177.9 million versus $251.8 million; net income was $92.9 million versus $153.9 million, and diluted EPS was $1.16 versus $1.90. 2014 net income includes $0.7 million after tax from a favorable resolution of indemnity obligations related to the former Metals business.
- Segment results, Q3 / nine months: Chlor Alkali Products income was $26.2 million / $101.3 million, down from $64.4 million / $173.1 million. Chemical Distribution earned $0.8 million / breakeven, versus $3.4 million / $9.7 million. Winchester earned $38.5 million / $109.9 million, versus $40.7 million / $109.1 million.
- Cash flow and investment: Nine-month operating cash flow was $99.5 million, down from $241.7 million, primarily due to lower earnings and an $80.3 million working-capital increase (versus $17.3 million in 2013). Capital expenditures were $49.7 million, versus $70.4 million. Cash and cash equivalents were $263.6 million at quarter-end, down $44.2 million from year-end 2013.
- Debt and liquidity: Total debt, including current installments, was $689.1 million, compared with $691.0 million at December 31, 2013. The company had $249.7 million available on its $265 million revolving facility after letters of credit; it reported compliance with covenants and no borrowing restrictions. Current assets were $857.0 million and current liabilities $391.6 million.
- Capital returns: Olin paid $47.4 million in dividends during the nine-month period and repurchased 1.7 million shares for $44.7 million. The quarterly dividend was $0.20 per share; a further $0.20 dividend was declared for payment in December 2014.
Material changes and unusual items
- Chlor Alkali Products drove much of the decline: lower caustic soda and other product prices and reduced chlorine and caustic soda volumes weighed on results. Q3 ECU netbacks were about $505, 11% below the prior-year quarter; the operating rate was 78%, versus 86%.
- Winchester’s Q3 income declined amid weaker shotshell and rifle demand, while nine-month income edged higher. Stronger pistol and rimfire demand continued, but its commercial backlog fell to $196.6 million at September 30 from $496.9 million at December 31, 2013.
- In August, Olin redeemed $150 million of 8.875% notes using proceeds from a new $150 million term loan. The redemption generated a $9.5 million Q3 interest charge for the call premium and write-off of debt issuance costs. Management anticipated approximately $10 million of interest savings in the first year after redemption.
- Prior-year comparisons include significant favorable items: a $11.0 million Chlor Alkali contract settlement and $13.9 million recovery of legacy legal costs in Q3 2013, as well as tax benefits that reduced the 2013 effective tax rate.
Outlook, risks, and contingencies
- Management projected Q4 2014 net income of $0.20–$0.25 per diluted share. It forecast slightly lower Q4 ECU netbacks than Q3, with Chlor Alkali segment income expected to improve sequentially on lower costs and better volumes, partly offset by lower netbacks. A $30-per-ton caustic soda increase had been announced, but its success was uncertain; most potential benefit would affect Q1 2015.
- Management expected 2014 capital spending of approximately $75 million, depreciation and amortization of approximately $140 million, an effective tax rate of 35%–37%, and environmental charges of approximately $10 million. Winchester’s centerfire relocation to Oxford, Mississippi was expected to finish by 2016; the project was forecast to save $35–$40 million annually when completed.
- Environmental reserves were $139.7 million at September 30, 2014; management estimated 2014 investigatory and remediation spending of approximately $20 million. The filing warns that evolving site conditions, regulation, and uncertainty over other responsible parties could increase costs and materially affect results or financial position.
- Recorded liabilities for legal actions, including asbestos-related matters, were $22.6 million. Olin said it did not believe these actions were reasonably likely to materially adversely affect its financial position, cash flows, or results. A separate EPA matter concerning alleged lead-emissions violations at the East Alton facility was settled: Olin paid a $110,000 penalty and completed equipment alterations at an immaterial cost.
- Other risks include cyclical chemical pricing and demand, energy and raw-material cost volatility, manufacturing outages, litigation and environmental exposure, pension sensitivities, and interest-rate and refinancing risks. Olin uses derivatives to hedge certain commodity and interest-rate exposures and stated it does not use them for speculation.
Important facts for investors to verify
- Whether caustic soda and chlorine prices, ECU netbacks, and Chlor Alkali operating rates stabilize or improve, and whether the announced price increase takes effect.
- Whether cash conversion recovers as seasonal working capital unwinds, given the sharp year-over-year decline in operating cash flow.
- Whether Winchester demand and backlog support the outlook, particularly as shotshell and rifle demand weakened.
- Execution, timing, and realized savings from the Winchester relocation and planned Chemical Distribution and Chlor Alkali co-product initiatives.
- Changes in environmental reserves and spending, legal exposures, floating-rate debt, and compliance with credit-facility covenants.