Olin Corporation (NYSE: OLN) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing also reports fourth-quarter results. Olin operates three segments: Chlor Alkali Products and Vinyls, Epoxy, and Winchester.
Financial performance and key metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Sales | $5,758.0 million | $6,110.0 million |
| Gross margin | $383.4 million; 6.7% of sales | $670.8 million; 11.0% of sales |
| Operating income (loss) | $(746.7) million | $177.8 million |
| Net income (loss) | $(969.9) million | $(11.3) million |
| Diluted EPS | $(6.14) | $(0.07) |
| Cash from operations | $418.4 million | $617.3 million |
| Capital expenditures | $298.9 million | $385.6 million |
| Cash and cash equivalents | $189.7 million | $220.9 million |
| Total debt | $3,863.8 million | $3,340.8 million |
| Debt to total capitalization | 72.7% | 58.0% |
| Current ratio | 1.4 | 1.6 |
The 2020 net loss included $699.8 million of non-cash goodwill impairment charges: $557.6 million in Chlor Alkali Products and Vinyls and $142.2 million in Epoxy. Reported interest expense was $292.7 million, up from $243.2 million. The reported effective tax rate was 4.9%; the filing explains that impairment-related tax effects and other tax items influenced the rate.
Fourth-quarter 2020 sales were $1,654.1 million and net loss was $33.0 million, compared with sales of $1,387.1 million and a net loss of $77.2 million in fourth-quarter 2019.
Segments and changes versus prior year
| Segment | 2020 sales | 2020 segment income | Change versus 2019 |
|---|---|---|---|
| Chlor Alkali Products and Vinyls | $2,959.9 million | $3.5 million | Sales fell 13%; income fell from $336.7 million, mainly on lower caustic soda and EDC prices and lower caustic soda volumes. |
| Epoxy | $1,870.5 million | $40.8 million | Sales fell 8%; income fell from $53.9 million, primarily due to lower prices and unfavorable mix, partly offset by lower feedstock and operating costs. |
| Winchester | $927.6 million | $92.3 million | Sales rose 39%; income rose from $40.1 million, reflecting higher commercial and military volumes and higher commercial pricing. |
Sales declined 6% overall. COVID-19 disruption weakened demand, volumes and pricing in the chemical businesses. Winchester benefited from higher ammunition demand and, beginning October 1, 2020, operation of the Lake City Army Ammunition Plant. Cash from operations decreased by $198.9 million year over year, while management reported a $141.6 million reduction in working capital.
Liquidity, debt and financing
Olin reported $3,863.8 million of debt at year-end, including $780.9 million at variable rates. It had $799.6 million available on its $800 million revolving credit facility, $124 million of additional capacity under its $250 million receivables financing agreement, and $189.7 million of cash. The company stated that it was in compliance with credit-agreement covenants at year-end; covenant borrowing capacity could be constrained if operating results weaken.
During 2020, Olin issued $500 million of 9.50% notes due 2025, drew a $500 million delayed-draw term loan, and redeemed $600 million of 9.75% notes due 2023. It redeemed the remaining $120 million of those 2023 notes in January 2021 using cash. Annual dividends remained $0.80 per share in 2020. No shares were repurchased in 2020.
Outlook, risks and unusual items
- 2021 outlook: Management expected year-over-year improvement in both chemical segments, with better ECU pricing partly offset by selectively lower volumes. It expected Winchester segment income to exceed 2020’s $92.3 million, supported by higher commercial pricing and volumes.
- Management projected 2021 capital spending of about $200 million, depreciation and amortization of $575–$600 million, an effective tax rate of 15%–20%, and cash taxes of approximately $15 million. It anticipated $20–$25 million of environmental expense.
- Winchester’s contractual ammunition backlog was estimated at $2.175 billion as of January 31, 2021, versus $151 million a year earlier; about 53% was expected to ship in 2021. The filing cautions that production capacity could constrain fulfillment and that orders may be modified or cancelled under customary terms.
- COVID-19 effects remained uncertain. Other principal risks include cyclical chemical pricing and demand, raw-material and energy costs, reliance on key suppliers and transport providers, operational hazards, substantial indebtedness and covenant exposure, and execution of the chemicals operating model.
- Environmental liabilities were $147.2 million at year-end; the company estimated a further $60 million of reasonably possible contingent environmental liabilities beyond reserves. Environmental cash outlays were projected at about $210 million in 2021.
- Olin faces U.S. and Canadian putative class actions alleging caustic soda price-fixing. Plaintiffs seek unspecified damages; Olin stated that potential losses were not currently estimable and that an unfavorable outcome could materially affect results or cash flows.
- In January 2021, Olin announced planned closures of two Freeport facilities, with approximately $23 million of restructuring charges expected through 2023. The filing also cites a $2.175 billion Winchester backlog, a major increase in ammunition demand, and continued uncertainty in the global economy.
Important facts for investors to verify
- Whether chemical pricing, margins and volumes recover as management projected, particularly in Chlor Alkali Products and Vinyls.
- Whether Winchester can convert its large backlog into shipments and earnings within available production capacity.
- Debt repayment, interest costs, covenant headroom and liquidity after the January 2021 note redemption.
- Potential changes to environmental reserves, the additional reasonably possible exposure, and outcomes of caustic soda litigation.
- Assumptions underlying the $699.8 million goodwill impairment and the possibility of further impairment if forecasts or market value weaken.
- Execution and costs of announced facility closures, and the effect of long-term supply, customer and Lake City contracts.