Olin Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This annual filing includes fourth-quarter results; it is not a standalone Q4 filing. Olin operates Chlor Alkali Products, Chemical Distribution, and Winchester.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Sales | $2,241.2 million | $2,515.0 million |
| Gross margin | $388.0 million; 17% of sales | $481.3 million; 19% of sales |
| Operating income | $203.4 million | $286.5 million |
| Income from continuing operations | $105.0 million | $178.6 million |
| Net income | $105.7 million | $178.6 million |
| Diluted EPS | $1.33 | $2.21 |
| Cash from operating activities | $159.2 million | $317.0 million |
| Capital expenditures | $71.8 million | $90.8 million |
Operating cash flow less capital expenditures was approximately $87.4 million in 2014. Fourth-quarter sales were $499.8 million and net income was $12.8 million, or $0.16 diluted EPS; the comparable 2013 quarter reported sales of $562.1 million and net income of $24.7 million, or $0.31 diluted EPS.
At year-end, cash and cash equivalents were $256.8 million, working capital was $182 million excluding cash and short-term investments, and the current ratio was 2.2. Total debt was $675.1 million, equal to 40.0% of total capitalization; $16.4 million was due within one year. Olin had $257.7 million available on its $265 million revolving facility and reported compliance with debt covenants. The annual common dividend remained $0.80 per share.
Segments and changes versus prior year
- Chlor Alkali Products: Sales fell 8% to $1,305.6 million and segment income declined to $130.1 million from $203.8 million. ECU netbacks averaged about $505, down 10% from $560; operating rates were 80%, versus 84%. Lower caustic soda prices and lower chlorine and caustic soda volumes were partially offset by lower costs and increased hydrochloric acid and potassium hydroxide shipments.
- Chemical Distribution: Sales declined to $293.8 million from $406.4 million, and segment income was breakeven versus $9.7 million. Lower caustic soda volumes and prices were the primary factors.
- Winchester: Sales declined 5% to $738.4 million and segment income was $127.3 million versus $143.2 million. Lower shotshell and rifle ammunition demand was partly offset by higher prices, other customer shipments, and lower costs from the Oxford, Mississippi facility transition.
Consolidated sales decreased 11%, gross margin declined 19%, and net income fell about 41%. Lower chemical prices and volumes drove much of the decline. Selling and administration costs fell 10%, but interest expense rose, including a $9.5 million charge related to redeeming the 8.875% notes.
Outlook, commentary, risks and unusual items
- 2015 outlook: Management projected Q1 diluted EPS of $0.20–$0.25. Full-year Chlor Alkali Products and Winchester segment income were expected to improve from 2014; Chemical Distribution income was also expected to improve from breakeven. Winchester commercial ammunition shipments were expected to be similar to 2014.
- Management forecast 2015 capital spending of $120–$130 million, environmental investigatory and remedial charges of $15–$20 million, environmental cash outlays of about $50 million, and an effective tax rate of 35%–37%. About $6 million of pretax restructuring charges was anticipated.
- Winchester’s centerfire relocation to Oxford was expected to finish by the end of 2016, with projected annual cost savings of $35–$40 million when complete. Management expected approximately $30 million of savings in 2015, compared with $24.1 million realized in 2014. Its commercial backlog was $289.0 million at January 31, 2015, down from $532.4 million a year earlier; orders may be canceled.
- Management forecast higher Q1 2015 ECU netbacks than Q4 2014’s approximately $490, while noting that announced caustic soda and chlorine price increases were not yet proven successful. The filing states that full-year 2015 other corporate and unallocated costs were expected to increase.
- Olin permanently closed part of its Becancour, Canada chlor alkali facility, reducing capacity by 185,000 tons. It recorded $10.0 million of related 2014 restructuring charges and expected about $5 million more through 2016.
- Environmental liabilities were $138.3 million at year-end, and Olin estimated up to $50 million of reasonably possible additional contingent environmental liabilities. Environmental cash outlays were $40.4 million in 2014. Legal-action liabilities were $22.1 million; management did not believe the pending actions were reasonably likely to materially adversely affect results. The Saltville natural-resource damages matter remained unresolved, with financial impact not determinable.
- The pension and postretirement remeasurement produced an $86.6 million after-tax charge to shareholders’ equity, reflecting lower discount rates and updated mortality assumptions. Qualified pension obligations exceeded plan assets by $138.7 million. Management expected no domestic qualified-plan cash contributions in 2015, subject to assumptions and pension funding rules.
- Key risks include cyclical chemical pricing and demand, fixed-ratio chlorine/caustic soda production, energy and freight costs, environmental obligations, production interruptions, litigation, pension assumptions, and debt covenant compliance in a downturn.
Important facts for investors to verify
- Whether announced chemical price increases are realized and improve ECU netbacks and Chlor Alkali Products earnings.
- Whether Winchester demand, cancellable backlog, and projected Oxford relocation savings develop as management expects.
- Whether Chemical Distribution restores profitability and achieves the stated growth and cost-synergy targets.
- Environmental reserve adequacy, potential additional exposure, and the eventual outcome of the Saltville matter.
- Debt maturities, covenant headroom, variable-rate exposure, and the sustainability of cash generation, dividends, and share repurchases.
- The impact of pension assumptions and funding requirements on future earnings, equity, and cash needs.