form10q2ndqtr.htm
SECURITIES
AND EXCHANGE
COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30,
2007
OR
|
¨
|
TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
file number
1-1070
Olin
Corporation
(Exact
name of registrant as specified
in its charter)
|
|
Virginia
|
13-1872319
|
(State
or other jurisdiction
of
incorporation
or
organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
190
Carondelet Plaza, Suite
1530, Clayton,
MO
|
63105-3443
|
(Address
of principal executive
offices)
|
(Zip
Code)
|
(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 is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer” and “large
accelerated filer” in Rule 12b-2 of the Exchange Act).
Large
Accelerated
Filer x Accelerated
Filer ¨ Non-accelerated
Filer ¨
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 June 30, 2007, 73,955,593 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)
|
|
June
30,
2007
|
|
|
December 31,
2006
|
|
|
June
30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and Cash
Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
Investments
|
|
|
26.6
|
|
|
|
76.6
|
|
|
|
76.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
241.6
|
|
|
|
263.3
|
|
|
|
279.1
|
|
Current
Deferred Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Current
Assets
|
|
|
35.5
|
|
|
|
32.0
|
|
|
|
27.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
(less Accumulated Depreciation of $1,437.7, $1,407.0 and
$1,402.0)
|
|
|
465.7
|
|
|
|
486.9
|
|
|
|
477.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Income
Taxes
|
|
|
135.9
|
|
|
|
117.3
|
|
|
|
125.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
76.0
|
|
|
|
75.9
|
|
|
|
78.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Installments of Long-Term
Debt
|
|
$
|
8.3
|
|
|
$
|
1.7
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
Payable
|
|
|
37.0
|
|
|
|
4.8
|
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current
Liabilities
|
|
|
457.1
|
|
|
|
407.8
|
|
|
|
408.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
Pension
Liability
|
|
|
128.8
|
|
|
|
234.4
|
|
|
|
567.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,054.9
|
|
|
|
1,093.2
|
|
|
|
1,395.3
|
|
Commitments
and
Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, Par Value $1 Per
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized,
120.0 Shares; Issued
and Outstanding 73.9, 73.3 and 72.5 Shares
|
|
|
73.9
|
|
|
|
73.3
|
|
|
|
72.5
|
|
Additional
Paid-In
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive
Loss
|
|
|
(301.1
|
|
|
|
(318.5
|
)
|
|
|
(311.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’
Equity
|
|
|
599.6
|
|
|
|
543.3
|
|
|
|
481.8
|
|
Total
Liabilities and
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold (exclusive of
LIFO inventory liquidation gains, shown
below)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIFO
Inventory Liquidation
Gains
|
|
|
7.8
|
|
|
|
―
|
|
|
|
13.1
|
|
|
|
13.5
|
|
Selling
and
Administration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and
Development
|
|
|
1.2
|
|
|
|
1.1
|
|
|
|
2.3
|
|
|
|
2.3
|
|
Restructuring
(Credit)
Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Operating
Income
|
|
|
0.2
|
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
of Non-consolidated
Affiliates
|
|
|
12.3
|
|
|
|
13.0
|
|
|
|
20.4
|
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
3.2
|
|
|
|
2.9
|
|
|
|
6.7
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
Taxes
|
|
|
54.0
|
|
|
|
51.8
|
|
|
|
88.5
|
|
|
|
106.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
35.6
|
|
|
$
|
33.0
|
|
|
$
|
58.7
|
|
|
$
|
66.7
|
|
Net
Income per Common
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.46
|
|
|
$
|
0.80
|
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per Common
Share
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
Average
Common Shares
Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
73.8
|
|
|
|
72.4
|
|
|
|
73.7
|
|
|
|
72.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Issued
|
|
|
Par
Value
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
|
Total
Shareholders’
Equity
|
|
Balance
at January 1,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
Adjustment
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
0.5
|
|
|
|
―
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock ($0.40 per
share)
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
(28.9
|
)
|
|
|
(28.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
Exercised
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
4.2
|
|
|
|
―
|
|
|
|
―
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Transactions
|
|
|
―
|
|
|
|
―
|
|
|
|
0.3
|
|
|
|
―
|
|
|
|
―
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30,
2006
|
|
|
72.5
|
|
|
$
|
72.5
|
|
|
$
|
707.7
|
|
|
$
|
(311.5
|
)
|
|
$
|
13.1
|
|
|
$
|
481.8
|
|
Balance
at January 1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
Adjustment
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
0.3
|
|
|
|
―
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Pension Liability
Adjustment, Net
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
12.5
|
|
|
|
―
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock ($0.40 per
share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued
for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Benefit
Plans
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
9.2
|
|
|
|
―
|
|
|
|
―
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation
|
|
|
―
|
|
|
|
―
|
|
|
|
(1.4
|
)
|
|
|
―
|
|
|
|
―
|
|
|
|
(1.4
|
)
|
Cumulative
Effect of Accounting
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30,
2007
|
|
|
73.9
|
|
|
$
|
73.9
|
|
|
$
|
730.8
|
|
|
$
|
(301.1
|
)
|
|
$
|
96.0
|
|
|
$
|
599.6
|
|
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)
|
|
Six Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
58.7
|
|
|
$
|
66.7
|
|
Adjustments
to Reconcile Net
Income to Net Cash and Cash Equivalents Provided by (Used for)
Operating
Activities:
|
|
|
|
|
|
|
|
|
Earnings
of Non-consolidated
Affiliates
|
|
|
(20.4
|
)
|
|
|
(25.1
|
)
|
Other
Operating Income – Gain on
Disposition of Real Estate
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation
|
|
|
2.5
|
|
|
|
3.0
|
|
Depreciation
and
Amortization
|
|
|
|
|
|
|
|
|
LIFO
Inventory Liquidation
Gains
|
|
|
(13.1
|
)
|
|
|
(13.5
|
)
|
Dividend
Received from
Non-consolidated Affiliate
|
|
|
|
|
|
|
|
|
Deferred
Income
Taxes
|
|
|
(6.8
|
)
|
|
|
(53.0
|
)
|
Qualified
Pension Plan
Contribution
|
|
|
|
|
|
|
|
|
Qualified
Pension Plan
Expense
|
|
|
12.9
|
|
|
|
17.7
|
|
Common
Stock Issued under Employee
Benefit Plans
|
|
|
|
|
|
|
|
|
Change
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
34.8
|
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued
Liabilities
|
|
|
9.2
|
|
|
|
36.9
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
1.5
|
|
|
|
7.1
|
|
Other
Noncurrent
Liabilities
|
|
|
|
|
|
|
|
|
Other
Operating
Activities
|
|
|
5.0
|
|
|
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Disposition of
Property, Plant and Equipment
|
|
|
0.2
|
|
|
|
1.3
|
|
Purchase
of Short-Term
Investments
|
|
|
|
|
|
|
|
|
Proceeds
from Sale
of Short-Term
Investments
|
|
|
50.0
|
|
|
|
―
|
|
Proceeds
from Sale/Leaseback of
Equipment
|
|
|
|
|
|
|
|
|
Distributions
from Affiliated
Companies, Net
|
|
|
11.7
|
|
|
|
19.0
|
|
Other
Investing
Activities
|
|
|
|
|
|
|
|
|
Net
Investing
Activities
|
|
|
44.6
|
|
|
|
(87.5
|
)
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
Repayments
|
|
|
(1.1
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
Stock
Options
Exercised
|
|
|
0.8
|
|
|
|
4.4
|
|
Excess
Tax Benefits from Stock
Options Exercised
|
|
|
|
|
|
|
|
|
Dividends
Paid
|
|
|
(29.5
|
)
|
|
|
(28.9
|
)
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
and Cash Equivalents
|
|
|
30.7
|
|
|
|
(186.6
|
)
|
Cash
and Cash Equivalents,
Beginning of Period
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of
Period
|
|
$
|
230.5
|
|
|
$
|
117.1
|
|
Cash
Paid for Interest and Income
Taxes:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
9.0
|
|
|
$
|
10.3
|
|
Income
Taxes, Net of
Refunds
|
|
|
|
|
|
|
|
|
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
(Tabular
amounts in millions, except per
share data)
(Unaudited)
1.
|
Olin
Corporation
is a Virginia
corporation,
incorporated in 1892. We are a manufacturer concentrated in three
business
segments: Chlor Alkali Products, Metals, and Winchester.
Chlor Alkali
Products, with four U.S.
manufacturing
facilities, produces chlorine and caustic soda, sodium hydrosulfite,
hydrochloric acid, hydrogen, bleach products and potassium hydroxide.
Metals, with its principal manufacturing facilities in East Alton,
IL and
Montpelier, OH, produces and distributes copper and copper alloy
sheet,
strip, foil, rod, welded tube, fabricated parts, and stainless steel
and
aluminum strip. 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, 2006. Certain reclassifications were made to prior year
amounts to conform to the 2007 presentation.
2.
|
Allowance
for
doubtful accounts was $8.8 million at June 30, 2007, $9.5 million at
December 31, 2006, and $9.8 million at June 30, 2006. Provisions
(credited) charged to operations were $(0.1) million and $0.7 million
for
the three months ended June 30, 2007 and 2006, respectively, and
$0.4
million and $1.4 million for the six months ended June 30, 2007 and
2006,
respectively. Bad debt write-offs, net of recoveries, were $1.1 million
and $0.7 million for the six months ended June 30, 2007 and 2006,
respectively.
|
3.
|
Inventory
consists of the following:
|
|
|
June
30,
2007
|
|
|
December 31,
2006
|
|
|
June
30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
273.1
|
|
|
|
293.7
|
|
|
|
253.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
166.7
|
|
|
|
151.8
|
|
|
|
159.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIFO
reserve
|
|
|
(456.8
|
)
|
|
|
(426.7
|
)
|
|
|
(380.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (primarily
operating supplies, spare parts, and maintenance parts) and first-in, first-out
(FIFO) (primarily inventory of foreign subsidiaries) methods. Elements of costs
in inventories include 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
June
30, 2007, reflect certain estimates relating to inventory quantities and costs
at December 31, 2007. If the FIFO method of inventory accounting had been
used, inventories would have been approximately $456.8 million, $426.7 million
and $380.7 million higher than reported at June 30, 2007, December 31,
2006, and June 30, 2006, respectively. Fluctuations in underlying metal values
will increase or decrease the FIFO value of the inventories.
As
part of the Metals inventory
reduction program, a LIFO inventory liquidation gain of $7.8 million was
realized in the three months ended June 30, 2007 and $13.1 million in the six
months ended June 30, 2007. As part of the 2006 Metals restructuring
actions, a LIFO inventory liquidation gain of $13.5 million was realized in
the
six months ended June 30, 2006 related to the closure of our Waterbury Rolling
Mills (Waterbury)
facility. The Metals
restructuring action is described under note 10.
4.
|
Basic
and diluted
income per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per
share
reflect the dilutive effect of stock-based
compensation.
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Computation
of Basic Income per
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
35.6
|
|
|
$
|
33.0
|
|
|
$
|
58.7
|
|
|
$
|
66.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per
share
|
|
$
|
0.48
|
|
|
$
|
0.46
|
|
|
$
|
0.80
|
|
|
$
|
0.92
|
|
Computation
of Diluted Income
per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
35.6
|
|
|
$
|
33.0
|
|
|
$
|
58.7
|
|
|
$
|
66.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares
|
|
|
73.8
|
|
|
|
72.4
|
|
|
|
73.7
|
|
|
|
72.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
shares
|
|
|
74.2
|
|
|
|
72.6
|
|
|
|
73.9
|
|
|
|
72.5
|
|
Diluted
net income per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
We
are party to
various government and private environmental actions associated with
past
manufacturing operations and former waste disposal sites. Environmental
provisions charged to income amounted to $7.0 million and $5.2 million
for
the three months ended June 30, 2007 and 2006, respectively, and
$13.1
million and $10.1 million for the six months ended June 30, 2007
and 2006,
respectively. Charges to income for investigatory and remedial
efforts were material to operating results in 2006 and are expected
to be
material to operating results in 2007. The consolidated balance sheets
include reserves for future environmental expenditures to investigate
and
remediate known sites amounting to $93.0 million at June 30, 2007,
$90.8
million at December 31, 2006, and $100.2 million at June 30, 2006, of
which $58.0 million, $55.8 million, and $65.2 million were classified
as
other noncurrent liabilities,
respectively.
|
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.
6.
|
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 six-month periods ended June 30, 2007 and 2006. At June
30,
2007, 154,076 shares remain authorized to be
purchased.
|
7.
|
We
issued less
than 0.1 million and 0.2 million shares with a total value of $0.8
million and $4.4 million, representing stock options exercised for
the six
months ended June 30, 2007 and 2006, respectively. In addition, for
the six months ended June 30, 2007 and 2006, we issued 0.6 million
and
0.4 million shares with a total value of $9.8 million and $7.8
million, respectively, in connection with our Contributing Employee
Ownership Plan (CEOP).
|
8.
|
Other
operating
income consists of miscellaneous operating income items which are
related
to our business activities and gains (losses) on the disposition
of
property, plant, and equipment. Other operating income of $0.2
million for the three and six months ended June 30, 2007 represents
the
impact of the gain realized on an intangible asset sale in Chlor
Alkali
Products, which will be recognized ratably through March 2012. Other
operating income for the three and six months ended June 30, 2006
included
a $0.7 million gain on the disposition of a former manufacturing
plant.
|
9.
|
We
define segment
results as income (loss) before interest expense, interest income,
other
income, and income taxes, and include the operating results of
non-consolidated affiliates. Intersegment sales of $26.0 million
and $17.6
million for the three months ended June 30, 2007 and 2006, respectively,
and $48.8 million and $32.9 million for the six months ended June
30, 2007
and 2006, respectively, representing the sale of ammunition cartridge
case
cups to Winchester from Metals, at prices that approximate market,
have
been eliminated from Metals segment
sales.
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chlor
Alkali
Products
|
|
$
|
166.4
|
|
|
$
|
169.5
|
|
$
|
321.7
|
|
$
|
343.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winchester
|
|
|
99.8
|
|
|
|
85.7
|
|
|
200.0
|
|
|
175.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals(1)
(2)
|
|
|
20.7
|
|
|
|
8.7
|
|
|
30.6
|
|
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
provision
|
|
|
(7.0
|
)
|
|
|
(5.2
|
)
|
|
(13.1
|
)
|
|
(10.1
|
)
|
Other
corporate and unallocated
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
credit
(charge)(4)
|
|
|
1.7
|
|
|
|
―
|
|
|
1.7
|
|
|
(15.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(4.9
|
)
|
|
|
(5.1
|
)
|
|
(9.9
|
)
|
|
(10.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
0.1
|
|
|
|
0.3
|
|
|
0.2
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Earnings
of
non-consolidated affiliates are included in the segment results consistent
with management’s monitoring of the operating segments. The earnings from
non-consolidated affiliates, by segment, are as
follows:
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
Earnings
of non-consolidated
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Metals
segment
income for the three and six months ended June 30, 2007 included
LIFO
inventory liquidation gains of $7.8 million and $13.1 million,
respectively, resulting from the Metals inventory reduction
program. Metals segment income for the six months ended June
30, 2006, included a LIFO inventory liquidation gain of $13.5 million
related to the closure of our Waterbury
facility as part
of the 2006 Metals restructuring
actions.
|
(3)
|
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.
|
(4)
|
The
2007
restructuring credit of $1.7 million is primarily the result of realizing
more proceeds than expected from equipment sales associated with
the 2006
closure of the Waterbury
facility. The six-month period ended June 30, 2006 reflects the
2006 Metals restructuring charge of $15.7
million.
|
10.
|
On
February 1, 2006, we announced that, in connection with the ongoing
cost reduction efforts of our Metals business, we decided to close
our
Waterbury
facility and
consolidate those production activities into our East
Alton,
IL
mill. In
addition, on March 14, 2006, we decided to reduce the utilization of
one of our Metals service center facilities by consolidating certain
activities into another service center facility, and make overhead
reductions in the Metals business affecting approximately 20 employees.
We
based this decision on an evaluation of the size, location, and capability
of our facilities and staffing in light of anticipated business needs.
We
substantially completed these activities by June 30, 2006. As a
result of these cost reduction efforts, we recorded a pretax restructuring
charge of $15.7 million in the first quarter of 2006. In the fourth
quarter of 2006 and the second quarter of 2007, primarily as a result
of
realizing more proceeds than expected from equipment sales, we reduced
our
previously established restructuring reserve related to the Waterbury
facility by $1.6
million and $1.5 million, respectively. The net restructuring charge
of
$12.6 million included lease and other contract termination costs
($6.9
million), the write-off of equipment and facility costs ($2.6 million),
and employee severance and related benefit costs ($3.1 million).
We expect
to incur cash expenditures of $8.7
million related
to this restructuring charge, of which $8.2 million has been paid
as of
June 30, 2007. The impact of this restructuring charge was substantially
offset by a LIFO inventory liquidation gain of $13.5 million realized
in
2006 related to the closure of our Waterbury
facility.
|
|
On
November 27, 2006, we announced that, in connection with the ongoing
cost reduction efforts of our Metals business, we decided to close
our New
Haven Copper Company facility in Seymour,
CT
(Seymour
facility) and
consolidate some of those production activities into other Olin
locations. We based this decision on an evaluation of the size,
location, and capability of our facilities and staffing in light
of
anticipated business needs. We substantially completed the
closure of the Seymour
facility
by March 31, 2007. We recorded a one-time pretax restructuring charge
of $3.5 million in the fourth quarter of 2006. This restructuring
charge
included the write-off of equipment and facility costs ($2.4 million),
employee severance and related benefit costs ($0.9 million), and
other
contract termination costs ($0.2 million). We expect to incur cash
expenditures of $1.6 million related to this restructuring, of which
$0.9
million has been paid as of June 30, 2007. The impact of this
restructuring charge was more than offset by a LIFO inventory liquidation
gain of $10.4 million realized in 2006 related to the closure of
our
Seymour
facility.
|
The
following table summarizes our
restructuring activity for the six months ended June 30, 2007 and the remaining
balances as of June 30, 2007:
|
|
December 31,
2006
Accrued Costs
|
|
|
Amounts
Utilized
|
|
|
Adjustments
|
|
|
June
30,
2007
Accrued Costs
|
|
2006
Metals Restructuring
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
and other contract
termination costs
|
|
$
|
7.5
|
|
|
$
|
(5.5
|
)
|
$
|
(1.1
|
)
|
|
$
|
0.9
|
|
Write-off
of equipment and
facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
severance and job-related
benefits
|
|
|
2.5
|
|
|
|
(1.1
|
)
|
|
(0.3
|
)
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
Corporate Restructuring
Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
severance and job-related
benefits
|
|
$
|
0.3
|
|
|
$
|
(0.1
|
)
|
$
|
(0.2
|
)
|
|
$
|
―
|
|
The
majority of the remaining balance of
$2.0 million of the 2006 restructuring charge is expected to be paid out in
2007.
11.
|
In
December 2004,
the Financial Accounting Standards Board (FASB) issued Statement
of
Financial Accounting Standards (SFAS) No. 123 (Revised 2004),
“Share-Based Payment” (SFAS No. 123R), which is a revision of SFAS
No. 123, “Accounting for Stock-Based Compensation” (SFAS
No. 123). This pronouncement revised the accounting treatment for
stock-based compensation. It established standards for transactions
in
which an entity exchanges its equity instruments for goods or services.
It
also addressed transactions in which an entity incurs liabilities
in
exchange for goods or services that are based on the fair value of
the
entity’s equity instruments or that may be settled by the issuance of
those equity instruments. This statement focused primarily on accounting
for transactions in which an entity obtained employee services in
share-based payment
transactions.
|
Effective
January 1, 2006, we began
recording compensation expense associated with stock options and other forms
of
equity compensation in accordance with SFAS No. 123R. We adopted the
modified prospective transition method provided for under SFAS No. 123R
and, consequently, have not retroactively adjusted results from prior periods.
Under this transition method, compensation cost associated with stock options
includes the amortization, using the straight-line method, related to the
remaining unvested portion of all stock option awards granted prior to
January 1, 2006, based on the grant-date fair value, estimated in
accordance with the original provisions of SFAS No. 123 and the
amortization, using the straight line method, related to all stock option awards
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS
No. 123R.
In
2006, a reclassification totaling
$9.0 million from Other Liabilities to Additional Paid-In Capital was made
related to previously recorded costs for deferred directors’ compensation, the
fair value of stock options assumed at the 2002 acquisition of Chase Industries,
restricted stock, and the portion of performance shares that are settled in
our
stock. In 2007, a reclassification totaling $3.5 million from Additional Paid-In
Capital to Other Liabilities was made for deferred directors’ compensation that
could be settled in cash. These reclassifications conform to the
accounting treatment for stock-based compensation in SFAS
No. 123R.
Assumptions
The
fair value of each option granted,
which typically vests ratably over three years, was estimated on the date of
grant, using the Black-Scholes option-pricing model with the following
weighted-average assumptions used:
Grant
date
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest
rate
|
|
|
4.81
|
%
|
|
|
4.55
|
%
|
|
|
|
|
|
|
|
|
|
Expected
life
(years)
|
|
|
7.0
|
|
|
|
7.0
|
|
Grant
fair value (per
option)
|
|
|
|
|
|
|
|
|
Dividend
yield for 2007 and 2006 is
based on a five-year historical average. The dividend yield on prior option
grants was based on the actual dividend in effect at the date of grant and
the
quoted market price of our stock at the date of the award. Risk-free interest
rate is based on zero coupon U.S. Treasury securities rates for the expected
life of the options. Expected volatility is 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 is
based
on historical exercise and cancellation patterns, and we believe that historical
experience is the best estimate of future exercise patterns.
12.
|
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 this equity-basis
affiliate in its entirety were as
follows:
|
100%
Basis
|
|
June
30,
2007
|
|
|
December
31,
2006
|
|
|
June
30,
2006
|
|
Condensed
Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
46.7
|
|
|
$
|
25.1
|
|
|
$
|
48.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
19.4
|
|
|
|
22.1
|
|
|
|
18.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
Condensed
Income Statement
Data:
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
27.2
|
|
|
|
32.6
|
|
|
|
46.5
|
|
|
|
63.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amount of cumulative unremitted
earnings (losses) of SunBelt
was $13.6 million at June 30, 2007,
($5.2) million at December 31, 2006, and $10.6 million at June 30, 2006. We
received distributions from SunBelt
totaling $8.6 million and $18.7 million
in the six months ended June 30, 2007 and 2006, respectively. We have
not made any contributions in 2007 or 2006. In addition, we received
net
settlements of advances of $3.1 million and $0.3 million in the six months
ended
June 30, 2007 and 2006, respectively.
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. For the three and six months ended June 30, 2006, our share of
SunBelt’s
operating results was reduced by $1.0
million and $1.9 million, respectively, for additional depreciation expense.
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 and
$1.9 million in the three and six months ended June 30, 2007,
respectively. We provide various administrative, management and
logistical services to SunBelt
for which we received fees totaling
$2.1 million and $2.0 million in the three months ended June 30, 2007
and 2006, respectively, and $4.0 million and $3.9 million in the six months
ended June 30, 2007 and 2006, respectively.
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 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 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.
After the payment of $6.1 million on the Series O Notes in December 2006 our
guarantee of these SunBelt Notes was $67.0 million at June 30, 2007. In the
event SunBelt
cannot make any of these payments, we
would be required to fund our half of such payment. 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 SunBelt Notes. In such event, any make whole, or similar, penalties
or costs will be paid by the transferring party.
13.
|
Our
domestic
defined benefit pension plans are non-contributory final-average-pay
or
flat-benefit plans and most of our domestic employees are covered
by a
defined benefit pension plan. 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 and are not
significant. Our defined benefit pension plans provide 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
June
30,
|
|
|
Three Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components
of Net Periodic
Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
|
24.5
|
|
|
|
23.8
|
|
|
|
1.1
|
|
|
|
1.2
|
|
Expected
return on plans’
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service
cost
|
|
|
0.8
|
|
|
|
1.3
|
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
Recognized
actuarial
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment
|
|
|
0.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
periodic benefit
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
Six Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components
of Net Periodic
Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
9.5
|
|
|
$
|
10.2
|
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
return on plans’
assets
|
|
|
(60.8
|
)
|
|
|
(55.9
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization
of prior service
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
actuarial
loss
|
|
|
16.2
|
|
|
|
16.5
|
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit
cost
|
|
$
|
15.7
|
|
|
$
|
20.5
|
|
|
$
|
5.3
|
|
|
$
|
5.3
|
|
In
May 2007, we made a $100 million
voluntary contribution to our defined benefit pension plan. In addition,
the asset allocation in the plan was adjusted to insulate the plan from discount
rate risk. Also during 2007, we recorded a curtailment charge of $0.5
million resulting from the conversion of a portion of the Metals hourly
workforce from a defined benefit pension plan to a defined contribution pension
plan.
Employees
also participate in defined
contribution pension plans. Our defined benefit pension plan was closed to
salaried employees and certain hourly employees hired after December 31,
2004. These employees participate in a defined contribution pension plan which
is administered as part of the CEOP. We contribute a defined percentage of
pay
to the defined contribution plan on behalf of each of the eligible employees
to
an individual retirement contribution account. Expenses of the defined
contribution pension plans were $1.3 million and $0.3 million for the three
months ended June 30, 2007 and 2006, respectively, and $2.2 million and $0.7
million for the six months ended June 30, 2007 and 2006,
respectively.
14.
|
In
July 2006, the
FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN No. 48). This interpretation clarified the
accounting for uncertainty in income taxes recognized in the financial
statements in accordance with FASB Statement No. 109, “Accounting for
Income Taxes.” FIN No. 48 prescribes a recognition threshold and
requires a measurement of a tax position taken or expected to be
taken in
a tax return. This interpretation also provides guidance on the treatment
of derecognition, classification, interest and penalties, accounting
in
interim periods, and
disclosure.
|
We
adopted the provisions of FIN No. 48
on January 1, 2007. As a result of the implementation, we recognized
a $0.1 million increase in the liability for unrecognized tax benefits, which
was accounted for as a reduction to Retained Earnings. In addition,
FIN No. 48 required a reclassification of unrecognized tax benefits and related
interest and penalties from deferred income taxes to current and long-term
liabilities. At January 1, 2007, we reclassified $19.8 million from
Deferred Income Taxes to Accrued Liabilities ($3.1 million) and Other
Liabilities ($16.7 million).
As
of January 1, 2007, we had $16.5
million of gross unrecognized tax benefits, of which $11.9 million would impact
the effective tax rate, if recognized. The remainder of $4.6 million
would be a reduction to goodwill, if recognized. The unrecognized tax
benefit, net of the federal income tax benefit, totaled $13.6 million. If these
tax benefits are not recognized, the result would be cash tax
payments.
We
recognize interest and penalty
expense related to unrecognized tax positions as a component of the Income
Tax
Provision. As of January 1, 2007, interest accrued was approximately $4.3
million, and penalties accrued were approximately $0.9
million. During the six months ended June 30, 2007 and 2006, we
expensed interest of $0.5 million and $0.9 million,
respectively.
As
of January 1, 2007, we believed it
was reasonably possible that our total amount of unrecognized tax benefits
would
decrease by $1.6 million over the next twelve months. The recognition
of these tax benefits in 2007 is the result of a state income tax payment
of $0.9 million related to a change in a tax filing position and the lapse
of
federal, state, and foreign statutes of limitation.
On
July 10, 2006, we finalized a
settlement with the Internal Revenue Service (IRS), which includes the periods
1996 to 2002 and relates primarily to the tax treatment of capital losses
generated in 1997. We expect to make interest payments of
approximately $2.0 million in 2007 to various state and local jurisdictions
in
conjunction with the IRS settlement. We have filed both federal and
state amended income tax returns for years 2002 and prior to report changes
to
taxable income per IRS examinations. Such tax years remain subject to
examination to the extent of the changes reported.
Our
federal income tax returns for 2003
to 2006 are open tax years. We file in numerous state and foreign jurisdictions
with varying statutes of limitation open from 2002 through 2006 depending on
each jurisdiction’s unique statute of limitation. At this time, the
IRS has not conducted an examination of the 2003 federal income tax
return. The statute of limitations for the 2003 federal income tax
return expires in the second half of 2007. In 2006, the IRS commenced
an examination of our U.S.
income tax return for
2004. In June 2007, we reached an agreement in principle with the IRS
for the 2004 tax examination. The settlement resulted in a reduction
of income tax expense of $0.6 million in the second quarter of 2007 related
primarily to a favorable adjustment to our extraterritorial income
exclusion. In connection with the settlement, we paid $3.2 million to
the IRS in June 2007 and expect to pay an additional $0.5 million in the third
quarter of 2007. We expect to file amended tax returns to recover
$6.2 million in taxes, due to increased net operating loss and Alternative
Minimum Tax credit carryforwards.
15.
|
On
January 31, 2007, we entered
into a sale/leaseback agreement for chlorine railcars acquired in
2005 and
2006 by our Chlor Alkali Products segment. The sale/leaseback
is an operating lease which expires on December 31, 2016. This
transaction reduced our fixed assets by $15.7 million. We
received proceeds from the sale of $14.8 million. The loss on
this transaction was deferred and is being amortized over the terms
of the
lease agreement.
|
|
On
June 26, 2007, we entered into the $100 million 364-day revolving
credit
facility ($100 million Credit Facility) and the $150 million 364-day
revolving credit facility ($150 million Credit
Facility). According to their terms, the $100 million Credit
Facility matures on June 24, 2008 or upon an increase in the lending
commitments under our existing revolving credit facility and the
establishment of an accounts receivable securitization facility,
and the
$150 million Credit Facility matures on June 24, 2008. Under
these facilities, we may select various floating rate borrowing
options. They include various customary restrictive covenants,
including restrictions related to the ratio of debt to earnings before
interest, taxes, depreciation and amortization (leverage ratio) and
the
ratio of earnings before interest expense, taxes, depreciation and
amortization to interest expense (coverage ratio). As of June
30, 2007, we had $250 million available under these facilities, which
had no borrowings
outstanding.
|
On
July 25, 2007, we established a $250 million accounts receivable securitization
facility (Accounts Receivable Facility). The 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. The Accounts
Receivable Facility expires in July 2012.
16.
|
On
May 20, 2007, we entered into a merger agreement pursuant to which
one of
our wholly-owned subsidiaries will be merged with and into Pioneer
Companies, Inc. (Pioneer) and, upon the merger, Pioneer will become
our
wholly-owned subsidiary. In connection with the merger,
the holders of outstanding shares of Pioneer’s common stock will receive
$35.00 in cash for each share of Pioneer’s common
stock. Pioneer is a leading producer of chlor-alkali products
in North America.
|
The
aggregate purchase price for all of Pioneer’s outstanding shares of common
stock, together with the aggregate payment due to holders of options to purchase
shares of common stock of Pioneer, is approximately $420 million. In
connection with the merger, Pioneer will redeem its convertible debt for
approximately $150 million.
The
merger is subject to a number of customary closing conditions, including the
adoption of the merger agreement by Pioneer’s stockholders, and is expected to
close during the third quarter of 2007. On July 16,
2007, we announced that the waiting period under the Hart-Scott-Rodino Antitrust
Improvement Act applicable to the merger had expired.
We
intend to finance the aggregate merger consideration and the related repayment
of Pioneer’s indebtedness with our and Pioneer’s available cash and drawings
under the $100 million Credit Facility, the $150 million Credit Facility, and
the Accounts Receivable Facility.
Item 2.
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
Business
Background
Our
manufacturing operations are
concentrated in three business segments: Chlor Alkali Products, Metals, and
Winchester.
All three 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 capacity in our Chlor
Alkali Products business, can lead to very significant changes in our overall
profitability. While a majority of Metals sales are of a commodity nature,
this
business has a significant volume of specialty engineered products targeted
for
specific end-uses. In these applications, technical capability and performance
differentiate the product and play a role in product selection, and thus price
is not the only selection criterion. 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.
Recent
Developments
On
June 26, 2007, we entered into the $100 million Credit Facility and the $150
million Credit Facility. According to their terms, the $100 million
Credit Facility matures on June 24, 2008 or upon an increase in the lending
commitments under our existing revolving credit facility and the establishment
of an accounts receivable securitization facility, and the $150 million Credit
Facility matures on June 24, 2008. Under
these facilities, we may select various floating rate borrowing
options. They include various customary restrictive covenants,
including restrictions related to the ratio of debt to earnings before interest,
taxes, depreciation and amortization (leverage ratio) and the ratio of earnings
before interest expense, taxes, depreciation and amortization to interest
expense (coverage ratio). As of June 30, 2007, we had $250
million available under these facilities, which had no borrowings
outstanding.
On
July 25, 2007, we established a $250 million Accounts Receivable
Facility. The 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. The Accounts Receivable Facility expires in July
2012.
On
May 20, 2007, we entered into a merger agreement pursuant to which one of our
wholly-owned subsidiaries will be merged with and into Pioneer and, upon the
merger, Pioneer will become our wholly-owned subsidiary. In
connection with the merger, the holders of outstanding shares of Pioneer’s
common stock will receive $35.00 in cash for each share of Pioneer’s common
stock. Pioneer is a leading producer of chlor-alkali products in
North America. Pioneer’s common stock is quoted on the
NASDAQ.
The
aggregate purchase price for all of Pioneer’s outstanding shares of common
stock, together with the aggregate payment due to holders of options to purchase
shares of common stock of Pioneer, is approximately $420 million. In
connection with the merger, Pioneer will redeem its convertible debt for
approximately $150 million.
The
merger is subject to a number of customary closing conditions, including the
adoption of the merger agreement by Pioneer’s stockholders, and is expected to
close during the third quarter of 2007. On July 16, 2007, we
announced that the waiting period under the Hart-Scott-Rodino Antitrust
Improvement Act applicable to the merger had expired.
We
intend to finance the aggregate merger consideration and the related repayment
of Pioneer’s indebtedness with our and Pioneer’s available cash and drawings
under the $100 million Credit Facility, the $150 million Credit Facility, and
the Accounts Receivable Facility.
On
June 4, 2007, Pioneer was served with a petition naming it and its directors
as
defendants in a stockholder derivative action alleging breaches of fiduciary
duties and other violations of state law arising out of the proposed
merger. The action also names us as a defendant and alleges that we
aided and abetted Pioneer and its directors in such breaches and other
violations. The action seeks, among other relief, to enjoin the
proposed merger. An unfavorable outcome in this action could prevent
or delay the merger. Olin and Pioneer believe that the allegations in
this petition are entirely without merit and intend to defend vigorously against
this action.
In
May 2007, we made a $100 million
voluntary contribution to our defined benefit pension plan. In addition,
the asset allocation in the plan was adjusted to insulate the plan from discount
rate risk. Based on the combination of these actions, it is likely that
the defined benefit pension plan will meet the full funding requirements of
the
Pension Protection Act of 2006 without any additional contributions. The
contribution was accretive to earnings beginning in the second quarter and
will
be fully tax deductible against 2006 income. Also during the second
quarter, we recorded a curtailment charge of $0.5 million resulting from the
conversion of a portion of the Metals hourly workforce from a defined benefit
pension plan to a defined contribution pension plan.
Consolidated
Results of
Operations
($
in millions, except per share
data)
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold (exclusive of
LIFO inventory liquidation gains, shown below)
|
|
|
760.1
|
|
|
|
741.2
|
|
|
|
1,461.0
|
|
|
|
1,373.6
|
|
LIFO
Inventory Liquidation
Gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
86.8
|
|
|
|
85.2
|
|
|
|
156.9
|
|
|
|
191.4
|
|
Selling
and
Administration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and
Development
|
|
|
1.2
|
|
|
|
1.1
|
|
|
|
2.3
|
|
|
|
2.3
|
|
Restructuring
(Credit)
Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Operating
Income
|
|
|
0.2
|
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
of Non-consolidated
Affiliates
|
|
|
12.3
|
|
|
|
13.0
|
|
|
|
20.4
|
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
3.2
|
|
|
|
2.9
|
|
|
|
6.7
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
Taxes
|
|
|
54.0
|
|
|
|
51.8
|
|
|
|
88.5
|
|
|
|
106.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
35.6
|
|
|
$
|
33.0
|
|
|
$
|
58.7
|
|
|
$
|
66.7
|
|
Net
Income per Common
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.46
|
|
|
$
|
0.80
|
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2007
Compared to the Three Months Ended June 30, 2006
Sales
for the three months ended June
30, 2007 were $839.1 million compared with $826.4 million last year, an increase
of $12.7 million, or 2%. Chlor Alkali Products sales decreased by $3.1 million,
or 2%, due to ECU prices, which decreased approximately 9%. Chlor alkali
shipment volumes increased 3% from the prior year. In the Metals segment, sales
increased $1.7 million. The increase in Metals segment sales was the result
of
increased metal prices and higher average selling prices, partially offset
by lower shipment volumes (12%). Winchester
sales were higher by $14.1 million, or
16%, due to increased selling prices and higher volumes.
Gross
margin increased $1.6 million, or
2%, over the three months ended June 30, 2006, primarily as a result of a LIFO
inventory liquidation gain resulting from the Metals inventory reduction
program, which was offset in part by lower ECU selling prices in Chlor Alkali
Products. Gross margin as a percentage of sales was 10% in 2007 and
2006.
Selling
and administration expenses as a
percentage of sales were 5% in 2007 and 2006. Selling and administration
expenses for the three months ended June 30, 2007 were $0.1 million higher
than
the three months ended June 30, 2006, primarily due to increased management
incentive compensation of $2.7 million primarily resulting from mark-to-market
adjustments on stock-based compensation, offset by lower pension expense of
$1.1
million, decreased relocation charges of $0.7 million, and lower bad debt
expenses of $0.8 million.
The
2007 restructuring credit of $1.7
million is primarily the result of realizing more proceeds than expected from
equipment sales associated with the 2006 closure of the Waterbury
facility.
Other
operating income of $0.2 million
for the three months ended June 30, 2007 represents the impact of the gain
realized on an intangible asset sale in Chlor Alkali Products, which will be
recognized ratably through March 2012. Other operating income for the
three months ended June 30, 2006 included a gain of $0.7 million on the
disposition of a former manufacturing plant.
The
earnings of non-consolidated
affiliates were $12.3 million for the three months ended June 30, 2007, a
decrease of $0.7 million from $13.0 million for the three months ended June
30,
2006, primarily due to lower ECU selling prices at SunBelt.
Interest
expense decreased by
$0.2
million from 2006, primarily due
to the effect of lower
interest rates.
The
higher interest income of $0.3
million was due to higher short-term interest rates and higher average cash
balances.
The
effective tax rate for the three
months ended June 30, 2007 of 34.1% is lower than the 35% U.S. federal statutory
rate primarily due to the benefit of the domestic manufacturing deduction
contained in the Jobs Creation Act of 2004, which increased from 3% to 6% in
2007, and the utilization of certain state tax credits, which were offset in
part by state income taxes and income in certain foreign jurisdictions being
taxed at higher rates. The effective tax rate for the three months ended June
30, 2006 of 36.3% was higher than the 35% U.S.
federal statutory rate primarily due to
state income taxes and income in certain foreign jurisdictions being taxed
at
higher rates.
Six
Months Ended June 30, 2007
Compared to the Six Months Ended June 30, 2006
Sales
for the six months ended
June 30, 2007 were $1,604.8 million compared with $1,551.5 million last
year, an increase of $53.3 million, or 3%. Chlor Alkali Products sales decreased
by $21.5 million, or 6%, due to ECU prices, which decreased approximately 12%.
Chlor alkali shipment volumes were lower than the prior year. In the Metals
segment, sales increased $50.5 million, or 5%. The increase in Metals segment
sales was the result of increased metal prices and higher average selling
prices, offset by lower shipment volumes of 13%. Winchester
sales increased by $24.3 million, or
14%, primarily due to increased selling prices and demand from commercial
customers.
Gross
margin decreased $34.5 million, or
18%, over the six months ended June 30, 2006, primarily as a result of
lower ECU selling prices for Chlor Alkali products, but was offset in part
by
higher selling prices and increased volumes in Winchester. Gross
margin as a percentage of sales decreased to 10% in 2007 from 12% in 2006.
The resulting margin percentage decrease reflects the gross margin dollar
decrease of $34.5 million and higher Metals sales resulting from increased
metal
values.
Selling
and administration expenses as a
percentage of sales were 5% in 2007 and 6% in 2006. Selling and administration
expenses for the six months ended June 30, 2007 were $4.5 million lower, or
5%, than the six months ended June 30, 2006 primarily due to lower pension
expense of $1.9 million, a lower level of legal and legal-related settlement
expenses of $1.3 million, decreased relocation charges of $1.3 million,
decreased consulting expense of $1.0 million, and lower bad debt expense of
$1.0
million. These decreased costs were partially offset by increased
management incentive compensation of $1.4 million, primarily resulting from
mark-to-market adjustments on stock-based compensation.
The
2007 restructuring credit of $1.7
million is primarily the result of realizing more proceeds than expected from
equipment sales associated with the 2006 closure of the Waterbury
facility. A restructuring
charge of $15.7 million was recorded for the six months ended June 30, 2006
and related to the Metals segment.
Other
operating income of $0.2 million
for the six months ended June 30, 2007 represents the impact of the gain
realized on an intangible asset sale in Chlor Alkali Products, which will be
recognized ratably through March 2012. Other operating income for the
six months ended June 30, 2006 included a gain of $0.7 million on the
disposition of a former manufacturing plant.
The
earnings of non-consolidated
affiliates were $20.4 million for the six months ended June 30, 2007, a
decrease of $4.7 million from $25.1 million for the six months ended
June 30, 2006, primarily due to lower ECU selling prices at
SunBelt.
Interest
expense decreased by $0.3
million from 2006, primarily due to the effect of lower interest
rates.
The
higher interest income of $0.8
million was due to higher short-term interest rates and higher average cash
balances.
The
effective tax rate for the six
months ended June 30, 2007 of 33.7% is lower than the 35% U.S. federal statutory
rate primarily due to the benefit of the domestic manufacturing deduction
contained in the Jobs Creation Act of 2004, which increased from 3% to 6% in
2007, and the utilization of certain state tax credits, which were offset in
part by state income taxes and income in certain foreign jurisdictions being
taxed at higher rates. The effective tax rate for the six months ended
June 30, 2006 of 37.2% is higher than the 35% U.S. federal statutory rate
primarily due to state income taxes, income in certain foreign jurisdictions
being taxed at higher rates, and the accrual of interest on taxes which may
become payable in the future.
Segment
Results
We
define segment results as income
(loss) before interest expense, interest income, other income, and income taxes,
and include the operating results of non-consolidated affiliates. Intersegment
sales of $26.0 million and $17.6 million for the three months ended June 30,
2007 and 2006, respectively, and $48.8 million and $32.9 million for the six
months ended June 30, 2007 and 2006, respectively, representing the sale of
ammunition cartridge case cups to Winchester from Metals, at prices that
approximate market, have been eliminated from Metals segment
sales.
($
in
millions)
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chlor
Alkali
Products
|
|
$
|
166.4
|
|
|
$
|
169.5
|
|
|
$
|
321.7
|
|
|
$
|
343.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winchester
|
|
|
99.8
|
|
|
|
85.7
|
|
|
|
200.0
|
|
|
|
175.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals(1)
(2)
|
|
|
20.7
|
|
|
|
8.7
|
|
|
|
30.6
|
|
|
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
provision
|
|
|
(7.0
|
)
|
|
|
(5.2
|
)
|
|
|
(13.1
|
)
|
|
|
(10.1
|
)
|
Other
corporate and unallocated
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
credit
(charge)(4)
|
|
|
1.7
|
|
|
|
―
|
|
|
|
1.7
|
|
|
|
(15.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(4.9
|
)
|
|
|
(5.1
|
)
|
|
|
(9.9
|
)
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Earnings
of
non-consolidated affiliates are included in the segment results consistent
with management’s monitoring of the operating segments. The earnings from
non-consolidated affiliates, by segment, are as
follows:
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
Earnings
of non-consolidated
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Metals
segment
income for the three and six months ended June 30, 2007 included
LIFO
inventory liquidation gains of $7.8 million and $13.1 million,
respectively, resulting from the Metals inventory reduction
program. Metals segment income for the six months ended June
30, 2006 included a LIFO inventory liquidation gain of $13.5 million
related to the closure of our Waterbury
facility as part
of the 2006 Metals restructuring
actions.
|
(3)
|
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.
|
(4)
|
The
2007
restructuring credit of $1.7 million is primarily the result of realizing
more proceeds than expected from equipment sales associated with
the 2006
closure of the Waterbury
facility. The
six-month period ended June 30, 2006 reflects the 2006 Metals
restructuring charge of $15.7
million.
|
Chlor
Alkali
Products
Three
Months Ended June 30, 2007
Compared to the Three Months Ended June 30, 2006
Chlor
Alkali Products’ sales for the
three months ended June 30, 2007 were $166.4 million compared to $169.5 million
for the three months ended June 30, 2006, a decrease of $3.1 million, or 2%.
The
sales decrease was due to ECU pricing, which decreased 9%
from the three months ended June 30,
2006. Shipment volumes increased 3% from the prior year. Our ECU
netbacks, excluding SunBelt,
were approximately $510 for the three
months ended June 30, 2007 compared to approximately $560 for the same period
in
2006. Our operating rate for the three months ended June 30, 2007 was 97% of
capacity, compared to 95% for the three months ended June 30,
2006.
Chlor
Alkali posted segment income of
$55.3 million for the three months ended June 30, 2007, compared to $67.2
million for the same period in 2006, a decrease of $11.9 million, or 18%.
Segment income was lower in 2007 primarily because of lower selling
prices ($11.7 million), increased operating costs ($2.3 million), and lower
SunBelt
operating results ($0.7 million), but
offset in part by higher volumes ($3.0 million). Operating expenses increased
primarily due to increases in distribution costs and manufacturing costs, which
included higher electricity prices. In addition, freight costs, which
reduce our ECU netbacks, increased 24% in the three months ended June 30, 2007
compared to the same period last year.
Six
Months Ended June 30, 2007 Compared
to the Six Months Ended June 30, 2006
Chlor
Alkali Products’ sales for the six
months ended June 30, 2007 were $321.7 million compared to $343.2 million for
the six months ended June 30, 2006, a decrease of $21.5 million, or 6%. The
sales decrease was due to ECU pricing, which decreased 12% from the six months
ended June 30, 2006. Shipment volumes were lower than the prior
year. Our ECU netbacks, excluding SunBelt,
were approximately $505 for the six
months ended June 30, 2007 compared to approximately $575 for the same period
in
2006. Our operating rate was 92% of capacity for the six months ended June
30,
2007 and 2006.
Chlor
Alkali posted segment income of
$98.5 million for the six months ended June 30, 2007, compared to $141.1 million
for the same period in 2006, a decrease of $42.6 million, or 30%. Segment income
was lower in 2007 primarily because of lower selling prices ($29.7 million),
increased operating costs ($7.2 million), lower volumes ($1.1 million), and
lower SunBelt
operating results ($4.6 million).
Operating expenses increased primarily due to increases in distribution costs
and manufacturing costs, which included higher electricity prices. In
addition, freight costs, which reduce our ECU netbacks, increased 23% in the
six
months ended June 30, 2007 compared to the same period last
year.
Metals
Three
Months Ended June 30, 2007
Compared to the Three Months Ended June 30, 2006
Sales
for the three months ended June
30, 2007 were $572.9 million compared to sales of $571.2 million for the three
months ended June 30, 2006, an increase of $1.7 million. This increase reflects
higher metal values and higher average selling prices, offset by 12% lower
volumes. The COMEX copper price averaged $3.46 per pound in the second quarter
of 2007 compared with $3.37 per pound in 2006, an increase of 3%. The
average LME zinc price was $1.66 per pound in the second quarter of 2007
compared with $1.49 per pound in 2006, an increase of 11%.
Shipments
to automotive customers
decreased by 15% for the three months ended June 30, 2007 compared to the same
period in 2006, due to decreased automotive production from 2006 and customer
inventory reductions. Shipments to the building products segment
decreased 9% over the same period last year due to decreased demand from the
housing industry. Shipments to electronics segment customers
decreased 11%. Coinage shipments were up 11% compared with the second
quarter of 2006, primarily due to the 2007 introduction of the Presidential
$1
coin by the United States Mint. Ammunition shipments were 3% higher
than the prior year.
The
Metals segment reported income of
$20.7 million for the three months ended June 30, 2007 compared to $8.7 million
in 2006, an increase of $12.0 million. The Metals segment income for the three
months ended June 30, 2007 included a LIFO inventory liquidation gain of $7.8
million as part of the Metals inventory reduction program. There was
no LIFO inventory liquidation gain for the three months ended June 30,
2006. The Metals segment income for 2006 included a $2.3 million gain
from the settlement of an insurance claim related to the 2004 fire that occurred
in the electrical control room for the hot mill located in East Alton,
IL. The
Metals segment
increased earnings were primarily due to higher selling prices ($9.9 million),
the inventory liquidation gain ($7.8 million), and lower costs resulting from
the 2006 restructuring and plant shutdown actions ($3.1
million). These factors more than offset the negative impact of the
lower sales volumes ($4.8 million) and higher energy and metal melting loss
costs ($2.7 million). The price of copper and zinc increased by 3%
and 11%, respectively, from the three months ended June 30,
2006.
Six
Months Ended June 30, 2007 Compared
to the Six Months Ended June 30, 2006
Sales
for the six months ended June 30,
2007 were $1,083.1 million compared to sales of $1,032.6 million for the six
months ended June 30, 2006, an increase of $50.5 million, or 5%. This increase
reflects higher metal values and higher average selling prices, offset by 13%
lower volumes. The COMEX copper price averaged $3.08 per pound for the six
months ended June 30, 2007 compared with $2.81 per pound in 2006, an
increase of 10%. The average LME zinc price was $1.61 per
pound for the six months ended June 30, 2007 compared with $1.26 per
pound in 2006, an increase of 28%.
Shipments
to automotive customers
decreased by 23% for the six months ended June 30, 2007 compared to the same
period in 2006, due to decreased automotive production from 2006 and customer
inventory reductions. Shipments to the building products segment
decreased 12% over the same period last year due to decreased demand from the
housing industry. Shipments to the electronics segment customers
decreased 15%. Coinage shipments for the six months ended June
30, 2007 were 6% higher compared to the same period in 2006
primarily due to the 2007 introduction of the Presidential $1 coin by the United
States Mint. Ammunition shipments were comparable to last
year.
The
Metals segment reported income of
$30.6 million for the six months ended June 30, 2007 compared to $29.2 million
in 2006, an increase of $1.4 million. The Metals segment income for
2007 included a LIFO inventory liquidation gain of $13.1 million as part of
the
Metals inventory reduction program. The Metals segment income for
2006 included a LIFO inventory liquidation gain of $13.5 million related to
the
closure of our Waterbury
operations and included a $2.3 million
gain from the settlement of an insurance claim related to the 2004 fire that
occurred in the electrical control room for the hot mill located in East Alton,
IL. The
Metals segment
increased earnings were primarily due to higher selling prices ($15.1 million)
and lower costs resulting from the 2006 restructuring and plant shutdown actions
($5.2 million). These factors more than offset the negative impact of
the lower sales volumes ($12.6 million) and higher energy and metal melting
loss
costs ($5.1 million). The price of copper and zinc increased by 10%
and 28%, respectively, from the six months ended June 30,
2006.
Winchester
Three
Months Ended June 30, 2007
Compared to the Three Months Ended June 30, 2006
Sales
were $99.8 million for the three
months ended June 30, 2007 compared to $85.7 million for the three months ended
June 30, 2006, an increase of $14.1 million, or 16%. Sales of ammunition to
domestic commercial customers increased $7.2 million. Shipments to the
U.S.
military and to law enforcement
organizations increased by $4.1 million and $1.4 million, respectively, for
the
three months ended June 30, 2007 compared to the same period in
2006. Sales to international customers also increased $0.9
million.
Winchester
reported segment income of $5.6 million
for the three months ended June 30, 2007 compared to $3.3 million for the three
months ended June 30, 2006, an increase of $2.3 million. The increase was due
to
the impact of higher selling prices and increased volumes ($10.0 million),
which
were partially offset by increased commodity and other material costs and higher
operating costs ($8.0 million).
Six
Months Ended June 30, 2007 Compared
to the Six Months Ended June 30, 2006
Sales
were $200.0 million for the six
months ended June 30, 2007 compared to $175.7 million for the six months ended
June 30, 2006, an increase of $24.3 million, or 14%. Sales of ammunition to
domestic commercial customers increased $12.7 million. Shipments to the
U.S.
military and to law enforcement
organizations increased by $6.0 million and $2.7 million, respectively, for
the
six months ended June 30, 2007 compared to the same period in
2006. Sales to international customers also increased $2.0
million.
Winchester
reported segment income of $13.7
million for the six months ended June 30, 2007 compared to $7.2 million for
the
six months ended June 30, 2006, an increase of $6.5 million. The increase was
due to the impact of higher selling prices and increased volumes ($19.3
million), which were partially offset by increased commodity and other material
costs and higher operating costs ($13.4 million).
Corporate/Other
Three
Months Ended June 30, 2007
Compared to the Three Months Ended June 30, 2006
For
the three months ended June 30,
2007, pension expense included in Corporate/Other was $2.5 million compared
to
$4.5 million for the three months ended June 30, 2006. The $2.0 million decrease
in corporate pension expense was due to the combination of a 25-basis point
increase in the discount rate, the voluntary contributions to our defined
benefit pension plan of $100 million in May 2007 and $80 million in September
2006, and the favorable performance on plan assets in 2006. This decrease
was offset by a curtailment charge of $0.5 million resulting from the conversion
of a portion of the Metals hourly workforce from a defined benefit pension
plan
to a defined contribution pension plan. On a total company basis,
pension expense for the three months ended June 30, 2007 was $8.3 million
compared to $10.8 million for the three months ended June 30,
2006.
For
the three months ended June 30,
2007, charges to income for environmental investigatory and remedial activities
were $7.0 million compared with $5.2 million in 2006. This provision
relates primarily to expected future investigatory and remedial activities
associated with past manufacturing operations and former waste disposal
sites.
For
the three months ended June 30,
2007, other corporate and unallocated costs were $18.4 million compared with
$16.5 million in 2006, an increase of $1.9 million, or 12%. Management incentive
compensation increased by $2.6 million, primarily resulting from mark-to-market
adjustments on stock-based compensation, offset by lower legal and legal-related
settlement expenses of $0.3 million, and decreased consulting expense of $0.3
million.
Six
Months Ended June 30, 2007
Compared to the Six Months Ended June 30, 2006
For
the six months ended June 30,
2007, pension expense included in Corporate/Other was $4.0 million compared
to
$7.9 million for the six months ended June 30, 2006. The $3.9 million
decrease in corporate pension expense was due to the combination of a 25-basis
point increase in discount rate, the voluntary contributions to our defined
benefit pension plan of $100 million in May 2007 and $80 million in September
2006, and the favorable performance on plan assets in 2006. This decrease was
offset by a curtailment charge of $0.5 million resulting from the conversion
of
a portion of the Metals hourly workforce from a defined benefit pension plan
to
a defined contribution pension plan. On a total company basis,
pension expense for the six months ended June 30, 2007 was $15.7 million
compared to $20.5 million for the six months ended June 30,
2006.
For
the six months ended June 30,
2007, charges to income for environmental investigatory and remedial activities
were $13.1 million compared with $10.1 million in 2006. This
provision relates primarily to expected future remedial and investigatory
activities associated with past manufacturing operations and former waste
disposal sites. We currently estimate these charges to income for the full
year
to be in the $26 million range compared to $22.6 million in 2006 (which included
$1.2 million in recoveries from third parties of environmental costs incurred
and expensed in prior periods).
For
the six months ended June 30,
2007, other corporate and unallocated costs were $36.1 million compared with
$35.2 million in 2006, an increase of $0.9 million, or 3%. Management
incentive compensation increased by $1.8 million, primarily resulting from
mark-to-market adjustments on stock-based compensation, offset by lower legal
and legal-related settlement expenses of $0.8 million.
Outlook
Earnings
for the third quarter of 2007 are projected to be in the $0.40 per diluted
share
range, which includes approximately $6.0 million of LIFO inventory liquidation
gains resulting from planned inventory reductions in Metals. Our
third quarter forecast does not include any potential impact from the Pioneer
acquisition, which is currently expected to be consummated in the third
quarter.
Chlor
Alkali earnings are expected to be similar to second quarter 2007 levels,
as
higher ECU values are likely to be offset by seasonally higher electricity
costs
and increases in transportation costs. We continue to experience
strong demand for both chlorine and caustic soda. We expect our
netbacks to improve in the third quarter, as the recent caustic soda price
increases have been implemented in the market.
Metals
results are expected to decline from second quarter levels, reflecting the
negative impact of planned internal and customer plant maintenance
shutdowns. We anticipate an additional $6 million LIFO inventory
liquidation gain in the third quarter, and we are confident that we will
achieve
the total targeted inventory reduction of 20%, which we announced in January
2007, by the end of 2008. As of June 30, 2007, including the
inventory reductions associated with the 2006 plant closings, strip business
inventories have been reduced by 22% since the beginning of 2006.
Winchester
earnings are also expected to improve from the second quarter reflecting
the
traditionally strong pre-hunting season quarter. In response to the
continuing increase in the price of lead, price increases of up to 15% were
announced by Winchester to be effective on September 1, 2007. Similar
increases were announced by Winchester’s major competitors. This
September 1 price increase is the tenth increase since the beginning of
2004.
Winchester
recently received a one-year $27 million order for .50 caliber ammunition
from
the U.S. Army. This contract contains two options increasing the
potential value to $67 million. Deliveries under the contract are
planned to take place in 2008 and 2009. If all the options are
awarded, deliveries would be expected to continue into 2011. With
this award, Winchester now has sufficient backlog to make it highly likely
that
full-year 2008 military sales will be at least equal to the projected full-year
2007 level.
Environmental
Matters
For
the six months ended June 30, 2007
and 2006, cash outlays for environmental matters were $10.9 million and $12.8
million, respectively. These cash outlays were for environmental investigatory
and remediation activities associated with former waste disposal sites and
past
manufacturing operations. Spending in 2007 for investigatory and remedial
efforts, the timing of which is subject to regulatory approvals and other
uncertainties, is estimated to be in the $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 $7.0 million at June 30, 2007.
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 activities were $7.0 million and $5.2 million for
the
three months ended June 30, 2007 and 2006, respectively, and $13.1 million
and
$10.1 million for the six months ended June 30, 2007 and 2006,
respectively. Charges to income for investigatory and remedial
efforts were material to operating results in 2006 and are expected to be
material to operating results in 2007 and may be material to operating results
in future years.
Our
consolidated balance sheets included
liabilities for future environmental expenditures to investigate and remediate
known sites amounting to $93.0 million at June 30, 2007, $90.8 million at
December 31, 2006, and $100.2 million at June 30, 2006 of which $58.0
million, $55.8 million, and $65.2 million were classified as other noncurrent
liabilities, respectively. 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 $45 million to
$55
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 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 SFAS No. 5, “Accounting for Contingencies,” 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
|
|
Six Months Ended
June
30,
|
|
Provided
By (Used For) ($ in
millions)
|
|
2007
|
|
|
2006
|
|
Qualified pension
plan
contribution
|
|
|
|
|
|
|
|
|
Net
operating
activities
|
|
|
7.6
|
|
|
|
(80.8
|
)
|
|
|
|
|
|
|
|
|
|
Net
investing
activities
|
|
|
44.6
|
|
|
|
(87.5
|
)
|
|
|
|
|
|
|
|
|
|
Net
financing
activities
|
|
|
(21.5
|
)
|
|
|
(18.3
|
)
|
Operating
Activities
For
the six months ended June 30, 2007,
cash provided by operating activities increased by $88.4 million from 2006
primarily due to a decrease in working capital. In 2007, working
capital decreased $3.5 million compared with an increase of $108.2 million
in
2006. This change in working capital growth from 2007 to 2006 was
partially offset by lower earnings. Payables increased from December
31, 2006 by $32.5 million, primarily due to timing of payments at
Metals. Receivables increased from December 31, 2006 by $58.9
million, primarily as a result of increased sales in Winchester
and Metals. Our days sales
outstanding decreased by approximately two days from prior
year. Inventories decreased from December 31, 2006 by $21.7 million,
primarily as a result of the inventory reduction program in
Metals. In 2007, cash provided by operating activities included a
contribution to our pension plan of $100.0 million.
The 2007 cash from operations was
affected by an $80.6 million decrease in cash tax payments.
Investing
Activities
Capital
spending of $32.3 million in the
six months ended June 30, 2007 was $1.6 million higher than in the corresponding
period in 2006. The increase was due in part to an increase in bleach production
capacity expansions in our Chlor Alkali Products operations. For
the total year, we expect our capital spending to be approximately $80 million
to $85 million. We expect depreciation to be in the $72 million range
for full-year 2007.
On
January 31, 2007, we entered into a
sale/leaseback agreement for chlorine railcars in our Chlor Alkali Products
segment that were acquired in 2005 and 2006. We received proceeds
from the sale of $14.8 million.
During
the six months ended June
30, 2007, we sold $50.0 million of short-term investments, which were purchased
during the six months ended June 30, 2006.
The
2007 decrease in distributions from
affiliated companies reflected the impact
of SunBelt’s lower operating results
and net
advanced
activities of
SunBelt.
Financing
Activities
At
June 30, 2007, we had $123.7 million
available under our $160.0 million senior revolving credit facility because
we
had issued $36.3 million of letters of credit under a subfacility for the
purpose of supporting certain long-term debt and certain workers compensation
insurance policies. In addition to our senior revolving credit facility, we
entered into two new credit facilities in June 2007. On June 26,
2007, we entered into a $100
million Credit Facility and a $150 million Credit Facility. These
commitments have been put in place to support the funding of the Pioneer
acquisition. The $100 million Credit Facility matures on June 24,
2008, or upon the establishment of an accounts receivable securitization program
and an increase in the lending commitments under our existing revolving credit
facility. The $150 million Credit Facility matures on June 24,
2008. As of June 30, 2007, we had $250 million available under
the $100 million and the $150 million credit facilities, which
had no borrowings outstanding. Under these facilities, we
may select various floating rate borrowing options. They include 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).
On
July 25, 2007, we entered into a $250
million Accounts Receivable Facility. The 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 July 31,
2007, we had no drawings under the Accounts Receivable Facility, which expires
in July 2012.
During
the six months ended June 30,
2007 and 2006, we issued 0.6 million and 0.4 million shares of common
stock with a total value of $9.8 million and $7.8 million, respectively, to
the
CEOP. These shares were issued to satisfy the investment in our common stock
resulting from employee contributions, our matching contributions and
re-invested dividends. We issued less than 0.1 million and 0.2 million
shares with a total value of $0.8 million and $4.4 million, representing stock
options exercised for the six months ended June 30, 2007 and 2006,
respectively.
The
percent of total debt to total
capitalization decreased to 29.5% at June 30, 2007, from 31.8% at year-end
2006.
The decrease was due primarily to the higher shareholders’ equity resulting from
the net income for the six-month period ended June 30, 2007 and a lower level
of
outstanding debt at June 30, 2007.
In
the first two quarters of 2007
and 2006, we paid a quarterly dividend of $0.20 per share. In July 2007,
our board of directors declared a dividend of $0.20 per share on our common
stock, payable on September 10, 2007 to shareholders of record
on August 10, 2007.
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
conditions, 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, short-term investments, cash flow from
operations, short-term borrowings under our three revolving credit
facilities and borrowings under our Accounts Receivable Facility. We also 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, pulp and paper, automotive,
electronics, housing, and the telecommunications sectors. Cash flow from
operations is affected by changes in ECU selling prices caused by the changes
in
the supply/demand balance of chlorine and caustic, resulting in the chlor alkali
business having significant leverage on our earnings. 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 $11 million
annual change in our revenues and pretax profit when we are operating at full
capacity. In addition, cash flow from operating activities is affected by the
prices of copper and zinc. For example, assuming Metals segment shipment volumes
remain the same, a $0.10 per pound change in the metal prices results in an
approximate $4.0 million change in our investment in working
capital.
Our
current debt structure is used to
fund our business operations. As of June 30, 2007, we had borrowings of $250.8
million, of which $2.9 million was issued at variable rates. We have entered
into interest rate swaps on $101.6 million of our underlying fixed-rate debt
obligations, whereby we agree to pay variable rates to a counterparty who,
in
turn, pays us fixed rates. The counterparty to these agreements is 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 $1.6 million and
are
included in Other Assets on the accompanying Consolidated 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 are an additional source of
liquidity.
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 2007 through 2011 and $0.6 million in 2012. This supply agreement expires
in
2012.
We,
and our partner, PolyOne, own
equally SunBelt. Prior
to the second quarter
of 2007, Oxy Vinyls was a joint venture between OxyChem and
PolyOne. Oxy Vinyls is required to purchase 250,000 tons of chlorine
based on a formula related to its market price. We market the 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.
After the payment of $6.1 million on the Series O Notes in December 2006, our
guarantee of these notes was $67.0 million at June 30, 2007. In the event
SunBelt
cannot make any of these payments, we
would be required to fund our half of such payment. 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 June 30,
2007, December 31, 2006, and June 30, 2006, 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
February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
which permits an entity to measure certain financial assets and liabilities
at
fair value. The statement’s objective is to improve financial
reporting by allowing entities to mitigate volatility in reported earnings
caused by the measurement of related assets and liabilities using different
attributes, without having to apply complex hedge accounting
provisions. This statement becomes effective for fiscal years
beginning after November 15, 2007 and should be applied
prospectively. It is expected that this statement will not have a
material effect on our financial statements.
In
September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements.” This statement does not require
any new fair value measurements, but rather, it provides 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 relates 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 becomes
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. It is expected that this statement
will not have a material effect on our financial statements.
In
September 2006, the FASB issued FASB
Staff Position (FSP) No. AUG AIR-1, “Accounting for Planned Major Maintenance
Activities,” which amends certain provisions in the AICPA Industry Audit Guide,
“Audits of Airlines” and APBO No. 28, “Interim Financial
Reporting.” This position prohibits the use of the accrue-in-advance
method of accounting for planned major maintenance activities in annual and
interim financial reporting periods. This position became effective
for fiscal years beginning after December 15, 2006 and should be applied
retrospectively for all financial statements presented. Previously,
our accrual for planned major maintenance costs did not extend past year end,
but was accrued within the year for the year. This position did not have a
material effect on our 2006 financial statements, and therefore, no restatements
were made.
In
July 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN
No. 48). This interpretation clarified the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN No. 48
prescribes a recognition threshold and requires a measurement of a tax position
taken or expected to be taken in a tax return. This interpretation also provides
guidance on the treatment of derecognition, classification, interest and
penalties, accounting in interim periods, and disclosure. This interpretation
was effective for fiscal years beginning after December 15, 2006. We
adopted the provisions of FIN No. 48 on January 1, 2007. As a result
of the implementation, we recognized a $0.1 million increase in the liability
for unrecognized tax benefits, which has been accounted for as a reduction
to
Retained Earnings.
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 Metals and Winchester segments’ products, 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 June 30, 2007, we maintained open positions on futures
contracts totaling $87.1 million ($64.7 million at December 31, 2006 and
$43.5 million at June 30, 2006). Assuming a hypothetical 10% increase in
commodity prices which are currently hedged, we would experience a $8.7 million
($6.5 million at December 31, 2006 and $4.4 million at June 30, 2006)
increase in our cost of inventory purchased, which would be offset by a
corresponding increase in the value of related hedging
instruments.
Beginning
in 2007, we entered into
forward metal sales transactions to hedge a portion of our Metals segment
inventory. The purpose of the hedging activity was to protect the inventory
against changes in fair value due to changes in the spot metal prices. The
derivative contracts designated as fair value hedges of our Metals inventory
were marked-to-market within the quarter based upon changes in the COMEX forward
prices, and the Metals inventory being hedged was marked-to-market based upon
changes in the spot price at the end of the quarter. The differences between
the
indices used to mark-to-market the Metals inventory being hedged and the forward
contracts designated as fair value hedges can result in volatility in our
reported earnings. However, over time gains or losses on the sale of the Metals
inventory will be offset by gains or losses on the fair value hedges, resulting
in the realization of gross margin we anticipated at the time the transaction
was structured. In the six months ended June 30, 2007, we recognized
a pretax loss of $0.6 million within Cost of Goods Sold related to hedge
ineffectiveness and changes in time value excluded from the assessment of hedge
ineffectiveness.
We
are exposed to changes in interest
rates primarily as a result of our investing and financing activities. Investing
activity is not material to our consolidated financial position, results of
operations, or cash flows. Our current debt structure is used to fund
our business operations, and commitments from banks under our senior revolving
credit facility are a source of liquidity. As of June 30,
2007, December 31, 2006, and June 30, 2006, we had long-term
borrowings of $250.8 million, $253.9 million, and $252.3 million, respectively,
of which $2.9 million at June 30, 2007, December 31, 2006, and June 30, 2006
was
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 $101.6
million of such swaps, whereby we agree to pay variable rates to a counterparty
who, in turn, pays us fixed rates. In all cases, the underlying index for the
variable rates is the six-month London InterBank Offered Rate (LIBOR).
Accordingly, payments are settled every six months and the term of the swap
is
the same as the underlying debt instrument.
Assuming
no changes in the $104.5
million of variable-rate debt levels from December 31, 2006, we estimate that
a
hypothetical change of 100-basis points in the LIBOR interest rates from 2006
would impact interest expense by $1.0 million on an annualized pretax
basis.
The
following table reflects the swap
activity related to certain debt obligations as of June 30,
2007:
Underlying
Debt
Instrument
|
|
Swap
Amount
|
|
Date of Swap
|
|
June
30,
2007
Floating Rate
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.125%,
due
2011
|
|
$
|
25.0
|
|
March
2002
|
|
|
7.5-8.5
|
%(a)
|
Industrial
development and
environmental improvement obligations at fixed interest rates of
6.0% to
6.75%, due 2007-2017
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.5
|
|
March
2002
|
|
|
5.72
|
%
|
(a)
Actual
rate is set in
arrears. We project the rate will fall within the range
shown.
These
interest rate swaps reduced
interest expense, resulting in an increase in pretax income of $0.3 million
and
$0.6 million for the six months ended June 30, 2007 and 2006,
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 June 30, 2007. 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
June 30, 2007 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,”
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, 2006, include, but are not limited to the
following:
|
•
|
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 automotive, electronics, coinage, telecommunications,
ammunition, housing, vinyls and pulp and paper, and the migration
by
United States customers to low-cost foreign
locations;
|
|
•
|
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;
|
|
•
|
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;
|
|
•
|
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;
|
|
•
|
costs
and other
expenditures in excess of those projected for environmental investigation
and remediation or other legal
proceedings;
|
|
•
|
higher-than-expected
raw material, energy, transportation, and/or logistics
costs;
|
|
•
|
unexpected
litigation outcomes;
|
|
•
|
the
occurrence of
unexpected manufacturing interruptions and outages, including those
occurring as a result of labor disruptions and production
hazards;
|
|
•
|
new
regulations
or public policy changes regarding the transportation of hazardous
chemicals and the security of chemical manufacturing facilities;
and
|
|
•
|
an
increase in
our indebtedness or higher-than-expected interest rates, affecting
our
ability to generate sufficient cash flow for debt
service.
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
1-31,
2007
|
|
|
—
|
|
N/A
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
154,076
|
(1)
|
(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 June 30, 2007, 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.
The
Company held its Annual Meeting of
Shareholders on April 26, 2007. Of the 73,643,645 shares of Common
Stock entitled to vote at such meeting, 69,109,312 shares were present for
purposes of a quorum. At the meeting, shareholders elected to the
Board of Directors C. Robert Bunch, Randall W. Larrimore, and Anthony W. Ruggiero
as Class I directors with terms
expiring in 2010. The terms of office of the following directors
continued after the Annual Meeting of Shareholders: Donald W. Bogus,
Virginia A. Kamsky, John M. B.
O’Connor, Richard M. Rompala, Joseph D. Rupp, and Philip J. Schulz. Votes
cast for and votes
withheld in the election of Directors were as follows:
|
|
Votes For
|
|
|
Votes
Withheld
|
|
C.
Robert
Bunch
|
|
|
67,283,595
|
|
|
|
1,825,717
|
|
|
|
|
|
|
|
|
|
|
Randall
W.
Larrimore
|
|
|
67,193,104
|
|
|
|
1,916,208
|
|
|
|
|
|
|
|
|
|
|
Anthony
W.
Ruggiero
|
|
|
66,799,496
|
|
|
|
2,309,816
|
|
There
were no abstentions or broker
nonvotes.
The
shareholders ratified the
appointment of KPMG LLP as the independent registered public accounting firm
for
the Corporation for 2007. Voting for the resolution ratifying the
appointment were 68,051,368 shares. Voting against were 767,038
shares. Abstaining were 290,906 shares. There were no
broker nonvotes.
Item 5.
Other
Information.
Not
Applicable.
Item 6.
Exhibits.
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
|
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:
July 31, 2007
EXHIBIT
INDEX
Exhibit No.
|
Description
|
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
|