Olin Corporation — 2015 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2015; fourth-quarter figures are included. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and Winchester ammunition. On October 5, 2015, it acquired Dow Chemical’s U.S. Chlor Alkali and Vinyl, Global Chlorinated Organics, and Global Epoxy businesses. Their results are consolidated only from the closing date, so reported 2015 results are not directly comparable with prior years.
Financial performance
- Revenue: 2015 sales were $2,854.4 million, up 27% from $2,241.2 million in 2014; acquired businesses contributed $802.6 million after closing. Fourth-quarter sales were $1,267.4 million, versus $499.8 million in Q4 2014.
- Profit and margins: 2015 operating income was $100.7 million, down from $203.4 million; net loss was $1.4 million, compared with net income of $105.7 million. Gross margin was $367.6 million, or 13% of sales, versus $388.0 million, or 17%, in 2014. Q4 2015 net loss was $62.7 million, or $0.39 per diluted share; Q4 2014 net income was $12.8 million. Acquisition-related costs were $123.4 million for 2015, including $47.1 million in change-in-control pension/deferred compensation costs.
- Segments: Chlor Alkali Products and Vinyls reported $1,713.4 million in sales and $115.5 million in segment income; Winchester reported $711.4 million and $115.6 million, respectively. Epoxy, included only from the acquisition date, reported $429.6 million in sales and a $7.5 million segment loss. Q4 Chlor Alkali Products and Vinyls segment income was $46.6 million; Q4 Epoxy segment loss was $7.5 million.
- Cash flow and investment: Operating cash flow was $217.1 million, compared with $159.2 million in 2014. Capital expenditures were $130.9 million, up from $71.8 million. Cash and cash equivalents ended the year at $392.0 million, versus $256.8 million.
- Debt and liquidity: Total debt was $3,881.7 million, compared with $675.1 million at year-end 2014; debt was 61.6% of total capitalization, versus 40.0%. Current debt maturities were $206.5 million. The company had $489.6 million available on its $500 million revolving facility and reported a 1.7 current ratio. Approximately $2,305.9 million of debt carried variable rates.
- Other metrics: The company paid $0.80 per share in dividends during 2015. Environmental liabilities were $138.1 million; management estimated a further $60 million of reasonably possible contingent environmental liabilities.
Material changes versus prior periods
- The Dow acquisition substantially expanded Olin’s scale, assets, product mix, international exposure, and share count. Olin issued approximately 87.5 million shares, representing about 53% of shares outstanding after closing.
- Sales rose with the acquired businesses, but legacy chlor-alkali results were pressured by lower volumes and prices, especially caustic soda. Winchester sales and segment income also declined, reflecting lower commercial volumes, less favorable product mix, and lower pricing, partly offset by reduced material costs.
- Acquisition financing drove debt sharply higher and interest expense increased to $97.0 million from $43.8 million. The reported annual loss also reflects acquisition costs and only partial-year acquired-business results.
- Insurance recoveries totaled $57.4 million in 2015, including $46.0 million recorded as other operating income, primarily for damage and business interruption at Becancour and McIntosh facilities.
Outlook, commentary, risks, and contingencies
- Management projected Q1 2016 diluted EPS of $0.05–$0.15, including about $10 million of pretax acquisition-related costs and $35 million of acquisition step-up depreciation and amortization.
- Management expected at least $250 million of annual acquisition synergies by 2019, with potential for up to $100 million of additional annual synergies if new sales and markets are achieved. It expected $100–$150 million of transition costs and $200 million of incremental capital spending during the first three years.
- For 2016, Olin forecast capital spending of $300–$340 million, including about $60 million for synergies; depreciation and amortization of $490–$500 million; and an effective tax rate of 35%–38%. Winchester segment income was expected to exceed 2015’s $115.6 million, with lower operating costs and higher volumes partly offset by lower pricing.
- Principal risks include cyclical commodity pricing and demand, integration and synergy execution, elevated leverage and covenant compliance, floating-rate exposure, feedstock and energy availability/cost, reliance on Dow supply and site-service agreements, environmental remediation, operational and transportation incidents, and pension funding volatility. Management said it was in compliance with debt covenants at year-end.
- Environmental-related cash outlays were forecast at approximately $240 million in 2016, including normal plant operating costs; annual outlays were expected to range from $230–$250 million over the next several years. The company also disclosed pending environmental matters, including the Saltville natural-resource-damage assessment, and recorded $21.2 million of liabilities for other legal actions. Management did not consider the latter matters reasonably likely to materially affect results, while noting litigation uncertainties.
- The company’s unaudited pro forma results, as if the acquisition had occurred at the start of 2014, showed 2015 sales of $5,681.8 million and a net loss of $36.4 million, versus 2014 sales of $6,948.2 million and net income of $2.4 million. These illustrative figures exclude anticipated synergies and are not a forecast.
Important facts for investors to verify
- Whether integration proceeds on schedule and the announced synergy targets are achieved after accounting for transition costs and required capital spending.
- How much of 2015’s reported revenue and earnings change reflects the acquisition versus underlying business trends, given the partial-year consolidation.
- Debt repayment capacity, refinancing needs, variable-rate exposure, and compliance with leverage and interest-coverage covenants as operating conditions change.
- Actual chlor-alkali pricing and volumes, Winchester demand and pricing, and whether the expected cost savings offset cyclical pressures.
- Final acquisition purchase-price allocation and pension asset transfers, along with developments in environmental reserves, contingent exposures, and the Saltville matter.