Olin Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This annual filing also reports fourth-quarter results. Olin manufactures chlor alkali products (71% of 2011 sales) and Winchester ammunition (29%).
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Sales | $1,961.1 million | $1,585.9 million |
| Gross margin | $387.2 million; 20% of sales | $236.0 million; 15% of sales |
| Operating income | $223.9 million | $69.9 million |
| Net income | $241.7 million; diluted EPS $2.99 | $64.8 million; diluted EPS $0.81 |
| Cash from operations | $215.9 million | $115.5 million |
| Capital expenditures | $200.9 million | $85.3 million |
| Cash and cash equivalents, year-end | $304.8 million | $458.6 million |
| Total debt, year-end | $536.4 million | $496.0 million |
| Debt to total capitalization | 35.2% | 37.4% |
| Current ratio | 2.0 | 2.3 |
Operating cash flow less capital expenditures was approximately $15.0 million. Olin also held $51.7 million of restricted cash for specified capital projects and had $231.5 million available on its $240 million revolving facility. The board maintained a $0.80 annual dividend per share.
Material changes and unusual items
- Sales rose 24%, driven mainly by higher chlor alkali prices and consolidation of SunBelt after Olin acquired PolyOne’s remaining 50% interest on February 28, 2011. SunBelt contributed $170.5 million of sales after acquisition.
- Reported net income included a one-time, noncash $181.4 million pretax gain from remeasuring Olin’s previously held SunBelt interest, alongside a $76.0 million discrete deferred tax expense. The reported earnings increase therefore does not represent recurring operating growth alone.
- Chlor Alkali Products segment income more than doubled to $245.0 million from $117.2 million; higher ECU netbacks and SunBelt contributed, while operating rates declined to 80% from 82%.
- Winchester segment income fell 40% to $37.9 million from $63.0 million. Higher metal and other material costs, manufacturing costs, and relocation costs outweighed higher selling prices.
- Quarterly sales and net income were $445.8 million and $18.7 million in Q4 2011, versus $385.4 million and $2.0 million in Q4 2010. Q4 2011 ECU netbacks were about $580, down from about $590 in Q3 as weaker chlorine prices more than offset caustic soda increases.
- Environmental recoveries from prior-period costs were $11.4 million in 2011; environmental charges before those recoveries were $19.3 million.
Outlook, risks, and contingencies
- Management projected Q1 2012 diluted EPS of $0.35–$0.40. It forecast a slight sequential decline in ECU netbacks, chlor alkali operating rates around 80%, and Winchester earnings comparable with Q1 2011.
- Management expected 2012 capital spending of $215–$245 million, an effective tax rate of 36%–37%, and approximately $10 million of restructuring charges. It forecast environmental-related cash outlays of about $60 million in 2012.
- Olin planned to convert Charleston, Tennessee, from mercury-cell to membrane technology and reconfigure Augusta, Georgia, by the end of 2012. The Charleston project is expected to reduce electricity use per ECU by about 25%; the Augusta reconfiguration reduces chlor alkali capacity.
- The Winchester centerfire relocation to Oxford, Mississippi, was expected to continue through 2015 and, when complete, to reduce annual operating costs by about $30 million. The company reported $51.0 million of 2011 spending on the relocation and $31.0 million in government grants received.
- The revolving credit facility expires in October 2012. Olin reported covenant compliance at year-end, but said renewal terms and future covenant compliance cannot be assured. Debt maturities include $147.7 million in 2016.
- Environmental liabilities were $163.3 million at year-end; Olin estimated up to $40 million of additional contingent environmental liabilities as reasonably possible. Legal-action liabilities, including asbestos-related matters, were $16.4 million; management did not expect those matters to materially adversely affect near-term results.
- Key business risks include chlor alkali cyclicality and co-product demand imbalance, commodity and energy costs, freight costs, environmental obligations, operating hazards, pension assumptions, and government-contracting requirements. A labor contract covering 130 Becancour employees was scheduled to expire in April 2012.
Most important facts for investors to verify
- How much of 2011 earnings and future performance reflects recurring operations versus the SunBelt remeasurement gain and acquisition-related consolidation?
- Whether chlor alkali pricing and chlorine demand stabilize, and whether announced caustic soda increases are realized.
- Whether Winchester can manage metal-cost pressure and achieve the expected savings from its Oxford relocation.
- Whether the revolving credit facility is refinanced before October 2012 on acceptable terms, and whether covenant headroom remains adequate.
- Whether projected capital spending, environmental outlays, and remediation liabilities remain within management estimates.