Olin Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are noted where relevant. Olin manufactures chlor-alkali and vinyl products, epoxy materials, and ammunition. Results include Dow’s acquired businesses for all of 2016 but only from October 5, 2015 in 2015, limiting year-over-year comparability.
Financial results and key metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Sales | $5,550.6 million | $2,854.4 million |
| Gross margin | $626.9 million; 11% of sales | $367.6 million; 13% of sales |
| Operating income | $152.6 million | $100.9 million |
| Interest expense | $191.9 million | $97.0 million |
| Net income (loss) | $(3.9) million; $(0.02) per diluted share | $(1.4) million; $(0.01) per diluted share |
| Cash from operations | $603.2 million | $217.1 million |
| Capital expenditures | $278.0 million | $130.9 million |
Operating cash flow less capital expenditures was approximately $325 million. Cash and cash equivalents ended 2016 at $184.5 million, down from $392.0 million. Current ratio was 1.7. Total debt was $3,617.6 million, equal to 61.4% of total capitalization; $2,238.4 million was variable-rate debt. Olin had $483.4 million available on its $500 million revolving facility, after letters of credit. The company reported compliance with debt covenants at year-end.
Fourth-quarter 2016 sales were $1,385.7 million and net income was $17.5 million, or $0.10 diluted EPS. Full-year sales growth of 94% primarily reflects the acquired businesses’ full-year contribution, rather than equivalent organic growth.
Segments and changes versus prior year
- Chlor Alkali Products and Vinyls: Sales were $2,999.3 million and segment income $224.9 million, versus $1,713.4 million and $115.5 million in 2015. The full-year acquired-business contribution and freight synergies lifted results; lower prices for caustic soda, hydrochloric acid and potassium hydroxide partially offset the improvement. Management reported caustic pricing momentum entering 2017.
- Epoxy: Sales were $1,822.0 million and segment income $15.4 million, compared with $429.6 million and a $7.5 million loss in 2015. The change mainly reflects a full year of acquired-business results; 2015 also included purchase-accounting inventory charges.
- Winchester: Sales were $729.3 million and segment income $120.9 million, up 3% and 5%, respectively. Higher volumes and lower material costs were partly offset by lower selling prices and higher operating costs.
Gross margin percentage declined to 11% from 13%. Interest expense nearly doubled, principally because of acquisition-related debt and higher rates. Olin recorded $112.9 million of restructuring charges, including $76.6 million of noncash asset impairments, and $48.8 million of acquisition-related costs. The company also recorded an $11.0 million insurance recovery in other operating income; 2015 included larger insurance recoveries.
Outlook, risks and unusual items
- 2017 outlook: Management projected diluted EPS of $0.70–$1.15, including approximately $50 million of pretax restructuring and acquisition-integration costs. It expected first-quarter EPS to be the year’s lowest, partly due to planned maintenance.
- Chlor Alkali Products and Vinyls segment income was expected to improve on higher caustic soda and EDC prices and lower purchased ethylene costs. Epoxy income was expected to rise on better volumes and lower operating costs; Winchester income was expected to decline, reflecting customer inventory reduction and higher material costs.
- 2017 planned capital spending was $300–$350 million; management also expected $209.4 million of supply-contract payments, interest rates of approximately 5%, tax rate of 25%–30%, and depreciation and amortization of $530–$540 million.
- Management targets at least $250 million of annual acquisition synergies by 2019; approximately $75 million was realized in 2016. Additional potential synergies of up to $100 million depend on sales growth and market access. Integration costs and capital spending remain necessary to achieve the targets.
- Olin closed or reduced a combined 433,000 tons of chlor-alkali capacity in 2016. Additional restructuring charges of approximately $33 million were expected through 2020, excluding any adverse result in a contract-termination arbitration dispute. Potential losses in that dispute were not estimable and could materially affect results.
- Environmental liabilities were $137.3 million at year-end; Olin estimated up to $60 million of additional reasonably possible contingent environmental liabilities. Environmental spending, regulation, litigation, commodity-price cycles, customer concentration (Dow represented about 15% of sales), and acquisition integration are material risks.
- Olin’s pension obligation exceeded qualified plan assets by $633.2 million under the disclosed measure. Results and funding needs may be sensitive to discount rates, investment returns and other actuarial assumptions.
Important facts for investors to verify
- How much of 2016’s sales and cash-flow increase reflects the acquisition, receivables factoring, and other working-capital effects, versus underlying operating growth?
- Whether announced caustic soda and EDC price increases are realized, and whether segment margins improve as management projected.
- Progress toward the $250 million synergy target, alongside integration costs, planned capital spending and the large ethylene-supply payments.
- Debt refinancing and covenant capacity, exposure to variable rates, and the cash impact of the 2018 and 2020 maturities.
- Outcomes and potential financial exposure from the contract arbitration, environmental matters, and pension assumptions.