Business context and reporting period
Olin Corporation’s Form 10-K covers the fiscal year ended December 31, 2018, with unaudited quarterly data for Q4. Olin operates three segments: Chlor Alkali Products and Vinyls (57% of 2018 sales), Epoxy (33%), and Winchester ammunition (10%). DowDuPont was its largest customer, accounting for approximately 14% of sales.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Sales | $6,946.1 million | $6,268.4 million |
| Gross margin | $1,124.0 million; 16% of sales | $713.5 million; 11% of sales |
| Operating income | $676.9 million | $296.6 million |
| Net income | $327.9 million; diluted EPS $1.95 | $549.5 million; diluted EPS $3.26 |
| Cash from operations | $907.8 million | $648.8 million |
| Capital expenditures | $385.2 million | $294.3 million |
| Cash and cash equivalents | $178.8 million | $218.4 million |
| Total debt | $3,230.3 million | $3,612.0 million |
| Debt / total capitalization | 53.3% | 56.7% |
| Current ratio | 1.5 | 1.8 |
Operating cash flow less capital expenditures was approximately $523 million. At year-end, $596.5 million was available under the revolving credit facility and $125 million under the receivables financing agreement. The company reported compliance with debt covenants. Annual dividends were $0.80 per share.
Material changes versus the prior comparable period
- Sales rose 11%, largely on higher Chlor Alkali and Epoxy prices. Segment income was $637.1 million for Chlor Alkali Products and Vinyls (up from $405.8 million), $52.8 million for Epoxy (versus a $11.8 million loss), and $38.4 million for Winchester (down from $72.4 million).
- Net income fell from 2017 despite stronger operating results, principally because 2017 included a $437.9 million provisional tax benefit from the Tax Cuts and Jobs Act.
- FY 2018 included $111 million of environmental insurance recoveries, a $21.5 million non-cash impairment of the Bay Gas investment, and an $8 million insurance recovery related to a 2017 VCM facility interruption.
- Interest expense rose to $243.2 million from $217.4 million. Capital expenditures increased to $385.2 million, while debt declined by about $382 million year over year.
- For Q4, sales were $1,635.0 million and net income was $53.3 million (diluted EPS $0.32), compared with $1,619.9 million and $489.3 million (diluted EPS $2.89) in Q4 2017. The prior-year quarter included a substantial tax benefit.
Outlook, commentary, risks and unusual items
- Management projected 2019 diluted EPS of approximately $1.60, including about $80 million of pretax IT integration and restructuring costs. It expected Q1 2019 to be the year’s lowest quarterly EPS.
- 2019 segment outlook: Chlor Alkali and Vinyls income expected to be comparable to 2018; Epoxy results expected to improve; Winchester income expected to be similar. Management cited expected price, volume, input-cost and maintenance effects across the segments.
- 2019 capital spending was projected at $375–$425 million, including approximately $80 million for the IT project. The project is expected to continue through 2020. Management forecast an effective and cash tax rate of approximately 25%.
- Key exposures include cyclical chemical pricing and demand, volatile energy and raw-material costs, freight and logistics costs, reliance on key suppliers (including DowDuPont), severe-weather and operating disruptions, foreign-exchange movements, and execution risks in the multi-year IT systems transition.
- Environmental liabilities were $125.6 million at year-end; management estimated up to $60 million of additional reasonably possible contingent environmental liabilities. Environmental-related cash outlays were projected at approximately $220 million in 2019, mostly normal operating costs.
- A Plaquemine, Louisiana contract dispute was scheduled for arbitration in Q4 2019; potential additional losses were not estimable and could be material if resolved unfavorably. The company also disclosed other litigation, including asbestos-related claims.
- The qualified pension plans were underfunded by approximately $668.9 million. Management expected no domestic qualified-plan contributions through 2019 and less than $5 million of international contributions in 2019.
- Winchester announced closure of its Geelong, Australia ammunition assembly operations; Olin recorded $4.1 million of 2018 restructuring costs and expected about $1 million more in 2019. The company also had a $440–$465 million payment due to DowDuPont around Q4 2020 under an ethylene supply arrangement.
Important facts for investors to verify
- Underlying earnings excluding the $111 million environmental recovery and other unusual items, and the normalization of 2017 results for its one-time tax benefit.
- Whether 2019 segment forecasts hold as caustic soda pricing, chemical demand, raw-material costs and Winchester commercial volumes evolve.
- Progress, remaining costs and operational risks of the IT project, alongside the outlook for capital spending and cash generation.
- Debt maturities, interest costs, available borrowing capacity, covenant headroom and funding of the 2020 ethylene payment.
- Developments in the Plaquemine arbitration and environmental exposures, including the potential additional $60 million contingency.
KPMG issued an unqualified audit opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective as of December 31, 2018.