Business context and reporting period
Olin Corporation’s Form 10-K covers the fiscal year ended December 31, 2010; it is an annual filing, not a standalone fourth-quarter report. Olin manufactures chlor alkali products (65% of 2010 sales) and Winchester ammunition and related products (35%). The filing also provides unaudited quarterly results, including Q4 2010.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Sales | $1,585.9 million | $1,531.5 million |
| Gross margin | $236.0 million; 14.9% of sales | $308.8 million; 20.2% of sales |
| Operating income | $69.9 million | $182.6 million |
| Net income | $64.8 million | $135.7 million |
| Diluted EPS | $0.81 | $1.73 |
| Cash from operations | $115.5 million | $200.2 million |
| Capital expenditures | $85.3 million | $137.9 million |
Q4 2010 sales were $385.4 million and net income was $2.0 million, or $0.02 diluted EPS, compared with $350.9 million and $21.8 million, or $0.28 diluted EPS, in Q4 2009.
Chlor Alkali Products sales rose 8% to $1,036.6 million, but segment income fell 7% to $117.2 million. Chlorine and caustic soda volumes increased 15%; ECU netbacks averaged $475, down 9%, while the Q4 netback improved to $515. Winchester sales declined 3% to $549.3 million and segment income declined 8% to $63.0 million.
At year-end, cash and cash equivalents were $458.6 million and restricted cash was $102.0 million. Total debt was $496.0 million, including $77.8 million due within one year; debt was 37.4% of total capitalization, up from 32.6%. The current ratio was 2.3. Olin reported $231.4 million available under its $240 million revolving facility and $36.0 million of undrawn Go Zone bond capacity. It was in compliance with its credit covenants.
The annual dividend was $0.80 per share. Operating cash flow less capital expenditures was approximately $30.2 million; dividends paid were $63.3 million.
Material changes versus the prior comparable period
- Sales increased 4%, primarily as Chlor Alkali shipments recovered; however, lower ECU pricing and reduced Winchester commercial demand weighed on earnings.
- Net income fell about 52%. Gross margin declined from 20% to 15% of sales, and operating income fell about 62%.
- The comparison is affected by environmental recoveries: Olin recognized $7.2 million in 2010 versus $82.1 million in 2009. Excluding those recoveries, environmental charges were $16.3 million and $24.1 million, respectively.
- Operating cash flow decreased $84.7 million, chiefly reflecting lower earnings. Capital spending fell as the St. Gabriel expansion had been completed in 2009.
- Debt increased by $97.6 million, largely reflecting tax-exempt bond financing for planned capital projects.
Outlook, commentary, risks and unusual items
Management projected Q1 2011 diluted EPS of $0.20–$0.25. It expected Chlor Alkali segment earnings to improve from both Q4 2010 and Q1 2010, with an operating rate around 80%. Winchester earnings were expected above Q4 2010 but below Q1 2010, due in part to lower commercial demand and higher commodity costs. Olin forecast 2011 bleach shipment growth of 15%–20%, capital spending of $230–$250 million, and an effective tax rate of 36%–37%. No full-year 2011 EPS guidance was provided.
Olin approved a Charleston, Tennessee conversion from mercury-cell to membrane technology and an Augusta, Georgia reconfiguration, targeting completion by the end of 2012. The Charleston project is estimated to cost approximately $160 million; the changes reduce chlor alkali capacity overall and are expected to lower electricity use per ECU at Charleston by about 25%. The company also began a five-year Winchester centerfire relocation to Oxford, Mississippi; it forecasts about $30 million in annual operating-cost savings once complete, but expects the project to reduce 2011 segment income by $4–$5 million. The total 2010 restructuring charge was $34.2 million, and no cash expenditures against that charge had been made by year-end. Further charges are expected but not quantified.
Environmental liabilities were $167.6 million at year-end, with an additional $50 million of contingent environmental liabilities considered reasonably possible. Estimated 2011 environmental cash outlays were approximately $55 million. Legal-action liabilities, including asbestos claims, were $18.1 million; management did not expect those actions to materially affect results in the near term. The Saltville natural-resource-damage matter remained unresolved, and its potential financial impact was unclear.
Key risks include the cyclical and commodity-sensitive chlor alkali market, fixed-ratio chlorine/caustic production and customer concentration in certain products, energy and raw-material cost volatility, environmental remediation obligations, litigation, labor negotiations, operational hazards, pension assumptions, and debt-covenant exposure in a downturn. A $10 per ECU price change was estimated to affect annual revenue and pretax profit by about $17 million at full capacity.
Important facts for investors to verify
- Whether announced caustic soda price increases and higher ECU netbacks were realized, and whether volume recovery translated into improved Chlor Alkali profitability.
- How commercial ammunition demand and metal input costs affected Winchester after the 2010 demand decline, and whether relocation savings are achieved on schedule.
- Actual 2011 restructuring spending, total project costs, public incentives, and the timing of benefits from the Charleston conversion and Oxford relocation.
- Environmental reserve adequacy, additional recoveries, the possible $50 million exposure, and developments in the Saltville matter.
- Cash generation versus planned $230–$250 million capital spending, the $77.8 million 2011 debt maturity, facility covenants, and restricted-cash availability for qualifying projects.
- How much of the year’s earnings and quarterly results reflected environmental recoveries, tax adjustments, restructuring, and other nonrecurring items.