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AXLL > SEC Filings for AXLL > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for AXIALL CORP/DE/


7-Aug-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General

We are a leading North American manufacturer and international marketer of chemicals and building products. Our chlorovinyls and aromatics chemical products are sold for further processing into a wide variety of end-use applications, including plastic pipe and pipe fittings, siding and window frames, bonding agents for wood products, high-quality plastics, acrylic sheeting and coatings for wire and cable, paper, minerals, metals and water treatment industries. Our building products segment manufactures window and door profiles, mouldings, siding, pipe and pipe fittings and deck products.

Merger with PPG's Chemicals Business

On January 28, 2013, Axiall Corporation ("Axiall") completed a series of transactions resulting in the Merger with the chemicals business of PPG Industries, Inc. ("the Merged Business") and the related financings (collectively the "Transactions"). The operations of the Merged Business are included in our financial results from January 28, 2013, the closing date of the Merger.

The purchase price of the Merged Business of approximately $2.7 billion consists of: (i) shares of our common stock received by PPG shareholders valued at approximately $1.8 billion, based on the closing stock sale price of $50.24 on the last trade date prior to the closing date of the Merger; (ii) debt assumed of approximately $967.0 million; and (iii) the assumption of other liabilities, including pension liabilities and other post-retirement obligations. The final purchase price is subject to a settlement with PPG related to the final working capital of the Merged Business as of the date of acquisition.

In connection with the Transactions, through June 30, 2013 we have paid approximately $53.6 million in fees and expenses including: (i) approximately $30.3 million of debt issuance costs, of which approximately $19.3 million was deferred; and (ii) approximately $23.3 million of related professional and legal fees.

We expect to continue to incur significant costs in connection with the Transactions, including approximately $55.0 million in costs to attain Merger synergies. These costs are expected to include plant reliability improvement initiatives, transition and integration expenses, such as consulting professionals' fees, information technology implementation costs, relocation costs and severance costs, that management believes are necessary to realize approximately $115.0 million of annualized cost synergies within two years from the consummation of the Transactions. A portion of these costs may be capitalizable. During the three month period ended June 30, 2013, we incurred $11.3 million of the estimated $55.0 million in costs to attain Merger synergies of which $5.4 million and $5.9 million are included in transaction related costs and other, net and cost of sales, respectively in our unaudited condensed consolidated statements of income. During the six month period ended June 30, 2013, we incurred $12.0 million of the estimated $55.0 million in costs to attain Merger synergies of which $6.1 million and $5.9 million are included in transaction related costs and other, net and cost of sales, respectively in our unaudited condensed consolidated statements of income.

Consolidated Overview

For the three months ended June 30, 2013, net sales totaled $1,272.8 million, an increase of 47 percent compared to $867.7 million for the three months ended June 30, 2012. Operating income was $124.6 million for the three months ended June 30, 2013, an increase of $96.2 million from the $28.4 million of operating income for the three months ended June 30, 2012. Adjusted EBITDA was $197.9 million for the three months ended June 30, 2013 as compared to $54.3 million for the three

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months ended June 30, 2012. In addition, the company reported net income attributable to Axiall of $72.8 million, or $1.03 per diluted share for the second quarter of 2013, compared to net income attributable to Axiall of $13.6 million, or $0.39 per diluted share, for the second quarter of 2012. Excluding the items described in the Reconciliation of Non-GAAP Financial Measures on page 50 from the calculation of Net income attributable to Axiall, the company reported Adjusted Net Income of $84.0 million, and Adjusted Earnings Per Share of $1.19 for the second quarter of 2013, compared to Adjusted Net Income of $17.7 million, and Adjusted Earnings Per Share of $0.51 for the second quarter of 2012. See Reconciliation of Non-GAAP Financial Measures on page 50. These changes are primarily attributable to the inclusion of results of operations from the Merged Business since January 28, 2013, the closing date of the Merger.

For the six months ended June 30, 2013, net sales totaled $2,334.0 million, an increase of 35 percent compared to $1,727.6 million for the six months ended June 30, 2012. Operating income was $195.8 million for the six months ended June 30, 2013, an increase of $99.2 million from the $96.6 million of operating income for the six months ended June 30, 2012. Adjusted EBITDA was $331.3 million for the six months ended June 30, 2013 as compared to $129.8 million for the six months ended June 30, 2012. In addition, the company reported net income attributable to Axiall of $69.3 million, and Adjusted Earnings Per Share of $1.06 for the first six months of 2013, compared to net income attributable to Axiall of $48.9 million, and Adjusted Earnings Per Share of $1.40 for the first six months of 2012. The company reported Adjusted Net Income of $129.1 million, and Adjusted Earnings Per Share of $1.98 for the first six months of 2013, compared to Adjusted Net Income of $45.3 million, and Adjusted Earnings Per Share of $1.30 for the first six months of 2012. See Reconciliation of Non-GAAP Financial Measures on page 50. These changes are primarily attributable to the inclusion of results of operations from the Merged Business since January 28, 2013, the closing date of the Transactions.

Chlorovinyls Business Overview

Our chlorovinyls segment produces a highly integrated chain of chlor-alkali and derivative products (chlorine, caustic soda, VCM, vinyl resins, ethylene dichloride, chlorinated solvents, calcium hypochlorite, muriatic acid and phosgene derivatives) and compound products (vinyl compounds and compound additives and plasticizers). As discussed further below, certain highlights from our chlorovinyls segment results of operations for the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012 were as follows:

Net sales totaled $801.8 million and $339.8 million for the three months ended June 30, 2013 and 2012, respectively, increasing approximately 136 percent, principally due to the inclusion of sales results from the Merged Business.

Net sales totaled $1,416.3 and $669.3 million for the six months ended June 30, 2013 and 2012, respectively, increasing approximately 112 percent, also due to the inclusion of sales results from the Merged Business.

Operating income and Adjusted EBITDA increased to $118.2 million and $177.6 million, respectively during the three months ended June 30, 2013 versus operating income and Adjusted EBITDA of $34.5 million and $45.8 million, respectively, for the comparable period in the prior year. The increase was principally due to the inclusion of operating results from the Merged Business.

Operating income and Adjusted EBITDA increased to $209.4 million and $311.8 million, respectively during the six months ended June 30, 2013 versus operating income and Adjusted EBITDA of $86.4 million and $91.5 million, respectively, for the comparable period in the prior year. The increase was principally due to the inclusion of operating results from the Merged Business.

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Our chlorovinyls segment and the chemical industry in general are cyclical in nature and are affected by domestic and worldwide economic conditions. Cyclical price swings, driven by changes in supply and demand, can lead to significant changes in the overall profitability of our chlorovinyls segment. The demand for our chlorovinyls products tends to reflect fluctuations in downstream markets that are affected by consumer spending for durable and non-durable goods as well as construction. Global capacity also materially affects the prices of chlorovinyls products. Historically, in periods of high operating rates, prices rise and margins increase and, as a result, new capacity is announced. Since world scale size plants are generally the most cost-competitive, new increases in capacity tend to be on a large scale and are often undertaken by existing industry participants. Usually, as new capacity is added, prices decline until increases in demand improve operating rates and the new capacity is absorbed or, in some instances, until less efficient producers withdraw capacity from the market. As the additional supply is absorbed, operating rates rise, prices increase and the cycle repeats.

In addition, purchased raw materials and natural gas costs account for the majority of our cost of sales and can also have a material effect on our profitability and margins. Some of the primary raw materials used in our chlorovinyls products, including ethylene, are crude oil and natural gas derivatives and therefore follow the oil and gas industry price trends.

Building Products Business Overview

Our building products segment consists of two primary product groups: (i) window and door profiles and mouldings products, which include extruded vinyl window and door profiles and interior and exterior mouldings products; and (ii) outdoor building products, which includes siding, pipe and pipe fittings and deck products. Our vinyl-based building products are marketed under the Royal Building Products, Celect, Zuri, Korflo, Overture, S4S and Exterior Portfolio brand names. As discussed further below, certain highlights from our building products segment results of operations for the three and six month periods ended June 30, 2013 compared to the three and six month periods ended June 30, 2012 were as follows:

Net sales totaled $244.5 million and $252.4 million for the three months ended June 30, 2013 and 2012, respectively, decreasing approximately 3 percent primarily due to lower sales prices in Canada and overall consistent sales volumes between periods.

Net sales totaled $406.7 million and $439.6 million for the six months ended June 30, 2013 and 2012, respectively, decreasing approximately 7 percent primarily due to lower sales volumes in the six months ended June 30, 2013. The closure of the fence product line in March 2012 also contributed to lower sales in the six months ended June 30, 2013 versus the comparable period in the prior year.

Operating income and Adjusted EBITDA increased to $19.6 million and $28.2 million, respectively, for the three months ended June 30, 2013 compared to an operating income and Adjusted EBITDA of $15.4 million and $24.5 million, respectively for the three months ended June 30, 2012. This increase is primarily a result of lower conversion costs and lower selling, general and administrative costs.

Operating income and Adjusted EBITDA decreased to $5.8 million and $25.7 million, for the six months ended June 30, 2013 compared to an operating income and Adjusted EBITDA of $9.0 million and $27.8 million, respectively for the six months ended June 30, 2012. The decrease in operating income was primarily driven by lower sales volumes in the six months ended June 30, 2013.

The building products segment is impacted by changes in the North American home repair and remodeling sectors, as well as the new construction industry, which may be significantly affected by changes in economic and other conditions such as gross domestic product levels, employment levels, demographic trends, consumer confidence, increases in interest rates and availability of consumer

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financing for home repair and remodeling projects as well as the availability of financing for new home purchases. These factors can lower the demand for, and pricing of our products, while we may not be able to reduce our costs by an equivalent amount.

Aromatics Business Overview

Our aromatics segment is highly integrated and manufactures cumene products and phenol and acetone products (co-products made from cumene). As discussed further below, certain highlights of our aromatics segment results of operations for the three and six months ended June 30, 2013 were as follows:

Net sales were $226.5 million and $275.5 million for the three months ended June 30, 2013 and 2012, respectively, decreasing 18 percent, reflecting a 35 percent decrease in the sales volume of cumene (which reduced net sales by approximately $59 million), partially offset by an overall 5 percent increase in the average sales price for cumene, phenol and acetone. The decrease in the sales volume of cumene was primarily attributable to lower domestic contract sales volume for cumene and lower export demand for phenol and phenol derivatives, products for which cumene is a raw material. The higher sales prices were driven primarily by higher costs for the feedstock benzene.

Net sales were $511.0 million and $618.7 million for the six months ended June 30, 2013 and 2012, respectively, decreasing 17 percent, reflecting a 37 percent decrease in the sales volume of cumene and a 10 percent decrease in the sales volume for phenol and acetone, partially offset by a 16 percent increase in the average overall sales price for cumene, phenol and acetone. The higher sales prices were driven primarily by higher costs for the feedstocks propylene and benzene.

Operating income and adjusted EBITDA were $4.3 million and $4.6 million, respectively, for the three months ended June 30, 2013 compared to an operating loss and Adjusted EBITDA of $2.4 million and negative $2.0 million, respectively for the comparable period in the prior year. The increases in operating income and Adjusted EBITDA were primarily the result of a $5.1 million inventory holding loss in the second quarter of 2013 compared to a $13.7 million inventory holding loss during the second quarter of 2012.

Operating income and Adjusted EBITDA were $17.3 million and $17.8 million, respectively, for the six months ended June 30, 2013 compared to $35.2 million and $35.9 million, respectively for the six months ended June 30, 2012. The decreases in operating income and Adjusted EBITDA were primarily the result of a $0.1 million inventory holding loss in the first six months of 2013 versus a $6.8 million inventory holding gain and the benefit of opportunistic high margin export sales in the first six months of 2012.

Significant volatility in raw materials costs can decrease product margins as sales price increases sometimes lag raw materials cost increases. Product margins may also suffer from a sharp decline in raw materials costs due to the time lag between the purchase of raw materials and the sale of the finished goods manufactured using those raw materials.

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Results of Operations

The following table sets forth our unaudited condensed consolidated statements
of income data for each of the three and six month periods ended June 30, 2013
and 2012, and the percentage of net sales of each line item for the three and
six month periods presented.

                                 Three Months Ended June 30,                       Six Months Ended June 30,
(Dollars in millions)            2013                    2012                    2013                     2012
Net sales                $  1,272.8     100.0%    $  867.7     100.0%    $  2,334.0     100.0%    $  1,727.6     100.0%
Cost of sales               1,041.7      81.8%       780.9      90.0%       1,940.7      83.1%       1,537.3      89.0%

Gross margin                  231.1      18.2%        86.8      10.0%         393.3      16.9%         190.3      11.0%
Selling, general and
administrative
expenses                       97.7       7.7%        51.8       6.0%         176.0       7.5%          99.5       5.8%
Transaction related
costs and other, net            8.8       0.7%         6.6       0.8%          21.5       0.9%          11.6       0.7%
Gain on sale of
assets                            -         -%           -         -%             -         -%         (17.4 )    (1.0% )

Operating income              124.6       9.8%        28.4       3.2%         195.8       8.4%          96.6       5.6%
Interest expense, net         (19.4 )    (1.5% )     (14.5 )    (1.7% )       (37.7 )    (1.6% )       (28.9 )    (1.7% )
Foreign exchange gain
(loss)                          0.3         -%        (0.3 )       -%           0.4         -%          (0.4 )       -%
Loss on redemption
and other debt costs              -         -%           -         -%         (78.5 )    (3.4% )           -         -%
Gain on acquisition
of controlling
interest                          -         -%           -         -%          23.5       1.0%             -         -%
Less provision for
income taxes                   31.8       2.5%           -         -%          32.6       1.4%          18.4       1.1%

Consolidated net
income                         73.7       5.8%        13.6       1.5%          70.9       3.0%          48.9       2.8%
Less net income
attributable to
noncontrolling
interest                        0.9          -           -          -           1.6       0.1%             -       0.0%

Net income
attributable to
Axiall                   $     72.8       5.8%    $   13.6       1.5%    $     69.3       2.9%    $     48.9       2.8%

The following table sets forth certain financial data, by reportable segment, for each of the three and six month periods ended June 30, 2013 and 2012.

                                 Three Months Ended June 30,                      Six Months Ended June 30,
(Dollars in millions)            2013                    2012                   2013                    2012
Sales
Chlorovinyls products     $   801.8      63.0%    $  339.8      39.1%    $ 1,416.3      60.7%    $   669.3      38.8%
Building products             244.5      19.2%       252.4      29.1%        406.7      17.4%        439.6      25.4%
Aromatics products            226.5      17.8%       275.5      31.8%        511.0      21.9%        618.7      35.8%

Net sales                 $ 1,272.8     100.0%    $  867.7     100.0%    $ 2,334.0     100.0%    $ 1,727.6     100.0%

Operating income
Chlorovinyls products     $   118.2               $   34.5               $   209.4               $    86.4
Building products              19.6                   15.4                     5.8                     9.0
Aromatics products              4.3                   (2.4 )                  17.3                    35.2
Unallocated corporate         (17.5 )                (19.1 )                 (36.7 )                 (34.0 )

Total operating income    $   124.6               $   28.4               $   195.8               $    96.6

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Three Months Ended June 30, 2013 versus Three Months Ended June 30, 2012

Consolidated Results

Net sales. For the three months ended June 30, 2013, net sales totaled $1,272.8 million, an increase of 47 percent versus $867.7 million for the comparable quarter in the prior year. The net sales increase was primarily attributable to our chlorovinyls segment's inclusion of sales revenue from the Merged Business.

Gross margin percentage. Total gross margin percentage increased to 18 percent for the three months ended June 30, 2013 from 10 percent for the three months ended June 30, 2012. This increase was primarily attributable to higher caustic soda sales after the addition of the Merged Business, which resulted in the chlorovinyls segment contributing 14 percent to the total gross margin. During the three months ended June 30, 2013, the chlorovinyls segment's gross margin was negatively impacted by approximately $3.2 million for the fair value of inventory purchase accounting adjustment related to the Merger. Gross margin was also impacted by $5.9 million of costs to attain Merger synergies related to plant reliability improvement initiatives.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $97.7 million for the three months ended June 30, 2013, an 89 percent increase from $51.8 million for the three months ended June 30, 2012. The increase in selling, general and administrative expenses was primarily due to the Merged Business.

Transaction related costs and other, net. Transaction related costs and other, net, increased to $8.8 million for the three months ended June 30, 2013 primarily due to professional fees associated with the Transactions.

Operating Income. Operating income increased to $124.6 million for the three months ended June 30, 2013 from $28.4 million for the three months ended June 30, 2012, as a result of the reasons described above and in the discussion for each segment.

Interest expense, net. Interest expense, net increased to $19.4 million for the three months ended June 30, 2013 from $14.5 million for the three months ended June 30, 2012. The 34 percent increase in interest expense, net was primarily attributable to a higher overall average debt balance during the three months ended June 30, 2013, compared to the three month period ended June 30, 2012, partially offset by lower interest rates.

Provision for income taxes. The provision for income taxes was $31.8 million for the three months ended June 30, 2013. There were no provisions for income taxes for the three months ended June 30, 2012 primarily due to income tax expense on minimal pretax income being offset by a $3.3 million tax benefit for the reversal of uncertain tax positions during the quarter.

Our effective income tax rates for the three months ended June 30, 2013 and 2012 were a provision of 30.2 percent and a benefit of 0.1 percent, respectively. The difference in the tax rate as compared to the U.S. statutory federal income tax rate in 2013 was primarily due to various permanent differences including deductions for manufacturing activities. The difference in the tax rate as compared to the U.S. statutory federal income tax rate in 2012 was primarily due to income tax expense on a minimal pretax income, provisions for state tax and various permanent differences including deductions for manufacturing activities and the favorable impact of changes in uncertain tax positions ($3.3 million for the three months ended June 30, 2012).

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Chlorovinyls Segment

Net sales. Net sales totaled $801.8 million for the three months ended June 30, 2013, an increase of 136 percent versus net sales of $339.8 million for the comparable three month period in 2012. Our overall net sales increase was primarily due to the inclusion of sales from the Merged Business. The increase from the Merged Business was augmented by higher resin sales prices and sales volume. Our operating rates in the chlorovinyls segment for the quarter ended June 30, 2013 exceeded the IHS, Inc. ("IHS") published June year-to-date forecasted industry operating rates for both the chlorine/caustic and vinyl resins industries.

Operating income. Operating income increased by $83.7 million to $118.2 million for the three months ended June 30, 2013 from $34.5 million for the three months ended June 30, 2012. This operating income increase was due primarily to the impact of the Merged Business. Operating income was negatively impacted by approximately $3.2 million in fair value inventory purchase accounting adjustment related to the Transactions, which is reflected in the increased cost of sales. Operating income was also impacted by feedstock price fluctuations including increases in the cost of natural gas and ethylene for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The Adjusted EBITDA increase of $131.8 million to $177.6 million for the three months ended June 30, 2013 from $45.8 million for the three months ended June 30, 2012 was predominantly due to the same reasons as the increase in operating income offset by the impact of the $3.2 million in the fair value of inventory purchase accounting adjustment and additional depreciation and amortization expense from the fair value adjustments to property, plant and equipment and intangible assets related to the acquisition of the Merged Business. Operating income was also impacted by $5.9 million of costs to attain Merger synergies related to plant reliability improvement initiatives.

Building Products Segment

Net Sales. Net sales totaled $244.5 million for the three months ended June 30, 2013, decreasing 3 percent versus $252.4 million for the comparable three month period in 2012. On a constant currency basis, net sales were $246.1 million for the three months ended June 30, 2013, a decrease of 2 percent, compared to the three months ended June 30, 2012. The net sales decrease was driven by lower sales prices in Canada and overall consistent volumes in the three months ended June 30, 2013 compared to the three months ended June 30, 2012. For the second quarter of 2013, our Building Products segment's geographical sales to the U.S. and Canada were 47 percent and 52 percent respectively, compared with 46 percent and 53 percent for the second quarter of 2012.

Operating Income. Operating income was $19.6 million and $15.4 million for the three months ended June 30, 2013 and 2012, respectively, increasing $4.2 million, driven by improved conversion costs and lower selling, general and administrative expenses. Adjusted EBITDA increased to $28.2 million for the three months ended June 30, 2013 compared to an Adjusted EBITDA of $24.5 million for the three months ended June 30, 2012. This increase was predominantly due to the same reasons as the increase in operating income.

Aromatics Segment

Net Sales. Net sales were $226.5 million for the three months ended June 30, 2013, a decrease of 18 percent versus $275.5 million for the comparable three month period in 2012. The net sales decrease primarily resulted from a 22 percent decline in our overall sales volume driven by lower cumene sales volumes partially offset by higher phenol and acetone demand, in the second quarter of 2013 versus the second quarter of 2012. The sales volume decrease was also partially offset by an increase in average sales prices of 7 percent for cumene and 1 percent for phenol and acetone. The decrease in the sales volume of cumene was primarily attributable to lower domestic contract sales volume for cumene and

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lower export demand for phenol and phenol derivatives, products for which cumene is a raw material. The sales price increases reflected higher costs for the feedstock benzene.

Operating income. Operating income was $4.3 million and negative $2.4 million for the three months ended June 30, 2013 and 2012, respectively. The $6.7 million increase in operating income was due primarily to a lower inventory . . .

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