Olin Corporation — 2013 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2013; the filing also provides unaudited quarterly results. Olin operates Chlor Alkali Products, Chemical Distribution and Winchester. These businesses represented approximately 54%, 16% and 30% of 2013 sales, respectively. Chemical Distribution includes KA Steel, acquired in August 2012, so 2013 results include a full year of ownership versus only part of 2012.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Sales | $2,515.0 million | $2,184.7 million |
| Gross margin | $481.3 million; 19% of sales | $436.7 million; 20% of sales |
| Operating income | $286.5 million | $258.9 million |
| Net income | $178.6 million | $149.6 million |
| Diluted EPS | $2.21 | $1.85 |
| Cash from operations | $317.0 million | $279.2 million |
| Capital expenditures | $90.8 million | $255.7 million |
- Sales rose 15% and net income rose 19%. Winchester’s strong commercial demand and KA Steel’s additional period of ownership drove much of the sales increase.
- Segment income: Chlor Alkali Products $203.8 million, down from $263.2 million; Chemical Distribution $9.7 million, up from $4.5 million; Winchester $143.2 million, up from $55.2 million.
- Chlor Alkali ECU netbacks averaged about $560, down 3% from 2012. Fourth-quarter netbacks fell to about $525 amid weaker chlorine and caustic soda demand. Chlor Alkali operating rates were 84% for 2013 versus 80% in 2012.
- Cash and cash equivalents were $307.8 million at year-end; restricted cash was $4.2 million. Olin reported $233.4 million available under its $265 million revolving credit facility. Current ratio was 2.1.
- Total debt was $691.0 million, or 38.6% of total capitalization, down from 41.7% in 2012. Interest expense increased to $38.6 million from $26.4 million. Debt due within one year was $12.6 million; $143.7 million of maturities were scheduled for 2016.
- Quarterly 2013 fourth-quarter sales were $562.1 million, net income $24.7 million and diluted EPS $0.31, compared with $587.6 million, $34.6 million and $0.43, respectively, in fourth-quarter 2012.
Material changes and notable items
- Winchester’s 2013 segment income reached its highest level in at least two decades, supported by higher volumes and prices. Commercial demand surged from late 2012; contracted backlog was $532.4 million as of January 31, 2014, with about 98% expected to be filled during 2014. Commercial backlog orders may be canceled.
- Chlor Alkali segment income declined mainly because of lower hydrochloric acid and chlorine prices, planned maintenance outages, higher electricity costs and depreciation. An $11.0 million favorable contract settlement partly offset these effects.
- 2013 included a $6.5 million gain from selling an equity interest in a bleach-related joint venture and a $13.9 million reduction in selling and administration expense from recovery of legacy legal costs. The effective tax rate was 28.6%, including specified tax benefits; excluding five identified tax items, management reported an effective rate of 36.0%.
- Cash from operations increased, while capital spending fell substantially following completion of major chlor-alkali conversion and bleach-capacity projects. Olin also received $35.8 million from equipment sale-leasebacks and repurchased $36.2 million of shares.
- The Winchester centerfire relocation to Oxford, Mississippi continued. Management forecast total annual operating cost reductions of $35–$40 million when complete, expected by the end of 2016; projected savings for 2014 were $24–$26 million.
Outlook, risks and contingencies
- Management projected first-quarter 2014 diluted EPS of $0.30–$0.35, versus $0.50 in first-quarter 2013. Chlor Alkali earnings were expected to decline year over year; Winchester earnings were expected to increase.
- Management forecast lower first-quarter 2014 ECU netbacks than fourth-quarter 2013, citing lower caustic soda prices partly offset by higher chlorine prices. Winter weather had caused power curtailments, logistics disruption, shipment delays and higher costs affecting Chlor Alkali and Chemical Distribution.
- For 2014, management expected capital spending of $95–$105 million, depreciation and amortization of $135–$140 million, an effective tax rate of 35%–37%, environmental investigatory and remedial charges of $15–$20 million, and total environmental cash outlays of about $50 million.
- Environmental liabilities were $144.6 million at year-end, with an additional reasonably possible contingent exposure estimated at $40 million. Environmental spending and outcomes remain uncertain. Recorded liabilities for legal actions, including asbestos-related claims, were $19.3 million; management did not believe these matters were reasonably likely to materially harm results or financial position.
- Key risks include cyclical chlor-alkali pricing and co-product demand imbalance, energy and freight costs, environmental obligations, litigation, production and transportation hazards, pension assumptions, information-system disruption, and compliance with debt covenants during a downturn. Management reported covenant compliance at year-end.
Important facts for investors to verify
- Whether elevated Winchester commercial demand and backlog converted to shipments and earnings, given that orders can be canceled and management anticipated unusually high demand only through the second quarter of 2014.
- Whether chlorine and caustic soda pricing recovered after the fourth-quarter 2013 decline, and the resulting effect on ECU netbacks and Chlor Alkali profitability.
- Progress against KA Steel’s target of approximately $35 million in annual synergies by the end of three years, including how segment transfers and intersegment eliminations affect reported results.
- Actual Winchester relocation spending, timing and savings compared with management’s 2014 and completion forecasts.
- Environmental reserve adequacy and cash requirements, the $40 million possible additional exposure, debt maturities and continued access to revolver capacity.