final10qq32008.htm
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended September 30, 2008
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
file number 1-1070
Olin
Corporation
(Exact
name of registrant as specified in its charter)
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Virginia
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13-1872319
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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190
Carondelet Plaza, Suite 1530, Clayton, MO
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63105-3443
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(Address
of principal executive offices)
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(Zip
Code)
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(314)
480-1400
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer ¨ Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
September 30, 2008, 76,883,897 shares of the registrant’s common stock were
outstanding.
Part I —
Financial Information
Item 1.
Financial Statements.
OLIN
CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed
Balance Sheets
(In
millions, except per share data)
(Unaudited)
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September
30,
2008
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December
31,
2007
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September
30,
2007
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ASSETS
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Current
Assets:
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Cash
and Cash Equivalents
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Current
Deferred Income Taxes
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Current
Assets of Discontinued Operations
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Property,
Plant and Equipment (less Accumulated Depreciation of $950.3, $912.6 and
$903.1)
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Assets
of Discontinued Operations
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LIABILITIES AND
SHAREHOLDERS’ EQUITY
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Current
Installments of Long-Term Debt
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Current
Liabilities of Discontinued Operations
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Total
Current Liabilities
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Accrued
Pension Liability
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Liabilities
of Discontinued Operations
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Commitments
and Contingencies
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Common
Stock, Par Value $1 Per Share: Authorized, 120.0
Shares;
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Issued
and Outstanding 76.9, 74.5 and 74.2 Shares
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Additional
Paid-In Capital
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Accumulated
Other Comprehensive Loss
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Retained
Earnings (Accumulated Deficit)
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Total
Shareholders’ Equity
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Total
Liabilities and Shareholders’ Equity
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The
accompanying Notes to Condensed Financial Statements are an integral part of the
condensed financial statements.
OLIN
CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed
Statements of Income
(In
millions, except per share data)
(Unaudited)
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Three Months Ended
September
30,
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Nine
Months Ended
September
30,
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2008
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2007
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2008
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2007
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Selling
and Administration
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Earnings
of Non-consolidated Affiliates
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Income
from Continuing Operations before Taxes
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Income
from Continuing Operations
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Income
from Discontinued Operations, Net
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Loss
on Disposal of Discontinued Operations, Net
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Net
Income (Loss) per Common Share:
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Basic
Income (Loss) per Common Share:
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Income
from Continuing Operations
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Income
from Discontinued Operations, Net
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Loss
on Disposal of Discontinued Operations, Net
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Diluted
Income (Loss) per Common Share:
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Income
from Continuing Operations
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Income
from Discontinued Operations, Net
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Loss
on Disposal of Discontinued Operations, Net
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Dividends
per Common Share
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Average
Common Shares Outstanding:
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The
accompanying Notes to Condensed Financial Statements are an integral part of the
condensed financial statements.
OLIN
CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed
Statements of Shareholders’ Equity
(In
millions, except per share data)
(Unaudited)
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Common
Stock
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Shares
Issued
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Par
Value
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Additional
Paid-In
Capital
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Accumulated
Other
Comprehensive
Loss
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Retained
Earnings
(Accumulated
Deficit)
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Total
Shareholders’
Equity
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Balance
at January 1, 2007
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Amortization
of Prior Service Costs and Actuarial Losses, Net
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Common
Stock ($0.60 per share)
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Cumulative
Effect of Accounting Change
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Balance
at September 30, 2007
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Balance
at January 1, 2008
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Amortization
of Prior Service Costs and Actuarial Losses, Net
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Common
Stock ($0.60 per share)
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Balance
at September 30, 2008
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The
accompanying Notes to Condensed Financial Statements are an integral part of the
condensed financial statements.
OLIN
CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed
Statements of Cash Flows
(In
millions)
(Unaudited)
|
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Nine Months Ended
September
30,
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2008
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2007
|
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Operating
Activities
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Loss
from Discontinued Operations, Net
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Adjustments
to Reconcile Net Income (Loss) to Net Cash and Cash Equivalents (Used for)
Provided by Operating Activities:
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Earnings
of Non-consolidated Affiliates
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Depreciation
and Amortization
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Qualified
Pension Plan Contribution
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Qualified
Pension Plan (Income) Expense
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Impairment
of Investment in Corporate Debt Securities
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Common
Stock Issued under Employee Benefit Plans
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Accounts
Payable and Accrued Liabilities
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Other
Noncurrent Liabilities
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Other
Operating Activities
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Cash
(Used for) Provided by Continuing Operations
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Discontinued Operations, Net
|
|
|
|
|
|
|
|
|
Operating
Activities from Discontinued Operations
|
|
|
|
|
|
|
|
|
Cash
Provided by Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Acquired through Purchase Transaction
|
|
|
|
|
|
|
|
|
Cash
Acquired through Business Acquisition
|
|
|
|
|
|
|
|
|
Proceeds
from Disposition of Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
Proceeds
from Sale of Short-Term Investments
|
|
|
|
|
|
|
|
|
Proceeds
from Sale/Leaseback of Equipment
|
|
|
|
|
|
|
|
|
Distributions
from Affiliated Companies, Net
|
|
|
|
|
|
|
|
|
Other
Investing Activities
|
|
|
|
|
|
|
|
|
Cash
Used for Continuing Operations
|
|
|
|
|
|
|
|
|
Investing
Activities from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
Tax Benefits from Stock Options Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Debt Issuance Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
|
|
|
|
|
|
|
Cash
Paid for Interest and Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 two business segments: Chlor Alkali Products
and Winchester. Chlor Alkali Products, with nine U.S. manufacturing
facilities and one Canadian manufacturing facility, produces chlorine and
caustic soda, sodium hydrosulfite, hydrochloric acid, hydrogen, bleach
products and potassium hydroxide. Winchester, with its principal
manufacturing facility in East Alton, IL, produces and distributes
sporting ammunition, reloading components, small caliber military
ammunition and components, and industrial
cartridges.
|
|
On
October 15, 2007, we announced we entered into a definitive agreement to
sell the Metals business to a subsidiary of Global Brass and Copper
Holdings, Inc. (Global), an affiliate of KPS Capital Partners, LP, a New
York-based private equity firm. The transaction closed on
November 19, 2007. Accordingly, for all periods presented prior
to the sale, Metals’ assets and liabilities are classified as “held for
sale” and presented separately in the Condensed Balance Sheets, and the
related operating results and cash flows are reported as discontinued
operations in the Condensed Statements of Income and Condensed Statements
of Cash Flows, respectively.
|
|
On
August 31, 2007, we acquired Pioneer Companies, Inc. (Pioneer), whose
earnings were included in the accompanying financial statements since the
date of acquisition.
|
|
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, 2007.
Certain reclassifications were made to prior year amounts to conform to
the 2008 presentation.
|
2.
|
Allowance
for doubtful accounts receivable consisted of the
following:
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of year
|
|
|
|
|
|
|
|
|
Provisions
charged (credited)
|
|
|
|
|
|
|
|
|
Write-offs,
net of recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions
charged to operations for the three months ended September 30, 2008 were $1.7
million. Provisions credited to operations for the three months ended
September 30, 2007 were $0.6 million.
3.
|
Inventories
consisted of the following:
|
|
|
September
30,
2008
|
|
|
December 31,
2007
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
conjunction with the acquisition of Pioneer, we obtained inventories with a fair
value of $25.1 million as of August 31, 2007. Inventories are valued
at the lower of cost or market, with cost being determined principally by the
dollar value last-in, first-out (LIFO) method of inventory
accounting. Cost for other inventories has been determined
principally by the average cost method, primarily operating supplies, spare
parts, and maintenance parts. Elements of costs in inventories included raw
materials, direct labor, and manufacturing overhead. Inventories
under the LIFO method are based on annual estimates of quantities and costs as
of year-end; therefore, the condensed financial statements at September 30,
2008, reflect certain estimates relating to inventory quantities and costs at
December 31, 2008. If the first-in, first-out (FIFO) method of inventory
accounting had been used, inventories would have been approximately $69.0
million, $53.4 million and $62.5 million higher than reported at September 30,
2008, December 31, 2007, and September 30, 2007,
respectively.
4.
|
Basic
and diluted income (loss) per share was computed by dividing net income
(loss) by the weighted average number of common shares outstanding.
Diluted income (loss) per share reflects the dilutive effect of
stock-based compensation.
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Computation of Basic
Income (Loss) per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation of Diluted
Income (Loss) per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $6.4 million
and $16.2 million for the three months ended September 30, 2008 and 2007,
respectively, and $21.2 million and $29.3 million for the nine months
ended September 30, 2008 and 2007, respectively. Charges to
income for investigatory and remedial efforts were material to operating
results in 2007 and have been material to operating results in 2008. The
condensed balance sheets included reserves for future environmental
expenditures to investigate and remediate known sites amounting to $161.1
million at September 30, 2008, $155.6 million at December 31, 2007,
and $137.0 million at September 30, 2007, of which $126.1 million, $120.6
million, and $102.0 million were classified as other noncurrent
liabilities, respectively. In conjunction with the acquisition
of Pioneer, as of August 31, 2007 we assumed $57.5 million of
environmental liabilities associated with their current and past
manufacturing operations and former waste disposal
sites.
|
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 have a material adverse affect on 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 nine-month periods ended September 30, 2008 and
2007. At September 30, 2008, 154,076 shares remained authorized to be
purchased.
|
7.
|
We
issued 1.8 million shares and 0.1 million shares with a total value of
$38.1 million and $1.5 million, representing stock options exercised for
the nine months ended September 30, 2008 and 2007, respectively. In
addition, we issued 0.5 million and 0.7 million shares with a total value
of $11.3 million and $12.9 million for the nine months ended September 30,
2008 and 2007, respectively, in connection with our Contributing Employee
Ownership Plan (CEOP).
|
8.
|
We
define segment results as income (loss) from continuing operations before
interest expense, interest income, other income, and income taxes, and
include the operating results of non-consolidated
affiliates.
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
income (expense)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
corporate and unallocated costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Earnings
of non-consolidated affiliates were included in the Chlor Alkali Products
segment results consistent with management’s monitoring of the operating
segments. The earnings from non-consolidated affiliates were $12.0 million
and $14.1 million for the three months ended September 30, 2008 and 2007,
respectively, and $31.1 million and $34.4 million for the nine months
ended September 30, 2008 and 2007,
respectively.
|
|
(2)
|
The
service cost and the amortization of prior service cost components of
pension expense related to the employees of the operating segments are
allocated to the operating segments based on their respective estimated
census data. All other components of pension costs are included in
Corporate/Other and include items such as the expected return on plan
assets, interest cost, and recognized actuarial gains and
losses. Pension income for the nine months ended September 30,
2008 included a curtailment charge of $0.8 million resulting from the
conversion of our McIntosh, AL chlor alkali hourly workforce from a
defined benefit pension plan to a defined contribution pension
plan.
|
|
(3)
|
Other
(expense) income for the three and nine months ended September 30, 2008
included an impairment charge of the full value of a $26.6 million
investment in corporate debt securities. We are currently
unable to utilize the capital loss resulting from the impairment of these
corporate debt securities; therefore, no tax benefit was recognized during
the period for the impairment loss.
|
9.
|
Stock-based
compensation granted included stock options, performance stock awards,
restricted stock awards, and deferred directors’
compensation. Stock-based compensation expense totaled $0.4
million and $3.2 million for the three months ended September 30, 2008 and
2007, respectively, and $7.9 million and $7.3 million for the nine months
ended September 30, 2008 and 2007,
respectively.
|
In 2008,
we granted 523,350 stock options with an exercise price of
$20.29. The fair value of each stock 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
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
fair value (per option)
|
|
|
|
|
|
|
|
|
Dividend
yield for 2008 and 2007 was based on a historical average. 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.
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. This reclassification conforms to the accounting
treatment for stock-based compensation in Statement of Financial Accounting
Standards (SFAS) No. 123 (Revised 2004), “Share-Based Payment.”
10.
|
We
have a 50% ownership interest in SunBelt Chlor Alkali Partnership
(SunBelt), which was accounted for using the equity method of accounting.
The condensed financial positions and results of operations of SunBelt in
its entirety were as follows:
|
100%
Basis
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
September
30,
2007
|
|
Condensed
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
|
2007
|
Condensed
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amount of cumulative unremitted earnings of SunBelt was $23.6 million, $6.6
million and $10.9 million at September 30, 2008, December 31, 2007, and
September 30, 2007, respectively. We received distributions from SunBelt
totaling $18.3 million and $22.5 million in the nine months ended September 30,
2008 and 2007, respectively. We have not made any contributions in
2008 or 2007. We received net settlements of advances of $20.9
million and $24.5 million in the nine months ended September 30, 2008 and 2007,
respectively.
In
accounting for our ownership interest in SunBelt, we adjust the reported
operating results for additional depreciation expense in order to conform
SunBelt’s plant and equipment useful lives to ours. Beginning January
1, 2007, the original machinery and equipment of SunBelt had been fully
depreciated in accordance with our useful asset lives, thus resulting in lower
depreciation expense. The lower depreciation expense increased our
share of SunBelt’s operating results by $1.0 million and $0.9 million for the
three months ended September 30, 2008 and 2007, respectively, and $3.3 million
and $2.8 million for the nine months ended September 30, 2008 and 2007,
respectively. The operating results from SunBelt included interest
expense of $1.1 million and $1.2 million for the three months ended September
30, 2008 and 2007, respectively, and $3.3 million and $3.6 million for the nine
months ended September 30, 2008 and 2007, respectively, on the SunBelt
Notes. Finally, we provide various administrative, management and
logistical services to SunBelt for which we received fees totaling
$2.2 million in the three months ended September 30, 2008 and 2007,
and $6.5 million and $6.2 million in the nine months ended September 30, 2008
and 2007, 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, our partner in this venture, has
guaranteed the Series G Notes, in both cases pursuant to customary guaranty
agreements. Our guarantee and PolyOne’s guarantee are several, rather than
joint. Therefore, we are not required to make any payments to satisfy the Series
G Notes guaranteed by PolyOne. An insolvency or bankruptcy of PolyOne will not
automatically trigger acceleration of the SunBelt Notes or cause us to be
required to make payments under our guarantee, even if PolyOne is required to
make payments under its guarantee. However, if SunBelt does not make timely
payments on the SunBelt Notes, whether as a result of a failure to pay on a
guarantee or otherwise, the holders of the SunBelt Notes may proceed against the
assets of SunBelt for repayment. If we were to make debt service payments under
our guarantee, we would have a right to recover such payments from
SunBelt.
Beginning
on December 22, 2002 and each year through 2017, SunBelt is required to
repay $12.2 million of the SunBelt Notes, of which $6.1 million is attributable
to the Series O Notes. Our guarantee of these SunBelt Notes was $60.9
million at September 30, 2008. In the event SunBelt cannot make any of these
payments, we would be required to fund the payment on the Series O Notes. In
certain other circumstances, we may also be required to repay the SunBelt Notes
prior to their maturity. We and PolyOne have agreed that, if we or PolyOne
intend to transfer our respective interests in SunBelt and the transferring
party is unable to obtain consent from holders of 80% of the aggregate principal
amount of the indebtedness related to the guarantee being transferred after good
faith negotiations, then we and PolyOne will be required to repay our respective
portions of the SunBelt Notes. In such event, any make whole or similar
penalties or costs will be paid by the transferring party.
11.
|
In
October 2007, we announced that we were freezing our defined benefit
pension plan for salaried and certain non-bargaining hourly
employees. Affected employees were eligible to accrue pension
benefits through December 31, 2007, but are not accruing any additional
benefits under the plan after that date. Employee service after
December 31, 2007 does count toward meeting the vesting requirements for
such pension benefits and the eligibility requirements for commencing a
pension benefit, but not toward the calculation of the pension benefit
amount. Compensation earned after 2007 similarly does not count
toward the determination of the pension benefit amounts under the defined
benefit pension plan. In lieu of continuing pension benefit
accruals for the affected employees under the pension plan, starting in
2008, we provide a contribution to an individual retirement contribution
account maintained with the CEOP equal to 5% of the employee’s eligible
compensation if such employee is less than age 45, and 7.5% of the
employee’s eligible compensation if such employee is age 45 or
older. Most of our employees now participate in defined contribution
pension plans. Expenses of the defined contribution pension
plans were $2.8 million and $0.6 million for the three months ended
September 30, 2008 and 2007, respectively, and $8.7 million and $1.9
million for the nine months ended September 30, 2008 and 2007,
respectively.
|
|
A
portion of our bargaining hourly employees continue to participate in our
domestic defined benefit pension plans, which are non-contributory
final-average-pay or flat-benefit plans. Our funding policy for the
defined benefit pension plans is consistent with the requirements of
federal laws and regulations. Our foreign subsidiaries maintain pension
and other benefit plans, which are consistent with statutory practices.
Our defined benefit pension 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
September
30,
|
|
|
Three Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Components
of Net Periodic Benefit (Income) Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
return on plans’ assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service cost
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Recognized
actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit (income) cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
Nine Months Ended
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Components
of Net Periodic Benefit (Income) Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
return on plans’ assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit (income) cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
service cost and the amortization of prior service cost components of pension
expense related to the employees of the operating segments were allocated to the
operating segments based on their respective estimated census
data. Therefore, the allocated portion of net periodic benefit costs
for the Metals business of $2.1 million and $6.4 million for the three and nine
months ended September 30, 2007, respectively, were included in income from
discontinued operations. The allocated portion of other
postretirement benefit costs for the Metals business of $1.2 million and $3.8
million for the three and nine months ended September 30, 2007, respectively,
were included in income from discontinued operations.
In June
2008, we recorded a curtailment charge of $0.8 million resulting from the
conversion of our McIntosh, AL chlor alkali hourly workforce from a defined
benefit pension plan to a defined contribution pension plan. In
September 2007, we recorded a curtailment charge of $6.6 million related to the
sale of the Metals business which was included in the loss on disposal of
discontinued operations. In June 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. The June 2007 curtailment charge was included in income
from discontinued operations.
We
account for our defined benefit pension plans using actuarial models required by
SFAS No. 87, “Employers’ Accounting for Pensions.” This model uses an
attribution approach that generally spreads the financial impact of changes to
the plan and actuarial assumptions over a period of time. Changes in
liabilities/assets due to changes in actuarial assumptions such as discount
rate, rate of compensation increases and mortality, as well as annual deviations
between what was assumed and what was experienced by the plan are treated as
gains or losses. The principle underlying the required attribution approach is
that employees render service over their average remaining service lives on a
relatively smooth basis and, therefore, the accounting for benefits earned under
the pension or non-pension postretirement benefits plans should follow the same
relatively smooth pattern. With the freezing of our defined benefit
pension plan for salaried and certain non-bargained hourly employees that became
effective January 1, 2008 and the sale of the Metals business, substantially all
defined benefit pension plan participants were inactive; therefore, actuarial
gains and losses are now being amortized based upon the remaining life
expectancy of the inactive plan participants rather than the future service
period of the active participants, which was the amortization period used prior
to 2008. At December 31, 2007, the average remaining life expectancy
of the inactive participants in the defined benefit pension plan was 19.0 years;
compared to the average remaining service lives of the active employees in the
defined benefit pension plan of 10.7 years.
In May
2007, we made a voluntary contribution to our defined benefit pension plan of
$100 million. In addition, during 2007 the asset allocation in the defined
benefit pension plan was adjusted to insulate the plan from discount rate risk
and reduce the plan’s exposure to equity investments.
12.
|
In
July 2006, the Financial Accounting Standards Board (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 prescribed a recognition threshold and
required a measurement of a tax position taken or expected to be taken in
a tax return. This interpretation also provided 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
decrease to Retained Earnings (Accumulated Deficit). 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. As of January 1, 2007, the remainder of $4.6 million
would have been a reduction to goodwill, if recognized. Upon
completion of the Metals sale, the potential reduction to goodwill would instead
be recognized as income from discontinued operations.
During
the three months ended September 30, 2008, we favorably resolved $7.6 million of
Pioneer unrecognized tax benefits associated with certain tax audits, which was
recorded as a reduction in goodwill. We acquired $30.1 million of
gross unrecognized tax benefits as part of the Pioneer acquisition, all of which
would be a reduction to goodwill, if recognized during 2008. The
unrecognized tax benefit, net of federal income tax benefit, totaled $29.4
million. If these tax benefits are not recognized, the result as of
September 30, 2008 would have been cash tax payments of $8.4
million. After adopting SFAS No. 141R, “Business Combinations” (SFAS
No. 141R) in 2009, any remaining balance of unrecognized tax benefits would
affect our effective tax rate instead of goodwill, if
recognized.
As of
September 30, 2008, we had $51.1 million of gross unrecognized tax benefits
(including Pioneer), of which $21.0 million would impact the effective tax rate,
if recognized. After adopting SFAS No. 141R, in 2009, the entire
gross unrecognized tax benefit would affect our effective tax rate instead of
goodwill, if recognized. A reconciliation of the beginning and ending
amounts of unrecognized tax benefits is as follows:
Balance
at December 31, 2007
|
|
|
|
|
Increase
for prior year tax positions
|
|
|
|
|
Decrease
for prior year tax positions
|
|
|
|
|
|
|
|
|
|
Increase
for current year tax positions
|
|
|
|
|
Reductions
due to statute of limitations
|
|
|
|
|
Balance
at September 30, 2008
|
|
|
|
|
As of
September 30, 2008, it was reasonably possible that our total amount of
unrecognized tax benefits would decrease by approximately $4.8 million over the
next twelve months. The reduction primarily relates to settlements
with tax authorities 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 included the periods 1996 to 2002 and related primarily to the tax
treatment of capital losses generated in 1997. We made payments of
$46.7 million in 2006. We made payments of $0.6 million in 2007
and expect to make payments of approximately $1.5 million in 2008 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.
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 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.
Our
federal income tax returns for 2004 to 2007 are open tax years under statute of
limitations. We file in numerous state and foreign jurisdictions with
varying statutes of limitation open from 2003 through 2007 depending on each
jurisdiction’s unique statute of limitation. Pioneer filed income tax
returns in the U.S., various states, Canada, and various Canadian
provinces. Pioneer tax returns for the years 2002 and forward are
open for examination. Pioneer is currently under examination by the
Canada Revenue Agency for its 2002 through 2004 tax years. We have
been notified by the IRS that it will commence an audit of Pioneer’s 2006 tax
year.
13.
|
On
August 31, 2007, we acquired Pioneer, a manufacturer of chlorine, caustic
soda, bleach, sodium chlorate, and hydrochloric acid. Pioneer
owned and operated four chlor-alkali facilities and several bleach
manufacturing facilities in North America. Under the merger
agreement, each share of Pioneer common stock was converted into the right
to receive $35.00 in cash, without interest. 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, was $426.1 million, which included
direct fees and
expenses.
|
We
finalized our purchase price allocation during the three months ended September
30, 2008. The adjustments to the purchase price allocation were
primarily the result of finalizing estimates for environmental expenditures to
investigate and remediate known sites and asset retirement obligations,
partially offset by a resolution of certain tax audit issues. These
adjustments resulted in an increase in goodwill of $1.8 million. The
following table summarizes the final allocation of the purchase price to
Pioneer’s assets and liabilities:
|
|
August
31, 2007
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
|
|
|
|
|
|
|
Included
in total current assets is cash and cash equivalents of $126.4
million. Included in other liabilities are liabilities for future
environmental expenditures to investigate and remediate known sites of $57.5
million, liabilities for unrecognized tax benefits of $29.6 million, accrued
pension and postretirement liabilities of $15.0 million, asset retirement
obligations of $22.0 million and other liabilities of $7.8 million.
On March
12, 2008, we announced that, in connection with our plans to streamline our
Chlor Alkali Products manufacturing operations in Canada in order to serve our
customer base in a more cost effective manner, we would close the acquired
Dalhousie, New Brunswick, Canada chlorine, caustic soda, sodium chlorate, and
sodium hypochlorite operations. We substantially completed the closure of
the Dalhousie facility by June 30, 2008. We expect to incur cash
expenditures of $2.5 million in 2008 associated with the shutdown, which were
previously included in current liabilities on the August 31, 2007 balance
sheet.
The
following pro forma summary presents the condensed statement of operations as if
the acquisition of Pioneer had occurred at the beginning of the period
(unaudited):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro
forma statements of operations included an increase to interest expense of $1.1
million and $4.3 million for the three and nine months ended September 30, 2007,
respectively. This adjustment was calculated assuming that our borrowings
of $110 million, at an interest rate of 5.76% at the time of the merger, were
outstanding from January 1, 2007. The pro forma statements of
operations used estimates and assumptions based on information available at the
time. Management believes the estimates and assumptions to be
reasonable; however, actual results may differ significantly from this pro forma
financial information. The pro forma information does not reflect any
cost savings that might be achieved from combining the operations and is not
intended to reflect the actual results that would have occurred had the
companies actually been combined during the periods
presented.
14.
|
On
October 15, 2007, we announced we entered into a definitive agreement to
sell the Metals business to Global for $400 million, payable in
cash. The price received was subject to a customary working
capital adjustment. The transaction closed on November 19,
2007. The final loss recognized related to this
transaction will be dependent upon the final determination of the value of
working capital in the business. Based on an estimated working
capital adjustment, net cash proceeds from the transaction were $380.8
million.
|
The
Metals business was a reportable segment comprised of principal manufacturing
facilities in East Alton, IL and Montpelier, OH. Metals produced and
distributed copper and copper alloy sheet, strip, foil, rod, welded tube,
fabricated parts, and stainless steel and aluminum strip. Sales for
the Metals business were $521.8 million and $1,604.9 million for the three and
nine months ended September 30, 2007, respectively. Intersegment
sales for the three and nine months ended September 30, 2007 were $20.2 million
and $69.0 million, respectively, representing the sale of ammunition cartridge
case cups to Winchester from Metals, at prices that approximate market, and have
been eliminated from Metals sales. In conjunction with the sale of
the Metals business, Winchester agreed to purchase the majority of its
ammunition cartridge case cups and copper-based strip requirements from Global
under a multi-year agreement with pricing, terms, and conditions which
approximate market. As the criteria to treat the related assets and
liabilities as “held for sale” were met in the third quarter of 2007, for all
periods presented prior to the sale, the related assets and liabilities were
classified as “held for sale,” and the results of operations from the Metals
business have been reclassified as discontinued operations.
The major
classes of assets and liabilities of the Metals business included in assets
“held for sale” in the Condensed Balance Sheet were as follows:
|
September
30, 2007
|
|
Receivables
|
$
|
224.0
|
|
Inventories
|
|
150.0
|
|
Other
current assets
|
|
11.7
|
|
Current
assets of discontinued operations
|
|
385.7
|
|
Property,
plant, and equipment
|
|
188.0
|
|
Other
assets
|
|
7.9
|
|
Assets
of discontinued operations
|
|
195.9
|
|
Accounts
payable
|
|
(141.4
|
)
|
Accrued
liabilities
|
|
(38.5
|
)
|
Current
liabilities of discontinued operations
|
|
(179.9
|
)
|
Liabilities
of discontinued operations
|
|
(9.0
|
)
|
Net
assets held for sale
|
$
|
392.7
|
|
In
conjunction with the sale of the Metals business, we retained certain assets and
liabilities including certain assets co-located with our Winchester business in
East Alton, IL, assets and liabilities associated with former Metals
manufacturing locations, pension assets and pension and postretirement
healthcare and life insurance liabilities associated with Metals employees for
service earned through the date of sale, and certain environmental obligations
existing at the date of closing associated with current and past Metals
manufacturing operations and waste disposal sites.
15.
|
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” (SFAS No. 159), which
permitted an entity to measure certain financial assets and liabilities at
fair value. The statement’s objective was 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 became effective for fiscal years
beginning after November 15, 2007 and was to be applied
prospectively. We adopted the provisions of SFAS No.
159 on January 1, 2008. As we did not elect to measure
existing assets and liabilities at fair value, the adoption of this
statement did not have an effect on our financial
statements.
|
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
(SFAS No. 157). This statement did not require any new fair value
measurements, but rather, it provided enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair value. The
changes to current practice resulting from the application of this statement
related to the definition of fair value, the methods used to estimate fair
value, and the requirement for expanded disclosures about estimates of fair
value. This statement became effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
effective date for this statement for all nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis, has been delayed by one
year. Nonfinancial assets and nonfinancial liabilities that could be
impacted by this deferral include assets and liabilities initially measured at
fair value in a business combination, and intangible assets and goodwill tested
annually for impairment. We adopted the provisions of SFAS No. 157
related to financial assets and financial liabilities on January 1,
2008. The partial adoption of this statement did not have a material
impact on our financial statements. It is expected that the remaining provisions
of this statement will not have a material effect on our financial
statements.
In
October 2008, the FASB issued FASB Staff Position SFAS No. 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active,” (SFAS No. 157-3). This position clarifies the application of
FASB No. 157 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. This position
was effective for us on September 30, 2008. The adoption of this
position did not have an effect on our financial statements.
Fair
value is defined as the price at which an asset could be exchanged in a current
transaction between knowledgeable, willing parties or the amount that would be
paid to transfer a liability to a new obligor, not the amount that would be paid
to settle the liability with the creditor. Where available, fair value is based
on observable market prices or parameters or derived from such prices or
parameters. Where observable prices or inputs are not available, valuation
models are applied. These valuation techniques involve some level of management
estimation and judgment, the degree of which is dependent on the price
transparency for the instruments or market and the instruments’
complexity.
Assets
and liabilities recorded at fair value in the condensed balance sheets are
categorized based upon the level of judgment associated with the inputs used to
measure their fair value. Hierarchical levels, defined by SFAS No. 157 and
directly related to the amount of subjectivity associated with the inputs to
fair valuation of these assets and liabilities, are as follows:
Level 1 —
Inputs were unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date.
Level 2 —
Inputs (other than quoted prices included in Level 1) were either directly or
indirectly observable for the asset or liability through correlation with market
data at the measurement date and for the duration of the instrument’s
anticipated life.
Level 3 —
Inputs reflected management’s best estimate of what market participants would
use in pricing the asset or liability at the measurement date. Consideration was
given to the risk inherent in the valuation technique and the risk inherent in
the inputs to the model.
Determining
which hierarchical level an asset or liability falls within requires significant
judgment. We will evaluate our hierarchy disclosures each
quarter. The following table summarizes the financial instruments
measured at fair value in the Condensed Balance Sheet as of September 30,
2008:
|
Fair
Value Measurements
|
|
Level
1
|
Level
2
|
Level
3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
forward contracts
|
|
|
|
|
|
|
|
|
Short-term
investments
We
classified our marketable securities as available-for-sale which were reported
at fair market value. Unrealized gains and losses, to the extent such
losses are considered temporary in nature, are included in Accumulated Other
Comprehensive Loss, net of applicable taxes. At such time as the
decline in fair market value and the related unrealized loss is determined to be
a result of impairment of the underlying instrument, the loss is recorded as a
charge to earnings. Fair values for marketable securities are based
upon prices and other relevant information observable in market transactions
involving identical or comparable assets or liabilities or prices obtained from
independent third-party pricing services. The third-party pricing
services employ various models that take into consideration such market-based
factors as recent sales, risk-free yield curves, prices of similarly rated
bonds, and direct discussions with dealers familiar with these types of
securities.
As of
June 30, 2008, we held corporate debt securities totaling $26.6 million of par
value with a fair value of $20.5 million. For the three months ended
June 30, 2008, a temporary unrealized after-tax loss of $3.7 million ($6.1
million pretax) was recorded in Accumulated Other Comprehensive
Loss. As of June 30, 2008, we concluded no other-than-temporary
impairment losses had occurred. The AA-rated issuer of these debt
securities had funded all redemptions at par and maintained short-term A1/P2
credit ratings. We entered into this structured investment vehicle in
March 2006 as part of an approved cash management portfolio. Given
our liquidity and capital structure, we had the ability to hold these debt
securities until maturity on April 1, 2009.
Through
September 30, 2008, the issuer of these debt securities had continued to fund
all redemptions at par but was downgraded to short-term A3/P2 credit
ratings. On October 1, 2008, the issuer of these debt securities
announced it would cease trading and appoint a receiver as a result of financial
market turmoil. The decline in the market value of the assets
supporting these debt securities negatively impacted the liquidity of the
issuer. On October 1, subsequent to the issuer’s announcement, the
Moody’s rating for these debt securities was downgraded from A3 to
Ca.
As of
September 30, 2008, we continued to hold corporate debt securities totaling
$26.6 million of par value. We determined that these debt securities
had no fair market value due to the actions taken by the issuer, turmoil in the
financial markets, the lack of liquidity of the issuer, and the lack of trading
in these debt securities. These factors have led management to
believe the recovery of the asset value, if any, is highly
unlikely.
Because
of the unlikelihood that these debt securities will recover in value, we
recorded an after-tax impairment loss of $26.6 million in Other (Expense) Income
for the three months ended September 30, 2008. We are currently
unable to utilize the capital loss resulting from the impairment of these
corporate debt securities; therefore, no tax benefit was recognized during the
period for the impairment loss.
Interest
rate swaps
The fair
value of the interest rate swaps was included in Other Assets and Long-Term Debt
as of September 30, 2008. These financial instruments were valued
using the “income approach” valuation technique. This method used
valuation techniques to convert future amounts to a single present
amount. The measurement was based on the value indicated by current
market expectations about those future amounts. We use interest rate
swaps as a means of managing interest rates on our outstanding fixed-rate debt
obligations.
Commodity
forward contracts
The fair
value of the commodity forward contracts was classified in Accrued Liabilities
as of September 30, 2008, with unrealized gains and losses included in
Accumulated Other Comprehensive Loss, net of applicable taxes. These
financial instruments were valued primarily based on prices and other relevant
information observable in market transactions involving identical or comparable
assets or liabilities including both forward and spot prices for
commodities. We use commodity forward contracts for certain raw
materials and energy costs such as copper, zinc, lead, and natural gas to
provide a measure of stability in managing our exposure to price
fluctuations.
SFAS No.
157 requires separate disclosure of assets and liabilities measured at fair
value on a recurring basis, as documented above, from those measured at fair
value on a nonrecurring basis. As of September 30, 2008, no assets or
liabilities were measured at fair value on a nonrecurring basis.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Business
Background
Our
manufacturing operations are concentrated in two business segments: Chlor Alkali
Products and Winchester. Both are capital intensive manufacturing businesses
with operating rates closely tied to the general economy. Each segment has a
commodity element to it, and therefore, our ability to influence pricing is
quite limited on the portion of the segment’s business that is strictly
commodity. Our Chlor Alkali Products segment is a commodity business where all
supplier products are similar and price is the major supplier selection
criterion. We have little or no ability to influence prices in this large,
global commodity market. Cyclical price swings, driven by changes in
supply/demand, can be abrupt and significant and, given the capacity in our
Chlor Alkali Products business, can lead to very significant changes in our
overall profitability. Winchester also has a commodity element to its business,
but a majority of Winchester ammunition is sold as a branded consumer product
where there are opportunities to differentiate certain offerings through
innovative new product development and enhanced product performance. While
competitive pricing versus other branded ammunition products is important, it is
not the only factor in product selection. The Metals business was
classified as discontinued operations during 2007 and was excluded from the
segment results.
Executive
Summary
Chlor
Alkali Products segment income improved 47% and 42% compared with the three and
nine months ended September 30, 2007, respectively, which reflects the
contributions and synergies from the Pioneer acquisition and improved
pricing. Operating rates in Chlor Alkali Products for the three and
nine months ended September 30, 2008 were negatively impacted by
hurricane-related outages at our St. Gabriel, LA facility and our SunBelt joint
venture.
During
the nine months ended September 30, 2008, demand for caustic soda remained
strong. However, caustic soda supply was constrained because of
reduced operating rates driven by weakness in chlorine demand, resulting in a
significant supply and demand imbalance for caustic soda. This
imbalance, along with increased freight and energy costs, resulted in
unprecedented caustic soda price increase announcements.
On March
12, 2008, we announced that, in connection with our plans to streamline Chlor
Alkali manufacturing operations in Canada in order to serve our customer base in
a more cost effective manner, we would close the acquired Dalhousie, New
Brunswick, Canada chlorine, caustic soda, sodium chlorate, and sodium
hypochlorite operations. We substantially completed the closure of
the Dalhousie facility by June 30, 2008. We expect to incur cash
expenditures of $2.5 million in 2008 associated with the shutdown, which were
previously included in current liabilities on the Pioneer acquisition balance
sheet. This action is expected to generate $8.0 million to $10.0
million of annual pretax savings.
Winchester
segment income was $9.8 million and $29.3 million for the three and nine months
ended September 30, 2008, respectively. Winchester segment income for
the nine months ended September 30, 2008, which represented record earnings for
the Winchester business, improved 24% compared with the prior
year. Winchester’s results for the nine months ended September 30,
2008, reflected the combination of improved pricing and increased
volumes.
For the
three months ended September 30, 2008, other (expense) income included an
impairment charge of the full value of a $26.6 million investment in corporate
debt securities. On October 1, 2008, the issuer of these debt
securities announced it would cease trading and appoint a receiver as a result
of financial market turmoil. The decline in the market value of the
assets supporting these debt securities negatively impacted the liquidity of the
issuer. We determined that these debt securities had no fair market
value due to the actions taken by the issuer, turmoil in the financial markets,
the lack of liquidity of the issuer, and the lack of trading in these debt
securities. We are currently unable to utilize the capital loss
resulting from the impairment of these corporate debt securities; therefore, no
tax benefit was recognized during the period for the impairment
loss. Previously, at June 30, 2008, a temporary unrealized after-tax
loss for these corporate debt securities of $3.7 million ($6.1 million pretax)
was recorded in accumulated other comprehensive loss.
For the
nine months ended September 30, 2008, the defined benefit pension plan’s
investment portfolio declined by approximately 8%. The decline
reflected the weakness in the domestic and international equity markets and
interest rate increases that reduced the value of fixed income
investments. During the same period, interest rates on corporate
bonds, used to determine the defined benefit pension plan’s liability discount
rate, have increased resulting in an estimated 125-basis point increase in the
discount rate. The combination of the plan’s investment performance
and the change in the discount rate have preserved the over funded position that
existed at December 31, 2007.
Consolidated
Results of Operations
($
in millions, except per share data)
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Three
Months Ended
September
30,
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Nine
Months Ended
September
30,
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2008
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2007
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2008
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2007
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Selling
and Administration
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Earnings
of Non-consolidated Affiliates
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Income
from Continuing Operations before Taxes
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Income
from Continuing Operations
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Income
from Discontinued Operations, Net
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Loss
on Disposal of Discontinued Operations, Net
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Net
Income (Loss) per Common Share:
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Basic
Income (Loss) per Common Share:
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Income
from Continuing Operations
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Income
from Discontinued Operations, Net
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Loss
on Disposal of Discontinued Operations, Net
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Diluted
Income (Loss) per Common Share:
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Income
from Continuing Operations
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Income
from Discontinued Operations, Net
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Loss
on Disposal of Discontinued Operations, Net
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—
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Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
Sales for
the three months ended September 30, 2008 were $502.9 million compared with
$350.3 million last year, an increase of $152.6 million, or 44%. Chlor Alkali Products
sales increased $140.8 million, or 64%, primarily due to higher ECU prices and
increased Pioneer sales of $110.3 million. The combined Olin and
Pioneer ECU netbacks increased 20% compared to the ECU netback in the prior
year, which included Pioneer for September only. Winchester sales
were higher by $11.8 million, or 9%, primarily due to increased selling prices
and higher volumes to law enforcement customers.
Gross
margin increased $53.7 million, or 78%, over the three months ended September
30, 2007, as a result of improved Chlor Alkali Products gross margin, primarily
due to higher ECU prices and the contribution from Pioneer. Gross
margin was also positively impacted by decreased environmental costs in 2008 of
$9.8 million primarily associated with a charge in the prior year related to
costs at a former waste disposal site based on revised remediation estimates
resulting from negotiations with a government agency and the reduction in
defined benefit pension expense of $4.4 million, which was partially offset by
an increase in defined contribution pension expense of $1.7
million. Gross margin as a percentage of sales was 24% in 2008 and
20% in 2007.
Selling
and administration expenses for the three months ended September 30, 2008
increased $4.6 million from the three months ended September 30, 2007 primarily
due to increased expenses associated with the acquired Pioneer operations, net
of synergies, of $3.1 million, a higher level of legal and legal-related
settlement costs of $3.4 million, a higher provision for doubtful customer
accounts receivable of $2.1 million, increased consulting costs of $0.5 million
and increased expenses arising from certain non-income tax audits of $0.5
million. These increases were partially offset by lower management
incentive compensation costs of $3.3 million primarily resulting from lower
mark-to-market adjustments on stock-based compensation and decreased defined
benefit pension expense of $2.8 million, partially offset by increased defined
contribution pension expense of $0.5 million. Selling and
administration expenses as a percentage of sales were 7% in 2008 and 9% in
2007.
Other
operating income of $0.4 million for the three months ended September 30, 2008
represented the impact of the gain realized in 2007 on an intangible asset sale
in Chlor Alkali Products, which is recognized ratably through March 2012 and the
impact of a gain realized on the sale of equipment, which is recognized ratably
through June 2009.
The
earnings of non-consolidated affiliates were $12.0 million for the three months
ended September 30, 2008, a decrease of $2.1 million from $14.1 million for the
three months ended September 30, 2007. Lower volumes at SunBelt due
to a production outage caused by the impact of Hurricane Ike on its customers
were partially offset by higher ECU selling prices in the three months ended
September 30, 2008.
Interest
expense decreased by $2.7 million from 2007, primarily due to the effect of
higher borrowings in 2007 related to the Pioneer acquisition and capitalizing
$1.2 million of interest in 2008 associated with our St. Gabriel, LA Chlor
Alkali facility conversion and expansion project.
The lower
interest income of $1.7 million for the three months ended September 30, 2008
was due to lower short-term interest rates.
Other
(expense) income for the three months ended September 30, 2008 included an
impairment charge of the full value of a $26.6 million investment in corporate
debt securities.
The
effective tax rate for continuing operations for the three months ended
September 30, 2008 included expense of $10.4 million for a valuation allowance
applied against the deferred tax benefit resulting from the $26.6 million
capital loss carryforward generated from the impairment of corporate debt
securities. The effective tax rate for continuing operations for the
three months ended September 30, 2008 also included a $2.5 million reduction in
expense primarily associated with the finalization of the 2007 income tax
returns, which resulted in an increased benefit for the domestic manufacturing
deduction. The effective tax rate for continuing operations for the
three months ended September 30, 2008 of 35.1%, which was increased by the
affect of these two items of $7.9 million, was higher than the 35% U.S. federal
statutory rate primarily due to state income taxes, which were offset in part by
the benefit of the domestic manufacturing deduction and the utilization of
certain state tax credits. The effective tax rate for continuing
operations for the three months ended September 30, 2007 of 32.7% was lower than
the 35% U.S. federal statutory rate primarily due to the benefit of the domestic
manufacturing deduction, 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.
Income
from discontinued operations, net for the three months ended September 30, 2007,
was $9.5 million. The Metals pretax income for the three months ended
September 30, 2007 included a LIFO inventory liquidation gain of $8.9 million as
part of a Metals inventory reduction program initiated in 2007. The
effective tax rate was 35.9% for the three months ended September 30,
2007.
Loss on
disposal of discontinued operations, net for the three months ended September
30, 2007, was $125.4 million. Based on the September 30, 2007 Metals
assets held for sale, we recognized a pretax loss of $151.8 million offset by a
$26.4 million income tax benefit.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
Sales for
the nine months ended September 30, 2008 were $1,330.3 million compared with
$872.0 million last year, an increase of $458.3 million, or 53%. Chlor Alkali
Products sales increased $419.6 million, or 77%, primarily due to the inclusion
of Pioneer sales totaling $376.0 million and higher ECU prices. The
combined Olin and Pioneer ECU netbacks increased 17% compared to the ECU netback
in the prior year, which included Pioneer for September
only. Winchester sales were higher by $38.7 million, or 12%, due to
increased selling prices and higher volumes to law enforcement
customers.
Gross
margin increased $116.4 million, or 68%, over the nine months ended September
30, 2007, as a result of improved Chlor Alkali Products gross margin primarily
due to the contribution from Pioneer and improved Winchester gross margin from
higher selling prices and improved volumes. Gross margin was also
positively impacted by decreased environmental costs in 2008 of $8.1 million
primarily associated with a charge in the prior year related to costs at a
former waste disposal site based on revised remediation estimates resulting from
negotiations with a government agency and the reduction in defined benefit
pension expense of $13.4 million, which was partially offset by an increase in
defined contribution pension expense of $5.8 million. Gross margin as
a percentage of sales was 22% in 2008 and 20% in 2007.
Selling
and administration expenses for the nine months ended September 30, 2008
increased $9.5 million from the nine months ended September 30, 2007 primarily
due to increased expenses associated with the acquired Pioneer operations, net
of synergies, of $11.9 million, increased consulting costs of $2.7 million,
increased salary and benefits costs of $2.5 million, and a higher provision for
doubtful customer accounts receivable of $2.7 million. These
increases were partially offset by decreased defined benefit pension expense of
$9.6 million, partially offset by increased defined contribution pension expense
of $1.0 million, and a lower level of legal and legal-related settlement costs
of $2.1 million. Selling and administration expenses as a percentage
of sales were 8% in 2008 and 11% in 2007.
Other
operating income of $1.5 million for the nine months ended September 30, 2008
represented the gain on the disposition of land associated with a former
manufacturing facility, the impact of the gain realized in 2007 on an intangible
asset sale in Chlor Alkali Products, which is recognized ratably through March
2012 and the impact of a gain realized on the sale of equipment, which is
recognized ratably through June 2009.
The
earnings of non-consolidated affiliates were $31.1 million for the nine months
ended September 30, 2008, a decrease of $3.3 million from $34.4 million for the
nine months ended September 30, 2007. Lower volumes at SunBelt due to
a production outage caused by the impact of Hurricane Ike on its customers were
partially offset by higher ECU selling prices in the nine months ended September
30, 2008.
Interest
expense decreased by $4.4 million from 2007, primarily due to the effect of
higher borrowings in 2007 related to the Pioneer acquisition and capitalizing
$2.2 million of interest in 2008 associated with our St. Gabriel, LA Chlor
Alkali facility conversion and expansion project.
The lower
interest income of $4.0 million in the nine months ended September 30, 2008 was
due to lower short-term interest rates.
Other
(expense) income for the nine months ended September 30, 2008 included an
impairment charge of the full value of a $26.6 million investment in corporate
debt securities.
The
effective tax rate for continuing operations for the nine months ended September
30, 2008 included expense of $10.4 million for a valuation allowance applied
against the deferred tax benefit resulting from the $26.6 million capital loss
carryforward generated from the impairment of corporate debt
securities. The effective tax rate for continuing operations for the
nine months ended September 30, 2008 also included a $2.5 million reduction in
expense primarily associated with the finalization of the 2007 income tax
returns, which resulted in an increased benefit for the domestic manufacturing
deduction. The effective tax rate for continuing operations for the
nine months ended September 30, 2008 of 35.7%, which was increased by the affect
of these two items of $7.9 million, was higher than the 35% U.S. federal
statutory rate primarily due to state income taxes, which were offset in part by
the benefit of the domestic manufacturing deduction and the utilization of
certain state tax credits. The effective tax rate for continuing
operations for the nine months ended September 30, 2007 of 32.4% was lower than
the 35% U.S. federal statutory rate primarily due to the benefit of the domestic
manufacturing deduction, and the utilization of certain state tax credits,
offset in part by state income taxes and income in certain foreign jurisdictions
being taxed at higher rates.
Income
from discontinued operations, net for the nine months ended September 30, 2007,
was $29.7 million. The Metals pretax income for the nine months ended
September 30, 2007 included a LIFO inventory liquidation gain of $22.0 million
as part of a Metals inventory reduction program initiated in
2007. The effective tax rate was 36.3% for the nine months ended
September 30, 2007.
Loss on
disposal of discontinued operations, net for the nine months ended September 30,
2007, was $125.4 million. Based on the September 30, 2007 Metals
assets held for sale, we recognized a pretax loss of $151.8 million offset by a
$26.4 million income tax benefit.
We define
segment results as income (loss) from continuing operations before interest
expense, interest income, other income, and income taxes, and include the
operating results of non-consolidated affiliates.
($
in millions)
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Three
Months Ended
September
30,
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Nine
Months Ended
September
30,
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2008
|
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2007
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2008
|
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2007
|
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Sales:
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Income
from continuing operations before taxes:
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Pension
income (expense)(2)
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Other
corporate and unallocated costs
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Other
(expense) income(3)
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Income
from continuing operations before taxes
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(1)
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Earnings
of non-consolidated affiliates were included in the Chlor Alkali Products
segment results consistent with management’s monitoring of the operating
segments. The earnings from non-consolidated affiliates were $12.0 million
and $14.1 million for the three months ended September 30, 2008 and 2007,
respectively, and $31.1 million and $34.4 million for the nine months
ended September 30, 2008 and 2007,
respectively.
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(2)
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The
service cost and the amortization of prior service cost components of
pension expense related to the employees of the operating segments are
allocated to the operating segments based on their respective estimated
census data. All other components of pension costs are included in
Corporate/Other and include items such as the expected return on plan
assets, interest cost, and recognized actuarial gains and
losses. Pension income for the nine months ended September 30,
2008 included a curtailment charge of $0.8 million resulting from the
conversion of our McIntosh, AL chlor alkali hourly workforce from a
defined benefit pension plan to a defined contribution pension
plan.
|
(3)
|
Other
(expense) income for the three and nine months ended September 30, 2008
included an impairment charge of the full value of a $26.6 million
investment in corporate debt securities. We are currently
unable to utilize the capital loss resulting from the impairment of these
corporate debt securities; therefore, no tax benefit was recognized during
the period for the impairment loss.
|
Chlor
Alkali Products
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
Chlor
Alkali Products’ sales for the three months ended September 30, 2008 were $362.1
million compared to $221.3 million for the three months ended September 30,
2007, an increase of $140.8 million, or 64%. The acquisition of
Pioneer contributed to an increase in sales of $110.3 million. Chlor
Alkali Products’ sales, excluding Pioneer, increased $30.5 million, or
17%. The sales increase was due to increased ECU pricing, partially
offset by lower volumes. The combined Olin and Pioneer chlorine and
caustic soda ECU netback, excluding SunBelt, was approximately $660 for the
three months ended September 30, 2008 compared to approximately $550 for the
same period in 2007, which included Pioneer for September
only. Freight costs included in the ECU netback increased by 27% in
the three months ended September 30, 2008 compared to same period in the prior
year. The combined Olin and Pioneer operating rate for the three
months ended September 30, 2008 was 89%, compared to the operating rate of 97%
for the three months ended September 30, 2007. The operating rate for
2008 was negatively affected by two hurricanes, which caused production and
customer outages and disruptions to the transportation system. During
the three months ended September 30, 2007, we were building inventory to support
our customers during a planned ten-day maintenance outage at our McIntosh, AL
facility, including the SunBelt facility, and shorter outages at four other
facilities in the fourth quarter of 2007.
Chlor
Alkali posted segment income of $103.6 million for the three months ended
September 30, 2008 compared to $70.7 million for the same period in
2007. Chlor Alkali segment income included Pioneer income of $31.7
million and $8.3 million for the three months ended September 30, 2008 and 2007,
respectively. Chlor Alkali segment income, excluding Pioneer, was
higher in 2008 by $9.5 million, or 15%, primarily because of increased selling
prices ($32.2 million), partially offset by decreased volumes ($4.1 million),
higher operating costs ($16.1 million), and lower SunBelt results ($2.4
million). Operating expenses increased primarily due to increases in
distribution costs and manufacturing costs, which included higher electricity
prices.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
Chlor
Alkali Products’ sales for the nine months ended September 30, 2008 were $962.6
million compared to $543.0 million for the nine months ended September 30, 2007,
an increase of $419.6 million, or 77%. The acquisition of Pioneer
contributed to an increase in sales of $376.0 million. Chlor Alkali
Products’ sales, excluding Pioneer, increased $43.6 million, or
9%. The sales increase was due to increased ECU pricing, partially
offset by lower volumes. The combined Olin and Pioneer chlorine and
caustic soda ECU netback, excluding SunBelt, was approximately $610 for the nine
months ended September 30, 2008 compared to approximately $520 for the same
period in 2007, which included Pioneer for September only. Freight
costs included in the ECU netback increased by 30% in the nine months ended
September 30, 2008 compared to same period in the prior year. The
combined Olin and Pioneer operating rate for the nine months ended September 30,
2008 was 87%, compared to the operating rate of 94% for the nine months ended
September 30, 2007. The lower operating rate for 2008 resulted from
lower chlorine demand and was negatively affected by two hurricanes, which
caused production and customer outages and disruptions to the transportation
system.
Chlor
Alkali posted segment income of $241.0 million for the nine months ended
September 30, 2008 compared to $169.2 million for the same period in
2007. Chlor Alkali segment income included Pioneer income of $72.7
million and $8.3 million for the nine months ended September 30, 2008 and 2007,
respectively. Chlor Alkali segment income, excluding Pioneer, was
higher in 2008 by $7.4 million, or 5%, primarily because of increased selling
prices ($58.2 million), partially offset by decreased volumes ($22.3 million),
higher operating costs ($27.4 million), and lower SunBelt results ($3.3
million). Chlor Alkali segment income for the nine months ended
September 30, 2008 also included a $2.6 million gain from a litigation
recovery. Operating expenses increased primarily due to increases in
distribution costs and manufacturing costs, which included higher electricity
prices.
Winchester
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
Sales
were $140.8 million for the three months ended September 30, 2008 compared to
$129.0 million for the three months ended September 30, 2007, an increase of
$11.8 million, or 9%. Shipments to law enforcement agencies increased
$5.9 million for the three months ended September 30, 2008 compared to the same
period in 2007. Sales of ammunition to domestic commercial customers
increased $2.4 million primarily due to higher selling
prices. Shipments to international commercial customers and military
customers increased $1.6 million and $0.7 million, respectively.
Winchester
reported segment income of $9.8 million for the three months ended September 30,
2008 compared to $10.0 million for the three months ended September 30, 2007, a
decrease of $0.2 million. The decrease was due to increased commodity and other
material costs and higher operating costs ($15.2 million) and lower volumes
primarily with commercial customers ($4.8 million), which were primarily offset
by the impact of higher selling prices and increased volumes to law enforcement
agencies ($19.5 million).
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
Sales
were $367.7 million for the nine months ended September 30, 2008 compared to
$329.0 million for the nine months ended September 30, 2007, an increase of
$38.7 million, or 12%. Shipments to law enforcement agencies
increased $16.0 million for the nine months ended September 30, 2008 compared to
the same period in 2007. Sales of ammunition to domestic commercial
customers increased $14.2 million primarily due to higher selling
prices. Shipments to international commercial customers and military
customers increased $5.6 million and $0.4 million, respectively.
Winchester
reported segment income of $29.3 million for the nine months ended September 30,
2008 compared to $23.7 million for the nine months ended September 30, 2007, an
increase of $5.6 million. The increase was due to the impact of higher selling
prices and increased volumes ($39.4 million), which were partially offset by
increased commodity and other material costs and higher operating costs ($34.2
million).
Corporate/Other
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
For the
three months ended September 30, 2008, pension income included in
Corporate/Other was $5.2 million compared to pension expense of $0.6 million for
the three months ended September 30, 2007. The $5.8 million decrease in
corporate pension expense was due to the combination of a required 25-basis
point increase in the discount rate, the $100 million
voluntary contribution made to our defined benefit pension plan in May
2007, the favorable performance on plan assets in 2007, the benefits of the
plan freeze for salary and non-bargained hourly employees, which became
effective January 1, 2008, and the increase in the amortization period of
actuarial losses.
On a
total company basis, defined benefit pension income for the three months ended
September 30, 2008 was $2.9 million compared to defined benefit pension expense
of $13.0 million for the three months ended September 30, 2007. The
decrease in total company pension expense reflected a curtailment charge of $6.6
million for the three months ended September 30, 2007 resulting from the sale of
the Metals business which was included in the loss on disposal of discontinued
operations. This defined benefit pension cost reduction was partially
offset by higher defined contribution pension costs. Total company
defined contribution pension expense for the three months ended September 30,
2008 was $2.8 million compared to $0.6 million for the three months ended
September 30, 2007.
For the
three months ended September 30, 2008, charges to income for environmental
investigatory and remedial activities were $6.4 million compared with $16.2
million in 2007. This provision related primarily to expected future
investigatory and remedial activities associated with past manufacturing
operations and former waste disposal sites. The decrease of $9.8
million was primarily due to a $7.8 million charge in the prior year related to
costs at a former waste disposal site based on revised remediation estimates
resulting from negotiations with a government agency.
For the
three months ended September 30, 2008, other corporate and unallocated costs
were $13.6 million compared with $12.3 million in 2007, an increase of $1.3
million, or 11%. Increased legal and legal-related settlement
expenses of $3.0 million, higher asset retirement obligation charges of $0.4
million, and increased expenses arising from certain non-income tax audits of
$0.4 million were partially offset by decreased stock-based compensation expense
of $3.3 million primarily resulting from lower mark-to-market adjustments.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
For the
nine months ended September 30, 2008, pension income included in Corporate/Other
was $13.3 million compared to pension expense of $4.1 million for the nine
months ended September 30, 2007. The $17.4 million decrease in corporate pension
expense was due to the combination of a required 25-basis point increase in the
discount rate, the $100 million voluntary contribution made to our defined
benefit pension plan in May 2007, the favorable performance on plan assets
in 2007, the benefits of the plan freeze for salary and non-bargained hourly
employees, which became effective January 1, 2008, and the increase in the
amortization period of actuarial losses. This decrease was partially
offset by a curtailment charge of $0.8 million resulting from the conversion of
our McIntosh, AL chlor alkali hourly workforce from a defined benefit pension
plan to a defined contribution pension plan.
On a
total company basis, defined benefit pension income for the nine months ended
September 30, 2008 was $7.8 million compared to defined benefit pension expense
of $28.7 million for the nine months ended September 30, 2007. The
decrease in total company pension expense reflected curtailment charges of $7.1
million for the nine months ended September 30, 2007 relating to the Metals
business which was included in discontinued operations. This defined
benefit pension cost reduction was partially offset by higher defined
contribution pension costs. Total company defined contribution
pension expense for the nine months ended September 30, 2008 was $8.7 million
compared to $1.9 million for the nine months ended September 30,
2007.
For the
nine months ended September 30, 2008, charges to income for environmental
investigatory and remedial activities were $21.2 million compared with $29.3
million in 2007. This provision related primarily to expected future
investigatory and remedial activities associated with past manufacturing
operations and former waste disposal sites. The decrease of $8.1
million was primarily due to a $7.8 million charge in the prior year related to
costs at a former waste disposal site based on revised remediation estimates
resulting from negotiations with a government agency.
For the
nine months ended September 30, 2008, other corporate and unallocated costs were
$47.5 million compared with $48.2 million in 2007, a decrease of $0.7 million,
or 1%. Legal and legal-related settlement expenses decreased $3.0
million, partially offset by higher asset retirement obligation charges of $1.3
million and increased expenses arising from certain non-income tax audits of
$0.7 million.
Outlook
Earnings
from continuing operations in the fourth quarter of 2008 are projected to be in
the $0.65 per diluted share range.
Chlor
Alkali Products earnings in the fourth quarter of 2008 are expected to improve
compared to last year, due to improved ECU netbacks partially offset by lower
volumes. The normal seasonal weakness of the industrial bleach
business and lower overall economic activity levels are contributing to the
expected lower operating rates. We expect Chlor Alkali Products
operating rates in the fourth quarter of 2008 to decline from the three months
ended September 30, 2008 level of 89% to the low 80% range.
While we
have seen improvements in caustic soda pricing for eight consecutive quarters,
we have continued to experience weaker chlorine prices. Chlorine
prices have declined for the last four consecutive quarters and we expect the
decline to continue through the balance of 2008 and into the first half of 2009.
The impact of the two hurricanes, which caused approximately 75% of North
American Chlor Alkali capacity to be shutdown for some period of time, makes it
likely that a significant portion of the $130 caustic soda price increase that
was announced during the third quarter of 2008 will be realized in our
system. We expect our ECU netbacks in the fourth quarter 2008 to
increase from the third quarter, and to continue to increase into the first half
of 2009.
Winchester
earnings in the fourth quarter of 2008 are expected to be approximately
breakeven in this seasonally weak quarter.
Winchester
continues to work towards completion of the relocation of its military packing
operations from its East Alton, IL facility to its Oxford, MS
facility. This relocation, which involves approximately 100
employees, is now expected to be completed by December 31, 2008 and is expected
to generate annual cost savings of approximately $3 million.
We expect
the fourth quarter 2008 charges for environmental investigatory and remedial
activities will be lower than the fourth quarter of 2007 level of $8.6
million. We currently estimate charges to income for environmental
investigatory and remedial activities for the full year 2008 will be
approximately 25% lower than the full year 2007 charges of $37.9
million.
We
believe the 2008 effective tax rate will be in the 39% range. The
effective tax rate includes an expense of $10.4 million as we are currently
unable to utilize the capital loss resulting from the impairment of the
corporate debt securities. The effective tax rate for 2008 also includes a $2.5
million reduction in expense primarily associated with the finalization of the
2007 income tax returns, which resulted in an increased benefit for the domestic
manufacturing deduction.
Environmental
Matters
($
in millions)
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|
September
30,
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|
2008
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2007
|
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Reserve
for Environmental Liabilities:
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|
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Balance
at Beginning of Year
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Remedial
and Investigatory Spending
|
|
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Currency
Translation Adjustments
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Environmental
investigatory and remediation activities spending was associated with former
waste disposal sites and past manufacturing operations. Spending in 2008 for
investigatory and remedial efforts, the timing of which is subject to regulatory
approvals and other uncertainties, is estimated to be in the $25 million range.
Expected spending for investigatory and remedial efforts in 2008 is lower than
previously estimated by $10 million primarily due to delayed regulatory
approvals which effectively deferred spending into future
periods. Cash outlays for remedial and investigatory activities
associated with former waste disposal sites and past manufacturing operations
were not charged to income, but instead, were charged to reserves established
for such costs identified and expensed to income in prior periods. Associated
costs of investigatory and remedial activities are provided for in accordance
with generally accepted accounting principles governing probability and the
ability to reasonably estimate future costs. Our ability to estimate future
costs depends on whether our investigatory and remedial activities are in
preliminary or advanced stages. With respect to unasserted claims, we accrue
liabilities for costs that, in our experience, we may incur to protect our
interest against those unasserted claims. Our accrued liabilities for unasserted
claims amounted to $2.0 million at September 30, 2008. With respect to asserted
claims, we accrue liabilities based on remedial investigation, feasibility
study, remedial action, and Operation, Maintenance and Monitoring (OM&M)
expenses that, in our experience, we may incur in connection with the asserted
claims. Required site OM&M expenses are estimated and accrued in their
entirety for required periods not exceeding 30 years, which reasonably
approximates the typical duration of long-term site OM&M.
Charges to income for investigatory and remedial efforts were material to
operating results in 2007 and have been material to operating results in 2008
and are expected to be material to operating results in future
years.
Our
condensed balance sheets included liabilities for future environmental
expenditures to investigate and remediate known sites amounting to $161.1
million at September 30, 2008, $155.6 million at December 31, 2007, and
$137.0 million at September 30, 2007, of which $126.1 million, $120.6 million,
and $102.0 million were classified as other noncurrent liabilities,
respectively. As part of the Pioneer acquisition, as of August 31,
2007, we assumed $57.5 million of environmental liabilities associated with
their current and past manufacturing operations and former waste disposal
sites. These amounts do not take into account any discounting of
future expenditures or any consideration of insurance recoveries or advances in
technology. These liabilities are reassessed periodically to
determine if environmental circumstances have changed and/or remediation efforts
and our estimate of related costs have changed. As a result of these
reassessments, future charges to income may be made for additional
liabilities.
Annual
environmental-related cash outlays for site investigation and remediation,
capital projects, and normal plant operations are expected to range between
approximately $50 million to $60 million over the next several years, $20
million to $40 million of which is for investigatory and remedial efforts, which
are expected to be charged against reserves recorded on our balance sheet. While
we do not anticipate a material increase in the projected annual level of our
environmental-related cash outlays, there is always the possibility that such an
increase may occur in the future in view of the uncertainties associated with
environmental exposures. Environmental exposures are difficult to assess for
numerous reasons, including the identification of new sites, developments at
sites resulting from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, changes in regulatory
authorities, the scarcity of reliable data pertaining to identified sites, the
difficulty in assessing the involvement and financial capability of other PRPs,
and our ability to obtain contributions from other parties, and the lengthy time
periods over which site remediation occurs. It is possible that some of these
matters (the outcomes of which are subject to various uncertainties) may be
resolved unfavorably to us, which could have a material adverse affect on our
financial position or results of operations.
Legal
Matters and Contingencies
We, and
our subsidiaries, are defendants in various legal actions (including proceedings
based on alleged exposures to asbestos) incidental to our past and current
business activities. While we believe that none of these legal actions will
materially adversely affect our financial position, in light of the inherent
uncertainties of litigation, we cannot at this time determine whether the
financial impact, if any, of these matters will be material to our results of
operations.
During
the ordinary course of our business, contingencies arise resulting from an
existing condition, situation, or set of circumstances involving an uncertainty
as to the realization of a possible gain contingency. In certain instances such
as environmental projects, we are responsible for managing the cleanup and
remediation of an environmental site. There exists the possibility of recovering
a portion of these costs from other parties. We account for gain contingencies
in accordance with the provisions of 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
|
|
Nine Months Ended
September
30,
|
|
Provided
By (Used For) ($ in millions)
|
|
2008
|
|
|
2007
|
|
Qualified
pension plan contribution
|
|
$
|
―
|
|
|
$
|
(100.0
|
)
|
Cash
(used for) provided by continuing operations
|
|
|
(0.5
|
)
|
|
|
8.7
|
|
Cash
provided by discontinued operations
|
|
|
―
|
|
|
|
100.5
|
|
Net
operating activities
|
|
|
(0.5
|
)
|
|
|
109.2
|
|
Capital
expenditures
|
|
|
(123.4
|
)
|
|
|
(40.1
|
)
|
Business
acquired through purchase transaction
|
|
|
―
|
|
|
|
(426.1
|
)
|
Cash
acquired through business acquisition
|
|
|
―
|
|
|
|
126.4
|
|
Net
investing activities
|
|
|
(102.6
|
)
|
|
|
(261.7
|
)
|
Net
financing activities
|
|
|
(2.7
|
)
|
|
|
(5.2
|
)
|
Operating
Activities
For the
nine months ended September 30, 2008, cash used for operating activities from
continuing operations increased by $9.2 million from 2007 primarily due to
increased working capital. In the nine months ended September 30,
2008, working capital increased $154.8 million compared with an increase of
$51.7 million in 2007. Receivables increased from December 31, 2007
by $60.9 million, primarily as a result of increased selling prices in both the
Chlor Alkali and Winchester businesses. Our days sales outstanding
decreased by approximately four days from prior year. Inventories
increased from December 31, 2007 by $39.7 million due to a seasonal increase and
higher raw material costs in Winchester. The increase in working
capital was partially offset by the $100 million voluntary contribution to our
defined benefit pension plan made in 2007 and higher earnings in
2008. The 2008 cash from operations was also affected by a $42.9
million increase in cash tax payments.
Investing
Activities
Capital
spending of $123.4 million in the nine months ended September 30, 2008 was $83.3
million higher than in the corresponding period in 2007. The increase was
primarily due to spending of $75.8 million for the St. Gabriel, LA Chlor Alkali
facility conversion and expansion project. For the total year, we
expect our capital spending to be approximately $190 million to $200
million. We expect depreciation to be in the $70 million range for
full-year 2008.
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.
On August
31, 2007 we acquired Pioneer and paid cash of $426.1 million. We also
acquired cash of $126.4 million with the Pioneer acquisition.
During
the nine months ended September 30, 2007, we sold $50.0 million of
short-term investments.
The 2008
decrease in distributions from affiliated companies primarily reflected the
impact of SunBelt’s lower operating results and net cash advanced from
SunBelt.
Financing
Activities
In March
2008, we repaid industrial development and environmental improvement tax exempt
bonds, which matured totaling $7.7 million that were issued through the parish
of Calcasieu, LA and the town of McIntosh, AL. In January 2008, we
repaid the remaining $2.1 million of the 2.75% Convertible Senior Subordinated
Notes due 2027 acquired from Pioneer.
We issued
0.5 million and 0.7 million shares of common stock with a total value of $11.3
million and $12.9 million to the CEOP for the nine months ended September 30,
2008 and 2007, respectively. 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 1.8 million shares
and 0.1 million shares with a total value of $38.1 million and $1.5 million
representing stock options exercised for the nine months ended September 30,
2008 and 2007, respectively.
The
percent of total debt to total capitalization decreased to 24.2% at September
30, 2008, from 28.1% at December 31, 2007. The decrease was due primarily to the
higher shareholders’ equity resulting from the net income for the nine months
ended September 30, 2008 and a lower level of outstanding debt at September 30,
2008.
In
the first three quarters of 2008 and 2007, we paid a quarterly dividend of
$0.20 per share. Dividends paid for the nine months ended September
30, 2008 and 2007 were $45.1 million and $44.3 million,
respectively. In October 2008, our board of directors declared a
dividend of $0.20 per share on our common stock, payable on December 10,
2008 to shareholders of record on November 10, 2008.
The
payment of cash dividends is subject to the discretion of our board of directors
and will be determined in light of then-current conditions, including our
earnings, our operations, our financial condition, our capital requirements, and
other factors deemed relevant by our board of directors. In the future, our
board of directors may change our dividend policy, including the frequency or
amount of any dividend, in light of then-existing conditions.
Liquidity
and Other Financing Arrangements
Our
principal sources of liquidity are from cash and cash equivalents, cash flow
from operations, and short-term borrowings under our revolving credit
facility and borrowings under our accounts receivable securitization facility
(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,
and pulp and paper. Cash flow from operations is affected by changes in ECU
selling prices caused by changes in the supply/demand balance of chlorine and
caustic, resulting in the chlor alkali business having significant leverage on
our earnings and cash flow. For example, assuming all other costs remain
constant and internal consumption remains approximately the same, a $10 per ECU
selling price change equates to an approximate $17 million annual change in our
revenues and pretax profit when we are operating at full capacity, including the
capacity acquired with Pioneer.
As of
September 30, 2008, we held corporate debt securities with a par value of $26.6
million. On October 1, 2008, the issuer of these debt securities
announced it would cease trading and appoint a receiver as a result of financial
market turmoil. The decline in the market value of the assets
supporting these debt securities negatively impacted the liquidity of the
issuer. We determined that these debt securities had no fair market
value due to the actions taken by the issuer, turmoil in the financial markets,
the lack of liquidity of the issuer, and the lack of trading in these debt
securities. Because of the unlikelihood that these debt securities
will recover in value, we recorded an after-tax impairment loss of $26.6 million
in other (expense) income for the three months ended September 30,
2008. We are currently unable to utilize the capital loss resulting
from the impairment of these corporate debt securities; therefore, no tax
benefit was recognized during the period for the impairment loss.
In August
2007, we entered into a $35 million letter of credit facility to assume the
various Pioneer letters of credit issued principally to support the acquisition
of equipment and materials for the St. Gabriel, LA Chlor Alkali facility
conversion and expansion project.
On
October 29, 2007, we entered into a new five-year senior revolving credit
facility of $220 million, which replaced a $160 million senior revolving credit
facility. During the first quarter of 2008, we increased our senior
revolving credit facility by $20 million to $240 million by adding a new lending
institution. The credit facility will expire in October
2012. We have the option to expand the $240 million senior revolving
credit facility by an additional $60 million by adding a maximum of two
additional lending institutions each year. At September 30, 2008, we
had $195.1 million available under this senior revolving credit facility,
because we had issued $44.9 million of letters of credit under a $110 million
subfacility. Under the senior revolving credit facility, we may
select various floating rate borrowing options. The facility includes
various customary restrictive covenants, including restrictions related to the
ratio of debt to earnings before interest expense, taxes, depreciation and
amortization (leverage ratio) and the ratio of earnings before interest expense,
taxes, depreciation and amortization to interest expense (coverage
ratio).
At
September 30, 2008, we had total letters of credit of $58.6 million outstanding,
of which $44.9 million were issued under our $240 million senior revolving
credit facility. These letters of credit were used to support certain
long-term debt, capital expenditure commitments, workers compensation insurance
policies, and plant closure and post-closure obligations.
On July
25, 2007, we established a 364-day Accounts Receivable Facility, renewable
annually for five years, which expires in July 2012. The $75 million
Accounts Receivable Facility provides for the sale of our eligible trade
receivables to third party conduits through a wholly-owned, bankruptcy-remote,
special purpose entity that is consolidated for financial statement
purposes. As of September 30, 2008, we had nothing drawn under the
Accounts Receivable Facility. At September 30, 2008, we had $75
million available under the Accounts Receivable Facility based on eligible trade
receivables.
Our
current debt structure is used to fund our business operations. As of September
30, 2008, we had borrowings of $249.7 million, of which $4.7 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 Citibank, N.A., a major financial institution. We have
designated the swap agreements as fair value hedges of the risk of changes in
the value of fixed-rate debt due to changes in interest rates for a portion of
our fixed-rate borrowings. Accordingly, the swap agreements have been recorded
at their fair market value of $7.0 million and are included in other assets on
the accompanying Condensed Balance Sheets, 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 revolving credit facility and
Accounts Receivable Facility are additional sources 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 2008 through 2011 and $0.6 million in 2012. This supply
agreement expires in 2012.
We, and
our partner, PolyOne, own equally SunBelt. Oxy Vinyls is
required to purchase 250,000 tons of chlorine from SunBelt based on a formula
related to its market price. Prior to July 2007, PolyOne had an ownership
interest in Oxy Vinyls. We market 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. Our guarantee of these notes was $60.9 million at
September 30, 2008. In the event SunBelt cannot make any of these payments, we
would be required to fund the payment on the Series O Notes. In certain other
circumstances, we may also be required to repay the SunBelt Notes prior to their
maturity. We and PolyOne have agreed that, if we or PolyOne intend to transfer
our respective interests in SunBelt and the transferring party is unable to
obtain consent from holders of 80% of the aggregate principal amount of the
indebtedness related to the guarantee being transferred after good faith
negotiations, then we and PolyOne will be required to repay our respective
portions of the SunBelt Notes. In such event, any make whole or similar
penalties or costs will be paid by the transferring party.
We
guarantee debt and other obligations under agreements with our affiliated
companies. In the normal course of business, we guarantee the
principal and interest under a $0.3 million line of credit of one of our
wholly-owned foreign affiliates. At September 30, 2008, December 31,
2007, and September 30, 2007, 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 March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities,” (SFAS No. 161), an amendment to SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” (SFAS No.
133). The statement requires enhanced disclosures that expand the
disclosure requirements in SFAS No. 133 about an entity’s derivative instruments
and hedging activities. It will require more robust qualitative
disclosures and expanded quantitative disclosures. This statement
will be effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged. It is expected that this statement will not have a
material effect on our financial statements.
In
December 2007, the FASB issued SFAS No. 141R. This statement requires
the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction, establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed, and requires additional disclosures by the
acquirer. Under this statement, all business combinations will be
accounted for by applying the acquisition method. This statement will
be effective for us on January 1, 2009 and will be applied to business
combinations occurring after the effective date. Earlier application
is prohibited. We are continuing to evaluate the effect of this
statement on our financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” (SFAS No. 160). This statement
will require noncontrolling interests (previously referred to as minority
interests) to be treated as a separate component of equity, not as a liability
or other item outside of permanent equity. The statement applies to
the accounting for noncontrolling interests and transactions with noncontrolling
interest holders in consolidated financial statements. This statement
will be effective for us on January 1, 2009. Earlier application is
prohibited. This statement will be applied prospectively to all
noncontrolling interests, including any that arose before the effective date
except that comparative period information must be recast to classify
noncontrolling interests in equity, attribute net income and other comprehensive
income to noncontrolling interests, and provide additional required
disclosures. It is expected that this statement will not have a
material effect on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, which permitted an entity to
measure certain financial assets and liabilities at fair value. The
statement’s objective was 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 became effective
for fiscal years beginning after November 15, 2007 and was to be applied
prospectively. We adopted the provisions of SFAS No. 159 on January
1, 2008. As we did not elect to measure existing assets and
liabilities at fair value, the adoption of this statement did not have an effect
on our financial statements.
In
September 2006, the FASB issued SFAS No. 157. This statement did not
require any new fair value measurements, but rather, it provided enhanced
guidance to other pronouncements that require or permit assets or liabilities to
be measured at fair value. The changes to current practice resulting
from the application of this statement related to the definition of fair value,
the methods used to estimate fair value, and the requirement for expanded
disclosures about estimates of fair value. This statement became
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The effective date for this
statement for all nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis has been delayed by one year. Nonfinancial
assets and nonfinancial liabilities that could be impacted by this deferral
include assets and liabilities initially measured at fair value in a business
combination, and intangible assets and goodwill tested annually for
impairment. We adopted the provisions of SFAS No. 157 related to
financial assets and financial liabilities on January 1,
2008. The partial adoption of this statement did not have a material
impact on our financial statements. It is expected that the remaining
provisions of this statement will not have a material effect on our financial
statements.
In
October 2008, the FASB issued SFAS No. 157-3. This position clarifies
the application of FASB No. 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not
active. This position was effective for us on September 30,
2008. The adoption of this position did not have an effect on our
financial statements.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
We are
exposed to market risk in the normal course of our business operations due to
our purchases of certain commodities, our ongoing investing and financing
activities, and our operations that use foreign currencies. The risk of loss can
be assessed from the perspective of adverse changes in fair values, cash flows,
and future earnings. We have established policies and procedures governing our
management of market risks and the uses of financial instruments to manage
exposure to such risks.
Energy
costs, including electricity used in our Chlor Alkali Products segment, and
certain raw materials and energy costs, namely copper, lead, zinc, electricity,
and natural gas used primarily in our Winchester segment, are subject to price
volatility. Depending on market conditions, we may enter into futures contracts
and put and call option contracts in order to reduce the impact of commodity
price fluctuations. As of September 30, 2008, we maintained open positions on
futures contracts totaling $77.9 million ($66.4 million at December 31,
2007 and $38.8 million at September 30, 2007). Assuming a hypothetical 10%
increase in commodity prices which are currently hedged, we would experience a
$7.8 million ($6.6 million at December 31, 2007 and $3.9 million at
September 30, 2007) increase in our cost of inventory purchased, which would be
partially offset by a corresponding increase in the value of related hedging
instruments.
We are
exposed to changes in interest rates primarily as a result of our investing and
financing activities. The effect of interest rates on our investing activity is
not material to our consolidated financial position, results of operations, or
cash flows. Our current debt structure is used to fund business
operations and commitments from banks under our revolving credit facility and
our Accounts Receivable Facility are sources of liquidity. As of September 30,
2008, December 31, 2007, and September 30, 2007, we had long-term
borrowings of $249.7 million, $259.0 million, and $430.7 million, respectively,
of which $4.7 million at September 30, 2008 and December 31, 2007 and $34.7
million at September 30, 2007, were issued at variable rates. As a result of our
fixed-rate financings, we entered into floating interest rate swaps in order to
manage interest expense and floating interest rate exposure to optimal levels.
We have entered into $101.6 million of such swaps, whereby we agree to pay
variable rates to a counterparty who, in turn, pays us fixed rates. The
counterparty to these agreements is Citibank, N.A., a major financial
institution. In all cases, the underlying index for the variable
rates is the six-month London InterBank Offered Rate (LIBOR). Accordingly,
payments are settled every six months and the terms of the swaps are the same as
the underlying debt instruments.
Assuming
no changes in the $106.3 million of variable-rate debt levels from December 31,
2007, we estimate that a hypothetical change of 100-basis points in the LIBOR
interest rates from 2007 would impact interest expense by $1.1 million on an
annualized pretax basis.
The
following table reflects the swap activity related to certain debt obligations
as of September 30, 2008:
Underlying
Debt Instrument
|
|
Swap
Amount
|
|
Date of Swap
|
|
September
30,
2008
Floating Rate
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
$ |
50.0 |
|
|
|
|
6.598
|
% |
|
|
|
$ |
25.0 |
|
|
|
|
6.0-8.0
|
% |
|
Industrial
development and environmental improvement obligations at fixed interest
rates of 6.625 % to 6.75%, due 2016-2017
|
|
$ |
21.1 |
|
|
|
|
2.89
|
% |
|
|
|
$ |
5.5 |
|
|
|
|
3.03
|
% |
|
(a) Actual
rate is set in arrears. We project the rate will fall within the range
shown.
These
interest rate swaps reduced interest expense by $1.6 million and $0.4 million
for the nine months ended September 30, 2008 and 2007,
respectively.
If the
actual change in interest rates or commodities pricing is substantially
different than expected, the net impact of interest rate risk or commodity risk
on our cash flow may be materially different than that disclosed
above.
We do not
enter into any derivative financial instruments for speculative
purposes.
Item 4.
Controls and Procedures
Our chief
executive officer and our chief financial officer evaluated the effectiveness of
our disclosure controls and procedures as of September 30,
2008. Based on that evaluation, our chief executive officer and chief
financial officer have concluded that, as of such date, our disclosure controls
and procedures were effective to ensure that information Olin is required to
disclose in the reports that it files or submits with the SEC under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the Commission’s rules and forms, and to
ensure that information we are required to disclose in such reports is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2008, 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,
2007, 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 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;
|
|
•
|
costs
and other expenditures in excess of those projected for environmental
investigation and remediation or other legal
proceedings;
|
|
•
|
unexpected
litigation outcomes;
|
|
•
|
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;
|
|
•
|
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;
|
|
•
|
higher-than-expected
raw material, energy, transportation, and/or logistics
costs;
|
|
•
|
an
increase in our indebtedness or higher-than-expected interest rates,
affecting our ability to generate sufficient cash flow for debt service;
and
|
|
•
|
adverse
conditions in the credit market, limiting or preventing our ability to
borrow.
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
|
(1)
|
On
April 30, 1998, the issuer announced a share repurchase program
approved by the board of directors for the purchase of up to
5 million shares of common stock. Through September 30, 2008,
4,845,924 shares had been repurchased, and 154,076 shares remain available
for purchase under that program, which has no termination
date.
|
Item 3.
Defaults Upon Senior Securities.
Not
Applicable.
Item 4.
Submission of Matters to a Vote of Security Holders.
Not
Applicable.
Item 5.
Other Information
Amendment
and Restatement of the Senior Plan and Supplemental Plan
On
October 24, 2008, Olin Corporation adopted amended and restated versions of the
Olin Senior Executive Pension Plan (the “Senior Plan”) and the Olin
Supplementary and Deferral Benefit Pension Plan (the “Supplemental Plan”)
(collectively, the “SERPs”). As previously disclosed, new benefit
accruals under the SERPs were frozen as of December 31, 2007. The
amendment to each SERP primarily provides for changes that are intended to
comply with, or secure exemption from, the applicable requirements of Section
409A of the Internal Revenue Code of 1986, as amended, and the applicable
Treasury regulations and guidance issued thereunder (“Code Section
409A”).
In
summary, the SERPs were amended as follows:
·
|
The
various plan provisions relating to the form and timing of SERP payments
and allowable payment elections for active participants were amended to
comply with the requirements of Code Section 409A; in particular, the
distribution elections for such participants are irrevocable after 2008,
with limited exceptions.
|
·
|
For
SERP participants who are specified employees as defined in Code
Section 409A, SERP benefits that are payable upon termination of
employment and subject to Code Section 409A may not be paid in the first
six months after retirement, but the first six months of benefits will be
paid in a lump sum as soon as practicable
thereafter.
|
·
|
For
SERP benefits that are payable upon a change of control and which are
subject to Code Section 409A, the change of control definition keying such
payment has been modified to be compliant with Code Section
409A.
|
·
|
The
$100,000 actuarial present value benefit threshold for receiving SERP
benefits in a lump sum payment form has been eliminated, and subject to
any six-month delay required by Code Section 409A, the lump sum (if
elected) shall be payable at retirement (or at age 65 if the participant
was not eligible for early
retirement).
|
Subject
to the preceding, the benefits, terms and conditions of the SERPs are generally
consistent with previous disclosures. The foregoing description of
the Senior Plan is qualified in its entirety by reference to the complete text
of the Senior Plan, which is attached hereto as Exhibit 10.1 and incorporated by
reference herein. The foregoing description of the Supplemental Plan
is qualified in its entirety by reference to the complete text of the
Supplemental Plan, which is attached hereto as Exhibit 10.2 and incorporated by
reference herein.
Amendment
and Restatement of the Supplemental CEOP
On
October 24, 2008, Olin Corporation adopted the amendment and restatement of the
Olin Corporation Supplemental Contributing Employee Ownership Plan (the
“Supplemental CEOP”). The amended and restated Supplemental CEOP is
intended to comply with the applicable requirements of Code Section 409A,
including the form and timing of Supplemental CEOP payments and allowable
payment elections for participants. The benefits, terms and
conditions of the Supplemental CEOP are generally consistent with previous
disclosures. The foregoing is qualified in its entirety by reference
to the complete text of the Supplemental CEOP, which is attached hereto as
Exhibit 10.3 and incorporated by reference herein.
Amendment
and Restatement of the Senior MICP
On
October 24, 2008, Olin Corporation adopted the amendment and restatement of the
Olin Senior Management Incentive Compensation Plan (the “SMICP”). The
amended and restated SMICP is intended to secure exemption from the applicable
requirements of Code Section 409A. The benefits, terms and conditions
of the SMICP are generally consistent with previous disclosures. The
foregoing is qualified in its entirety by reference to the complete text of the
SMICP, which is attached hereto as Exhibit 10.4 and incorporated by reference
herein.
Item 6.
Exhibits.
10.1
|
Olin
Senior Executive Pension Plan as amended and restated effective October
24, 2008
|
|
|
10.2
|
Olin
Supplementary and Deferral Benefit Pension Plan as amended and restated
effective October 24, 2008
|
|
|
10.3
|
Olin
Supplemental Contributing Employee Ownership Plan as amended and restated
effective October 24, 2008
|
|
|
10.4
|
Olin
Senior Management Incentive Compensation Plan as amended and restated
effective October 24, 2008
|
|
|
10.5
|
Amended
and Restated 1997 Stock Plan for Non-employee Directors as amended
effective as of October 23, 2008
|
|
|
10.6
|
Olin
Corporation 2000 Long Term Incentive Plan as amended and restated
effective October 22, 2008
|
|
|
10.7
|
Olin
Corporation 2003 Long Term Incentive Plan as amended and restated
effective October 22, 2008
|
|
|
10.8
|
Olin
Corporation 2006 Long Term Incentive Plan as amended and restated
effective October 22, 2008
|
|
|
10.9
|
2006
Performance Share Program as amended and restated effective October 22,
2008
|
|
|
10.10
|
Performance
Share Program as amended and restated effective October 22,
2008
|
|
|
10.11
|
First
Amendment, dated as of August 28, 2007, to the Purchase and Contribution
Agreement dated as of July 25, 2007 (as amended from time to time), among
A.J. Oster Co., A.J. Oster Foils, Inc., A.J. Oster West, Inc., Bryan
Metals, Inc., Chase Brass & Copper Company, Inc., and Olin
Corporation, as sellers, Olin Funding Company LLC, as purchaser, and Olin
Corporation, as collection agent
|
|
|
10.12
|
Second
Amendment, dated as of November 15, 2007, to the Purchase and Contribution
Agreement dated as of July 25, 2007 (as amended from time to time), among
A.J. Oster Co., A.J. Oster Foils, Inc., A.J. Oster West, Inc., Bryan
Metals, Inc., Chase Brass & Copper Company, Inc., and Olin
Corporation, as sellers, Olin Funding Company LLC, as purchaser, and Olin
Corporation, as collection agent
|
|
|
10.13
|
Third
Amendment, dated as of September 30, 2008, to the Purchase and
Contribution Agreement dated as of July 25, 2007 (as amended from time to
time), among A.J. Oster Co., A.J. Oster Foils, Inc., A.J. Oster West,
Inc., Bryan Metals, Inc., Chase Brass & Copper Company, Inc., and Olin
Corporation, as sellers, Olin Funding Company LLC, as purchaser, and Olin
Corporation, as collection agent
|
|
|
10.14
|
First
Amendment, dated as of August 28, 2007, to the Receivables Purchase
Agreement dated as of July 25, 2007 (as amended from time to time), among
Olin Funding Company LLC, as seller, CAFCO, LLC and Variable Funding
Capital Company LLC, as investors, Citibank, N.A. and Wachovia Bank,
National Association, (“Wachovia Bank”) as banks, Citicorp North America,
Inc. (“CNAI”) as program agent, CNAI and Wachovia Bank, as investor
agents, and Olin Corporation, as collection agent
|
|
|
10.15
|
Second
Amendment, dated as of November 15, 2007, to the Receivables Purchase
Agreement dated as of July 25, 2007 (as amended from time to time), among
Olin Funding Company LLC, as seller, CAFCO, LLC and Variable Funding
Capital Company LLC, as investors, Citibank, N.A. and Wachovia Bank,
National Association, (“Wachovia Bank”) as banks, Citicorp North America,
Inc. (“CNAI”) as program agent, CNAI and Wachovia Bank, as investor
agents, and Olin Corporation, as collection agent
|
|
|
10.16
|
Third
Amendment, dated as of July 23, 2008, to the Receivables Purchase
Agreement dated as of July 25, 2007 (as amended from time to time), among
Olin Funding Company LLC, as seller, CAFCO, LLC and Variable Funding
Capital Company LLC, as investors, Citibank, N.A. and Wachovia Bank,
National Association, (“Wachovia Bank”) as banks, Citicorp North America,
Inc. (“CNAI”) as program agent, CNAI and Wachovia Bank, as investor
agents, and Olin Corporation, as collection agent
|
|
|
10.17
|
Fourth
Amendment, dated as of September 30, 2008, to the Receivables Purchase
Agreement dated as of July 25, 2007 (as amended from time to time), among
Olin Funding Company LLC, as seller, CAFCO, LLC, as an investor, Citibank,
N.A. as a bank, Citicorp North America, Inc. (“CNAI”) as program agent,
CNAI as an investor agent, and Olin Corporation, as collection
agent
|
|
|
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:
October 27, 2008
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
10.1
|
Olin
Senior Executive Pension Plan as amended and restated effective October
24, 2008
|
|
|
10.2
|
Olin
Supplementary and Deferral Benefit Pension Plan as amended and restated
effective October 24, 2008
|
|
|
10.3
|
Olin
Supplemental Contributing Employee Ownership Plan as amended and restated
effective October 24, 2008
|
|
|
10.4
|
Olin
Senior Management Incentive Compensation Plan as amended and restated
effective October 24, 2008
|
|
|
10.5
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Amended
and Restated 1997 Stock Plan for Non-employee Directors as amended
effective as of October 23, 2008
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10.6
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Olin
Corporation 2000 Long Term Incentive Plan as amended and restated
effective October 22, 2008
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10.7
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Olin
Corporation 2003 Long Term Incentive Plan as amended and restated
effective October 22, 2008
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10.8
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Olin
Corporation 2006 Long Term Incentive Plan as amended and restated
effective October 22, 2008
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10.9
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2006
Performance Share Program as amended and restated effective October 22,
2008
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10.10
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Performance
Share Program as amended and restated effective October 22,
2008
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10.11
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First
Amendment, dated as of August 28, 2007, to the Purchase and Contribution
Agreement dated as of July 25, 2007 (as amended from time to time), among
A.J. Oster Co., A.J. Oster Foils, Inc., A.J. Oster West, Inc., Bryan
Metals, Inc., Chase Brass & Copper Company, Inc., and Olin
Corporation, as sellers, Olin Funding Company LLC, as purchaser, and Olin
Corporation, as collection agent
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10.12
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Second
Amendment, dated as of November 15, 2007, to the Purchase and Contribution
Agreement dated as of July 25, 2007 (as amended from time to time), among
A.J. Oster Co., A.J. Oster Foils, Inc., A.J. Oster West, Inc., Bryan
Metals, Inc., Chase Brass & Copper Company, Inc., and Olin
Corporation, as sellers, Olin Funding Company LLC, as purchaser, and Olin
Corporation, as collection agent
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10.13
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Third
Amendment, dated as of September 30, 2008, to the Purchase and
Contribution Agreement dated as of July 25, 2007 (as amended from time to
time), among A.J. Oster Co., A.J. Oster Foils, Inc., A.J. Oster West,
Inc., Bryan Metals, Inc., Chase Brass & Copper Company, Inc., and Olin
Corporation, as sellers, Olin Funding Company LLC, as purchaser, and Olin
Corporation, as collection agent
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10.14
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First
Amendment, dated as of August 28, 2007, to the Receivables Purchase
Agreement dated as of July 25, 2007 (as amended from time to time), among
Olin Funding Company LLC, as seller, CAFCO, LLC and Variable Funding
Capital Company LLC, as investors, Citibank, N.A. and Wachovia Bank,
National Association, (“Wachovia Bank”) as banks, Citicorp North America,
Inc. (“CNAI”) as program agent, CNAI and Wachovia Bank, as investor
agents, and Olin Corporation, as collection agent
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10.15
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Second
Amendment, dated as of November 15, 2007, to the Receivables Purchase
Agreement dated as of July 25, 2007 (as amended from time to time), among
Olin Funding Company LLC, as seller, CAFCO, LLC and Variable Funding
Capital Company LLC, as investors, Citibank, N.A. and Wachovia Bank,
National Association, (“Wachovia Bank”) as banks, Citicorp North America,
Inc. (“CNAI”) as program agent, CNAI and Wachovia Bank, as investor
agents, and Olin Corporation, as collection agent
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10.16
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Third
Amendment, dated as of July 23, 2008, to the Receivables Purchase
Agreement dated as of July 25, 2007 (as amended from time to time), among
Olin Funding Company LLC, as seller, CAFCO, LLC and Variable Funding
Capital Company LLC, as investors, Citibank, N.A. and Wachovia Bank,
National Association, (“Wachovia Bank”) as banks, Citicorp North America,
Inc. (“CNAI”) as program agent, CNAI and Wachovia Bank, as investor
agents, and Olin Corporation, as collection agent
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10.17
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Fourth
Amendment, dated as of September 30, 2008, to the Receivables Purchase
Agreement dated as of July 25, 2007 (as amended from time to time), among
Olin Funding Company LLC, as seller, CAFCO, LLC, as an investor, Citibank,
N.A. as a bank, Citicorp North America, Inc. (“CNAI”) as program agent,
CNAI as an investor agent, and Olin Corporation, as collection
agent
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12
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Computation
of Ratio of Earnings to Fixed Charges (Unaudited)
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31.1
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Section
302 Certification Statement of Chief Executive Officer
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31.2
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Section
302 Certification Statement of Chief Financial Officer
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32
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Section
906 Certification Statement of Chief Executive Officer and Chief Financial
Officer
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