Olin Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Olin manufactures chlor-alkali products and sporting, military and industrial ammunition through its Chlor Alkali Products and Winchester segments. Comparisons are with Q1 2010 unless stated otherwise. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change or context |
|---|---|---|---|
| Sales | $436.0 | $362.0 | Up 20% |
| Gross margin | $76.8; 18% of sales | $49.5; 14% of sales | Up $27.3 |
| Operating income | $38.6 | $19.7 | Operating margin about 8.9% vs. 5.4% |
| Net income | $133.7 | $14.1 | Includes $181.4 pretax noncash SunBelt remeasurement gain |
| Diluted EPS | $1.66 | $0.18 | Reported EPS is materially affected by the SunBelt gain |
| Operating cash flow | $(27.0) | $(14.4) | Higher working capital use outweighed improved earnings |
| Capital expenditures | $25.6 | $21.4 | Full-year 2011 forecast: $235–$255 |
Cash and cash equivalents were $280.4 at March 31, down from $458.6 at year-end 2010. Restricted cash was $99.1, largely held for qualifying capital projects. Total debt, including current maturities, was $581.2, compared with $496.0 at year-end. The company reported $231.4 available under its $240 revolving credit facility and said it was compliant with debt covenants. Quarterly dividends were $0.20 per share.
Material changes and business drivers
- SunBelt acquisition: On February 28, Olin bought PolyOne’s remaining 50% interest for $132.3 cash, plus assumed a guarantee related to SunBelt debt. Olin now owns 100%. It consolidated $85.3 of remaining SunBelt note principal and recorded a three-year performance-based earn-out, valued at $42.5 at quarter-end. The preliminary purchase accounting included $327.9 of goodwill and remained subject to valuation adjustments.
- The $181.4 pretax gain arose from remeasuring Olin’s previously held 50% SunBelt interest; it was noncash and nonrecurring. A related $76.0 deferred tax expense was recorded. Reported effective tax rate was 39.2%; management cited approximately 35.2% after adjusting for the SunBelt gain and related discrete tax effects.
- Chlor Alkali Products: Segment sales rose to $299.4 from $230.6 and segment income to $45.2 from $10.6. Higher ECU netbacks and chlorine and caustic soda volumes contributed; the segment’s operating rate increased to 80% from 75%. Results include SunBelt’s pre-acquisition equity earnings and, after acquisition, consolidated results.
- Winchester: Sales increased to $136.6 from $131.4, but segment income declined to $12.5 from $19.5. Higher metals, materials and manufacturing costs, along with costs of relocating centerfire operations, outweighed higher sales and prices. Commercial customers bought ahead of announced price increases.
Outlook, risks and unusual items
- Management projected Q2 2011 net income of about $0.45 per diluted share, compared with $0.21 in Q2 2010. It expected Chlor Alkali Products income to exceed both Q1 2011 and Q2 2010, supported by higher netbacks and volumes and a full quarter of 100% SunBelt ownership.
- Olin had announced caustic soda increases totaling $150 per ton and a $60-per-ton chlorine increase; management cautioned that realization was uncertain. Winchester Q2 segment income was expected to decline more than 50% from Q2 2010, reflecting metals costs and product mix. Announced ammunition price increases were also not assured of success.
- Management forecast a 2011 effective tax rate of 36%–37%, capital spending of $235–$255, and depreciation near $100. It forecast 2011 environmental investigatory and remediation charges of about $25, excluding recoveries, and anticipated approximately $10 of pretax recoveries in Q2.
- Major projects include converting Charleston, Tennessee, mercury-cell capacity to membrane technology, reconfiguring Augusta, Georgia, and relocating Winchester centerfire operations to Oxford, Mississippi. The Charleston/Augusta work was expected to finish by end-2012; the Winchester relocation was forecast to reduce annual costs by about $30 once completed, but reduce 2011 segment income by $4–$5. Olin expected $31 of government grants toward Winchester relocation costs.
- Environmental liabilities were $166.1 at quarter-end; Olin warned that estimates and outcomes remain uncertain and charges may be material in 2011 and future years. Other principal risks include cyclical chlor-alkali pricing and demand, volatile energy and commodity costs, manufacturing interruptions, litigation, and debt-service and covenant exposure. Olin stated that it did not expect its recorded legal-action liabilities of $16.2 to materially adversely affect near-term results.
Important facts for investors to verify
- Separate recurring operating performance from the $181.4 noncash SunBelt remeasurement gain when assessing Q1 earnings and EPS; review the acquisition pro forma results, which exclude that gain.
- Track SunBelt’s finalized purchase-price allocation, earn-out assumptions and subsequent contribution to Chlor Alkali Products.
- Assess whether announced chlor-alkali and ammunition price increases are realized and whether higher input costs or weaker demand offset them.
- Monitor cash conversion and working capital, debt and revolving-credit availability, and planned 2011 capital spending.
- Review environmental remediation costs, the anticipated Q2 recoveries, and progress and costs of the facility conversion and Winchester relocation projects.