SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-1070
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Olin Corporation
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(Exact name of registrant as specified in its charter)
Virginia 13-1872319
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Merritt 7, Norwalk, CT 06856
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(Address of principal executive offices) (Zip Code)
(203) 750-3000
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(Registrant's telephone number, including area code)
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(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
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As of October 31, 2001, there were outstanding 43,440,223 shares of the
registrant's common stock.
Part I - Financial Information
Item 1. Financial Statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Balance Sheets
(In millions, except per share data)
Unaudited
September 30, December 31,
2001 2000
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ASSETS
- ------
Cash and cash equivalents $ 5.5 $ 56.6
Short-term investments 25.0 25.0
Accounts receivable, net 218.4 196.7
Inventories 204.4 216.4
Income taxes receivable 18.7 0.4
Other current assets 46.0 33.1
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Total current assets 518.0 528.2
Property, plant and equipment
(less accumulated depreciation
of $1,230.2 and $1,177.9) 489.6 483.0
Other assets 117.8 111.6
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Total assets $ 1,125.4 $ 1,122.8
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Short-term borrowings and current
installments of long-term debt $ 199.7 $ 1.0
Accounts payable 91.8 123.8
Income taxes payable 1.3 1.6
Accrued liabilities 148.2 148.6
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Total current liabilities 441.0 275.0
Long-term debt 129.4 228.1
Deferred income taxes 76.8 79.8
Other liabilities 207.7 211.3
Commitments and contingencies
Shareholders' equity:
Common stock, par value $1 per share:
Authorized 120.0 shares
Issued 43.4 shares (44.0 in 2000) 43.4 44.0
Additional paid-in capital 204.3 215.7
Accumulated other comprehensive loss (25.9) (16.3)
Retained earnings 48.7 85.2
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Total shareholders' equity 270.5 328.6
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Total liabilities and shareholders' equity $ 1,125.4 $ 1,122.8
============= ============
_________________________
The accompanying Notes to Condensed Financial Statements are an integral part of
the condensed financial statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Income (Unaudited)
(In millions, except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2001 2000 2001 2000
----------- ----------- ----------- -------------
Sales $ 333.6 $ 413.1 $ 992.3 $ 1,191.7
Operating Expenses:
Cost of goods sold 302.9 340.1 879.9 982.1
Selling and administration 29.6 31.2 87.4 90.8
Research and development 1.2 1.3 4.0 4.1
Earnings(loss) of non-consolidated affiliates (2.3) 0.7 (4.6) 1.1
Interest expense 4.5 3.9 12.3 11.8
Interest income 0.1 0.4 0.5 0.7
Other income 0.5 0.1 4.0 2.1
Restructuring charge 25.9 -- 25.9 --
----------- ----------- ----------- -------------
Income(loss) before taxes (32.2) 37.8 (17.3) 106.8
Income tax provision(benefit) (12.8) 14.4 (6.9) 40.8
----------- ----------- ----------- -------------
Net income (loss) $ (19.4) $ 23.4 $ (10.4) $ 66.0
=========== =========== =========== =============
Net income (loss) per common share:
Basic $ (0.45) $ 0.52 $ (0.24) $ 1.46
Diluted (0.45) 0.52 (0.24) 1.46
Dividends per common share $ 0.20 $ 0.20 $ 0.60 $ 0.60
Average common shares outstanding:
Basic 43.4 45.1 43.6 45.1
Diluted 43.4 45.2 43.6 45.2
_________________________________
The accompanying Notes to Condensed Financial Statements are an integral part of
the condensed financial statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Cash Flows (Unaudited)
(In millions)
Nine Months
Ended September 30,
-------------------------------------------
2001 2000
---------------- ----------------
Operating activities
- --------------------
Net income(loss) $ (10.4) $ 66.0
Adjustments to reconcile income from operations to net cash
and cash equivalents provided by operating activities
(Earnings)loss of non-consolidated affiliates 4.6 (1.1)
Depreciation and amortization 64.1 59.4
Deferred income taxes (3.0) 8.7
Restructuring charge and unusual items 29.0 -
Change in:
Receivables (8.9) (58.8)
Inventories 31.6 13.0
Other current assets (10.6) 3.2
Accounts payable and accrued liabilities (65.8) 10.0
Income taxes payable (13.6) 17.4
Noncurrent liabilities (15.5) (13.5)
Other operating activities (4.4) (7.3)
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Net operating activities (2.9) 97.0
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Investing activities
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Capital expenditures (54.5) (57.1)
Business acquired in purchase transaction (48.3) -
Investments and advances-affiliated companies at equity 3.1 10.7
Other investing activities 0.9 (1.8)
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Net investing activities (98.8) (48.2)
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Financing activities
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Short-term debt borrowings 96.2 -
Long-term debt repayments (7.3) (1.1)
Purchases of Olin common stock (14.1) -
Stock options exercised 2.3 1.0
Dividends paid (26.1) (27.1)
Other financing activities (0.4) (0.4)
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Net financing activities 50.6 (27.6)
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Net (decrease)increase in cash and cash equivalents (51.1) 21.2
Cash and cash equivalents, beginning of period 56.6 21.0
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Cash and cash equivalents, end of period $ 5.5 $ 42.2
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___________________________________
The accompanying Notes to Condensed Financial Statements are an
integral part of the condensed financial statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)
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. We made certain reclassifications to prior year amounts to
conform to the 2001 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 for the year ended December 31,
2000.
2. Inventory consists of the following:
September 30, December 31,
2001 2000
---- ----
Raw materials and supplies $119.6 $126.7
Work in process 98.1 110.7
Finished goods 55.0 59.7
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272.7 297.1
LIFO reserve (68.3) (80.7)
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Inventory, net $204.4 $216.4
========== ==========
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, 2001, reflect certain estimates relating to
inventory quantities and costs at December 31, 2001.
3. Basic earnings (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 options.
Three Months Nine Months
Ended September 30, Ended September 30,
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Basic Earnings (Loss) Per Share 2001 2000 2001 2000
------------------------------- ---- ---- ---- ----
Basic earnings (loss):
Net income (loss) $(19.4) $23.4 $(10.4) $66.0
Basic shares 43.4 45.1 43.6 45.1
Basic earnings (loss) per share:
Net income (loss) $(0.45) $0.52 $(0.24) $1.46
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Diluted Earnings (Loss) Per 2001 2000 2001 2000
----------------------------- ---- ---- ---- ----
Share
-----
Diluted earnings (loss):
Net income (loss) $ (19.4) $ 23.4 $ (10.4) $ 66.0
Diluted shares:
Basic shares 43.4 45.1 43.6 45.1
Stock options --- .1 --- .1
------- -------- ------- --------
Diluted shares 43.4 45.2 43.6 45.2
======= ======== ======= ========
Diluted earnings (loss) per share:
Net income (loss) $ (0.45) $ 0.52 $ (0.24) $ 1.46
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 $4 million in each
of the three-month periods ended September 30, 2001 and 2000, and $11
million in each of the nine-month periods ended September 30, 2001 and
2000. Charges to income for investigatory and remedial efforts were
material to operating results in 2000 and may be material to operating
results in 2001. The consolidated balance sheets include reserves for
future environmental expenditures to investigate and remediate known sites
amounting to $101 million at September 30, 2001 and $110 million at
December 31, 2000, of which $76 million and $85 million were classified as
other noncurrent liabilities, respectively.
Environmental exposures are difficult to assess for numerous reasons,
including the identification of new sites, developments at sites resulting
from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, 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
length of time 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 against us, which could have a
material adverse effect on our operating results and financial condition.
5. The Board of Directors, in October 1996, authorized a share repurchase
program of up to 5 million shares of Olin common stock and, in April 1998,
approved an additional share repurchase program of up to an additional 5
million shares of Olin common stock, from time to time, as market
conditions warrant. Since January 1997 we have repurchased 9,701,767
shares, of which 4,701,767 were under the April 1998 program. During the
first nine months of 2001, we repurchased 694,870 shares of our common
stock.
6. We define segment operating income as earnings before interest expense,
interest income, other income, restructuring charge and unusual items, and
income taxes and include the operating results of non-consolidated
affiliates. Segment operating results include an allocation of corporate
operating expenses. Intersegment sales are not material.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
Sales: 2001 2000 2001 2000
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Chlor Alkali Products $ 93.8 $ 100.7 $ 304.1 $ 292.8
Metals 151.7 219.8 482.1 677.3
Winchester 88.1 92.6 206.1 221.6
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Total sales $ 333.6 $ 413.1 $ 992.3 $ 1,191.7
========== ============ =========== ============
Operating income (loss):
Chlor Alkali Products $ 0.7 $ 8.3 $ 17.1 $ 20.1
Metals (4.3) 21.7 (3.5) 75.2
Winchester 3.2 11.2 4.8 20.5
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Total operating income (loss) $ (0.4) $ 41.2 $ 18.4 $ 115.8
========== ============ =========== =============
Operating income (loss) $ (0.4) $ 41.2 $ 18.4 $ 115.8
Interest expense 4.5 3.9 12.3 11.8
Interest income 0.1 0.4 0.5 0.7
Other income 0.5 0.1 4.0 2.1
Restructuring charge and
unusual items (recorded
in Cost of Goods Sold) 27.9 --- 27.9 ---
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Income (loss) before taxes $ (32.2) $ 37.8 $ (17.3) $ 106.8
========== ============ =========== =============
7. We do not provide for U.S. income taxes on foreign currency translation
adjustments in reporting comprehensive income (loss) since we do not
provide for such taxes on undistributed earnings of foreign subsidiaries.
The components of comprehensive income (loss) for the three-month and
nine-month periods ended September 30, 2001 and 2000 are as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---------- ---------- ---------- -----------
Net income (loss) $ (19.4) $ 23.4 $ (10.4) $ 66.0
Other comprehensive income (loss):
Cumulative translation adjustment 0.6 --- (0.4) (2.0)
Hedging activity (4.1) --- (9.1) ---
---------- ---------- ---------- -----------
Comprehensive income (loss) $ (22.9) $ 23.4 $ (19.9) $ 64.0
========== ========== ========== ===========
8. As of January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 137 and No. 138. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain
derivative instruments embedded in other contracts and hedging activities.
SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. 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 are
recognized in earnings. For derivatives designated as a cash flow hedge,
the changes in fair value are recognized in other comprehensive income
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.
We use cash flow hedges of commodities such as copper, zinc, nickel and
lead to provide a measure of stability in managing our exposure to price
fluctuations. We also use foreign currency positions and fair value hedges
of interest rate swaps as a means of hedging these exposures.
As a result of adopting SFAS No. 133 on January 1, 2001, we recorded a
pretax $0.9 million decline in fair value to Accumulated Other
Comprehensive Loss. The unfavorable ineffective portion of
changes in fair value resulted in less than a $0.1 million charge to
earnings. Offsetting the above, assets totaling $1.2 million and
liabilities totaling $2.1 million were recorded at January 1, 2001.
At September 30, 2001, other comprehensive income (loss) included a pretax
decline in fair value of $9.1 million. In addition, the unfavorable
ineffective portion of changes in fair value resulted in a $1.4 million
charge to earnings for the nine-month period ended September 30, 2001.
Offsetting the above, there were assets totaling $2.2 million and
liabilities totaling $12.7 million.
Our foreign currency contracts and certain commodity derivatives did not
meet the criteria of SFAS No. 133 to qualify for hedge accounting. The
cumulative effect of items not qualifying for hedge accounting for the
three-month and nine-month periods ended September 30, 2001 was not
material to earnings.
9. In June 2001, we acquired the stock of Monarch Brass & Copper Corp.
("Monarch") for approximately $49 million. Monarch was a privately held,
specialty brass manufacturer headquartered in Waterbury, CT with annual
revenues of approximately $95 million. 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. The purchase price
exceeded the fair value of the identifiable net assets acquired by $19
million, which is being amortized on a straight-line basis over 30 years.
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.
10. In September 2001, we recorded a pretax charge of $29.0 million (or $0.40
diluted EPS) for restructuring and unusual items, primarily for costs
associated with a salaried workforce reduction through an early retirement
incentive program. Cost of Goods Sold and Other Income include $2.0 million
and $1.1 million, respectively, of unusual items. Cost of Goods Sold
included the write-off of inventory associated with cancelled customer
orders; Other Income included the write-off of an investment in an
E-commerce company. The restructuring charge of $25.9 million related to
the 190 employees retiring in connection with the retirement program and
represented primarily pension and postretirement benefit curtailment
losses and severance. As of September 30, 2001, 72 employees had retired
and we expect that 61 employees will retire in the fourth quarter of 2001
and the remainder will retire in the first quarter of 2002. The pension
benefits of $11.8 million will be paid out of the pension trust while the
other benefits which include $5.3 million of postretirement benefits in
Other Liabilities and $5.4 million of severance in Accrued Liabilities will
be paid out of our operating cash flows over time.
Item 2. Management's Discussion and Analysis of Financial Condition
------------------------------------------------------------
and Results of Operations
-------------------------
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
($ in millions, except per share data) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------
Sales $333.6 $413.1 $992.3 $1,191.7
Gross Margin 30.7 73.0 112.4 209.6
Selling and Administration 29.6 31.2 87.4 90.8
Restructuring Charge 25.9 -- 25.9 --
Net Income (Loss) (19.4) 23.4 (10.4) 66.0
Net Income (Loss) Per Common Share:
Basic $(0.45) $ 0.52 $(0.24) $ 1.46
Diluted $(0.45) $ 0.52 $(0.24) $ 1.46
================================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Sales decreased 19.2% due to lower volumes and selling prices. Sales volumes
were lower across all segments with the biggest impact coming from the Metals
segment which was heavily impacted by a soft economy, particularly in the
automotive, electronics and telecommunications industries.
Gross margin percentage decreased from 18% in 2000 to 9% in 2001 primarily due
to lower sales volumes.
Selling and administration as a percentage of sales was 9% in 2001 up from 8% in
2000. Selling and administration was $1.6 million lower than in 2000 due to
lower incentive compensation costs and fees incurred in 2000 associated with the
discontinued chlor alkali partnership negotiations.
The decrease in operating results from the non-consolidated affiliates was due
primarily to the lower operating results from the Sunbelt joint venture, which
was adversely impacted by lower chlorine pricing.
Excluding the charge for restructuring and unusual items, the effective tax rate
increased to 40.0% from 38.1% due to the under-utilization of foreign tax
credits.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000
Sales decreased 16.7% due to lower volumes, offset in part by higher selling
prices. Sales volumes were lower across all segments with the biggest impact
coming from the Metals
segment which was heavily impacted by a soft economy, particularly in the
automotive, electronics and telecommunications industries and to a lesser extent
by the strike at the East Alton, IL facility in the first quarter of 2001. The
price increase was primarily related to higher ECU prices in the Chlor Alkali
Products segment.
Gross margin percentage decreased from 18% in 2000 to 11% in 2001 primarily due
to lower sales volumes.
Selling and administration as a percentage of sales was 9% in 2001 up from 8% in
2000 due to the lower sales base in 2001 as a result of the factors noted above.
Selling and administration was $3.4 million lower than in 2000 due to lower
incentive compensation costs and fees incurred in 2000 associated with the
discontinued chlor alkali partnership negotiations.
The decrease in operating results from the non-consolidated affiliates was due
primarily to the lower operating results from the Sunbelt joint venture, which
was adversely impacted by lower chlorine pricing.
Excluding the charge for restructuring and unusual items, the effective tax rate
increased to 40.0% from 38.2% due to the non-deductible expenses for the
Company-owned life insurance programs and the under-utilization of foreign tax
credits.
Non-recurring income items in the first quarter accounted for approximately
$0.06 of the year-to-date earnings per share in 2001.
RESTRUCTURING CHARGES AND UNUSUAL ITEMS
In September 2001, we recorded a pretax charge of $29 million (or $0.40 diluted
EPS) for restructuring and unusual items, primarily for costs associated with a
salaried workforce reduction through an early retirement incentive program. Cost
of Goods Sold and Other Income include $2.0 million and $1.1 million,
respectively, of unusual items. Cost of Goods Sold included the write-off of
inventory associated with cancelled customer orders; Other Income included the
write-off of an investment in an E-commerce company. The restructuring charge of
$25.9 million related to the 190 employees retiring in connection with the
retirement program and represented primarily pension and postretirement benefit
curtailment losses and severance. As of September 30, 2001, 72 employees had
retired and we expect that 61 employees will retire in the fourth quarter of
2001 and the remainder will retire in the first quarter of 2002. The pension
benefits of $11.8 million will be paid out of the pension trust while the other
benefits which include $5.3 million of postretirement benefits in Other
Liabilities and $5.4 million of severance in Accrued Liabilities will be paid
out of our operating cash flows over time.
In the fourth quarter of 2001, we expect to take additional restructuring
actions to optimize our manufacturing operations and reduce costs.
SEGMENT OPERATING RESULTS
We define our segment operating results as earnings before interest expense,
interest income, other income, restructuring charge and unusual items, and
income taxes and include the operating results of non-consolidated affiliates.
Segment operating results include an allocation of corporate operating expenses.
CHLOR ALKALI PRODUCTS Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
($ in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------
Sales $93.8 $100.7 $304.1 $292.8
Operating Income 0.7 8.3 17.1 20.1
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Sales decreased 7% from 2000 primarily due to lower volumes. Soft demand for
chlorine in the vinyls and urethanes segments, caused primarily by the slowdown
in the general economy has led to reduced chlor-alkali operating rates across
the industry. For example, according to "The Chlorine Institute, Inc.", the
industry's average operating rate for the third quarter of 2001 was in the low
to mid 80% range, compared to 90% for the third quarter of 2000. Soft market
conditions caused a decrease in our ECU netback, excluding our Sunbelt plant,
from approximately $330 in the second quarter of 2001 to approximately $315 in
the third quarter. This compares with our ECU netback of approximately $300 in
the third quarter of 2000. Operating income decreased significantly in 2001
primarily due to lower volumes. Operating results from the Sunbelt joint venture
in 2001 were unfavorable due to lower chlorine prices.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000
Sales increased 4% from 2000 primarily due to higher ECU pricing, offset in part
by lower volumes. Our average ECU prices in the first nine months of 2001 were
approximately $325, compared to $290 in the first nine months of 2000. The
factors mentioned above, which contributed to the lower 2001 third quarter
operating income also contributed to the 2001 year-to-date decline in operating
income. Although the year-to-date sales were slightly higher than 2000, the
operating income is lower in 2001 primarily due to higher manufacturing costs
and losses from the Sunbelt joint venture. The increased manufacturing costs
included higher utility and salt costs and higher fixed cost absorption due to
lower production volumes.
METALS Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
($ in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------
Sales $151.7 $219.8 $482.1 $677.3
Operating Income (Loss) (4.3) 21.7 (3.5) 75.2
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Sales decreased 31% due primarily to a significant decline in volumes associated
with the weak economy. Metals' operating results were significantly lower
primarily due to the economic slowdown, which resulted in the loss of
substantial volumes throughout our Metals businesses. In addition, the mill
products operations in East Alton, IL took a two-week maintenance shutdown in
2001, with no similar shutdown in 2000. Most market segments served by our strip
operations were significantly behind last year's levels. Automotive, coinage,
electrical connectors, telecommunications and distributor customers had much
lower demand for the industry's products. These lower volumes contributed to the
decrease in operating income from $21.7 million in 2000 to a loss of $4.3
million in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000
Sales decreased 29% due to a significant decline in volumes. The factors
mentioned above, which contributed to the lower 2001 third quarter operating
income also contributed to the 2001 year-to-date decline in operating income. In
addition, the strike at our East Alton facility in the first quarter had a
moderate adverse impact on Metals' profits.
WINCHESTER Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
($ in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------
Sales $88.1 $92.6 $206.1 $221.6
Operating Income 3.2 11.2 4.8 20.5
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Sales in 2001 were 5% lower than 2000, primarily due to lower selling prices
resulting from softer market conditions, particularly for domestic commercial
products and the absense of fee income from the Lake City Army Ammunition Plant.
Export sales decreased from last year and international sales were lower due to
lower foreign exchange rates. The factors affecting sales as well as an
unfavorable product mix and higher personnel-related costs, were the main
contributors to the decrease in operating income from $11.2 million to $3.2
million in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000
Sales in 2001 were 7% lower than 2000 primarily due to the impact of soft
domestic commercial demand in the second and third quarters and the effects of
the strike at our East Alton facility in
the first quarter. International sales were down from last year due to lower
foreign exchange rates. The factors mentioned above, which adversely impacted
the 2001 third quarter operating income, as well as the impact of the strike
were the main contributors to the significant decrease in operating income.
2001 FOURTH QUARTER OUTLOOK
We expect that our operating results for the fourth quarter will be below our
previous forecast of a loss of approximately $.05 per share, excluding the
restructuring charge. Business conditions in all of our downstream markets
remain depressed and there are no signs of improvement at this time. As a
result, our fourth quarter loss could be in the $.20 per share range. Because of
this, we are monitoring all elements of our cash flows as we move forward in
this economic environment.
For the fourth quarter, we expect that the continued soft economy will adversely
affect our chlorine and caustic pricing resulting in a further decrease in our
ECU prices from third quarter levels. We have considerable leverage to ECU
prices and are closely monitoring market developments in what has become a very
volatile market.
Our projection for the Metals segment for the fourth quarter is that overall
demand from customers will not improve and could deteriorate further if the
economy continues to slow.
For the fourth quarter, Winchester's sales and operating results are expected to
decrease from third quarter levels due to normal seasonal factors, offset in
part by increasing consumer demand for some paramilitary ammunition.
2001 FULL YEAR OUTLOOK
We expect that our loss per share for 2001 will be in the $0.04 range before the
charges for restructuring and unusual items. Sales into markets served by us
have been difficult to project this year. This has been true particularly in the
chlor alkali market which has a large impact on our earnings. Business
conditions in all of our downstream markets are expected to remain depressed
through year-end.
ENVIRONMENTAL MATTERS
In the nine months ended September 30, 2001 and 2000, we spent approximately $22
million and $19 million, respectively, for investigatory and remediation
activities associated with former waste sites and past operations. Spending for
environmental investigatory and remedial efforts for the full year 2001 is
estimated to be $30 million. 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 periods. Associated costs of
investigatory and remedial activities are provided for in accordance with
generally accepted accounting principles governing probability and the ability
to reasonably estimate future costs. Charges to income for investigatory and
remedial activities were $11 million in each of the nine-month periods ended
September 30, 2001 and 2000.
Charges to income for investigatory and remedial efforts were material to
operating results in 2000 and may be material to net income in 2001 and future
years.
Our consolidated balance sheets included liabilities for future environmental
expenditures to investigate and remediate known sites amounting to $101 million
at September 30, 2001 and $110 million at December 31, 2000, of which $76
million and $85 million were classified as other noncurrent liabilities,
respectively. 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
environmental circumstances have changed and/or remediation efforts and their
costs can be better estimated. As a result of these reassessments, future
charges to income, which could be material, may be made for additional
liabilities.
Annual environmental-related cash outlays for site investigation and
remediation, capital projects, and normal plant operations are expected to range
between approximately $45-$55 million over the next several years. While we do
not anticipate a material increase in the projected annual level of our
environmental-related costs, there is always the possibility that such increases
may occur in the future in view of the uncertainties associated with
environmental exposures. Environmental exposures are difficult to assess for
numerous reasons, including the identification of new sites, developments at
sites resulting from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, the scarcity of
reliable data pertaining to identified sites, the difficulty in assessing the
involvement and financial capability of other potentially responsible parties
and our ability to obtain contributions from other parties and the lengthy time
periods over which site remediation occurs. It is possible that some of these
matters (the outcomes of which are subject to various uncertainties) may be
resolved unfavorably against us, which could have a material adverse effect on
our operating results and financial condition.
LIQUIDITY, INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA
CASH FLOW DATA
Nine Months
Ended September 30,
-------------------
Provided By (Used For) ($ in millions) 2001 2000
- -------------------------------------------------------------------------------
Net Operating Activities $(2.9) $97.0
Capital Expenditures (54.5) (57.1)
Net Investing Activities (98.8) (48.2)
Purchases of Olin Common Stock (14.1) --
Net Financing Activities 50.6 (27.6)
In 2001, income from continuing operations exclusive of non-cash charges,
borrowings under committed and uncommitted bank lines of credit and cash
equivalents on hand were used to finance our working capital requirements,
capital and investment projects, dividends, the purchase of our common stock and
long-term debt repayments.
OPERATING ACTIVITIES
In 2001, the decrease in cash provided by operating activities of continuing
operations was primarily attributable to lower operating results and a higher
investment in working capital. The liquidation of higher 2000 year-end accounts
payable and accrued liability balances was the main contributor to the increased
working capital requirements. Additionally, the current accounts payable and
accrued liability levels are lower than normal primarily due to the lower volume
of Metals business resulting from the impact of the soft economy on its markets.
INVESTING ACTIVITIES
Capital spending of $54.5 million in the first nine months of 2001 was $2.6
million lower than in the corresponding period in 2000. For the total year,
capital spending is expected to be in the $70 million range, compared with $95
million in 2000. The majority of the capital spending in the first nine months
of 2001 and for the total year 2001 will be on projects that were begun in 2000,
primarily in the Metals segment to expand production capacity in its higher
value added product categories, in particular high performance alloys. In 2002,
we plan to manage our capital spending at a level approximating 50% of
depreciation.
In June 2001, we acquired the stock of Monarch Brass & Copper Corp. ("Monarch")
for approximately $49 million. Monarch was a privately held, specialty brass
manufacturer headquartered in Waterbury, CT with annual revenues of
approximately $95 million. 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. The purchase price exceeded the
fair value of the identifiable net assets acquired by $19 million, which is
being amortized on a straight-line basis over 30 years.
FINANCING ACTIVITIES
At September 30, 2001, we had a $165 million line of credit under an unsecured
revolving credit agreement with a group of banks, of which $10 million was used.
In addition, we had a $25 million line of credit with another bank, none of
which was used. We may select various floating rate borrowing options under each
of these lines of credit. These credit facilities include various customary
restrictive covenants including restrictions related to the ratio of debt to
earnings before interest, taxes, depreciation and amortization and the ratio of
earnings before interest, taxes, depreciation and amortization to interest. We
intend to replace our existing credit facilities and to obtain debt financing to
refinance the $100 million note maturing in June of 2002 and the borrowings to
fund the acquisition of Monarch, and to provide additional liquidity. The terms
of any such financing arrangements will be subject to prevailing market
conditions.
During the first nine months of 2001, we used $14.1 million to repurchase
694,870 shares of our common stock. During the first nine months of 2000, we
repurchased no shares of our common stock.
The percent of total debt to total capitalization increased to 55% at September
30, 2001, from 41% at year-end 2000. The increase from year-end 2000 was due to
the increase in short-term borrowings and lower shareholders' equity at
September 30, 2001.
In 2001, we paid a first, second and third-quarter dividend of $0.20 per share.
In October 2001, our Board of Directors declared a quarterly dividend of $0.20
per share on our common stock, which is payable on December 10, 2001, to
shareholders of record on November 9, 2001.
NEW ACCOUNTING STANDARDS
As described in Item 1- Financial Statements under footnote No. 8 of the Notes
to Condensed Financial Statements, we adopted on January 1, 2001, Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities."
During the third quarter of 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 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. Goodwill amortization for the nine months ended September 30, 2001
was approximately $1.2 million. Statement 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. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." At this time, it is not
practical to reasonably estimate the impact of adopting these statements on our
financial statements.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Statement 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. Statement
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. At this time, it
is not practical to reasonably estimate the impact of adopting these statements
on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the normal course of our business operations
due to our operations in different foreign currencies, our purchases of certain
commodities and our ongoing
investing and financing activities. The risk of loss can be assessed from the
perspective of adverse changes in fair values, cash flows and future earnings.
We have established policies and procedures governing our management of market
risks and the uses of financial instruments to manage exposure to such risks.
The primary purpose of our foreign currency hedging activities is to manage
currency risks resulting from purchase and sale commitments in foreign
currencies (principally Australian dollar and Canadian dollar) and relating to
particular anticipated purchases and sales expected to be denominated in those
same foreign currencies. Foreign currency hedging activity is not material to
our consolidated financial position, results of operations or cash flow.
Certain raw materials, namely copper, lead and zinc, used primarily in our
Metals and Winchester segments' products are subject to price volatility.
Depending on market conditions, we may enter into futures contracts and put and
call option contracts in order to reduce the impact of metal price fluctuations.
As of September 30, 2001, we maintained open positions on futures contracts
totalling $70 million. Assuming a hypothetical 10% increase in commodity prices
which are currently hedged, we would experience a $7.0 million increase in our
cost of related inventory purchased, which would be 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. Investing activity is not material to our
consolidated financial position, results of operations or cash flow. Our current
debt structure used to fund business operations and maintain liquidity, at
September 30, 2001, was comprised of $231 million of long-term debt and $98
million of short-term debt. All short-term debt and $36 million of long-term
debt are at variable rates. We have interest rate swaps to hedge underlying debt
obligations. Interest rate swap activity is not material to our consolidated
financial position, results of operations or cash flow.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. 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 operate. The statements contained in this
quarterly report on Form 10-Q that are not statements of historical fact may
include forward-looking statements that involve a number of risks and
uncertainties.
We have used the words "anticipate," "intend," "may," "expect," "believe,"
"should," "plan," "will," "estimate," and variations of such words and similar
expressions in this quarterly report
on Form 10-Q 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 that are involved in our
forward-looking statements include but are not limited to
. economic instability in the United States;
. the cyclical nature of our operating results;
. higher than expected raw material and utility costs;
. general economic and business and market conditions;
. competitive pricing pressures;
. changes in Chlor Alkali's ECU prices from expected levels;
. loss of key customers or suppliers;
. Chlor Alkali operating rates dropping below anticipated levels;
. expansion or acceleration of Chlorine/Caustic molecules decoupling;
. lack of internal use for our chemical products;
. acceleration or expansion of back integration;
. higher than expected transportation and/or logistics costs;
. a protracted work stoppage in connection with collective bargaining
negotiations with labor unions;
. the supply/demand balance for our products, including the impact of
excess industry capacity;
. efficacy of new technologies;
. changes in U.S. laws and regulations;
. failure to achieve targeted cost reduction programs;
. capital expenditures, such as cost overruns, in excess of those
scheduled;
. our ability to comply with the terms of our government contracts;
. the availability of adequate capital to fund our operations;
. environmental costs in excess of those projected; and
. the occurrence of unexpected manufacturing interruptions/outages.
All of our forward-looking statements should be considered in light of
these factors.
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.
---------------------------------------------------
Not Applicable.
Item 5. Other Information.
-----------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
12. Computation of Ratio of Earnings to Fixed Charges
(Unaudited).
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended
September 30, 2001.
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/ A. W. Ruggiero
-----------------------------
Executive Vice President and
Chief Financial Officer
(Authorized Officer)
Date: November 13, 2001
EXHIBIT INDEX
Exhibit
No. Description
- ---- -----------
12. Computation of Ratio of Earnings to Fixed Charges (Unaudited).