SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One) | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2002 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission file number 1-1070
Olin Corporation | ||
(Exact name of registrant as specified in its charter) | ||
Virginia | 13-1872319 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
501 Merritt 7, Norwalk, CT | 06856 | |
(Address of principal executive offices) | (Zip Code) | |
(203) 750-3000 | ||
(Registrant’s telephone number, including area code) | ||
(Former name, address, and former fiscal year, if changed since last report) | ||
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 | o |
As of JulyOctober 31, 2002, there were outstanding 47,189,54357,330,111 shares of the registrant’s common stock.
Part I—I - Financial Information
Item 1. Financial Statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Unaudited | ||||||||
June 30, 2002 | December 31, 2001 | |||||||
ASSETS | ||||||||
| Cash and cash equivalents | $ | 89.3 | $ | 164.8 | ||||
| Short-term investments | 25.0 | 36.8 | ||||||
| Accounts receivable, net | 172.0 | 140.5 | ||||||
| Inventories | 226.7 | 223.2 | ||||||
| Income taxes receivable | 14.6 | 7.2 | ||||||
| Other current assets | 50.8 | 43.6 | ||||||
| Total current assets | 578.4 | 616.1 | ||||||
| Property, plant and equipment (less accumulated depreciation of $1,275.3 and $1,241.0) | 441.4 | 477.1 | ||||||
| Other assets | 120.6 | 125.9 | ||||||
| Total assets | $ | 1,140.4 | $ | 1,219.1 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Short-term borrowings and current installments of long-term debt | $ | 1.5 | $ | 101.5 | ||||
| Accounts payable | 97.8 | 96.8 | ||||||
| Income taxes payable | 0.1 | 0.4 | ||||||
| Accrued liabilities | 126.8 | 136.5 | ||||||
| Total current liabilities | 226.2 | 335.2 | ||||||
| Long-term debt | 328.5 | 329.2 | ||||||
| Deferred income taxes | 75.5 | 72.1 | ||||||
| Other liabilities | 210.3 | 211.6 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ equity: | ||||||||
| Common stock, par value $1 per share: | ||||||||
| Authorized 120.0 shares | ||||||||
| Issued 47.1 shares (43.4 in 2001) | 47.1 | 43.4 | ||||||
| Additional paid-in capital | 263.0 | 204.3 | ||||||
| Accumulated other comprehensive loss | (14.7 | ) | (17.6 | ) | ||||
| Retained earnings | 4.5 | 40.9 | ||||||
| Total shareholders’ equity | 299.9 | 271.0 | ||||||
| Total liabilities and shareholders’ equity | $ | 1,140.4 | $ | 1,219.1 | ||||
|
| Unaudited |
| December 31, |
| ||||
|
|
|
| ||||||
ASSETS |
|
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 93.9 |
| $ | 164.8 |
| ||
Short-term investments |
|
| 25.0 |
|
| 36.8 |
| ||
Accounts receivable, net |
|
| 210.5 |
|
| 140.5 |
| ||
Inventories |
|
| 255.5 |
|
| 223.2 |
| ||
Income taxes receivable |
|
| 9.5 |
|
| 7.2 |
| ||
Other current assets |
|
| 66.8 |
|
| 43.6 |
| ||
|
|
|
| ||||||
| Total current assets |
|
| 661.2 |
|
| 616.1 |
| |
Property, plant and equipment (less accumulated depreciation of $1,290.2 and $1,241.0) |
|
| 550.5 |
|
| 477.1 |
| ||
Other assets |
|
| 83.9 |
|
| 83.3 |
| ||
Goodwill |
|
| 83.0 |
|
| 42.6 |
| ||
|
|
|
| ||||||
Total assets |
| $ | 1,378.6 |
| $ | 1,219.1 |
| ||
|
|
|
| ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
| ||
Short-term borrowings and current installments of long-term debt |
| $ | 1.5 |
| $ | 101.5 |
| ||
Accounts payable |
|
| 107.8 |
|
| 96.8 |
| ||
Income taxes payable |
|
| 1.5 |
|
| 0.4 |
| ||
Accrued liabilities |
|
| 163.5 |
|
| 136.5 |
| ||
|
|
|
| ||||||
| Total current liabilities |
|
| 274.3 |
|
| 335.2 |
| |
Long-term debt |
|
| 328.4 |
|
| 329.2 |
| ||
Deferred income taxes |
|
| 91.6 |
|
| 72.1 |
| ||
Other liabilities |
|
| 214.5 |
|
| 211.6 |
| ||
Commitments and contingencies |
|
|
|
|
|
|
| ||
Shareholders’ equity: |
|
|
|
|
|
|
| ||
| Common stock, par value $1 per share: |
|
|
|
|
|
|
| |
| Authorized 120.0 shares Issued 57.2 shares (43.4 in 2001) |
|
| 57.2 |
|
| 43.4 |
| |
| Additional paid-in capital |
|
| 435.9 |
|
| 204.3 |
| |
| Accumulated other comprehensive loss |
|
| (17.4 | ) |
| (17.6 | ) | |
| Retained earnings (accumulated deficit) |
|
| (5.9 | ) |
| 40.9 |
| |
|
|
|
| ||||||
| Total shareholders’ equity |
|
| 469.8 |
|
| 271.0 |
| |
|
|
|
| ||||||
Total liabilities and shareholders’ equity |
| $ | 1,378.6 |
| $ | 1,219.1 |
| ||
|
|
|
| ||||||
The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements. | |||||||||
1
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||
| Sales | $ | 314.3 | $ | 324.5 | $ | 609.3 | $ | 658.7 | ||||||
| Operating Expenses: | ||||||||||||||
| Cost of goods sold | 284.7 | 282.1 | 554.8 | 577.0 | ||||||||||
| Selling and administration | 27.6 | 25.6 | 56.6 | 57.8 | ||||||||||
| Research and development | 1.1 | 1.3 | 2.3 | 2.8 | ||||||||||
| Loss of non-consolidated affiliates | 3.9 | 0.9 | 7.8 | 2.3 | ||||||||||
| Interest expense | 7.5 | 4.1 | 15.3 | 7.8 | ||||||||||
| Interest income | 1.0 | — | 1.8 | 0.4 | ||||||||||
| Other income | 0.3 | 0.3 | 1.6 | 3.5 | ||||||||||
| Income (loss) before taxes | (9.2 | ) | 10.8 | (24.1 | ) | 14.9 | ||||||||
| Income tax provision (benefit) | (2.2 | ) | 4.2 | (5.8 | ) | 5.9 | ||||||||
| Net income (loss) | $ | (7.0 | ) | $ | 6.6 | $ | (18.3 | ) | $ | 9.0 | ||||
| Net income (loss) per common share: | ||||||||||||||
| Basic | $ | (0.15 | ) | $ | 0.15 | $ | (0.40 | ) | $ | 0.21 | ||||
| Diluted | (0.15 | ) | 0.15 | (0.40 | ) | 0.20 | ||||||||
| Dividends per common share | $ | 0.20 | $ | 0.20 | $ | 0.40 | $ | 0.40 | ||||||
| Average common shares outstanding: | ||||||||||||||
| Basic | 46.9 | 43.4 | 45.4 | 43.7 | ||||||||||
| Diluted | 46.9 | 43.5 | 45.4 | 43.8 | ||||||||||
|
| Three Months |
| Nine Months |
| |||||||||
|
|
|
| |||||||||||
|
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| |||||
|
|
|
|
|
| |||||||||
Sales |
| $ | 340.3 |
| $ | 333.6 |
| $ | 949.6 |
| $ | 992.3 |
| |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Cost of goods sold |
|
| 307.9 |
|
| 302.9 |
|
| 862.7 |
|
| 879.9 |
|
| Selling and administration |
|
| 26.2 |
|
| 29.2 |
|
| 83.5 |
|
| 86.9 |
|
| Research and development |
|
| 1.2 |
|
| 1.2 |
|
| 3.5 |
|
| 4.0 |
|
| Restructuring charge |
|
| — |
|
| 25.9 |
|
| — |
|
| 25.9 |
|
Loss of non-consolidated affiliates |
|
| 0.5 |
|
| 2.3 |
|
| 8.3 |
|
| 4.6 |
| |
Interest expense |
|
| 5.8 |
|
| 4.9 |
|
| 20.4 |
|
| 12.8 |
| |
Interest income |
|
| 0.3 |
|
| 0.1 |
|
| 2.1 |
|
| 0.5 |
| |
Other income |
|
| 0.5 |
|
| 0.5 |
|
| 2.1 |
|
| 4.0 |
| |
|
|
|
|
|
| |||||||||
| Loss before taxes |
|
| (0.5 | ) |
| (32.2 | ) |
| (24.6 | ) |
| (17.3 | ) |
Income tax provision (benefit) |
|
| 0.5 |
|
| (12.8 | ) |
| (5.3 | ) |
| (6.9 | ) | |
|
|
|
|
|
| |||||||||
Net loss |
| $ | (1.0 | ) | $ | (19.4 | ) | $ | (19.3 | ) | $ | (10.4 | ) | |
|
|
|
|
|
| |||||||||
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Basic |
| $ | (0.02 | ) | $ | (0.45 | ) | $ | (0.41 | ) | $ | (0.24 | ) |
| Diluted |
|
| (0.02 | ) |
| (0.45 | ) |
| (0.41 | ) |
| (0.24 | ) |
Dividends per common share |
| $ | 0.20 |
| $ | 0.20 |
| $ | 0.60 |
| $ | 0.60 |
| |
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Basic |
|
| 49.7 |
|
| 43.4 |
|
| 47.0 |
|
| 43.6 |
|
| Diluted |
|
| 49.7 |
|
| 43.4 |
|
| 47.0 |
|
| 43.6 |
|
| ||||||||||||||
The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements. | ||||||||||||||
2
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Six Months Ended June 30, | ||||||||
2002 | 2001 | |||||||
Operating activities | ||||||||
| Net income (loss) | $ | (18.3 | ) | $ | 9.0 | |||
| Adjustments to reconcile income (loss) from operations to net cash and cash equivalents provided by operating activities | ||||||||
| Loss of non-consolidated affiliates | 7.8 | 2.3 | ||||||
| Depreciation and amortization | 42.6 | 41.5 | ||||||
| Deferred income taxes | 2.2 | 10.6 | ||||||
| Pension assets | (4.3 | ) | (8.1 | ) | ||||
| Change in: | ||||||||
| Receivables | (31.5 | ) | 10.3 | |||||
| Inventories | (3.5 | ) | 5.4 | |||||
| Other current assets | (7.2 | ) | (5.8 | ) | ||||
| Accounts payable and accrued liabilities | (3.7 | ) | (58.0 | ) | ||||
| Income taxes payable | (7.7 | ) | (13.6 | ) | ||||
| Other assets | 3.1 | 2.8 | ||||||
| Noncurrent liabilities | (5.8 | ) | (11.9 | ) | ||||
| Other operating activities | 3.7 | (4.4 | ) | |||||
| Net operating activities | (22.6 | ) | (19.9 | ) | ||||
Investing activities | ||||||||
| Capital expenditures | (7.2 | ) | (36.3 | ) | ||||
| Proceeds from sale of short-term investments | 11.0 | — | ||||||
| Business acquired in purchase transaction | — | (48.3 | ) | |||||
| Investments and advances-affiliated companies at equity | (1.9 | ) | 0.7 | |||||
| Other investing activities | 2.1 | 0.2 | ||||||
| Net investing activities | 4.0 | (83.7 | ) | |||||
Financing activities | ||||||||
| Short-term debt borrowings | — | 84.7 | ||||||
| Long-term debt: | ||||||||
| Borrowings | 34.7 | — | ||||||
| Repayments | (135.4 | ) | (4.2 | ) | ||||
| Issuance of common stock | 62.3 | — | ||||||
| Purchases of Olin common stock | (2.5 | ) | (14.1 | ) | ||||
| Stock options exercised | 2.6 | 2.3 | ||||||
| Dividends paid | (18.1 | ) | (17.5 | ) | ||||
| Other financing activities | (0.5 | ) | (0.4 | ) | ||||
| Net financing activities | (56.9 | ) | 50.8 | |||||
| Net decrease in cash and cash equivalents | (75.5 | ) | (52.8 | ) | ||||
| Cash and cash equivalents, beginning of period | 164.8 | 56.6 | ||||||
| Cash and cash equivalents, end of period | $ | 89.3 | $ | 3.8 | ||||
|
| Nine Months |
| ||||||||
|
|
| |||||||||
|
| 2002 |
| 2001 |
| ||||||
|
|
|
| ||||||||
Operating activities |
|
|
|
|
|
|
| ||||
Net loss |
| $ | (19.3 | ) | $ | (10.4 | ) | ||||
Adjustments to reconcile net loss to net cash and cash equivalents provided by operating |
|
|
|
|
|
|
| ||||
| Loss of non-consolidated affiliates |
|
| 8.3 |
|
| 4.6 |
| |||
| Depreciation and amortization |
|
| 63.8 |
|
| 64.1 |
| |||
| Deferred income taxes |
|
| 1.9 |
|
| (3.0 | ) | |||
| Qualified pension plan income |
|
| (5.9 | ) |
| (3.0 | ) | |||
| Common stock issued under employee benefit plans |
|
| 4.1 |
| — | |||||
| Change in: |
|
|
|
|
|
|
| |||
| Receivables |
|
| (44.3 | ) |
| (8.9 | ) | |||
| Inventories |
|
| (17.7 | ) |
| 33.6 |
| |||
| Other current assets |
|
| (17.9 | ) |
| (10.6 | ) | |||
| Accounts payable and accrued liabilities |
|
| 13.3 |
|
| (59.4 | ) | |||
| Income taxes payable |
|
| (3.8 | ) |
| (13.6 | ) | |||
| Other assets |
|
| 4.6 |
|
| 7.7 |
| |||
| Noncurrent liabilities |
|
| (14.6 | ) |
| (5.0 | ) | |||
Other operating activities |
|
| (1.3 | ) |
| 1.0 |
| ||||
|
|
|
| ||||||||
| Net operating activities |
|
| (28.8 | ) |
| (2.9 | ) | |||
|
|
|
| ||||||||
Investing activities |
|
|
|
|
|
|
| ||||
Capital expenditures |
|
| (15.2 | ) |
| (54.5 | ) | ||||
Proceeds from sale of short-term investments |
|
| 11.8 |
|
| — |
| ||||
Business acquired in purchase transaction |
|
| — |
|
| (48.3 | ) | ||||
Cash acquired through business acquisition, net |
|
| 13.1 |
|
| — |
| ||||
Investments and advances-affiliated companies at equity |
|
| (0.5 | ) |
| 3.1 |
| ||||
Disposition of property, plant and equipment |
|
| 13.8 |
|
| 1.3 |
| ||||
Other investing activities |
|
| 0.2 |
|
| (0.4 | ) | ||||
|
|
|
| ||||||||
| Net investing activities |
|
| 23.2 |
|
| (98.8 | ) | |||
|
|
|
| ||||||||
Financing activities |
|
|
|
|
|
|
| ||||
Short-term debt borrowings |
|
| — |
|
| 96.2 |
| ||||
Long-term debt: |
|
|
|
|
|
|
| ||||
| Borrowings |
|
| 34.7 |
|
| — |
| |||
| Repayments |
|
| (135.5 | ) |
| (7.3 | ) | |||
Issuance of common stock |
|
| 63.3 |
|
| — |
| ||||
Purchases of Olin common stock |
|
| (2.5 | ) |
| (14.1 | ) | ||||
Stock options exercised |
|
| 2.7 |
|
| 2.3 |
| ||||
Dividends paid |
|
| (27.5 | ) |
| (26.1 | ) | ||||
Other financing activities |
|
| (0.5 | ) |
| (0.4 | ) | ||||
|
|
|
| ||||||||
| Net financing activities |
|
| (65.3 | ) |
| 50.6 |
| |||
|
|
|
| ||||||||
| Net decrease in cash and cash equivalents |
|
| (70.9 | ) |
| (51.1 | ) | |||
Cash and cash equivalents, beginning of period |
|
| 164.8 |
|
| 56.6 |
| ||||
|
|
|
| ||||||||
Cash and cash equivalents, end of period |
| $ | 93.9 |
| $ | 5.5 |
| ||||
|
|
|
| ||||||||
| |||||||||||
The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements. | |||||||||||
3
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
1. | We have prepared the condensed financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, these financial statements reflect all adjustments (consisting only of normal accruals) which are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are adequate to make the information presented not misleading. Certain reclassifications were made to prior year amounts to conform to the 2002 presentation. We recommend that you read these condensed financial statements in conjunction with the financial statements, accounting policies and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December 31, 2001. |
2. | Inventory consists of the following: |
June 30, 2002 | December 31, 2001 | |||||||
| Raw materials and supplies | $ | 112.9 | $ | 119.4 | ||||
| Work in process | 94.0 | 97.7 | ||||||
| Finished goods | 82.8 | 63.8 | ||||||
| 289.7 | 280.9 | |||||||
| LIFO reserve | (63.0 | ) | (57.7 | ) | ||||
| Inventory, net | $ | 226.7 | $ | 223.2 | ||||
|
| September 30, |
| December 31, |
| ||
|
|
|
| ||||
Raw materials and supplies |
| $ | 122.0 |
| $ | 119.4 |
|
Work in process |
|
| 121.3 |
|
| 97.7 |
|
Finished goods |
|
| 72.2 |
|
| 63.8 |
|
|
|
|
| ||||
|
|
| 315.5 |
|
| 280.9 |
|
LIFO reserve |
|
| (60.0 | ) |
| (57.7 | ) |
|
|
|
| ||||
Inventory, net |
| $ | 255.5 |
| $ | 223.2 |
|
|
|
|
| ||||
Inventories are valued principally by the dollar value last-in, first-out (LIFO) method of inventory accounting; such valuations are not in excess of market. Cost for other inventories has been determined principally by the average cost and first-in, first-out (FIFO) methods. Elements of costs in inventories include raw materials, direct labor and manufacturing overhead. Inventories under the LIFO method are based on annual estimates of quantities and costs as of the year-end; therefore, the condensed financial statements at September 30, 2002, reflect certain estimates relating to inventory quantities and costs at December 31, 2002. | |
3. | Basic |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
Basic Earnings (Loss) Per Share | 2002 | 2001 | 2002 | 2001 | ||||||||||
| Net income (loss) | (7.0 | ) | $ | 6.6 | $ | (18.3 | ) | $ | 9.0 | |||||
| Basic shares | 46.9 | 43.4 | 45.4 | 43.7 | ||||||||||
| Basic net income (loss) per share | $ | (0.15 | ) | $ | 0.15 | $ | (0.40 | ) | $ | 0.21 | ||||
|
| Three Months |
| Nine Months |
| ||||||||
|
|
|
| ||||||||||
Basic Loss Per Share |
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| ||||
|
|
|
|
| |||||||||
Net loss |
| $ | (1.0 | ) | $ | (19.4 | ) | $ | (19.3 | ) | $ | (10.4 | ) |
Basic shares |
|
| 49.7 |
|
| 43.4 |
|
| 47.0 |
|
| 43.6 |
|
Basic net loss per share |
| $ | (0.02 | ) | $ | (0.45 | ) | $ | (0.41 | ) | $ | (0.24 | ) |
4
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
Diluted Earnings (Loss) Per Share | 2002 | 2001 | 2002 | 2001 | ||||||||||
| Net income (loss) | $ | (7.0 | ) | $ | 6.6 | $ | (18.3 | ) | $ | 9.0 | ||||
| Diluted shares: | ||||||||||||||
| Basic shares | 46.9 | 43.4 | 45.4 | 43.7 | ||||||||||
| Stock options | — | .1 | — | .1 | ||||||||||
| Diluted shares | 46.9 | 43.5 | 45.4 | 43.8 | ||||||||||
| Diluted net income (loss) per share | $ | (0.15 | ) | $ | 0.15 | $ | (0.40 | ) | $ | 0.20 | ||||
|
| Three Months |
| Nine Months |
| ||||||||
|
|
|
| ||||||||||
Diluted Loss Per Share |
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| ||||
|
|
|
|
| |||||||||
Net loss |
| $ | (1.0 | ) | $ | (19.4 | ) | $ | (19.3 | ) | $ | (10.4 | ) |
Diluted shares |
|
| 49.7 |
|
| 43.4 |
|
| 47.0 |
|
| 43.6 |
|
Diluted net loss per share |
| $ | (0.02 | ) | $ | (0.45 | ) | $ | (0.41 | ) | $ | (0.24 | ) |
4. | We are party to various governmental and private environmental actions associated with waste disposal sites and manufacturing facilities. Environmental provisions charged to income amounted to | |
Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at |
5. | The Board of Directors in April, 1998, authorized a share repurchase program of up to 5 million shares of our common stock. We have repurchased 4,845,924 shares under the April 1998 program. During the first |
In March 2002, we issued and sold 3,302,914 shares of common stock at a public offering price of $17.50. Net proceeds from the sale were approximately $56 million and are available for general corporate purposes. | |
In September 2002, we issued approximately 9.8 million shares at an average price of $18.11 per share for a total value of $178 million for the acquisition of Chase. | |
During the first nine months of 2002 we issued approximately .2 million shares with a total value of $2.7 million representing stock options exercised. In addition, we issued approximately .6 million shares with a total value of $11.4 million in connection with our Contributing Employee Ownership Plan and our deferred compensation programs. | |
6. | In June 2002, we repaid the $100 million 8% notes from the proceeds from the sale of $200 million 9.125% notes in December 2001. In March 2002, we refinanced four variable rate tax-exempt debt issues, totaling $35 million. |
7. | We define segment operating income (loss) as earnings (loss) before interest expense, interest income, other income, restructuring charge and unusual items, and income taxes and include the operating results of |
5
consolidated affiliates. Segment operating results include an allocation of corporate operating expenses. Intersegment sales are not material. |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||
| Sales: | ||||||||||||||
| Chlor Alkali Products | $ | 75.2 | $ | 105.2 | $ | 147.6 | $ | 210.3 | ||||||
| Metals | 174.5 | 156.9 | 334.9 | 330.4 | ||||||||||
| Winchester | 64.6 | 62.4 | 126.8 | 118.0 | ||||||||||
| Total sales | $ | 314.3 | $ | 324.5 | $ | 609.3 | $ | 658.7 | ||||||
| Operating income (loss): | ||||||||||||||
| Chlor Alkali Products | $ | (15.0 | ) | $ | 12.1 | $ | (30.1 | ) | $ | 16.4 | ||||
| Metals | 9.1 | 0.2 | 11.6 | 0.8 | ||||||||||
| Winchester | 2.9 | 2.3 | 6.3 | 1.6 | ||||||||||
| Total operating income (loss) | (3.0 | ) | 14.6 | (12.2 | ) | 18.8 | ||||||||
| Interest expense | 7.5 | 4.1 | 15.3 | 7.8 | ||||||||||
| Interest income | 1.0 | — | 1.8 | 0.4 | ||||||||||
| Other income | 0.3 | 0.3 | 1.6 | 3.5 | ||||||||||
| Income (loss) before taxes | $ | (9.2 | ) | $ | 10.8 | $ | (24.1 | ) | $ | 14.9 | ||||
|
| Three Months |
| Nine Months |
| |||||||||
|
|
|
| |||||||||||
|
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| |||||
|
|
|
|
|
| |||||||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Chlor Alkali Products |
| $ | 83.3 |
| $ | 93.8 |
| $ | 230.9 |
| $ | 304.1 |
|
| Metals |
|
| 164.0 |
|
| 151.7 |
|
| 498.9 |
|
| 482.1 |
|
| Winchester |
|
| 93.0 |
|
| 88.1 |
|
| 219.8 |
|
| 206.1 |
|
|
|
|
|
|
|
| ||||||||
Total sales |
| $ | 340.3 |
| $ | 333.6 |
| $ | 949.6 |
| $ | 992.3 |
| |
|
|
|
|
|
| |||||||||
Operating income (loss) before restructuring charge and unusual items: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Chlor Alkali Products |
| $ | (8.1 | ) | $ | 0.8 |
| $ | (38.4 | ) | $ | 17.2 |
|
| Metals |
|
| 4.8 |
|
| (4.0 | ) |
| 16.0 |
|
| (3.2 | ) |
| Winchester |
|
| 7.8 |
|
| 3.2 |
|
| 14.0 |
|
| 4.9 |
|
|
|
|
|
|
|
| ||||||||
Total operating income (loss) before restructuring charge and unusual items: |
|
| 4.5 |
|
| — |
|
| (8.4 | ) |
| 18.9 |
| |
| Interest expense |
|
| 5.8 |
|
| 4.9 |
|
| 20.4 |
|
| 12.8 |
|
| Interest income |
|
| 0.3 |
|
| 0.1 |
|
| 2.1 |
|
| 0.5 |
|
| Other income |
|
| 0.5 |
|
| 0.5 |
|
| 2.1 |
|
| 4.0 |
|
| Restructuring charge |
|
|
|
|
| 25.9 |
|
|
|
|
| 25.9 |
|
| Unusual items (recorded in Cost of Goods Sold) |
|
| — |
|
| 2.0 |
|
| — |
|
| 2.0 |
|
|
|
|
|
|
|
| ||||||||
Loss before taxes |
| $ | (0.5 | ) | $ | (32.2 | ) | $ | (24.6 | ) | $ | (17.3 | ) | |
|
|
|
|
|
| |||||||||
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which became effective and was adopted by us on January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of this statement. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” Accordingly, we ceased amortizing goodwill totaling $42 million as of January 1, 2002. | |
We completed an initial impairment review of our goodwill balance during the second quarter of 2002 and determined an impairment charge was not required. | |
If SFAS No. 142 had been in effect for the three and nine month periods ended September 30, 2001, net loss as reported of $19.4 million and $10.4 million would have decreased by $0.3 million and $0.7 million, respectively, representing the elimination of goodwill amortization. For the three and nine month periods ended September 30, 2001, reported basic net loss per share of $0.45 and $0.24 would have been $0.44 and $0.22, respectively, while reported diluted net loss per share of $0.45 and $0.24 would have been $0.44 and $0.22, respectively. | |
8. | In June 2001, we acquired the stock of Monarch Brass & Copper Corp. (“Monarch”) for approximately $48 million. Monarch was a privately held, specialty copper alloy manufacturer headquartered in Waterbury, CT with annual revenues of approximately $95 million in 2000. It produces and distributes an array of high performance copper alloys and other materials used for applications in electronics, telecommunications, automotive and building products. We financed the purchase through our credit lines. The purchase price exceeded the fair value of the identifiable net assets acquired by $19 million. The acquisition has been |
6
accounted for using the purchase method of accounting. The operating results of Monarch, which have been included in the accompanying financial statements since the date of acquisition, were not material. |
9. | On September 27, 2002, |
The aggregate purchase price was approximately $178 million, representing the issuance of approximately 9.8 million shares at a price of $18.11 per share (the average price per share of our stock a few days before and after the merger agreement was announced on May 8, 2002). | |
The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed at the date of acquisition. We have obtained preliminary third party valuations of Chase’s fixed assets and certain intangible assets (trademark). Based on these valuations, $41 million was assigned to goodwill and $8 million was assigned to trademark, both of which are not subject to amortization. Because these valuations have not been finalized, the allocation of the purchase price is subject to refinements. Goodwill will |
|
| September 30, 2002 |
| ||
|
|
| |||
Cash |
| $ | 13 |
| |
Working capital |
|
| 9 |
| |
Property, plant and equipment |
|
| 135 |
| |
Goodwill |
|
| 41 |
| |
Intangible assets (trademark) |
|
| 8 |
| |
Other, net |
|
| (28 | ) | |
|
|
| |||
| Net assets acquired |
| $ | 178 |
|
|
|
| |||
The following unaudited pro forma condensed results of operations for the three and nine month periods ended September 30, 2002 and 2001, reflect the merger as if it had occurred on January 1, 2001, the beginning of the fiscal period presented. |
|
| Three Months |
| Nine Months |
| |||||||||
|
|
|
| |||||||||||
|
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| |||||
|
|
|
|
|
| |||||||||
Sales |
| $ | 397 |
| $ | 390 |
| $ | 1,126 |
| $ | 1,172 |
| |
Income (loss) from |
|
| 1 |
|
| (17 | ) |
| (13 | ) |
| (5 | ) | |
Income (loss) from |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Basic |
| $ | 0.02 |
| $ | (0.32 | ) | $ | (0.28 | ) | $ | (0.09 | ) |
| Diluted |
| $ | 0.02 |
| $ | (0.32 | ) | $ | (0.28 | ) | $ | (0.09 | ) |
10. | In the 2002 |
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent Development
The consolidated results of operations do not include any revenues or profits of Chase common stock in a tax-free share exchange. We will issue approximately 10 million common sharesas it was acquired at the end of the quarter; however the balance sheet of Chase was consolidated as of September 30, 2002 as described more fully under this agreement.
Consolidated Results of Operations
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||
($ in millions, except per share data) | ||||||||||||||
| Sales | $ | 314.3 | $ | 324.5 | $ | 609.3 | $ | 658.7 | ||||||
| Gross Margin | 29.6 | 42.4 | 54.5 | 81.7 | ||||||||||
| Selling and Administration | 27.6 | 25.6 | 56.6 | 57.8 | ||||||||||
| Interest Expense, net | 6.5 | 4.1 | 13.5 | 7.4 | ||||||||||
| Net Income (Loss) | (7.0 | ) | 6.6 | (18.3 | ) | 9.0 | ||||||||
| Net Income (Loss) Per Common Share: | ||||||||||||||
| Basic | $ | (0.15 | ) | $ | 0.15 | $ | (0.40 | ) | $ | 0.21 | ||||
| Diluted | $ | (0.15 | ) | $ | 0.15 | $ | (0.40 | ) | $ | 0.20 | ||||
|
| Three Months |
| Nine Months |
| |||||||||
|
|
|
| |||||||||||
($ in millions, except per share data) |
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| |||||
|
|
|
|
| ||||||||||
Sales |
| $ | 340.3 |
| $ | 333.6 |
| $ | 949.6 |
| $ | 992.3 |
| |
Gross Margin |
|
| 32.4 |
|
| 30.7 |
|
| 86.9 |
|
| 112.4 |
| |
Selling and Administration |
|
| 26.2 |
|
| 29.2 |
|
| 83.5 |
|
| 86.9 |
| |
Interest Expense, net |
|
| 5.5 |
|
| 4.8 |
|
| 18.3 |
|
| 12.3 |
| |
Net Loss |
|
| (1.0 | ) |
| (19.4 | ) |
| (19.3 | ) |
| (10.4 | ) | |
Net Loss Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Basic |
| $ | (0.02 | ) | $ | (0.45 | ) | $ | (0.41 | ) | $ | (0.24 | ) |
| Diluted |
| $ | (0.02 | ) | $ | (0.45 | ) | $ | (0.41 | ) | $ | (0.24 | ) |
Three Months Ended JuneSeptember 30, 2002 Compared to the Three Months Ended JuneSeptember 30, 2001
Gross margin percentage decreased from 13% in 2001 to 9%approximated 9.5% in 2002 primarily due to lower ECU prices.
8
compensation costs and lower pension income ($0.5 million), offset in part by lower salary expense ($1.0 million) due to the early retirement incentive program and the voluntary separation program offeredimplemented in the latter part oflate 2001.
The decrease in operating resultslosses from the non-consolidated affiliates was due primarily to the lower operating resultslosses from the Sunbelt Chlor Alkali Partnership, which we own equally with our partner, PolyOne Corporation (“PolyOne”) and we refer to as the Sunbelt joint venture (2002—$4(2002 - $1 million loss; 2001—$12001 - $3 million loss), which were adversely impacted by lowerbenefited from higher ECU pricing.
Interest expense, net of interest income, increased from 2001 primarily due to higher interest rates on our debt portfolio.
In the additionalthird quarter of 2002, we recorded a tax provision of $0.5 million on a pretax loss of $0.5 million compared to an effective tax rate of 39.8% in 2001. The taxes recorded on the loss in 2002 were less than the statutory rate because we are accruing interest expenseon taxes which may become payable in the future.
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September 30, 2001
Sales decreased 4% due to lower selling prices (7%) and metal sales (2%), offset in part by increased sales (3%) from Monarch Brass & Copper Corp. (“Monarch”) which we acquired in June 2001 and increased volumes (2%). The price decreases were primarily related to lower ECU prices in the Chlor Alkali Products segment. Sales volumes were higher in the Winchester and Metals businesses, in particular strip shipments to the ammunition, automotive and electronics segments.
Gross margin percentage decreased from 11% in 2001 to 9% in 2002 primarily due to lower ECU prices.
Selling and administration as a percentage of sales were 9% in 2002 and 2001. Selling and administration were $3.4 million lower than in 2001 primarily due to lower administration expenses, reduced salaries ($4 million) onresulting from the early retirement incentive program and the voluntary separation program implemented in late 2001 and lower charitable contribution expense ($1 million) in 2002, partially offset by lower pension income ($3 million) in 2002.
The increase in operating losses from the non-consolidated affiliates was due primarily to the lower operating results from the Sunbelt joint venture (2002 - $9 million loss; 2001 - $5 million loss), which were adversely impacted by lower ECU pricing.
Interest expense, net of interest income, increased from 2001 due to higher average outstanding debt ($5 million) relating primarily to the $200 million that we borrowed in December 2001, partially offset by higher interest income ($12 million) resultingin 2002. The additional interest expense in 2002 was due to higher interest rates on our debt ($3 million).
9
Other income decreased from higher short-term investments.
The effective tax rate decreased in 2002 to 23.9%21.5% from 38.9%.39.9% in 2001. The tax benefit recorded on the loss in 2002 was less than the statutory rate because we are accruing interest on taxes which may become payable in the future.
Chlor Alkali Products
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||
($ in millions) | ||||||||||||||
| Sales | $ | 75.2 | $ | 105.2 | $ | 147.6 | $ | 210.3 | ||||||
| Operating Income (Loss) | (15.0 | ) | 12.1 | (30.1 | ) | 16.4 | ||||||||
|
| Three Months |
| Nine Months |
| ||||||||
|
|
|
| ||||||||||
($ in millions) |
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| ||||
|
|
|
|
| |||||||||
Sales |
| $ | 83.3 |
| $ | 93.8 |
| $ | 230.9 |
| $ | 304.1 |
|
Operating Income (Loss) |
|
| (8.1 | ) |
| 0.8 |
|
| (38.4 | ) |
| 17.2 |
|
Three Months Ended JuneSeptember 30, 2002 Compared to the Three Months Ended JuneSeptember 30, 2001
SixNine Months Ended JuneSeptember 30, 2002 Compared to the SixNine Months Ended JuneSeptember 30, 2001
10
due to lower prices ($5168 million) and higher losses from the Sunbelt joint venture, whose operating results (2002—$8(2002 - $9 million loss; 2001—$32001 - $5 million loss) were negatively impacted by significantly lower ECU pricing. Lower volumesThe losses from the Sunbelt joint venture include interest expense of $5 million in 2002 and 2001 on the first quarter (primarily caustic) reduced operating income by $6 million.Sunbelt Notes. The negative impact on our operating results from pricing and volume was partially offset by reductions in manufacturing and selling and administration costs ($1413 million). Profit improvement activities, lower steam cost and overall cost management contributed to these cost reductions.
Metals
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||
($ in millions) | |||||||||||
| Sales | $ | 174.5 | $ | 156.9 | $ | 334.9 | 330.4 | ||||
| Operating Income | 9.1 | 0.2 | 11.6 | 0.8 | |||||||
|
| Three Months |
| Nine Months |
| ||||||||
|
|
|
| ||||||||||
($ in millions) |
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| ||||
|
|
|
|
| |||||||||
Sales |
| $ | 164.0 |
| $ | 151.7 |
| $ | 498.9 |
|
| 482.1 |
|
Operating Income (Loss) |
|
| 4.8 |
|
| (4.0 | ) |
| 16.0 |
|
| (3.2 | ) |
Three Months Ended JuneSeptember 30, 2002 Compared to the Three Months Ended JuneSeptember 30, 2001
Metals’ operating income increased substantially from $0.2 in 2001 to $9.1 in 2002, due to reduced manufacturing costs and increased volumes. The lower costs in 2002 include the benefit of the early retirement incentive program implemented in late 2001 and the consolidation of Monarch’s distribution business and the idling of the Indianapolis facility for most of the quarter.
SixNine Months Ended JuneSeptember 30, 2002 Compared to the SixNine Months Ended JuneSeptember 30, 2001
Metals’ operating income increased substantially from $0.8 in 2001 to $11.6 in 2002, due to reduced manufacturing costs and the absence of the effect of the strike in 2001. Costs this year have been reduced by the early retirement incentive program, the consolidation of the Monarch distribution business and the idling of the Indianapolis facility early in the year. 2001 sales and profits for the six-monthnine-month period were adversely affected by a strike at the East Alton, IL facility which ended on January 21, 2001.
11
Winchester
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
($ in millions) | ||||||||||||
| Sales | $ | 64.6 | $ | 62.4 | $ | 126.8 | $ | 118.0 | ||||
| Operating Income | 2.9 | 2.3 | 6.3 | 1.6 | ||||||||
|
| Three Months |
| Nine Months |
| ||||||||
|
|
|
| ||||||||||
($ in millions) |
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| ||||
|
|
|
|
| |||||||||
Sales |
| $ | 93.0 |
| $ | 88.1 |
| $ | 219.8 |
| $ | 206.1 |
|
Operating Income |
|
| 7.8 |
|
| 3.2 |
|
| 14.0 |
|
| 4.9 |
|
Three Months Ended JuneSeptember 30, 2002 Compared to the Three Months Ended JuneSeptember 30, 2001
SixNine Months Ended JuneSeptember 30, 2002 Compared to the SixNine Months Ended JuneSeptember 30, 2001
2002 Outlook
Better Chlor Alkali results are expected due to higher selling prices in the fourth quarter. We are expecting prices for both chlorine and Winchester’s earnings shouldcaustic to increase with normal seasonalityfrom the third to the fourth quarter as our customers build inventory prior tocontracts reflect the hunting season. In the Metals segment, Brass earningsprice increases that have been announced in the marketplace since mid-year. We expect further price improvement in the first quarter of 2003 as our contracts reflect the price increases announced during the third quarter are normallyand fourth quarters. In late October, a major chlor alkali producer announced a price increase of $70 per ton on caustic soda effective immediately or as contract terms permit. We understand that another major producer effected a similar price increase. On October 31, 2002, we also made a similar announcement.
During the month of October, Chlor Alkali operated at about 94% of capacity. We expect that our operating rates will be somewhat lower than the second quarterin November and December as chlorine demand slows due to our regularly scheduled maintenance shutdowns. While business conditionsnormal seasonal factors associated with inventory management. We expect this to
12
result in certain of Olin’s downstream markets remain below normal levels, there are some signs of recovery. Our guidancea tight supply/demand situation for the third quarter does not include the impact of the anticipated acquisition of Chase later in the third quarter due to the uncertainty of the closing date of this transaction.
We expect earnings for caustic and chlorine. In mid-May, producers announced a $50 per ton increasethe Metals segment in the price of caustic effective immediately or as contracts permit,fourth quarter, which will include a modest profit from Chase, to decline from third quarter levels due to softening demand for our products. We forecast that overall demand for our strip and we expect to fully implement the increase over the next two quarters as our contract terms permit. Also in mid-May producers announced chlorine price increases ranging from $125 to $150 per ton which were to become effective for quarterly contracts on July 1, or as contracts permit. We expect to get all of this increase over the next few quarters as our contract terms permit.
For the thirdfourth quarter, Winchester’s sales and operating results will increaseare expected to decrease seasonally from their secondpeak third quarter levels as a result of the upcoming hunting season. We are optimistic about the balance of the year based on our first six months’ performance and our sales forecasts for the second half.
As we have previously disclosed, a significant decline has occurred in the equity markets in the second quarter of 2002.this year. As a result of this, the market value of our pension plan portfolio as of July 24, 2002 wasis currently less than the accumulated benefit obligation as of December 31, 2001.obligation. If, at December 31, 2002, the market value of the assets is less than the accumulated benefit obligation, under Statement of Financial Accounting Standards (“SFAS”) No. 87, we will be required at that time to reduce equity to reflect this difference. Based on estimates prepared using certain asset return, interest rate and actuarial assumptions under the review of our independent outside actuary, The Segal Company, ifIf the equity markets domarket does not change between July 24, 2002 and the end of the calendar year, and interest rates stay where they are between now andimprove by the end of the year, (because that wouldand interest rates (which also affect the calculation), do not change by the end of the year, we will be takingexpect to take a charge against equity, which is a non-cash charge, in the $150 million range. This would have no effect on the covenants in our credit facility.
The potential non-cash charge to equity, regardless of the amount, would have no effectnot affect our ability to borrow under our revolving credit agreement. Based on cash orour assumptions and estimates we may be required to make contributions to the pension funding requirementsfund, but those contributions would not be required for several years. In addition, pension income may be modestly lower over the next several years and would modestly affect pension income next year andfew years.
Environmental Matters
In the year thereafter. Of course, if the equity markets were to reverse themselves and improve by year-end, or if interest rates increase, there is a possibility that there would be a lesser charge or no charge at all.
13
Our consolidated balance sheets included liabilities for future expenditures to investigate and remediate known sites amounting to $95$101 million at JuneSeptember 30, 2002 and $100 million at December 31, 2001, of which $79 million and $73 million was classified as other noncurrent liabilities, at both dates.respectively. The September 30, 2002 environmental liabilities include $8 million associated with the Chase operations. Those amounts did not take into account any discounting of future expenditures or any consideration of insurance recoveries or advances in technology. Those liabilities are reassessed periodically to determine if circumstances have changed and/or remediation efforts and our estimate of related costs have changed. As a result of these reassessments, future charges to income may be made for additional liabilities.
Annual environmental-related cash outlays for site investigation and remediation, capital projects, and normal plant operations are expected to range between approximately $40 to $50 million over the next several years, $20 million to $25 million of which is expected to be charged against reserves recorded on our balance sheet. While we do not anticipate a material increase in the projected annual level of our environmental-related costs, there is always the possibility that such increases may occur in the future in view of the uncertainties associated with environmental exposures. Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies, advances in technology, changes in environmental laws and regulations and their application, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties and our ability to obtain contributions from other parties and the lengthy time periods over which site remediation occurs. It is possible that some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably to us, which could have a material adverse effect on our operating results and financial condition.
Liquidity, Investment Activity and Other Financial Data
Cash Flow Data
Six Months Ended June 30, | ||||||||
2002 | 2001 | |||||||
($ in millions) | ||||||||
| Provided By (Used For) | ||||||||
| Net Operating Activities | $ | (22.6 | ) | $ | (19.9 | ) | ||
|
| Nine Months |
| ||||
|
|
| |||||
Provided By (Used For) ($ in millions) |
| 2002 |
| 2001 |
| ||
|
|
| |||||
Net Operating Activities |
| $ | (28.8 | ) | $ | (2.9 | ) |
Capital Expenditures |
|
| (15.2 | ) |
| (54.5 | ) |
Net Investing Activities |
|
| 23.2 |
|
| (98.8 | ) |
Purchases of Olin Common Stock |
|
| (2.5 | ) |
| (14.1 | ) |
Net Financing Activities |
|
| (65.3 | ) |
| 50.6 |
|
| Capital Expenditures | (7.2 | ) | (36.3 | ) | ||
| Net Investing Activities | 4.0 | (83.7 | ) | |||
| Purchases of Olin Common Stock | (2.5 | ) | (14.1 | ) | ||
| Net Financing Activities | (56.9 | ) | 50.8 |
14
Operating Activities
Investing Activities
In January 2002, we received $11.0 million from the sale of the stock of Prudential Insurance Company. We were awarded these shares of stock in 2001 as a result of Prudential’s conversion from a mutual company to a stock company.
In June 2001, we acquired the stock of Monarch for approximately $48 million. Monarch was a privately held, specialty copper alloy manufacturer headquartered in Waterbury, CT with annual revenues of approximately $95 million in 2000. It produces and distributes an array of high performance copper alloys and other materials used for applications in electronics, telecommunications, automotive and building products. We financed the purchase price through our credit lines.facilities. The purchase price exceeded the fair value of the identifiable net assets acquired by $19 million. The acquisition has been accounted for using the purchase method of accounting. The operating results of Monarch, which have been included in the accompanying financial statements since the date of acquisition, were not material.
On September 27, 2002, we acquired 100% of the stock of Chase by the issuance of approximately 9.8 million shares of our common stock. We believe the merger constitutes a tax-free exchange. The total consideration was approximately $178 million, which represented the fair value of Olin common stock issued. Chase, with 2001 sales of $232 million, is a leading manufacturer and supplier of brass rod in the U.S. and Canada. The purchase price exceeded the fair value of the identifiable net assets acquired by $41 million. The acquisition has been accounted for using the purchase method of accounting. Our third quarter operating results do not include the sales or profits from Chase which was merged with Olin at the end of the quarter.
Financing Activities
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depreciation and amortization (“leverage ratio”) and the ratio of earnings before interest expense, taxes, depreciation and amortization to interest expense (“coverage ratio”). In the event that the leverage ratio equals or exceeds 3.75,
In December 2001, we sold $200 million of 9.125% Senior Notes with a maturity date of December 15, 2011. We used $100 million from the proceeds of the offering to repay the $100 million 8% notes in June 2002. In March 2002, we issued and sold 3,302,914 shares of common stock at a public offering price of $17.50. Net proceeds from this sale were approximately $56 million and provide liquidity and financial flexibility, and strengthen our financial position. The net proceeds are available for general corporate purposes.
In March 2002, we also refinanced $35 million of tax-exempt debt to create additional capacity under our revolving credit facility by eliminating the need for an equivalent amount of letters of credit. This action increased our potential liquidity by $35 million.
During the first sixnine months of 2002 and 2001, we used $2.5 million and $14.1 million to repurchase 144,157 and 694,870 shares of our common stock, respectively. Approximately 154,000 shares remain to be repurchased under our previously approved stock repurchase program.
The percent of total debt to total capitalization decreased to 52%41% at JuneSeptember 30, 2002, from 61% at year-end 2001 and was 52%55% at JuneSeptember 30, 2001. The decrease from year-end 2001 was due primarily to the repayment of the $100 million of the 8% notes and the increase in shareholder’s equity resulting from the issuance of approximately 3.3 million shares in March 2002.
In 2002, we paid quarterly dividends of $0.20 per share. In JulyOctober 2002, our Boardboard of Directorsdirectors declared a quarterly dividend of $0.20 per share on our common stock, which is payable on SeptemberDecember 10, 2002, to shareholders of record on August 9,November 11, 2002.
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
Cash flow from operations is subject to change as a result of the cyclical nature of our operating results, which have been affected recently by the economic downturn and resulting decline in demand from many of the industries served by us, such as coinage, electronics and the telecommunications sectors. In addition, cash flow from operations is affected by considerable
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changes in ECU prices caused by the changes in the supply/demand balance of chlorine and
Our current debt structure has been used to fund our business operations, and commitments from banks under our revolving credit facility are a source of liquidity. As of JuneSeptember 30, 2002, we had long-term borrowings of $330 million of which $1 million was issued at variable rates. We have entered into interest rate swaps on approximately $140 million of our underlying debt obligations, whereby we agree to pay variable rates to a counterparty who, in turn, pays us fixed rates. Annual maturities of long-term debt at December 31, 2001, were $102 million in 2002; $2 million in 2003; $27 million in 2004; $63 million in 2005; $1 million in 2006 and $236 million thereafter. We used a portion of net proceeds from the offering of our $200 million 9.125% Senior Notes in December 2001 to repay the $100 million 8% notes in June 2002.
We use operating leases for certain purposes, such as railroad cars, distribution, warehousing and office space, data processing and office equipment. Leases covering these properties may contain escalation clauses based on increased costs of the lessor, primarily property taxes, maintenance and insurance, and have renewal or purchase options. Future minimum rent payments under operating leases having initial or remaining non-cancelable lease terms in excess of one year at December 31, 2001 are as follows: $21 million in 2002; $20 million in 2003; $18 million in 2004; $16 million in 2005; $15 million in 2006 and a total of $61 million thereafter. Assets under capital leases are not significant.
On December 31, 1997, we entered into a long-term, sulfur dioxide supply agreement with Alliance Specialty Chemicals, Inc. (“Alliance”), formerly known as RFC S02, Inc. Alliance has the obligation to deliver annually 36,000 tons of sulfur dioxide. Alliance owns the sulfur dioxide plant, which is located at our Charleston, TN facility and is operated by us. The price for the sulfur dioxide is fixed over the life of the contract, and under the terms of the contract, we are obligated to make a monthly payment of approximately $200 thousand regardless of the amount of sulfur dioxide purchased. Commitments related to this agreement are approximately $2 million per year for 2002 through 2006 and a total of $12 million thereafter.
Our credit facility standby lettersis a source of credit and guarantees. In January 2002, we entered into a new senior revolving credit facility with a group of banks.liquidity. This credit facility is described above under the caption, “Financing Activities”. As of JuneSeptember 30, 2002, we did not have any outstanding borrowings under this credit facility.
The Sunbelt joint venture owns assets with productive capability to manufacture 275 thousand tons of caustic soda and 250 thousand tons of chlorine annually. We market all of the caustic soda production for the venture, while all of the chlorine production is required to be purchased by Oxy Vinyls (a joint venture between OxyChem and PolyOne) based on a formula tied to the
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market price of chlorine. The construction of this plant and equipment was financed by the
We have guaranteed Series O of the Sunbelt Notes, and PolyOne has guaranteed Series G of the Sunbelt Notes, in both cases pursuant to customary guaranty agreements. Our guarantee and PolyOne’s guarantee are separate, rather than joint. In other words, we are not required to make any payments under PolyOne’s guaranty of Sunbelt’s indebtedness. 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 timely payments on the Sunbelt Notes are not made, 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 the Sunbelt joint venture for repayment.
Beginning on December 22, 2002 and each year through 2017, our Sunbelt joint venture is required to repay approximately $12 million of the Sunbelt Notes, of which approximately $6 million is attributable to Series O of the Sunbelt Notes. In the event our Sunbelt joint venture cannot make any of these payments, we would be required to fund our half of such payment. In certain other circumstances, we may also be required to repay the Sunbelt Notes prior to their maturity. We and PolyOne have agreed that, if we or PolyOne intend to transfer our respective interests in the Sunbelt joint venture 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.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which became effective and was adopted by us on January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of this statement. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment ofor Disposal of Long-Lived Assets.” Accordingly, we ceased amortizing goodwill totaling $42 million as of January 1, 2002.
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We completed an initial impairment review of our goodwill balance during the second quarter of 2002 and determined an impairment charge was not required.
If SFAS No. 142 had been in effect for the three and sixnine month periods ended JuneSeptember 30, 2001, net incomeloss as reported of $6.6$19.4 million and $9.0$10.4 million would have increaseddecreased by $0.2$0.3 million and $0.4$0.7 million respectively, representing the elimination of goodwill amortization. For the three and sixnine month periods ended JuneSeptember 30, 2001, reported basic net incomeloss per share of $0.15$0.45 and $0.21$0.24 would have been $0.16$0.44 and $0.22, respectively, while reported diluted net incomeloss per share of $0.15$0.45 and $0.20$0.24 would have been $0.16$0.44 and $0.21,$0.22, respectively.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that the fair value of a liability for an asset retirement be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for fiscal years beginning after June 15, 2002. At this time, it is not practical to reasonably estimate the impact of adopting this statement on our financial statements.
The FASB issued SFAS No. 144, “Accounting for Impairment ofor Disposal of Long-Lived Assets.” SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. This statement requires that one accounting model be used for long-lived assets to be disposed of by sale whether previously held and used or newly acquired. In addition, it broadened the presentation of discontinued operations to include more disposal transactions. This statement is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. At the time of adoption on January 1, 2002, this statement did not have a material impact on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Certain raw materials and energy costs, namely copper, lead, zinc and zinc,natural gas, used primarily in our Metals and Winchester segments’ productssegments 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 metal and natural gas price fluctuations. As of JuneSeptember 30, 2002, we maintained open positions on futures contracts totaling $42$37 million ($5570 million at JuneSeptember 30, 2001). Assuming a hypothetical 10% increase in commodity prices which are currently hedged, we would experience a $4.2$3.7 million ($5.57.0 million at JuneSeptember 30, 2001) increase in our cost of related inventory purchased, which would be offset by a corresponding increase in the value of related hedging instruments.
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We are exposed to changes in interest rates primarily as a result of our investing and financing activities. Investing activity is not material to our consolidated financial position, results of operations or cash flow. Our current debt structure has been used to fund our business operations, and commitments from banks under our revolving credit facility are a source of liquidity. As of JuneSeptember 30, 2002, we had long-term borrowings of $330 million ($234231 million at JuneSeptember 30, 2001) of which $1 million ($36 million at JuneSeptember 30, 2001) was issued at variable rates. As a result of our recent 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 approximately $140 million of such swaps, whereby we agree to pay variable rates to a counterparty who, in turn, pays us fixed rates. In all cases the underlying index for the variable rates is six-month London InterBank Offered Rate (LIBOR). Accordingly, payments are settled every six months and the term of the swap is the same as the underlying debt instrument. In December 2001, we swapped interest payments on $50 million principal amount of our 9.125% Senior Notes to a floating rate (5.495% at JuneSeptember 30, 2002). In February and March 2002, we swapped interest payments on $30 million and $25 million principal amount, respectively, of our 9.125% Senior Notes to floating rates. Terms of these swaps set the floating rate at the end of each six-month reset period. Therefore, the interest rates for the current period will be set on December 16, 2002. We estimate that the rates will be between 5%4% and 6%5%. In AprilMarch 2002, we refinanced four variable-rate tax exempttax-exempt debt issues totaling $35 million. The purpose of the refinancings was to eliminate the need for letter of credit support that used our liquidity. In order to manage interest expense and floating interest rate exposure to optimal levels, we swapped the fixed rate debt of the newly refinanced bonds back to variable rate debt through interest rate swaps. At JuneSeptember 30, 2002, interest rates on swaps of $8 million, $21 million and $6 million of the swaps were 1.34%, 2.6% and 2.74%, respectively. The interest rate on the remaining $8 million swap is set at the end of the six-month reset period, or November 1, 2002, and is expected to be between 1.50% and 2%. These interest rate swaps reduced interest expense, resulting in an increasea decrease in pretax incomeloss of $2$3 million and less than $1 million for the sixnine months ended JuneSeptember 30, 2002 and 2001, respectively.
If the actual change in interest rates or commodities pricing is substantially different than expected, the net impact of interest rate risk or commodity risk on our cash flow may be materially different than that disclosed above.
We do not enter into any derivative financial instruments for speculative purposes.
Item 4. Controls and Procedures
(a) Evaluation of disclosure and procedures.
Our chief executive officer and chief financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing of this quarterly report, (the “Evaluation Date”). Based on this review, they have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that material information relating
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to Olin Corporation and its consolidated subsidiaries would be disclosed on a timely basis in this report.
(b) Changes in internal controls.
We maintain a system of internal accounting controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. For the quarter ended September 30, 2002, there were no significant changes to our internal controls or in other factors that could significantly affect our internal controls.
Cautionary Statement Regarding Forward-Looking Statements
We have used the words “anticipate,” “intend,” “may,” “expect,” “believe,” “should,” “plan,” “will,” “estimate,” and variations of such words and similar expressions in this quarterly report to identify such forward-looking statements. These statements are not guarantees of future
The risks, uncertainties and assumptions that are involved in our forward-looking statements include but are not limited to:
• | sensitivity to economic, business and market conditions in the United States and overseas, including economic instability or a downturn in the sectors served by us, such as automotive, electronics, coinage, telecommunications, ammunition, housing, vinyls and pulp and | ||
• | extraordinary events, such as the attacks on the World Trade Center and the Pentagon that occurred on September 11, | ||
• | economic and industry downturns that result in diminished product demand and excess manufacturing capacity in any of our segments and that, in many cases, result in lower selling prices and profits; |
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• | the cyclical nature of our operating results, particularly declines in average selling prices in the chlor alkali industry and the supply/demand balance for our products, including the impact of excess industry capacity or an imbalance in demand for our chlor alkali products; |
• | an increase in our indebtedness or higher-than-expected interest rates, affecting our ability to generate sufficient cash flow for debt service; |
• | unforeseen effects of competition; |
• | environmental costs and other expenditures in excess of those projected; |
• | higher-than-expected raw material and utility or transportation and/or logistics costs; |
• | the occurrence of unexpected manufacturing |
• | unexpected additional taxes and related interest as the result of pending income tax |
Votes For | Votes Withheld | |||
| G. Jackson Ratcliffe, Jr. | 38,674,853 | 1,460,094 | ||
| Richard M. Rompala | 38,692,016 | 1,442,931 | ||
| Joseph D. Rupp | 38,813,848 | 1,321,099 | ||
| Donald W. Griffin | 38,419,399 | 1,715,548 |
• | the effects of a continued depressed stock market on the asset values and declining long-term interest rates on the liabilities in our pension plan. | |
All of our forward-looking statements should be considered in light of these factors. | ||
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Part II - Other Information
Item 1. | Legal Proceedings. | ||
Not Applicable. | |||
Item 2. | Changes in Securities and Use of Proceeds. | ||
Not Applicable. | |||
Item 3. | Defaults Upon Senior Securities. | ||
Not Applicable. | |||
Item 4. | Submission of Matters to a Vote of Security Holders. | ||
The Company held its Special Meeting of Shareholders on September 25, 2002. At the meeting, shareholders approved the issuance of 0.6400 shares of Olin common stock for each share of Chase Industries Inc.’s common stock outstanding, in connection with the merger of Chase Industries Inc. and a wholly-owned subsidiary of Olin Corporation pursuant to the Agreement and Plan of Merger dated May 7, 2002, among Olin Corporation, Plumber Acquisition Corp. and Chase Industries Inc. Voting for the resolution approving the issuance of Olin common stock to stockholders of Chase in the merger of Chase and a subsidiary of Olin were 35,692,940 shares. Voting against were 782,094 shares. Abstaining were 472,969 shares. There were no broker nonvotes. | |||
Item 5. | Other Information. | ||
Not Applicable. | |||
Item 6. | Exhibits and Reports on Form 8-K. | ||
(a) | Exhibits | ||
10(h) | Form of Extension Letter dated September 26, 2002 relating to Executive Agreement. | ||
10(j) | 1997 Stock Plan for Non-Employee Directors as amended effective July 25, 2002. | ||
12. | Computation of Ratio of Earnings to Fixed Charges (Unaudited). | ||
99.1 | Certification Statement of Chief Executive Officer | ||
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99.2 | Certification Statement of Chief Financial Officer | ||
(b) | Reports on Form 8-K | ||
Form 8-K filed August 14, 2002 furnishing the Statements Under Oath of Olin’s Chief Executive Officer and Chief Financial Officer which were filed with the Securities and Exchange Commission on August 13, 2002, pursuant to the SEC’s Order No. 4-460. | |||
Form 8-K filed September 27, 2002 announcing closing of Chase Industries Inc. merger and filing the related pro forma financial information. | |||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OLIN CORPORATION | ||||
(Registrant) | ||||
By: | /s/ | |||
Executive Vice President and Chief Financial Officer (Authorized Officer) | ||||
Date: AugustNovember 13, 2002
CERTIFICATIONS
I, Joseph D. Rupp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Olin Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
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b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 | /s/ JOSEPH D. RUPP |
Joseph D. Rupp |
I, Anthony W. Ruggiero, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Olin Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
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4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 | /s/ ANTHONY W. RUGGIERO |
Anthony W. Ruggiero |
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EXHIBIT INDEX
Exhibit |
| |
10(h) | Form of Extension Letter dated September 26, 2002 relating to Executive Agreement. | |
10(j) | 1997 Stock Plan for Non-Employee Directors as amended effective July 25, 2002. | |
12. | Computation of Ratio of Earnings to Fixed Charges (Unaudited). | |
99.1 | Certification Statement of Chief Executive Officer | |
99.2 | Certification Statement of Chief Financial Officer |