Business context and reporting period
Olin Corporation’s Form 10-K covers the fiscal year ended December 31, 2012; it is an annual filing, with fourth-quarter results reported separately. Olin operates Chlor Alkali Products (65% of 2012 sales), Chemical Distribution (7%) and Winchester (28%). Its businesses make or distribute commodity chemicals and ammunition, with results exposed to economic cycles, commodity pricing and manufacturing costs.
Olin acquired chemical distributor KA Steel on August 22, 2012, creating the Chemical Distribution segment. It also completed the conversion of its Charleston, Tennessee chlor alkali facility to membrane technology and discontinued mercury-cell production at Augusta, Georgia.
Financial performance and key metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Sales | $2,184.7 million | $1,961.1 million |
| Gross margin | $436.7 million; 20% of sales | $387.2 million; 20% of sales |
| Operating income | $258.9 million | $223.9 million |
| Income before taxes | $225.2 million | $379.4 million |
| Net income / diluted EPS | $149.6 million / $1.85 | $241.7 million / $2.99 |
| Cash from operating activities | $279.2 million | $215.9 million |
| Capital expenditures | $255.7 million | $200.9 million |
| Cash and cash equivalents at year-end | $165.2 million | $304.8 million |
| Total debt / debt to capitalization | $713.7 million / 41.7% | $536.4 million / 35.2% |
Fourth-quarter 2012 sales were $587.6 million and net income was $34.6 million, or $0.43 per diluted share, versus $445.8 million, $18.7 million and $0.23, respectively, in fourth-quarter 2011. The filing does not provide a clear fourth-quarter operating cash flow or margin value.
At year-end, the current ratio was 1.7. Olin had $11.9 million of restricted cash and $233.3 million available under its $265 million revolving credit facility after letters of credit. Annual dividends were $0.80 per share.
Segment income: Chlor Alkali Products was $263.2 million, up from $245.0 million; Winchester was $55.2 million, up from $37.9 million; and Chemical Distribution contributed $4.5 million after the acquisition. KA Steel contributed $156.3 million of sales for its post-acquisition period.
Material changes versus prior periods
- Sales rose 11% year over year, reflecting KA Steel, a full year of SunBelt ownership, higher chemical prices and increased Winchester shipments and pricing.
- Net income fell from 2011, which included a $181.4 million noncash pretax gain from remeasuring Olin’s previously held SunBelt interest. The 2011 result also included $76.0 million of related deferred tax expense; the prior-year comparison is therefore affected by unusual acquisition accounting.
- Chlor Alkali ECU netbacks averaged approximately $575 in 2012, versus $570 in 2011 and $475 in 2010. Chlor Alkali operating rates were 80% in both 2012 and 2011.
- Winchester income improved on higher selling prices and volumes. Olin reported a marked surge in commercial ammunition demand beginning around the November 2012 election.
- Capital spending increased to $255.7 million, principally for the Charleston conversion, bleach capacity projects and Winchester’s relocation. Cash declined by $139.6 million during 2012, in part due to the $310.4 million net cash outlay for KA Steel.
Outlook, risks and unusual items
Management projected first-quarter 2013 diluted EPS of $0.40–$0.45, compared with $0.48 in first-quarter 2012. Chlor Alkali earnings were expected to decline on lower ECU netbacks and shipment volumes; Winchester earnings were expected to improve significantly on higher commercial demand and prices. Management expected unusually high commercial ammunition demand to continue at least into the third quarter of 2013.
- Olin expected $7–$10 million of KA Steel synergies in 2013 and approximately $35 million annually by the end of three years. It also estimated the acquisition’s tax election would provide cash tax benefits with a net present value of approximately $60 million.
- Winchester’s Oxford, Mississippi relocation was expected to generate $10–$15 million of cost savings in 2013 and approximately $30 million annually when complete; completion was forecast by the end of 2016.
- For 2013, management forecast capital spending of $100–$130 million, depreciation and amortization of $135–$140 million, an effective tax rate of 35%–37%, and environmental-related cash outlays of approximately $50 million. It expected environmental investigatory and remedial charges of $18–$22 million.
- Environmental liabilities were $146.5 million at year-end, with an additional $40 million of reasonably possible contingent exposure. Legal-action liabilities were $15.2 million; management did not believe those actions were reasonably likely to have a material adverse effect.
- Key risks include cyclical chemical prices and demand, the fixed co-production ratio of chlorine and caustic soda, energy and freight costs, environmental obligations, operating hazards, litigation, labor negotiations and pension assumptions. Debt agreements contain leverage and coverage covenants; Olin reported compliance at year-end.
- The pension and postretirement liability adjustment reduced equity by $101.9 million after tax in 2012, primarily reflecting a 100-basis-point decline in discount rates. The qualified defined benefit pension obligation exceeded plan assets by $91.4 million; Olin expected no domestic defined benefit plan cash contribution in 2013.
- Olin’s internal-control assessment and auditor opinion excluded KA Steel, acquired in August 2012. The auditor otherwise reported effective internal control over financial reporting and an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Whether the ammunition-demand surge and reported backlog of $440.8 million at January 31, 2013 convert into shipments and earnings; commercial orders may be canceled.
- Whether chlorine-price weakness, caustic soda pricing and shipment volumes deliver the forecast chemical segment results and whether planned KA Steel synergies are achieved.
- How acquisition funding, debt maturities—including $145.6 million due in 2016—and covenant headroom affect liquidity and leverage.
- Whether environmental remediation estimates, including the possible additional $40 million exposure, change as investigations and cleanup progress.
- Whether pension assumptions, asset returns and future funding requirements materially change reported equity, earnings or cash needs.