final10q3q2009.htm
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended September 30, 2009
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
file number 1-1070
Olin
Corporation
(Exact
name of registrant as specified in its charter)
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Virginia
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13-1872319
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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190
Carondelet Plaza, Suite 1530, Clayton, MO
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63105-3443
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(Address
of principal executive offices)
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(Zip
Code)
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(314)
480-1400
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer ¨ Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
September 30, 2009, 78,534,446 shares of the registrant’s common stock were
outstanding.
Part I —
Financial Information
Item 1.
Financial Statements.
OLIN
CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed
Balance Sheets
(In
millions, except per share data)
(Unaudited)
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September
30,
2009
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December
31,
2008
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September
30,
2008
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ASSETS
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Current
Assets:
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Cash
and Cash Equivalents
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Current
Deferred Income Taxes
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Property,
Plant and Equipment (less Accumulated Depreciation of $987.4, $956.0 and
$950.3)
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LIABILITIES AND SHAREHOLDERS’
EQUITY
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Total
Current Liabilities
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Accrued
Pension Liability
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Commitments
and Contingencies
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Common
Stock, Par Value $1 Per Share: Authorized, 120.0
Shares;
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Issued
and Outstanding 78.5, 77.3 and 76.9 Shares
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Additional
Paid-In Capital
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Accumulated
Other Comprehensive Loss
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Total
Shareholders’ Equity
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Total
Liabilities and Shareholders’ Equity
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The
accompanying Notes to Condensed Financial Statements are an integral part of the
condensed financial statements.
OLIN
CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed
Statements of Income
(In
millions, except per share data)
(Unaudited)
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Three Months Ended
September
30,
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Nine Months Ended
September
30,
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2009
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2008
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2009
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2008
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Selling
and Administration
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Other
Operating Income (Expense)
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)
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Earnings
of Non-consolidated Affiliates
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Net
Income per Common Share:
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Dividends
per Common Share
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Average
Common Shares Outstanding:
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The
accompanying Notes to Condensed Financial Statements are an integral part of the
condensed financial statements.
OLIN
CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed
Statements of Shareholders’ Equity
(In
millions, except per share data)
(Unaudited)
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Additional
Paid-In
Capital
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Accumulated
Other
Comprehensive
Loss
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Retained
Earnings
(Accumulated
Deficit)
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Total
Shareholders’
Equity
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Common
Stock
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Shares
Issued
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Par
Value
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Balance
at January 1, 2008
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Amortization
of Prior Service Costs and Actuarial Losses, Net
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Common
Stock ($0.60 per share)
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Balance
at September 30, 2008
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Balance
at January 1, 2009
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Amortization
of Prior Service Costs and Actuarial Losses, Net
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Common
Stock ($0.60 per share)
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Balance
at September 30, 2009
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The
accompanying Notes to Condensed Financial Statements are an integral part of the
condensed financial statements.
OLIN
CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed
Statements of Cash Flows
(In
millions)
(Unaudited)
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Nine Months Ended
September
30,
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2009
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2008
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Operating Activities
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Adjustments
to Reconcile Net Income to Net Cash and Cash Equivalents Provided by (Used
for) Operating Activities:
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Earnings
of Non-consolidated Affiliates
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Other
Operating Income – (Gains) Losses on Disposition of Property, Plant and
Equipment
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Depreciation
and Amortization
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Qualified
Pension Plan Contributions
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Qualified
Pension Plan Income
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Impairment
of Investment in Corporate Debt Securities
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Common
Stock Issued under Employee Benefit Plans
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Accounts
Payable and Accrued Liabilities
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Other
Noncurrent Liabilities
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Other
Operating Activities
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Proceeds
from Disposition of Property, Plant and Equipment
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Distributions
from Affiliated Companies, Net
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Other
Investing Activities
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Excess
Tax Benefits from Stock Options Exercised
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Deferred
Debt Issuance Cost
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Net
Increase (Decrease) in Cash and Cash Equivalents
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Cash
and Cash Equivalents, Beginning of Period
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Cash
and Cash Equivalents, End of Period
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Cash
Paid for Interest and Income Taxes:
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Income
Taxes, Net of Refunds
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Non-Cash
Investing Activities:
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Capital
Expenditures included in Accounts Payable and Accrued
Liabilities
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The
accompanying Notes to Condensed Financial Statements are an integral part of the
condensed financial statements.
OLIN
CORPORATION AND CONSOLIDATED SUBSIDIARIES
Notes to
Condensed Financial Statements
(Unaudited)
DESCRIPTION
OF BUSINESS
Olin
Corporation is a Virginia corporation, incorporated in 1892. We are a
manufacturer concentrated in two business segments: Chlor Alkali Products and
Winchester. Chlor Alkali Products, with nine U.S. manufacturing facilities and
one Canadian manufacturing facility, produces chlorine and caustic soda, sodium
hydrosulfite, hydrochloric acid, hydrogen, bleach products and potassium
hydroxide. Winchester, with its principal manufacturing facility in East Alton,
IL, produces and distributes sporting ammunition, reloading components, small
caliber military ammunition and components, and industrial
cartridges.
We have
prepared the condensed financial statements included herein, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). The preparation of the consolidated financial statements requires
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. In our opinion, these financial
statements reflect all adjustments (consisting only of normal accruals), which
are necessary to present fairly the results for interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations; however, we believe
that the disclosures are appropriate. We recommend that you read these condensed
financial statements in conjunction with the financial statements, accounting
policies, and the notes thereto and Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended December 31, 2008. Certain reclassifications
were made to prior year amounts to conform to the 2009 presentation, including
the reclassification of certain deferred tax amounts. The December
31, 2008 goodwill amount was reduced by $1.6 million, which reflected a
reclassification of deferred taxes associated with the resolution of a Canadian
capital tax matter.
We have
evaluated all subsequent events through October 27, 2009, which represents the
filing date of this Form 10-Q with the SEC, to ensure that this Form 10-Q
includes subsequent events that should be recognized in the financial statements
as of September 30, 2009, and appropriate disclosure of subsequent events, which
were not recognized in the financial statements.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS RECEIVABLES
We
evaluate the collectibility of accounts receivable based on a combination of
factors. We estimate an allowance for doubtful accounts as a
percentage of net sales based on historical bad debt experience. This
estimate is periodically adjusted when we become aware of a specific customer's
inability to meet its financial obligations (e.g., bankruptcy filing) or as a
result of changes in the overall aging of accounts receivable. While
we have a large number of customers that operate in diverse businesses and are
geographically dispersed, a general economic downturn in any of the industry
segments in which we operate could result in higher than expected defaults, and,
therefore, the need to revise estimates for the provision for doubtful accounts
could occur.
Allowance
for doubtful accounts receivable consisted of the following:
|
|
Nine
Months Ended
September
30,
|
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|
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2009
|
|
|
2008
|
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($
in millions)
|
|
Balance
at beginning of year
|
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Write-offs,
net of recoveries
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Currency
translation adjustments
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Provisions charged to operations were
$1.0 million and $1.7 million for the three months ended September 30, 2009 and
2008, respectively.
INVENTORIES
Inventories
consisted of the following:
|
|
September
30,
2009
|
|
|
December 31,
2008
|
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|
September
30,
2008
|
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($
in millions)
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Inventories
are valued at the lower of cost or market, with cost being determined
principally by the dollar value last-in, first-out (LIFO) method of inventory
accounting. Cost for other inventories has been determined
principally by the average cost method, primarily operating supplies, spare
parts, and maintenance parts. Elements of costs in inventories included raw
materials, direct labor, and manufacturing overhead. Inventories
under the LIFO method are based on annual estimates of quantities and costs as
of year-end; therefore, the condensed financial statements at September 30,
2009, reflect certain estimates relating to inventory quantities and costs at
December 31, 2009. If the first-in, first-out (FIFO) method of inventory
accounting had been used, inventories would have been approximately $56.7
million, $69.5 million and $69.0 million higher than reported at September 30,
2009, December 31, 2008, and September 30, 2008,
respectively.
EARNINGS
PER SHARE
Basic and
diluted net income per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted net income per share
reflects the dilutive effect of stock-based compensation.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
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|
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2009
|
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|
2008
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2009
|
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2008
|
|
Computation of Basic Income per
Share
|
|
($
and shares in millions, except per share data)
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Basic
net income per share
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Computation of Diluted Income per
Share
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Diluted
net income per share
|
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ENVIRONMENTAL
We are
party to various government and private environmental actions associated with
past manufacturing facilities and former waste disposal sites.
Environmental provisions (credited) charged to income were as
follows:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
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Recoveries
from third parties of costs incurred and expensed in prior
periods
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Total
environmental (income) expense
|
|
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|
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|
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|
|
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|
|
|
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|
|
|
Environmental
(income) expense for the three and nine months ended September 30, 2009 included
$44.3 million and $45.1 million, respectively, of recoveries from third parties
for costs incurred and expensed in prior periods. Charges to income
for investigatory and remedial efforts were material to operating results in
2008 and 2009. The condensed balance sheets included reserves for future
environmental expenditures to investigate and remediate known sites amounting to
$167.1 million, $158.9 million, and $161.1 million at September 30, 2009,
December 31, 2008, and September 30, 2008, respectively, of which $132.1
million, $123.9 million, and $126.1 million, respectively, were classified as
other noncurrent liabilities.
Environmental
exposures are difficult to assess for numerous reasons, including the
identification of new sites, developments at sites resulting from investigatory
studies, advances in technology, changes in environmental laws and regulations
and their application, changes in regulatory authorities, the scarcity of
reliable data pertaining to identified sites, the difficulty in assessing the
involvement and financial capability of other potentially responsible parties
(PRPs), our ability to obtain contributions from other parties, and the lengthy
time periods over which site remediation occurs. It is possible that some of
these matters (the outcomes of which are subject to various uncertainties) may
be resolved unfavorably to us, which could materially adversely affect our
financial position or results of operations.
During
the ordinary course of our business, contingencies arise resulting from an
existing condition, situation, or set of circumstances involving an uncertainty
as to the realization of a possible gain contingency. In certain instances
such as environmental projects, we are responsible for managing the cleanup and
remediation of an environmental site. There exists the possibility of
recovering a portion of these costs from other parties. We account for
gain contingencies in accordance with the provisions of Accounting Standards
Codification (ASC) 450 “Contingencies” (ASC 450), formerly SFAS No. 5,
“Accounting for Contingencies,” and therefore do not record gain contingencies
and recognize income until it is earned and realizable. During the
fourth quarter of 2009, we are anticipating a $35 million pretax recovery from
third parties for environmental costs incurred and expensed in prior
periods.
SHAREHOLDERS’
EQUITY
Our board
of directors, in April 1998, authorized a share repurchase program of up to
5 million shares of our common stock. We have repurchased 4,845,924 shares
under the April 1998 program. There were no share repurchases during the nine
month periods ended September 30, 2009 and 2008. At September 30,
2009, 154,076 shares remained authorized to be purchased.
We issued
less than 0.1 million shares and 1.8 million shares with a total value of $0.2
million and $38.1 million, representing stock options exercised for the nine
months ended September 30, 2009 and 2008, respectively. In addition, we
issued 1.1 million and 0.5 million shares with a total value of $13.8 million
and $11.3 million for the nine months ended September 30, 2009 and 2008,
respectively, in connection with our Contributing Employee Ownership Plan
(CEOP).
The
following table represents the activity included in accumulated other
comprehensive loss:
|
|
Foreign
Currency Translation Adjustment
|
|
|
Unrealized
Gains (Losses) on Derivative Contracts
(net
of taxes)
|
|
|
Amortization
of Prior Service Costs and Actuarial Losses
(net
of taxes)
|
|
|
Accumulated
Other Comprehensive Loss
|
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|
|
($
in millions)
|
|
Balance
at January 1, 2008
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Unrealized
gains (losses)
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Gains
reclassified into income
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Balance
at September 30, 2008
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Balance
at January 1, 2009
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Losses
reclassified into income
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Balance
at September 30, 2009
|
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SEGMENT
INFORMATION
We define
segment results as income before interest expense, interest income, other income
(expense), and income taxes, and include the operating results of
non-consolidated affiliates.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
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|
2009
|
|
|
2008
|
|
Sales:
|
|
($
in millions)
|
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Environmental
income (expense)(3)
|
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Other
corporate and unallocated costs
|
|
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Other
operating income (expense)(4)
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)
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Other
income (expense)(6)
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(1)
|
Earnings
of non-consolidated affiliates were included in the Chlor Alkali Products
segment results consistent with management’s monitoring of the operating
segments. The earnings from non-consolidated affiliates were $7.1 million
and $12.0 million for the three months ended September 30, 2009 and 2008,
respectively, and $32.9 million and $31.1 million for the nine months
ended September 30, 2009 and 2008,
respectively.
|
(2)
|
The
service cost and the amortization of prior service cost components of
pension expense related to the employees of the operating segments are
allocated to the operating segments based on their respective estimated
census data. All other components of pension costs are included in
Corporate/Other and include items such as the expected return on plan
assets, interest cost, and recognized actuarial gains and
losses. Pension income for the nine months ended September 30,
2008 included a curtailment charge of $0.8 million resulting from the
conversion of our McIntosh, AL Chlor Alkali hourly workforce from a
defined benefit pension plan to a defined contribution pension
plan.
|
(3)
|
Environmental
income (expense) for the three and nine months ended September 30, 2009
included $44.3 million and $45.1 million, respectively, of recoveries from
third parties for costs incurred and expensed in prior
periods.
|
(4)
|
Other
operating income (expense) for the nine months ended September 30, 2009
included a $3.7 million gain on the sale of land and $1.8 million of gains
on the disposal of assets primarily associated with the St. Gabriel, LA
facility conversion and expansion
project.
|
(5)
|
Interest
expense was reduced by capitalized interest of $3.6 million and $1.1
million for the three months ended September 30, 2009 and 2008,
respectively, and $9.1 million and $2.2 million for the nine months ended
September 30, 2009 and 2008,
respectively.
|
(6)
|
Other
income (expense) for the three and nine months ended September 30, 2008
included an impairment charge of the full value of a $26.6 million
investment in corporate debt securities. We are currently
unable to utilize the capital loss resulting from the impairment of these
corporate debt securities; therefore, no tax benefit was recognized during
the period for the impairment loss.
|
STOCK-BASED
COMPENSATION
Stock-based compensation granted
includes stock options, performance stock awards, restricted stock awards, and
deferred directors’ compensation. Stock-based compensation expense
was as follows:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
|
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|
|
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|
|
Mark-to-market
adjustments
|
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The fair
value of each stock option granted, which typically vests ratably over three
years, but not less than one year, was estimated on the date of grant, using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
Grant date
|
|
2009
|
|
|
2008
|
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Grant
fair value (per option)
|
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Dividend
yield for 2009 and 2008 was based on a historical average. Risk-free interest
rate was based on zero coupon U.S. Treasury securities rates for the expected
life of the options. Expected volatility was based on our historical stock price
movements, and we believe that historical experience is the best available
indicator of the expected volatility. Expected life of the option grant was
based on historical exercise and cancellation patterns, and we believe that
historical experience is the best estimate of future exercise
patterns.
INVESTMENTS
– AFFILIATED COMPANIES
We have a
50% ownership interest in SunBelt Chlor Alkali Partnership (SunBelt), which is
accounted for using the equity method of accounting. The condensed financial
positions and results of operations of SunBelt in its entirety were as
follows:
100% Basis
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
September
30,
2008
|
|
Condensed
Balance Sheet Data:
|
|
($
in millions)
|
|
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|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Condensed
Income Statement Data:
|
|
($
in millions)
|
|
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The
amount of cumulative unremitted earnings of SunBelt was $14.5 million, $12.9
million and $23.6 million at September 30, 2009, December 31, 2008, and
September 30, 2008, respectively. We received distributions from SunBelt
totaling $25.8 million and $18.3 million for the nine months ended September 30,
2009 and 2008, respectively. We have not made any contributions in
2009 or 2008.
In
accounting for our ownership interest in SunBelt, we adjust the reported
operating results for depreciation expense in order to conform SunBelt’s plant
and equipment useful lives to ours. Beginning January 1, 2007, the
original machinery and equipment of SunBelt had been fully depreciated in
accordance with our useful asset lives, thus resulting in lower depreciation
expense. The lower depreciation expense increased our share of
SunBelt’s operating results by $1.0 million for both the three months
ended September 30, 2009 and 2008, and $2.7 million and $3.3 million for the
nine months ended September 30, 2009 and 2008, respectively. The
operating results from SunBelt included interest expense of $1.0 million and
$1.1 million for the three months ended September 30, 2009 and 2008,
respectively, and $3.0 million and $3.3 million for the nine months ended
September 30, 2009 and 2008, respectively, on the SunBelt
Notes. Finally, we provide various administrative, management and
logistical services to SunBelt for which we received fees totaling $2.1 million
for both the three months ended September 30, 2009 and 2008, and $6.3 million
for both the nine months ended September 30, 2009 and 2008.
Pursuant
to a note purchase agreement dated December 22, 1997, SunBelt sold $97.5
million of Guaranteed Senior Secured Notes due 2017, Series O, and $97.5 million
of Guaranteed Senior Secured Notes due 2017, Series G. We refer to these notes
as the SunBelt Notes. The SunBelt Notes bear interest at a rate of 7.23% per
annum, payable semiannually in arrears on each June 22 and December
22.
We have
guaranteed the Series O Notes, and PolyOne, our partner in this venture, has
guaranteed the Series G Notes, in both cases pursuant to customary guaranty
agreements. Our guarantee and PolyOne’s guarantee are several, rather than
joint. Therefore, we are not required to make any payments to satisfy the Series
G Notes guaranteed by PolyOne. An insolvency or bankruptcy of PolyOne will not
automatically trigger acceleration of the SunBelt Notes or cause us to be
required to make payments under our guarantee, even if PolyOne is required to
make payments under its guarantee. However, if SunBelt does not make timely
payments on the SunBelt Notes, whether as a result of a failure to pay on a
guarantee or otherwise, the holders of the SunBelt Notes may proceed against the
assets of SunBelt for repayment. If we were to make debt service payments under
our guarantee, we would have a right to recover such payments from
SunBelt.
Beginning
on December 22, 2002 and each year through 2017, SunBelt is required to
repay $12.2 million of the SunBelt Notes, of which $6.1 million is attributable
to the Series O Notes. Our guarantee of these SunBelt Notes was $54.8
million at September 30, 2009. In the event SunBelt cannot make any of these
payments, we would be required to fund the payment on the Series O Notes. In
certain other circumstances, we may also be required to repay the SunBelt Notes
prior to their maturity. We and PolyOne have agreed that, if we or PolyOne
intend to transfer our respective interests in SunBelt and the transferring
party is unable to obtain consent from holders of 80% of the aggregate principal
amount of the indebtedness related to the guarantee being transferred after good
faith negotiations, then we and PolyOne will be required to repay our respective
portions of the SunBelt Notes. In such event, any make whole or similar
penalties or costs will be paid by the transferring party.
In
addition to SunBelt, we have two other investments, which are accounted for
under the equity method. The following table summarizes our
investments in our equity affiliates:
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
September
30,
2008
|
|
|
|
($
in millions)
|
|
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Investments
in equity affiliates
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The
following table summarizes our equity earnings of non-consolidated
affiliates:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
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|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
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($
in millions)
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Equity
earnings of non-consolidated affiliates
|
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We
received net distributions from our non-consolidated affiliates of $29.1 million
and $20.9 million for the nine months ended September 30, 2009 and 2008,
respectively.
LONG-TERM
DEBT
On August 19, 2009, we sold $150.0
million of 8.875% Senior Notes (2019 Notes) with a maturity date of August 15,
2019. The 2019 Notes were issued at 99.19% of par value, providing a
yield to maturity to investors of 9.0%. Interest will be paid
semi-annually beginning on February 15, 2010. Proceeds of $145.5
million, after expenses of $3.3 million, from the 2019 Notes will be used to
further strengthen our long-term liquidity given uncertain economic
times.
PENSION
PLANS AND RETIREMENT BENEFITS
Most of
our employees participate in defined contribution pension plans. We
provide a contribution to an individual retirement contribution account
maintained with the CEOP equal to 5% of the employee’s eligible compensation if
such employee is less than age 45, and 7.5% of the employee’s eligible
compensation if such employee is age 45 or older. Expenses of the defined
contribution pension plans were $3.0 million and $2.8 million for the three
months ended September 30, 2009 and 2008, respectively, and $10.0 million and
$8.7 million for the nine months ended September 30, 2009 and 2008,
respectively.
A portion
of our bargaining hourly employees continue to participate in our domestic
defined benefit pension plans, which are non-contributory final-average-pay or
flat-benefit plans. Our funding policy for the defined benefit pension plans is
consistent with the requirements of federal laws and regulations. Our foreign
subsidiaries maintain pension and other benefit plans, which are consistent with
statutory practices. Our defined benefit pension plan provides that if, within
three years following a change of control of Olin, any corporate action is taken
or filing made in contemplation of, among other things, a plan termination or
merger or other transfer of assets or liabilities of the plan, and such
termination, merger, or transfer thereafter takes place, plan benefits would
automatically be increased for affected participants (and retired participants)
to absorb any plan surplus (subject to applicable collective bargaining
requirements).
We also
provide certain postretirement health care (medical) and life insurance benefits
for eligible active and retired domestic employees. The health care plans are
contributory with participants’ contributions adjusted annually based on medical
rates of inflation and plan experience.
|
|
Pension
Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
Three Months Ended
September
30,
|
|
|
Three Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Components of Net Periodic Benefit (Income)
Cost
|
|
($
in millions)
|
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Expected
return on plans’ assets
|
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Amortization
of prior service cost
|
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Recognized
actuarial loss
|
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Net
periodic benefit (income) cost
|
|
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Pension
Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
Nine Months Ended
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
|
2009
|
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|
2008
|
|
|
2009
|
|
|
2008
|
|
Components of Net Periodic Benefit (Income)
Cost
|
|
($
in millions)
|
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Expected
return on plans’ assets
|
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Amortization
of prior service cost
|
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Recognized
actuarial loss
|
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Net
periodic benefit (income) cost
|
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|
During
the nine months ended September 30, 2009, we made contributions to our
foreign defined benefit pension plan of $2.0 million. In June 2008,
we recorded a curtailment charge of $0.8 million resulting from the conversion
of our McIntosh, AL Chlor Alkali hourly workforce from a defined benefit pension
plan to a defined contribution pension plan.
INCOME
TAXES
The
effective tax rate for the nine months ended September 30, 2009 included expense
of $2.0 million for a valuation allowance recorded against the foreign tax
credit carryforward deferred tax asset generated by our Canadian
operations.
At
September 30, 2009, our current deferred income taxes of $66.0 million included
refundable income taxes of $5.0 million. A reclassification totaling
$58.9 million from deferred income taxes to current deferred income taxes was
made conforming deferred taxes to the classification of the underlying related
assets and liabilities at September 30, 2008.
As of
September 30, 2009, we had $49.0 million of gross unrecognized tax benefits, all
of which would impact the effective tax rate, if recognized. The
amount of unrecognized tax benefits was as follows:
|
September
30, 2009
|
|
|
($
in millions)
|
|
Balance
at beginning of year
|
|
|
|
|
Increases
for prior year tax positions
|
|
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|
|
Decrease
for prior year tax positions
|
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|
|
Increases
for current year tax positions
|
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|
|
Settlements
with taxing authorities
|
|
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|
|
Reductions
due to statute of limitations
|
|
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|
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|
|
As of
September 30, 2009, we believe it is reasonably possible that our total amount
of unrecognized tax benefits will decrease by approximately $8.6 million over
the next twelve months. The reduction primarily relates to
settlements with taxing authorities and the lapse of federal, state, and foreign
statutes of limitation.
Our
federal income tax returns for 2005 to 2008 are open tax years under the statute
of limitations. We file in numerous state and foreign jurisdictions
with varying statutes of limitation. The tax years 2004 through 2008
are open depending on each jurisdiction’s unique statute of
limitation. Pioneer filed income tax returns in the U.S., various
states, Canada, and various Canadian provinces. The Pioneer income
tax returns are open for examination for the years 2005 and
forward. The Internal Revenue Service (IRS) has notified us of its
intent to audit our U.S. income tax return for 2006. The IRS has also
commenced an audit of Pioneer’s 2006 and 2007 tax years in the fourth quarter of
2008. The Canada Revenue Agency has commenced an audit of Pioneer’s
Canadian tax returns for its 2005 to 2007 tax years. No issues have
arisen to date that would suggest an additional tax liability should be
recognized.
DERIVATIVE
FINANCIAL INSTRUMENTS
In March
2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (SFAS No.
161), which was incorporated into ASC 815 “Derivatives and Hedging” (ASC
815). This statement provides companies with requirements for
enhanced disclosures about derivative instruments and hedging activities to
enable investors to better understand their effects on a company’s financial
position, financial performance and cash flows. In accordance with
the effective date of this statement, we adopted the revised disclosure
provisions of ASC 815 during the three months ended March 31,
2009.
We are
exposed to market risk in the normal course of our business operations due to
our purchases of certain commodities, our ongoing investing and financing
activities, and our operations that use foreign currencies. The risk of loss can
be assessed from the perspective of adverse changes in fair values, cash flows
and future earnings. We have established policies and procedures governing our
management of market risks and the use of financial instruments to manage
exposure to such risks. ASC 815, formerly SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (SFAS No. 133), requires
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. We
use hedge accounting treatment for substantially all of our business
transactions whose risks are covered using derivative instruments. In
accordance with ASC 815, we designate commodity forward contracts as cash flow
hedges of forecasted purchases of commodities and certain interest rate swaps as
fair value hedges of fixed-rate borrowings. We do not enter into any
derivative instruments for trading or speculative purposes.
Energy
costs, including electricity used in our Chlor Alkali Products segment, and
certain raw materials and energy costs, namely copper, lead, zinc, electricity,
and natural gas used primarily in our Winchester segment, are subject to price
volatility. Depending on market conditions, we may enter into futures contracts
and put and call option contracts in order to reduce the impact of commodity
price fluctuations. The majority of our commodity derivatives expire
within one year. Those commodity contracts that extend beyond one
year correspond with raw material purchases for long-term fixed-price sales
contracts.
We enter
into forward sales and purchase contracts to manage currency risk resulting from
purchase and sale commitments denominated in foreign currencies (principally
Canadian dollar and Euro). All of the currency derivatives expire within two
years and are for United States dollar equivalents. Our foreign currency forward
contracts do not meet the criteria to qualify for hedge
accounting. At September 30, 2009, December 31, 2008 and September
30, 2008, we had forward contracts to sell foreign currencies with a notional
value of $1.4 million, zero, and $0.9 million, respectively. At
September 30, 2009, December 31, 2008, and September 30, 2008 we had forward
contracts to buy foreign currencies with a notional value of $2.0 million, zero,
and $1.0 million, respectively.
In 2001
and 2002, we entered into interest rate swaps on $75 million of our underlying
fixed-rate debt obligations, whereby we agreed to pay variable rates to a
counterparty who, in turn, pays us fixed rates. The counterparty to
these agreements is Citibank, N.A., a major financial institution. In
January 2009, we entered into a $75 million fixed interest rate swap with equal
and opposite terms as the $75 million variable interest rate swaps on the
9.125% senior notes due 2011 (2011 Notes). We have agreed to pay
a fixed rate to a counterparty who, in turn, pays us variable
rates. The counterparty to this agreement is Bank of America, a major
financial institution. The result was a gain of $7.9 million on the
$75 million variable interest rate swaps, which will be recognized through
2011. In January 2009, we de-designated our $75 million interest rate
swaps that had previously been designated as fair value hedges. The
$75 million variable interest rate swaps and the $75 million fixed interest rate
swap do not meet the criteria for hedge accounting. All changes in
the fair value of these interest rate swaps are recorded currently in
earnings.
Cash
flow hedges
ASC 815
requires that all derivative instruments be recorded on the balance sheet at
their fair value. For derivative instruments that are designated and
qualify as a cash flow hedge, the change in fair value of the derivative is
recognized as a component of other comprehensive loss until the hedged item is
recognized into earnings. Gains and losses on the derivatives
representing hedge ineffectiveness are recognized currently in
earnings.
We had
the following notional amount of outstanding commodity forward contracts that
were entered into to hedge forecasted purchases:
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
September
30,
2008
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
As of
September 30, 2009, the counterparty to $38.6 million of these commodity forward
contracts was Wells Fargo, a major financial institution.
We use
cash flow hedges for certain raw material and energy costs such as copper, zinc,
lead, and natural gas to provide a measure of stability in managing our exposure
to price fluctuations associated with forecasted purchases of raw materials and
energy costs used in the company's manufacturing process. At
September 30, 2009, we had open positions in futures contracts through 2013. If
all open futures contracts had been settled on September 30, 2009, we would have
recognized a pretax gain of $12.6 million.
If
commodity prices were to remain at the levels they were at September 30, 2009,
approximately $9.9 million of deferred gains would be reclassified into earnings
during the next twelve months. The actual effect on earnings will be
dependent on actual commodity prices when the forecasted transactions
occur.
Fair
value hedges
For
derivative instruments that are designated and qualify as a fair value hedge,
the gain or loss on the derivative as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized in current earnings.
We include the gain or loss on the hedged items (fixed-rate borrowings) in the
same line item, interest expense, as the offsetting loss or gain on the related
interest rate swaps. As of September 30, 2009, December 31, 2008 and
September 30, 2008, the total notional amount of our interest rate swaps
designated as fair value hedges were $26.6 million, $101.6 million and $101.6
million, respectively. In January 2009, we de-designated our $75
million interest rate swaps that had previously been designated as fair value
hedges.
We use
interest rate swaps as a means of managing interest expense and floating
interest rate exposure to optimal levels. These interest rate swaps are treated
as fair value hedges. The accounting for gains and losses associated with
changes in fair value of the derivative and the effect on the condensed
financial statements will depend on the hedge designation and whether the hedge
is effective in offsetting changes in fair value of cash flows of the asset or
liability being hedged. We have entered into $26.6 million of such
swaps, whereby we agreed to pay variable rates to a counterparty who, in turn,
pays us fixed rates. The counterparty to these agreements is
Citibank, N.A., a major financial institution. In all cases, the
underlying index for the variable rates is six-month London InterBank Offered
Rate (LIBOR). Accordingly, payments are settled every six months and the terms
of the swaps are the same as the underlying debt instruments.
Financial
statement impacts
We
present our derivative assets and liabilities in our condensed balance sheets on
a net basis. We net derivative assets and liabilities whenever we
have a legally enforceable master netting agreement with the counterparty to our
derivative contracts. We use these agreements to manage and
substantially reduce our potential counterparty credit risk.
The
following table summarizes the location and fair value of the derivative
instruments on our condensed balance sheets. The table disaggregates
our net derivative assets and liabilities into gross components on a
contract-by-contract basis before giving effect to master netting
arrangements:
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
|
|
Fair
Value
|
|
|
|
Fair
Value
|
|
|
|
|
($
in millions)
|
|
|
|
($
in millions)
|
|
Derivatives
Designated as Hedging Instruments
|
Balance
Sheet
Location
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
September
30, 2008
|
|
Balance
Sheet
Location
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
September
30, 2008
|
|
|
|
|
|
|
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|
Commodity
contracts – gains
|
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Commodity
contracts – losses
|
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|
Derivatives
Not Designated as Hedging Instruments
|
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Commodity
contracts – losses
|
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Foreign
currency contracts
|
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(1) Does
not include the impact of cash collateral provided to
counterparties.
The
following table summarizes the effects of derivative instruments on our
condensed statements of income:
|
|
|
|
|
Amount
of Gain (Loss)
|
|
|
Amount
of Gain (Loss)
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
Location
of Gain (Loss)
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Derivatives
– Cash Flow Hedges
|
|
|
|
|
($
in millions)
|
|
Recognized
in other comprehensive loss (effective portion)
|
|
|
|
|
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|
Reclassified
from accumulated other comprehensive loss into income (effective
portion)
|
|
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|
Recognized
in income (ineffective portion)
|
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|
|
Derivatives
– Fair Value Hedges
|
|
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|
|
Derivatives
Not Designated as Hedging Instruments
|
|
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|
Foreign
currency contracts
|
|
Selling
and administration
|
|
|
|
|
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|
Credit
risk and collateral
By using
derivative instruments, we are exposed to credit and market risk. If a
counterparty fails to fulfill its performance obligations under a derivative
contract, our credit risk will equal the fair-value gain in a derivative.
Generally, when the fair value of a derivative contract is positive, this
indicates that the counterparty owes us, thus creating a repayment risk for us.
When the fair value of a derivative contract is negative, we owe the
counterparty and, therefore, assume no repayment risk. We minimize the credit
(or repayment) risk in derivative instruments by entering into transactions with
high-quality counterparties. We monitor our positions and the credit
ratings of our counterparties and we do not anticipate non-performance by the
counterparties.
Based on
the agreements with our various counterparties, cash collateral is required to
be provided when the net fair value of the derivatives, with the counterparty,
exceed a specific threshold. If the threshold is exceeded, cash is
either provided by the counterparty to us if the value of the derivatives is our
asset, or cash is provided by us to the counterparty if the value of the
derivatives is our liability. As of September 30, 2009, December
31, 2008 and September 30, 2008, the amounts recognized in accrued liabilities
for the right to reclaim cash collateral totaled zero, $22.0 million, and
$6.5 million, respectively. In all instances where we are party to a
master netting agreement, we offset the receivable or payable recognized upon
payment of cash collateral against the fair value amounts recognized for
derivative instruments that have also been offset under such master netting
agreements. A reclassification totaling $22.0 million and $6.5
million from other current assets to accrued liabilities was made conforming
cash collateral to the classification of the related derivative instruments at
December 31, 2008 and September 30, 2008, respectively.
FAIR
VALUE MEASUREMENTS
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(SFAS No. 157), which was incorporated into ASC 820 “Fair Value Measurements and
Disclosures” (ASC 820). This statement did not require any new fair
value measurements, but rather, it provided enhanced guidance to other
pronouncements that require or permit assets or liabilities to be measured at
fair value. The changes to current practice resulting from the application of
this statement related to the definition of fair value, the methods used to
estimate fair value, and the requirement for expanded disclosures about
estimates of fair value. This statement became effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The effective date for this statement for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis, was delayed by one
year. Nonfinancial assets and nonfinancial liabilities that were
impacted by this deferral included assets and liabilities initially measured at
fair value in a business combination, and intangible assets and goodwill tested
annually for impairment. We adopted the provisions of this statement
related to financial assets and financial liabilities on January 1,
2008. The partial adoption of this statement did not have a material
impact on our financial statements. We adopted the remaining
provisions of this statement related to nonfinancial assets and liabilities on
January 1, 2009. The adoption of the remaining provisions of this
statement did not have a material impact on our financial
statements.
In April
2009, the FASB issued Staff Position SFAS No. 157-4, “Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (SFAS
No. 157-4), which was incorporated into ASC 820. This position
provided guidelines for making fair value measurements more consistent with the
principles presented in ASC 820. This position related to determining
fair values when there is no active market or where the price inputs being used
represent distressed sales. This position stated that the objective
of fair value measurement is to reflect how much an asset would be sold for in
an orderly transaction (as opposed to a distressed or forced transaction) at the
date of the financial statements under current market
conditions. This position became effective for interim and fiscal
years ending after June 15, 2009, with early adoption permitted. We
adopted this position as of March 31, 2009. The adoption of this
position did not have a material effect on our financial
statements.
Fair
value is defined as the price at which an asset could be exchanged in a current
transaction between knowledgeable, willing parties or the amount that would be
paid to transfer a liability to a new obligor, not the amount that would be paid
to settle the liability with the creditor. Where available, fair value is based
on observable market prices or parameters or derived from such prices or
parameters. Where observable prices or inputs are not available, valuation
models are applied. These valuation techniques involve some level of management
estimation and judgment, the degree of which is dependent on the price
transparency for the instruments or market and the instruments’
complexity.
Assets
and liabilities recorded at fair value in the condensed balance sheets are
categorized based upon the level of judgment associated with the inputs used to
measure their fair value. Hierarchical levels, defined by ASC 820 and directly
related to the amount of subjectivity associated with the inputs to fair
valuation of these assets and liabilities, are as follows:
Level 1 —
Inputs were unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date.
Level 2 —
Inputs (other than quoted prices included in Level 1) were either directly or
indirectly observable for the asset or liability through correlation with market
data at the measurement date and for the duration of the instrument’s
anticipated life.
Level 3 —
Inputs reflected management’s best estimate of what market participants would
use in pricing the asset or liability at the measurement date. Consideration was
given to the risk inherent in the valuation technique and the risk inherent in
the inputs to the model.
Determining
which hierarchical level an asset or liability falls within requires significant
judgment. We evaluate our hierarchy disclosures each
quarter. The following table summarizes the financial instruments
measured at fair value in the condensed balance sheet as of September 30,
2009:
|
Fair
Value Measurements
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
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Total
|
|
Assets
|
($
in millions)
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Commodity
forward contracts
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Commodity
forward contracts
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Foreign
currency contracts
|
|
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|
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Short-term
investments
We
classified our marketable securities as available-for-sale which were reported
at fair market value. Unrealized gains and losses, to the extent such
losses are considered temporary in nature, are included in accumulated other
comprehensive loss, net of applicable taxes. At such time as the
decline in fair market value and the related unrealized loss is determined to be
a result of impairment of the underlying instrument, the loss is recorded as a
charge to earnings. Fair values for marketable securities are based
upon prices and other relevant information observable in market transactions
involving identical or comparable assets or liabilities or prices obtained from
independent third-party pricing services. The third-party pricing
services employ various models that take into consideration such market-based
factors as recent sales, risk-free yield curves, prices of similarly rated
bonds, and direct discussions with dealers familiar with these types of
securities.
As of
June 30, 2008, we held corporate debt securities totaling $26.6 million of par
value with a fair value of $20.5 million. For the six months ended
June 30, 2008, a temporary unrealized after-tax loss of $3.7 million ($6.1
million pretax) was recorded in accumulated other comprehensive
loss. As of June 30, 2008, we concluded no other-than-temporary
impairment losses had occurred. The AA-rated issuer of these debt
securities had funded all redemptions at par and maintained short-term A1/P2
credit ratings. We entered into this structured investment vehicle in
March 2006 as part of an approved cash management portfolio. Given
our liquidity and capital structure, we had the ability to hold these debt
securities until maturity on April 1, 2009.
Through
September 30, 2008, the issuer of these debt securities had continued to fund
all redemptions at par but was downgraded to short-term A3/P2 credit
ratings. On October 1, 2008, the issuer of these debt securities
announced it would cease trading and appoint a receiver as a result of financial
market turmoil. The decline in the market value of the assets
supporting these debt securities negatively impacted the liquidity of the
issuer. On October 1, subsequent to the issuer’s announcement, the
Moody’s rating for these debt securities was downgraded from A3 to
Ca.
As of
September 30, 2008, we continued to hold corporate debt securities totaling
$26.6 million of par value. We determined that these debt securities
had no fair market value due to the actions taken by the issuer, turmoil in the
financial markets, the lack of liquidity of the issuer, and the lack of trading
in these debt securities. These factors led management to believe the
recovery of the asset value, if any, was highly unlikely.
Because
of the unlikelihood that these debt securities would recover in value, we
recorded an after-tax impairment loss of $26.6 million in other income (expense)
for the three months ended September 30, 2008. We are currently
unable to utilize the capital loss resulting from the impairment of these
corporate debt securities; therefore, no tax benefit has been recognized for the
impairment loss.
Interest
rate swaps
The
fair value of the interest rate swaps were valued using the “income approach”
valuation technique. This method used valuation techniques to convert
future amounts to a single present amount. The measurement was based
on the value indicated by current market expectations about those future
amounts. We use interest rate swaps as a means of managing interest
expense and floating interest rate exposure to optimal levels.
Commodity forward
contracts
The fair
value of the commodity forward contracts were valued primarily based on prices
and other relevant information observable in market transactions involving
identical or comparable assets or liabilities including both forward and spot
prices for commodities. We use commodity forward contracts for
certain raw materials and energy costs such as copper, zinc, lead, and natural
gas to provide a measure of stability in managing our exposure to price
fluctuations.
Financial
Instruments
The
carrying values of cash and cash equivalents, accounts receivable and accounts
payable approximated fair values due to the short-term maturities of these
instruments. The fair value of our long-term debt was determined based on
current market rates for debt of the same risk and maturities. At September 30,
2009, December 31, 2008, and September 30, 2008, the estimated fair value
of debt was $389.5 million, $221.0 million and $239.8 million, respectively,
which compares to debt recorded on the balance sheet of $399.6 million, $252.4
million and $249.7 million, respectively. The lower fair value of
debt as of December 31, 2008 was due to the adverse conditions in the overall
credit and financial markets experienced in 2008.
ASC 820
requires separate disclosure of assets and liabilities measured at fair value on
a recurring basis, as documented above, from those measured at fair value on a
nonrecurring basis. Nonfinancial assets measured at fair value
on a nonrecurring basis are intangible assets and goodwill, which are reviewed
annually in the fourth quarter and/or when circumstances or other events
indicate that impairment may have occurred. No circumstances or
events happened that indicated impairment may have occurred for the nine months
ended September 30, 2009; therefore, no measurement at fair value was required
for these nonfinancial assets.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Business
Background
Our
manufacturing operations are concentrated in two business segments: Chlor Alkali
Products and Winchester. Both are capital intensive manufacturing businesses
with operating rates closely tied to the general economy. Each segment has a
commodity element to it, and therefore, our ability to influence pricing is
quite limited on the portion of the segment’s business that is strictly
commodity. Our Chlor Alkali Products segment is a commodity business where all
supplier products are similar and price is the major supplier selection
criterion. We have little or no ability to influence prices in this large,
global commodity market. Cyclical price swings, driven by changes in
supply/demand, can be abrupt and significant and, given the capacity in our
Chlor Alkali Products business, can lead to very significant changes in our
overall profitability. Winchester also has a commodity element to its business,
but a majority of Winchester ammunition is sold as a branded consumer product
where there are opportunities to differentiate certain offerings through
innovative new product development and enhanced product performance. While
competitive pricing versus other branded ammunition products is important, it is
not the only factor in product selection.
Executive
Summary
During
the second and third quarters of 2009, a bill was introduced in the United
States House of Representatives and the Senate, respectively, which, if
enacted, would ban the production of chlor alkali products using mercury cell
technology two years from the date it is enacted into law. On October 21,
2009, the House Committee on Energy and Commerce passed a bill that would
require chlor alkali producers using mercury cell technology to make a decision
by June 30, 2012 as to whether to shutdown or convert these facilities. If the
decision is to convert, the mercury cell plants would be required to be
converted by June 30, 2015. If the decision is not to convert, the
plants would be required to be shutdown by June 30, 2013. For this bill to
become law it must be passed by the full House of Representatives and the full
Senate. No action has yet been taken by the Senate on its
bill. Olin currently operates two facilities which utilize mercury cell
technology totaling approximately 350,000 ECUs of capacity (approximately 18% of
our capacity). We are closely monitoring the progress of these bills, but
it is too soon to estimate the likelihood of enactment, and therefore to
determine what impact there will be on Olin and the chlor alkali industry.
Olin operates its mercury cell facilities in full compliance with all
environmental rules and regulations.
Chlor
Alkali Products’ segment income was $3.9 million and $120.2 million for the
three and nine months ended September 30, 2009, respectively. Chlor
Alkali Products continued to experience the weak demand that began in the fourth
quarter of 2008. Volumes for chlorine and caustic soda decreased 20%
and 27% for the three and nine months ended September 30, 2009, respectively,
compared to the prior year. Operating rates in Chlor Alkali Products
for the three months ended September 30, 2009 and 2008 were 74% and 89%,
respectively, and for the nine months ended September 30, 2009 and 2008 were 70%
and 87%, respectively. These operating rates assume that 100% of our
demonstrated capacity was available for use. The capacity of our St.
Gabriel, LA facility has been shutdown since late November 2008 and the facility
will not be available for use until the conversion and expansion project is
completed. The mercury cell facility at St. Gabriel, LA became
permanently inoperable during the first quarter of 2009. In addition,
in response to low levels of customer demand for chlorine and caustic soda, an
additional 5% of our chlorine and caustic soda capacity has been
idled. After taking these capacity reduction actions into
consideration, our effective operating rates for the three and nine months ended
September 30, 2009 were 86% and 79%, respectively.
The third
quarter 2009 ECU netbacks of $375 were 43% lower than the third quarter of 2008
netbacks of $660, reflecting the changes in the pricing dynamics in North
America. During 2008, North American demand for caustic soda remained
strong, while supply continued to be constrained by the weakness in chlorine
demand. This resulted in a significant supply and demand imbalance
for caustic soda in North America, which resulted in record caustic soda
pricing. The result was a record ECU netback in the first quarter of
2009 of approximately $765. Beginning late in the fourth quarter of
2008 and continuing into the third quarter of 2009, demand for caustic soda
weakened significantly, and fell below the demand for chlorine. This
created excess supply in North America, which has caused caustic soda prices to
fall. The over supply of caustic soda caused industry operating rates
to be constrained, which resulted in chlorine price increase announcements of
$300 per ton during the second quarter of 2009. Caustic soda prices
declined precipitously in the second quarter of 2009 and these declines
continued into the third quarter of 2009. During the third quarter of
2009, chlorine and caustic soda demand became more balanced eliminating the
oversupply of caustic soda, which resulted in caustic soda price increase
announcements of $180 per ton. We began realizing increases in
chlorine prices in the third quarter of 2009 with most of the improvement
expected in the fourth quarter of 2009 and into 2010. We expect caustic soda
prices to decline further in the fourth quarter of 2009 before we are able to
begin realizing the third quarter 2009 price increase announcements in caustic
soda. We expect to begin realizing these price increases in caustic soda
in the first quarter of 2010.
Winchester
segment income was $23.0 million and $59.1 million for the three and nine months
ended September 30, 2009, respectively. Winchester segment income for
the three and nine months ended September 30, 2009, improved 135% and 102%,
respectively, compared to prior year. Winchester’s results reflected
the continuation of the stronger than normal demand that began in the fourth
quarter of 2008, lower commodity and other material costs, and improved
pricing.
Earnings
for the three and nine months ended September 30, 2009 included $44.3 million
and $45.1 million, respectively, of recoveries from third parties for
environmental costs incurred and expensed in prior periods.
On August
19, 2009, we sold $150.0 million of 2019 Notes with a maturity date of August
15, 2019. The 2019 Notes were issued at 99.19% of par value,
providing a yield to maturity to investors of 9.0%. Interest will be
paid semi-annually beginning on February 15, 2010. Proceeds of $145.5
million, after expenses of $3.3 million, from the 2019 Notes will be used to
further strengthen our long-term liquidity given uncertain economic
times.
Consolidated
Results of Operations
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
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2008
|
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2009
|
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2008
|
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($
in millions, except per share data)
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Selling
and administration
|
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Other
operating income (expense)
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)
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Earnings
of non-consolidated affiliates
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Net
Income per Common Share:
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Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
Sales for
the three months ended September 30, 2009 were $397.0 million compared to $502.9
million last year, a decrease of $105.9 million, or 21%. Chlor Alkali
Products’ sales decreased $133.3 million, or 37%, due to lower ECU prices and
decreased shipment volumes. Our ECU netbacks, excluding SunBelt,
decreased 43% compared to the same period in the prior
year. Winchester sales increased by $27.4 million, or 19%, from the
three months ended September 30, 2008, primarily due to increased
volumes.
Gross
margin decreased $42.3 million, or 34%, compared to the three months ended
September 30, 2008, due to decreased Chlor Alkali gross margin resulting from
decreased ECU netbacks and lower volumes, partially offset by improved
Winchester gross margin resulting from higher volumes and lower commodity and
other material costs. Gross margin was positively impacted by
recoveries from third parties for environmental costs incurred and expensed in
prior periods of $44.3 million. Gross margin as a percentage of sales
decreased to 20% in 2009 from 24% in 2008.
Selling
and administration expenses for the three months ended September 30, 2009
decreased $4.4 million, or 12%, from the three months ended September 30, 2008,
primarily due to lower non-income taxes of $5.4 million, primarily resulting
from a favorable resolution of a Canadian capital tax matter, lower recruiting
and relocation charges of $2.3 million and a lower provision for doubtful
customer accounts receivable of $0.7 million. These decreases were
partially offset by increased management incentive compensation expense of $2.7
million, primarily resulting from mark-to-market adjustments on stock-based
compensation, and a higher level of legal and legal-related settlement expenses
of $1.5 million, which included recovery actions for environmental costs
previously incurred and expensed. Selling and administration expenses
as a percentage of sales were 8% in 2009 and 7% in 2008.
Other
operating income (expense) for the three months ended September 30, 2009
increased $1.5 million from the three months ended September 30, 2008, primarily
due to a gain in 2009 of $0.9 million on dispositions of property, plant and
equipment compared to a loss in 2008 of $0.6 million on dispositions of
property, plant and equipment.
The
earnings of non-consolidated affiliates were $7.1 million for the three months
ended September 30, 2009, a decrease of $4.9 million from the three months ended
September 30, 2008, primarily due to lower ECU netbacks at SunBelt partially
offset by increased earnings at our bleach joint venture.
Interest
expense decreased by $1.4 million, or 42%, in 2009 primarily due to an increase
of $2.5 million in capitalized interest associated with our St. Gabriel, LA
facility conversion and expansion project and a major maintenance capital
project at our McIntosh, AL facility, partially offset by a higher level of
outstanding debt.
Interest
income decreased by $0.9 million, or 90%, in 2009 primarily due to lower
short-term interest rates.
The
effective tax rate for the three months ended September 30, 2009 included a $2.8
million reduction in expense primarily associated with the finalization of the
2008 income tax returns, which primarily resulted in lower state tax expense,
and a $1.5 million reduction in expense primarily associated with the expiration
of statutes of limitation in domestic jurisdictions. After giving
consideration to these two items of $4.3 million, the effective tax rate for the
three months ended September 30, 2009 of 37.2% was higher than the 35% U.S.
federal statutory rate primarily due to state income taxes, which were offset in
part by the utilization of certain state tax credits. The effective
tax rate for the three months ended September 30, 2008 included expense of $10.4
million for a valuation allowance applied against the deferred tax benefit
resulting from the $26.6 million capital loss carryforward generated from the
impairment of corporate debt securities. The effective tax rate for
the three months ended September 30, 2008 also included a $2.5 million reduction
in expense primarily associated with the finalization of the 2007 income tax
returns, which resulted in an increased domestic manufacturing
deduction. After giving consideration to these two items of $7.9
million, the effective tax rate for the three months ended September 30, 2008 of
35.1% was higher than the 35% U.S. federal statutory rate primarily due to state
income taxes, which were offset in part by the benefit of the domestic
manufacturing deduction and the utilization of certain state tax
credits.
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Sales for
the nine months ended September 30, 2009 were $1,180.6 million compared to
$1,330.3 million last year, a decrease of $149.7 million, or
11%. Chlor Alkali Products’ sales decreased $223.7 million, or 23%,
due to decreased shipment volumes and lower ECU prices. Our ECU
netbacks, excluding SunBelt, decreased 10% compared to the same period in the
prior year. Winchester sales increased by $74.0 million, or 20%, from
the nine months ended September 30, 2008, primarily due to increased
volumes.
Gross
margin decreased $43.1 million, or 15%, compared to the nine months ended
September 30, 2008, due to decreased Chlor Alkali gross margin resulting from
lower volumes and decreased ECU netbacks, partially offset by improved
Winchester gross margin resulting from higher volumes and lower commodity and
other material costs. Gross margin was positively impacted by
recoveries from third parties for environmental costs incurred and expensed in
prior periods of $45.1 million. Gross margin as a percentage of sales
decreased to 21% in 2009 from 22% in 2008.
Selling
and administration expenses for the nine months ended September 30, 2009
increased $2.0 million, or 2%, from the nine months ended September 30, 2008,
primarily due to a higher level of legal and legal-related settlement expenses
of $5.1 million, which included recovery actions for environmental costs
previously incurred and expensed, a higher provision for doubtful customer
accounts receivable of $4.4 million, related to a deterioration in customer
credit, and increased consulting fees of $2.6 million, partially offset by a
favorable resolution of a Canadian capital tax matter of $4.6 million, lower
recruiting and relocation charges of $3.9 million, and decreased management
incentive compensation expense of $1.8 million. Selling and
administration expenses as a percentage of sales were 9% in 2009 and 8% in
2008.
Other
operating income (expense) for the nine months ended September 30, 2009
increased $6.2 million from the nine months ended September 30, 2008, primarily
due to a $3.7 million gain on the sale of land and $1.8 million of gains on the
disposition of property, plant and equipment primarily associated with the St.
Gabriel, LA facility conversion and expansion project compared to a loss in 2008
of $0.6 million on dispositions of property, plant and equipment.
The
earnings of non-consolidated affiliates were $32.9 million for the nine months
ended September 30, 2009, an increase of $1.8 million from the nine months ended
September 30, 2008, primarily due to increased earnings at our bleach joint
venture.
Interest
expense decreased by $6.3 million, or 55%, in 2009 primarily due to an increase
of $6.9 million in capitalized interest associated with our St. Gabriel, LA
facility conversion and expansion project and a major maintenance capital
project at our McIntosh, AL facility partially offset by a higher level of
outstanding debt.
Interest
income decreased by $4.3 million, or 83%, in 2009 primarily due to lower
short-term interest rates and lower average cash balances.
The
effective tax rate for the nine months ended September 30, 2009 included expense
of $2.0 million for a valuation allowance recorded against the foreign tax
credit carryforward deferred tax asset generated by our Canadian
operations. Additionally, the effective tax rate for the nine months
ended September 30, 2009 included a $2.8 million reduction in expense primarily
associated with the finalization of the 2008 income tax returns, which primarily
resulted in lower state tax expense, and a $2.3 million reduction in expense
primarily associated with the expiration of statutes of limitation in domestic
and foreign jurisdictions and a law change in foreign
jurisdictions. After giving consideration to these three items of
$3.1 million, the effective tax rate for the nine months ended September 30,
2009 of 36.7%, was higher than the 35% U.S. federal statutory rate primarily due
to state income taxes, which were offset in part by the utilization of certain
state tax credits. The effective tax rate for the nine months ended
September 30, 2008 included expense of $10.4 million for a valuation allowance
applied against the deferred tax benefit resulting from the $26.6 million
capital loss carryforward generated from the impairment of corporate debt
securities. The effective tax rate for the nine months ended
September 30, 2008 also included a $2.5 million reduction in expense primarily
associated with the finalization of the 2007 income tax returns, which resulted
in an increased domestic manufacturing deduction. After giving
consideration to these two items of $7.9 million, the effective tax rate for the
nine months ended September 30, 2008 of 35.7% was higher than the 35% U.S.
federal statutory rate primarily due to state income taxes, which were offset in
part by the benefit of the domestic manufacturing deduction and the utilization
of certain state tax credits.
Segment
Results
We define
segment results as income before interest expense, interest income, other income
(expense), and income taxes, and include the operating results of
non-consolidated affiliates.
|
|
Three
Months Ended
September
30,
|
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Nine
Months Ended
September
30,
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2009
|
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2008
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2009
|
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2008
|
|
Sales:
|
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($
in millions)
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Environmental
income (expense)(3)
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Other
corporate and unallocated costs
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Other
operating income (expense)(4)
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)
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Other
income (expense)(6)
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(1)
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Earnings
of non-consolidated affiliates were included in the Chlor Alkali Products
segment results consistent with management’s monitoring of the operating
segments. The earnings from non-consolidated affiliates were $7.1 million
and $12.0 million for the three months ended September 30, 2009 and 2008,
respectively, and $32.9 million and $31.1 million for the nine months
ended September 30, 2009 and 2008,
respectively.
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(2)
|
The
service cost and the amortization of prior service cost components of
pension expense related to the employees of the operating segments are
allocated to the operating segments based on their respective estimated
census data. All other components of pension costs are included in
Corporate/Other and include items such as the expected return on plan
assets, interest cost, and recognized actuarial gains and
losses. Pension income for the nine months ended September 30,
2008 included a curtailment charge of $0.8 million resulting from the
conversion of our McIntosh, AL Chlor Alkali hourly workforce from a
defined benefit pension plan to a defined contribution pension
plan.
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(3)
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Environmental
income (expense) for the three and nine months ended September 30, 2009
included $44.3 million and $45.1 million, respectively, of recoveries from
third parties for costs incurred and expensed in prior
periods.
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(4)
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Other
operating income (expense) for the nine months ended September 30, 2009
included a $3.7 million gain on the sale of land and $1.8 million of gains
on the disposal of assets primarily associated with the St. Gabriel, LA
facility conversion and expansion
project.
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(5)
|
Interest
expense was reduced by capitalized interest of $3.6 million and $1.1
million for the three months ended September 30, 2009 and 2008,
respectively, and $9.1 million and $2.2 million for the nine months ended
September 30, 2009 and 2008,
respectively.
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(6)
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Other
income (expense) for the three and nine months ended September 30, 2008
included an impairment charge of the full value of a $26.6 million
investment in corporate debt securities. We are currently
unable to utilize the capital loss resulting from the impairment of these
corporate debt securities; therefore, no tax benefit was recognized during
the period for the impairment loss.
|
Chlor
Alkali Products
Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
Chlor
Alkali Products’ sales for the three months ended September 30, 2009 were $228.8
million compared to $362.1 million for the three months ended September 30,
2008, a decrease of $133.3 million, or 37%. The sales decrease was
primarily due to lower chlorine and caustic soda volumes of 20%, and lower ECU
pricing, which decreased 43% from the three months ended September 30,
2008. Volumes for bleach increased 21% compared to the three months
ended September 30, 2008. Our ECU netbacks, excluding SunBelt, were
approximately $375 for the three months ended September 30, 2009 compared to
approximately $660 for the three months ended September 30,
2008. Freight costs included in the ECU netback increased 8% for the
three months ended September 30, 2009, compared to the three months ended
September 30, 2008. Our operating rate for the three months ended
September 30, 2009 was 74%, compared to our operating rate of 89% for the three
months ended September 30, 2008. The lower operating rate for 2009
resulted from lower caustic soda and chlorine demand.
Chlor
Alkali posted segment income of $3.9 million for the three months ended
September 30, 2009 compared to $104.3 million for the same period in 2008, a
decrease of $100.4 million, or 96%. Chlor Alkali segment income was
lower primarily due to lower ECU netbacks ($87.5 million), decreased volumes
($17.8 million) and lower earnings of non-consolidated affiliates ($4.9 million)
primarily related to SunBelt, offset by lower operating costs ($9.8 million),
primarily electricity.
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Chlor
Alkali Products’ sales for the nine months ended September 30, 2009 were $738.9
million compared to $962.6 million for the nine months ended September 30, 2008,
a decrease of $223.7 million, or 23%. The sales decrease was
primarily due to lower chlorine and caustic soda volumes of 27%, and lower ECU
pricing, which decreased 10% from the nine months ended September 30,
2008. Volumes for bleach increased 16% compared to the nine months
ended September 30, 2008. Our ECU netbacks, excluding SunBelt, were
approximately $550 for the nine months ended September 30, 2009 compared to
approximately $610 for the nine months ended September 30,
2008. Freight costs included in the ECU netback increased 9% for the
nine months ended September 30, 2009, compared to the nine months ended
September 30, 2008. Our operating rate for the nine months ended
September 30, 2009 was 70%, compared to our operating rate of 87% for the nine
months ended September 30, 2008. The lower operating rate for 2009
resulted from lower caustic soda and chlorine demand.
Chlor
Alkali posted segment income of $120.2 million for the nine months ended
September 30, 2009 compared to $241.8 million for the same period in 2008, a
decrease of $121.6 million, or 50%. Chlor Alkali segment income was
lower primarily due to decreased volumes ($93.8 million) and lower ECU netbacks
($31.3 million), partially offset by lower operating costs ($1.7 million) and
improved earnings of non-consolidated affiliates ($1.8 million) primarily
related to our bleach joint venture.
Winchester
Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
Sales
were $168.2 million for the three months ended September 30, 2009 compared to
$140.8 million for the three months ended September 30, 2008, an increase of
$27.4 million, or 19%. Sales of ammunition to domestic and
international commercial customers increased $19.9 million. Shipments
to military customers also increased $9.2 million. These increases
were partially offset by lower shipments to industrial customers, who primarily
supply the construction sector, of $2.6 million and decreased shipments to law
enforcement agencies of $1.8 million.
Winchester
reported segment income of $23.0 million for the three months ended September
30, 2009 compared to $9.8 million for the three months ended September 30, 2008,
an increase of $13.2 million, or 135%. The increase was primarily due to the
impact of decreased commodity and other material costs partially offset by
higher operating costs ($7.7 million) and increased volumes and higher selling
prices ($5.6 million).
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Sales
were $441.7 million for the nine months ended September 30, 2009 compared to
$367.7 million for the nine months ended September 30, 2008, an increase of
$74.0 million, or 20%. Sales of ammunition to domestic and
international commercial customers increased $64.4 million. Shipments
to military customers also increased $15.6 million. These increases
were partially offset by lower shipments to industrial customers, who primarily
supply the construction sector, of $6.5 million and decreased shipments to law
enforcement agencies of $1.9 million.
Winchester
reported segment income of $59.1 million for the nine months ended September 30,
2009 compared to $29.3 million for the nine months ended September 30, 2008, an
increase of $29.8 million, or 102%. The increase was primarily due to the impact
of increased volumes and higher selling prices ($21.2 million) and decreased
commodity and other material costs partially offset by higher operating costs
($8.5 million).
Corporate/Other
Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
For the
three months ended September 30, 2009, pension income included in
Corporate/Other was $6.3 million compared to $5.2 million for the three months
ended September 30, 2008. On a total company basis, defined benefit
pension income for the three months ended September 30, 2009 was $4.6 million
compared to $2.9 million for the three months ended September 30,
2008.
Credits
to income for environmental investigatory and remedial activities were $38.8
million for the three months ended September 30, 2009, which includes $44.3
million of recoveries from third parties of costs incurred and expensed in prior
periods. Without these recoveries in 2009, charges to income for
environmental investigatory and remedial activities would have been $5.5 million
for the three months ended September 30, 2009 compared with $6.4 million for the
three months ended September 30, 2008. These charges related
primarily to expected future investigatory and remedial activities associated
with past manufacturing operations and former waste disposal sites.
For the
three months ended September 30, 2009, other corporate and unallocated costs
were $15.5 million compared with $13.6 million in 2008, an increase of $1.9
million, or 14%. The increase was primarily due to higher management
incentive compensation costs of $4.8 million, primarily resulting from
mark-to-market adjustments on stock-based compensation, higher asset retirement
obligation charges of $0.8 million, and increased legal and legal-related
settlement expenses of $0.8 million, which included recovery actions for
environmental costs previously incurred and expensed, partially offset by the
favorable resolution of a Canadian capital tax matter of $4.6
million.
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
For the
nine months ended September 30, 2009, pension income included in Corporate/Other
was $16.8 million compared to $13.3 million for the nine months ended September
30, 2008. Pension income for the nine months ended September 30, 2008
included a curtailment charge of $0.8 million resulting from the conversion of
our McIntosh, AL Chlor Alkali hourly workforce from a defined benefit pension
plan to a defined contribution pension plan. On a total company
basis, defined benefit pension income for the nine months ended September 30,
2009 was $13.3 million compared to $7.8 million for the nine months ended
September 30, 2008.
Credits
to income for environmental investigatory and remedial activities were $26.8
million for the nine months ended September 30, 2009, which includes $45.1
million of recoveries from third parties of costs incurred and expensed in prior
periods. Without these recoveries in 2009, charges to income for
environmental investigatory and remedial activities would have been $18.3
million for the nine months ended September 30, 2009 compared with $21.2 million
for the nine months ended September 30, 2008. These charges related
primarily to expected future investigatory and remedial activities associated
with past manufacturing operations and former waste disposal sites.
For the
nine months ended September 30, 2009, other corporate and unallocated costs were
$50.5 million compared with $47.5 million in 2008, an increase of $3.0 million,
or 6%. The increase was primarily due to increased legal and
legal-related settlement expenses of $3.9 million, which included recovery
actions for environmental costs previously incurred and expensed, higher asset
retirement obligation charges of $2.4 million, and increased consulting fees of
$1.3 million, partially offset by the favorable resolution of a Canadian capital
tax matter of $4.6 million.
Outlook
Net
income in the fourth quarter of 2009 is projected to be in the $0.15 per diluted
share range compared with $0.61 per diluted share in the fourth quarter of
2008. Our fourth quarter of 2009 forecast includes an expected $35 million
pretax of additional recoveries from third parties for environmental costs
incurred and expensed in prior periods.
The
fourth quarter of 2009 Chlor Alkali Products’ segment earnings are expected to
be similar to the third quarter of 2009 as anticipated higher ECU netbacks are
expected to offset seasonally weaker demand. We have seen a
continuation of the weak chlor alkali demand environment experienced in the
fourth quarter of 2008 continue through out 2009.
Beginning
late in the fourth quarter of 2008 and continuing through the third quarter of
2009, demand for caustic soda weakened significantly, and fell below the demand
for chlorine. This created excess supply in North America, which has
caused caustic soda prices to fall. The over supply of caustic soda
caused industry operating rates to be constrained, which resulted in chlorine
price increase announcements of $300 per ton during the second quarter of
2009. Caustic soda prices declined precipitously in the second
quarter of 2009 and these declines continued into the third quarter of
2009. During the third quarter of 2009, chlorine and caustic soda
demand became more balanced eliminating the oversupply of caustic soda, which
resulted in caustic soda price increase announcements of $180 per
ton. We began realizing increases in chlorine prices in the
third quarter of 2009 with most of the improvement expected in the fourth
quarter of 2009 and into 2010. We expect caustic soda prices to decline
further in the fourth quarter of 2009 before we are able to begin realizing the
third quarter 2009 price increase announcments in caustic soda. We expect
to begin realizing these price increases in caustic soda in the first
quarter of 2010. Overall, ECU netbacks are expected to improve in the
fourth quarter of 2009 compared to the third quarter.
We expect
Chlor Alkali Products’ operating rates in the fourth quarter of 2009 to
be in the 70% to 75% range which is similar to the third quarter of 2009
level of 74% and an improvement from the fourth quarter of 2008 level of
67%.
Winchester
fourth quarter of 2009 results are expected to exceed the fourth quarter of
2008 segment income of $3.3 million but be significantly lower than the third
quarter of 2009 due to seasonally weaker demand. The improved
Winchester results from the prior year are based on continued higher volumes and
lower commodity and other material costs. During 2009,
Winchester has experienced a continuation of the above normal levels of demand
that began around the November 2008 presidential election. The
increase in demand has been across the majority of Winchester’s product
offerings, including rifle, pistol and rimfire. Winchester
anticipates that higher than normal levels of demand will continue in the fourth
quarter of 2009.
Without
the full year 2009 recoveries of approximately $80 million of environmental
costs incurred and expensed in prior periods, we anticipate that full year 2009
charges for environmental investigatory and remedial activities will be in the
$25 million range, which is lower than the 2008 charges of $27.7
million.
We
believe the full year 2009 effective tax rate will be in the 34% to 35%
range.
We anticipate our capital spending to
be in the $150 million range for 2009. This spending is higher than
our prior forecast due to additional investments in our Winchester and bleach
operations. We continue to expect depreciation to be in the $75 million range
for full-year 2009. Based on our preliminary outlook, we currently
expect 2010 capital spending to be in the $70 million to $80 million range, and
depreciation in 2010 to be approximately $90 million.
Environmental
Matters
Environmental
provisions (credited) charged to income were as follows:
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Three
Months Ended
September
30,
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Nine
Months Ended
September
30,
|
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|
|
2009
|
|
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2008
|
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2009
|
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|
2008
|
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($
in millions)
|
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Recoveries
from third parties of costs incurred and expensed in prior
periods
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Total
environmental (income) expense
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Environmental
(income) expense for the three and nine months ended September 30, 2009 included
$44.3 million and $45.1 million, respectively, of recoveries from third parties
for costs incurred and expensed in prior periods.
Our
liabilities for future environmental expenditures were as follows:
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September
30,
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2009
|
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2008
|
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Reserve
for Environmental Liabilities:
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($
in millions)
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Balance
at beginning of year
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Remedial
and investigatory spending
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Currency
translation adjustments
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Environmental
investigatory and remediation activities spending was associated with former
waste disposal sites and past manufacturing operations. Spending in 2009 for
investigatory and remedial efforts, the timing of which is subject to regulatory
approvals and other uncertainties, is estimated to be in the $25 million to $35
million range. Cash outlays for remedial and investigatory activities associated
with former waste disposal sites and past manufacturing operations were not
charged to income, but instead, were charged to reserves established for such
costs identified and expensed to income in prior periods. Associated costs of
investigatory and remedial activities are provided for in accordance with
generally accepted accounting principles governing probability and the ability
to reasonably estimate future costs. Our ability to estimate future costs
depends on whether our investigatory and remedial activities are in preliminary
or advanced stages. With respect to unasserted claims, we accrue liabilities for
costs that, in our experience, we may incur to protect our interest against
those unasserted claims. Our accrued liabilities for unasserted claims amounted
to $2.5 million at September 30, 2009. With respect to asserted claims, we
accrue liabilities based on remedial investigation, feasibility study, remedial
action, and Operation, Maintenance and Monitoring (OM&M) expenses that, in
our experience, we may incur in connection with the asserted claims. Required
site OM&M expenses are estimated and accrued in their entirety for required
periods not exceeding 30 years, which reasonably approximates the typical
duration of long-term site OM&M. Charges to income for
investigatory and remedial efforts were material to operating results in 2008
and 2009 and are expected to be material to operating results in future
years.
Our
condensed balance sheets included liabilities for future environmental
expenditures to investigate and remediate known sites amounting to $167.1
million at September 30, 2009, $158.9 million at December 31, 2008, and
$161.1 million at September 30, 2008, of which $132.1 million, $123.9 million,
and $126.1 million, respectively, were classified as other noncurrent
liabilities. These amounts do not take into account any discounting
of future expenditures or any consideration of insurance recoveries or advances
in technology. These liabilities are reassessed periodically to
determine if environmental circumstances have changed and/or remediation efforts
and our estimate of related costs have changed. As a result of these
reassessments, future charges to income may be made for additional
liabilities.
Annual
environmental-related cash outlays for site investigation and remediation,
capital projects, and normal plant operations are expected to range between
approximately $50 million to $60 million over the next several years, $20
million to $40 million of which is for investigatory and remedial efforts, which
are expected to be charged against reserves recorded on our balance sheet. While
we do not anticipate a material increase in the projected annual level of our
environmental-related cash outlays, there is always the possibility that such an
increase may occur in the future in view of the uncertainties associated with
environmental exposures. Environmental exposures are difficult to assess for
numerous reasons, including the identification of new sites, developments at
sites resulting from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, changes in regulatory
authorities, the scarcity of reliable data pertaining to identified sites, the
difficulty in assessing the involvement and financial capability of other PRPs,
and our ability to obtain contributions from other parties, and the lengthy time
periods over which site remediation occurs. It is possible that some of these
matters (the outcomes of which are subject to various uncertainties) may be
resolved unfavorably to us, which could materially adversely affect on our
financial position or results of operations.
Legal
Matters and Contingencies
We, and
our subsidiaries, are defendants in various legal actions (including proceedings
based on alleged exposures to asbestos) incidental to our past and current
business activities. While we believe that none of these legal actions will
materially adversely affect our financial position, in light of the inherent
uncertainties of litigation, we cannot at this time determine whether the
financial impact, if any, of these matters will be material to our results of
operations.
During
the ordinary course of our business, contingencies arise resulting from an
existing condition, situation, or set of circumstances involving an uncertainty
as to the realization of a possible gain contingency. In certain instances such
as environmental projects, we are responsible for managing the cleanup and
remediation of an environmental site. There exists the possibility of recovering
a portion of these costs from other parties. We account for gain contingencies
in accordance with the provisions of ASC 450, and therefore do not record gain
contingencies and recognize income until it is earned and
realizable.
Liquidity,
Investment Activity and Other Financial Data
Cash
Flow Data
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Nine Months Ended
September
30,
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2009
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2008
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Provided by (Used For)
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($
in millions)
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Long-term
debt borrowings
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Operating
Activities
For the
nine months ended September 30, 2009, cash provided by operating activities
increased by $96.1 million from 2008 primarily due to a smaller increase in
working capital than the prior year. For the nine months ended
September 30, 2009, working capital increased $71.1 million compared with an
increase of $161.6 million in 2008. Receivables increased from
December 31, 2008 by $50.6 million, which includes receivables from third
parties for recoveries of environmental costs incurred and expensed in prior
periods. Our days sales outstanding was consistent with December 31,
2008. Accounts payable and accrued liabilities decreased by $21.2
million primarily due to a $20.6 million payment for the final settlement of
working capital on the sale of the Metals business, which was consistent with
the estimated working capital adjustment we anticipated from the
transaction. The 2009 cash from operations was also affected by a
$43.3 million decrease in cash tax payments. The nine months ended
September 30, 2009 included contributions to our foreign pension plan of $2.0
million.
Investing
Activities
Capital
spending of $122.3 million for the nine months ended September 30, 2009 was $1.1
million lower than in the corresponding period in 2008. For the
total year, we expect our capital spending to be in the $150 million
range. Approximately half of our 2009 spending will be related to the
St. Gabriel, LA conversion and expansion project. We expect
depreciation to be in the $75 million range for full-year 2009.
The 2009
increase in distributions from affiliated companies primarily reflected the
impact of net cash advanced from SunBelt.
Financing
Activities
In August 2009, we sold $150.0 million
of 2019 Notes with a maturity date of August 15, 2019. The 2019 Notes
were issued at 99.19% of par value, providing a yield to maturity to investors
of 9.0%. Interest will be paid semi-annually beginning on February
15, 2010. Proceeds of $145.5 million, after expenses of $3.3 million,
from the 2019 Notes will be used to further strengthen our long-term liquidity
given uncertain economic times.
In
February 2009, we reissued $1.5 million of variable rate Mississippi industrial
revenue bonds, which were redeemed by us at par value in October
2008. These were originally issued in 2005 in conjunction with our
relocation of a portion of our Winchester operations to Oxford, MS.
In March
2008, we repaid industrial development and environmental improvement tax exempt
bonds, which matured totaling $7.7 million that were issued through the parish
of Calcasieu, LA and the town of McIntosh, AL. In January 2008, we
repaid the remaining $2.1 million of the 2.75% Convertible Senior Subordinated
Notes due 2027 acquired from Pioneer.
We issued
1.1 million and 0.5 million shares of common stock with a total value of $13.8
million and $11.3 million to the CEOP for the nine months ended September 30,
2009 and 2008, respectively. These shares were issued to satisfy the
investment in our common stock resulting from employee contributions, our
matching contributions, retirement contributions and re-invested dividends. We
issued less than 0.1 million shares and 1.8 million shares with a total value of
$0.2 million and $38.1 million representing stock options exercised for the nine
months ended September 30, 2009 and 2008, respectively.
The
percent of total debt to total capitalization increased to 32.5% at September
30, 2009, from 26.4% at December 31, 2008. The increase was due primarily to the
higher level of long-term debt at September 30, 2009 resulting from the issuance
of the 2019 Notes, in August 2009, partially offset by higher shareholders’
equity resulting from the net income for the nine months ended September 30,
2009.
In
the first three quarters of 2009 and 2008, we paid a quarterly dividend of
$0.20 per share. Dividends paid for the nine months ended September
30, 2009 and 2008 were $46.7 million and $45.1 million,
respectively. In October 2009, our board of directors declared a
dividend of $0.20 per share on our common stock, payable on December 10,
2009 to shareholders of record on November 10, 2009.
The
payment of cash dividends is subject to the discretion of our board of directors
and will be determined in light of then-current conditions, including our
earnings, our operations, our financial condition, our capital requirements, and
other factors deemed relevant by our board of directors. In the future, our
board of directors may change our dividend policy, including the frequency or
amount of any dividend, in light of then-existing conditions.
Liquidity
and Other Financing Arrangements
Our
principal sources of liquidity are from cash and cash equivalents, cash flow
from operations, and short-term borrowings under our senior revolving
credit facility and borrowings under our accounts receivable securitization
facility (Accounts Receivable Facility). Additionally, we believe
that we have access to the debt and equity markets.
Cash flow
from operations is variable as a result of both the seasonal and the cyclical
nature of our operating results, which have been affected by seasonal and
economic cycles in many of the industries we serve, such as vinyls, urethanes,
bleach, ammunition, and pulp and paper. The seasonality of the
ammunition business, which is typically driven by the fall hunting season, and
the seasonality of the vinyls and bleach business, which are stronger in periods
of warmer weather, typically cause working capital to fluctuate between $50
million to $100 million over the course of the year. Cash flow from
operations is affected by changes in ECU selling prices caused by changes in the
supply/demand balance of chlorine and caustic, resulting in the chlor alkali
business having significant leverage on our earnings and cash flow. For example,
assuming all other costs remain constant and internal consumption remains
approximately the same, a $10 per ECU selling price change equates to an
approximate $17 million annual change in our revenues, pretax profit, and pretax
cash flow when we are operating at full capacity.
For the
nine months ended September 30, 2009, cash provided by operating activities
increased by $96.1 million from 2008 primarily due to a smaller increase in
working capital than the prior year. For the nine months ended
September 30, 2009, working capital increased $71.1 million compared with an
increase of $161.6 million in 2008. Receivables increased from
December 31, 2008 by $50.6 million, which includes receivables from third
parties for recoveries of environmental costs incurred and expensed in prior
periods. Our days sales outstanding was consistent with December 31,
2008. Accounts payable and accrued liabilities decreased by $21.2
million primarily due to a $20.6 million payment for the final settlement of
working capital on the sale of the Metals business, which was consistent with
the estimated working capital adjustment we anticipated from the
transaction. The 2009 cash from operations was also affected by a
$43.3 million decrease in cash tax payments. The nine months ended
September 30, 2009 included contributions to our foreign pension plan of $2.0
million.
Capital
spending of $122.3 million for the nine months ended September 30, 2009 was $1.1
million lower than in the corresponding period in 2008. For the total
year, we expect our capital spending to be in the $150 million
range. Approximately half of our 2009 spending will be related to the
St. Gabriel, LA conversion and expansion project. We expect
depreciation to be in the $75 million range for full-year 2009.
The cash
increase of $130.1 million for the nine months ended September 30, 2009,
reflects the cash proceeds from the $150.0 million of 2019 Notes issued in
August 2009, offset by both the normal seasonal growth in working capital,
one-time items mentioned above, and capital spending associated with the
conversion and expansion project at our St. Gabriel, LA facility. Based on these
factors, we believe the September 30, 2009 cash balance of $376.6 million, and
the availability of approximately $294.6 million of liquidity from our senior
revolving credit facility and our Accounts Receivable Facility is sufficient
liquidity to meet our short-term and long-term needs. Additionally,
we believe that we have access to the debt and equity markets.
Since
2006, we held corporate debt securities with a par value of $26.6
million. On October 1, 2008, the issuer of these debt securities
announced it would cease trading and appoint a receiver as a result of financial
market turmoil. The decline in the market value of the assets
supporting these debt securities negatively impacted the liquidity of the
issuer. We determined that these debt securities had no fair market
value due to the actions taken by the issuer, turmoil in the financial markets,
the lack of liquidity of the issuer, and the lack of trading in these debt
securities. Because of the unlikelihood that these debt securities
would recover in value, we recorded an after-tax impairment loss of $26.6
million in other income (expense) during the third quarter of
2008. We are currently unable to utilize the capital loss resulting
from the impairment of these corporate debt securities; therefore, no tax
benefit has been recognized for the impairment loss.
In August
2009, we sold $150.0 million of 2019 Notes with a maturity date of August 15,
2019. The 2019 Notes were issued at 99.19% of par value, providing a
yield to maturity to investors of 9.0%. Interest will be paid
semi-annually beginning on February 15, 2010. Proceeds of $145.5
million, after expenses of $3.3 million, from the 2019 Notes will be used to
further strengthen our long-term liquidity given uncertain economic
times.
In August
2007, we entered into a $35 million letter of credit facility to assume the
various Pioneer letters of credit issued principally to support the acquisition
of equipment and materials for the St. Gabriel, LA facility conversion and
expansion project.
On
October 29, 2007, we entered into a new five-year senior revolving credit
facility of $220 million, which replaced a $160 million senior revolving credit
facility. During the first quarter of 2008, we increased our senior
revolving credit facility by $20 million to $240 million by adding a new lending
institution. The credit facility will expire in October
2012. We have the option to expand the $240 million senior revolving
credit facility by an additional $60 million by adding a maximum of two
additional lending institutions each year. At September 30, 2009, we
had $219.6 million available under this senior revolving credit facility,
because we had issued $20.4 million of letters of credit under a $110 million
subfacility. Under the senior revolving credit facility, we may
select various floating rate borrowing options. The actual interest rate
paid on borrowings under the senior revolving credit facility is based on a
pricing grid which is dependent upon the leverage ratio as calculated under the
terms of the facility for the prior fiscal quarter. The facility includes
various customary restrictive covenants, including restrictions related to the
ratio of debt to earnings before interest expense, taxes, depreciation and
amortization (leverage ratio) and the ratio of earnings before interest expense,
taxes, depreciation and amortization to interest expense (coverage
ratio). Compliance with these covenants is determined quarterly based
on the operating cash flows for the last four quarters. We were in
compliance with all covenants and restrictions under all our outstanding credit
agreements as of September 30, 2009 and 2008, and December 31, 2008, and no
event of default had occurred that would permit the lenders under our
outstanding credit agreements to accelerate the debt if not cured. In
the future, our ability to generate sufficient operating cash flows, among other
factors, will determine the amounts available to be borrowed under these
facilities. As of September 30, 2009, there were no covenants or
other restrictions that limited our ability to borrow.
At
September 30, 2009, we had total letters of credit of $50.5 million outstanding,
of which $20.4 million were issued under our $240 million senior revolving
credit facility. These letters of credit were used to support certain
long-term debt, capital expenditure commitments, workers compensation insurance
policies, and plant closure and post-closure obligations.
On July
25, 2007, we established a $250 million, 364-day Accounts Receivable Facility,
renewable annually for five years, which expires in July 2012. As a
result of the sale of Metals, the Accounts Receivable Facility was reduced from
$250 million to $100 million. In July 2008, the Accounts Receivable
Facility was reduced from $100 million to $75 million. The $75
million Accounts Receivable Facility provides for the sale of our eligible trade
receivables to third party conduits through a wholly-owned, bankruptcy-remote,
special purpose entity that is consolidated for financial statement
purposes. As of September 30, 2009, we had nothing drawn under the
Accounts Receivable Facility. At September 30, 2009, we had $75
million available under the Accounts Receivable Facility based on eligible trade
receivables. The Accounts Receivable Facility contains specific
covenants relating to the ability of the lender to obtain or maintain a first
priority lien on the receivables. In addition, the Accounts
Receivable Facility incorporates the leverage and coverage covenants that are
contained in the senior revolving credit facility.
Our
current debt structure is used to fund our business operations. As of September
30, 2009, we had borrowings of $399.6 million, of which $4.7 million was issued
at variable rates. We have entered into interest rate swaps on $26.6 million of
our underlying fixed-rate debt obligations, whereby we agreed to pay variable
rates to a counterparty who, in turn, pays us fixed rates. The counterparty to
these agreements is Citibank, N.A., a major financial institution. We have
designated the swap agreements as fair value hedges of the risk of changes in
the value of fixed-rate debt due to changes in interest rates for a portion of
our fixed-rate borrowings. Accordingly, the swap agreements have been recorded
at their fair market value of $2.0 million and are included in other assets on
the accompanying condensed balance sheet, with a corresponding increase in the
carrying amount of the related debt. No gain or loss has been recorded as the
contracts met the criteria to qualify for hedge accounting treatment with no
ineffectiveness. Commitments from banks under our senior revolving credit
facility and Accounts Receivable Facility are additional sources of
liquidity.
In 2001
and 2002, we entered into interest rate swaps on $75 million of our underlying
fixed-rate debt obligations, whereby we agreed to pay variable rates to a
counterparty who, in turn, pays us fixed rates. The counterparty to
these agreements is Citibank, N.A., a major financial institution. In
January 2009, we entered into a $75 million fixed interest rate swap with equal
and opposite terms as the $75 million variable interest rate swaps on the 2011
Notes. We have agreed to pay a fixed rate to a counterparty who, in
turn, pays us variable rates. The counterparty to this agreement is
Bank of America, a major financial institution. The result was a gain
of $7.9 million on the $75 million variable interest rate swaps, which will be
recognized through 2011. In January 2009, we de-designated our $75
million interest rate swaps that had previously been designated as fair value
hedges. The $75 million variable interest rate swaps and the $75
million fixed interest rate swap do not meet the criteria for hedge
accounting. All changes in the fair value of these interest rate
swaps are recorded currently in earnings.
Off-Balance
Sheet Arrangements
On
December 31, 1997, we entered into a long-term, sulfur dioxide supply
agreement with Alliance Specialty Chemicals, Inc. (Alliance), formerly known as
RFC S02, Inc. Alliance has the obligation to deliver annually 36,000 tons of
sulfur dioxide. Alliance owns the sulfur dioxide plant, which is located at our
Charleston, TN facility and is operated by us. The price for the sulfur dioxide
is fixed over the life of the contract, and under the terms of the contract, we
are obligated to make a monthly payment of approximately $0.2 million regardless
of the amount of sulfur dioxide purchased. Commitments related to this agreement
are approximately $2.4 million per year for 2009 through 2011 and $0.6 million
in 2012. This supply agreement expires in 2012.
We, and
our partner, PolyOne, own equally SunBelt. Oxy Vinyls is
required to purchase 250,000 tons of chlorine from SunBelt based on a formula
related to its market price. Prior to July 2007, PolyOne had an ownership
interest in Oxy Vinyls. We market any excess chlorine and all of the
caustic soda produced. The construction of this plant and equipment was financed
by the issuance of $195.0 million of Guaranteed Senior Secured Notes due 2017.
SunBelt sold $97.5 million of Guaranteed Senior Secured Notes due 2017, Series
O, and $97.5 million of Guaranteed Senior Secured Notes due 2017, Series G. We
refer to these notes as the SunBelt Notes. The SunBelt Notes bear interest at a
rate of 7.23% per annum payable semiannually in arrears on each
June 22 and December 22.
We have
guaranteed the Series O Notes, and PolyOne has guaranteed the Series G Notes, in
both cases pursuant to customary guaranty agreements. Our guarantee and
PolyOne’s guarantee are several, rather than joint. Therefore, we are not
required to make any payments to satisfy the Series G Notes guaranteed by
PolyOne. An insolvency or bankruptcy of PolyOne will not automatically trigger
acceleration of the SunBelt Notes or cause us to be required to make payments
under our guarantee, even if PolyOne is required to make payments under its
guarantee. However, if SunBelt does not make timely payments on the SunBelt
Notes, whether as a result of a failure to pay on a guarantee or otherwise, the
holders of the SunBelt Notes may proceed against the assets of SunBelt for
repayment. If we were to make debt service payments under our guarantee, we
would have a right to recover such payments from SunBelt.
Beginning
on December 22, 2002 and each year through 2017, SunBelt is required to
repay $12.2 million of the SunBelt Notes, of which $6.1 million is attributable
to the Series O Notes. Our guarantee of these notes was $54.8 million at
September 30, 2009. In the event SunBelt cannot make any of these payments, we
would be required to fund the payment on the Series O Notes. In certain other
circumstances, we may also be required to repay the SunBelt Notes prior to their
maturity. We and PolyOne have agreed that, if we or PolyOne intend to transfer
our respective interests in SunBelt and the transferring party is unable to
obtain consent from holders of 80% of the aggregate principal amount of the
indebtedness related to the guarantee being transferred after good faith
negotiations, then we and PolyOne will be required to repay our respective
portions of the SunBelt Notes. In such event, any make whole or similar
penalties or costs will be paid by the transferring party.
We
guarantee debt and other obligations under agreements with our affiliated
companies. In the normal course of business, we guarantee the
principal and interest under a $0.3 million line of credit of one of our
wholly-owned foreign affiliates. At September 30, 2009, December 31,
2008, and September 30, 2008, our wholly-owned foreign affiliate had no
borrowings outstanding under this line of credit, which would be utilized for
working capital purposes.
New
Accounting Standards
In July
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of
Generally Accepted Accounting Principles,” (the Codification), which was
incorporated into ASC 105 “Generally Accepted Accounting Principles” (ASC
105). The Codification will be the single source of authoritative
U.S. generally accepted accounting principles. The Codification does
not change generally accepted accounting principles, but is intended to make it
easier to find and research issues. The Codification introduces a new
structure that takes accounting pronouncements and organizes them by
approximately 90 accounting topics. The Codification was effective
for interim and fiscal years ending after September 15, 2009. We
adopted the Codification on July 1, 2009. The adoption of this
statement did not have a material effect on our financial statements but changed
our reference to generally accepted accounting principles beginning in the third
quarter of 2009.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets,” which was incorporated into ASC 860 “Transfers and Servicing” (ASC
860) and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),”
which was incorporated into ASC 810 “Consolidation” (ASC 810). These
statements changed the way entities account for securitizations and
special-purpose entities. The new standards eliminate existing
exceptions, strengthen the standards relating to securitizations and
special-purpose entities, and enhance disclosure requirements. Both
of these statements are effective for fiscal years beginning after November 15,
2009. The adoption of these statements will not have a material
effect on our financial statements.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” which was incorporated
into ASC 855 “Subsequent Events” (ASC 855). ASC 855 provides guidance
on management’s assessment of subsequent events. The statement is not
expected to significantly change practice because its guidance is similar to
that in American Institute of Certified Public Accountants Professional
Standards U.S. Auditing Standards Section 560, “Subsequent Events,” with some
modifications. This statement became effective for us on June 15,
2009. The adoption of this statement did not have a material effect
on our financial statements.
In April
2009, the FASB issued three Staff Positions (FSP) intended to provide additional
application guidance and enhance disclosures regarding fair value measurements
and impairments of securities. SFAS No. 157-4 provided guidelines for
making fair value measurements more consistent with the principles presented in
ASC 820. FSP SFAS No. 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments,” which were incorporated into ASC 825
“Financial Instruments” (ASC 825), enhanced consistency in financial reporting
by increasing the frequency of fair value disclosures. FSP SFAS No.
115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments,” which were incorporated into ASC 320 “Investments – Debt and
Equity Securities” (ASC 320), provided additional guidance designed to create
greater clarity and consistency in accounting for and presenting impairment
losses on securities.
The
position updating ASC 820 related to determining fair values when there is no
active market or where the price inputs being used represent distressed
sales. This position stated that the objective of fair value
measurement is to reflect how much an asset would be sold for in an orderly
transaction (as opposed to a distressed or forced transaction) at the date of
the financial statements under current market conditions.
The
position updating ASC 825 related to fair value disclosures for any financial
instruments that are not currently reflected on the balance sheet at fair
value. Prior to issuing this position, fair values for these assets
and liabilities were only disclosed once a year. This position
required these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value.
The
position updating ASC 320 on other-than-temporary impairments is intended to
bring greater consistency to the timing of impairment recognition, and provide
greater clarity to investors about the credit and noncredit components of
impaired debt securities that are not expected to be sold. The
measure of impairment in comprehensive income remains fair
value. This position also required increased and more timely
disclosures sought by investors regarding expected cash flows, credit losses,
and an aging of securities with unrealized losses.
These
positions became effective for interim and fiscal years ending after June 15,
2009, with early adoption permitted. We adopted these positions as of
March 31, 2009. The adoption of these positions did not have a
material effect on our financial statements.
In
December 2008, the FASB issued FSP SFAS No. 132R-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets,” an amendment of SFAS No. 132 (revised
2003), “Employers’ Disclosures about Pensions and Other Postretirement
Benefits,” which were both incorporated into ASC 715 “Compensation – Retirement
Benefits” (ASC 715). This position will require more detailed
disclosures regarding defined benefit pension plan assets including investment
policies and strategies, major categories of plan assets, valuation techniques
used to measure the fair value of plan assets and significant concentrations of
risk within plan assets. This position becomes effective for fiscal
years ending after December 15, 2009. Upon initial application, the
provisions of this position are not required for earlier periods that are
presented for comparative purposes. We are currently evaluating the
disclosure requirements of this new position.
In March
2008, the FASB issued SFAS No. 161, an amendment to SFAS No. 133, which were
both incorporated into ASC 815. This statement required enhanced
disclosures that expand previous disclosure requirements about an entity’s
derivative instruments and hedging activities. It required more
robust qualitative disclosures and expanded quantitative
disclosures. This statement became effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. We adopted the provisions of this
statement on January 1, 2009, which requires additional disclosure in our 2009
financial statements. The adoption of this statement did not have a
material impact on our financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which was
incorporated into ASC 805 “Business Combinations” (ASC 805). This
statement required the acquiring entity in a business combination to recognize
all (and only) the assets acquired and liabilities assumed in the transaction,
established the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed, and required additional disclosures by
the acquirer. Under this statement, all business combinations are
accounted for by applying the acquisition method. This statement
became effective for us on January 1, 2009. Earlier application was
prohibited. The effect of the adoption of this statement on our
financial statements will be on adjustments made to pre-acquisition Pioneer
income tax contingencies, which will no longer be reflected as an adjustment to
goodwill but recognized through income tax expense.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which was incorporated into ASC 810
“Consolidation” (ASC 810). This statement required noncontrolling
interests (previously referred to as minority interests) to be treated as a
separate component of equity, not as a liability or other item outside of
permanent equity. The statement applied to the accounting for
noncontrolling interests and transactions with noncontrolling interest holders
in consolidated financial statements. This statement became effective
for us on January 1, 2009. Earlier application was
prohibited. This statement was applied prospectively to all
noncontrolling interests, including any that arose before the effective date
except that comparative period information must be recast to classify
noncontrolling interests in equity, attribute net income and other comprehensive
income to noncontrolling interests, and provide additional required
disclosures. The adoption of this statement did not have a material
effect on our financial statements.
In
September 2006, the FASB issued SFAS No. 157. This statement did not
require any new fair value measurements, but rather, it provided enhanced
guidance to other pronouncements that require or permit assets or liabilities to
be measured at fair value. The changes to current practice resulting
from the application of this statement related to the definition of fair value,
the methods used to estimate fair value, and the requirement for expanded
disclosures about estimates of fair value. This statement became
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The effective date for this
statement for all nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis was delayed by one year. Nonfinancial assets and
nonfinancial liabilities that were impacted by this deferral included assets and
liabilities initially measured at fair value in a business combination, and
intangible assets and goodwill tested annually for impairment. We
adopted the provisions of this statement related to financial assets and
financial liabilities on January 1, 2008, which required additional
disclosure in our financial statements. The partial adoption of this
statement did not have a material impact on our financial statements. We
adopted the remaining provisions of this statement related to nonfinancial
assets and nonfinancial liabilities on January 1, 2009. The adoption
of the remaining provisions of this statement did not have a material impact on
our financial statements.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
We are
exposed to market risk in the normal course of our business operations due to
our purchases of certain commodities, our ongoing investing and financing
activities, and our operations that use foreign currencies. The risk of loss can
be assessed from the perspective of adverse changes in fair values, cash flows,
and future earnings. We have established policies and procedures governing our
management of market risks and the uses of financial instruments to manage
exposure to such risks.
Energy
costs, including electricity used in our Chlor Alkali Products segment, and
certain raw materials and energy costs, namely copper, lead, zinc, electricity,
and natural gas used primarily in our Winchester segment, are subject to price
volatility. Depending on market conditions, we may enter into futures contracts
and put and call option contracts in order to reduce the impact of commodity
price fluctuations. As of September 30, 2009, we maintained open positions on
futures contracts totaling $57.4 million ($84.0 million at December 31,
2008 and $77.9 million at September 30, 2008). Assuming a hypothetical 10%
increase in commodity prices which are currently hedged, we would experience a
$5.7 million ($8.4 million at December 31, 2008 and $7.8 million at
September 30, 2008) increase in our cost of inventory purchased, which would be
substantially offset by a corresponding increase in the value of related hedging
instruments.
We are
exposed to changes in interest rates primarily as a result of our investing and
financing activities. The effect of interest rates on our investing activity is
not material to our consolidated financial position, results of operations, or
cash flows. Our current debt structure is used to fund business
operations and commitments from banks under our senior revolving credit facility
and our Accounts Receivable Facility are sources of liquidity. As of September
30, 2009, December 31, 2008, and September 30, 2008, we had long-term
borrowings of $399.6 million, $252.4 million, and $249.7 million, respectively,
of which $4.7 million at September 30, 2009 and September 30, 2008, and $3.1
million at December 31, 2008 were issued at variable rates. As a result of our
fixed-rate financings, we entered into floating interest rate swaps in order to
manage interest expense and floating interest rate exposure to optimal levels.
We have entered into $26.6 million of such swaps, whereby we agreed to pay
variable rates to a counterparty who, in turn, pays us fixed rates. The
counterparty to these agreements is Citibank, N.A., a major financial
institution. In all cases, the underlying index for the variable
rates is the six-month LIBOR. Accordingly, payments are settled every six months
and the terms of the swaps are the same as the underlying debt
instruments.
In 2001
and 2002, we entered into interest rate swaps on $75 million of our underlying
fixed-rate debt obligations, whereby we agreed to pay variable rates to a
counterparty who, in turn, pays us fixed rates. The counterparty to
these agreements is Citibank, N.A., a major financial institution. In
January 2009, we entered into a $75 million fixed interest rate swap with equal
and opposite terms as the $75 million variable interest rate swaps on the 2011
Notes. We have agreed to pay a fixed rate to a counterparty who, in
turn, pays us variable rates. The counterparty to this agreement is
Bank of America, a major financial institution. The result was a gain
of $7.9 million on the $75 million variable interest rate swaps, which will be
recognized through 2011.
The
following table reflects the swap activity related to certain debt obligations
as of September 30, 2009:
Underlying Debt Instrument
|
|
Swap
Amount
|
|
Date of Swap
|
|
September
30, 2009
|
|
|
|
($ in million)
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Olin
Pays Floating Rate:
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|
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Industrial
development and environmental improvement obligations at fixed interest
rates of 6.625% to 6.75%, due 2016-2017
|
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Olin
Receives Floating
Rate:
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|
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(a) Actual
rate is set in arrears. We project the rate will fall within the range
shown.
These
interest rate swaps reduced interest expense by $3.4 million and $1.6 million
for the nine months ended September 30, 2009 and 2008,
respectively.
If the
actual change in interest rates or commodities pricing is substantially
different than expected, the net impact of interest rate risk or commodity risk
on our cash flow may be materially different than that disclosed
above.
We do not
enter into any derivative financial instruments for speculative
purposes.
Item
4. Controls and Procedures
Our chief
executive officer and our chief financial officer evaluated the effectiveness of
our disclosure controls and procedures as of September 30,
2009. Based on that evaluation, our chief executive officer and chief
financial officer have concluded that, as of such date, our disclosure controls
and procedures were effective to ensure that information Olin is required to
disclose in the reports that it files or submits with the SEC under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the Commission’s rules and forms, and to
ensure that information we are required to disclose in such reports is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2009, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item
4T. Controls and Procedures
Not
applicable.
Cautionary
Statement Regarding Forward-Looking Statements
This
quarterly report on Form 10-Q includes forward-looking statements. These
statements relate to analyses and other information that are based on
management’s beliefs, certain assumptions made by management, forecasts of
future results, and current expectations, estimates and projections about the
markets and economy in which we and our various segments operate. The statements
contained in this quarterly report on Form 10-Q that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties.
We have
used the words “anticipate,” “intend,” “may,” “expect,” “believe,” “should,”
“plan,” “estimate,” “project,” “forecast,” and variations of such words and
similar expressions in this quarterly report to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions, which are difficult to
predict and many of which are beyond our control.
Therefore,
actual outcomes and results may differ materially from those matters expressed
or implied in such forward looking-statements. We undertake no obligation to
update publicly any forward-looking statements, whether as a result of future
events, new information or otherwise.
The risks,
uncertainties and assumptions involved in our forward-looking statements many of
which are discussed in more detail in our filings with the SEC, including our
Annual Report on Form 10-K for the year ended December 31, 2008, include,
but are not limited to the following:
|
•
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sensitivity
to economic, business and market conditions in the United States and
overseas, including economic instability or a downturn in the sectors
served by us, such as ammunition, housing, vinyls and pulp and paper, and
the migration by United States customers to low-cost foreign
locations;
|
|
•
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the
cyclical nature of our operating results, particularly declines in average
selling prices in the chlor alkali industry and the supply/demand balance
for our products, including the impact of excess industry capacity or an
imbalance in demand for our chlor alkali
products;
|
|
•
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economic
and industry downturns that result in diminished product demand and excess
manufacturing capacity in any of our segments and that, in many cases,
result in lower selling prices and
profits;
|
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•
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costs
and other expenditures in excess of those projected for environmental
investigation and remediation or other legal
proceedings;
|
|
•
|
changes
in legislation or government regulations or policies, including proposed
legislation that would phase out the use of mercury in the manufacture of
chlorine, caustic soda, and related
products;
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•
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the
effects of any declines in global equity markets on asset values and any
declines in interest rates used to value the liabilities in our pension
plan;
|
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•
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unexpected
litigation outcomes;
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•
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new
regulations or public policy changes regarding the transportation of
hazardous chemicals and the security of chemical manufacturing
facilities;
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•
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the
occurrence of unexpected manufacturing interruptions and outages,
including those occurring as a result of labor disruptions and production
hazards;
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•
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higher-than-expected
raw material and energy, transportation, and/or logistics
costs;
|
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•
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an
increase in our indebtedness or higher-than-expected interest rates,
affecting our ability to generate sufficient cash flow for debt
service;
|
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•
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continuing
weak industry conditions could affect our ability to comply with the
financial maintenance covenants in our senior revolving credit facility
and our accounts receivable facility;
and
|
|
•
|
adverse
conditions in the credit and capital markets, limiting or preventing our
ability to borrow or raise capital.
|
You should
consider all of our forward-looking statements in light of these factors. In
addition, other risks and uncertainties not presently known to us or that we
consider immaterial could affect the accuracy of our forward-looking
statements.
Part II -
Other Information
Item 1.
Legal Proceedings.
Not
Applicable.
Item 1A.
Risk Factors.
Not
Applicable.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Not
applicable.
(b) Not
applicable.
(c)
Issuer
Purchases of Equity Securities
Period
|
|
Total Number of
Shares (or Units)
Purchased(1)
|
|
Average Price
Paid per Share
(or
Unit)
|
|
Total Number of
Shares (or Units)
Purchased as
Part of
Publicly
Announced
Plans
or Programs
|
|
|
Maximum
Number of
Shares
(or Units) that
May Yet Be
Purchased
Under the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On
April 30, 1998, the issuer announced a share repurchase program
approved by the board of directors for the purchase of up to
5 million shares of common stock. Through September 30, 2009,
4,845,924 shares had been repurchased, and 154,076 shares remain available
for purchase under that program, which has no termination
date.
|
Item 3.
Defaults Upon Senior Securities.
Not
Applicable.
Item 4.
Submission of Matters to a Vote of Security Holders.
Not
Applicable.
Item 5.
Other Information
Not
Applicable.
Item 6.
Exhibits.
4.1
|
Indenture
dated as of August 19, 2009, between Olin Corporation and The Bank of New
York Mellon Trust Company—Exhibit 4.1 to Form 8-K dated August 19,
2009.*
|
|
|
4.2
|
First
Supplemental Indenture dated as of August 19, 2009, between Olin
Corporation and The Bank of New York Mellon Trust Company—Exhibit 4.2 to
Form 8-K dated August 19, 2009.*
|
|
|
4.3
|
Form
of 8.875% Senior Note due 2019-Exhibit 4.3 to Form 8-K dated August 19,
2009.*
|
|
|
10.1
|
Performance
Share Program
|
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges (Unaudited)
|
|
|
31.1
|
Section
302 Certification Statement of Chief Executive Officer
|
|
|
31.2
|
Section
302 Certification Statement of Chief Financial Officer
|
|
|
32
|
Section
906 Certification Statement of Chief Executive Officer and Chief Financial
Officer
|
*Previously
filed as indicated and incorporated herein by reference.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
OLIN
CORPORATION
|
|
(Registrant)
|
|
|
|
|
By:
|
/s/ John E. Fischer
|
|
Vice President and Chief Financial Officer
(Authorized
Officer)
|
Date:
October 27, 2009
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
4.1
|
Indenture
dated as of August 19, 2009, between Olin Corporation and The Bank of New
York Mellon Trust Company—Exhibit 4.1 to Form 8-K dated August 19,
2009.*
|
|
|
4.2
|
First
Supplemental Indenture dated as of August 19, 2009, between Olin
Corporation and The Bank of New York Mellon Trust Company—Exhibit 4.2 to
Form 8-K dated August 19, 2009.*
|
|
|
4.3
|
Form
of 8.875% Senior Note due 2019-Exhibit 4.3 to Form 8-K dated August 19,
2009.*
|
|
|
10.1
|
Performance
Share Program
|
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges (Unaudited)
|
|
|
31.1
|
Section
302 Certification Statement of Chief Executive Officer
|
|
|
31.2
|
Section
302 Certification Statement of Chief Financial Officer
|
|
|
32
|
Section
906 Certification Statement of Chief Executive Officer and Chief Financial
Officer
|
*Previously
filed as indicated and incorporated herein by reference.