Olin Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also presents unaudited quarterly results, including fourth-quarter 2017. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition through Chlor Alkali Products and Vinyls, Epoxy, and Winchester.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Sales | $6,268.4 million | $5,550.6 million |
| Gross margin | $728.8 million; 11.6% of sales | $626.9 million; 11.3% of sales |
| Operating income | $331.0 million | $152.6 million |
| Income before taxes | $117.2 million | Loss of $34.2 million |
| Net income (loss) | $549.5 million; diluted EPS $3.26 | Loss of $3.9 million; diluted EPS loss of $0.02 |
| Cash from operating activities | $648.8 million | $603.2 million |
| Capital expenditures | $294.3 million | $278.0 million |
| Cash and cash equivalents | $218.4 million | $184.5 million |
| Total debt | $3,612.0 million | $3,617.6 million |
Net income was lifted by a $432.3 million income-tax benefit, including a provisional $437.9 million benefit from the 2017 Tax Act; it substantially exceeded pretax income. Operating cash flow less capital expenditures was approximately $354.5 million (calculated from reported figures). The current ratio was 1.8, and debt was 56.7% of total capitalization, down from 61.4%.
Material changes versus 2016
- Sales rose 13%, principally on higher chlor-alkali and epoxy prices and increased volumes. Gross margin increased 16%.
- Chlor Alkali Products and Vinyls segment income increased to $405.8 million from $224.9 million, supported by higher caustic soda and EDC prices and volumes.
- Epoxy moved to an $11.8 million segment loss from $15.4 million of income. Higher benzene and propylene costs, maintenance and Hurricane Harvey impacts outweighed pricing and volume gains.
- Winchester segment income fell 40% to $72.4 million as commercial ammunition demand and product mix weakened and material costs rose; military and law-enforcement shipments partly offset the decline.
- Interest expense rose to $217.4 million from $191.9 million. Restructuring charges declined to $37.6 million from $112.9 million.
Liquidity, debt, and significant items
- At year-end, $574.9 million was available under the $600 million revolving facility; Olin reported compliance with its debt covenants. The company stated it expected cash, operating cash flow, and available borrowing capacity to meet its needs.
- In January 2018, Olin issued $550 million of 5.00% notes due 2030 and used the proceeds to repay term-loan debt, eliminating required quarterly installments on that amount.
- Hurricane Harvey reduced 2017 results by an estimated $54.7 million, including $27.0 million in Chlor Alkali Products and Vinyls and $27.7 million in Epoxy.
- Olin recognized $37.6 million of restructuring charges in 2017, primarily related to chlor-alkali capacity reductions. Approximately $22 million of additional charges were expected through 2020 for those actions.
- Environmental liabilities were $131.6 million; management estimated a further $60 million of reasonably possible contingent environmental liabilities. Environmental cash outlays were estimated at $200–$220 million annually over the next several years, including normal plant operating costs.
Outlook and risks
- Management projected 2018 diluted EPS of $1.40–$1.95, including approximately $20 million of pretax restructuring charges. First-quarter 2018 was expected to be the year’s lowest-earnings quarter, mainly due to turnaround timing.
- Management expected higher Chlor Alkali Products and Vinyls and Winchester segment income, and improvement in Epoxy, while anticipating higher corporate costs. The forecast included an approximately 25% effective tax rate.
- 2018 capital spending was projected at $375–$425 million, including about $100 million for a multi-year information-technology project; 2018 project costs were estimated at $50 million. The project was expected to be completed in 2020.
- Key risks include cyclical chemical pricing and demand, volatility in feedstock and energy costs, reliance on suppliers and transportation providers, severe weather and plant interruptions, high debt and covenant sensitivity, pension funding exposure, and environmental and litigation contingencies.
- DowDuPont represented approximately 14% of 2017 sales and remained a significant customer and supplier. A further $440–$465 million payment for additional ethylene supply was expected around the fourth quarter of 2020.
Important facts for investors to verify
- How much of 2017’s reported $549.5 million net income is attributable to the provisional tax benefit, and what adjustments to that estimate were made in 2018?
- Whether caustic soda and other product pricing, volumes, and margins support the 2018 segment outlook, particularly after Harvey and planned maintenance.
- Whether Winchester’s commercial ammunition demand and product mix recover as projected.
- Debt repayment, refinancing terms, covenant headroom, and the cash-flow effects of supply-contract commitments and receivables financing or factoring.
- Progress and realized costs of the information-technology project, along with environmental liabilities and other contingent exposures.