Olin Corporation (NYSE: OLN) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 24, 2020. The filing reports full-year results and unaudited quarterly data, including fourth-quarter results. Olin operates Chlor Alkali Products and Vinyls, Epoxy, and Winchester businesses.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Sales | $6,110.0 million | $6,946.1 million |
| Gross margin | $670.8 million; 11% of sales | $1,124.0 million; 16% of sales |
| Operating income | $177.8 million | $676.9 million |
| Net income (loss) | $(11.3) million; $(0.07) per diluted share | $327.9 million; $1.95 per diluted share |
| Cash from operations | $617.3 million | $907.8 million |
| Capital expenditures | $385.6 million | $385.2 million |
| Cash and equivalents at year-end | $220.9 million | $178.8 million |
| Total debt at year-end | $3,340.8 million | $3,230.3 million |
| Debt / total capitalization | 58.0% | 53.3% |
| Current ratio | 1.6 | 1.5 |
Operating cash flow less capital expenditures was approximately $231.7 million in 2019, versus $522.6 million in 2018. Interest expense was $243.2 million in both years. Olin paid $0.80 per share in dividends and repurchased $145.9 million of stock in 2019.
Fourth-quarter 2019 sales were $1,387.1 million and net loss was $77.2 million, compared with sales of $1,635.0 million and net income of $53.3 million in fourth-quarter 2018.
Business mix and material changes
- Chlor Alkali Products and Vinyls: 2019 sales of $3,420.1 million, down 14%; segment income of $336.7 million, down 47%. Lower caustic soda pricing was the principal earnings pressure.
- Epoxy: Sales of $2,024.4 million, down 12%, mainly from lower prices and unfavorable currency translation. Segment income was $53.9 million, slightly above 2018 as lower input and maintenance costs largely offset weaker prices.
- Winchester: Sales of $665.5 million, up 1%; segment income of $40.1 million, up 4%, reflecting higher commercial volumes and lower material costs, partly offset by lower prices.
- Overall sales declined 12%. The 2018 comparison benefited from $111.0 million of environmental insurance recoveries; 2019 included $4.8 million of related recoveries. 2019 also included $76.5 million of restructuring charges, including $58.9 million of non-cash impairment charges.
- Olin decided to close a 230,000-ton chlor-alkali plant and its VDC facility in Freeport, Texas, by the end of 2020. It expects approximately $50 million of additional restructuring charges through 2024.
Liquidity, debt and financing
Year-end debt was $3.34 billion, including $720 million of 9.75% notes due 2023 and $500 million of 10.00% notes due 2025. In July 2019, Olin issued $750 million of 5.625% notes due 2029 and entered a new $2.0 billion senior credit facility, including an $800 million revolving facility. It reported $796.5 million available on the revolver and compliance with its debt covenants at year-end. Management stated that available cash, operating cash flow and borrowing capacity were expected to meet liquidity needs.
Olin expected to use up to $1.2 billion of delayed-draw term loan capacity to redeem the 2023 and 2025 notes around October 2020; the contemplated redemptions carried an estimated $42 million call premium. A separate payment to Dow under an ethylene supply arrangement, not to exceed $493 million, was expected around the fourth quarter of 2020.
Outlook, risks and unusual items
- Management expected weak chemical demand and pricing to persist through at least first-quarter 2020, with lower raw-material costs partly cushioning the effect.
- The Lake City Army ammunition plant contract was expected to add $450–$550 million of annual Winchester revenue after operational control transfers on October 1, 2020. Olin forecast approximately $25 million of transition costs and $80 million of initial working capital investment in 2020. The fixed-price contract exposes Olin to cost overruns and transition risks.
- 2020 estimates included capital spending of $250–$300 million; depreciation and amortization of $550–$575 million; environmental expense of $25–$30 million; an effective tax rate of 27%–33%; and cash taxes of $30–$40 million. Management expected higher corporate and unallocated costs than in 2019.
- Environmental liabilities were $139.0 million at year-end, and Olin estimated up to $80 million of additional reasonably possible contingent environmental liabilities. Environmental cash outlays were estimated at about $210 million for 2020.
- Material unresolved matters include a Plaquemine contract arbitration, a chlorine-supply pricing dispute with Oxy, and purported caustic soda price-fixing class actions. Potential losses were not estimable in the filing; an adverse outcome could be material. Other recorded legal liabilities were $12.4 million.
- Key broader exposures include cyclicality and commodity pricing, energy and feedstock costs and supply, dependence on Dow and other suppliers, plant and transportation incidents, environmental compliance and remediation, pension funding, foreign exchange, and information-technology implementation. The ERP project was about 35% converted at year-end and expected to be substantially complete in 2020.
Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The auditor identified goodwill valuation and environmental obligation estimates as critical audit matters. No goodwill impairment was recorded in 2019.
Investor verification priorities
- Track caustic soda and other chemical pricing, volumes, and demand against management’s 2020 outlook.
- Verify Lake City transition progress, actual costs and working-capital needs, and whether the expected revenue contribution is achieved under the fixed-price contract.
- Confirm refinancing and redemption of the high-coupon 2023 and 2025 notes, including the delayed-draw borrowing and call premium.
- Assess cash generation after capital spending, dividends, repurchases, the Dow ethylene payment, and any additional borrowing.
- Monitor environmental reserve revisions, potential claims, and the outcomes of the disclosed arbitration, Oxy dispute, and caustic soda litigation.