final10k2009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the fiscal year ended December 31,
2009
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OR
¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the transition period from
to
|
Commission
file number 1-1070
OLIN
CORPORATION
(Exact
name of registrant as specified in its charter)
|
|
Virginia
|
13-1872319
|
(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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190
Carondelet Plaza, Suite 1530, Clayton, MO
(Address
of principal executive offices)
|
63105-3443
(Zip
code)
|
Registrant’s
telephone number, including area code: (314) 480-1400
Securities
registered pursuant to Section 12(b) of the Act:
|
|
Title
of each class
|
Name
of each exchange
on
which registered
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Common
Stock,
par
value $1 per share
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes ¨ No x
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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 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 ¨ 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
June 30, 2009, the aggregate market value of registrant’s common stock, par
value $1 per share, held by non-affiliates of registrant was approximately
$926,999,831 based on the closing sale price as reported on the New York Stock
Exchange.
As of
January 29, 2010, 78,749,713 shares of the registrant’s common stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the following document are incorporated by reference in this Form
10-K
as
indicated herein:
|
|
|
Document
|
|
Part
of 10-K into which incorporated
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Proxy
Statement relating to Olin’s 2010
Annual
Meeting of Shareholders
to
be held on April 22, 2010
|
|
Part
III
|
PART
I
Item 1. BUSINESS
GENERAL
Olin
Corporation is a Virginia corporation, incorporated in 1892, having its
principal executive offices in Clayton, MO. We are a manufacturer
concentrated in two business segments: Chlor Alkali Products and
Winchester®. Chlor
Alkali Products manufactures and sells chlorine and caustic soda, sodium
hydrosulfite, hydrochloric acid, hydrogen, bleach products and potassium
hydroxide, which represent 63% of 2009 sales. Winchester products,
which represent 37% of 2009 sales, include sporting ammunition, reloading
components, small caliber military ammunition and components, and industrial
cartridges. See our discussion of our segment disclosures contained
in Item 7—“Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
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’ operating results and cash flows are reported as discontinued operations
in the consolidated statements of operations and consolidated statements of
cash flows, respectively.
On August
31, 2007 we acquired Pioneer Companies, Inc. (Pioneer), whose operating results
are included in the accompanying consolidated financial statements since the
date of acquisition.
GOVERNANCE
We
maintain an Internet website at www.olin.com. Our
reports on Form 10-K, Form 10-Q, and Form 8-K, as well as amendments to those
reports, are available free of charge on our website, as soon as reasonably
practicable after we file the reports with the Securities and Exchange
Commission (SEC). Additionally, a copy of our SEC filings can be
obtained at the SEC at their Office of Investor Education and Advocacy at 100 F
Street, N.E., Washington, D.C. 20549 or by calling that office of the SEC
at 1-800-SEC-0330. Also, a copy of our electronically filed materials
can be obtained at www.sec.gov. Our
Principles of Corporate Governance, Committee Charters and Code of Conduct are
available on our website at www.olin.com in the
Governance Section under Governance Documents and Committees.
In May
2009, our Chief Executive Officer executed the annual Section 303A.12(a)
CEO Certification required by the New York Stock Exchange (NYSE), certifying
that he was not aware of any violation of the NYSE’s corporate governance
listing standards by us. Additionally, our Chief Executive Officer
and Chief Financial Officer executed the required Sarbanes-Oxley Act of 2002
(SOX) Sections 302 and 906 certifications relating to this Annual Report on Form
10-K, which are filed with the SEC as exhibits to this Annual Report on Form
10-K.
PRODUCTS,
SERVICES AND STRATEGIES
Chlor
Alkali Products
Products
and Services
We have
been involved in the U.S. chlor alkali industry for more than 100 years and are
a major participant in the North American chlor alkali
market. Chlorine, caustic soda and hydrogen are co-produced
commercially by the electrolysis of salt. These co-products are
produced simultaneously, and in a fixed ratio of 1.0 ton of chlorine to 1.1 tons
of caustic soda. The industry refers to this as an Electrochemical
Unit or ECU. With a demonstrated capacity as of the end of 2009 of
1.95 million ECUs per year, including 50% of the production from our partnership
with PolyOne Corporation (PolyOne), which we refer to as SunBelt, we are the
third largest chlor alkali producer, measured by production volume of chlorine
and caustic soda, in North America, according to data from Chemical Market
Associates, Inc. (CMAI). CMAI is a global petrochemical, plastics and
fibers consulting firm established in 1979. Approximately 55% of our
caustic soda production is high purity membrane and rayon grade, which,
according to CMAI data, normally commands a premium selling price in the
market. According to data from CMAI, we are the largest North
American producer of industrial bleach, which is manufactured using both
chlorine and caustic soda.
Our
manufacturing facilities in Augusta, GA; McIntosh, AL; Charleston, TN; St.
Gabriel, LA; Henderson, NV; Becancour, Quebec; and a portion of our facility in
Niagara Falls, NY are ISO 9002 certified. In addition, Augusta, GA;
McIntosh, AL; Charleston, TN; and Niagara Falls, NY are ISO 14001
certified. ISO 9000 (which includes ISO 9001 and ISO 9002) and ISO
14000 (which includes ISO 14001) are sets of related international
standards on quality assurance and environmental management developed by the
International Organization for Standardization to help companies effectively
document the quality and environmental management system elements to be
implemented to maintain effective quality and environmental management
systems. Our facilities in Augusta, GA; McIntosh, AL; Charleston, TN;
Niagara Falls, NY; and St. Gabriel, LA have also achieved Star status in the
Voluntary Protection Program (VPP) of the Occupational Safety and Health
Administration (OSHA). OSHA’s VPP is a program in which companies
voluntarily participate that recognizes facilities for their exemplary safety
and health programs. Our Augusta, GA; McIntosh, AL; Charleston, TN;
and Niagara Falls, NY chlor alkali manufacturing sites and the division
headquarters are accredited under the RC 14001 Responsible Care® (RC 14001)
standard. Supported by the chemical industry and recognized by
government and regulatory agencies, RC 14001 establishes requirements for the
management of safety, health, environmental, security, transportation, product
stewardship, and stakeholder engagement activities for the
business.
Chlorine
is used as a raw material in the production of thousands of products for
end-uses including vinyls, chlorinated intermediates, isocyanates, and water
treatment. A significant portion of U.S. chlorine production is
consumed in the manufacture of ethylene dichloride, or EDC, a precursor for
polyvinyl chloride, or PVC. PVC is a plastic used in applications
such as vinyl siding, plumbing and automotive parts. We estimate that
approximately 11% of our chlorine produced, including the production from our
share of SunBelt, is consumed in the manufacture of EDC. While much
of the chlorine produced in the U.S. is consumed by the producing company to
make downstream products, we sell most of the chlorine we produce to third
parties in the merchant market.
Caustic
soda has a wide variety of end-use applications, the largest of which is in the
pulp and paper industry used in the delignification and bleaching portion of the
pulping process. Caustic soda is also used in the production of
detergents and soaps, alumina and a variety of other inorganic and organic
chemicals.
The chlor
alkali industry is cyclical, both as a result of changes in demand for each of
the co-products and as a result of the large increments in which new capacity is
added and removed. Because chlorine and caustic are produced in a
fixed ratio, the supply of one product can be constrained both by the physical
capacity of the production facilities and/or by the ability to sell the
co-product. Prices for both products respond rapidly to changes in
supply and demand. Our ECU netbacks (defined as gross selling price
less freight and discounts) averaged approximately $520, $635 and $535 per ECU
in 2009, 2008 and 2007, respectively.
Beginning
in late 2006, driven by reduced levels of chlorine demand and a series of
planned and unplanned plant maintenance outages, chlor alkali plant operating
rates for the industry were reduced. While this allowed chlorine
supply to stay balanced, it caused caustic soda demand, which did not experience
a decline, to exceed supply. This led to industry-wide caustic soda
price increases. During the first three quarters of 2008, North
American demand for caustic soda remained strong. However, caustic
soda supply continued to be constrained by the weakness in chlorine demand,
which caused operating rates to be reduced. This resulted in a
significant supply and demand imbalance for caustic soda in North America.
This imbalance, combined with increased freight and energy costs, resulted in
our achieving record levels of caustic soda pricing. During the
fourth quarter of 2008, North American caustic soda demand weakened but less
than the decline in chlorine demand. This caused the caustic soda
supply and demand imbalance to continue, which continued to support record
levels of caustic soda prices. The result was a record ECU netback,
in our system, in the first quarter of 2009.
Our 2009
ECU netbacks of $520 were 18% lower than the 2008 netbacks of $635, reflecting
the changes in the pricing dynamics in North America. Beginning late
in the fourth quarter of 2008 and continuing through 2009, demand for caustic
soda weakened significantly, and fell below the demand for
chlorine. This created excess supply in North America, which has
caused caustic soda prices to fall. The over supply of caustic soda
caused industry operating rates to be constrained, which resulted in chlorine
price increase announcements of $300 per ton during the second quarter of
2009. Caustic soda prices declined precipitously in the second
quarter of 2009 and these declines continued into the third quarter of
2009. During the third quarter of 2009, chlorine and caustic soda
demand became more balanced eliminating the oversupply of caustic
soda. We began realizing increases in chlorine prices in the third
quarter of 2009 with most of the improvement in the fourth quarter of
2009. We believe that ECU netbacks, in our system, have bottomed out
in the third quarter of 2009. During the fourth quarter of 2009, as
caustic soda demand improved, chlorine production declined due to seasonally
weaker demand. This resulted in a supply and demand imbalance for
caustic soda in North America. As a result of this imbalance, in
December 2009, a $75 per ton caustic soda price increase was
announced. We expect to begin realizing this price increase in
caustic soda in the second quarter of 2010.
Electricity
and salt are the major purchased raw materials for our Chlor Alkali Products
segment. Raw materials represent approximately 48% of the total cost
of producing an ECU. Electricity is the single largest raw material
component in the production of chlor alkali products. During the past
five years, we experienced an increase in the cost of electricity from our
suppliers due primarily to energy cost increases and regulatory
requirements. We are supplied by utilities that primarily utilize
coal, hydroelectric, natural gas, and nuclear power. The
commodity nature of this industry places an added emphasis on cost management
and we believe that we have managed our manufacturing costs in a manner that
makes us one of the low cost producers in the industry. During the
fourth quarter of 2009, we completed a conversion and expansion project at our
St. Gabriel, LA facility and initiated production. This project
increased capacity at this location from 197,000 ECUs to 246,000 ECUs and will
significantly reduce the site’s manufacturing costs. In addition, as
market demand requires, we believe the design of the SunBelt plant, as well as
the new design of the St. Gabriel, LA facility, will enable us to expand
capacity cost-effectively at these locations.
We also
manufacture and sell other chlor alkali-related products. These
products include chemically processed salt, hydrochloric acid, sodium
hypochlorite (bleach), hydrogen, sodium hydrosulfite, and potassium
hydroxide. We have recently invested in capacity and product upgrades
in bleach and hydrochloric acid. In the fourth quarter of 2009, we
initiated bleach manufacturing and shipping by railroad expansion projects at
three of our chlor alkali facilities. We are also actively developing
a low salt, high strength bleach facility that will double the concentration of
the bleach we manufacture, which should significantly reduce transportation
costs. During 2010, we expect to initiate a $15 million to $20
million capital project to construct a low salt, high strength bleach facility
to be co-located at one of our existing chlor alkali facilities.
The
following table lists products of our Chlor Alkali Products business, with
principal products on the basis of annual sales highlighted in bold
face.
Products
& Services
|
|
Major
End Uses
|
|
Plants
& Facilities
|
|
Major
Raw Materials & Components for
Products/Services
|
Chlorine/caustic
soda
|
|
Pulp
& paper processing, chemical manufacturing, water purification,
manufacture of vinyl chloride, bleach, swimming pool chemicals &
urethane chemicals
|
|
Augusta, GA
Becancour,
Quebec
Charleston,
TN
Henderson,
NV
McIntosh,
AL
Niagara
Falls, NY
St.
Gabriel, LA
|
|
salt,
electricity
|
|
|
|
|
|
|
|
Sodium
hypochlorite
(bleach)
|
|
Household
cleaners, laundry bleaching, swimming pool sanitizers, semiconductors,
water treatment, textiles, pulp & paper and food
processing
|
|
Augusta,
GA
Becancour,
Quebec
Charleston,
TN
Henderson,
NV
McIntosh,
AL
Niagara
Falls, NY
Santa
Fe Springs, CA
Tacoma,
WA
Tracy,
CA
|
|
chlorine,
caustic soda
|
|
|
|
|
|
|
|
Hydrochloric
acid
|
|
Steel,
oil & gas, plastics, organic chemical synthesis, water and wastewater
treatment, brine treatment, artificial sweeteners, pharmaceuticals, food
processing and ore
and
mineral processing
|
|
Augusta, GA
Becancour,
Quebec
Charleston,
TN
Henderson,
NV
McIntosh,
AL
Niagara
Falls, NY
|
|
chlorine,
hydrogen
|
|
|
|
|
|
|
|
Potassium
hydroxide
|
|
Fertilizer
manufacturing, soaps, detergents
and
cleaners, battery manufacturing, food processing chemicals and
deicers
|
|
Charleston,
TN
|
|
potassium
chloride, electricity
|
|
|
|
|
|
|
|
Hydrogen
|
|
Fuel
source, hydrogen peroxide and hydrochloric acid
|
|
Augusta,
GA
Becancour,
Quebec
Charleston,
TN
Henderson,
NV
McIntosh,
AL
Niagara
Falls, NY
St.
Gabriel, LA
|
|
salt,
electricity
|
|
|
|
|
|
|
|
Sodium
hydrosulfite
|
|
Paper,
textile & clay bleaching
|
|
Charleston,
TN
|
|
caustic
soda, sulfur dioxide
|
Strategies
Continued Role as a Preferred
Supplier to Merchant Market Customers. Based on our
market research, we believe our Chlor Alkali Products business is viewed as a
preferred supplier by our merchant market customers. We will continue
to focus on providing quality customer service support and developing
relationships with our valued customers.
Pursue Incremental Expansion
Opportunities. We have invested in capacity and product
upgrades in our chemically processed salt, hydrochloric acid, bleach, potassium
hydroxide and hydrogen businesses. These expansions increase our
captive use of chlorine while increasing the sales of these
co-products. These niche businesses provide opportunities to upgrade
chlorine and caustic to higher value-added applications. We also have
the opportunity, when business conditions permit, to pursue incremental
expansion through our SunBelt and St. Gabriel, LA facilities.
Winchester
Products
and Services
Winchester
is in its 143rd year
of operation and its 79th year
as part of Olin. Winchester is a premier developer and manufacturer
of small caliber ammunition for sale to domestic and international retailers
(commercial customers), law enforcement agencies and domestic and international
militaries. We believe we are a leading U.S. producer of ammunition
for recreational shooters, hunters, law enforcement agencies and the U.S. Armed
Forces. As an example of our law enforcement business, the Federal
Bureau of Investigation (FBI) awarded Winchester a five-year contract in 2007
for bonded pistol ammunition and, in 2009, we received a Department of Homeland
Security (DHS) contract for pistol ammunition. Our legendary
Winchester® product line includes all major gauges and calibers of shotgun
shells, rimfire and centerfire ammunition for pistols and rifles, reloading
components and industrial cartridges. We believe we are the leading
U.S. supplier of small caliber commercial ammunition. In support of
our continuous improvement initiatives, our manufacturing facilities in East
Alton, IL, achieved ISO recertification to the ISO 9001:2008 standard in
December 2009. Additionally our facility in Australia was upgraded to
the ISO 9001:2008 standard in February 2009 and our manufacturing facility in
Oxford, MS achieved ISO 9001:2008 recertification in January 2010.
Winchester
has strong relationships throughout the sales and distribution chain and strong
ties to traditional dealers and distributors. Winchester has also
built its business with key high volume mass merchants and specialty sporting
goods retailers. We have consistently developed industry-leading
ammunition. In 2009, Winchester was named “Ammunition Manufacturer of
the Year” for the second consecutive year by the National Association of
Sporting Goods Wholesalers, the carton for Winchester’s 2008 Theodore Roosevelt
Commemorative Ammunition was honored with a “2009 Excellence Award” from the
Paperboard Packaging Council, the International Hunter Education Association
(IHEA) presented Winchester with the “Gladney Davidson Memorial Award,” its most
prestigious honor, and Winchester’s new web-based ballistics calculator received
the 2009 SHOT Show “Editor’s Choice” award from Shooting Sports Retailer
magazine. In 2010, the Winchester® Supreme Elite™ Bonded
PDX1™ product line will receive the National Rifle Association’s “Golden
Bullseye Award” in the ammunition category from its Shooting Illustrated
magazine and Winchester has additionally been honored with the “2010 Cabela
Lifetime Business Achievement Award” from the U.S. Sportsmen’s Alliance
(USSA).
Winchester
purchases raw materials such as copper-based strip and ammunition cartridge case
cups and lead from vendors based on a conversion charge or
premium. These conversion charges or premiums are in addition to the
market prices for metal as posted on exchanges such as the Commodity Exchange,
or COMEX, and London Metals Exchange, or LME. Winchester’s other main
raw material is propellant, which is purchased predominantly from one of the
United States’ largest propellant suppliers.
The
following table lists products and services of our Winchester business, with
principal products on the basis of annual sales highlighted in bold
face.
Products
& Services
|
|
Major
End Uses
|
|
Plants
& Facilities
|
|
Major
Raw Materials & Components for Products/Services
|
Winchester®
sporting ammunition (shot-shells, small caliber centerfire &
rimfire ammunition)
|
|
Hunters
& recreational shooters, law enforcement agencies
|
|
East
Alton, IL
Oxford,
MS
Geelong,
Australia
|
|
brass,
lead, steel, plastic, propellant, explosives
|
|
|
|
|
|
|
|
Small
caliber military ammunition
|
|
Infantry
and mounted weapons
|
|
East
Alton, IL
Oxford,
MS
|
|
brass,
lead, propellant, explosives
|
|
|
|
|
|
|
|
Industrial
products (8 gauge loads & powder-actuated tool
loads)
|
|
Maintenance
applications in power &
concrete
industries, powder-actuated tools in construction industry
|
|
East
Alton, IL
Oxford,
MS
Geelong,
Australia
|
|
brass,
lead, plastic, propellant,
explosives
|
Strategies
Leverage Existing
Strengths. Winchester plans to seek new opportunities to
leverage the legendary Winchester brand name and will continue to offer a full
line of ammunition products to the markets we serve, with specific focus on
investments that lower our costs and that make Winchester ammunition the retail
brand of choice.
Focus on Product Line
Growth. With a long record of pioneering new product
offerings, Winchester has built a strong reputation as an industry
innovator. This includes the introduction of reduced-lead and
non-lead products, which are growing in popularity for use in indoor shooting
ranges and for outdoor hunting.
INTERNATIONAL
OPERATIONS
Our
subsidiary, PCI Chemicals Canada Company/Société PCI Chimie Canada, operates one
chlor alkali facility in Becancour, Quebec, which sells chlor
alkali-related products within Canada and to the United States. Our
subsidiary, Winchester Australia Limited, loads and packs sporting and
industrial ammunition in Australia. See the Note “Segment
Information” of the notes to consolidated financial statements in Item 8,
for geographic segment data. We are incorporating our segment
information from that Note into this section of our Form 10-K.
CUSTOMERS
AND DISTRIBUTION
During
2009, no single customer accounted for more than 10% of sales. Sales
to all U.S. government agencies and sales under U.S. government contracting
activities in total accounted for approximately 5% of sales in
2009. Products we sell to industrial or commercial users or
distributors for use in the production of other products constitute a major part
of our total sales. We sell some of our products, such as caustic
soda and sporting ammunition, to a large number of users or distributors, while
we sell others, such as chlorine, in substantial quantities to a relatively
small number of industrial users. We discuss the customers for each
of our two businesses in more detail above under “Products and
Services.”
We market
most of our products and services primarily through our sales force and sell
directly to various industrial customers, wholesalers, other distributors, and
the U.S. Government and its prime contractors.
Because
we engage in some government contracting activities and make sales to the U.S.
Government, we are subject to extensive and complex U.S. Government procurement
laws and regulations. These laws and regulations provide for ongoing
government audits and reviews of contract procurement, performance and
administration. Failure to comply, even inadvertently, with these
laws and regulations and with laws governing the export of munitions and other
controlled products and commodities could subject us or one or more of our
businesses to civil and criminal penalties, and under certain circumstances,
suspension and debarment from future government contracts and the exporting of
products for a specified period of time.
BACKLOG
The total
amount of contracted backlog was approximately $231.2 million and $228.8 million
as of January 31, 2010 and 2009, respectively. The backlog orders are
in our Winchester business. Backlog is comprised of all open customer
orders not yet shipped. Approximately 70% of contracted backlog as of
January 31, 2010 is expected to be filled during 2010.
COMPETITION
We are in
active competition with businesses producing the same or similar products, as
well as, in some instances, with businesses producing different products
designed for the same uses.
Chlor
alkali manufacturers in North America, with approximately 15.2 million tons of
chlorine and 16.2 million tons of caustic soda capacity, account for
approximately 20% of worldwide chlor alkali production
capacity. According to CMAI, the Dow Chemical Company
(Dow), and the Occidental Chemical Corporation (OxyChem), are the two largest
chlor alkali producers in North America. Approximately 75% of the
total North American capacity is located in the U.S. Gulf Coast
region.
Many of
our competitors are integrated producers of chlorine, using some, or all, of
their chlorine production in the manufacture of other downstream
products. In contrast, we are primarily a merchant producer of
chlorine and sell the majority of our chlorine to merchant
customers. We do utilize chlorine to manufacture industrial bleach
and hydrochloric acid. As a result, we supply a greater share of the
merchant chlorine market than our share of overall industry
capacity. There is a worldwide market for caustic soda, which
attracts imports and allows exports depending on market
conditions. All of our competitors sell caustic soda into the North
American merchant market.
The chlor
alkali industry in North America is highly competitive, and many of our
competitors, including Dow and OxyChem, are substantially larger and have
greater financial resources than we do. While the technologies to
manufacture and transport chlorine and caustic soda are widely available, the
production facilities require large capital investments, and are subject to
significant regulatory and permitting requirements.
We are
among the largest manufacturers in the United States of commercial small caliber
ammunition based on independent market research sponsored by the Sporting Arms
and Ammunition Manufacturers’ Institute (SAAMI) and the National Shooting Sports
Foundation. Founded in 1926, SAAMI is an association of the nation’s
leading manufacturers of sporting firearms, ammunition and
components. According to SAAMI, our Winchester business, Alliant
Techsystems Inc. (ATK) and Remington Arms Company, Inc. (Remington) are the
three largest commercial ammunition manufacturers in the United
States. The ammunition industry is highly competitive with us, ATK,
Remington, numerous smaller domestic manufacturers and foreign producers
competing for sales to the commercial ammunition customers. Many
factors influence our ability to compete successfully, including price,
delivery, service, performance, product innovation and product recognition and
quality, depending on the product involved.
EMPLOYEES
As of
December 31, 2009, we had approximately 3,700 employees, with 3,500 working
in the United States and 200 working in foreign countries, primarily
Canada. Various labor unions represent a majority of our hourly-paid
employees for collective bargaining purposes.
The
following labor contract is scheduled to expire in 2010:
Location
|
|
Number
of Employees
|
|
Expiration
Date
|
Henderson,
NV (Chlor Alkali)
|
|
70
|
|
March
2010
|
While we
believe our relations with our employees and their various representatives are
generally satisfactory, we cannot assure that we can conclude this labor
contract or any other labor agreements without work stoppages and cannot assure
that any work stoppages will not have a material adverse effect on our business,
financial condition, or results of operations.
RESEARCH
ACTIVITIES; PATENTS
Our
research activities are conducted on a product-group basis at a number of
facilities. Company-sponsored research expenditures were $2.2 million
in 2009 and $2.0 million in 2008 and 2007.
We own or
license a number of patents, patent applications, and trade secrets covering our
products and processes. We believe that, in the aggregate, the rights
under our patents and licenses are important to our operations, but we do not
consider any individual patent or license or group of patents and licenses
related to a specific process or product to be of material importance to our
total business.
RAW
MATERIALS AND ENERGY
We
purchase the major portion of our raw material requirements. The
principal basic raw materials for our production of chlor alkali products are
salt, electricity, potassium chloride, sulfur dioxide, and
hydrogen. A portion of the salt used in our Chlor Alkali Products
segment is produced from internal resources. Lead, brass, and
propellant are the principal raw materials used in the Winchester
business. We typically purchase our electricity, salt, potassium
chloride, sulfur dioxide, ammunition cartridge case cups and copper-based strip,
and propellants pursuant to multi-year contracts. We provide
additional information with respect to specific raw materials in the tables set
forth under “Products and Services.”
Electricity
is the predominant energy source for our manufacturing
facilities. Most of our facilities are served by utilities which
generate electricity principally from coal, hydroelectric and nuclear power
except at St. Gabriel, LA and Henderson, NV which predominantly use natural
gas.
ENVIRONMENTAL
AND TOXIC SUBSTANCES CONTROLS
In the
United States, the establishment and implementation of federal, state and local
standards to regulate air, water and land quality affect substantially all of
our manufacturing locations. Federal legislation providing for
regulation of the manufacture, transportation, use and disposal of hazardous and
toxic substances, and remediation of contaminated sites has imposed additional
regulatory requirements on industry, particularly the chemicals
industry. In addition, implementation of environmental laws, such as
the Resource Conservation and Recovery Act and the Clean Air Act, has required
and will continue to require new capital expenditures and will increase
operating costs. Our Canadian facility is governed by federal
environmental laws administered by Environment Canada and by provincial
environmental laws enforced by administrative agencies. Many of these
laws are comparable to the U.S. laws described above. We employ
waste minimization and pollution prevention programs at our manufacturing sites
and we are a party to various governmental and private environmental actions
associated with former waste disposal sites and past manufacturing
facilities. Charges or credits to income for investigatory and
remedial efforts were material to operating results in the past three years and
may be material to operating results in future years.
See our
discussion of our environmental matters in Item 3, “Legal Proceedings”
below, the Note “Environmental” of the notes to consolidated financial
statements contained in Item 8, and Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
Item 1A. RISK
FACTORS
In
addition to the other information in this Form 10-K, the following factors
should be considered in evaluating Olin and our business. All of our
forward-looking statements should be considered in light of these
factors. Additional risks and uncertainties that we are unaware of or
that we currently deem immaterial also may become important factors that affect
us.
Sensitivity to Global Economic
Conditions and Cyclicality—Our operating results could be negatively
affected during economic downturns.
The
business of most of our customers, particularly our vinyl, urethanes, and pulp
and paper customers are, to varying degrees, cyclical and have historically
experienced periodic downturns. These economic and industry downturns
have been characterized by diminished product demand, excess manufacturing
capacity and, in some cases, lower average selling prices. Therefore,
any significant downturn in our customers’ businesses or in global economic
conditions could result in a reduction in demand for our products and could
adversely affect our results of operations or financial condition.
Although
we do not generally sell a large percentage of our products directly to
customers abroad, a large part of our financial performance is dependent upon a
healthy economy beyond North America. Our customers sell their
products abroad. As a result, our business is affected by general
economic conditions and other factors in Western Europe and most of East Asia,
particularly China and Japan, including fluctuations in interest rates, customer
demand, labor costs, currency changes, and other factors beyond our
control. The demand for our customers’ products, and therefore, our
products, is directly affected by such fluctuations. In addition, our
customers could decide to move some or all of their production to lower cost,
offshore locations, and this could reduce demand in North America for our
products. We cannot assure you that events having an adverse effect
on the industries in which we operate will not occur or continue, such as a
downturn in the Western European, Asian or world economies, increases in
interest rates, or unfavorable currency fluctuations. Economic
conditions in other regions of the world, predominantly Asia and Europe, can
increase the amount of caustic soda produced and available for export to North
America. The increased caustic soda supply can put downward pressure
on our caustic soda prices, negatively impacting our profitability.
Cyclical Pricing Pressure—Our
profitability could be reduced by declines in average selling prices of our
products, particularly declines in the ECU netback for chlorine and
caustic.
Our
historical operating results reflect the cyclical and sometimes volatile nature
of the chemical and ammunition industries. We experience cycles of
fluctuating supply and demand in each of our business segments, particularly in
Chlor Alkali Products, which result in changes in selling
prices. Periods of high demand, tight supply and increasing operating
margins tend to result in increases in capacity and production until supply
exceeds demand, generally followed by periods of oversupply and declining
prices. The significant North American chlor alkali capacity (over
100,000 annual ECU’s) which became operational during 2009 was at the Shintech,
Inc. facility in Plaquemine, LA. In North America, because Shintech
consumes the chlorine it produces, this expansion may result in more caustic
soda supply in the market. Dow announced the permanent closure in
2009 of a portion of their Oyster Creek (Freeport), TX
facility. Another factor influencing demand and pricing for chlorine
and caustic soda is the price of natural gas. Higher natural gas
prices increase our customers’ and competitors’ manufacturing costs, and
depending on the ratio of crude oil to gas prices, could make them less
competitive in world markets. Continued expansion offshore,
particularly in Asia, will continue to have an impact on the ECU values as
imported caustic soda replaces some capacity in the U.S.
Price in
the chlor alkali industry is the major supplier selection
criterion. We have little or no ability to influence prices in this
large commodity market. Decreases in the average selling prices of
our products could have a material adverse effect on our
profitability. 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. While we
strive to maintain or increase our profitability by reducing costs through
improving production efficiency, emphasizing higher margin products, and by
controlling transportation, selling, and administration expenses, we cannot
assure you that these efforts will be sufficient to offset fully the effect of
decreases in pricing on operating results.
Because
of the cyclical nature of our businesses, we cannot assure you that pricing or
profitability in the future will be comparable to any particular historical
period, including the most recent period shown in our operating
results. We cannot assure you that the chlor alkali industry will not
experience adverse trends in the future, or that our operating results and/or
financial condition will not be adversely affected by them.
Our
Winchester segment is also subject to changes in operating results as a result
of cyclical pricing pressures, but to a lesser extent than the Chlor Alkali
Products segment. Selling prices of ammunition are affected by
changes in raw material costs and availability and customer demand, and declines
in average selling prices of our Winchester segment could adversely affect our
profitability.
Imbalance in Demand for Our Chlor
Alkali Products—A loss of a substantial customer for our chlorine or
caustic soda could cause an imbalance in demand for these products, which could
have an adverse effect on our results of operations.
Chlorine
and caustic soda are produced simultaneously and in a fixed ratio of 1.0 ton of
chlorine to 1.1 tons of caustic soda. The loss of a substantial
chlorine or caustic soda customer could cause an imbalance in demand for our
chlorine and caustic soda products. An imbalance in demand may
require us to reduce production of both chlorine and caustic soda or take other
steps to correct the imbalance. Since we cannot store chlorine, we
may not be able to respond to an imbalance in demand for these products as
quickly or efficiently as some of our competitors. If a substantial
imbalance occurred, we would need to reduce prices or take other actions that
could have a negative impact on our results of operations and financial
condition.
Environmental Costs—We have
ongoing environmental costs, which could have a material adverse effect on our
financial position or results of operations.
The
nature of our operations and products, including the raw materials we handle,
exposes us to the risk of liabilities or claims with respect to environmental
matters. In addition, we are party to various governmental and
private environmental actions associated with past manufacturing facilities and
former waste disposal sites. We have incurred, and expect to incur,
significant costs and capital expenditures in complying with environmental laws
and regulations.
The
ultimate costs and timing of environmental liabilities are difficult to
predict. Liabilities under environmental laws relating to
contaminated sites can be imposed retroactively and on a joint and several
basis. One liable party could be held responsible for all costs at a
site, regardless of fault, percentage of contribution to the site or the
legality of the original disposal. We could incur significant costs,
including cleanup costs, natural resources damages, civil or criminal fines and
sanctions and third-party lawsuits claiming, for example, personal injury and/or
property damage, as a result of past or future violations of, or liabilities
under, environmental or other laws.
In
addition, future events, such as changes to or more rigorous enforcement of
environmental laws, could require us to make additional expenditures, modify or
curtail our operations and/or install pollution control equipment.
Accordingly,
it is possible that some of the matters in which we are involved or may become
involved may be resolved unfavorably to us, which could materially adversely
affect our financial position or results of operations. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Environmental Matters.”
Effects of Regulation—Changes
in legislation or government regulations or policies, including tax policies,
could have a material adverse effect on our financial position or results of
operations.
Legislation
that may be passed by Congress or other legislative bodies or new regulations
that may be issued by federal and other administrative agencies could
significantly affect the sales, costs and profitability of our
business. The chemical and ammunition industries are subject to
legislative and regulatory actions, which could have a material adverse effect
on our financial position or results of operations.
During
the second and third quarters of 2009, a bill was introduced in the United
States House of Representatives and the Senate, respectively, which, if
enacted, would ban the production of chlor alkali products using mercury cell
technology two years from the date it is enacted into law. On October
21, 2009, the House of Representatives Committee on Energy and Commerce passed a
bill that would require chlor alkali producers using mercury cell technology to
make a decision by June 30, 2012 as to whether to shutdown or convert these
facilities. If the decision is to convert, the mercury cell plants
would be required to be converted by June 30, 2015. If the decision
is not to convert, the plants would be required to be shutdown by June 30,
2013. For this bill to become law it must be passed by the full House
of Representatives and the full Senate. No additional action has been
taken on this bill since October in the House of Representatives and no action
has yet been taken by the Senate on its bill. We currently
operate two facilities which utilize mercury cell technology totaling
approximately 350,000 ECUs of capacity (approximately 18% of our
capacity). We are closely monitoring the progress of these bills, but
it is too soon to estimate the likelihood of enactment, and therefore to
determine what impact there will be on us and the chlor alkali
industry. We operate our mercury cell facilities in full compliance
with all environmental rules and regulations.
Litigation and Claims—We are
subject to litigation and other claims, which could cause us to incur
significant expenses.
We are a
defendant in a number of pending legal proceedings relating to our present and
former operations. These include proceedings alleging injurious
exposure of plaintiffs to various chemicals and other substances (including
proceedings based on alleged exposures to asbestos). Frequently, such
proceedings involve claims made by numerous plaintiffs against many
defendants. However, because of the inherent uncertainties of
litigation, we are unable to predict the outcome of these proceedings and
therefore cannot determine whether the financial impact, if any, will be
material to our financial position or results of operations.
Security and Chemicals
Transportation—New regulations on the transportation of hazardous
chemicals and/or the security of chemical manufacturing facilities and public
policy changes related to transportation safety could result in significantly
higher operating costs.
The
chemical industry, including the chlor alkali industry, has proactively
responded to the issues related to national security and environmental concerns
by starting new initiatives relating to the security of chemicals industry
facilities and the transportation of hazardous chemicals in the United
States. Government at the local, state, and federal levels also has
begun regulatory processes which could lead to new regulations that would impact
the security of chemical plant locations and the transportation of hazardous
chemicals. Our Chlor Alkali business could be adversely impacted by
the cost of complying with any new regulations. Our business also
could be adversely affected because of an incident at one of our facilities or
while transporting product. The extent of the impact would depend on
the requirements of future regulations and the nature of an incident, which are
unknown at this time.
Production Hazards—Our
facilities are subject to operating hazards, which may disrupt our
business.
We are
dependent upon the continued safe operation of our production
facilities. Our production facilities are subject to hazards
associated with the manufacture, handling, storage and transportation of
chemical materials and products and ammunition, including leaks and ruptures,
explosions, fires, inclement weather and natural disasters, unexpected utility
disruptions or outages, unscheduled downtime and environmental
hazards. From time to time in the past, we have had incidents that
have temporarily shut down or otherwise disrupted our manufacturing, causing
production delays and resulting in liability for workplace injuries and
fatalities. Some of our products involve the manufacture and/or
handling of a variety of explosive and flammable materials. Use of
these products by our customers could also result in liability if an explosion,
fire, spill or other accident were to occur. We cannot assure you
that we will not experience these types of incidents in the future or that these
incidents will not result in production delays or otherwise have a material
adverse effect on our business, financial condition or results of
operations.
Cost Control—Our profitability
could be reduced if we continue to experience increasing raw material, utility,
transportation or logistics costs, or if we fail to achieve our targeted cost
reductions.
Our
operating results and profitability are dependent upon our continued ability to
control, and in some cases further reduce, our costs. If we are
unable to do so, or if costs outside of our control, particularly our costs of
raw materials, utilities, transportation and similar costs, increase beyond
anticipated levels, our profitability will decline.
Credit Facilities—Weak
industry conditions could affect our ability to comply with the financial
maintenance covenants in our senior revolving credit facility and our Accounts
Receivable Facility.
Our
senior revolving credit facility and our Accounts Receivable Facility include
certain financial maintenance covenants requiring us to not exceed a maximum
leverage ratio and to maintain a minimum coverage ratio. Depending on
the magnitude and duration of chlor alkali cyclical downturns, including
deterioration in prices and volumes, there can be no assurance that we will
continue to be in compliance with these ratios. If we failed to
comply with either of these covenants in a future period and were not able to
obtain waivers from the lenders thereunder, we would need to refinance our
current senior revolving credit facility and Accounts Receivable
Facility. However, there can be no assurance that such refinancing
would be available to us on terms that would be acceptable to us or at
all.
Pension Plans—The impact of
declines in global equity and fixed income markets on asset values and any
declines in interest rates used to value the liabilities in our pension plan may
result in higher pension costs and the need to fund the pension plan in future
years in material amounts.
In May
2007 and September 2006, we made voluntary pension plan contributions of $100.0
million and $80.0 million, respectively.
Under
Accounting Standard Codification (ASC) 715 “Compensation–Retirement Benefits”
(ASC 715), formerly Statement of Financial Accounting Standards (SFAS) No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans,” (SFAS No. 158), we recorded an after-tax charge of $27.3 million ($41.7
million pretax) to shareholders’ equity as of December 31, 2009 for our pension
and other postretirement plans. This charge reflected a 50-basis
point decrease in the plans discount rate, partially offset by the favorable
performance on plan assets during 2009. In 2008, we recorded an
after-tax charge of $99.4 million ($162.7 million pretax) to shareholders’
equity as of December 31, 2008 for our pension and other postretirement
plans. This charge reflected the unfavorable performance on plan
assets during 2008. In 2007, we recorded a $138.3 million after-tax
credit ($226.6 million pretax) to shareholders’ equity as of December 31, 2007
for our pension and other postretirement plans. This credit reflected
a 25-basis point increase in the plans’ discount rate, combined with an increase
in the value of the plan assets from favorable plan performance and the $100.0
million contribution. The non-cash charges or credits to
shareholders’ equity do not affect our ability to borrow under our senior
revolving credit agreement.
During
2007, the asset allocation in the plan was adjusted to attempt to insulate the
plan from discount rate risk and reduce the plan’s exposure to equity
investments. Effective January 1, 2005, our defined benefit pension
plan was closed to new salaried and certain non-bargained hourly
employees. Subsequently, as new collective bargaining agreements were
negotiated, by January 1, 2009, our defined benefit pension plan was closed to
all our new union-represented employees. Effective January 1, 2008,
we froze our defined benefit pension plan for salaried and certain non-bargained
hourly workers and these employees began to participate in a defined
contribution pension plan. In 2010, we expect pension income
associated with the defined benefit pension plan to be similar compared to
2009.
The
determinations of pension expense and pension funding are based on a variety of
rules and regulations. Changes in these rules and regulations could
impact the calculation of pension plan liabilities and the valuation of pension
plan assets. They may also result in higher pension costs, additional
financial statement disclosure, and accelerate the need to fully fund the
pension plan. During the third quarter of 2006, the “Pension
Protection Act of 2006” became law, amended by “The Worker, Retiree, and
Employer Recovery Act,” during the fourth quarter of 2008. Among the
stated objectives of the laws were the protection of both pension beneficiaries
and the financial health of the Pension Benefit Guaranty Corporation
(PBGC). To accomplish these objectives, the new laws required
sponsors to fund defined benefit pension plans earlier than previous
requirements and to pay increased PBGC premiums. Based on the
combination of the asset allocation adjustment, the favorable asset
performance in 2006, 2007 and 2009, the $100.0 million and $80.0 million
voluntary contributions, and the benefits from the plan freeze, offset by the
unfavorable performance on plan assets in 2008, we will not be required to make
any cash contributions to the domestic defined benefit pension plan at least
through 2010. We do have a small Canadian defined benefit pension
plan to which we made $4.5 million of contributions in 2009 and we anticipate
approximately $4 million of contributions in 2010. At December 31,
2009, the market value of assets in our defined benefit pension plans of
$1,722.0 million exceeded the projected benefit obligation by $5.0
million.
In
addition, the impact of declines in global equity and fixed income
markets on asset values may result in higher pension costs and may increase
and accelerate the need to fund the pension plan in future years. For
example, holding all other assumptions constant, a 100-basis point decrease or
increase in the assumed rate of return on plan assets would have decreased or
increased, respectively, the 2009 defined benefit pension plan income by
approximately $15.6 million.
Holding
all other assumptions constant, a 50-basis point decrease in the discount rate
used to calculate pension income for 2009 and the projected benefit obligation
as of December 31, 2009 would have decreased pension income by $1.4 million
and increased the projected benefit obligation by $82.0 million. A
50-basis point increase in the discount rate used to calculate pension income
for 2009 and the projected benefit obligation as of December 31, 2009 would
have increased pension income by $2.7 million and decreased the projected
benefit obligation by $83.0 million.
Indebtedness—Our indebtedness
could adversely affect our financial condition and limit our ability to grow and
compete, which could prevent us from fulfilling our obligations under our
indebtedness.
As of
December 31, 2009, we had $398.4 million of indebtedness outstanding,
including $1.4 million representing the fair value related to $26.6 million of
interest rate swaps and $5.5 million representing the unrecognized gain related
to $75 million of interest rate swaps at December 31,
2009. This outstanding indebtedness excludes our guarantee of $48.8
million of indebtedness of SunBelt. This does not include our $240.0
million senior revolving credit facility of which we had $219.6 million
available on that date because we had issued $20.4 million of letters of credit
or our $75 million accounts receivable securitization facility (Accounts
Receivable Facility). As of December 31, 2009, our indebtedness
represented 32.6% of our total capitalization. At December 31, 2009,
none of our indebtedness was due within one year.
Our
indebtedness could adversely affect our financial condition and limit our
ability to fund working capital, capital expenditures and other general
corporate purposes, to accommodate growth by reducing funds otherwise available
for other corporate purposes, and to compete, which in turn could prevent us
from fulfilling our obligations under our indebtedness. In addition,
our indebtedness could make us more vulnerable to any continuing downturn in
general economic conditions and reduce our ability to respond to changing
business and economic conditions. Despite our level of indebtedness,
the terms of our senior revolving credit facility, our Accounts Receivable
Facility, and our existing indentures permit us to borrow additional
money. If we borrow more money, the risks related to our indebtedness
could increase.
Debt Service—We may not be
able to generate sufficient cash to service our debt, which may require us to
refinance our indebtedness or default on our scheduled debt
payments.
Our
ability to generate sufficient cash flow from operations to make scheduled
payments on our debt depends on a range of economic, competitive and business
factors, many of which are outside our control. We cannot assure you
that our business will generate sufficient cash flow from
operations. If we are unable to meet our expenses and debt
obligations, we may need to refinance all or a portion of our indebtedness on or
before maturity, sell assets or raise equity. We cannot assure you
that we would be able to refinance any of our indebtedness, sell assets or raise
equity on commercially reasonable terms or at all, which could cause us to
default on our obligations and impair our liquidity. Our inability to
generate sufficient cash flow to satisfy our debt obligations, or to refinance
our obligations on commercially reasonable terms, would have an adverse effect
on our business, financial condition and results of operations, as well as on
our ability to satisfy our debt obligations. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
See Item 7A—“Quantitative and Qualitative Disclosures about Market Risk”
and “Liquidity and Other Financing Arrangements.”
Credit and Capital Market
Conditions—Adverse conditions in the credit and capital markets may limit
or prevent our ability to borrow or raise capital.
While we
believe we have facilities in place that should allow us to borrow funds as
needed, adverse conditions in the credit and financial markets could prevent us
from obtaining financing, if the need arises. Our ability to invest
in our businesses and refinance maturing debt obligations could require access
to the credit and capital markets and sufficient bank credit lines to support
cash requirements. If we are unable to access the credit and capital
markets, we could experience a material adverse effect on our financial position
or results of operations.
Labor Matters—We cannot assure
you that we can conclude future labor contracts or any other labor agreements
without work stoppages.
Various
labor unions represent a majority of our hourly-paid employees for collective
bargaining purposes. The following labor contract is scheduled to
expire in 2010:
Location
|
|
Number
of Employees
|
|
Expiration
Date
|
Henderson,
NV (Chlor Alkali)
|
|
70
|
|
March
2010
|
While we
believe our relations with our employees and their various representatives are
generally satisfactory, we cannot assure that we can conclude this labor
contract or any other labor agreements without work stoppages and cannot assure
that any work stoppages will not have a material adverse effect on our business,
financial condition, or results of operations.
Item
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
Item
2. PROPERTIES
We have
manufacturing sites at 13 separate locations in ten states, Canada and
Australia. Most manufacturing sites are owned although a number of
small sites are leased. We listed the locations at or from which our
products and services are manufactured, distributed, or marketed in the tables
set forth under the caption “Products and Services.”
We lease
warehouses, terminals and distribution offices and space for executive and
branch sales offices and service departments.
Item
3. LEGAL PROCEEDINGS
Saltville
We have
completed all work in connection with remediation of mercury contamination at
the site of our former mercury cell chlor alkali plant in Saltville, VA required
to date. In mid-2003, the Trustees for natural resources in the North
Fork Holston River, the Main Stem Holston River, and
associated floodplains, located in Smyth and Washington Counties in Virginia and
in Sullivan and Hawkins Counties in Tennessee notified us of, and invited
our participation in, an assessment of alleged damages to natural resources
resulting from the release of mercury. The Trustees also notified us
that they have made a preliminary determination that we are potentially liable
for natural resource damages in said rivers and floodplains. We have
agreed to participate in the assessment. We and the Trustees have
agreed to enter into discussions concerning a resolution of this
matter. In light of the ongoing discussions and inherent
uncertainties of the assessment, we cannot at this time determine whether the
financial impact, if any, of this matter will be material to our financial
position or results of operations. See “Environmental Matters”
contained in Item 7—“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
St.
Gabriel, LA Mercury Vapor Emissions Release
Our
subsidiary, Pioneer, discovered in October 2004 that the carbon-based system
used to remove mercury from the hydrogen gas stream at the St. Gabriel, LA
facility was not at that time sufficiently effective, resulting in mercury vapor
emissions that were above the permit limits approved by the Louisiana Department
of Environmental Quality (LDEQ). Pioneer immediately reduced the
plant’s operating rate and, in late November 2004, completed the
installation of the necessary equipment and made the other needed changes, and
the plant resumed its normal operations. Pioneer’s emissions
monitoring since that time confirmed that the air emissions are below the permit
limits. In January 2005, the LDEQ issued a violation notice to
Pioneer as a result of this mercury vapor emissions release. In
December 2005, the LDEQ issued a penalty assessment of $0.4 million with
respect to the notice of violation. Pioneer has administratively
appealed the penalty assessment. Given the facts and circumstances,
Pioneer requested that the LDEQ reconsider the penalty assessment.
Other
As part
of the continuing environmental investigation by federal, state, and local
governments of waste disposal sites, we have entered into a number of settlement
agreements requiring us to participate in the investigation and cleanup of a
number of sites. Under the terms of such settlements and related
agreements, we may be required to manage or perform one or more elements of a
site cleanup, or to manage the entire remediation activity for a number of
parties, and subsequently seek recovery of some or all of such costs from other
Potentially Responsible Parties (PRPs). In many cases, we do not know
the ultimate costs of our settlement obligations at the time of entering into
particular settlement agreements, and our liability accruals for our obligations
under those agreements are often subject to significant management judgment on
an ongoing basis. Those cost accruals are provided for in accordance
with generally accepted accounting principles and our accounting policies set
forth in the environmental matters section in Item 7—“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
We, and
our subsidiaries, are defendants in various other 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.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did
not submit any matter to a vote of security holders during the three months
ended December 31, 2009.
Executive
Officers of the Registrant as of February 24, 2010
Name
and Age
|
|
Office
|
|
Served as an
Olin Officer Since
|
|
|
Chairman,
President and Chief Executive Officer
|
|
|
|
|
Vice
President and Treasurer
|
|
|
|
|
Vice
President, Human Resources
|
|
|
|
|
Vice
President and Chief Financial Officer
|
|
|
|
|
Vice
President, Strategic Planning
|
|
|
|
|
Vice
President and President, Winchester Division
|
|
|
|
|
Vice President and President, Chlor Alkali Products Division
|
|
|
|
|
Vice
President, General Counsel and Secretary
|
|
|
|
|
Vice
President and Controller
|
|
|
No family
relationship exists between any of the above named executive officers or between
any of them and any of our directors. Such officers were elected to
serve, subject to the By-laws, until their respective successors are
chosen.
S. C.
Curley, J. E. Fischer, R. M. Hammett, J. D. Rupp, J. L. McIntosh, and G. H. Pain
have served as executive officers more than five years.
Dolores
J. Ennico was elected Vice President, Human Resources effective May 1,
2009. Prior to that time and since October 2005, she served as
Corporate Vice President, Human Resources. From March 2004 to September
2005, she served as Vice President, Administration for Olin's Winchester
Division and former Metals group.
G. Bruce
Greer, Jr. joined Olin on May 2, 2005 as Vice President, Strategic
Planning. Prior to joining Olin and since 1997, Mr. Greer was
employed by Solutia, Inc., an applied chemicals company. From 2003 to
April 2005, he served as President of Pharma Services, a Division of Solutia and
Chairman of Flexsys, an international rubber chemicals company which was a joint
venture partially owned by Solutia and Akzo Nobel. Prior to that,
Mr. Greer served as a Vice President of Corporate Development, Technology,
and Information Technology for Solutia.
Todd A.
Slater was elected Vice President and Controller, effective May 27,
2005. From April 2004 until May 2005, he served as Operations
Controller. From January 2003 until April 2004, he served as Vice
President and Financial Officer for Olin’s former Metals
Group. Prior to 2003, Mr. Slater served as Vice President, Chief
Financial Officer and Secretary for Chase Industries Inc. (which was merged into
Olin on September 27, 2002 and divested as part of the sale of the Metals
business in November 2007).
PART
II
Item
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
As of
January 29, 2010, we had 4,889 record holders of our common
stock.
Our
common stock is traded on the New York Stock Exchange.
The high
and low sales prices of our common stock during each quarterly period in 2009
and 2008 are listed below. A dividend of $0.20 per common share was
paid during each of the four quarters in 2009 and 2008.
2009
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Market
price of common stock per New York Stock Exchange composite
transactions
|
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|
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|
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|
|
Market
price of common stock per New York Stock Exchange composite
transactions
|
|
|
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|
Issuer
Purchases of Equity Securities
Period
|
Total Number of Shares
(or
Units) Purchased
|
|
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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|
|
(1)
|
On
April 30, 1998, we announced a share repurchase program approved by
our board of directors for the purchase of up to 5 million shares of
common stock. Through December 31, 2009, 4,845,924 shares
had been repurchased, and 154,076 shares remain available for purchase
under that program, which has no termination
date.
|
Performance
Graph
This
graph compares the total shareholder return on our common stock with the total
return on the (i) Standard and Poor’s 1000 Index (the “S&P 1000”) and
(ii) the Peer Group. Our Peer Group is comprised of Georgia Gulf
Corporation, Occidental Petroleum Corporation, Alliant Techsystems, PPG
Industries, Inc., The Dow Chemical Company and Westlake Chemical
Corporation.
Data is
for the five-year period from December 31, 2004 through December 31,
2009. The cumulative return includes reinvestment of dividends. The Peer Group
is weighted in accordance with market capitalization (closing stock price
multiplied by the number of shares outstanding) as of the beginning of each of
the five years covered by the performance graph. We calculated the weighted
return for each year by multiplying (a) the percentage that each
corporation’s market capitalization represented of the total market
capitalization for all corporations in the Peer Group for such year by
(b) the total shareholder return for that corporation for such
year.
Item 6.
SELECTED FINANCIAL DATA
TEN-YEAR
SUMMARY
($
and shares in millions, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
Operations
|
|
|
|
|
|
|
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|
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|
|
Selling
and administration
|
|
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|
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|
|
|
Loss
on restructuring of businesses
|
|
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|
|
|
|
|
|
|
Earnings
(loss) of non-consolidated affiliates
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
Discontinued
operations, net
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
Cumulative
effect of accounting changes, net
|
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|
|
|
|
|
|
Cash
and cash equivalents and short-term investments
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital, excluding cash and cash equivalents and short-term
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Market
price of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
Purchases
of common stock
|
|
|
|
|
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|
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|
|
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|
|
|
Total
debt to total capitalization
|
|
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|
|
|
|
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|
|
|
|
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|
|
|
Average
common shares outstanding - diluted
|
|
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|
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Our
Selected Financial Data reflects the following businesses as discontinued
operations: Metals business in 2007 and Olin Aegis in 2004. Since
August 31, 2007, our Selected Financial Data reflects the Pioneer
acquisition.
(1) Employee
data exclude employees who worked at government-owned/contractor-operated
facilities.
Item
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
BACKGROUND
The
Metals business was classified as discontinued operations during 2007 and was
excluded from the segment results for all periods presented. As a
result, 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 business is a commodity business where all supplier products are
similar and price is the major supplier selection criterion. We have
little or no ability to influence prices in this large, global commodity
market. Cyclical price swings, driven by changes in supply/demand,
can be abrupt and significant and, given capacity in our Chlor Alkali Products
business, can lead to very significant changes in our overall
profitability. Winchester also has a commodity element to its
business, but a majority of Winchester ammunition is sold as a branded consumer
product where there are opportunities to differentiate certain offerings through
innovative new product development and enhanced product
performance. While competitive pricing versus other branded
ammunition products is important, it is not the only factor in product
selection.
RECENT
DEVELOPMENTS AND HIGHLIGHTS
2009
Year
In 2009,
Chlor Alkali Products’ segment income was $125.4 million, a decline of 62%
compared with the prior year. Chlor Alkali Products continued to
experience the weak product demand that began in the fourth quarter of
2008. Volumes for chlorine and caustic soda decreased 22% compared to
2008. Volumes for bleach, which accounted for approximately 12% of
Chlor Alkali Products’ sales, increased 17% compared to
2008. Operating rates in Chlor Alkali Products for 2009 and 2008
were 70% and 82%, respectively. These operating rates assume
that 100% of our demonstrated capacity was available for use. The
capacity of our St. Gabriel, LA facility had been shutdown since late November
2008 and the facility was not available for use until the conversion and
expansion project was completed in the fourth quarter of 2009. In
addition, in response to low levels of customer demand for chlorine and caustic
soda, an additional 5% of our chlorine and caustic soda capacity has been idled
by us. After taking these capacity reduction actions into
consideration, our effective operating rate for 2009 was 78%.
Our 2009
ECU netbacks of $520 were 18% lower than the 2008 netbacks of $635, reflecting
the changes in the pricing dynamics in North America. During 2008,
North American demand for caustic soda remained strong, while supply continued
to be constrained by the weakness in chlorine demand. This resulted
in a significant supply and demand imbalance for caustic soda in North America,
which resulted in record caustic soda pricing. The result was a
record ECU netback, in our system, in the first quarter of 2009 of approximately
$765. Beginning late in the fourth quarter of 2008 and continuing
through 2009, demand for caustic soda weakened significantly, and fell below the
demand for chlorine. This created excess supply in North America,
which has caused caustic soda prices to fall. The over supply of
caustic soda caused industry operating rates to be constrained, which resulted
in chlorine price increase announcements of $300 per ton during the second
quarter of 2009. Caustic soda prices declined precipitously in the
second quarter of 2009 and these declines continued into the third quarter of
2009. During the third quarter of 2009, chlorine and caustic soda
demand became more balanced eliminating the oversupply of caustic
soda. We began realizing increases in chlorine prices in the
third quarter of 2009 with most of the improvement in the fourth quarter of
2009. We believe that ECU netbacks, in our system, have bottomed out
in the third quarter of 2009. During the fourth quarter of 2009, as
caustic soda demand improved, chlorine production declined due to seasonally
weaker demand. This resulted in a supply and demand imbalance for
caustic soda in North America. As a result of this imbalance, in
December 2009, a $75 per ton caustic soda price increase was
announced. We expect to begin realizing this price increase in
caustic soda in the second quarter of 2010.
Winchester
segment income of $68.6 million in 2009, which represented the highest level of
segment income in at least the last two decades, improved 110% compared to the
prior year segment income of $32.6 million. Winchester continues to
experience the above normal levels of demand that began around the November 2008
presidential election. The increase in demand has been across the
majority of Winchester’s product offerings, including rifle, pistol and rimfire
ammunition. On a volume basis, Winchester’s unit shipments increased
14% in 2009 compared to 2008, which was driven by the higher level of commercial
sales. Winchester’s results reflected the impact of increased volumes
and higher selling prices, and lower commodity and other material
costs.
Income
from continuing operations before taxes for 2009 included $82.1 million of
recoveries from third parties for environmental costs incurred and expensed in
prior periods.
On August
19, 2009, we sold $150.0 million of 8.875% Senior Notes (2019 Notes) with a
maturity date of August 15, 2019. The 2019 Notes were issued at
99.19% of par value, providing a yield to maturity to investors of
9.0%. Interest will be paid semi-annually beginning on February 15,
2010. Proceeds of $145.5 million, after expenses of $3.3 million,
from the 2019 Notes will be used to further strengthen our long-term liquidity
given uncertain economic times.
During
the fourth quarter of 2009, we completed a conversion and expansion project at
our St. Gabriel, LA facility and initiated production. This project
increased capacity at this location from 197,000 ECUs to 246,000 ECUs and will
significantly reduce the site’s manufacturing costs. Our capital
spending included $69.6 million and $87.2 million for the St. Gabriel, LA
facility conversion and expansion project in 2009 and 2008,
respectively.
During
the second and third quarters of 2009, a bill was introduced in the United
States House of Representatives and the Senate, respectively, which, if
enacted, would ban the production of chlor alkali products using mercury cell
technology two years from the date it is enacted into law. On October
21, 2009, the House of Representatives Committee on Energy and Commerce passed a
bill that would require chlor alkali producers using mercury cell technology to
make a decision by June 30, 2012 as to whether to shutdown or convert these
facilities. If the decision is to convert, the mercury cell plants
would be required to be converted by June 30, 2015. If the decision
is not to convert, the plants would be required to be shutdown by June 30,
2013. For this bill to become law it must be passed by the full House
of Representatives and the full Senate. No additional action has been
taken on this bill since October in the House of Representatives and no action
has yet been taken by the Senate on its bill. We currently
operate two facilities which utilize mercury cell technology totaling
approximately 350,000 ECUs of capacity (approximately 18% of our
capacity). We are closely monitoring the progress of these bills, but
it is too soon to estimate the likelihood of enactment, and therefore to
determine what impact there will be on us and the chlor alkali
industry. We operate our mercury cell facilities in full compliance
with all environmental rules and regulations.
2008
Year
In 2008,
Chlor Alkali Products had record segment income of $328.3 million, an
improvement of 38% compared with 2007. This improvement reflects the
combination of the full year contributions from the Pioneer acquisition of $72.7
million, including synergies, and improved pricing of $108.4
million. These were partially offset by the effect from lower
chlorine and caustic soda volumes of $46.7 million. Operating rates
in our Chlor Alkali Products business were 82% for 2008, which were negatively
impacted during the fourth quarter of 2008 by lower levels of demand from all
major customer groups, and by hurricane-related outages at our St. Gabriel, LA
facility and our SunBelt joint venture during the third quarter of
2008. In response to the low level of demand during the fourth
quarter of 2008, we announced that the St. Gabriel, LA facility, which was
shutdown for scheduled maintenance in late November 2008, would not resume
operations until the current conversion and expansion project was
completed. The project was completed in the fourth quarter of
2009. The St. Gabriel, LA facility represents approximately 10% of
our chlorine and caustic soda capacity.
During
the first three quarters of 2008, North American demand for caustic soda
remained strong. In addition, caustic soda supply was constrained by
the weakness in chlorine demand, which caused operating rates to be
reduced. This created an imbalance between caustic soda supply and
demand. This imbalance, combined with increased freight and energy
costs, resulted in our achieving record levels of caustic soda
pricing. During the fourth quarter of 2008, North American caustic
soda demand weakened but less than the decline in chlorine
demand. This caused the caustic soda supply and demand imbalance to
continue, which continued to support record levels of caustic soda
prices.
On March
12, 2008, we announced that, in connection with our plans to streamline 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
bleach operations. We substantially completed the closure of the
Dalhousie facility by June 30, 2008. We expect to incur cash
expenditures of $2.5 million associated with the shutdown, which were previously
included in current liabilities on the Pioneer acquisition balance
sheet. We have paid $2.2 million of costs associated with this
shutdown as of December 31, 2009. This action is expected to generate
$8 million to $10 million of annual pretax savings.
Winchester
segment income was $32.6 million in 2008, which represented record earnings for
the Winchester business, an increase of 23% compared with
2007. Winchester’s results for 2008 reflected the combination of
improved pricing and increased law enforcement volumes which more than offset
higher commodity, material and manufacturing costs.
In 2008,
other income (expense) 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. During the third
quarter of 2008, 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 has been recognized for the impairment loss.
In 2008,
the domestic defined benefit pension plan’s investment portfolio declined by
approximately 1%. The decline reflected the weakness in the domestic
and international equity markets and increases in interest rate spreads, which
reduced the value of certain corporate fixed income investments. The
2008 pension plan’s investment performance reflects the actions taken in 2007 to
reduce the defined benefit pension plan’s exposure to equity investments and
increase its exposure to fixed income investments. During the same
period, interest rates on corporate bonds, used to determine the defined benefit
pension plan’s liability discount rate, fluctuated dramatically during the year
but ended comparable with the levels at December 31, 2007, which resulted in no
change to the discount rate for 2008. We recorded an after-tax charge
of $99.4 million ($162.7 million pretax) to shareholders’ equity as of December
31, 2008 for our pension and other postretirement plans, which reduced the over
funded position in our pension plan that existed at December 31,
2007. This charge reflected the unfavorable performance on pension
plan assets and the unchanged discount rate during 2008.
2007
Year
Discontinued
Operations
In 2001,
the industry in which the Metals business operates experienced a 25% decline in
volumes that created over capacity in the marketplace, which reduced our
financial returns in the Metals business. Volumes did not return to
pre-2001 levels. Since 2001, we had undertaken a number of
restructuring and downsizing actions, including multiple plant closures. The
benefits of these actions were more than offset by the escalation of both energy
and commodity metal prices, specifically copper, zinc, and nickel. As
a result, we were unable to realize acceptable returns in the
business. During the second half of 2006 and first half of 2007, we
evaluated a number of strategic alternatives for the Metals business, and we
made the decision in mid-2007 to engage Goldman, Sachs & Co. to conduct a
formal strategic evaluation process, including the alternative of selling the
business. The sale of Metals provides us with the financial
flexibility to pursue investments in areas where we can earn the best
returns.
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 sale was subject to Hart-Scott-Rodino Antitrust
Improvement Act clearance, but not shareholder approval. The
transaction closed on November 19, 2007. Based on the Metals assets
held for sale, we recognized a pretax loss of $160.0 million partially offset by
a $21.0 million income tax benefit, resulting in a net loss on disposal of
discontinued operations of $139.0 million for 2007. The loss on
disposal of discontinued operations included a pension curtailment charge of
$6.9 million, other postretirement benefits curtailment credit of $1.1 million
and transaction fees of $24.6 million. The final loss
recognized related to this transaction did not change upon the final
determination of the value of working capital in the business. The
loss on the disposal, which included transaction costs, reflected a book value
of the Metals business of approximately $564 million and a tax basis of
approximately $396 million. The difference between the book and tax
values of the business reflected primarily goodwill of $75.8 million and
intangibles of $10.4 million. Based on the final working capital
adjustment, we received net cash proceeds from the transaction of $380.8
million, which was in addition to the $98.1 million of after-tax cash flow
realized from the operation of Metals during 2007.
In April
2008, we and Global entered into binding arbitration regarding the final working
capital adjustment. The arbitration was concluded in 2009 and
resulted in a payment of $20.6 million, which was consistent with the estimated
working capital adjustment we anticipated from the transaction.
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 $1,891.7 million for the period of our ownership in
2007. The Metals business sales included commodity metal price
changes that are primarily a pass-through. Intersegment sales of
$81.4 million for the period of our ownership in 2007, representing the sale of
ammunition cartridge case cups to Winchester from Metals, at prices that
approximate market, 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. The Metals business employed
approximately 2,900 hourly and salaried employees. The results of
operations from the Metals business have been presented as discontinued
operations for all periods presented.
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.
Pioneer
Acquisition
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 plants 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 includes direct fees and expenses. We financed the
merger with cash and $110.0 million of borrowings against our Accounts
Receivable Facility. At the date of acquisition, Pioneer had cash and
cash equivalents of $126.4 million. We assumed $120.0 million of
Pioneer’s convertible debt which was redeemed in the fourth quarter of 2007 and
January 2008. We paid a conversion premium of $25.8 million on the
Pioneer convertible debt.
For 2008
and the last four months of 2007, Pioneer sales were $552.7 million and $183.6
million, respectively, and segment income was $101.9 million and $29.2 million,
respectively, which were included in our Chlor Alkali Products segment
results.
Between
August 2007 and December 2008, Chlor Alkali Products segment earnings included
approximately $47 million of realized cost savings from integrating the Pioneer
operations and our operations . The ability to optimize freight costs
has been a key synergy realized as part of the Pioneer
acquisition. In 2007 and 2008, we identified and implemented changes
in ship-to and ship-from of both operations’ locations that have reduced annual
chlorine ton miles shipped by approximately 5%. The opportunity to
rationalize selling and administration costs was also a significant cost savings
realized as part of the Pioneer acquisition. During the first
quarter of 2008, the Pioneer corporate office in Houston was closed, the space
was subleased, and all of those activities were consolidated into our existing
functions and facilities.
Financing
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 materials for the St. Gabriel, LA facility conversion and expansion
project.
On
October 29, 2007, we entered into a new $220 million five-year senior revolving
credit facility, which replaced the $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 new senior revolving 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 through adding a maximum
of two additional lending institutions each year. Borrowing options
and restrictive covenants are similar to those of our previous $160 million
senior revolving credit facility. The $240 million senior revolving
credit facility includes a $110 million letter of credit subfacility which is in
addition to the $35 million letter of credit facility.
On June
26, 2007, we entered into the $100 million 364-day revolving credit facility
($100 million Credit Facility) and the $150 million 364-day revolving credit
facility ($150 million Credit Facility). According to their terms,
the $100 million Credit Facility matured on the earlier of June 24, 2008 or upon
an increase in the lending commitments under our existing senior revolving
credit facility and the establishment of an accounts receivable securitization
facility, and the $150 million Credit Facility would have matured on June 24,
2008. In the fourth quarter of 2007, the $100 million Credit Facility
expired as all conditions for early termination were met and the $150 million
Credit Facility was terminated as we no longer needed the credit
commitment.
On July
25, 2007, we established a $250 million, 364-day Accounts Receivable Facility,
renewable annually for five years, which expires in July 2012. As a
result of the sale of Metals, the Accounts Receivable Facility was reduced from
$250 million to $100 million. In July 2008, the Accounts Receivable
Facility was further reduced from $100 million to $75 million. The
$75 million Accounts Receivable Facility provides for the sale of our eligible
trade receivables to a third party conduit through a wholly-owned,
bankruptcy-remote, special purpose entity that is consolidated for financial
statement purposes. The Accounts Receivable Facility contains
specific covenants relating to the ability of the lender to obtain or maintain a
first priority lien on the receivables. In addition, the Accounts
Receivable Facility incorporates the leverage and coverage covenants that are
contained in the senior revolving credit facility.
CHLOR
ALKALI PRODUCTS PRICING
In
accordance with industry practice, we compare ECU prices on a netback basis,
reporting and analyzing prices net of the cost of transporting the products to
customers to allow for a comparable means of price comparisons between periods
and with respect to our competitors. For purposes of determining our
ECU netback, we use prices that we realize as a result of sales of chlorine and
caustic soda to our customers, and we do not include the value of chlorine and
caustic soda that is incorporated in other products that we manufacture and
sell.
Quarterly
and annual average ECU netbacks, excluding SunBelt, for 2009, 2008 and 2007 were
as follows, which includes Pioneer ECU netbacks subsequent to August 31,
2007:
Beginning
in late 2006, driven by reduced levels of chlorine demand and a series of
planned and unplanned plant maintenance outages, chlor alkali plant operating
rates for the industry were reduced. While this allowed chlorine
supply to stay balanced, it caused caustic soda demand, which did not experience
a decline, to exceed supply. This led to industry-wide caustic soda
price increases. During the first three quarters of 2008, North
American demand for caustic soda remained strong. However, caustic
soda supply continued to be constrained by the weakness in chlorine demand,
which caused operating rates to be reduced. This resulted in a
significant supply and demand imbalance for caustic soda in North
America. This imbalance, combined with increased freight and energy
costs, resulted in our achieving record levels of caustic soda
pricing. During the fourth quarter of 2008, North American caustic
soda demand weakened but less than the decline in chlorine
demand. This caused the caustic soda supply and demand imbalance to
continue, which continued to support record levels of caustic soda
prices. The result was a record ECU netback, in our system, in the
first quarter of 2009.
Our 2009
ECU netbacks of $520 were 18% lower than the 2008 netbacks of $635, reflecting
the changes in the pricing dynamics in North America. Beginning late
in the fourth quarter of 2008 and continuing through 2009, demand for caustic
soda weakened significantly, and fell below the demand for
chlorine. This created excess supply in North America, which has
caused caustic soda prices to fall. The over supply of caustic soda
caused industry operating rates to be constrained, which resulted in chlorine
price increase announcements of $300 per ton during the second quarter of
2009. Caustic soda prices declined precipitously in the second
quarter of 2009 and these declines continued into the third quarter of
2009. During the third quarter of 2009, chlorine and caustic soda
demand became more balanced eliminating the oversupply of caustic
soda. We began realizing increases in chlorine prices in the third
quarter of 2009 with most of the improvement in the fourth quarter of
2009. We believe that ECU netbacks, in our system, have bottomed out
in the third quarter of 2009. During the fourth quarter of 2009, as
caustic soda demand improved, chlorine production declined due to seasonally
weaker demand. This resulted in a supply and demand imbalance for
caustic soda in North America. As a result of this imbalance, in
December 2009, a $75 per ton caustic soda price increase was
announced. We expect to begin realizing this price increase in
caustic soda in the second quarter of 2010.
PENSION
AND POSTRETIREMENT BENEFITS
In
October 2007, we announced that we were freezing our domestic defined benefit
pension plan for salaried and certain non-bargained 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 December 31, 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 Contributing Employee Ownership Plan (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. Freezing the domestic defined benefit pension plan for
salaried and certain non-bargained hourly employees was accounted for as a
curtailment under ASC 715, formerly SFAS No. 88, “Employer’s Accounting for
Settlements and Curtailments of Defined Benefit Pension Plan and for Termination
Benefits” (SFAS No. 88). As a result of freezing the domestic defined
benefit pension plan, we recorded a curtailment charge of $1.9 million for the
defined benefit pension plan and a corresponding curtailment credit of $1.9
million for the non-qualified pension plan in 2007.
We
account for our defined benefit pension plans and non-pension postretirement
benefit plans using actuarial models required by ASC 715, formerly SFAS No. 87,
“Employers’ Accounting for Pensions” (SFAS No. 87) and SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other than Pension," (SFAS
No. 106), respectively. 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 liability 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 closure of our defined benefit
pension plan to new entrants, the freezing of our domestic 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 beginning in 2008 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. For the years ended December 31, 2009 and
2008, the average remaining life expectancy of the inactive participants in the
defined benefit pension plan was 19 years.
During
the third quarter of 2006, the “Pension Protection Act of 2006”, amended by “The
Worker, Retiree, and Employer Recovery Act,” during the fourth quarter of 2008,
became law. Among the stated objectives of the laws are the
protection of both pension beneficiaries and the financial health of the
PBGC. To accomplish these objectives, the new laws require sponsors
to fund defined benefit pension plans earlier than previous requirements and to
pay increased PBGC premiums. The laws require defined benefit pension
plans to be fully funded in 2011. In September 2006, we made a
voluntary pension plan contribution of $80.0 million and in May 2007, we made an
additional $100.0 million voluntary contribution to our defined benefit pension
plan. During 2007, the asset allocation in the plan was adjusted to
attempt to insulate the plan from discount rate risk and reduce the plan’s
exposure to equity investments. Based on the combination of these
actions and favorable asset performance in 2006, 2007 and 2009 offset by the
unfavorable performance on plan assets in 2008, we will not be required to make
any cash contributions to the domestic defined benefit pension plan at least
through 2010. We do have a small Canadian defined benefit pension
plan to which we made $4.5 million of contributions in 2009 and we anticipate
approximately $4 million of contributions in 2010. At December 31,
2009, the market value of assets in our defined benefit pension plans of
$1,722.0 million exceeded the projected benefit obligation by $5.0
million.
Under ASC
715, formerly SFAS No. 158, we recorded an after-tax charge of $27.3 million
($41.7 million pretax) to shareholders’ equity as of December 31, 2009 for our
pension and other postretirement plans. This charge reflected a
50-basis point decrease in the plans’ discount rate, partially offset by the
favorable performance on plan assets during 2009. In 2008, we
recorded an after-tax charge of $99.4 million ($162.7 million pretax) to
shareholders’ equity as of December 31, 2008 for our pension and other
postretirement plans. This charge reflected the unfavorable
performance on plan assets during 2008. In 2007, we recorded a $138.3
million after-tax credit ($226.6 million pretax) to shareholders’ equity as of
December 31, 2007 for our pension and other postretirement
plans. This credit reflected a 25-basis point increase in the plans’
discount rate, combined with an increase in the value of the plan assets from
favorable plan performance and the $100.0 million contribution. The
non-cash credits or charges to shareholders’ equity do not affect our ability to
borrow under our senior revolving credit agreement.
Components
of net periodic benefit (income) costs were:
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Other
postretirement benefits
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In 2008,
we recorded curtailment charges of $4.1 million associated with the transition
of a portion of our East Alton, IL Winchester hourly workforce and our McIntosh,
AL Chlor Alkali hourly workforce from a defined benefit pension plan to a
defined contribution pension plan. In 2007, we recorded a defined
benefit pension curtailment charge of $6.9 million and other postretirement
benefits curtailment credit of $1.1 million related to the sale of the Metals
business, which were included in the loss on disposal of discontinued
operations. Also during 2007, we recorded a curtailment charge of
$0.5 million resulting from the conversion of a portion of the Metals hourly
workforce from a defined benefit pension plan to a defined contribution pension
plan. This curtailment charge was included in income from
discontinued operations.
After
giving effect to the changes in curtailment charges and credits, the decrease in
2008 net periodic pension expense from 2007 was due to the favorable impact of
the $100 million voluntary contribution made in May 2007, the favorable 2007
investment returns, a 25-basis point increase in the liability discount rate in
2007, the impact of the plan freeze for salaried and certain non-bargained
hourly employees that became effective January 1, 2008, and an increase in the
amortization period for actuarial losses.
The
service cost and the amortization of prior service cost components of pension
expense related to employees of the operating segments are 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 $7.9 million for the period of our ownership in 2007
was included in income from discontinued operations. The portion of
other postretirement benefit costs for the Metals business employees of $4.4
million for the period of our ownership in 2007 was also included in income from
discontinued operations.
CONSOLIDATED
RESULTS OF OPERATIONS
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Years
ended December 31, |
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2009
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2008
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2007
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($ in millions, except per share data)
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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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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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2009
Compared to 2008
Our total
sales for 2009 were $1,531.5 million compared to $1,764.5 million last year, a
decrease of $233.0 million, or 13%. Chlor Alkali Products’ sales
decreased by $311.6 million, or 24%, primarily due to decreased shipment volumes
and lower ECU prices. Our ECU netbacks, excluding SunBelt, decreased
18% compared to last year. Winchester sales increased by $78.6
million, or 16%, from 2008 primarily due to increased volumes.
Gross
margin decreased $78.5 million, or 20%, from 2008, due to decreased Chlor Alkali
gross margin resulting from lower volumes and decreased ECU netbacks, partially
offset by improved Winchester gross margin resulting from higher volumes and
lower commodity and other material costs. The 2009 gross margin was
positively impacted by recoveries from third parties for environmental costs
incurred and expensed in prior periods of $82.1 million. Gross margin
as a percentage of sales decreased to 20% in 2009 from 22% in 2008.
Selling
and administration expenses in 2009 decreased $2.0 million, or 1%, from 2008,
primarily due to lower non-income taxes of $5.3 million, primarily due to a
favorable resolution of a Canadian capital tax matter, lower recruiting and
relocation charges of $4.3 million, and decreased management incentive
compensation expense of $2.5 million, which includes mark-to-market adjustments
on stock-based compensation, partially offset by a higher level of legal and
legal-related settlement expenses of $3.6 million, which included costs for
recovery actions for environmental costs previously incurred and expensed, a
higher provision for doubtful customer accounts receivable of $2.6 million
related to a deterioration in customer credit, increased consulting and
professional fees of $2.3 million and higher salary and benefit costs of $1.6
million. Selling and administration expenses as a percentage of sales
were 9% in 2009 and 8% in 2008.
Other
operating income in 2009 increased by $7.9 million from 2008. Other
operating income for 2009 included gains of $6.5 million on the disposition of
property, plant, and equipment compared to a loss of $0.7 million for
2008. The 2009 gains were primarily associated with sales of real
estate and dispositions of assets associated with the St. Gabriel, LA facility
conversion and expansion project. Other operating income for 2009
also included a gain of $0.8 million for the sale of other assets.
The
earnings of non-consolidated affiliates were $37.7 million for 2009, a decrease
of $1.7 million from 2008, primarily due to lower ECU prices at SunBelt,
partially offset by increased earnings at our bleach joint venture.
Interest
expense decreased by $1.7 million, or 13%, in 2009 primarily due to an increase
of $4.7 million in capitalized interest associated with our St. Gabriel, LA
facility conversion and expansion project and a major maintenance capital
project at our McIntosh, AL facility, partially offset by a higher level of
outstanding debt.
Interest
income decreased by $5.1 million, or 82%, in 2009 primarily due to lower
short-term interest rates.
The effective
tax rate for 2009 included a $2.8 million reduction in expense primarily
associated with the finalization of the 2008 income tax returns, which resulted
in lower state tax expense, and a $3.2 million reduction in expense primarily
associated with the expiration of statutes of limitation in domestic and foreign
jurisdictions. After giving consideration to these two items of $6.0
million, the effective tax rate for 2009 of 38.2%, was higher than the 35% U.S.
federal statutory rate primarily due to state income taxes, which were offset in
part by the utilization of certain state tax credits. The effective
tax rate for 2008 included expense of $10.4 million for a valuation allowance
required 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 2008 also included a $2.1
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. After giving consideration to these two
items of $8.3 million, the effective tax rate for 2008 of 35.5% 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.
2008
Compared to 2007
For 2008,
total company sales were $1,764.5 million compared with $1,276.8 million in
2007, an increase of $487.7 million, or 38%. Chlor Alkali Products
sales increased by $430.3 million, or 51%, primarily due to the inclusion of a
full year of Pioneer sales in 2008 compared with four months in 2007 and higher
ECU prices. The acquisition of Pioneer contributed to an increase in
2008 sales of $369.1 million compared to 2007. Winchester sales
increased by $57.4 million, or 13%, from 2007 primarily due to increased selling
prices and improved law enforcement volumes.
Gross
margin increased $146.0 million, or 61%, from 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. Gross margin was also positively impacted by decreased
environmental costs in 2008 of $10.2 million primarily associated with a charge
in 2007 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 $13.7 million, which was
partially offset by an increase in defined contribution pension expense of $7.6
million. Gross margin as a percentage of sales increased to 22% in
2008 from 19% in 2007.
Selling
and administration expenses as a percentage of sales were 8% in 2008 and 10% in
2007. Selling and administration expenses in 2008 were $8.1 million
higher than 2007 primarily due to expenses associated with the acquired Pioneer
operations, net of synergies of $10.5 million, a higher provision for doubtful
customer accounts receivable of $3.0 million, increased stock-based compensation
expense of $2.3 million, primarily resulting from mark-to-market adjustments,
higher consulting costs of $1.3 million and increased salary and benefit costs
of $1.4 million. These increases were partially offset by decreased
defined benefit pension expense of $12.1 million, offset by increased defined
contribution pension expense of $1.0 million.
Other
operating income for 2008 included $1.0 million for a portion of a 2007 gain
realized on an intangible asset sale in Chlor Alkali Products, which is
recognized ratably through 2012, $0.9 million for a portion of a gain realized
on the sale of equipment, which is recognized ratably through June 2009, and
$0.2 million of a gain on the disposition of land associated with a former
manufacturing facility. These gains were partially offset by a loss
of $0.9 million on the disposition of property, plant and
equipment. Other operating income for 2007 included the receipt of a
$1.3 million contingent payment associated with a 1995 divestiture and $0.6
million for a portion of a 2007 gain realized on an intangible asset sale in
Chlor Alkali Products.
The
earnings of non-consolidated affiliates were $39.4 million for 2008, a decrease
of $6.6 million from 2007. Lower volumes at SunBelt, due to the
impact of hurricane-related outages and other force majeure events at one of its
chlorine customers, were partially offset by higher ECU prices.
Interest
expense decreased by $8.8 million, or 40%, in 2008, primarily due to a lower
level of outstanding debt and capitalization of $5.0 million of interest in 2008
associated with our St. Gabriel, LA facility conversion and expansion project
and a major maintenance capital project at our McIntosh, AL
facility.
Interest
income decreased by $5.4 million, or 47%, in 2008 primarily due to lower
short-term interest rates.
Other
income (expense) for 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 2008 included expense of $10.4
million for a valuation allowance required against the deferred tax benefit
generated from the impairment of corporate debt securities. As we are
currently unable to utilize the capital loss resulting from the impairment of
the $26.6 million of corporate debt securities, no tax benefit was recognized
during 2008 for the impairment loss. Additionally, the effective tax
rate for continuing operations for 2008 included a $2.1 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 2008
of 35.5%, which was increased by the effect of these two items of $8.3 million,
was higher than the 35% U.S. federal statutory rate primarily due to state
income taxes, which were offset in part by the benefit of the domestic
manufacturing deduction and the utilization of certain state tax
credits. The effective tax rate for continuing operations for 2007
of 33.1% was lower than the 35% U.S. federal statutory rate primarily due to the
benefit of the domestic manufacturing deduction and the utilization of certain
state tax credits, offset in part by state income taxes and income in certain
foreign jurisdictions being taxed at higher rates.
SEGMENT
RESULTS
We define
segment results as income (loss) from continuing operations before interest
expense, interest income, other income (expense), and income taxes and include
the results of non-consolidated affiliates. Consistent with the
guidance in ASC 280 “Segment Reporting” (ASC 280), formerly SFAS No. 131,
“Disclosures About Segments of an Enterprise and Related Information,” (SFAS No.
131), we have determined it is appropriate to include the operating results of
non-consolidated affiliates in the relevant segment financial
results. Our management considers SunBelt to be an integral component
of the Chlor Alkali Products segment. They are engaged in the same
business activity as the segment, including joint or overlapping marketing,
management, and manufacturing functions.
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Years
ended December 31, |
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2009
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2008
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2007
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Sales:
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($
in millions)
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Income
from continuing operations before taxes
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Pension
income (expense)(2)
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Environmental
income (expense)(3)
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Other
corporate and unallocated costs
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Other
operating income(4)
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Other
income (expense)(6)
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Income
from continuing operations before taxes
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(1)
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Earnings
of non-consolidated affiliates are included in the Chlor Alkali Products
segment results consistent with management’s monitoring of the operating
segment. The earnings from non-consolidated affiliates were
$37.7 million, $39.4 million, and $46.0 million for the years ended 2009,
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 (expense) for the year ended December
31, 2008 included curtailment charges of $4.1 million associated with the
transition of a portion of our East Alton, IL Winchester hourly workforce
and our McIntosh, AL Chlor Alkali hourly workforce from a defined benefit
pension plan to a defined contribution pension
plan.
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(3)
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Environmental
income (expense) in 2009 included $82.1 million of recoveries from third
parties for costs incurred and expensed in prior
periods. Environmental income (expense) is included in cost of
goods sold in the consolidated statements of
operations.
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(4)
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Other
operating income for 2009 included a $3.7 million gain on the sale of
land, a $1.2 million gain on the disposition of a former manufacturing
facility and $1.6 million of gains on the disposal of assets primarily
associated with the St. Gabriel, LA conversion and expansion
project.
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(5)
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Interest
expense was reduced by capitalized interest of $9.7 million, $5.0 million
and $0.2 million for the years ended 2009, 2008 and 2007,
respectively.
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(6)
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Other
income (expense) in 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
has been recognized for the impairment
loss.
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Chlor
Alkali Products
2009
Compared to 2008
Chlor
Alkali Products’ sales for 2009 were $963.8 million compared to $1,275.4 million
for 2008, a decrease of $311.6 million, or 24%. The sales decrease
was primarily due to lower chlorine and caustic soda volumes of 22%, and lower
ECU pricing, which decreased 18% from 2008. Volumes for bleach, which
accounted for approximately 12% of Chlor Alkali Products’ sales, increased 17%
compared to 2008. Our ECU netbacks, excluding SunBelt, were
approximately $520 compared to approximately $635 for 2008. Freight
costs included in the ECU netback increased 9% for 2009 compared to
2008. Our operating rate for 2009 was 70%, compared to our operating
rate of 82% for 2008. The lower operating rate for 2009 was the
result of lower caustic soda and chlorine demand.
Chlor
Alkali posted segment income of $125.4 million for 2009 compared to $328.3
million for 2008, a decrease of $202.9 million, or 62%. Chlor Alkali
segment income was lower primarily due to lower ECU netbacks ($126.9 million),
decreased volumes ($69.1 million), higher operating costs ($5.2 million), and
lower earnings of non-consolidated affiliates ($1.7 million). The
lower earnings of non-consolidated affiliates primarily resulted from lower ECU
prices at SunBelt, partially offset by increased earnings at our bleach joint
venture. The operating results from SunBelt included interest expense
of $4.0 million and $4.4 million in 2009 and 2008, respectively, on the SunBelt
Notes.
2008
Compared to 2007
Chlor
Alkali Products’ sales for 2008 were $1,275.4 million compared to $845.1 million
for 2007, an increase of $430.3 million, or 51%. Pioneer sales for
2008 were $552.7 million compared to $183.6 million for the last four months of
2007, an increase of $369.1 million. Chlor Alkali Products’ sales,
excluding Pioneer, increased $61.2 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, increased 19% to approximately $635 for 2008
compared to approximately $535 in 2007, which included Pioneer for the last four
months. Freight costs included in the ECU netback increased 28% in
2008 compared to 2007. The combined Olin and Pioneer operating rate
for 2008 was 82%, compared to the operating rate of 92% in 2007. The
lower operating rate for 2008 was the result of lower chlorine demand and was
also negatively affected by two hurricanes, which caused production and customer
outages and disruptions to the transportation system.
Chlor
Alkali posted segment income of $328.3 million for 2008 compared to $237.3
million for 2007. Chlor Alkali segment income included Pioneer income
of $101.9 million and $29.2 million for 2008 and 2007,
respectively. Chlor Alkali segment income, excluding Pioneer, was
higher in 2008 by $18.3 million, or 9%, primarily because of increased selling
prices ($108.4 million), partially offset by decreased volumes ($46.7 million),
higher operating costs ($35.2 million), and lower SunBelt results ($7.5
million). Chlor Alkali segment income for 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. The lower SunBelt earnings
primarily resulted from lower volumes due to the impact of hurricane-related
outages and other force majeure events at one of its chlorine customers
partially offset by higher ECU selling prices in 2008. The operating
results from SunBelt included interest expense of $4.4 million and $4.8 million
in 2008 and 2007, respectively, on the SunBelt Notes.
Winchester
2009
Compared to 2008
Winchester
sales were $567.7 million for 2009 compared to $489.1 million for 2008, an
increase of $78.6 million, or 16%. Sales of ammunition to domestic
and international commercial customers increased $66.1
million. Winchester continues to experience the above normal levels
of demand that began around the November 2008 presidential
election. The increase in demand has been across the majority of
Winchester’s product offerings, including rifle, pistol and rimfire
ammunition. Shipments to military customers also increased $20.3
million. These increases were partially offset by lower shipments to
industrial customers, who primarily supply the construction sector, of $7.8
million and decreased shipments to law enforcement agencies of $3.3
million. On a volume basis, Winchester’s overall unit shipments
increased 14%, which was driven by the higher level of commercial
sales.
Winchester
reported segment income of $68.6 million for 2009 compared to $32.6 million for
2008, an increase of $36.0 million, or 110%. The increase was
primarily due to the impact of increased volumes and higher selling prices
($24.7 million) and decreased commodity and other material costs partially
offset by higher operating costs ($10.7 million).
2008
Compared to 2007
Sales
were $489.1 million in 2008 compared to $431.7 million for 2007, an increase of
$57.4 million, or 13%. Sales of ammunition to domestic and
international commercial customers increased $31.1 million. Shipments
to law enforcement agencies increased $19.4 million for 2008 compared to
2007. Shipments to military customers increased $2.8
million.
Winchester
reported segment income of $32.6 million for 2008 compared to $26.4 million for
2007, an increase of $6.2 million, or 23%. The increase was due to
the impact of higher selling prices and increased volumes to law enforcement
agencies ($56.1 million), which were partially offset by increased commodity and
other material costs and higher operating costs ($46.0 million) and lower
volumes primarily with commercial customers ($6.7 million). For 2008,
the actual copper cost for Winchester increased by 11% compared to 2007, while
the average price of lead increased 75% compared to 2007. The
Winchester business consumes approximately four times as much lead as it does
copper, and the year-over-year increase in the actual lead cost equates to
approximately $25 million of annual expense.
Corporate/Other
2009
Compared to 2008
For 2009,
pension income included in corporate/other was $22.3 million compared to $14.8
million for 2008. Pension income for 2008 included a curtailment
charge of $4.1 million associated with the transition of a portion of our East
Alton, IL Winchester hourly workforce and 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
2009 was $16.7 million compared to $7.6 million for 2008.
Credits
to income for environmental investigatory and remedial activities were $58.0
million for 2009, which includes $82.1 million of recoveries from third parties
of costs incurred and expensed in prior periods. Without these
recoveries in 2009, charges to income for environmental investigatory and
remedial activities would have been $24.1 million for 2009 compared with $27.7
million for 2008. These charges relate primarily to expected future
investigatory and remedial activities associated with past manufacturing
operations and former waste disposal sites.
For 2009,
other corporate and unallocated costs were $63.1 million compared with $58.6
million in 2008, an increase of $4.5 million, or 8%. The increase was
primarily due to higher asset retirement obligation charges of $4.4 million,
primarily related to increases in estimated costs for certain assets, increased
legal and legal-related settlement expenses of $3.3 million, which included
costs for recovery actions for environmental costs previously incurred and
expensed, increased consulting and professional fees of $1.5 million and higher
salary and benefit costs of $1.3 million, partially offset by lower non-income
taxes of $5.1 million, primarily due to a favorable resolution of a Canadian
capital tax matter, and decreased management incentive compensation costs of
$1.1 million, which includes mark-to-market adjustments on stock-based
compensation.
2008
Compared to 2007
For 2008,
pension income included in corporate/other was $14.8 million compared to pension
expense of $3.9 million for 2007. The $18.7 million decrease in
corporate pension expense was due to the combination of a 25-basis point
increase in the liability discount rate in 2007, 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 certain non-bargained hourly employees, which became
effective January 1, 2008, and the increase in the amortization period of
actuarial losses. These decreases were partially offset by
curtailment charges of $4.1 million associated with the transition of a portion
of our East Alton, IL Winchester hourly workforce and 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 2008 was $7.6 million
compared to defined benefit pension expense of $33.5 million for
2007. The decrease in total company pension expense reflected
curtailment charges of $7.4 million for 2007 relating to the Metals business and
$7.9 million for the Metals allocated portion of service cost and the
amortization of prior service cost components of pension expense, which were
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 2008
was $11.3 million compared to $2.7 million for 2007.
Charges
to income for environmental investigatory and remedial activities were $27.7
million for 2008, compared with $37.9 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 $10.2 million was primarily due to a $7.9
million charge in 2007 related to costs at a former waste disposal site based on
revised remediation estimates resulting from negotiations with a government
agency.
For 2008,
other corporate and unallocated costs were $58.6 million compared with $63.8
million in 2007, a decrease of $5.2 million, or 8%. The decrease was
primarily due to lower asset retirement obligation charges of $3.6 million,
primarily related to a reduction in the liability for a former chemical
manufacturing location, lower legal and legal-related settlement expenses of
$2.9 million, and lower consulting charges of $0.8 million, partially offset by
increased management incentive compensation costs of $1.9 million, primarily
resulting from mark-to-market adjustments on stock-based
compensation.
2010
OUTLOOK
Net
income in the first quarter of 2010 is projected to be in the $0.10 per diluted
share range compared with $0.60 per diluted share in the first quarter of
2009.
In Chlor
Alkali Products, the first quarter of 2010 segment earnings are expected to
improve slightly compared to the fourth quarter of 2009 as we are anticipating
some improvement in demand as compared to the fourth quarter of
2009. We also expect the first quarter 2010 chlorine and caustic soda
shipments to improve from the first quarter of 2009. Chlor Alkali
Products’ operating rates in the first quarter of 2010 are forecast to
be in the low to mid 70% range, which is an improvement from both the
fourth quarter of 2009 level of 70% and the first quarter of 2009 level of
65%. Fourth quarter 2009 ECU netbacks were approximately $425, which
was an improvement from the approximately $375 experienced in the third quarter
of 2009. First quarter 2010 ECU netbacks are anticipated to be
comparable to the fourth quarter of 2009. The first quarter of 2009
ECU netback was a record, in our system, of approximately $765. We
believe that ECU netbacks, in our system, bottomed out in the third quarter of
2009. In December 2009, a $75 per ton caustic soda price increase was
announced. We expect to begin realizing this price increase in
caustic soda in the second quarter of 2010.
Winchester
first quarter 2010 segment earnings are expected to be similar to the first
quarter of 2009 segment earnings of $17.0 million as higher than normal levels
of demand are expected to continue in the first quarter of
2010. During the first quarter of 2010, Winchester announced price
increases to be effective at the end of the first quarter of
2010. Similar increases were announced by Winchester’s major
competitors. These increases are in reaction to the escalation in the
prices of both copper and lead.
Winchester
continues to experience the above normal levels of demand that began around the
November 2008 presidential election. The increase in demand has been
across the majority of Winchester’s product offerings, including rifle, pistol
and rimfire ammunition. Additionally, we believe there is an
industry-wide lack of ammunition inventory in the customer supply chain
system. Winchester anticipates that higher than normal levels of
demand will continue past the first quarter of 2010.
Without
the 2009 recoveries of $82.1 million of environmental costs incurred and
expensed in prior periods, we anticipate that 2010 charges for environmental
investigatory and remedial activities will be 10% to 20% greater than the 2009
level of $24.1 million. As we look beyond 2009, we do not believe
that there will be meaningful additional recoveries of environmental costs
incurred and expensed in prior periods.
In 2010,
we expect defined benefit pension income will be similar to the 2009
level. Based on the December 31, 2009 funding status, we will not be
required to make any cash contributions to our domestic defined benefit pension
plan in 2010, and we also believe it is unlikely we will be required to make any
contributions in 2011. We do have a small Canadian defined benefit
pension plan to which we made $4.5 million of contributions in 2009 and we
anticipate approximately $4 million of contributions in
2010.
We
believe the 2010 effective tax rate will be in the 37% to 38% range, before
discrete items. During periods of low earnings, our effective tax
rate can be significantly impacted by permanent tax deduction items, return to
provision adjustments, changes in tax contingencies and valuation allowances,
and tax credits.
In 2010,
we expect our capital spending to be in the $70 million to $80 million range,
which includes bleach manufacturing and shipping by railroad expansion projects
at three of our chlor alkali facilities. This anticipated 2010
capital spending compares with the 2009 capital spending of $137.9
million. We are also actively developing a low salt, high strength
bleach facility that will double the concentration of the bleach we manufacture,
which should significantly reduce transportation costs. During 2010,
we expect to initiate a $15 million to $20 million capital project to construct
a low salt, high strength bleach facility to be co-located at one of our
existing chlor alkali facilities. Additional investments in low salt,
high strength bleach could follow in future years. As a result of the
capitalization of the St. Gabriel, LA conversion and expansion project in late
2009, we expect 2010 depreciation expense to be approximately $90
million.
ENVIRONMENTAL
MATTERS
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Years
ended December 31, |
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2009
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2008
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2007
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Cash
(receipts) outlays:
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($
in millions)
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Remedial
and investigatory spending (charged to reserve)
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Recoveries
from third parties
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Plant
operations (charged to cost of goods sold)
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Total
cash (receipts) outlays
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December
31, |
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2009 |
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2008 |
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2007 |
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Reserve
for environmental liabilities:
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($ in millions) |
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Remedial
and investigatory spending
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Pioneer
acquired liabilities
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Currency
translation adjustments
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Total
environmental-related cash outlays in 2009 decreased compared to 2008 and 2007
due to the recoveries from third parties of costs incurred and expensed in prior
periods. Remedial and investigatory spending was lower in 2009 than
2008 due to reduced spending at two former Pioneer sites and principally
completing an expansive investigation at a former manufacturing site in 2009
partially offset by spending in 2009 to complete remedial action at a
site. Remedial and investigatory spending was lower in 2008 than 2007
due to an expansive investigation at a former manufacturing site and the
implementation of remedial actions at five other sites in 2007. Total
environmental-related cash outlays for 2010 are estimated to be approximately
$63 million, of which $35 million is expected to be spent on investigatory and
remedial efforts, $3 million on capital projects and $25 million on normal plant
operations. Historically, we have funded our environmental capital
expenditures through cash flow from operations and expect to do so in the
future.
Cash
outlays for remedial and investigatory activities associated with former waste
sites and past operations were not charged to income but instead were charged to
reserves established for such costs identified and expensed to income in prior
years. Cash outlays for normal plant operations for the disposal of
waste and the operation and maintenance of pollution control equipment and
facilities to ensure compliance with mandated and voluntarily imposed
environmental quality standards were charged to income.
In the
United States, the establishment and implementation of federal, state, and local
standards to regulate air, water and land quality affect substantially all of
our manufacturing locations. Federal legislation providing for
regulation of the manufacture, transportation, use, and disposal of hazardous
and toxic substances, and remediation of contaminated sites, has imposed
additional regulatory requirements on industry, particularly the chemicals
industry. In addition, implementation of environmental laws, such as
the Resource Conservation and Recovery Act and the Clean Air Act, has required
and will continue to require new capital expenditures and will increase plant
operating costs. Our Canadian facility is governed by federal
environmental laws administered by Environment Canada and by provincial
environmental laws enforced by administrative agencies. Many of these
laws are comparable to the U.S. laws described above. We employ
waste minimization and pollution prevention programs at our manufacturing
sites.
We are
party to various governmental and private environmental actions associated with
past manufacturing facilities and former waste disposal
sites. 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 interests against
those unasserted claims. Our accrued liabilities for unasserted
claims amounted to $3.4 million at December 31, 2009. With
respect to asserted claims, we accrue liabilities based on remedial
investigation, feasibility study, remedial action and operation, maintenance and
monitoring (OM&M) expenses that, in our experience, we may incur in
connection with the asserted claims. Required site OM&M expenses
are estimated and accrued in their entirety for required periods not exceeding
30 years, which reasonably approximates the typical duration of long-term site
OM&M. Charges or credits to income for investigatory and remedial
efforts were material to operating results in 2009, 2008 and 2007 and may be
material to operating results in future years.
Environmental
provisions (credited) charged to income, which are included in cost of goods
sold, were as follows:
|
|
Years
ended December 31, |
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2009
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2008
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2007
|
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($
in millions)
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Recoveries
from third parties of costs incurred and expensed in prior
periods
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Total
environmental (income) expense
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These
charges relate primarily to remedial and investigatory activities associated
with past manufacturing operations and former waste disposal sites.
Our total
estimated environmental liability at the end of 2009, was attributable to 68
sites, 16 of which were USEPA National Priority List (NPL) sites. Ten
sites accounted for 79% of our environmental liability and, of the remaining 58
sites, no one site accounted for more than 2% of our environmental
liability. At one of these ten sites a remedial action plan is being
implemented. At five of the ten sites, part of the site is subject to
a remedial investigation and another part is in the long-term OM&M
stage. At one of these ten sites, part of the site is subject to a
remedial investigation, part to a remedial action plan, and another part is in
the long-term OM&M stage. At two sites, part of the site is
subject to a remedial action plan and part of the site to long-term
OM&M. The one remaining site is in long-term
OM&M. All ten sites are either associated with past manufacturing
operations or former waste disposal sites. None of the ten largest
sites represents more than 20% of the liabilities reserved on our consolidated
balance sheet at December 31, 2009 for future environmental
expenditures.
Our
consolidated balance sheets included liabilities for future environmental
expenditures to investigate and remediate known sites amounting to $166.1
million at December 31, 2009, and $158.9 million at December 31, 2008,
of which $131.1 million and $123.9 million, respectively, were classified as
other noncurrent liabilities. Our environmental liability amounts
did 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. Of the $166.1 million included on our consolidated
balance sheet at December 31, 2009 for future environmental expenditures,
we currently expect to utilize $98.7 million of the reserve for future
environmental expenditures over the next 5 years, $20.2 million for expenditures
6 to 10 years in the future, and $47.2 million for expenditures beyond 10 years
in the future. These estimates are subject to a number of risks and
uncertainties, as described in Item 1A “Risk Factors—Environmental
Costs.”
Annual
environmental-related cash outlays for site investigation and remediation,
capital projects, and normal plant operations are expected to range between $50
million to $70 million over the next several years, $20 million to $40 million
of which is for investigatory and remedial efforts, which are expected to be
charged against reserves recorded on our balance sheet. While we do
not anticipate a material increase in the projected annual level of our
environmental-related cash outlays, there is always the possibility that such an
increase may occur in the future in view of the uncertainties associated with
environmental exposures. Environmental exposures are difficult to
assess for numerous reasons, including the identification of new sites,
developments at sites resulting from investigatory studies, advances in
technology, changes in environmental laws and regulations and their application,
changes in regulatory authorities, the scarcity of reliable data pertaining to
identified sites, the difficulty in assessing the involvement and financial
capability of other PRPs, and our ability to obtain contributions from other
parties and the lengthy time periods over which site remediation
occurs. It is possible that some of these matters (the outcomes of
which are subject to various uncertainties) may be resolved unfavorably to us,
which could materially adversely affect our financial position or results of
operations. At December 31, 2009, we estimate we may have
additional contingent environmental liabilities of $50 million in addition to
the amounts for which we have already recorded as a reserve.
LEGAL
MATTERS AND CONTINGENCIES
We, and
our subsidiaries, are defendants in various legal actions (including proceedings
based on alleged exposures to asbestos) incidental to our past and current
business activities. We describe some of these matters in “Item
3—Legal Proceedings.” While we believe that none of these legal
actions will materially adversely affect our financial position, in light of the
inherent uncertainties of litigation, we cannot at this time determine whether
the financial impact, if any, of these matters will be material to our results
of operations.
During
the ordinary course of our business, contingencies arise resulting from an
existing condition, situation, or set of circumstances involving an uncertainty
as to the realization of a possible gain contingency. In certain
instances such as environmental projects, we are responsible for managing the
cleanup and remediation of an environmental site. There exists the
possibility of recovering a portion of these costs from other
parties. We account for gain contingencies in accordance with the
provisions of ASC 450 “Contingencies” (ASC 450), formerly SFAS No. 5,
“Accounting for Contingencies,” (SFAS No. 5), and therefore do not record gain
contingencies and recognize income until it is earned and
realizable.
LIQUIDITY,
INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA
Cash
Flow Data
|
|
Years
ended December 31, |
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2009
|
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2008
|
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2007
|
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Provided by (used for)
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($
in millions)
|
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Qualified
pension plan contributions
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Cash
provided by continuing operations
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Cash
provided by discontinued operations
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Business
acquired through purchase acquisition
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Cash
acquired through business acquisition
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Proceeds
from sale of a business
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Long-term
debt borrowings (repayments), net
|
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Operating
Activities
For 2009,
cash provided by operating activities increased by $84.6 million from 2008
primarily due to a smaller increase in working capital than the prior
year. In 2009, working capital increased $22.6 million compared with
an increase of $97.8 million in 2008. Receivables decreased from
December 31, 2008 by $29.7 million, primarily due to lower sales. Our
days sales outstanding was consistent with prior year. Accounts
payable and accrued liabilities decreased from December 31, 2008 by $43.5
million, primarily as a result of the timing of payments and a $20.6 million
payment for the final settlement of working capital on the sale of the Metals
business, which was consistent with the estimated working capital adjustment we
anticipated from the transaction. The 2009 cash from operations was
also affected by a $57.9 million decrease in cash tax payments. In
2009, we made contributions to our foreign defined benefit pension plan of $4.5
million.
For 2008,
cash provided by operating activities from continuing operations increased by
$16.8 million from 2007 primarily due to the $100 million voluntary contribution
to our domestic defined benefit pension plan made in 2007 and higher earnings in
2008, mostly offset by increased working capital. In 2008, working
capital increased $97.8 million compared with a decrease of $47.3 million in
2007. Receivables increased from December 31, 2007 by $9.5 million,
as a result of increased selling prices in both our Chlor Alkali and Winchester
businesses and improved volumes at Winchester partially offset by lower December
2008 chlorine and caustic soda volumes compared with 2007. Our days
sales outstanding decreased by approximately two days from
2007. Inventories increased from December 31, 2007 by $25.0 million
primarily due to increased ammunition inventories and higher raw material costs
in Winchester. Accounts payable and accrued liabilities decreased
from December 31, 2007 by $66.1 million, primarily as a result of payments of
retained Metals liabilities. The 2008 cash from operations was also
affected by a $24.6 million increase in cash tax payments.
Capital
Expenditures
Capital
spending was $137.9 million, $180.3 million, and $76.1 million in 2009, 2008 and
2007, respectively. Capital spending in 2009 included $69.6 million
for the St. Gabriel, LA facility conversion and expansion project and also
increased investments in our bleach operations. The increase in 2008
was primarily due to spending of $87.2 million for the St. Gabriel, LA facility
conversion and expansion project and increased spending for a major maintenance
capital project at our McIntosh, AL facility. Capital spending in
2007 included $9.1 million for the St. Gabriel, LA facility conversion and
expansion project and also spending required to increase bleach capacity in our
Chlor Alkali Products operations. Capital spending was 196%, 265%,
and 161% of depreciation in 2009, 2008 and 2007, respectively.
In 2010,
we expect our capital spending to be in the $70 million to $80 million range,
which includes bleach manufacturing and shipping by railroad expansion projects
at three of our Chlor Alkali facilities. We are also actively
developing a low salt, high strength bleach facility that will double the
concentration of the bleach we manufacture, which should significantly reduce
transportation costs. During 2010, we expect to initiate a $15
million to $20 million capital project to construct a low salt, high strength
bleach facility to be co-located at one of our existing chlor alkali
facilities.
During
the first quarter of 2007, we entered into a sale/leaseback transaction for
chlorine railcars that were acquired in 2005 and 2006. This
transaction reduced our fixed assets by approximately $16.0
million.
Investing
Activities
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.
On
November 19, 2007, we completed the sale of the Metals business to
Global. We received net proceeds from the sale of $380.8
million.
During
2007, we sold $50.0 million of short-term investments in corporate debt
securities, which were purchased during 2006.
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.
The 2009,
2008 and 2007 distributions from affiliated companies, net, represented
primarily our share of the SunBelt joint venture’s operating results, net of
cash payments to the affiliates. Also, included in 2007 was our
purchase for cash of $11.6 million for an equity interest in a limited liability
company that owns a bleach and related chemical manufacturing facility (bleach
joint venture).
Financing
Activities
In August
2009, we sold $150.0 million of 2019 Notes with a maturity date of August 15,
2019. The 2019 Notes were issued at 99.19% of par value, providing a
yield to maturity to investors of 9.0%. Interest will be paid
semi-annually beginning on February 15, 2010. Proceeds of $145.5
million, after expenses of $3.3 million, from the 2019 Notes will be used to
further strengthen our long-term liquidity given uncertain economic
times.
In
February 2009, we reissued $1.5 million of variable rate Mississippi industrial
revenue bonds, which were redeemed by us at par value in October
2008. These were originally issued in 2005 in conjunction with our
relocation of a portion of our Winchester operations to Oxford, MS.
In March
2008, we repaid industrial development and environmental improvement tax exempt
bonds, which matured totaling $7.7 million that were issued through the parish
of Calcasieu, LA and the town of McIntosh, AL. In January 2008, we
repaid the remaining $2.1 million of the 2.75% Convertible Senior Subordinated
Notes due 2027 (Convertible Notes) acquired from Pioneer.
During
2007, $117.9 million of the Convertible Notes issued by Pioneer and the related
$25.8 million premium were repaid using drawings from our Accounts Receivable
Facility and cash.
During
2009, 2008 and 2007, we issued 1,260,693; 947,643; and 836,131 shares of common
stock, respectively, with a total value of $16.9 million, $18.1 million and
$15.5 million, respectively, to the Olin CEOP. These shares were
issued to satisfy the investment in our common stock resulting from employee
contributions, our matching contributions, retirement contributions and
re-invested dividends.
The
percent of total debt to total capitalization increased to 32.6% at
December 31, 2009, from 26.4% at year-end 2008 and 28.1% at year-end
2007. The 2009 increase from 2008 was due primarily to the higher
level of long-term debt at December 31, 2009 resulting from the issuance of the
2019 Notes in August 2009, partially offset by higher shareholders’ equity
resulting from the net income for the year ended December 31,
2009. The 2008 decrease from 2007 was due primarily to a lower level
of outstanding debt resulting from repayments and the higher shareholders’
equity resulting from net income offset by the non-cash charge for our pension
and other postretirement plans.
Dividends
per common share were $0.80 in 2009, 2008 and 2007. Total dividends
paid on common stock amounted to $62.5 million, $60.6 million and $59.2 million
in 2009, 2008 and 2007, respectively.
The
payment of cash dividends is subject to the discretion of our board of directors
and will be determined in light of then-current conditions, including our
earnings, our operations, our financial condition, our capital requirements and
other factors deemed relevant by our board of directors. In the
future, our board of directors may change our dividend policy, including the
frequency or amount of any dividend, in light of then-existing
conditions.
LIQUIDITY
AND OTHER FINANCING ARRANGEMENTS
Our
principal sources of liquidity are from cash and cash equivalents, cash flow
from operations and short-term borrowings under our senior revolving credit
facility and borrowings under our Accounts Receivable
Facility. Additionally, we believe that we have access to the debt
and equity markets.
Cash flow
from operations is variable as a result of both the seasonal and the cyclical
nature of our operating results, which have been affected by seasonal and
economic cycles in many of the industries we serve, such as the vinyls,
urethanes, bleach, ammunition and pulp and paper. The seasonality of
the ammunition business, which is typically driven by the fall hunting season,
and the seasonality of the vinyls and bleach businesses, which are stronger in
periods of warmer weather, typically cause working capital to fluctuate between
$50 million to $100 million over the course of the year. Cash flow
from operations is affected by changes in ECU selling prices caused by the
changes in the supply/demand balance of chlorine and caustic, resulting in the
chlor alkali business having significant leverage on our
earnings. For example, assuming all other costs remain constant and
internal consumption remains approximately the same, a $10 per ECU selling price
change equates to an approximate $17 million annual change in our revenues and
pretax profit when we are operating at full capacity.
For 2009,
cash provided by operating activities increased by $84.6 million from 2008
primarily due to a smaller increase in working capital than the prior
year. In 2009, working capital increased $22.6 million compared with
an increase of $97.8 million in 2008. Receivables decreased from
December 31, 2008 by $29.7 million, primarily due to lower sales. Our
days sales outstanding was consistent with prior year. Accounts
payable and accrued liabilities decreased from December 31, 2008 by $43.5
million, primarily as a result of the timing of payments and a $20.6 million
payment for the final settlement of working capital on the sale of the Metals
business, which was consistent with the estimated working capital adjustment we
anticipated from the transaction. The 2009 cash from operations was
also affected by a $57.9 million decrease in cash tax payments. In
2009, we made contributions to our foreign defined benefit pension plan of $4.5
million.
Capital
spending was $137.9 million, $180.3 million, and $76.1 million in 2009, 2008 and
2007, respectively. Capital spending in 2009 included $69.6 million
for the St. Gabriel, LA facility conversion and expansion project and also
increased investments in our bleach operations. The increase in 2008
was primarily due to spending of $87.2 million for the St. Gabriel, LA facility
conversion and expansion project and increased spending for a major maintenance
capital project at our McIntosh, AL facility. Capital spending in
2007 included $9.1 million for the St. Gabriel, LA facility conversion and
expansion project and also spending required to increase bleach capacity in our
Chlor Alkali Products operations. Capital spending was 196%, 265%,
and 161% of depreciation in 2009, 2008 and 2007, respectively.
The cash
increase of $212.0 million for 2009, reflects the cash proceeds from the $150.0
million of 2019 Notes issued in August 2009, and the receipt of the majority of
the proceeds from the recoveries of environmental costs incurred and expensed in
prior periods, offset by both the normal seasonal growth in working capital,
one-time items mentioned above, and capital spending associated with the
conversion and expansion project at our St. Gabriel, LA
facility. Based on these factors, we believe the December 31, 2009
cash balance of $458.5 million, and the availability of approximately $294.6
million of liquidity from our senior revolving credit facility and our Accounts
Receivable Facility is sufficient liquidity to meet our short-term and long-term
needs. Additionally, we believe that we have access to the debt and
equity markets.
Since
2006, we held corporate debt securities with a par value of $26.6
million. On October 1, 2008, the issuer of these debt securities
announced it would cease trading and appoint a receiver as a result of financial
market turmoil. The decline in the market value of the assets
supporting these debt securities negatively impacted the liquidity of the
issuer. We determined that these debt securities had no fair market
value due to the actions taken by the issuer, turmoil in the financial markets,
the lack of liquidity of the issuer, and the lack of trading in these debt
securities. Because of the unlikelihood that these debt securities
would recover in value, we recorded an after-tax impairment loss of $26.6
million in other income (expense) in the third quarter of 2008. We
are currently unable to utilize the capital loss resulting from the impairment
of these corporate debt securities; therefore, no tax benefit has been
recognized for the impairment loss.
In August
2009, we sold $150.0 million of 2019 Notes with a maturity date of August 15,
2019. The 2019 Notes were issued at 99.19% of par value, providing a
yield to maturity to investors of 9.0%. Interest will be paid
semi-annually beginning on February 15, 2010. Proceeds of $145.5
million, after expenses of $3.3 million, from the 2019 Notes will be used to
further strengthen our long-term liquidity given uncertain economic
times.
On
October 29, 2007, we entered into a new $220 million five-year senior revolving
credit facility, which replaced the $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 an additional
lending institution. The new senior revolving 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 through adding a
maximum of two additional lending institutions each year. At December
31, 2009, we had $219.6 million available under this senior revolving credit
facility, because we had issued $20.4 million of letters of credit under a $110
million subfacility. Under the senior revolving credit facility, we
may select various floating rate borrowing options. The actual interest
rate paid on borrowings under the senior revolving credit facility is based on a
pricing grid which is dependent upon the leverage ratio as calculated under the
terms of the facility at the end of the prior fiscal quarter. The facility includes
various customary restrictive covenants, including restrictions related to the
ratio of debt to earnings before interest expense, taxes, depreciation and
amortization (leverage ratio) and the ratio of earnings before interest expense,
taxes, depreciation and amortization to interest expense (coverage
ratio). Compliance with these covenants is determined quarterly based
on the operating cash flows for the last four quarters. We were in
compliance with all covenants and restrictions under all our outstanding credit
agreements as of December 31, 2009 and 2008, and no event of default had
occurred that would permit the lenders under our outstanding credit agreements
to accelerate the debt if not cured. In the future, our ability to
generate sufficient operating cash flows, among other factors, will determine
the amounts available to be borrowed under these facilities. As of
December 31, 2009, there were no covenants or other restrictions that limited
our ability to borrow.
At
December 31, 2009, we had letters of credit of $46.7 million outstanding, of
which $20.4 million were issued under our $240 million senior revolving credit
facility. In addition to our senior revolving credit facility, we
have a $35 million letter of credit facility. These letters of credit
were used to support certain long-term debt, capital expenditure commitments,
certain workers compensation insurance policies, and plant closure and
post-closure obligations.
We have a
$75 million, 364-day Accounts Receivable Facility, renewable annually for five
years, which expires in July 2012. The Accounts Receivable Facility
provides for the sale of our eligible trade receivables to a third party conduit
through a wholly-owned, bankruptcy-remote, special purpose entity that is
consolidated for financial statement purposes. As of December 31,
2009, we had nothing drawn under the Accounts Receivable Facility. At
December 31, 2009, we had $75 million available under the Accounts Receivable
Facility based on eligible trade receivables. The Accounts Receivable
Facility contains specific covenants relating to the ability of the lender to
obtain or maintain a first priority lien on the receivables. In
addition, the Accounts Receivable Facility incorporates the leverage and
coverage covenants that are contained in the senior revolving credit
facility.
Our
current debt structure is used to fund our business operations. As of
December 31, 2009, we had long-term borrowings of $398.4 million of which
$4.7 million was at variable rates. Annual maturities of long-term
debt are none in 2010, $80.5 million in 2011, none in 2012, $11.4 million in
2013, $1.8 million in 2014 and a total of $304.7 million
thereafter. Commitments from banks under our senior revolving credit
facility and Accounts Receivable Facility are additional sources of
liquidity.
We have
entered into interest rate swaps on $26.6 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 $1.4 million and are included in other assets on the
accompanying consolidated balance sheet, with a corresponding increase in the
carrying amount of the related debt. No gain or loss has been
recorded as the swaps met the criteria to qualify for hedge accounting treatment
with no ineffectiveness.
In 2001
and 2002, we entered into interest rate swaps on $75 million of our underlying
fixed-rate debt obligations, whereby we agreed to pay variable rates to a
counterparty who, in turn, pays us fixed rates. The counterparty to
these agreements is Citibank, N.A., a major financial institution. In
January 2009, we entered into a $75 million fixed interest rate swap with equal
and opposite terms as the $75 million variable interest rate swaps on the 9.125%
senior notes due in 2011 (2011 Notes). We have agreed to pay a fixed
rate to a counterparty who, in turn, pays us variable rates. The
counterparty to this agreement is Bank of America, a major financial
institution. The result was a gain of $7.9 million on the $75 million
variable interest rate swaps, which will be recognized through
2011. As of December 31, 2009, $5.5 million of this gain was included
in long-term borrowings. In January 2009, we de-designated our $75
million interest rate swaps that had previously been designated as fair value
hedges. The $75 million variable interest rate swaps and the $75
million fixed interest rate swap do not meet the criteria for hedge
accounting. All changes in the fair value of these interest rate
swaps are recorded currently in earnings.
We have
registered an undetermined amount of securities with the SEC, so that, from
time-to-time, we may issue debt securities, preferred stock and/or common stock
and associated warrants in the public market under that registration
statement.
OFF-BALANCE
SHEET ARRANGEMENTS
We use
operating leases for certain properties, such as railroad cars; distribution,
warehousing and office space; and data processing and office
equipment. Virtually none of our lease agreements contain escalation
clauses or step rent provisions. Assets under capital leases are not
significant. During the first quarter of 2007, we entered into a
$16.0 million sale/leaseback transaction for chlorine railcars that were
acquired in 2005 and 2006.
In
conjunction with the St. Gabriel conversion and expansion project, we entered
into a twenty-year brine and pipeline supply agreement with PetroLogistics
Olefins, LLC (PetroLogistics). PetroLogistics installed, owns and
operates, at its own expense, a pipeline supplying brine to the St. Gabriel, LA
facility. Beginning November 2009, we are obligated to make a fixed
annual payment over the life of the contract of $2.0 million for use of the
pipeline, regardless of the amount of brine purchased. We also have a
minimum usage requirement for brine of $8.4 million over the first five-year
period of the contract. After the first five-year period, the
contract contains a buy out provision exercisable by us for $12.0
million.
On
December 31, 1997, we entered into a long-term, sulfur dioxide supply
agreement with Alliance Specialty Chemicals, Inc. (Alliance), formerly known as
RFC SO2, 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 $0.2
million regardless of the amount of sulfur dioxide
purchased. Commitments related to this agreement are $2.4 million per
year for 2010 and 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 thousand tons of chlorine 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. After the payment of $6.1 million on the
Series O Notes in December 2009, our guarantee of these notes was $48.8
million. In the event SunBelt cannot make any of these payments, we
would be required to fund the payment on the Series O Notes. In
certain other circumstances, we may also be required to repay the SunBelt Notes
prior to their maturity. We and PolyOne have agreed that, if we or
PolyOne intend to transfer our respective interests in SunBelt and the
transferring party is unable to obtain consent from holders of 80% of the
aggregate principal amount of the indebtedness related to the guarantee being
transferred after good faith negotiations, then we and PolyOne will be required
to repay our respective portions of the SunBelt Notes. In such event,
any make whole or similar penalties or costs will be paid by the transferring
party.
Excluding
our guarantee of the SunBelt Notes described above, our long-term contractual
commitments, including the on and off-balance sheet arrangements, consisted of
the following:
|
|
Payments
Due by Period
|
|
Contractual
Obligations
|
|
Total
|
|
|
Less
than
1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More than
5 Years
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
payments under debt obligations and interest rate swap agreements(a)
|
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|
|
|
|
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|
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|
|
|
|
|
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|
|
|
|
|
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Contingent
tax liability (FIN 48)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
pension plan contributions(b)
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified
pension plan payments
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Postretirement
benefit payments
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Off-Balance
Sheet Commitments:
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|
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Noncancelable
operating leases
|
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|
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$
|
|
|
(a)
|
For
the purposes of this table, we have assumed for all periods presented that
there are no changes in the principal amount of any variable rate debt
from the amounts outstanding on December 31, 2009 and that there are
no changes in the rates from those in effect at December 31, 2009
which ranged from 0.3% to 9.125%.
|
(b)
|
These
amounts are only estimated payments assuming an annual expected rate of
return on pension plan assets of 8.5%, and a discount rate on pension plan
obligations of 5.75%. These estimated payments are subject to
significant variation and the actual payments may be more than the amounts
estimated. Given the inherent uncertainty as to actual minimum
funding requirements for qualified defined benefit pension plans, no
amounts are included in this table for any period beyond one
year. As a result of the asset allocation adjustment, the
favorable asset performance in 2006, 2007 and 2009, the $100.0
million and $80.0 million voluntary contributions made in 2007 and 2006,
respectively, and the benefits from the plan freeze, offset by the
unfavorable performance on plan assets in 2008, based on the current
funding requirements, we will not be required to make any cash
contributions to the domestic defined benefit pension plan at least
through 2010. We do have a small Canadian defined benefit
pension plan to which we made $4.5 million of contributions in 2009 and we
anticipate approximately $4.0 million of contributions in
2010. See discussion on “Pension Protection Act of 2006”
amended by “The Worker, Retiree, and Employer Recovery Act” in “Pension
Plans” in the notes to the consolidated financial
statements.
|
Non-cancelable
operating leases and purchasing commitments are utilized in our normal course of
business for our projected needs. For losses that we believe are
probable and which are estimable we have accrued for such amounts in our
consolidated balance sheets. In addition to the table above, we have
various commitments and contingencies including: defined benefit and
postretirement healthcare plans (as described below), environmental matters (see
“Environmental Matters” included in Item 7—“Management’s Discussion and
Analysis of Financial Condition and Results of Operations”), and litigation
claims (see Item 3—“Legal Proceedings”).
We have
several defined benefit and defined contribution pension plans, as described in
the “Pension Plans” note in the notes to consolidated financial
statements. We fund the defined benefit pension plans based on the
minimum amounts required by law plus such amounts we deem
appropriate. We have postretirement healthcare plans that provide
health and life insurance benefits to certain retired employees and their
beneficiaries, as described in the "Postretirement Benefits" note in the
notes to consolidated financial statements. These other
postretirement plans are not pre-funded and expenses are paid by us as
incurred.
We also
have standby letters of credit of $46.7 million of which $20.4 million have been
issued through our senior revolving credit facility. At
December 31, 2009, we had $219.6 million available under our senior
revolving credit facility.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, sales and expenses, and related disclosure of contingent assets and
liabilities. Significant estimates in our consolidated financial
statements include goodwill recoverability, environmental, restructuring and
other unusual items, litigation, income tax reserves including deferred tax
asset valuation allowances, pension, postretirement and other benefits and
allowance for doubtful accounts. We base our estimates on prior
experience, facts and circumstances and other assumptions. Actual
results may differ from these estimates.
We
believe the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of the consolidated financial
statements.
Goodwill
Goodwill
is not amortized, but is reviewed annually in the fourth quarter and/or when
circumstances or other events indicate that impairment may have
occurred. Circumstances that could trigger an impairment test include
but are not limited to: a significant adverse change in the business
climate; a significant adverse legal judgment; adverse cash flow trends; an
adverse action or assessment by a government agency; unanticipated competition;
decline in our stock price; and a significant restructuring charge within a
reporting unit. The annual impairment test involves the comparison of
the estimated fair value of a reporting unit to its carrying
amount. We define reporting units at the business segment level or
one level below the business segment, which for our Chlor Alkali Products
segment are the U.S. operations and Canadian operations. For purposes
of testing goodwill for impairment, goodwill has been allocated to these
reporting units to the extent it relates to each reporting unit.
We use a
discounted cash flow approach to develop the estimated fair value of a reporting
unit. Management judgment is required in developing the assumptions
for the discounted cash flow model. We also corroborate our
discounted cash flow analysis by evaluating a market-based approach that
considers earnings before interest, taxes, depreciation and amortization
(EBITDA) multiples from a representative sample of comparable public companies
in the chemical industry. An impairment would be recorded if the
carrying amount exceeded the estimated fair value. No impairment
charges were recorded for 2009, 2008 or 2007.
The
discount rate, profitability assumptions, terminal growth rate and cyclical
nature of our chlor alkali business are the material assumptions utilized in the
discounted cash flow model used to estimate the fair value of each reporting
unit. The discount rate reflects a weighted-average cost of capital,
which is calculated based on observable market data. Some of these
data (such as the risk free or treasury rate and the pretax cost of debt) are
based on the market data at a point in time. Other data (such as the
equity risk premium) are based upon market data over time for a peer group of
companies in the chemical manufacturing industry with a market capitalization
premium added, as applicable.
The
discounted cash flow analysis requires estimates, assumptions and judgments
about future events. Our analysis uses our internally generated
long-range plan. Our discounted cash flow analysis uses the
assumptions in our long-range plan about terminal growth rates, forecasted
capital expenditures, and changes in future working capital requirements to
determine the implied fair value of each reporting unit. The
long-range plan reflects management judgment, supplemented by independent
chemical industry analyses which provide multi-year chlor alkali industry
operating and pricing forecasts.
We
believe the assumptions used in our discounted cash flow analysis are
appropriate and result in reasonable estimates of the implied fair value of each
reporting unit. However, given the economic environment and the
uncertainties regarding the impact on our business, there can be no assurance
that our estimates and assumptions, made for purposes of our goodwill impairment
testing during the fourth quarter of 2009, will prove to be an accurate
prediction of the future. In order to evaluate the sensitivity of the
fair value calculations on the goodwill impairment test, we applied a
hypothetical 10% decrease to the fair value of each reporting
unit. In all cases, the estimated fair value of the reporting units
exceeded the carrying value of the reporting units by a substantial
amount. We also applied a hypothetical decrease of 100-basis points
in our terminal growth rate or an increase of 100-basis points in our
weighted-average cost of capital to test the fair value
calculation. The estimated fair value of the reporting units derived
in these calculations also exceeded our book value by a substantial amount for
each of our reporting units. If our assumptions regarding forecasted
sales or gross margins are not achieved, we may be required to record goodwill
impairment charges in future periods. It is not possible at this time
to determine if any such future impairment charge would result or, if it does,
whether such charge would be material.
Environmental
Accruals
(charges to income) for environmental matters are recorded when it is probable
that a liability has been incurred and the amount of the liability can be
reasonably estimated, based upon current law and existing
technologies. These amounts, which are not discounted and are
exclusive of claims against third parties, are adjusted periodically as
assessments and remediation efforts progress or additional technical or legal
information becomes available. Environmental costs are capitalized if
the costs increase the value of the property and/or mitigate or prevent
contamination from future operations. Environmental costs and
recoveries are included in costs of goods sold.
Environmental
exposures are difficult to assess for numerous reasons, including the
identification of new sites, developments at sites resulting from investigatory
studies, advances in technology, changes in environmental laws and regulations
and their application, changes in regulatory authorities, the scarcity of
reliable data pertaining to identified sites, the difficulty in assessing the
involvement and financial capability of other PRPs and our ability to obtain
contributions from other parties and the lengthy time periods over which site
remediation occurs. It is possible that some of these matters (the
outcomes of which are subject to various uncertainties) may be resolved
unfavorably to us, which could materially adversely affect our financial
position or results of operations.
Pension
and Postretirement Plans
We
account for our defined benefit pension plans and non-pension postretirement
benefit plans using actuarial models required by ASC 715, formerly SFAS
No. 87 and SFAS No. 106, respectively. These models
use an attribution approach that generally spreads the financial impact of
changes to the plan and actuarial assumptions over the average remaining service
lives of the employees in the plan. Changes in liability 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 closure of our defined benefit
pension plan to new entrants, the freezing of our domestic 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 beginning in 2008 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. For the year ended December 31, 2007, the
average remaining life expectancy of the inactive participants in the defined
benefit pension plan was 19 years; compared to the average remaining service
lives of the active employees in the defined benefit pension plan of 10.7
years. The increase in the amortization period of actuarial losses
had the effect of increasing 2008 defined benefit pension income compared to
2007. For the years ended December 31, 2009 and 2008, the average
remaining life expectancy of the inactive participants in the defined benefit
pension plan was 19 years.
One of
the key assumptions for the net periodic pension calculation is the expected
long-term rate of return on plan assets, used to determine the “market-related
value of assets.” (The “market-related value of assets” recognizes
differences between the plan’s actual return and expected return over a five
year period). The required use of an expected long-term rate of
return on the market-related value of plan assets may result in recognized
pension income that is greater or less than the actual returns of those plan
assets in any given year. Over time, however, the expected long-term
returns are designed to approximate the actual long-term returns and, therefore,
result in a pattern of income and expense recognition that more closely matches
the pattern of the services provided by the employees. As differences
between actual and expected returns are recognized over five years, they
subsequently generate gains and losses that are subject to amortization over the
average remaining life expectancy of the inactive plan participants, as
described in the preceding paragraph.
We use
long-term historical actual return information, the mix of investments that
comprise plan assets, and future estimates of long-term investment returns by
reference to external sources to develop the expected return on plan assets as
of December 31.
The
discount rate assumptions used for pension and non-pension postretirement
benefit plan accounting reflect the rates available on high-quality fixed-income
debt instruments on December 31 of each year. The rate of
compensation increase is based upon our long-term plans for such
increases. For retiree medical plan accounting, we review external
data and our own historical trends for healthcare costs to determine the
healthcare cost trend rates.
Changes
in pension costs may occur in the future due to changes in these assumptions
resulting from economic events. For example, holding all other
assumptions constant, a 100-basis point decrease or increase in the assumed rate
of return on plan assets would have decreased or increased, respectively, the
2009 defined benefit pension plan income by approximately $15.6
million. Holding all other assumptions constant, a 50-basis point
decrease in the discount rate used to calculate pension income for 2009 and the
projected benefit obligation as of December 31, 2009 would have decreased
pension income by $1.4 million and increased the projected benefit obligation by
$82.0 million. A 50-basis point increase in the discount rate used to
calculate pension income for 2009 and the projected benefit obligation as of
December 31, 2009 would have increased pension income by $2.7 million and
decreased the projected benefit obligation by $83.0 million. For
additional information on long-term rates of return, discount rates and
projected healthcare costs projections, see “Pension Plans” and “Postretirement
Benefits” in the notes to the consolidated financial statements.
NEW
ACCOUNTING PRONOUNCEMENTS
In
January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06
“Improving Disclosures About Fair Value Measurements” (ASU 2010-06), which
amends ASC 820 “Fair Value Measurements and Disclosures” (ASC
820). This update adds new fair value disclosure requirements about
transfers into and out of Level 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements related to Level 3
measurements. This update expands disclosures on valuation techniques
and inputs used to measure fair value. This update is effective for
fiscal years beginning after December 15, 2009, except for the requirement to
provide the Level 3 activity of purchases, sales, issuances, and settlements,
which will be effective for fiscal years beginning after December 15,
2010. We will adopt the provisions of ASU 2010-06 in 2010, except for
the requirement to provide the additional Level 3 activity, which will be
adopted in 2011. This update will require additional disclosure in
our first quarter 2010 condensed financial statements. The adoption
of this update will not have a material effect on our consolidated financial
statements.
In July
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting
Principles,” (the Codification), which was incorporated into ASC 105 “Generally
Accepted Accounting Principles” (ASC 105). The Codification will be
the single source of authoritative U.S. generally accepted accounting
principles. The Codification does not change generally accepted
accounting principles, but is intended to make it easier to find and research
issues. The Codification introduces a new structure that takes
accounting pronouncements and organizes them by approximately 90 accounting
topics. The Codification was effective for interim and fiscal years
ending after September 15, 2009. We adopted the Codification on July
1, 2009. The adoption of this statement did not have a material
effect on our consolidated financial statements but changed our reference to
generally accepted accounting principles beginning in the third quarter of
2009.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets” (SFAS No. 166), which was incorporated into ASC 860 “Transfers and
Servicing” (ASC 860) and SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (SFAS No. 167), which was incorporated into ASC 810 “Consolidation”
(ASC 810). These statements changed the way entities account for
securitizations and special-purpose entities. The new standards
eliminate existing exceptions, strengthen the standards relating to
securitizations and special-purpose entities, and enhance disclosure
requirements. Both of these statements are effective for fiscal years
beginning after November 15, 2009. The adoption of these statements
will not have a material effect on our consolidated financial
statements.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS No. 165), which
was incorporated into ASC 855 “Subsequent Events” (ASC 855). ASC 855
provides guidance on management’s assessment of subsequent
events. The statement is not expected to significantly change
practice because its guidance is similar to that in American Institute of
Certified Public Accountants Professional Standards U.S. Auditing Standards
Section 560, “Subsequent Events,” with some modifications. This
statement became effective for us on June 15, 2009. The adoption of
this statement did not have a material effect on our consolidated financial
statements.
In April
2009, the FASB issued three Staff Positions (FSP) intended to provide additional
application guidance and enhance disclosures regarding fair value measurements
and impairments of securities. FSP SFAS No. 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (SFAS
No. 157-4) provided guidelines for making fair value measurements more
consistent with the principles presented in ASC 820. FSP SFAS No.
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (SFAS No. 107-1 and APB 28-1), which were incorporated into ASC 825
“Financial Instruments” (ASC 825), enhanced consistency in financial reporting
by increasing the frequency of fair value disclosures. FSP SFAS No.
115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” (SFAS No. 115-2 and SFAS No. 124-2), which were incorporated into
ASC 320 “Investments – Debt and Equity Securities” (ASC 320), provided
additional guidance designed to create greater clarity and consistency in
accounting for and presenting impairment losses on securities.
The
position updating ASC 820 related to determining fair values when there is no
active market or where the price inputs being used represent distressed
sales. This position stated that the objective of fair value
measurement is to reflect how much an asset would be sold for in an orderly
transaction (as opposed to a distressed or forced transaction) at the date of
the financial statements under current market conditions.
The
position updating ASC 825 related to fair value disclosures for any financial
instruments that are not currently reflected on the balance sheet at fair
value. Prior to issuing this position, fair values for these assets
and liabilities were only disclosed once a year. This position
required these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value.
The
position updating ASC 320 on other-than-temporary impairments is intended to
bring greater consistency to the timing of impairment recognition, and provide
greater clarity to investors about the credit and noncredit components of
impaired debt securities that are not expected to be sold. The
measure of impairment in comprehensive income remains fair
value. This position also required increased and more timely
disclosures sought by investors regarding expected cash flows, credit losses,
and an aging of securities with unrealized losses.
These
positions became effective for interim and fiscal years ending after June 15,
2009, with early adoption permitted. We adopted these positions as of
March 31, 2009. The adoption of these positions did not have a
material effect on our consolidated financial statements.
In
December 2008, the FASB issued FSP SFAS No. 132R-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets,” (SFAS No. 132R-1), an amendment of
SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and
Other Postretirement Benefits,” (SFAS No. 132R), which were both incorporated
into ASC 715. This position required more detailed disclosures
regarding defined benefit pension plan assets including investment policies and
strategies, major categories of plan assets, valuation techniques used to
measure the fair value of plan assets and significant concentrations of risk
within plan assets. This position became effective for fiscal years
ending after December 15, 2009. Upon initial application, the
provisions of this position were not required for earlier periods that are
presented for comparative purposes. The adoption of this statement
did not have a material impact on our consolidated financial
statements.
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),
which were both incorporated into ASC 815 “Derivatives and Hedging” (ASC
815). The statement required enhanced disclosures that expand the
previous disclosure requirements about an entity’s derivative instruments and
hedging activities. It required more robust qualitative disclosures
and expanded quantitative disclosures. This statement became
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. We adopted the provisions of this statement on January 1,
2009, which required additional disclosure in our 2009 financial
statements. The adoption of this statement did not have a material
impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” (SFAS No.
141R), which was incorporated into ASC 805 “Business Combinations” (ASC
805). This statement required the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction, established the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
required additional disclosures by the acquirer. Under this
statement, all business combinations are accounted for by applying the
acquisition method. This statement became effective for us on January
1, 2009. Earlier application was prohibited. The effect of
the adoption of this statement on our consolidated financial statements will be
on adjustments made to pre-acquisition Pioneer income tax contingencies, which
will no longer be reflected as an adjustment to goodwill but recognized through
income tax expense.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” (SFAS No. 160), which was incorporated into
ASC 810. This statement required noncontrolling interests (previously
referred to as minority interests) to be treated as a separate component of
equity, not as a liability or other item outside of permanent
equity. The statement applied to the accounting for noncontrolling
interests and transactions with noncontrolling interest holders in consolidated
financial statements. This statement became effective for us on
January 1, 2009. Earlier application was prohibited. This
statement was applied prospectively to all noncontrolling interests, including
any that arose before the effective date except that comparative period
information must be recast to classify noncontrolling interests in equity,
attribute net income and other comprehensive income to noncontrolling interests,
and provide additional required disclosures. The adoption of this
statement did not have a material effect on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
(SFAS No. 157), which was incorporated into ASC 820. This statement
did not require any new fair value measurements, but rather, it provided
enhanced guidance to other pronouncements that require or permit assets or
liabilities to be measured at fair value. The changes to current
practice resulting from the application of this statement related to the
definition of fair value, the methods used to estimate fair value, and the
requirement for expanded disclosures about estimates of fair
value. This statement became effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. The effective date for this statement for all nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis was
delayed by one year. Nonfinancial assets and nonfinancial liabilities
that were impacted by this deferral included assets and liabilities initially
measured at fair value in a business combination, and intangible assets and
goodwill tested annually for impairment. We adopted the provisions of
this statement related to financial assets and financial liabilities on
January 1, 2008, which required additional disclosure in our financial
statements. The partial adoption of this statement did not have a
material impact on our consolidated financial statements. We adopted
the remaining provisions of this statement related to nonfinancial assets and
nonfinancial liabilities on January 1, 2009. The adoption of the
remaining provisions of this statement did not have a material impact on our
consolidated financial statements.
DERIVATIVE
FINANCIAL INSTRUMENTS
ASC 815,
formerly SFAS No. 133, required an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. We use hedge accounting treatment
for substantially all of our business transactions whose risks are covered using
derivative instruments. The accounting treatment of changes in fair
value is dependent upon whether or not a derivative instrument is designated as
a hedge and, if so, the type of hedge. For derivatives designated as
a fair value hedge, the changes in the fair value of both the derivative and the
hedged item are recognized in earnings. For derivatives designated as
a cash flow hedge, the change in fair value of the derivative is recognized in
other comprehensive loss until the hedged item is recognized in
earnings. Ineffective portions are recognized currently in
earnings. Unrealized gains and losses on derivatives not qualifying
for hedge accounting are recognized currently in earnings. All
derivatives recognized in earnings impact the expense line item on our
consolidated statement of operations that is consistent with the nature of the
underlying hedged item.
We enter
into forward sales and purchase contracts to manage currency risk resulting from
purchase and sale commitments denominated in foreign currencies (principally
Canadian dollar and Euro). All of the currency derivatives expire
within two years and are for United States dollar equivalents. At
December 31, 2009, we had forward contracts to sell foreign currencies with a
fair value of $0.3 million and forward contracts to buy foreign currencies with
a fair value of $1.7 million. At December 31, 2008, we had no
forward contracts to buy or to sell foreign currencies.
We use
cash flow hedges for certain raw material and energy costs such as copper, zinc,
lead, and natural gas to provide a measure of stability in managing our exposure
to price fluctuations associated with forecasted purchases of raw materials and
energy costs used in our manufacturing process. For derivative
instruments that are designated and qualify as a cash flow hedge, the change in
fair value of the derivative is recognized as a component of other comprehensive
loss until the hedged item is recognized into earnings. Gains and
losses on the derivatives representing hedge ineffectiveness are recognized
currently in earnings. Losses on settled futures contracts were $20.4
million, ($12.5 million, net of taxes) and $8.1 million, ($5.0 million, net of
taxes) in 2009 and 2008, respectively, which were included in cost of goods
sold. Gains on settled futures contracts were $23.4 million, ($14.3
million, net of taxes), in 2007, which were included in cost of goods
sold. At December 31, 2009, we had open positions in futures
contracts through 2013 totaling $61.4 million (2008—$84.0
million). If all open futures contracts had been settled on
December 31, 2009, we would have recognized a pretax gain of $18.7
million.
At
December 31, 2009, accumulated other comprehensive loss included a gain,
net of taxes, in fair value on commodity forward contracts of $11.6
million. If commodity prices were to remain at the levels they were
at December 31, 2009, approximately $7.7 million of deferred gains, net of tax,
would be reclassified into earnings during the next twelve
months. The actual effect on earnings will be dependent on commodity
prices when the forecasted transactions occur. At December 31, 2008,
accumulated other comprehensive loss included a loss, net of taxes, in fair
value on commodity forward contracts of $25.0 million.
We use
interest rate swaps as a means of managing interest expense and floating
interest rate exposure to optimal levels. The accounting for gains
and losses associated with changes in fair value of the derivative and the
effect on the consolidated financial statements will depend on the hedge
designation and whether the hedge is effective in offsetting changes in fair
value of cash flows of the asset or liability being hedged. For
derivative instruments that are designated and qualify as a fair value hedge,
the gain or loss on the derivative as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized in current
earnings. We include the gain or loss on the hedged items (fixed-rate
borrowings) in the same line item, interest expense, as the offsetting loss or
gain on the related interest rate swaps. As of December 31, 2009 and
December 31, 2008, the total notional amount of our interest rate swaps
designated as fair value hedges were $26.6 million and $101.6 million,
respectively.
In 2001
and 2002, we entered into interest rate swaps on $75 million of our underlying
fixed-rate debt obligations, whereby we agreed to pay variable rates to a
counterparty who, in turn, pays us fixed rates. In January 2009, we
entered into a $75 million fixed interest rate swap with equal and opposite
terms as the $75 million variable interest rate swaps on the 2011
Notes. We have agreed to pay a fixed rate to a counterparty who, in
turn, pays us variable rates. The result was a gain of $7.9 million
on the $75 million variable interest rate swaps, which will be recognized
through 2011. In January 2009, we de-designated our $75 million
interest rate swaps that had previously been designated as fair value
hedges. The $75 million variable interest rate swaps and the $75
million fixed interest rate swap do not meet the criteria for hedge
accounting. All changes in the fair value of these interest rate
swaps are recorded currently in earnings.
The fair
value of our derivative asset and liability balances were:
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
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Total
derivative liability
|
|
|
|
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The
ineffective portion of changes in fair value resulted in $0.1 million, zero and
$(0.1) million credited (charged) to earnings for the years ended
December 31, 2009, 2008 and 2007, respectively.
Our
foreign currency forward contracts, certain commodity derivatives, and our $75
million fixed and variable interest rate swaps did not meet the criteria to
qualify for hedge accounting. The effect on operating results of
items not qualifying for hedge accounting was a charge of $2.7 million for 2009
and zero for 2008 and 2007.
Item
7A. 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 use 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 December 31, 2009, we
maintained open positions on futures contracts totaling $61.4 million ($84.0
million at December 31, 2008). Assuming a hypothetical 10%
increase in commodity prices, which are currently hedged, we would experience a
$6.1 million ($8.4 million at December 31, 2008) increase in our cost of
inventory purchased, which would be substantially offset by a corresponding
increase in the value of related hedging instruments.
We are
exposed to changes in interest rates primarily as a result of our investing and
financing activities. The effect of interest rates on investing
activity is not material to our consolidated financial position, results of
operations, or cash flows. Our current debt structure is used to fund
business operations, and commitments from banks under our senior revolving
credit facility and our Accounts Receivable Facility are sources of
liquidity. As of December 31, 2009, we had long-term borrowings
of $398.4 million ($252.4 million at December 31, 2008) of which $4.7
million ($3.1 million at December 31, 2008) was issued at variable
rates. As a result of our fixed-rate financings, we entered into
floating interest rate swaps in order to manage interest expense and floating
interest rate exposure to optimal levels. We have entered into $26.6
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 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.
In 2001
and 2002, we entered into interest rate swaps on $75 million of our underlying
fixed-rate debt obligations, whereby we agreed to pay variable rates to a
counterparty who, in turn, pays us fixed rates. The counterparty to
these agreements is Citibank, N.A., a major financial institution. In
January 2009, we entered into a $75 million fixed interest rate swap with equal
and opposite terms as the $75 million variable interest rate swaps on the 2011
Notes. We have agreed to pay a fixed rate to a counterparty who, in
turn, pays us variable rates. The counterparty to this agreement is
Bank of America, a major financial institution. The result was a gain
of $7.9 million on the $75 million variable interest rate swaps, which will be
recognized through 2011. In January 2009, we de-designated our $75
million interest rate swaps that had previously been designated as fair value
hedges. The $75 million variable interest rate swaps and the $75
million fixed interest rate swap do not meet the criteria for hedge
accounting. All changes in the fair value of these interest rate
swaps are recorded currently in earnings.
Assuming
no changes in the $31.3 million of variable-rate debt levels from
December 31, 2009, we estimate that a hypothetical change of 100-basis
points in the LIBOR interest rates from 2009 would impact annual interest
expense by $0.3 million.
The
following table reflects the swap activity related to certain debt
obligations:
Underlying
Debt Instrument
|
|
Swap
Amount
|
|
Date of Swap
|
|
December 31, 2009
|
|
|
($ in millions)
|
|
|
|
Olin
Pays
Floating
Rate:
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Industrial
development and environmental improvement obligations at interest
rates of 6.625% to 6.75%, due 2016-2017
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Olin
Receives
Floating
Rate:
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|
(a)
|
Actual
rate is set in arrears. We project the rate will fall within
the range shown.
|
These
interest rate swaps reduced interest expense by $5.1 million, $2.5 million and
$0.6 million in 2009, 2008 and 2007, respectively.
If the
actual change in interest 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.
CAUTIONARY
STATEMENT ABOUT FORWARD-LOOKING STATEMENTS:
This
report 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
report that are not statements of historical fact may include forward-looking
statements that involve a number of risks and uncertainties.
We have
used the words “anticipate,” “intend,” “may,” “expect,” “believe,” “should,”
“plan,” “estimate,” “project,” “forecast,” and variations of such words and
similar expressions in this 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
include those discussed under Item 1A. Risk Factors. 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.
Item
8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Olin Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting. Olin’s internal
control system was designed to provide reasonable assurance to the company’s
management and board of directors regarding the preparation and fair
presentation of published financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation, and may not prevent or detect all
misstatements.
The
management of Olin Corporation has assessed the effectiveness of the company’s
internal control over financial reporting as of December 31,
2009. In making this assessment, we used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated
Framework to guide our analysis and assessment. Based on our
assessment as of December 31, 2009, the company’s internal control over
financial reporting was effective based on those criteria.
Our
independent registered public accountants, KPMG LLP, have audited and issued a
report on our internal controls over financial reporting, which appears in this
Form 10-K.
/s/
Joseph D. Rupp
Chairman,
President and Chief Executive Officer
/s/ John
E. Fischer
Vice
President and Chief Financial Officer
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of Olin Corporation:
We have
audited the accompanying consolidated balance sheets of Olin
Corporation and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, shareholders’ equity and cash flows for
each of the years in the three-year period ended December 31,
2009. We also have audited Olin Corporation’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Olin Corporation’s management is
responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on the Company's internal
control over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Olin Corporation and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, Olin Corporation maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control - Integrated
Framework issued by the COSO.
/s/ KPMG
LLP
St.
Louis, Missouri
February 24,
2010
CONSOLIDATED
BALANCE SHEETS
December 31
($ in
millions, except share data)
Assets
|
|
2009
|
|
|
2008
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
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|
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|
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|
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|
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|
|
|
|
|
Current deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $1 per share:
|
|
|
|
|
|
|
|
|
Authorized,
120,000,000 shares;
|
|
|
|
|
|
|
|
|
Issued
and outstanding 78,721,979 shares (77,304,344 in
2008)
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
The
accompanying notes to consolidated financial statements are an integral part of
the consolidated financial statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
ended December 31
($ in
millions, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to consolidated financial statements are an integral part of
the consolidated financial statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
($ in
millions, except per share data)
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
|
Total
Shareholders’
Equity
|
|
Shares
Issued
|
|
|
Par
Value
|
Balance
at January 1, 2007
|
|
|
|
|
|
$ |
|
|
|
$
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and postretirement liability adjustment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service costs and actuarial losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock ($0.80 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and postretirement liability adjustment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service costs and actuarial losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock ($0.80 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and postretirement liability adjustment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service costs and actuarial losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock ($0.80 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to consolidated financial statements are an integral part of
the consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
ended December 31
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash and cash equivalents provided
by (used for) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income—(gains) losses on disposition of property, plant and
equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
pension plan contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
pension plan (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of investment in corporate debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued under employee benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in assets and liabilities net of purchase and sale of
businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
acquired in 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of a business
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
tax benefits from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes, net of refunds
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to consolidated financial statements are an integral part of
the consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION
OF BUSINESS
Olin
Corporation is a Virginia corporation, incorporated in 1892. We are a
manufacturer concentrated in two business segments: Chlor Alkali
Products and Winchester. Chlor Alkali Products, with nine U.S.
manufacturing facilities and one Canadian manufacturing facility, produces
chlorine and caustic soda, sodium hydrosulfite, hydrochloric acid, hydrogen,
bleach products and potassium hydroxide. Winchester, with its
principal manufacturing facility in East Alton, IL, produces and distributes
sporting ammunition, reloading components, small caliber military ammunition and
components, and industrial cartridges.
On
October 15, 2007, we announced we entered into a definitive agreement to sell
the Metals business to Global. The transaction closed on November 19,
2007. Accordingly, for all periods presented prior to the sale,
Metals' operating results and cash flows are reported as discontinued operations
in the consolidated statements of operations and consolidated statements of
cash flows, respectively.
On August
31, 2007 we acquired Pioneer, whose operating results are included in the
accompanying consolidated financial statements since the date of
acquisition.
ACCOUNTING
POLICIES
The
preparation of the consolidated financial statements requires estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from those
estimates.
Basis
of Presentation
The
consolidated financial statements include the accounts of Olin Corporation and
all majority-owned subsidiaries. Investment in our 50% owned
affiliate and other affiliates are accounted for on the equity
method. Accordingly, we include only our share of earnings or losses
of these affiliates in consolidated net income. Certain
reclassifications were made to prior year amounts to conform to the 2009
presentation. In 2009, the December 31, 2008 goodwill amount was
reduced by $1.6 million, which reflected a reclassification of deferred taxes
associated with the resolution of a Canadian capital tax matter.
We have
evaluated all subsequent events through February 24, 2010, which represents the
filing date of this Form 10-K with the SEC, to ensure that this Form 10-K
includes subsequent events that should be recognized in the consolidated
financial statements as of December 31, 2009, and appropriate disclosure of
subsequent events, which were not recognized in the consolidated financial
statements.
Revenue
Recognition
Revenues
are recognized on sales of product at the time the goods are shipped and the
risks of ownership have passed to the customer. Shipping and handling
fees billed to customers are included in sales. Allowances for
estimated returns, discounts and rebates are recognized when sales are recorded
and are based on various market data, historical trends and information from
customers. Actual returns, discounts and rebates have not been
materially different from estimates.
Cost
of Goods Sold and Selling and Administration Expenses
Cost of
goods sold includes the costs of inventory sold, related purchasing,
distribution and warehousing costs, costs incurred for shipping and handling,
depreciation and amortization expense related to these activities, and
environmental remediation costs and recoveries. Selling and
administration expenses include personnel costs associated with sales, marketing
and administration, research and development, legal and legal-related costs,
consulting and professional services fees, advertising expenses, depreciation
expense related to these activities and other similar costs and foreign
currency translation.
Other
Operating Income
Other
operating income consists of miscellaneous operating income items, which are
related to our business activities, and gains (losses) on disposition of
property, plant and equipment. Other operating income for 2009
included a $3.7 million gain on the sale of land, a $1.2 million gain on the
disposition of a former manufacturing facility and $1.6 million of gains on the
disposal of assets primarily associated with the St. Gabriel, LA facility
conversion and expansion project. Other operating income for 2009
also included $1.0 million for a portion of a 2007 gain realized on an
intangible asset sale in Chlor Alkali Products, which is recognized ratably
through 2012, $0.8 million for the sale of other assets and $0.4 million for a
portion of a gain realized on the sale of equipment, which was recognized
ratably through June 2009. Other operating income for 2008 included
$1.0 million for a portion of a 2007 gain realized on an intangible asset sale
in Chlor Alkali Products, which is recognized ratably through 2012, $0.9 million
for a portion of a gain realized on the sale of equipment, which is recognized
ratably through June 2009, and $0.2 million of a gain on the disposition of land
associated with a former manufacturing facility. These gains were
partially offset by a loss of $0.9 million on the disposition of property, plant
and equipment. Other operating income for 2007 included the receipt
of a $1.3 million contingent payment associated with a 1995 divestiture and $0.6
million for a portion of a 2007 gain realized on an intangible asset sale in
Chlor Alkali Products, which is be recognized ratably through 2012.
Other
Income (Expense)
Other
income (expense) consists of non-operating income items which are not related to
our primary business activities. Other income (expense) for 2008
included an impairment charge of the full value of a $26.6 million investment in
corporate debt securities.
Foreign
Currency Translation
The
functional currency for our Canadian chlor alkali subsidiary is the U.S. dollar;
accordingly, gains and losses resulting from balance sheet translations are
included in selling and administration. Other foreign affiliates’
balance sheet amounts are translated at the exchange rates in effect at
year-end, and operations statement amounts are translated at the average rates
of exchange prevailing during the year. Translation adjustments are
included in accumulated other comprehensive loss.
Cash
and Cash Equivalents
All
highly liquid investments, with a maturity of three months or less at the date
of purchase, are considered to be cash equivalents.
Short-Term
Investments
We
classify our marketable securities as available-for-sale, which are reported at
fair market value with unrealized gains and losses included in accumulated other
comprehensive loss, net of applicable taxes. The fair value of
marketable securities is determined by quoted market prices. Realized
gains and losses on sales of investments, as determined on the specific
identification method, and declines in value of securities judged to be
other-than-temporary are included in other income (expense) in the consolidated
statements of operations. Interest and dividends on all securities
are included in interest income and other income (expense),
respectively.
Allowance
for Doubtful Accounts Receivable
We
evaluate the collectibility of accounts receivable based on a combination of
factors. We estimate an allowance for doubtful accounts as a
percentage of net sales based on historical bad debt experience. This
estimate is periodically adjusted when we become aware of a specific customer's
inability to meet its financial obligations (e.g., bankruptcy filing) or as a
result of changes in the overall aging of accounts receivable. While
we have a large number of customers that operate in diverse businesses and are
geographically dispersed, a general economic downturn in any of the industry
segments in which we operate could result in higher than expected defaults, and,
therefore, the need to revise estimates for the provision for doubtful accounts
could occur.
Inventories
Inventories
are valued at the lower of cost or market, with cost being determined
principally by the dollar value last-in, first-out (LIFO) method of inventory
accounting. Cost for other inventories has been determined
principally by the average-cost (primarily operating supplies, spare parts and
maintenance parts) method. Elements of costs in inventories include
raw materials, direct labor and manufacturing overhead.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Depreciation is computed on
a straight-line basis over the estimated useful lives of the related
assets. Interest costs incurred to finance expenditures for major
long-term construction projects are capitalized as part of the historical cost
and included in property, plant and equipment and are depreciated over the
useful lives of the related assets. Leasehold improvements are
amortized over the term of the lease or the estimated useful life of the
improvement, whichever is shorter. Start-up costs are expensed as
incurred. Expenditures for maintenance and repairs are charged to
expense when incurred while the costs of significant improvements, which extend
the useful life of the underlying asset, are capitalized.
Property,
plant and equipment are reviewed for impairment when conditions indicate that
the carrying values of the assets may not be recoverable. Such
impairment conditions include an extended period of idleness or a plan of
disposal. If such impairment indicators are present or other factors
exist that indicate that the carrying amount of an asset may not be recoverable,
we determine whether impairment has occurred through the use of an undiscounted
cash flow analysis at the lowest level for which identifiable cash flows
exist. The amount of impairment loss, if any, is measured by the
difference between the net book value of the assets and the estimated fair value
of the related assets.
Asset
Retirement Obligations
We record
the fair value of an asset retirement obligation associated with the retirement
of a tangible long-lived asset as a liability in the period
incurred. The liability is measured at discounted fair value and is
adjusted to its present value in subsequent periods as accretion expense is
recorded. The corresponding asset retirement costs are capitalized as
part of the carrying amount of the related long-lived asset and depreciated over
the asset’s useful life. Asset retirement obligations are reviewed
annually in the fourth quarter and/or when circumstances or other events
indicate that changes underlying retirement assumptions may have
occurred.
The
activity of our asset retirement obligation was as follows:
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At
December 31, 2009 and 2008, our consolidated balance sheets included an asset
retirement obligation of $53.1 million and $46.6 million, respectively, which
were classified as other noncurrent liabilities.
In 2009,
we had net adjustments that increased the asset retirement obligation by $2.7
million, which were primarily comprised of increases in estimated costs for
certain assets.
In 2008,
we had net adjustments that decreased the asset retirement obligation by $1.0
million. These adjustments were primarily comprised of a decrease in
the estimated liabilities by $2.9 million, primarily based on a higher
probability of reducing the retirement obligation at a former chemical location
than was previously assessed, partially offset by an increase of $1.9 million in
estimated costs for certain assets.
Comprehensive
Income (Loss)
Accumulated
other comprehensive loss consists of foreign currency translation adjustments,
pension and postretirement liability adjustments, amortization of prior service
costs and actuarial losses net unrealized gains (losses) on derivative
contracts, and net unrealized gains (losses) on marketable
securities. We do not provide for U.S. income taxes on foreign
currency translation adjustments since we do not provide for such taxes on
undistributed earnings for foreign subsidiaries.
Goodwill
Goodwill
is not amortized, but is reviewed annually in the fourth quarter and/or when
circumstances or other events indicate that impairment may have
occurred. Circumstances that could trigger an impairment test include
but are not limited to: a significant adverse change in the business
climate; a significant adverse legal judgment; adverse cash flow trends; an
adverse action or assessment by a government agency; unanticipated competition;
decline in our stock price; and a significant restructuring charge within a
reporting unit. The annual impairment test involves the comparison of
the estimated fair value of a reporting unit to its carrying
amount. We define reporting units at the business segment level or
one level below the business segment, which for our Chlor Alkali Products
segment are the U.S. operations and Canadian operations. For purposes
of testing goodwill for impairment, goodwill has been allocated to these
reporting units to the extent it relates to each reporting unit. The fair value is
determined based on a variety of assumptions including estimated future cash
flows of the reporting unit, discount rates and comparable company trading
multiples. An impairment would be recorded if the carrying amount
exceeded the estimated fair value. No impairment charges were recorded for 2009,
2008 or 2007.
We use a
discounted cash flow approach “income approach” to develop the estimated fair
value of a reporting unit. Management judgment is required in
developing the assumptions for the discounted cash flow model. We
also corroborate our discounted cash flow analysis by evaluating a market-based
approach that considers earnings before interest, taxes, depreciation and
amortization (EBITDA) multiples from a representative sample of comparable
public companies in the chemical industry. An impairment would be
recorded if the carrying amount exceeded the estimated fair value.
The
discount rate, profitability assumptions, terminal growth rate and cyclical
nature of our chlor alkali business are the material assumptions utilized in the
discounted cash flow model used to estimate the fair value of each reporting
unit. The discount rate reflects a weighted-average cost of capital,
which is calculated based on observable market data. Some of these
data (such as the risk free or treasury rate and the pretax cost of debt) are
based on the market data at a point in time. Other data (such as the
equity risk premium) are based upon market data over time for a peer group of
companies in the chemical manufacturing industry with a market
capitalization premium added, as applicable.
The
discounted cash flow analysis requires estimates, assumptions and judgments
about future events. Our analysis uses our internally generated
long-range plan. Our discounted cash flow analysis uses the
assumptions in our long-range plan about terminal growth rates, forecasted
capital expenditures, and changes in future working capital requirements to
determine the implied fair value of each reporting unit. The
long-range plan reflects management judgment, supplemented by independent
chemical industry analyses which provide multi-year chlor alkali industry
operating and pricing forecasts.
All of
our recorded goodwill, which is associated with acquisitions, is included in the
Chlor Alkali Products segment. Given the economic environment and the
uncertainties regarding the impact on our business, there can be no assurance
that our estimates and assumptions, made for purposes of our goodwill impairment
testing during the fourth quarter of 2009, will prove to be an accurate
prediction of the future. If our assumptions regarding forecasted
sales or gross margins are not achieved, we may be required to record goodwill
impairment charges in future periods. It is not possible at this time
to determine if any such future impairment charge would result or, if it does,
whether such charge would be material.
Other
Assets
Included
in other assets were the following:
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assets (less accumulated amortization of $3.5 million and $2.0 million,
respectively)
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The
August 31, 2007 valuation of identifiable intangible assets that were obtained
from the Pioneer acquisition included $19.0 million associated with customers,
customer contracts and relationships, and $1.2 million associated with
internally developed and purchased software. These assets will be
amortized over fifteen years and five years, respectively, on a straight-line
basis. Amortization expense was $1.5 million in both 2009 and
2008. Intangible assets are reviewed annually in the fourth quarter
and/or when circumstances or other events indicate that impairment may have
occurred.
Environmental
Liabilities and Expenditures
Accruals
(charges to income) for environmental matters are recorded when it is probable
that a liability has been incurred and the amount of the liability can be
reasonably estimated, based upon current law and existing
technologies. These amounts, which are not discounted and are
exclusive of claims against third parties, are adjusted periodically as
assessment and remediation efforts progress or additional technical or legal
information becomes available. Environmental costs are capitalized if
the costs increase the value of the property and/or mitigate or prevent
contamination from future operations.
Discontinued
Operations
We
present the results of operations, financial position and cash flows that have
either been sold or that meet the criteria for "held for sale" accounting as
discontinued operations. At the time an operation qualifies for “held
for sale” accounting, the operation is evaluated to determine whether or not the
carrying value exceeds its fair value less cost to sell. Any loss as
a result of carrying value in excess of fair value less cost to sell is recorded
in the period the operation meets “held for sale”
accounting. Management judgment is required to assess the criteria
required to meet “held for sale” accounting, and estimate fair
value. Changes to the operation could cause it to no longer qualify
for “held for sale” accounting and changes to fair value could result in an
increase or decrease to previously recognized losses.
Income
Taxes
Deferred
taxes are provided for differences between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance
is provided to offset deferred tax assets if, based on the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.
Derivative
Financial Instruments
We are
exposed to market risk in the normal course of our business operations due to
our purchases of certain commodities, our ongoing investing and financing
activities, and our operations that use foreign currencies. The risk
of loss can be assessed from the perspective of adverse changes in fair values,
cash flows and future earnings. We have established policies and
procedures governing our management of market risks and the use of financial
instruments to manage exposure to such risks. We use hedge accounting
treatment for substantially all of our business transactions whose risks are
covered using derivative instruments. The hedge accounting treatment
provides for the deferral of gains or losses (included in other comprehensive
loss) on derivative instruments until such time as the related transactions
occur.
Concentration
of Credit Risk
Accounts
receivable is the principal financial instrument which subjects us to a
concentration of credit risk. Credit is extended based upon the
evaluation of a customer’s financial condition and, generally, collateral is not
required. Concentrations of credit risk with respect to receivables
are somewhat limited due to our large number of customers, the diversity of
these customers’ businesses and the geographic dispersion of such
customers. The majority of our accounts receivable are derived from
sales denominated in U.S. dollars. We maintain an allowance for
doubtful accounts based upon the expected collectibility of all trade
receivables.
Fair
Value
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 consolidated balance sheets are
categorized based upon the level of judgment associated with the inputs used to
measure their fair value. Hierarchical levels, defined by ASC 820,
formerly 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:
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1 — Inputs were unadjusted, quoted prices in active markets for identical
assets or liabilities at the measurement
date.
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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.
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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.
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Retirement-Related
Benefits
We
account for our defined benefit pension plans and non-pension postretirement
benefit plans using actuarial models required by ASC 715, formerly SFAS
No. 87 and SFAS No. 106, respectively. These models use an
attribution approach that generally spreads the financial impact of changes to
the plan and actuarial assumptions over the average remaining service lives of
the employees in the plan. Changes in liability 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 closure of our defined benefit pension plan to new
entrants, the freezing of our domestic 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 beginning in 2008 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. For the year ended December 31, 2007, the average remaining
life expectancy of the inactive participants in the defined benefit pension plan
was 19 years; compared to the average remaining service lives of the active
employees in the defined benefit pension plan of 10.7 years. For the
years ended December 31, 2009 and 2008, the average remaining life expectancy of
the inactive participants in the defined benefit pension plan was 19
years.
One of
the key assumptions for the net periodic pension calculation is the expected
long-term rate of return on plan assets, used to determine the “market-related
value of assets.” The “market-related value of assets” recognizes
differences between the plan’s actual return and expected return over a five
year period. The required use of an expected long-term rate of return
on the market-related value of plan assets may result in a recognized pension
income that is greater or less than the actual returns of those plan assets in
any given year. Over time, however, the expected long-term returns
are designed to approximate the actual long-term returns and, therefore, result
in a pattern of income and expense recognition that more closely matches the
pattern of the services provided by the employees. As differences
between actual and expected returns are recognized over five years, they
subsequently generate gains and losses that are subject to amortization over the
average remaining life expectancy of the inactive plan participants, as
described in the preceding paragraph.
We use
long-term historical actual return information, the mix of investments that
comprise plan assets, and future estimates of long-term investment returns by
reference to external sources to develop the expected return on plan assets as
of December 31.
The
discount rate assumptions used for pension and non-pension postretirement
benefit plan accounting reflect the rates available on high-quality fixed-income
debt instruments on December 31 of each year. The rate of
compensation increase is based upon our long-term plans for such
increases. For retiree medical plan accounting, we review external
data and our own historical trends for healthcare costs to determine the
healthcare cost trend rates.
Stock-Based
Compensation
We
measure the cost of employee services received in exchange for an award of
equity instruments, such as stock options, performance shares, and restricted
stock, based on the grant-date fair value of the award. This cost is
recognized over the period during which an employee is required to provide
service in exchange for the award, the requisite service period (usually the
vesting period). An initial measurement is made of the cost of
employee services received in exchange for an award of liability instruments
based on its current fair value and the value of that award is subsequently
remeasured at each reporting date through the settlement
date. Changes in fair value of liability awards during the requisite
service period are recognized as compensation cost over that
period.
The fair
value of each option granted, which typically vests ratably over three years,
but not less than one year, was estimated on the date of grant, using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
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Dividend
yield was based on a historical average. Risk-free interest rate was
based on zero coupon U.S. Treasury securities rates for the expected life of the
options. Expected volatility was based on our historical stock price
movements, and we believe that historical experience is the best available
indicator of the expected volatility. Expected life of the option
grant was based on historical exercise and cancellation patterns, and we believe
that historical experience is the best estimate for future exercise
patterns.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
January 2010, the FASB issued ASU 2010-06, which amends ASC 820. This
update adds new fair value disclosure requirements about transfers into and out
of Level 1 and 2 and separate disclosures about purchases, sales, issuances, and
settlements related to Level 3 measurements. This update expands
disclosures on valuation techniques and inputs used to measure fair
value. This update is effective for fiscal years beginning after
December 15, 2009, except for the requirement to provide the Level 3 activity of
purchases, sales, issuances, and settlements, which will be effective for fiscal
years beginning after December 15, 2010. We will adopt the provisions
of ASU 2010-06 in 2010, except for the requirement to provide the additional
Level 3 activity, which will be adopted in 2011. This update will
require additional disclosure in our first quarter 2010 condensed financial
statements. The adoption of this update will not have a material
effect on our consolidated financial statements.
In July
2009, the FASB issued the Codification, which was incorporated into ASC
105. The Codification will be the single source of authoritative U.S.
generally accepted accounting principles. The Codification does not
change generally accepted accounting principles, but is intended to make it
easier to find and research issues. The Codification introduces a new
structure that takes accounting pronouncements and organizes them by
approximately 90 accounting topics. The Codification was effective
for interim and fiscal years ending after September 15, 2009. We
adopted the Codification on July 1, 2009. The adoption of this
statement did not have a material effect on our consolidated financial
statements but changed our reference to generally accepted accounting principles
beginning in the third quarter of 2009.
In June
2009, the FASB issued SFAS No. 166, which was incorporated into ASC 860, and
SFAS No. 167, which was incorporated into ASC 810. These statements
changed the way entities account for securitizations and special-purpose
entities. The new standards eliminate existing exceptions, strengthen
the standards relating to securitizations and special-purpose entities, and
enhance disclosure requirements. Both of these statements are
effective for fiscal years beginning after November 15, 2009. The
adoption of these statements will not have a material effect on our consolidated
financial statements.
In May
2009, the FASB issued SFAS No. 165, which was incorporated into ASC
855. ASC 855 provides guidance on management’s assessment of
subsequent events. The statement is not expected to significantly
change practice because its guidance is similar to that in American Institute of
Certified Public Accountants Professional Standards U.S. Auditing Standards
Section 560, “Subsequent Events,” with some modifications. This
statement became effective for us on June 15, 2009. The adoption of
this statement did not have a material effect on our consolidated financial
statements.
In April
2009, the FASB issued three FSP’s intended to provide additional application
guidance and enhance disclosures regarding fair value measurements and
impairments of securities. SFAS No. 157-4 provided guidelines for
making fair value measurements more consistent with the principles presented in
ASC 820. SFAS No. 107-1 and APB 28-1, which were incorporated into
ASC 825, enhanced consistency in financial reporting by increasing the frequency
of fair value disclosures. SFAS No. 115-2 and SFAS No. 124-2, which
were incorporated into ASC 320, provided additional guidance designed to create
greater clarity and consistency in accounting for and presenting impairment
losses on securities.
The
position updating ASC 820 related to determining fair values when there is no
active market or where the price inputs being used represent distressed
sales. This position stated that the objective of fair value
measurement is to reflect how much an asset would be sold for in an orderly
transaction (as opposed to a distressed or forced transaction) at the date of
the financial statements under current market conditions.
The
position updating ASC 825 related to fair value disclosures for any financial
instruments that are not currently reflected on the balance sheet at fair
value. Prior to issuing this position, fair values for these assets
and liabilities were only disclosed once a year. This position
required these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value.
The
position updating ASC 320 on other-than-temporary impairments is intended to
bring greater consistency to the timing of impairment recognition, and provide
greater clarity to investors about the credit and noncredit components of
impaired debt securities that are not expected to be sold. The
measure of impairment in comprehensive income remains fair
value. This position also required increased and more timely
disclosures sought by investors regarding expected cash flows, credit losses,
and an aging of securities with unrealized losses.
These
positions became effective for interim and fiscal years ending after June 15,
2009, with early adoption permitted. We adopted these positions as of
March 31, 2009. The adoption of these positions did not have a
material effect on our consolidated financial statements.
In
December 2008, the FASB issued SFAS No. 132R-1, an amendment of SFAS No. 132R,
which was incorporated into ASC 715. This position required more
detailed disclosures regarding defined benefit pension plan assets including
investment policies and strategies, major categories of plan assets, valuation
techniques used to measure the fair value of plan assets and significant
concentrations of risk within plan assets. This position became
effective for fiscal years ending after December 15, 2009. Upon
initial application, the provisions of this position were not required for
earlier periods that are presented for comparative purposes. The
adoption of this statement did not have a material impact on our consolidated
financial statements.
In March
2008, the FASB issued SFAS No. 161, an amendment to SFAS No. 133, which were
both incorporated into ASC 815. The statement required enhanced
disclosures that expand the previous disclosure requirements about an entity’s
derivative instruments and hedging activities. It required more
robust qualitative disclosures and expanded quantitative
disclosures. This statement became effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. We adopted the provisions of this
statement on January 1, 2009, which required additional disclosure in our 2009
financial statements. The adoption of this statement did not have a
material impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141R, which was incorporated into ASC
805. This statement required the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction, established the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
required additional disclosures by the acquirer. Under this
Statement, all business combinations are accounted for by applying the
acquisition method. This statement became effective for us on January
1, 2009. Earlier application was prohibited. The effect of
the adoption of this statement on our consolidated financial statements will be
on adjustments made to pre-acquisition Pioneer income tax contingencies, which
will no longer be reflected as an adjustment to goodwill but recognized through
income tax expense.
In
December 2007, the FASB issued SFAS No. 160, which was incorporated into ASC
810. This statement required noncontrolling interests (previously
referred to as minority interests) to be treated as a separate component of
equity, not as a liability or other item outside of permanent
equity. The statement applied to the accounting for noncontrolling
interests and transactions with noncontrolling interest holders in consolidated
financial statements. This statement became effective for us on
January 1, 2009. Earlier application was prohibited. This
statement was applied prospectively to all noncontrolling interests, including
any that arose before the effective date except that comparative period
information must be recast to classify noncontrolling interests in equity,
attribute net income and other comprehensive income to noncontrolling interests,
and provide additional required disclosures. The adoption of this
statement did not have a material effect on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, which was incorporated into ASC
820. This statement did not require any new fair value measurements,
but rather, it provided enhanced guidance to other pronouncements that require
or permit assets or liabilities to be measured at fair value. The
changes to current practice resulting from the application of this statement
related to the definition of fair value, the methods used to estimate fair
value, and the requirement for expanded disclosures about estimates of fair
value. This statement became effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. The effective date for this statement for all nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis was
delayed by one year. Nonfinancial assets and nonfinancial liabilities
that were impacted by this deferral included assets and liabilities initially
measured at fair value in a business combination, and intangible assets and
goodwill tested annually for impairment. We adopted the provisions of
this statement related to financial assets and financial liabilities on
January 1, 2008, which required additional disclosure in our financial
statements. The partial adoption of this statement did not have a
material impact on our consolidated financial statements. We adopted
the remaining provisions of this statement related to nonfinancial assets and
nonfinancial liabilities on January 1, 2009. The adoption of the
remaining provisions of this statement did not have a material impact on our
consolidated financial statements.
ACQUISITIONS
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 plants 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 includes direct fees and expenses. We financed the
merger with cash and $110.0 million of borrowings against our Accounts
Receivable Facility. At the date of acquisition, Pioneer had cash and
cash equivalents of $126.4 million. We assumed $120.0 million of
Pioneer’s convertible debt which was redeemed in the fourth quarter of 2007 and
January 2008. We paid a conversion premium of $25.8 million on the
Pioneer convertible debt.
For
segment reporting purposes, Pioneer has been included in Chlor Alkali
Products. Our results for 2008 and 2007 included $552.7 million and
$183.6 million, respectively, of Pioneer sales and $101.9 million and $29.2
million, respectively, of Pioneer segment income.
We
finalized our purchase price allocation during 2008. The adjustments
to the purchase price allocation were primarily the result of finalizing
estimates for environmental expenditures to investigate and remediate known
sites and asset retirement obligations, partially offset by a resolution of
certain tax audit issues. These adjustments resulted in no change to
goodwill. The following table summarizes the final allocation of the
purchase price to Pioneer’s assets and liabilities:
|
|
August
31, 2007
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
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 $29.3 million, accrued
pension and postretirement liabilities of $15.0 million, asset retirement
obligations of $23.6 million and other liabilities of $6.2 million.
During
the fourth quarter of 2007, we completed our valuation of identifiable
intangible assets that resulted from the Pioneer acquisition. We
allocated $19.0 million of purchase price to intangible assets relating to
customers, customer contracts and relationships, which management estimates to
have a useful life of fifteen years, and $1.2 million to intangible assets
associated with internally developed and purchased software, which management
estimates to have a useful life of five years. These identifiable
intangible assets were included in other assets.
Based on
the valuation, $301.9 million was assigned to goodwill. In 2009, the
December 31, 2008 goodwill amount was reduced by $1.6 million, which reflected a
reclassification of deferred taxes associated with the resolution of a Canadian
tax matter. None of the goodwill is deductible for tax
purposes. The goodwill represents the portion of the purchase price
that is in excess of the fair values of the other net assets
acquired. The primary reason for the acquisition and the principal
factors that contributed to a Pioneer purchase price that resulted in the
recognition of goodwill are the cost savings available from the combination of
the two businesses, the geographic diversification the Pioneer locations provide
us, and the strengthened position in the industrial bleach
segment. The cost-saving opportunities included the elimination of
duplicate administrative activities and improved operational efficiencies in
logistics, purchasing, and manufacturing.
Goodwill
recorded in the acquisition is not amortized but is reviewed annually in
the fourth quarter and/or when circumstances or other events indicate that
impairment may have occurred.
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
bleach operations. We substantially completed the closure of the
Dalhousie facility by June 30, 2008. We expect to incur cash
expenditures of $2.5 million associated with the shutdown, which were previously
included in current liabilities on the August 31, 2007 balance
sheet. We have paid $2.2 million of costs associated with this
shutdown as of December 31, 2009.
The
following pro forma summary presents the condensed statement of operations as if
the acquisition of Pioneer had occurred at the beginning of the period
(unaudited):
|
|
Year
ended
December
31,
|
|
|
|
2007
|
|
|
|
($
in millions,
except
per share data)
|
|
|
|
$ |
1,625.0 |
|
Income
from continuing operations
|
|
|
116.1 |
|
|
|
|
6.1 |
|
Income
from continuing operations per common share:
|
|
|
|
|
|
|
$ |
1.57 |
|
|
|
|
1.56 |
|
Net
income per common share:
|
|
|
|
|
|
|
$ |
0.08 |
|
|
|
|
0.08 |
|
The pro
forma statement of operations includes an increase to interest expense of $4.3
million. This adjustment is calculated assuming that our borrowings
of $110.0 million at an interest rate of 5.76% at the time of the merger were
outstanding from January 1, 2007. The pro forma statement of
operations uses 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 period presented.
DISCONTINUED
OPERATIONS
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. We recognized a pretax loss of $160.0 million partially offset
by a $21.0 million income tax benefit, resulting in a net loss on disposal of
discontinued operations of $139.0 million for 2007. The loss on
disposal of discontinued operations included a pension curtailment charge of
$6.9 million, other postretirement benefits curtailment credit of $1.1 million,
and transaction fees of $24.6 million. The final loss
recognized related to this transaction did not change upon the final
determination of the value of working capital in the business. The
loss on the disposal, which included transaction costs, reflected a book value
of the Metals business of approximately $564 million and a tax basis of
approximately $396 million. The difference between the book and tax
values of the business reflected primarily goodwill of $75.8 million and
intangibles of $10.4 million. Based on the final working capital
adjustment, we received net cash proceeds from the transaction of $380.8
million, which was in addition to the $98.1 million of after-tax cash flow
realized from the operation of Metals during 2007.
In April
2008, we and Global entered into a binding arbitration regarding the final
working capital adjustment. The arbitration was concluded in 2009 and
resulted in a payment of $20.6 million, which was consistent with the estimated
working capital adjustment we anticipated from the transaction.
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 $1,891.7 million for the period of our ownership in
2007. Intersegment sales of $81.4 million for the period of our
ownership in 2007 representing the sale of ammunition cartridge case cups to
Winchester from Metals, at prices that approximate market, have been eliminated
from Metals sales. In conjunction with the sale of the Metals
business, Winchester agreed to purchase the majority of its ammunition cartridge
case cups and copper-based strip requirements from Global under a multi-year
agreement with pricing, terms, and conditions which approximate
market. The Metals business employed approximately 2,900 hourly and
salaried employees. The results of operations from the Metals
business have been presented as discontinued operations for all periods
presented.
In
conjunction with the sale of the Metals business, we retained certain assets and
liabilities including certain assets co-located with our Winchester business in
East Alton, IL, assets and liabilities associated with former Metals
manufacturing locations, pension assets and pension and postretirement
healthcare and life insurance liabilities associated with Metals employees for
service earned through the date of sale, and certain environmental obligations
existing at the date of closing associated with current and past Metals
manufacturing operations and waste disposal sites.
EARNINGS
PER SHARE
Basic and
diluted income (loss) per share are computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted
earnings per share reflect the dilutive effect of stock-based
compensation.
|
|
Years
ended December 31,
|
|
Computation
of Income (Loss) per Share
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($
and shares in millions, except per share data)
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
effect of stock-based compensation of 0.2 million, zero and 0.2 million shares
have not been included in dilutive earnings per share in 2009, 2008 and 2007,
respectively, as their effect would have been anti-dilutive.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS RECEIVABLES
Allowance for doubtful accounts receivable consisted
of the following:
|
|
December
31, |
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-offs,
net of recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVENTORIES
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
valued using the LIFO method comprised 68% and 73% of the total inventories at
December 31, 2009 and 2008, respectively. If the first-in,
first-out (FIFO) method of inventory accounting had been used, inventories would
have been $58.2 million and $69.5 million higher than that reported at
December 31, 2009 and 2008, respectively.
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
December
31,
|
|
|
Useful
Lives
|
|
2009
|
|
|
2008
|
|
|
|
|
($
in millions)
|
|
Land
and improvements to land
|
|
|
|
|
|
|
|
|
|
Buildings
and building equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $70.2 million, $68.1 million, and $47.3 million for 2009, 2008 and
2007, respectively. Leased assets capitalized and included above are
not significant. Interest capitalized was $9.7 million, $5.0 million,
and $0.2 million for 2009, 2008 and 2007, respectively. Maintenance
and repairs charged to operations amounted to $135.0 million, $124.1 million,
and $88.8 million in 2009, 2008 and 2007, respectively. The increase
in depreciation expense and maintenance and repair charges from 2007 primarily
relate to Pioneer.
The
consolidated statements of cash flows for the years ended December 31, 2009 and
2008, included a $2.6 million and $(16.2) million, respectively, increase
(reduction) to capital expenditures, with the corresponding change to accounts
payable and accrued liabilities, related to purchases of property, plant and
equipment included in accounts payable at December 31, 2009 and
2008.
INVESTMENTS—AFFILIATED
COMPANIES
We have a
50% ownership interest in SunBelt which is accounted for using the equity method
of accounting. Condensed financial positions and results of
operations of this equity-basis affiliate in its entirety were as
follows:
|
|
December
31,
|
|
|
100% Basis
|
|
2009
|
|
|
2008
|
|
|
|
|
Condensed
balance sheet data:
|
|
($
in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
income statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amount of cumulative unremitted earnings of SunBelt was $3.5 million and $12.9
million at December 31, 2009 and 2008, respectively. We received
distributions from SunBelt totaling $34.4 million, $29.4 million, and $35.1
million in 2009, 2008 and 2007, respectively. We have not made any
contributions in 2009, 2008 or 2007.
In
accounting for our ownership interest in SunBelt, we adjust the reported
operating results for depreciation expense in order to conform SunBelt’s plant
and equipment useful lives to ours. Beginning January 1, 2007, the
original machinery and equipment of SunBelt had been fully depreciated in
accordance with our useful asset lives, thus resulting in lower depreciation
expense. The lower depreciation expense increased our share of
SunBelt’s operating results by $3.5 million, $4.8 million and $3.8 million in
2009, 2008 and 2007, respectively. The operating results from Sunbelt
included interest expense of $4.0 million, $4.4 million, and $4.8 million in
2009, 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 $8.4 million, $8.2 million, and $8.3 million
in 2009, 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 guarantee
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 failure to pay on a guarantee or otherwise, the holders of the SunBelt Notes
may proceed against the assets of SunBelt for repayment. If we were
to make debt service payments under our guarantee, we would have a right to
recover such payments from SunBelt.
Beginning
on December 22, 2002 and each year through 2017, SunBelt is required to
repay $12.2 million of the SunBelt Notes, of which $6.1 million is attributable
to the Series O Notes. After the payment of $6.1 million on the
Series O Notes in December 2009, our guarantee of these notes was $48.8
million. In the event SunBelt cannot make any of these payments, we
would be required to fund the payment on the Series O Notes. In
certain other circumstances, we may also be required to repay the SunBelt Notes
prior to their maturity. We and PolyOne have agreed that, if we or
PolyOne intend to transfer our respective interests in SunBelt and the
transferring party is unable to obtain consent from holders of 80% of the
aggregate principal amount of the indebtedness related to the guarantee being
transferred after good faith negotiations, then we and PolyOne will be required
to repay our respective portions of the SunBelt Notes. In such event,
any make whole or similar penalties or costs will be paid by the transferring
party.
In
addition to SunBelt, we have two other investments, which are accounted for
under the equity method.
On
November 16, 2007, we purchased for cash an $11.6 million equity interest
in a limited liability company that owns a bleach and related
chemical manufacturing facility (bleach joint venture). As part
of the investment we also entered into several commercial agreements, including
agreements by which we will supply raw materials and services, and we
will have marketing responsibility for bleach and caustic soda.
We hold a
9.1% limited partnership interest in Bay Gas Storage Company, Ltd. (Bay Gas), an
Alabama limited partnership, in which EnergySouth, Inc. (EnergySouth), which was
acquired in 2008 by Sempra Energy, is the general partner with interest of
90.9%. Bay Gas owns, leases, and operates underground gas storage and
related pipeline facilities, which are used to provide storage in the McIntosh,
AL area and delivery of natural gas to EnergySouth customers.
The
following table summarizes our investments in our equity
affiliates:
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in equity affiliates
|
|
|
|
|
|
|
|
|
The
following table summarizes our equity earnings of non-consolidated
affiliates:
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Equity
earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
We
received net settlement of advances of $37.1 million, $27.6 million, and $25.4
million for 2009, 2008 and 2007, respectively.
DEBT
Credit
Facility
On
October 29, 2007, we entered into a new $220 million five-year senior revolving
credit facility, which replaced the $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 new senior revolving 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 December 31, 2009
we had $219.6 million available under this senior revolving credit facility,
because we had issued $20.4 million of letters of credit under a $110 million
subfacility. Under the senior revolving credit facility, we may
select various floating rate borrowing options. The actual interest
rate paid on borrowings under the senior revolving credit facility is based on a
pricing grid which is dependent upon the leverage ratio as calculated under the
terms of the facility at the end of the prior fiscal quarter. The facility includes
various customary restrictive covenants, including restrictions related to the
ratio of debt to earnings before interest expense, taxes, depreciation and
amortization (leverage ratio) and the ratio of earnings before interest expense,
taxes, depreciation and amortization to interest expense (coverage
ratio). Compliance with these covenants is determined quarterly based
on the operating cash flows for the last four quarters. We were in
compliance with all covenants and restrictions under all our outstanding credit
agreements as of December 31, 2009 and 2008, and no event of default had
occurred that would permit the lenders under our outstanding credit agreements
to accelerate the debt if not cured. In the future, our ability to
generate sufficient operating cash flows, among other factors, will determine
the amounts available to be borrowed under these facilities. As of
December 31, 2009, there were no covenants or other restrictions that limited
our ability to borrow.
At
December 31, 2009, we had letters of credit of $46.7 million outstanding, of
which $20.4 million were issued under our $240 million senior revolving credit
facility. In addition to our senior revolving credit facility, we
have a $35 million letter of credit facility. These letters of credit
are used to support certain long-term debt, capital expenditure commitments,
certain workers compensation insurance policies, and plant closure and
post-closure obligations.
Long-Term
Debt
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Notes
payable:
|
|
($
in millions)
|
|
9.125%,
due 2011 (includes interest rate swaps of $5.5 million in 2009 and $8.5
million in 2008)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.875%,
due 2019 (includes unamortized discount of $1.2
million)
|
|
|
|
|
|
|
|
|
Industrial
development and environmental improvement obligations at fixed interest
rates of 6.625% to 6.75%, due 2014-2025 (includes interest rate swaps of
$1.4 million in 2009 and $2.8 million in 2008)
|
|
|
|
|
|
|
|
|
Accounts
receivable facility
|
|
|
|
|
|
|
|
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|
|
Amounts
due within one year
|
|
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|
|
|
|
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|
|
|
In August
2009, we sold $150.0 million of 2019 Notes with a maturity date of August 15,
2019. The 2019 Notes were issued at 99.19% of par value, providing a
yield to maturity to investors of 9.0%. Interest will be paid
semi-annually beginning on February 15, 2010. Proceeds of $145.5
million, after expenses of $3.3 million, from the 2019 Notes will be used to
further strengthen our long-term liquidity given uncertain economic
times.
We have a
$75 million, 364-day Accounts Receivable Facility, renewable annually for five
years, which expires in July 2012. The Accounts Receivable Facility
provides for the sale of our eligible trade receivables to a third party conduit
through a wholly-owned, bankruptcy-remote, special purpose entity that is
consolidated for financial statement purposes. At December 31, 2009,
we had $75 million available under the Accounts Receivable Facility based on
eligible trade receivables. At December 31, 2009, we had no
securitized accounts receivable or the corresponding debt on the consolidated
balance sheet. Interest expense under this facility was zero in 2009
and 2008 and $1.0 million for 2007. The Accounts Receivable Facility
contains specific covenants relating to the ability of the lender to obtain or
maintain a first priority lien on the receivables. In addition, the
Accounts Receivable Facility incorporates the leverage and coverage covenants
that are contained in the senior revolving credit facility.
Annual
maturities of long-term debt are none in 2010, $80.5 million in 2011, none in
2012, $11.4 million in 2013, $1.8 million in 2014 and a total of $304.7 million
thereafter.
As a
result of our fixed-rate financings, we entered into floating interest rate
swaps in order to manage interest expense and floating interest rate
exposure. We have entered into swaps, as disclosed below, whereby we
agree to pay variable and fixed rates to a counterparty who, in turn, pays us
fixed and variable rates. In all cases the underlying index for
variable rates is the six-month LIBOR. Accordingly, payments are
settled every six months and the terms of the swaps are the same as the
underlying debt instruments.
The
following table reflects the swap activity related to certain debt
obligations:
Underlying
Debt Instrument
|
|
Swap
Amount
|
|
Date
of Swap
|
|
December 31, 2009
|
|
|
|
|
($
in millions)
|
|
|
|
Olin
Pays
Floating
Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
development and environmental improvement obligations at interest
rates of 6.625%-6.75% due 2016-2017
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Olin
Receives
Floating
Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(a)
|
Actual
rate is set in arrears. We project the rate will fall within
the range shown.
|
In 2001
and 2002, we entered into interest rate swaps on $75 million of our underlying
fixed-rate debt obligations, whereby we agreed to pay variable rates to a
counterparty who, in turn, pays us fixed rates. The counterparty to
these agreements is Citibank, N.A., a major financial institution. In
January 2009, we entered into a $75 million fixed interest rate swap with equal
and opposite terms as the $75 million variable interest rate swaps on the 2011
Notes. We have agreed to pay a fixed rate to a counterparty who, in
turn, pays us variable rates. The counterparty to this agreement is
Bank of America, a major financial institution. The result was a gain
of $7.9 million on the $75 million variable interest rate swaps, which will be
recognized through 2011. As of December 31, 2009, $5.5 million of
this gain was included in long-term borrowings as an increase to the carrying
amount of the 2011 Notes.
The
remaining $26.6 million of interest rate swaps have been designated as fair
value hedges of the risk of changes in the value of our fixed-rate debt due to
changes in interest rates, for a portion of our fixed-rate
borrowings. Accordingly, the interest rate swaps have been recorded
at their fair market value of $1.4 million at December 31, 2009 and are included
in other assets on the accompanying consolidated balance sheet, with a
corresponding increase in the carrying amount of the industrial development and
environmental improvement obligations. No gain or loss has been
recorded as the swaps meet the criteria to qualify for hedge accounting
treatment with no ineffectiveness. The counterparty to these interest
rate swap contracts is Citibank, N.A., a major financial
institution.
Our loss
in the event of nonperformance by these counterparties could be significant to
our financial position and results of operations. These interest rate
swaps reduced interest expense by $5.1 million, $2.5 million, and $0.6 million
for 2009, 2008 and 2007, respectively. The difference between
interest paid and interest received is included as an adjustment to interest
expense.
PENSION
PLANS
In
October 2007, we announced that we were freezing our domestic defined
benefit pension plan for salaried and certain non-bargained 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 December 31, 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. Freezing the
domestic defined benefit pension plan for salaried and certain non-bargained
hourly employees was accounted for as a curtailment under ASC 715, formerly SFAS
No. 88. As a result of freezing the domestic defined benefit plan, we
recorded a curtailment charge of $1.9 million for the defined benefit pension
plan and a corresponding curtailment credit of $1.9 million for the
non-qualified pension plan in 2007. Beginning in 2008, most of our
employees participate in defined contribution pension plans. Expenses
of the defined contribution pension plans were $12.7 million, $11.3 million and
$2.7 million for 2009, 2008 and 2007, respectively.
A portion
of our bargaining hourly employees continue to participate in our domestic
defined benefit pension plans under a flat-benefit formula. Our
funding policy for the defined benefit pension plans is consistent with the
requirements of federal laws and regulations. Our foreign
subsidiaries maintain pension and other benefit plans, which are consistent with
statutory practices. Our defined benefit pension plan provides that
if, within three years following a change of control of Olin, any corporate
action is taken or filing made in contemplation of, among other things, a plan
termination or merger or other transfer of assets or liabilities of the plan,
and such termination, merger or transfer thereafter takes place, plan benefits
would automatically be increased for affected participants (and retired
participants) to absorb any plan surplus (subject to applicable collective
bargaining requirements).
During
the third quarter of 2006, the “Pension Protection Act of 2006,” amended by “The
Worker, Retiree, and Employer Recovery Act,” during the fourth quarter of 2008,
became law. Among the stated objectives of the laws were the
protection of both pension beneficiaries and the financial health of the
PBGC. To accomplish these objectives, the new laws require sponsors
to fund defined benefit pension plans earlier than previous requirements and to
pay increased PBGC premiums. The laws require defined benefit pension
plans to be fully funded in 2011. This will accelerate and
potentially increase our pension plan funding requirements.
Pension
Obligations and Funded Status
Changes
in the benefit obligation and plan assets were as follows:
|
Pension
Benefits
|
|
Pension
Benefits
|
|
|
2009
|
|
2008
|
|
|
($
in millions)
|
|
($
in millions)
|
|
Change
in Benefit Obligation
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
Benefit
obligation at beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Currency
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Fair
value of plans’ assets at beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
return on plans’ assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plans’ assets at end of year
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under ASC
715, formerly SFAS No. 158, we recorded a $23.0 million after-tax charge ($35.0
million pretax) to shareholders’ equity as of December 31, 2009 for our pension
plans. This charge reflected a 50-basis point decrease in the plans’
discount rate, partially offset by the favorable performance on plan assets
during 2009. In 2008, we recorded a $103.2 million after-tax charge
($168.9 million pretax) to shareholders’ equity as of December 31, 2008 for our
pension plans. This charge reflected the unfavorable performance on
plan assets during 2008.
Amounts
recognized in the consolidated balance sheets consisted of:
|
Pension
Benefits
|
|
Pension
Benefits
|
|
|
2009
|
|
2008
|
|
|
($
in millions)
|
|
($
in millions)
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
benefit in current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
benefit in noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
The $93.0
million actuarial loss for 2009 was the result of actuarial losses, primarily
due to a 50-basis point decrease in the plans’ discount rate. The
$3.1 million actuarial gain for 2008 was the result of actuarial gains due to
plan experience.
At
December 31, 2009 and 2008, the benefit obligation of non-qualified pension
plans was $60.4 million and $56.5 million, respectively, and was included in the
above pension benefit obligation. There were no plan assets for these
non-qualified pension plans. Benefit payments for the non-qualified
pension plans are expected to be as follows: 2010—$4.2 million;
2011—$4.0 million; 2012—$10.4 million; 2013—$4.4 million; and 2014—$3.4
million. Benefit payments for the qualified plans are projected to be
as follows: 2010—$118.0 million; 2011—$108.3 million; 2012—$103.6
million; 2013—$99.6 million; and 2014—$96.1 million.
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
|
Projected
benefit obligation
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
|
|
|
|
|
|
|
Fair
value of plan assets
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Components
of Net Periodic Benefit (Income) Cost
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
return on plans’ assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit (income) cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in Other Comprehensive Loss (Pretax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service costs and actuarial losses
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Therefore, the allocated portion of net periodic pension
benefit costs for the Metals business of $7.9 million for the period of our
ownership in 2007 was included in income from discontinued
operations.
In 2008,
we recorded curtailment charges of $4.1 million associated with the transition
of a portion of our East Alton, IL Winchester hourly workforce and our McIntosh,
AL Chlor Alkali hourly workforce from a defined benefit pension plan to a
defined contribution pension plan. In 2007, we recorded a defined
benefit pension curtailment charge of $6.9 million related to the sale of the
Metals business, which was included in the loss on disposal of discontinued
operations. Also during 2007, we recorded a curtailment charge of
$0.5 million resulting from the conversion of a portion of the Metals hourly
workforce from a defined benefit pension plan to a defined contribution pension
plan, which was included in income from discontinued operations.
Pension
Plan Assumptions
Certain
actuarial assumptions, such as discount rate and long-term rate of return on
plan assets, have a significant effect on the amounts reported for net periodic
benefit cost and accrued benefit obligation amounts. We use a
measurement date of December 31 for our pension plans.
|
|
Pension Benefits
|
|
Weighted
Average Assumptions:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate—periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
return on assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
of compensation increase
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate—benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
The
discount rate is based on a hypothetical yield curve represented by a series of
annualized individual zero-coupon bond spot rates for maturities ranging from
one-half to thirty years. The bonds used in the yield curve must have
a rating of AA or better per Standard & Poor’s, be non-callable, and
have at least $150 million par outstanding. The yield curve is then
applied to the projected benefit payments from the plan. Based on
these bonds and the projected benefit payment streams, the single rate that
produces the same yield as the matching bond portfolio, rounded to the nearest
quarter point, is used as the discount rate.
The
long-term expected rate of return on plan assets represents an estimate of the
long-term rate of returns on the investment portfolio consisting of equities,
fixed income, and alternative investments. We use long-term
historical actual return information, the allocation mix of investments that
comprise plan assets, and forecast estimates of long-term investment returns by
reference to external sources. The historic rate of return on plan
assets has been 10.3% for the last 5 years, 6.8% for the last 10 years, and
10.5% for the last 15 years. The following rates of return by asset class were
considered in setting the long-term rate of return assumption:
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|
|
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|
|
Absolute
return strategies
|
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|
Plan
Assets
Our
pension plan asset allocation at December 31, 2009 and 2008, by asset class
is as follows:
|
|
Percentage of Plan Assets
|
|
Asset
Class
|
|
2009
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2008
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Absolute
return strategies
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The
Alternative Investments asset class includes hedge funds, real estate, and
private equity investments. The Alternative Investment class is
intended to help diversify risk and increase returns by utilizing a broader
group of assets.
Absolute
Return Strategies further diversify the plan’s assets through the use of asset
allocations that seek to provide a targeted rate of return over
inflation. The investment managers allocate funds within asset
classes that they consider to be undervalued in an effort to preserve gains in
overvalued asset classes and to find opportunities in undervalued asset
classes.
A master
trust was established by our pension plan to accumulate funds required to meet
benefit payments of our plan and is administered solely in the interest of our
plan’s participants and their beneficiaries. The master trust’s
investment horizon is long term. Its assets are managed by
professional investment managers or invested in professionally managed
investment vehicles.
Our
pension plan maintains a portfolio of assets designed to achieve an appropriate
risk adjusted return. The portfolio of assets is also structured to
protect the funding level from the negative impacts of interest rate changes on
the asset and liability values. This is accomplished by investing in
a portfolio of assets with a maturity duration that approximately matches the
duration of the plan liabilities. Risk is managed by diversifying
assets across asset classes whose return patterns are not highly correlated,
investing in passively and actively managed strategies and in value and growth
styles, and by periodic rebalancing of asset classes, strategies and investment
styles to objectively set targets.
The
following target allocation and ranges have been set for each asset
class:
Asset
Class
|
|
Target Allocation
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|
|
Target Range
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Absolute
return strategies
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Ranges
recognize the tendency of trends to persist and are designed to minimize
transaction costs associated with rebalancing. Asset class target
allocations are reviewed periodically and adjusted as appropriate. In
September 2006, we made a voluntary pension plan contribution of $80.0 million
and in May 2007, we made an additional $100.0 million voluntary contribution to
our defined benefit pension plan. As a result of these voluntary
contributions and favorable asset performance during 2006 and 2007, the asset
allocation in our pension plan was adjusted to insulate the plan from discount
rate risk and to reduce the plan’s exposure to equity investments.
For our
domestic qualified pension plans, based on current funding requirements, we will
not be required to make any cash contributions at least through 2010. We
do have a small Canadian defined benefit pension plan to which we made $4.5
million of contributions in 2009 and we anticipate approximately $4 million of
contributions in 2010.
Determining
which hierarchical level an asset or liability falls within requires significant
judgment. The following table summarizes our defined benefit pension
plan assets measured at fair value as of December 31, 2009:
Asset class |
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
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|
|
Total
|
|
|
|
($
in millions)
|
|
Equity
securities
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Corporate
debt instruments
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Market
neutral hedge funds
|
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Absolute
return strategies
|
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|
U.S. equities—This class
included actively and passively managed common equity securities comprised
primarily of large-capitalization stocks with value, core and growth
strategies.
Non-U.S. equities—This class
included actively managed common equity securities comprised primarily of
international large-capitalization stocks from both developed and emerging
markets.
Fixed income and
cash—This class included debt
instruments issued by the US and Canadian Treasury, U.S. Agencies, corporate
debt instruments, asset- and mortgage-backed securities and cash.
Event driven hedge funds—This
class included hedge funds that invest in securities to capture excess returns
that are driven by market or specific company events including activist
investment philosophies and the arbitrage of equity and private and public debt
securities.
Market neutral hedge
funds—This class included investments in U.S. and international equities
and fixed income securities while maintaining a market neutral position in those
markets.
Real estate funds—This class
included several funds that invest primarily in U.S. commercial real
estate.
Private equity funds—This
class included several private equity funds that invest primarily in
infrastructure and U.S. power generation and transmission assets.
Other hedge funds—This class
primarily included uninvested cash, long-short equity strategies and a global
macro fund which invested in fixed income, equity, currency, commodity and
related derivative markets.
Absolute return
strategies—This class included multiple strategies which use asset
allocations that seek to provide a targeted rate of return over
inflation. The investment managers allocate funds within asset
classes that they consider to be undervalued in an effort to preserve gains in
overvalued asset classes and to find opportunities in undervalued asset
classes. At December 31, 2009, the asset
allocation included investment in approximately 30% equities, 60% cash and
fixed income, and 10% alternative investments.
U.S.
equities and non-U.S. equities are primarily valued based on the closing price
reported in an active market on which the individual securities are
traded. Fixed income investments are primarily valued at the closing
price reported, if traded on an active market, values derived from comparable
securities of issuers with similar credit ratings, or under a discounted cash
flow approach that utilizes observable inputs, such as current yields of similar
instruments, but includes adjustments for risks that may not be observable such
as certain credit and liquidity risks. Alternative investments are
primarily valued at the net asset value as determined by the independent
administrator or custodian of the fund. The net asset value is based
on the underlying investments, which are valued using inputs such as quoted
market prices of identical instruments, discounted future cash flows,
independent appraisals, and market-based comparable data. Absolute
return strategies are commingled funds which reflect the fair value of our
ownership interest in these funds. The investments in these
commingled funds include some or all of the above asset classes and are
primarily valued at net asset values based on the underlying investments,
which are valued consistent with the methodologies described above for each
asset class.
The
following table summarizes the activity for our defined benefit pension plan
level 3 assets for the year ended December 31, 2009:
|
|
December
31,
2008
|
|
|
Realized
Gain/(Loss)
|
|
|
Unrealized
Gain/(Loss) Relating to Assets Held at Period End
|
|
|
Purchases,
Sales, and Settlements
|
|
|
Transfers
In/(Out)
|
|
|
December
31, 2009
|
|
|
|
($
in millions)
|
|
Fixed
income / cash
|
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$
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|
Corporate
debt instruments
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Market
neutral hedge funds
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|
Absolute
return strategies
|
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|
POSTRETIREMENT
BENEFITS
We
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. We use a
measurement date of December 31 for our postretirement plans.
Other
Postretirement Benefits Obligations and Funded Status
Changes in the benefit obligation were
as follows:
|
Other
Postretirement Benefits
|
|
Other
Postretirement Benefits
|
|
|
2009
|
|
2008
|
|
|
($
in millions)
|
|
($
in millions)
|
|
Change
in Benefit Obligation
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
Benefit
obligation at beginning of year
|
|
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Currency
translation adjustments
|
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|
Benefit
obligation at end of year
|
|
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Other
Postretirement Benefits
|
|
Other
Postretirement Benefits
|
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Under ASC
715, formerly SFAS No. 158, we recorded a $4.3 million after-tax charge ($6.7
million pretax) to shareholders’ equity as of December 31, 2009 for our other
postretirement plans. In 2008, we recorded a $3.8 million after-tax
credit ($6.2 million pretax) to shareholders’ equity as of December 31, 2008 for
our other postretirement plans.
Amounts
recognized in the consolidated balance sheets consisted of:
|
Other
Postretirement Benefits
|
|
Other
Postretirement Benefits
|
|
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|
Accrued
benefit in current liabilities
|
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Accrued
benefit in noncurrent liabilities
|
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Accumulated
other comprehensive loss
|
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Other
Postretirement Benefits
|
|
Components
of Net Periodic Benefit Cost
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($
in millions)
|
|
|
|
$ |
1.2 |
|
|
$ |
1.5 |
|
|
$ |
2.5 |
|
|
|
|
4.2 |
|
|
|
4.4 |
|
|
|
5.4 |
|
Amortization
of prior service cost
|
|
|
(0.2
|
) |
|
|
(0.2
|
) |
|
|
(0.3
|
) |
Recognized
actuarial loss
|
|
|
2.1 |
|
|
|
2.8 |
|
|
|
4.3 |
|
|
|
|
― |
|
|
|
― |
|
|
|
(1.1
|
) |
Net
periodic benefit cost
|
|
$ |
7.3 |
|
|
$ |
8.5 |
|
|
$ |
10.8 |
|
Included
in Other Comprehensive Loss (Pretax)
|
|
|
|
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|
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|
|
|
|
|
|
|
$ |
6.7 |
|
|
$ |
(6.2 |
) |
|
$ |
(14.5 |
) |
Amortization
of prior service costs and actuarial losses
|
|
|
(1.9
|
) |
|
|
(2.6
|
) |
|
|
(2.9
|
) |
The
service cost and amortization of prior service cost components of postretirement
benefit expense related to the employees of the operating segments are allocated
to the operating segments based on their respective estimated census
data. Therefore, the portion of other postretirement benefit costs
for the Metals business employees of $4.4 million for the period of our
ownership in 2007 was included in income from discontinued
operations.
In 2007,
we recorded an other postretirement benefits curtailment credit of $1.1 million
related to the sale of the Metals business, which was included in the loss on
disposal of discontinued operations.
Other
Postretirement Benefits Plan Assumptions
Certain
actuarial assumptions, such as discount rate, have a significant effect on the
amounts reported for net periodic benefit cost and accrued benefit obligation
amounts.
|
|
Other
Postretirement Benefits
|
|
Weighted
Average Assumptions:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate—periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate—benefit obligation
|
|
|
|
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|
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|
|
|
|
The
discount rate is based on a hypothetical yield curve represented by a series of
annualized individual zero-coupon bond spot rates for maturities ranging from
one-half to thirty years. The bonds used in the yield curve must have
a rating of AA or better per Standard & Poor’s, be non-callable, and
have at least $150 million par outstanding. The yield curve is then
applied to the projected benefit payments from the plan. Based on
these bonds and the projected benefit payment streams, the single rate that
produces the same yield as the matching bond portfolio, rounded to the nearest
quarter point, is used as the discount rate.
We review
external data and our own internal trends for healthcare costs to determine the
healthcare cost for the post retirement benefit obligation. The
assumed healthcare cost trend rates for pre-65 retirees were as
follows:
|
Other
Postretirement Benefits
|
|
|
2009
|
|
|
2008
|
|
Healthcare
cost trend rate assumed for next year
|
|
|
|
|
|
|
|
|
Rate
that the cost trend rate gradually declines to
|
|
|
|
|
|
|
|
|
Year
that the rate reaches the ultimate rate
|
|
|
|
|
|
For
post-65 retirees, we provide a fixed dollar benefit, which is not subject to
escalation.
Assumed
healthcare cost trend rates have an effect on the amounts reported for the
healthcare plans. A one-percentage-point change in assumed healthcare
cost trend rates would have the following effects:
|
|
One-Percentage
Point
Increase
|
|
|
One-Percentage
Point
Decrease
|
|
|
|
($
in millions)
|
|
Effect
on total of service and interest costs
|
|
|
|
|
|
|
|
|
Effect
on postretirement benefit obligation
|
|
|
|
|
|
|
|
|
We expect
to make payments of approximately $8 million in 2010 and $7 million for each of
the next four years under the provisions of our other postretirement benefit
plans.
INCOME
TAXES
|
|
Years
ended December 31, |
|
Components
of Income From Continuing Operations Before Taxes
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of Income Tax Provision
|
|
|
|
|
|
|
|
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|
The
following table accounts for the difference between the actual tax provision and
the amounts obtained by applying the statutory U.S. federal income tax rate of
35% to the income from continuing operations before taxes.
|
|
Years
ended December 31, |
|
Effective
Tax Rate Reconciliation (Percent)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Statutory
federal tax rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
rate differential
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
manufacturing/export tax incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in tax contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
|
|
|
Components
of Deferred Tax Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
and state net operating losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
loss carryforward
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
miscellaneous items
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
miscellaneous items
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realization
of the net deferred tax assets is dependent on future reversals of existing
temporary differences and adequate future taxable income, exclusive of reversing
temporary differences and carryforwards. Although realization is not
assured, we believe that it is more likely than not that the net deferred tax
assets will be realized.
At December 31, 2009, refundable income taxes of $19.4 million were
included in other current assets in the consolidated balance sheet.
At
December 31, 2009 and 2008, we had federal tax benefits of $3.8 million and $8.5
million, respectively, relating to actual foreign tax credit
carryforwards. At December 31, 2009 and 2008, we had a valuation
allowance of $3.8 million and $3.5 million, respectively, due to uncertainties
regarding the realization of the tax benefits of our actual foreign tax
credit carryforwards. Our tax benefits for the foreign tax credit
carryforwards and the associated valuation allowance were as
follows:
|
|
Foreign
Tax
Benefit
|
|
|
Valuation
Allowance
|
|
|
|
($
in millions)
|
|
Balance
at January 1, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
for prior year limitations
|
|
|
|
|
|
|
|
|
Decreases
for current year utilization
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
|
|
|
|
|
|
Decreases
for prior year utilization
|
|
|
|
|
|
|
|
|
Decreases
for current year utilization
|
|
|
|
|
|
|
|
|
Increases
for future year limitations
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
|
|
|
|
|
|
In 2007,
we acquired federal tax benefits of $4.8 million as part of the Pioneer
acquisition associated with the expected future foreign tax credits that will be
generated by the deferred tax liabilities of Pioneer’s Canadian
subsidiary. At December 31, 2009, we had federal tax benefits of $3.5
million recorded associated with the expected future foreign tax
credits. Realization of the tax benefits associated with such foreign
tax credits is dependent upon reversal of Canadian temporary differences, future
U.S. taxable income and future foreign source taxable income. We
believe that it is more likely than not that the deferred tax benefits will be
realized and no valuation allowance is necessary.
We
acquired a U.S. net operating loss carryforward (NOL) of approximately $6.6
million (representing $2.3 million of deferred tax assets) as part of the
Pioneer acquisition. At December 31, 2009, we had approximately $5.1
million (representing $1.8 million of deferred tax assets) remaining, that will
expire in years 2017 through 2020, if not utilized. The utilization
of this NOL is limited under Section 382 of the Internal Revenue Code to $0.5
million in each year through 2020. We believe that it is more likely
than not that the NOL will be realized and no valuation allowance is
necessary.
At
December 31, 2009, we had deferred state tax benefits of $1.5 million
relating to state NOLs, which are available to offset future state taxable
income through 2023. Due to uncertainties regarding realization of
the tax benefits, a valuation allowance of $0.8 million has been applied against
the deferred state tax benefits at December 31, 2009.
At
December 31, 2009, we had deferred state tax benefits of $7.5 million relating
to state tax credits that are available to offset future state tax
liabilities. Due to uncertainties regarding the realization of these
state tax credits, a valuation allowance of $7.1 million has been applied
against the deferred state tax credits at December 31, 2009.
At
December 31, 2009, we had a capital loss carryforward of $43.2 million
(representing $16.6 million of deferred tax assets) that is available to offset
future consolidated capital gains. Due to uncertainties regarding the
realization of the capital loss carryforward, a valuation allowance of $16.6
million has been applied against the deferred tax benefit at December 31,
2009.
The total
amount of undistributed earnings of foreign subsidiaries was approximately $33.3
million at December 31, 2009. The Company has not provided deferred
taxes on foreign earnings because such earnings are indefinitely reinvested
outside the United States. Deferred taxes have not been provided on
the excess book basis in the shares of certain foreign subsidiaries because
these basis differences are not expected to reverse in the foreseeable
future. The undistributed earnings and excess book basis differences
could reverse through a sale, receipt of dividends from the subsidiaries, as
well as various other events. It is not practical to calculate the
residual income tax that would result if these basis differences reversed due to
the complexities of the tax law and the hypothetical nature of the
calculations.
The
American Jobs Creation Act (AJCA), signed into law in October 2004, made a
number of changes to the income tax laws which will affect us in future
years. The most significant change for us was a new deduction for
qualifying domestic production activity, which replaced the extraterritorial
income exclusion. As a result of AJCA, we expect a modest decline in
our effective tax rate in 2010 and future years when the qualifying domestic
production activity deduction increases.
In July
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” (FIN No. 48), which was incorporated into ASC 740 “Income Taxes”
(ASC 740). This interpretation clarified the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with FASB No.
109. 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 an
increase to 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).
We
acquired $29.8 million of gross unrecognized tax benefits in conjunction with
the Pioneer acquisition, all of which would have been a reduction to goodwill,
if recognized prior to 2009. During third quarter 2008, we favorably
resolved $7.6 million of Pioneer unrecognized tax benefits associated with
certain audits, which was recorded as a reduction to goodwill. After
adopting ASC 805, formerly SFAS No. 141R in 2009, any remaining balance of
unrecognized tax benefits will affect our effective tax rate instead of
goodwill, if recognized. If these tax benefits are not realized, the
result, as of December 31, 2009, would be cash tax payments of $11.4
million.
As of
December 31, 2009, we had $50.8 million of gross unrecognized tax benefits
(including Pioneer), of which $48.3 million would impact the effective tax rate,
if recognized. If these tax benefits are not recognized, the result
would be cash tax payments of $31.8 million. As of December 31, 2008,
we had $50.2 million of gross unrecognized tax benefits (including Pioneer), all
of which would have impacted the effective rate, if recognized. The
change for 2009 relates to additional gross unrecognized benefits for ongoing
income tax audits by various taxing jurisdictions and current year tax
positions, as well as the expiration of the statute of limitations in domestic
jurisdictions and settlements of ongoing audits. In 2009, the
decrease for prior year tax positions included $0.4 million of foreign currency
translation. The amounts of unrecognized tax benefits were as
follows:
|
|
December
31, |
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
Increase
for prior year tax positions
|
|
|
|
|
|
|
|
|
Decrease
for prior year tax positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
for current year tax positions
|
|
|
|
|
|
|
|
|
Decrease
due to tax settlements
|
|
|
|
|
|
|
|
|
Reductions
due to statute of limitations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
We
recognize interest and penalty expense related to unrecognized tax positions as
a component of the income tax provision. As of December 31, 2009,
interest and penalties accrued was $3.8 million. For 2009, 2008 and
2007, we expensed interest and penalties of $1.1 million, $1.5 million, and $1.4
million, respectively.
As of
December 31, 2009, we believe it is reasonably possible that our total amount of
unrecognized tax benefits will decrease by approximately $10.5 million over the
next twelve months. The reduction primarily relates to settlements
with tax authorities and the lapse of federal, state, and foreign statutes of
limitation.
Our
federal and Canadian income tax returns for 2006 to 2008 are open tax years
under statute of limitations. We file in numerous states, Canadian
provinces, and foreign jurisdictions with varying statutes of limitation open
from 2004 through 2008 depending on each jurisdiction’s unique statute of
limitation. The IRS has commenced an audit of our U.S. income tax
return for 2006. We believe we have adequately provided for all tax
positions; however, amounts asserted by taxing authorities could be greater than
our accrued position.
Pioneer
filed income tax returns in the U.S., various states, Canada, and various
Canadian provinces. Pioneer income tax returns are open for
examination for the years 2005 and forward. The IRS commenced an
audit of Pioneer’s 2006 and 2007 tax years in the fourth quarter of
2008. The IRS audit of Pioneer’s 2006 and 2007 tax years was closed
in the fourth quarter of 2009 and resulted in no change to taxable income as
originally reported. The Canada Revenue Agency has commenced an audit
of Pioneer’s Canadian tax returns for its 2005 to 2007 tax years. No
issues have arisen to date that would suggest an additional tax liability should
be recognized.
ACCRUED
LIABILITIES
Included
in accrued liabilities were the following:
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
|
Accrued
compensation and payroll taxes
|
|
|
|
|
|
|
|
|
Fair
value of foreign currency and commodity forward
contracts
|
|
|
|
|
|
|
|
|
Accrued
employee benefits
|
|
|
|
|
|
|
|
|
Retained
obligations from Metals sale
|
|
|
|
|
|
|
|
|
Environmental
(current portion only)
|
|
|
|
|
|
|
|
|
Legal
and professional costs
|
|
|
|
|
|
|
|
|
Asset
retirement obligation (current portion only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
|
|
|
|
|
|
CONTRIBUTING
EMPLOYEE OWNERSHIP PLAN
The CEOP
is a defined contribution plan available to essentially all domestic
employees. Company matching contributions are invested in the same
investment allocation as the employee’s contribution. The matching
contributions for salaried employees were contingent upon our financial
performance through 2007. Beginning in 2008, the matching
contributions for salaried employees were no longer contingent upon financial
performance. During 2007, a performance match was earned. Our
matching contributions for eligible employees amounted to $5.0 million, $4.6
million, and $7.7 million in 2009, 2008 and 2007,
respectively. Effective January 1, 2010, we suspended the match on
all salaried and certain non-bargained hourly employees’
contributions.
Employees
become vested in the value of the contributions we make to the CEOP according to
a schedule based on service. After two years of service, participants
are 25% vested. They vest in increments of 25% for each additional
year and after five years of service, they are 100% vested in the value of the
contributions that we have made to their accounts.
Employees
may transfer any or all of the value of the investments, including Olin common
stock, to any one or combination of investments available in the
CEOP. Employees may transfer balances daily and may elect to transfer
any percentage of the balance in the fund from which the transfer is
made. However, when transferring out of a fund, employees are
prohibited from trading out of the fund to which the transfer was made for seven
calendar days. This limitation does not apply to trades into the
money market fund or the Olin Common Stock Fund.
STOCK-BASED
COMPENSATION
Stock-based
compensation expense was allocated to the operating segments for the portion
related to employees whose compensation would be included in cost of goods sold
with the remainder recognized in corporate/other. There were no
significant capitalized stock-based compensation costs. Total
stock-based compensation expense was $9.4 million for 2009 and 2008, and $7.1
million for 2007.
Stock
Plans
Under the
stock option and long-term incentive plans, options may be granted to purchase
shares of our common stock at an exercise price not less than fair market value
at the date of grant, and are exercisable for a period not exceeding ten years
from that date. Stock options, restricted stock and performance
shares typically vest over three years. We issue shares to settle
stock options, restricted stock, and share-based performance
awards. On April 23, 2009, the shareholders approved the 2009
Long Term Incentive Plan which authorized an additional 3.0 million shares
available for grant. In 2009, long-term incentive awards included
stock options, performance share awards, and restricted stock. The
stock option exercise price was set at the fair market value of common stock on
the date of the grant, and the options have a ten-year term.
In 2000,
a one-time grant of Performance Accelerated Vesting Stock Options was granted
with an exercise price of $18.97, which was the fair market value of our common
stock on the date of grant. These options had a term of
120 months and would vest in 119 months, and could vest early, but only if
the stock price increased to $28 per share or more for 10 days in any 30 day
calendar period. During 2008, the criteria for early vesting was met;
therefore, all of the outstanding Performance Accelerated Vesting Stock Options
are vested. Performance Accelerated Vesting Stock Options of 295,000
shares were outstanding at December 31, 2009.
Stock
option transactions were as follows:
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
|
Shares
|
|
|
Option
Price
|
|
|
Weighted Average
Option
Price
|
|
|
Options
|
|
|
Weighted Average
Exercise
Price
|
|
Outstanding
at January 1, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2009, the average exercise period for all outstanding and
exercisable options was 65 months and 45 months,
respectively. At December 31, 2009, the aggregate intrinsic
value (the difference between the exercise price and market value) for
outstanding options was $4.2 million and exercisable options was $1.1
million. The total intrinsic value of options exercised during the
years ended December 31, 2009 and 2008 was zero and $15.9 million,
respectively.
The total
unrecognized compensation cost related to unvested stock options at
December 31, 2009 was $3.1 million and was expected to be recognized over a
weighted average period of 1.2 years.
The
following table provides certain information with respect to stock options
exercisable at December 31, 2009:
Range
of
Exercise
Prices
|
|
|
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2009, common shares reserved for issuance and available for
grant or purchase under the following plans consisted of:
|
|
Number
of Shares
|
|
Stock
Option Plans
|
|
Reserved
for Issuance
|
|
|
Available for
Grant or Purchase(1)
|
|
2000
long term incentive plan
|
|
|
|
|
|
|
2003
long term incentive plan
|
|
|
|
|
|
|
2006
long term incentive plan
|
|
|
|
|
|
|
2009
long term incentive plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1991
long term incentive plan (plan expired)
|
|
|
|
|
|
|
1996
stock option plan (plan expired)
|
|
|
|
|
|
|
Chase
benefit plans (assumed in acquisition)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
under stock option plans
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Stock
Purchase Plans
|
|
Reserved
for Issuance
|
|
|
Available for
Grant or Purchase
|
|
1997
stock plan for non-employee directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
under stock purchase plans
|
|
|
|
|
|
|
(1)
|
All
available to be issued as stock options, but includes a sub-limit for all
types of stock awards of 2,590,294
shares.
|
Under the
stock purchase plans, our non-employee directors may defer certain elements of
their compensation into shares of our common stock based on fair market value of
the shares at the time of deferral. Non-employee directors annually
receive stock grants as a portion of their director compensation. Of
the shares reserved under the stock purchase plans at December 31, 2009,
254,244 shares were committed.
Performance share
awards are denominated in shares of our stock and are paid half in cash and half
in stock. Payouts are based on Olin’s average annual return on
capital over a three-year performance cycle in relation to the average annual
return on capital over the same period among a portfolio of public companies
which are selected in concert with outside compensation
consultants. The expense associated with performance shares is
recorded based on our estimate of our performance relative to the respective
target. If an employee leaves the company before the end of the
performance cycle, the performance shares may be prorated based on the number of
months of the performance cycle worked and are settled in cash instead of half
in cash and half in stock when the three-year performance cycle is
completed. Performance share transactions were as
follows:
|
|
To
Settle in Cash
|
|
|
To
Settle in Shares
|
|
|
|
Shares
|
|
|
Weighted
Average Fair Value per Share
|
|
|
Shares
|
|
|
Weighted
Average
Fair Value
per Share
|
|
Outstanding
at January 1, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted
from shares to cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
vested at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
summary of the status of our unvested performance shares to be settled in cash
were as follows:
|
|
Shares
|
|
|
Weighted
Average
Fair Value
per Share
|
|
Unvested
at January 1, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
at December 31, 2009
|
|
|
|
|
|
|
|
|
At
December 31, 2009, the liability recorded for performance shares to be
settled in cash totaled $4.4 million. The total unrecognized
compensation cost related to unvested performance shares at December 31,
2009 was $4.0 million and was expected to be recognized over a weighted average
period of 1.1 years.
SHAREHOLDERS’
EQUITY
During
2009 and 2008, we issued 1,260,693 shares and 947,643 shares of common stock,
respectively, with a total value of $16.9 million and $18.1 million,
respectively, to the CEOP. These shares were issued to satisfy the
investment in our common stock resulting from employee contributions, our
matching contributions, retirement contributions and re-invested
dividends.
There
were no share repurchases in 2009, 2008 and 2007. Under programs
previously approved by our board of directors, 154,076 shares remained to be
repurchased as of December 31, 2009.
We have
registered an undetermined amount of securities with the SEC, so that, from
time-to-time, we may issue debt securities, preferred stock and/or common stock
and associated warrants in the public market under that registration
statement.
The
following table represents the activity included in accumulated other
comprehensive loss:
|
|
Foreign
Currency
Translation
Adjustment
|
|
|
Unrealized
Gains
(Losses)
on
Derivative
Contracts
(net
of taxes)
|
|
|
Pension
and
Postretirement
Benefits
(net
of taxes)
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
($
in millions)
|
|
Balance
at January 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and postretirement benefits (net of taxes) activity in other comprehensive loss
included the amortization of prior service costs and actuarial losses and
pension and postretirement liability adjustments.
As a
result of the sale of the Metals business in 2007, we recognized an after-tax
loss on previously unrecognized foreign currency translation adjustments and net
unrecognized losses on derivative contracts of $4.4 million and $3.6 million,
respectively, which were included in the loss on disposal of discontinued
operations.
Unrealized
gains and losses on derivative contracts (net of taxes) activity in other
comprehensive loss included a deferred tax provision (benefit) for 2009, 2008
and 2007 of $23.2 million, $(16.6) million and $2.0 million,
respectively. Pension and postretirement benefits (net of taxes)
activity in other comprehensive loss included a deferred tax provision (benefit)
for 2009, 2008 and 2007 of $(9.7) million, $(56.3) million and $105.4 million,
respectively.
SEGMENT
INFORMATION
We define
segment results as income (loss) from continuing operations before interest
expense, interest income, other income (expense), and income taxes, and include
the results of non-consolidated affiliates. Consistent with the
guidance in ASC 280, formerly SFAS No. 131, we have determined it is appropriate
to include the operating results of non-consolidated affiliates in the relevant
segment financial results. Our management considers SunBelt to be an
integral component of the Chlor Alkali Products segment. It is
engaged in the same business activity as the segment, including joint or
overlapping marketing, management, and manufacturing functions.
|
|
Years
ended December 31, |
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Sales:
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
of non-consolidated affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments—affiliated
companies (at equity):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets include only those assets which are directly identifiable to an operating
segment. All goodwill, which is associated with its acquisition, is
included in the assets of the Chlor Alkali Products segment. Assets
of the corporate/other segment include primarily such items as cash and cash
equivalents, short-term investments, deferred taxes and other
assets.
|
|
Years
ended December 31, |
|
Geographic
Data:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Sales:
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
($ in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
acquisition of Pioneer contributed sales in the United States and foreign areas
in 2007 of $136.8 million and $46.8 million, respectively. Transfers
between geographic areas are priced generally at prevailing market
prices. Export sales from the United States to unaffiliated customers
were $20.9 million, $29.0 million, and $32.7 million in 2009, 2008 and 2007,
respectively.
ENVIRONMENTAL
In the
United States, the establishment and implementation of federal, state and local
standards to regulate air, water and land quality affect substantially all
of our manufacturing locations. Federal legislation providing for
regulation of the manufacture, transportation, use and disposal of hazardous and
toxic substances, and remediation of contaminated sites, has imposed additional
regulatory requirements on industry, particularly the chemicals
industry. In addition, implementation of environmental laws, such as
the Resource Conservation and Recovery Act and the Clean Air Act, has required
and will continue to require new capital expenditures and will increase plant
operating costs. Our Canadian facility is governed by federal
environmental laws administered by Environment Canada and by provincial
environmental laws enforced by administrative agencies. Many of these
laws are comparable to the U.S. laws described above. We employ
waste minimization and pollution prevention programs at our manufacturing
sites.
We are
party to various governmental and private environmental actions associated with
past manufacturing facilities and former waste disposal
sites. 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 interests against
those unasserted claims. Our accrued liabilities for unasserted
claims amounted to $3.4 million at December 31, 2009. With
respect to asserted claims, we accrue liabilities based on remedial
investigation, feasibility study, remedial action and OM&M expenses that, in
our experience, we may incur in connection with the asserted
claims. Required site OM&M expenses are estimated and accrued in
their entirety for required periods not exceeding 30 years, which reasonably
approximates the typical duration of long-term site OM&M.
Our
liabilities for future environmental expenditures were as follows:
|
|
December
31, |
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remedial
and investigatory spending
|
|
|
|
|
|
|
|
|
Pioneer
acquired liabilities
|
|
|
|
|
|
|
|
|
Currency
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2009 and 2008, our consolidated balance sheets included
environmental liabilities of $131.1 million and $123.9 million, respectively,
which were classified as other noncurrent liabilities. Our
environmental liability amounts did 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. Of the $166.1 million included on our consolidated
balance sheet at December 31, 2009 for future environmental expenditures,
we currently expect to utilize $98.7 million of the reserve for future
environmental expenditures over the next 5 years, $20.2 million for expenditures
6 to 10 years in the future, and $47.2 million for expenditures beyond 10 years
in the future.
Our total
estimated environmental liability at December 31, 2009, was attributable to 68
sites, 16 of which were USEPA NPL sites. Ten sites accounted for 79%
of our environmental liability and, of the remaining 58 sites, no one site
accounted for more than 2% of our environmental liability. At one of
these ten sites a remedial action plan is being implemented. At five
of the ten sites, part of the site is subject to a remedial investigation and
another part is in the long-term OM&M stage. At one of these ten
sites, part of the site is subject to a remedial investigation, part to a
remedial action plan, and another part is in the long-term OM&M
stage. At two sites, part of the site is subject to a remedial action
plan and part of the site to long-term OM&M. The one remaining
site is in long-term OM&M. All ten sites are either associated
with past manufacturing operations or former waste disposal
sites. None of the ten largest sites represents more than 20% of the
liabilities reserved on our consolidated balance sheet at December 31, 2009
for future environmental expenditures.
Charges
or credits to income for investigatory and remedial efforts were material to
operating results in 2009, 2008 and 2007 and may be material to operating
results in future years.
Environmental
provisions (credited) charged to income, which are included in cost of goods
sold, were as follows:
|
|
Years
ended December 31, |
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
from third parties of costs incurred and expensed in prior
periods
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
environmental (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
These
charges relate primarily to remedial and investigatory activities associated
with past manufacturing operations and former waste disposal sites.
Annual
environmental-related cash outlays for site investigation and remediation are
expected to range between approximately $20 million to $40 million over the next
several years, which are expected to be charged against reserves recorded on our
balance sheet. While we do not anticipate a material increase in the
projected annual level of our environmental-related cash outlays, there is
always the possibility that such an increase may occur in the future in view of
the uncertainties associated with environmental
exposures. Environmental exposures are difficult to assess for
numerous reasons, including the identification of new sites, developments at
sites resulting from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, changes in regulatory
authorities, the scarcity of reliable data pertaining to identified sites, the
difficulty in assessing the involvement and financial capability of other PRPs
and our ability to obtain contributions from other parties and the lengthy time
periods over which site remediation occurs. It is possible that some
of these matters (the outcomes of which are subject to various uncertainties)
may be resolved unfavorably to us, which could materially adversely affect our
financial position or results of operations. At December 31,
2009, we estimate we may have additional contingent environmental liabilities of
$50 million in addition to the amounts for which we have already recorded as a
reserve.
COMMITMENTS
AND CONTINGENCIES
The
following table summarizes our contractual commitments under non-cancelable
operating leases and purchase contracts as of December 31, 2009:
|
|
Operating
Leases
|
|
|
Purchase
Commitments
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
We lease
certain properties, such as railroad cars; distribution, warehousing and office
space; and data processing and office equipment. Virtually none of
our lease agreements contain escalation clauses or step rent
provisions. Total rent expense charged to operations amounted to
$45.4 million, $46.2 million, and $33.3 million in 2009, 2008 and 2007,
respectively (sublease income is not significant). The above purchase
commitments include raw material and utility purchasing commitments utilized in
our normal course of business for our projected needs.
In
conjunction with the St. Gabriel conversion and expansion project, we entered
into a twenty-year brine and pipeline supply agreement with
PetroLogistics. PetroLogistics installed, owns and operates, at its
own expense, a pipeline supplying brine to the St. Gabriel, LA
facility. Beginning November 2009, we are obligated to make a fixed
annual payment over the life of the contract of $2.0 million for use of the
pipeline, regardless of the amount of brine purchased. We also have a
minimum usage requirement for brine of $8.4 million over the first five-year
period of the contract. After the first-five year period, the
contract contains a buy out provision exercisable by us for $12.0
million.
On
December 31, 1997, we entered into a long-term, sulfur dioxide supply
agreement with Alliance, formerly known as RFC SO2, 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 $0.2 million
regardless of the sulfur dioxide purchased. Commitments related to
this agreement are $2.4 million per year for 2010 and 2011 and $0.6 million in
2012. This supply agreement expires in 2012.
We, and
our subsidiaries, are defendants in various legal actions (including proceedings
based on alleged exposures to asbestos) incidental to our past and current
business activities. While we believe that none of these legal
actions will materially adversely affect our financial position, in light of the
inherent uncertainties of litigation, we cannot at this time determine whether
the financial impact, if any, of these matters will be material to our results
of operations.
During
the ordinary course of our business, contingencies arise resulting from an
existing condition, situation, or set of circumstances involving an uncertainty
as to the realization of a possible gain contingency. In certain
instances such as environmental projects, we are responsible for managing the
cleanup and remediation of an environmental site. There exists the
possibility of recovering a portion of these costs from other
parties. We account for gain contingencies in accordance with the
provisions of ASC 450, formerly SFAS No. 5, and therefore do not record
gain contingencies and recognize income until it is earned and
realizable.
DERIVATIVE
FINANCIAL INSTRUMENTS
We are
exposed to market risk in the normal course of our business operations due to
our purchases of certain commodities, our ongoing investing and financing
activities, and our operations that use foreign currencies. The risk
of loss can be assessed from the perspective of adverse changes in fair values,
cash flows and future earnings. We have established policies and
procedures governing our management of market risks and the use of financial
instruments to manage exposure to such risks. ASC 815, formerly SFAS
No. 133, required an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. We use hedge accounting treatment for substantially
all of our business transactions whose risks are covered using derivative
instruments. In accordance with ASC 815, we designate commodity
forward contracts as cash flow hedges of forecasted purchases of commodities and
certain interest rate swaps as fair value hedges of fixed-rate
borrowings. We do not enter into any derivative instruments for
trading or speculative purposes.
Energy
costs, including electricity used in our Chlor Alkali Products segment, and
certain raw materials and energy costs, namely copper, lead, zinc, electricity,
and natural gas used primarily in our Winchester segment, are subject to price
volatility. Depending on market conditions, we may enter into futures
contracts and put and call option contracts in order to reduce the impact of
commodity price fluctuations. The majority of our commodity
derivatives expire within one year. Those commodity contracts that
extend beyond one year correspond with raw material purchases for long-term
fixed-price sales contracts.
We enter
into forward sales and purchase contracts to manage currency risk resulting from
purchase and sale commitments denominated in foreign currencies (principally
Canadian dollar and Euro). All of the currency derivatives expire
within two years and are for United States dollar equivalents. Our
foreign currency forward contracts do not meet the criteria to qualify for hedge
accounting. At December 31, 2009 and December 31, 2008, we had
forward contracts to sell foreign currencies with a notional value of $0.3
million and zero, respectively. At December 31, 2009 and December 31,
2008, we had forward contracts to buy foreign currencies with a notional value
of $1.7 million and zero, respectively.
In 2001
and 2002, we entered into interest rate swaps on $75 million of our underlying
fixed-rate debt obligations, whereby we agreed to pay variable rates to a
counterparty who, in turn, pays us fixed rates. The counterparty to
these agreements is Citibank, N.A., a major financial institution. In
January 2009, we entered into a $75 million fixed interest rate swap with equal
and opposite terms as the $75 million variable interest rate swaps on the 2011
Notes. We have agreed to pay a fixed rate to a counterparty who, in
turn, pays us variable rates. The counterparty to this agreement is
Bank of America, a major financial institution. The result was a gain
of $7.9 million on the $75 million variable interest rate swaps, which will be
recognized through 2011. In January 2009, we de-designated our $75
million interest rate swaps that had previously been designated as fair value
hedges. The $75 million variable interest rate swaps and the $75
million fixed interest rate swap do not meet the criteria for hedge
accounting. All changes in the fair value of these interest rate
swaps are recorded currently in earnings.
Cash
Flow Hedges
ASC 815
requires that all derivative instruments be recorded on the balance sheet at
their fair value. For derivative instruments that are designated and
qualify as a cash flow hedge, the change in fair value of the derivative is
recognized as a component of other comprehensive loss until the hedged item is
recognized into earnings. Gains and losses on the derivatives
representing hedge ineffectiveness are recognized currently in
earnings.
We had
the following notional amount of outstanding commodity forward contracts that
were entered into to hedge forecasted purchases:
|
|
December
31, |
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2009, the counterparty to $36.2 million of these commodity forward
contracts was Wells Fargo, a major financial institution.
We use
cash flow hedges for certain raw material and energy costs such as copper, zinc,
lead, and natural gas to provide a measure of stability in managing our exposure
to price fluctuations associated with forecasted purchases of raw materials and
energy costs used in our manufacturing process. At December 31, 2009,
we had open positions in futures contracts through 2013. If all open
futures contracts had been settled on December 31, 2009, we would have
recognized a pretax gain of $18.7 million.
If
commodity prices were to remain at the levels they were at December 31, 2009,
approximately $12.5 million of deferred gains would be reclassified into
earnings during the next twelve months. The actual effect on earnings
will be dependent on actual commodity prices when the forecasted transactions
occur.
Fair
Value Hedges
For
derivative instruments that are designated and qualify as a fair value hedge,
the gain or loss on the derivative as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized in current
earnings. We include the gain or loss on the hedged items (fixed-rate
borrowings) in the same line item, interest expense, as the offsetting loss or
gain on the related interest rate swaps. As of December 31, 2009 and
December 31, 2008, the total notional amount of our interest rate swaps
designated as fair value hedges were $26.6 million and $101.6 million,
respectively. In January 2009, we de-designated our $75 million
interest rate swaps that had previously been designated as fair value
hedges.
We use
interest rate swaps as a means of managing interest expense and floating
interest rate exposure to optimal levels. These interest rate swaps
are treated as fair value hedges. The accounting for gains and losses
associated with changes in fair value of the derivative and the effect on the
consolidated financial statements will depend on the hedge designation and
whether the hedge is effective in offsetting changes in fair value of cash flows
of the asset or liability being hedged. We have entered into $26.6
million of such swaps, whereby we agreed to pay variable rates to a counterparty
who, in turn, pays us fixed rates. The counterparty to these
agreements is Citibank, N.A., a major financial institution. In all
cases, the underlying index for the variable rates is six-month
LIBOR. Accordingly, payments are settled every six months and the
terms of the swaps are the same as the underlying debt instruments.
Financial
Statement Impacts
We
present our derivative assets and liabilities in our consolidated balance sheets
on a net basis. We net derivative assets and liabilities whenever we
have a legally enforceable master netting agreement with the counterparty to our
derivative contracts. We use these agreements to manage and
substantially reduce our potential counterparty credit risk.
The
following table summarizes the location and fair value of the derivative
instruments on our consolidated balance sheets. The table
disaggregates our net derivative assets and liabilities into gross components on
a contract-by-contract basis before giving effect to master netting
arrangements:
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
|
|
Fair
Value
|
|
|
|
Fair
Value
|
|
Derivatives
Designated as Hedging Instruments
|
Balance
Sheet
Location
|
|
December
31,
|
|
Balance
Sheet
Location
|
|
December
31,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.4 |
|
|
$ |
11.3 |
|
|
|
$ |
6.9 |
|
|
$ |
11.3 |
|
Commodity
contracts – gains
|
|
|
|
17.7 |
|
|
|
― |
|
|
|
|
― |
|
|
|
(0.3
|
) |
Commodity
contracts – losses
|
|
|
|
(0.2
|
) |
|
|
― |
|
|
|
|
― |
|
|
|
41.2 |
|
|
|
|
$ |
18.9 |
|
|
$ |
11.3 |
|
|
|
$ |
6.9 |
|
|
$ |
52.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.0 |
|
|
$ |
― |
|
|
|
$ |
0.9 |
|
|
$ |
― |
|
Foreign
currency contracts
|
|
|
|
― |
|
|
|
― |
|
|
|
|
0.1 |
|
|
|
― |
|
|
|
|
$ |
6.0 |
|
|
$ |
― |
|
|
|
$ |
1.0 |
|
|
$ |
― |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24.9 |
|
|
$ |
11.3 |
|
|
|
$ |
7.9 |
|
|
$ |
52.2 |
|
(1) Does
not include the impact of cash collateral received from or provided to
counterparties.
The
following table summarizes the effects of derivative instruments on our
consolidated statements of operations:
|
|
|
Amount
of Gain (Loss)
|
|
|
|
|
Years
Ended
December
31,
|
|
|
Location
of Gain (Loss)
|
|
2009
|
|
|
2008
|
|
Derivatives
– Cash Flow Hedges
|
|
|
($
in millions)
|
|
Recognized
in other comprehensive loss (effective portion)
|
|
|
|
|
|
|
|
|
|
Reclassified
from accumulated other comprehensive loss into income (effective
portion)
|
|
|
|
|
|
|
|
|
|
Recognized
in income (ineffective portion)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
– Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency contracts
|
Selling
and administration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Risk and Collateral
By using
derivative instruments, we are exposed to credit and market risk. If
a counterparty fails to fulfill its performance obligations under a derivative
contract, our credit risk will equal the fair-value gain in a
derivative. Generally, when the fair value of a derivative contract
is positive, this indicates that the counterparty owes us, thus creating a
repayment risk for us. When the fair value of a derivative contract
is negative, we owe the counterparty and, therefore, assume no repayment
risk. We minimize the credit (or repayment) risk in derivative
instruments by entering into transactions with high-quality
counterparties. We monitor our positions and the credit ratings of
our counterparties and we do not anticipate non-performance by the
counterparties.
Based on
the agreements with our various counterparties, cash collateral is required to
be provided when the net fair value of the derivatives, with the counterparty,
exceed a specific threshold. If the threshold is exceeded, cash is
either provided by the counterparty to us if the value of the derivatives is our
asset, or cash is provided by us to the counterparty if the value of the
derivatives is our liability. As of December 31, 2009, the amounts
recognized in other current assets for cash collateral provided by
counterparties was $2.2 million. As of December 31, 2008, the amounts
recognized in accrued liabilities for the right to reclaim cash collateral
totaled $22.0 million. In all instances where we are party to a
master netting agreement, we offset the receivable or payable recognized upon
payment of cash collateral against the fair value amounts recognized for
derivative instruments that have also been offset under such master netting
agreements. A reclassification totaling $22.0 million from other
current assets to accrued liabilities was made conforming cash collateral to the
classification of the related derivative instruments at December 31,
2008.
FAIR
VALUE MEASUREMENTS
Assets
and liabilities recorded at fair value in the consolidated balance sheets are
categorized based upon the level of judgment associated with the inputs used to
measure their fair value. Hierarchical levels are directly related to
the amount of subjectivity associated with the inputs to fair valuation of these
assets and liabilities. We are required to separately disclose assets
and liabilities measured at fair value on a recurring basis, from those measured
at fair value on a nonrecurring basis. Nonfinancial assets measured
at fair value on a nonrecurring basis are intangible assets and goodwill, which
are reviewed annually in the fourth quarter and/or when circumstances or other
events indicate that impairment may have occurred. Determining which
hierarchical level an asset or liability falls within requires significant
judgment. The
following table summarizes the financial instruments measured at fair value in
the consolidated balance sheets:
Balance
at December 31, 2009
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Total
|
|
|
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
|
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. In the second quarter of
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.
During
the third quarter of 2008, we determined that these debt securities had no fair
market value due to the actions taken by the issuer, turmoil in the financial
markets, the lack of liquidity of the issuer, and the lack of trading in these
debt securities. These factors led management to believe the recovery
of the asset value, if any, was highly unlikely.
Because
of the unlikelihood that these debt securities would recover in value, we
recorded an after-tax impairment loss of $26.6 million in other income (expense)
in the third quarter of 2008. We are currently unable to utilize the
capital loss resulting from the impairment of these corporate debt securities;
therefore, no tax benefit has been recognized for the impairment
loss.
Interest
Rate Swaps
The fair
value of the interest rate swaps was included in other assets, long-term debt
and other liabilities as of December 31, 2009 and 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 other current assets
as of December 31, 2009 and classified in accrued liabilities as of December 31,
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.
Foreign
Currency Contracts
The fair
value of the foreign currency contracts was classified in accrued liabilities as
of December 31, 2009, with gains and losses included in selling and
administration expense as these financial instruments do not meet the criteria
to qualify for hedge accounting. 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 foreign currencies. We
enter into forward sales and purchase contracts to manage currency risk
resulting from purchase and sale commitments denominated in foreign currencies
(principally Canadian dollar and Euro).
Financial
Instruments
The
carrying values of cash and cash equivalents, accounts receivable and accounts
payable approximated fair values due to the short-term maturities of these
instruments. The fair value of our long-term debt was determined
based on current market rates for debt of the same risk and
maturities. At December 31, 2009 and December 31, 2008, the
estimated fair value of debt was $416.0 million and $232.4 million,
respectively, which compares to debt recorded on the balance sheet of $398.4
million and $252.4 million, respectively. The lower fair value of
debt as of December 31, 2008 was due to the adverse conditions in the overall
credit and financial markets experienced in 2008.
OTHER
FINANCIAL DATA
Quarterly
Data (Unaudited)
($
in millions, except per share data)
2009
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
dividends per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
price of common stock(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
dividends per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
price of common stock(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cost
of goods sold included recoveries from third parties for environmental
costs incurred and expensed in prior periods of $0.8 million, $44.3
million, $37.0 million and $82.1 million in the second quarter of 2009,
third quarter of 2009, fourth quarter of 2009 and full year 2009,
respectively.
|
(2)
|
NYSE
composite transactions.
|
Item
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not
applicable.
Item
9A. CONTROLS AND PROCEDURES
Our chief
executive officer and our chief financial officer evaluated the effectiveness of
our disclosure controls and procedures as of December 31,
2009. Based on that evaluation, our chief executive officer and chief
financial officer have concluded that, as of such date, our disclosure controls
and procedures were effective to ensure that information Olin is required to
disclose in the reports that it files or submits with the SEC under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commission’s rules and forms, and to
ensure that information required to be disclosed 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 December 31, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item
9B. OTHER INFORMATION
Not
applicable.
PART
III
Item 10. DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
We
incorporate the biographical information relating to our Directors under the
heading “Item 1- Proposal for the Election of Directors” in our Proxy Statement
relating to our 2010 Annual Meeting of Shareholders (the “Proxy Statement”) by
reference in this Report. See also the list of executive officers
following Item 4 in Part I of this Report. We incorporate the
information regarding compliance with Section 16 of the Securities Exchange
Act of 1934, as amended, contained in the paragraph entitled “Section 16(a)
Beneficial Ownership Reporting Compliance” under the heading “Security Ownership
of Directors and Officers” in our Proxy Statement by reference in this
Report.
The
information with respect to our audit committee, including the audit committee
financial expert, is incorporated by reference in this Report to the information
contained in the paragraph entitled “What are the committees of the Board?”
under the heading “Corporate Governance Matters” in our Proxy
Statement. We incorporate by reference in this Report information
regarding procedures for shareholders to nominate a director for election, in
the Proxy Statement under the headings “Miscellaneous-How can I directly
nominate a director for election to the Board at the 2011 Annual Meeting?” and
“Corporate Governance Matters-What is Olin’s director nomination
process?”
We have
adopted a code of business conduct and ethics for directors, officers and
employees, known as the Code of Conduct. The Code is available in the
About Olin, Ethics section of our website at www.olin.com.
Item 11. EXECUTIVE
COMPENSATION
The
information in the Proxy Statement under the heading “Compensation Committee
Interlocks and Insider Participation,” on page 17 and the information on
pages 23 through 55, (beginning with the information under the heading
“Compensation Discussion and Analysis” through the information under the heading
“Compensation Committee Report,”) are incorporated by reference in this
Report.
Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
We
incorporate the information concerning securities authorized for issuance under
equity compensation plans under the heading “Equity Compensation Plan
Information” in our Proxy Statement, the information concerning holdings of our
common stock by certain beneficial owners contained under the heading “Certain
Beneficial Owners” in our Proxy Statement, and the information concerning
beneficial ownership of our common stock by our directors and officers under the
heading “Security Ownership of Directors and Officers” in our Proxy Statement by
reference in this Report.
Item 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
We
incorporate the information under the headings “Review, Approval, or
Ratification of Transactions with Related Persons” and “Which board members are
independent?” in our Proxy Statement by reference in this Report.
Item 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
We
incorporate the information concerning the accounting fees and services of our
independent registered public accounting firm, KPMG LLP under the heading “Item
4—Proposal to Ratify Appointment of Independent Registered Public Accounting
Firm” in our Proxy Statement by reference in this Report.
PART
IV
Item 15. EXHIBITS;
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(a) 1. Consolidated Financial
Statements
Consolidated
financial statements of the registrant are included in Item 8
above.
2. Financial Statement
Schedules
Schedules
containing separate financial statements of SunBelt Chlor Alkali Partnership are
set forth beginning on page S-1 immediately following the signature page in the
copy of this annual report filed with the SEC. Separate consolidated
financial statements of our other 50% or less owned subsidiaries accounted
for by the equity method are not summarized herein and have been omitted
because, in the aggregate, they would not constitute a significant
subsidiary.
Schedules
not included herein are omitted because they are inapplicable or not required or
because the required information is given in the consolidated financial
statements and notes thereto.
3.
Exhibits
Management
contracts and compensatory plans and arrangements are listed as Exhibits 10(a)
through 10(dd) below.
3
|
(a)
|
Olin’s
Restated Articles of Incorporation as amended effective May 8,
1997—Exhibit 3(a) to Olin’s Form 10-Q for the quarter ended June 30,
2003.*
|
|
(b)
|
By-laws
of Olin as amended effective February 19, 2009—Exhibit 3(b) to Olin’s
Form 8-K dated December 15, 2008.*
|
4
|
(a)
|
Form
of Senior Debt Indenture between Olin and Chemical Bank—Exhibit 4(a) to
Form 8-K dated June 15, 1992; Supplemental Indenture dated as of March 18,
1994 between Olin and Chemical Bank—Exhibit 4(c) to Registration Statement
No. 33-52771 and Second Supplemental Indenture dated as of December 11,
2001 between Olin and JPMorgan Chase Bank, formerly known as Chemical
Bank—Exhibit 4 to Form 8-K dated December 20, 2001.*
|
|
(b)
|
9.125%
Senior Note Due 2011—Exhibit 4(f) to Olin’s Form 10-K for
2001.*
|
|
(c)
|
Indenture
between Olin and JPMorgan Chase Bank, N.A. dated as of June 26,
2006—Exhibit 4.1 to Olin’s Form 8-K dated June 26,
2006.*
|
|
(d)
|
Form
T-1 Statement of Eligibility for Trustee under Indenture between Olin and
JPMorgan Chase Bank, N.A. dated as of June 26, 2006—Exhibit 25.1 to Olin’s
Amendment No. 2 to Registration Statement No. 333-138283 filed on January
9, 2007.*
|
|
(e)
|
6.75%
Senior Note Due 2016—Exhibit 4.1 to Olin’s Form 8-K dated July 28,
2006.*
|
|
(f)
|
First
Supplemental Indenture between Olin and JPMorgan Chase Bank, N.A. dated
July 28, 2006—Exhibit 4.2 to Olin’s Form 8-K dated July 28,
2006.*
|
|
(g)
|
Registration
Rights Agreement among Olin, Banc of America Securities LLC, Citigroup
Global Markets Inc. and Wachovia Capital Markets, LLC dated July 28,
2006—Exhibit 4.3 to Olin’s Form 8-K dated July 28,
2006.*
|
|
(h)
|
Indenture
dated as of August 19, 2009, between Olin Corporation and The Bank of New
York Mellon Trust Company—Exhibit 4.1 to Olin’s Form 8-K dated August 19,
2009.*
|
|
(i)
|
First
Supplemental Indenture dated as of August 19, 2009, between Olin
Corporation and The Bank of New York Mellon Trust Company—Exhibit 4.2 to
Olin’s Form 8-K dated August 19, 2009.*
|
|
(j)
|
Form
of 8.875% Senior Note due 2019—Exhibit 4.3 to Olin’s Form 8-K dated August
19, 2009.*
|
|
(k)
|
Form
T-1 Statement of Eligibility for Trustee under Indenture dated as of
August 19, 2009 between Olin and The Bank of New York Mellon Trust
Company—Exhibit 25.1 to Olin’s Post-Effective Amendment No. 1 to Form S-3
Registration Statement filed on August 13, 2009.*
|
|
|
We
are party to a number of other instruments defining the rights of holders
of long-term debt. No such instrument authorizes an amount of securities
in excess of 10% of the total assets of Olin and its subsidiaries on a
consolidated basis. Olin agrees to furnish a copy of each instrument to
the Commission upon request.
|
10
|
(a)
|
Employee
Deferral Plan as amended and restated effective as of January 30, 2003 and
as amended effective January 1, 2005—Exhibit 10(b) to Olin’s Form 10-K for
2002 and Exhibit 10(b)(1) to Olin’s Form 10-K for 2005,
respectively.*
|
|
(b)
|
Olin
Senior Executive Pension Plan amended and restated effective October 24,
2008—Exhibit 10.1 to Olin’s Form 10-Q for the quarter ended September 30,
2008.*
|
|
(c)
|
Olin
Supplemental Contributing Employee Ownership Plan as amended and restated
effective October 24, 2008 and as amended effective February 19,
2009—Exhibit 10.3 to Olin’s Form 10-Q for the quarter ended September 30,
2008 and Exhibit 10.1 to Olin’s Form 10-Q for the quarter ended March 31,
2009, respectively.*
|
|
(d)
|
Olin
Corporation Key Executive Life Insurance Program—Exhibit 10(e) to Olin’s
Form 10-K for 2002.*
|
|
(e)
|
Form
of executive agreement between Olin and certain executive officers-Exhibit
99.1 to Olin’s Form 8-K dated January 26, 2005.*
|
|
(f)
|
Form
of executive change-in-control agreement between Olin and certain
executive officers-Exhibit 99.2 to Olin’s Form 8-K dated January 26,
2005.*
|
|
(g)
|
Form
of amendment to executive agreement between Olin and Messrs. Curley,
Fischer and Hammett dated November 9, 2007—Exhibit 10(g) to Olin’s Form
10-K for 2007.*
|
|
(h)
|
Form
of amendment to executive change-in-control agreement between Olin and
Messrs. Curley, Fischer and Hammett dated November 9, 2007—Exhibit 10(h)
to Olin’s Form 10-K for 2007.*
|
|
(i)
|
Form
of amendment to executive agreement between Olin and G. Bruce Greer, Jr.
dated November 9, 2007—Exhibit 10(i) to Olin’s Form 10-K for
2007.*
|
|
(j)
|
Form
of amendment to executive change-in-control agreement between Olin and G.
Bruce Greer, Jr. dated November 9, 2007—Exhibit 10(j) to Olin’s Form 10-K
for 2007.*
|
|
(k)
|
Form
of executive agreement between Olin and Messrs. Rupp, McIntosh and Pain
dated November 1, 2007-Exhibit 10.1 to Olin’s Form 10-Q for the quarter
ended September 30, 2007.*
|
|
(l)
|
Form
of executive change-in-control agreement between Olin and Messrs. Rupp,
McIntosh and Pain dated November 1, 2007-Exhibit 10.2 to Olin’s Form 10-Q
for the quarter ended September 30, 2007.*
|
|
(m)
|
Olin
1991 Long Term Incentive Plan, as amended through January 30, 2003—Exhibit
10(g) to Olin’s Form 10-K for 2002.*
|
|
(n)
|
Amended
and Restated 1997 Stock Plan for Non-Employee Directors as amended
effective December 11, 2008—Exhibit 10(n) to Olin’s Form 10-K for
2008.*
|
|
(o)
|
Olin
Senior Management Incentive Compensation Plan, as amended and restated
effective October 24, 2008—Exhibit 10.4 to Olin’s Form 10-Q for the
quarter ended September 30, 2008.*
|
|
(p)
|
Description
of Restricted Stock Unit Awards granted under the 2000, 2003 or 2006 Long
Term Incentive Plans—Exhibit 10(p) to Olin’s Form 10-K for
2008.*
|
|
(q)
|
1996
Stock Option Plan for Key Employees of Olin Corporation and Subsidiaries
as amended as of January 30, 2003—Exhibit 10(l) to Olin’s Form 10-K for
2002.*
|
|
(r)
|
Olin
Supplementary and Deferral Benefit Pension Plan as amended and restated
effective October 24, 2008—Exhibit 10.2 to Olin’s Form 10-Q for the
quarter ended September 30, 2008.*
|
|
(s)
|
Olin
Corporation 2000 Long Term Incentive Plan as amended and restated
effective October 22, 2008—Exhibit 10.6 to Olin’s Form 10-Q for the
quarter ended September 30, 2008.*
|
|
(t)
|
Olin
Corporation 2003 Long Term Incentive Plan as amended and restated
effective October 22, 2008—Exhibit 10.7 to Olin’s Form 10-Q for the
quarter ended September 30, 2008.*
|
|
(u)
|
Olin
Corporation 2006 Long Term Incentive Plan as amended and restated
effective October 22, 2008—Exhibit 10.8 to Olin’s Form 10-Q for the
quarter ended September 30, 2008.*
|
|
(v)
|
Olin
Corporation 2009 Long Term Incentive Plan-Appendix A to Olin’s Proxy
Statement dated March 11, 2009.*
|
|
(w)
|
2006
Performance Share Program as amended and restated effective October 22,
2008—Exhibit 10.9 to Olin’s Form 10-Q for the quarter ended September 30,
2008.*
|
|
(x)
|
Performance
Share Program codified to reflect amendments through October 22,
2008—Exhibit 10.1 to Olin’s Form 10-Q for the quarter ended September 30,
2009.*
|
|
(y)
|
Chase
Industries Inc. 1997 Non-Employee Director Stock Option Plan, as amended
May 26, 1998 and First Amendment effective as of November 19, 1999—Exhibit
10.6 to Chase Industries Inc. Form 10-K for 1998 and Exhibit 10.9 to Chase
Industries Inc. Form 10-K for 1999, respectively—SEC file No.
1-13394.*
|
|
(z)
|
Form
of Non-Qualified Stock Option Award Certificate—Exhibit 10(bb) to Olin’s
Form 10-K for 2007.*
|
|
(aa)
|
Form
of Restricted Stock Unit Award Certificate—Exhibit 10(cc) to Form 10-K for
2007.*
|
|
(bb)
|
Form
of Performance Award and Senior Performance Award Certificates—Exhibit
10(dd) to Olin’s Form 10-K for 2007.*
|
|
(cc)
|
Summary
of Stock Option Continuation Policy—Exhibit 10.2 to Olin’s Form 10-Q for
the quarter ended March 31, 2009.*
|
|
(dd)
|
Olin
Corporation Contributing Employee Ownership Plan Amended and Restated
effective as of December 31, 2009.
|
|
(ee)
|
Distribution
Agreement between Olin Corporation and Arch Chemicals, Inc., dated as of
February 1, 1999—Exhibit 2.1 to Olin’s Form 8-K filed
February 23, 1999.*
|
|
(ff)
|
Partnership
Agreement between Olin SunBelt, Inc. and 1997 Chloralkali Venture Inc.
dated August 23, 1996—Exhibit 99.1 to Olin’s Form 8-K dated December 3,
2001.*
|
|
(gg)
|
Amendment
to Partnership Agreement between Olin SunBelt, Inc. and 1997 Chloralkali
Venture Inc. dated December 23, 1997—Exhibit 99.2 to Olin’s Form 8-K dated
December 3, 2001.*
|
|
(hh)
|
Amendment
to Partnership Agreement between Olin SunBelt, Inc. and 1997 Chloralkali
Venture Inc. dated December 23, 1997—Exhibit 99.3 to Olin’s Form 8-K dated
December 3, 2001.*
|
|
(ii)
|
Amendment
to Partnership Agreement between Olin SunBelt, Inc. and 1997 Chloralkali
Venture Inc. dated April 30, 1998—Exhibit 99.4 to Olin’s Form 8-K dated
December 3, 2001.*
|
|
(jj)
|
Amendment
to Partnership Agreement between Olin SunBelt, Inc. and 1997 Chloralkali
Venture Inc. dated January 1, 2003—Exhibit 10(aa) to Olin’s Form 10-K for
2002.*
|
|
(kk)
|
Note
Purchase Agreement dated December 22, 1997 between the SunBelt Chlor
Alkali Partnership and the Purchasers named therein—Exhibit 99.5 to Olin’s
Form 8-K dated December 3, 2001.*
|
|
(ll)
|
Guarantee
Agreement dated December 22, 1997 between Olin and the Purchasers named
therein—Exhibit 99.6 to Olin’s Form 8-K dated December 3,
2001.*
|
|
(mm)
|
Subordination
Agreement dated December 22, 1997 between Olin and the Subordinated
Parties named therein—Exhibit 99.7 to Olin’s Form 8-K dated December 3,
2001.*
|
|
(nn)
|
Agreement
and Plan of Merger dated as of May 20, 2007, among Olin Corporation,
Princeton Merger Corp., and Pioneer Companies, Inc.-Exhibit 2.1 to Olin’s
Form 8-K dated May 21, 2007.*
|
|
(oo)
|
Purchase
Agreement dated as of October 15, 2007, among Global Brass and Copper
Acquisition Co. and Olin Corporation-Exhibit 2.1 to Olin’s Form 8-K dated
October 15, 2007.*
|
|
(pp)
|
Credit
Agreement dated as of October 29, 2007 among Olin and the banks named
therein—Exhibit 10.1 to Olin’s Form 8-K dated October 29,
2007.*
|
|
(qq)
|
Purchase
and Contribution Agreement dated as of July 25, 2007, 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—Exhibit 10.1 to Olin’s Form 8-K dated July 27,
2007.*
|
|
(rr)
|
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—Exhibit 10.11 to Olin’s Form 10-Q for the
quarter ended September 30, 2008.*
|
|
(ss)
|
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—Exhibit 10.12 to Olin’s Form 10-Q for the
quarter ended September 30, 2008.*
|
|
(tt)
|
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—Exhibit 10.13 to Olin’s Form 10-Q for the
quarter ended September 30,
2008.*
|
|
(uu)
|
Receivables
Purchase Agreement dated as of July 25, 2007, 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—Exhibit 10.2 to Olin’s Form 8-K dated
July 27, 2007.*
|
|
(vv)
|
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—Exhibit 10.14 to Olin’s
Form 10-Q for the quarter ended September 30, 2008.*
|
|
(ww)
|
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—Exhibit 10.15 to Olin’s
Form 10-Q for the quarter ended September 30, 2008.*
|
|
(xx)
|
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—Exhibit 10.16 to Olin’s
Form 10-Q for the quarter ended September 30, 2008.*
|
|
(yy)
|
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—Exhibit 10.17 to Olin’s Form 10-Q for the quarter ended September
30, 2008.*
|
11
|
|
Computation
of Per Share Earnings (included in the Note—“Earnings Per Share” to Notes
to Consolidated Financial Statements in Item 8.)
|
12
|
|
Computation
of Ratio of Earnings to Fixed Charges (unaudited).
|
21
|
|
List
of Subsidiaries.
|
23.1
|
|
Consent
of KPMG LLP.
|
23.2
|
|
Consent
of Ernst & Young LLP.
|
31.1
|
|
Section
302 Certification Statement of Chief Executive Officer.
|
31.2
|
|
Section
302 Certification Statement of Chief Financial Officer.
|
32
|
|
Section
906 Certification Statement of Chief Executive Officer and Chief Financial
Officer.
|
*Previously
filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC file No. 1-1070 unless
otherwise indicated.
Any of
the foregoing exhibits are available from the Company by writing to:
Mr. George H. Pain, Vice President, General Counsel and Secretary,
Olin Corporation, 190 Carondelet Plaza, Suite 1530, Clayton,
MO 63105-3443.
Shareholders
may obtain information from Wells Fargo Shareowner Services, our registrar and
transfer agent, who also manages our Dividend Reinvestment Plan by writing to:
Wells Fargo Shareowner Services, PO Box 64874, St. Paul, MN 55164-0874, by
telephone at (800) 468-9716 or via the Internet at www.shareowneronline.com,
click on “contact us”.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
Date:
February 24, 2010
OLIN
CORPORATION
|
|
|
|
By /s/ JOSEPH D.
RUPP
|
|
Joseph
D. Rupp
Chairman,
President and
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ JOSEPH
D. RUPP
Joseph
D. Rupp
|
|
Chairman,
President and Chief Executive Officer and Director (Principal Executive
Officer)
|
|
February 24,
2010
|
|
|
|
|
|
/s/ GRAY
G. BENOIST
Gray
G. Benoist
|
|
Director
|
|
February 24,
2010
|
|
|
|
|
|
/s/ DONALD
W. BOGUS
Donald
W. Bogus
|
|
Director
|
|
February 24,
2010
|
|
|
|
|
|
/s/ C.
ROBERT BUNCH
C.
Robert Bunch
|
|
Director
|
|
February 24,
2010
|
|
|
|
|
|
/s/ RANDALL
W. LARRIMORE
Randall
W. Larrimore
|
|
Director
|
|
February 24,
2010
|
|
|
|
|
|
/s/ JOHN
M. B. O’CONNOR
John
M. B. O’Connor
|
|
Director
|
|
February 24,
2010
|
|
|
|
|
|
/s/ RICHARD
M. ROMPALA
Richard
M. Rompala
|
|
Director
|
|
February 24,
2010
|
|
|
|
|
|
/s/ PHILIP
J. SCHULZ
Philip
J. Schulz
|
|
Director
|
|
February 24,
2010
|
|
|
|
|
|
/s/ VINCENT
J. SMITH
Vincent
J. Smith
|
|
Director
|
|
February 24,
2010
|
|
|
|
|
|
/s/ JOHN
E. FISCHER
John
E. Fischer
|
|
Vice
President and Chief Financial Officer (Principal Financial
Officer)
|
|
February 24,
2010
|
|
|
|
|
|
/s/ TODD
A. SLATER
Todd
A. Slater
|
|
Vice
President and Controller (Principal Accounting Officer)
|
|
February 24,
2010
|
Audited
Financial Statements
SunBelt
Chlor Alkali Partnership
Years
Ended December 31, 2009 and 2008
With
Report of Independent Registered Public Accounting Firm
SunBelt
Chlor Alkali Partnership
Audited
Financial Statements
Years
Ended December 31, 2009 and 2008
Contents
Report
of Independent Registered Public Accounting Firm
|
S-1
|
Audited
Financial Statements
|
|
Balance
Sheets
|
S-2
|
Income
Statements
|
S-3
|
Statements
of Partners’ Capital (Deficit)
|
S-4
|
Statements
of Cash Flows
|
S-5
|
Notes
to Financial Statements
|
S-6
|
Report of
Independent Registered Public Accounting Firm
The
Partners
SunBelt Chlor Alkali Partnership
We have
audited the accompanying balance sheets of SunBelt Chlor Alkali Partnership as
of December 31, 2009 and 2008, and the related statements of income,
partners’ capital (deficit) and cash flows for each of the three years in the
period ended December 31, 2009. These financial statements are the
responsibility of the Partnership’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Partnership’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SunBelt Chlor Alkali Partnership at
December 31, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles.
Cleveland,
Ohio
February 18,
2010
SunBelt
Chlor Alkali Partnership
Balance
Sheets
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
1,772 |
|
|
$ |
13,230 |
|
Receivable
from OxyVinyls, LP
|
|
|
5,867,957 |
|
|
|
2,142,230 |
|
Receivables
from partners
|
|
|
6,852,165 |
|
|
|
17,351,616 |
|
Inventories
|
|
|
2,195,227 |
|
|
|
1,804,600 |
|
Prepaid
expenses and other current assets
|
|
|
1,214,626 |
|
|
|
1,130,608 |
|
Total
current assets
|
|
|
16,131,747 |
|
|
|
22,442,284 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
93,476,246 |
|
|
|
106,956,187 |
|
Deferred
financing costs, net
|
|
|
641,183 |
|
|
|
721,330 |
|
Total
assets
|
|
$ |
110,249,176 |
|
|
$ |
130,119,801 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and partners’ capital
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Amounts
payable to partners
|
|
$ |
9,226,131 |
|
|
$ |
7,466,830 |
|
Current
portion of long-term debt
|
|
|
12,187,500 |
|
|
|
12,187,500 |
|
Total
current liabilities
|
|
|
21,413,631 |
|
|
|
19,654,330 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
85,312,500 |
|
|
|
97,500,000 |
|
|
|
|
|
|
|
|
|
|
Partners’
capital
|
|
|
3,523,045 |
|
|
|
12,965,471 |
|
Total
liabilities and partners’ capital
|
|
$ |
110,249,176 |
|
|
$ |
130,119,801 |
|
See
accompanying notes.
SunBelt Chlor Alkali
Partnership
Income
Statements
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
167,442,320 |
|
|
$ |
173,019,093 |
|
|
$ |
180,555,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
71,292,948 |
|
|
|
70,475,462 |
|
|
|
62,255,321 |
|
Depreciation
and amortization
|
|
|
16,266,895 |
|
|
|
15,163,235 |
|
|
|
14,866,744 |
|
Loss
on disposal of assets
|
|
|
397,166 |
|
|
|
2,125,117 |
|
|
|
118,249 |
|
Administrative
and general expenses
|
|
|
11,906,084 |
|
|
|
11,663,995 |
|
|
|
12,042,123 |
|
|
|
|
99,863,093 |
|
|
|
99,427,809 |
|
|
|
89,282,437 |
|
Operating
income
|
|
|
67,579,227 |
|
|
|
73,591,284 |
|
|
|
91,273,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
― |
|
|
|
372,631 |
|
|
|
― |
|
Interest
expense
|
|
|
(7,930,406 |
) |
|
|
(8,811,563 |
) |
|
|
(9,692,719 |
) |
Interest
income
|
|
|
44,335 |
|
|
|
374,620 |
|
|
|
802,271 |
|
Income
before taxes
|
|
|
59,693,156 |
|
|
|
65,526,972 |
|
|
|
82,382,879 |
|
State
income tax expense
|
|
|
(315,000 |
) |
|
|
(435,000 |
) |
|
|
(376,271 |
) |
Net
income
|
|
$ |
59,378,156 |
|
|
$ |
65,091,972 |
|
|
$ |
82,006,608 |
|
See
accompanying notes.
SunBelt
Chlor Alkali Partnership
Statements
of Partners’ Capital (Deficit)
|
|
Partners
|
|
|
|
|
|
|
|
|
|
Venture,
Inc.
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$ |
(2,612,969 |
) |
|
$ |
(2,612,969 |
) |
|
$ |
(5,225,938 |
) |
Cash
distributions to partners
|
|
|
(35,048,793 |
) |
|
|
(35,048,793 |
) |
|
|
(70,097,585 |
) |
Net
income
|
|
|
41,003,304 |
|
|
|
41,003,304 |
|
|
|
82,006,608 |
|
Balance
at December 31, 2007
|
|
|
3,341,542 |
|
|
|
3,341,542 |
|
|
|
6,683,085 |
|
Cash
distributions to partners
|
|
|
(29,404,793 |
) |
|
|
(29,404,793 |
) |
|
|
(58,809,586 |
) |
Net
income
|
|
|
32,545,986 |
|
|
|
32,545,986 |
|
|
|
65,091,972 |
|
Balance
at December 31, 2008
|
|
|
6,482,735 |
|
|
|
6,482,735 |
|
|
|
12,965,471 |
|
Cash
distributions to partners
|
|
|
(34,410,291 |
) |
|
|
(34,410,291 |
) |
|
|
(68,820,582 |
) |
Net
income
|
|
|
29,689,078 |
|
|
|
29,689,078 |
|
|
|
59,378,156 |
|
Balance
at December 31, 2009
|
|
$ |
1,761,522 |
|
|
$ |
1,761,522 |
|
|
$ |
3,523,045 |
|
See
accompanying notes.
SunBelt Chlor Alkali
Partnership
Statements
of Cash Flows
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
59,378,156 |
|
|
$ |
65,091,972 |
|
|
$ |
82,006,608 |
|
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
16,266,895 |
|
|
|
15,163,235 |
|
|
|
14,866,744 |
|
Loss
on disposal of assets
|
|
|
397,166 |
|
|
|
2,125,117 |
|
|
|
118,249 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
from OxyVinyls
|
|
|
(3,725,727 |
) |
|
|
3,884,544 |
|
|
|
1,705,864 |
|
Receivables
from partners
|
|
|
10,499,451 |
|
|
|
1,455,519 |
|
|
|
(4,503,853 |
) |
Inventories
|
|
|
(390,627 |
) |
|
|
9,047 |
|
|
|
(206,513 |
) |
Amounts
payable to partners
|
|
|
1,759,301 |
|
|
|
(1,370,177 |
) |
|
|
(1,096,006 |
) |
Prepaid
expenses and other assets
|
|
|
(84,018 |
) |
|
|
2,694 |
|
|
|
327,468 |
|
Net
cash provided by operating activities
|
|
|
84,100,597 |
|
|
|
86,361,951 |
|
|
|
93,218,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(3,105,973 |
) |
|
|
(15,352,635 |
) |
|
|
(10,933,476 |
) |
Proceeds
on sale of property, plant, and equipment
|
|
|
2,000 |
|
|
|
― |
|
|
|
― |
|
Net
cash used by investing activities
|
|
|
(3,103,973 |
) |
|
|
(15,352,635 |
) |
|
|
(10,933,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
distributions to partners
|
|
|
(68,820,582 |
) |
|
|
(58,809,586 |
) |
|
|
(70,097,585 |
) |
Principal
payments on long-term debt
|
|
|
(12,187,500 |
) |
|
|
(12,187,500 |
) |
|
|
(12,187,500 |
) |
Net
cash used by financing activities
|
|
|
(81,008,082 |
) |
|
|
(70,997,086 |
) |
|
|
(82,285,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(11,458 |
) |
|
|
12,230 |
|
|
|
― |
|
Cash
at beginning of year
|
|
|
13,230 |
|
|
|
1,000 |
|
|
|
1,000 |
|
Cash
and cash equivalents at end of year
|
|
$ |
1,772 |
|
|
$ |
13,230 |
|
|
$ |
1,000 |
|
See
accompanying notes.
SunBelt
Chlor Alkali Partnership
Notes to
Financial Statements
December
31, 2009 and 2008
1.
Organization
SunBelt
Chlor Alkali Partnership (the Partnership) was formed on August 23, 1996,
under a Partnership Agreement, between 1997 Chlor Alkali Venture, Inc. and Olin
SunBelt Inc. (the Partners). 1997 Chlor Alkali Venture, Inc. is a wholly owned
subsidiary of PolyOne Corporation (formerly The Geon Company) and Olin SunBelt
Inc. is a wholly owned subsidiary of the Olin Corporation. Each of the Partners
has a 50% interest in the Partnership. The Partnership Agreement provides that
the capital investment of the Partners will be maintained and the Partnership’s
income or loss will be allocated to the Partners based on their ownership
interest percentages.
The
Partnership was formed for the purpose of construction and operation of a
Chlor-Alkali facility. The facility, which is located in McIntosh, Alabama
produces chlorine, caustic soda and hydrogen.
2.
Significant Accounting Policies
The
Partnership considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. There were no cash
equivalents held by the Partnership as of December 31, 2009 and
2008.
Inventories
are valued at the lower of cost or market. Cost is determined by the first-in,
first-out (FIFO) method.
Property,
Plant and Equipment and Depreciation
Property,
plant and equipment are carried at cost. Major renewals and betterments are
capitalized. Maintenance and repair expenditures which do not improve or extend
the life of the respective assets are expensed as incurred. Depreciation for all
plant and equipment is computed using the straight-line method over their
estimated useful lives. The ranges of estimated useful lives are as
follows:
Land
improvements
|
20
years
|
Buildings
|
20
years
|
Machinery
and equipment
|
5–20
years
|
Long-lived
assets are assessed for impairment when operating profits for the related
business or a significant change in the use of an asset indicate that their
carrying value may not be recoverable.
SunBelt
Chlor Alkali Partnership
Notes to
Financial Statements (continued)
2.
Significant Accounting Policies (continued)
Deferred Financing
Costs
Costs
incurred by the Partnership in obtaining its long-term debt are deferred and
amortized over the term of the debt using the effective interest
method.
The
carrying values of cash, accounts receivable and accounts payable approximate
fair values due to the short-term maturities of these
instruments. The fair value of our long-term debt was estimated based
on current market rates for debt of similar risk and maturities. At
December 31, 2009 and 2008, the estimated fair value of debt was approximately
$97,300,000 and $84,500,000, which compares to debt recorded on the balance
sheet of $97,500,000 and $109,687,500 at December 31, 2009 and 2008,
respectively.
The
Partnership recognizes revenues upon passage of title which is based on shipping
terms.
Shipping
and Handling Costs
Shipping
and handling costs are reflected in costs of sales.
No
provision is made for income taxes other than the Texas state gross margin tax
as the Partnership’s results of operations are includable in the tax returns of
the Partners. The Partnership paid taxes of $317,193 in 2009, $435,000 in 2008
and $0 in 2007.
SunBelt
Chlor Alkali Partnership
Notes to
Financial Statements (continued)
2.
Significant Accounting Policies (continued)
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those
estimates.
Since the
Partnership’s major products are commodities, significant changes in the prices
of chemical products could have a significant impact on the results of
operations for any particular period. The Partnership had one major chlorine
customer, OxyVinyls LP, during the periods presented, which accounted for 38%,
31%, and 38% of total sales for the years ended December 31, 2009, 2008 and
2007, respectively.
Subsequent
Events
Events
subsequent to December 31, 2009 have been evaluated through February 18, 2010,
the date of issuance of these financial statements. There were no
subsequent events requiring recognition in these financial statements for the
year ended December 31, 2009.
3.
Inventories
Inventories
are comprised as follows:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
1,230,161 |
|
|
$ |
803,826 |
|
Production
parts
|
|
|
965,066 |
|
|
|
1,000,774 |
|
|
|
$ |
2,195,227 |
|
|
$ |
1,804,600 |
|
SunBelt
Chlor Alkali Partnership
Notes to
Financial Statements (continued)
4.
Property, Plant and Equipment, net
Property,
plant and equipment, net are comprised as follows:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
$ |
4,862,826 |
|
|
$ |
4,862,826 |
|
Building
|
|
|
4,084,254 |
|
|
|
4,084,254 |
|
Machinery
and equipment
|
|
|
239,096,069 |
|
|
|
236,246,567 |
|
Construction-in-process
|
|
|
843,473 |
|
|
|
1,807,849 |
|
|
|
|
248,886,622 |
|
|
|
247,001,496 |
|
Less
allowance for depreciation
|
|
|
155,410,376 |
|
|
|
140,045,309 |
|
|
|
$ |
93,476,246 |
|
|
$ |
106,956,187 |
|
5.
Transactions With Affiliates
The
Partnership has various management service agreements, dated August 23,
1996, with the Olin Corporation. These agreements, which include compensation
for managing the facility, an asset utilization fee, a fleet fee and a
distribution fee, have terms from five to ten years with five year price
adjustment renewals. Charges for these services were $8,412,847, $8,150,580, and
$8,309,350 for 2009, 2008 and 2007, respectively, and are included in
administrative and general expenses in the income statements.
The
Partnership’s cash policy prohibits distributions to the Partners until the cash
balance is sufficient to cover both the debt principal payments and interest
expense for the year. The Partnership made distributions to the Partners
totaling $68,820,581, $58,809,586 and $70,097,585 in 2009, 2008 and 2007,
respectively.
In
accordance with the Partnership Operating Agreement, the majority of chlorine
produced by the Partnership is sold to OxyVinyls LP which was 24% owned by
PolyOne Corporation until July 6, 2007. The remaining chlorine and all of
the caustic soda produced by the Partnership is marketed and distributed by the
Olin Corporation.
On
December 23, 1997, the Partnership borrowed $195,000,000 in a private
placement of debt. The debt is secured by the property, plant, equipment and
inventory of the Partnership. The term of the loan is 20 years at an interest
rate of 7.23%. The first principal payment of $12,187,500 was paid on
December 22, 2002, with equal annual payments due through December 22,
2017. Interest is payable semi-annually in arrears on June 22 and
December 22. Interest payments totaled $7,930,406, $8,811,563, and
$9,692,719 in 2009, 2008 and 2007, respectively. The debt is guaranteed by the
Partners.
SunBelt
Chlor Alkali Partnership
Notes to
Financial Statements (continued)
The
Partnership has operating leases for certain property, machinery and equipment.
At December 31, 2009, future minimum lease payments under
noncancelable operating leases are as follows:
2010
|
|
$ |
2,107,826 |
|
2011
|
|
|
2,107,826 |
|
2012
|
|
|
2,107,826 |
|
2013
|
|
|
2,107,826 |
|
2014
|
|
|
1,840,451 |
|
Thereafter
|
|
|
1,724,942 |
|
Total
minimum future lease payments
|
|
$ |
11,996,697 |
|
Rent
expense was $1,879,007, $1,743,882 and $2,047,601 for the years ended
December 31, 2009, 2008 and 2007, respectively.
8.
Commitments and Contingencies
The
Partnership is subject to legal proceedings and claims that arise in the
ordinary course of its business. Management evaluates each claim and provides
for any potential loss when the loss is probable and reasonably estimable. In
the opinion of management, the ultimate liability with respect to these actions
will not materially affect the financial condition, results of operations, or
cash flows of the Partnership.
EXHIBIT
INDEX
See Item
15(a)(3) for a list of all exhibits required under Item 601 of Regulation S-K,
including those incorporated by reference from other filings. Set forth
below are those exhibits included with this filing:
Exhibit
No.
|
Description
|
|
|
10(dd)
|
Olin
Corporation Contributing Employee Ownership Plan Amended and Restated
effective as of December 31, 2009
|
|
|
11
|
Computation
of Per Share Earnings (included in the Note–“Earnings Per Share” to Notes
to Consolidated Financial Statements in Item 8.)
|
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges (Unaudited)
|
|
|
21
|
List
of Subsidiaries
|
|
|
23.1
|
Consent
of KPMG LLP
|
|
|
23.2
|
Consent
of Ernst & Young LLP
|
|
|
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
|