Today, Olin businesses are leading producers
and marketers of high performance chemicals,
metals, microelectronic materials and sporting
ammunition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED
($ in millions, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------
Sales $2,638 $2,665 $2,268
Gross Margin 617 550 424
Selling and Administration 319 293 256
Interest Expense 29 35 28
Interest and Other Income 216 16 9
Income from Continuing Operations 288 134 79
Net Income 280 140 91
Per Common Share:
Primary
Income from
Continuing Operations $ 5.52 $ 2.63 $ 1.57
Net Income $ 5.34 $ 2.75 $ 1.83
Fully Diluted
Income from
Continuing Operations $ 5.43 $ 2.56 $ 1.53
Net Income $ 5.27 $ 2.67 $ 1.77
- --------------------------------------------------------------------------------
Notes:
- --Results of operations have been restated to reflect the spin-off of Primex
Technologies, Inc. and earnings per share have been restated for two-for-one
stock split.
- --1996 Interest and Other Income includes a pretax gain of $188 million ($115
million after tax, $2.20 fully diluted E.P.S.) on the sale of the isocyanates
business at Lake Charles, LA in December.
1996 Compared to 1995
Sales decreased 1% while net income reached record levels, increasing 18%,
excluding a $115 million gain from the sale of the isocyanates business. The
decrease in sales was attributable to a 2% decrease in volume and a 3% decrease
in metal values offset by a 2% improvement in pricing and a 2% increase due to
the inclusion of OCG for a full year. Net income was enhanced by lower raw
material costs and improved product mix. In 1996, record operating results were
achieved by both the Chlor Alkali and Chemicals divisions.
Gross margin percentage was 23%, an increase of 2% due to price increases
in several Chemical product lines, higher caustic volumes, lower raw materials
costs and an improved product mix.
Selling and administration expenses as a percentage of sales increased to
12% from 11%. Selling and administration expenses increased in amount due
primarily to the inclusion of OCG's operating expenses for a full year, expenses
related to the spin-off of Primex Technologies, Inc., higher costs related to
incentive compensation programs and higher sales promotion and advertising
expenses for Pool Products and Winchester sporting ammunition. This increase was
offset in part by the impact of cost reduction programs.
Research and development expenditures increased due to the inclusion of
OCG's research and development expenses for a full year in 1996.
Interest expense decreased due to lower average short-term borrowings and
lower average interest rates.
Interest and other income increased due to the gains on the sale of the
isocyanates business and the company's corporate headquarters combined with the
favorable performance of the nonconsolidated affiliates.
The effective tax rate increased to 35% from 34%. The increase was mainly
attributable to the gain on the sale of the isocyanates business. At December
31, 1996, the company had net deferred tax assets of $135 million, primarily
comprised of temporary differences between financial statement and tax bases of
assets and liabilities. No valuation allowance has been provided because
management believes that it is more likely than not that there will be
sufficient taxable income to allow for the realization of these tax benefits.
In December of 1996, the company sold its isocyanates business to ARCO
Chemical Company ("ARCO") for $565 million in cash. The sale included all assets
at the company's Lake Charles, LA facility used in the manufacture and sale of
toluene diisocyanate, aliphatic isocyanates and nitric acid. In connection with
the transaction, the company recorded a pretax gain of $188 million ($115
million after tax gain) which is included in Interest and Other Income. The
company's results of operations for 1996 and 1995 include sales of $296 million
and $255 million and operating income of $52 million and $19 million,
respectively, from the isocyanates business.
On December 31, 1996, the company completed the spin-off of its Ordnance
and Aerospace businesses as Primex Technologies, Inc. ("Primex"). Under the
terms of the spin-off, the company distributed to its holders of common stock of
record at the close of business on December 19, 1996, one Primex common share
for every ten shares of Olin common stock. The results of operations have been
restated to reflect Primex as discontinued operations for all periods presented.
1995 Compared to 1994
Sales and net income increased 18% and 54%, respectively. The sales increase was
attributed to an 8% improvement in pricing (exclusive of higher metal values), a
3% increase in sales volume and 3% increase due to the inclusion of OCG's sales
for six months. Past strategic investments were a key factor in meeting the
increased demand. In addition to the impact of increased volume and pricing, net
income was enhanced by prior years' initiatives to restructure and reengineer
the company and reduce costs. In 1995, record results were achieved by Brass,
Chlor Alkali and the Microelectronic Materials divisions.
Gross margin percentage was 21%, an increase of 2%. Higher caustic and TDI
prices more than offset increased raw material and manufacturing costs.
Selling and administration expenses as a percentage of sales were 11% in
both years. Selling and administration expenses increased
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
in amount due primarily to additional information processing costs, the
inclusion of the operating expenses of acquired businesses and higher costs
related to short-term incentive compensation programs. This increase was offset
in part by the impact of cost reduction programs.
Research and development expenditures increased as a result of the OCG
acquisition. Excluding the impact of OCG, research and development expenses
decreased 10% through cost reduction programs and a better focus in the
Chemicals product lines on the development of new and differentiated products.
Interest expense increased due to higher average interest rates on higher
average borrowings.
The favorable performance of non-consolidated affiliates, particularly in
Japan, increased interest and other income.
The effective tax rate was 34% in 1995 and 1994. At December 31, 1995, the
company had net deferred tax assets of $61 million, primarily comprised of
temporary differences between financial statement and tax bases of assets and
liabilities.
In 1995, the company completed the sales of its Sun(R) brand trademark and
its chlorinated isocyanurates business including a manufacturing plant in South
Charleston, WV and a related operation in Livonia, MI. These transactions did
not have a material impact on the company's results of operations for 1995.
In 1995, the company acquired the remaining 50% of OCG Microelectronic
Materials, a joint venture formed by Ciba-Geigy and the company in 1990, for
approximately $65 million. In addition, the company acquired the remaining 51%
of Etoxyl, C.A., a Latin American joint venture. The purchase price for Etoxyl
is contingent upon the future earnings of this venture.
CHEMICALS
RESULTS OF OPERATIONS
($ in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Sales $1,586 $1,501 $1,195
Operating Income 207 140 52
- --------------------------------------------------------------------------------
1996 Compared to 1995
Sales and operating income increased 6% and 48%, respectively. The sales
increase was due to the inclusion of sales of OCG for a full year and higher
pricing which more than offset lower volumes. The sales improvement reflected
the record performances by the Chlor Alkali and Chemicals divisions which more
than offset the shortfall in Microelectronic Materials. Higher pricing in
several product lines was the most significant factor in the operating income
improvement.
Higher caustic volumes and chlorine pricing, lower utility costs and
operating expenses contributed to Chlor Alkali's record performance.
Higher pricing in several product lines contributed to Chemicals' record
performance. Operating results of the isocyanates business were at record levels
even though 1996 included 11 months of operations from the isocyanates business
which was sold to ARCO in December. Higher international demand and prices were
the main contributors to this improvement. Higher sales volumes resulting from
increased product offerings and strong international demand contributed to the
improved performance of the specialty urethanes coating business.
Pool Products sales decreased, while profits were significantly ahead of
last year. Increased pricing was more than offset by lower volumes due to
production capacity constraints and the sale of the chlorinated isocyanurates
business in late 1995. Increased pricing along with higher Pace volumes
contributed to increased profits.
Higher prices for glycols and polyols, lower raw materials costs and
reduced manufacturing and operating costs contributed to ethylene
oxide/propylene oxide (EO/PO) derivative products' favorable performance.
Operating results of specialty chemicals exceeded last year. Worldwide
volumes increased as a result of higher foreign sales and new product sales. The
profit impact from these additional volumes was offset in part by higher-priced
purchased materials due to limited production capacity and higher operating
costs for toxicology studies.
Microelectronic Materials' sales increased due to the inclusion of OCG's
sales for twelve months in 1996 compared to six months in 1995. The positive
impact of the inclusion of OCG in operating results was more than offset by the
negative impact of the downturn in the semiconductor industry, higher costs
associated with the delays in the start-up of the new Mesa, AZ facility and
development costs for a new semiconductor package.
1995 Compared to 1994
Sales and operating income increased 26% and 169%, respectively. This
improvement reflected the improved performances by the Chlor Alkali and
Microelectronic Materials divisions and the improved operating results of the
isocyanates business.
In Chlor Alkali, demand remained strong throughout the year. Caustic
pricing continued to improve, while chlorine prices remained stable. Plant
operating manufacturing rates were close to capacity and lower manufacturing
costs were aided by cost reduction initiatives from reengineering programs.
Operating results of the isocyanates business exceeded last year. Worldwide
TDI prices more than offset the effects of a scheduled plant maintenance
turnaround. Specialty urethanes coating product line sales nearly doubled due to
stronger worldwide demand, but new product introductions and market-entry costs
negatively impacted its operating results.
Pool Products sales increased 10%, while profits were slightly below last
year. Increases in sales volume and pricing were more than offset by higher raw
material and other costs.
In EO/PO derivative products, the combination of higher prices and volumes
of flexible polyols and a lower raw material cost contributed to its financial
improvement.
In specialty chemicals, biocides had record volumes on a variety of
products, reflecting the continual growth of this business.
18
In Microelectronic Materials, electronic chemicals sales more than doubled
and profits increased significantly due to the strong demand from the
semiconductor industry for the company's high-purity electronic chemicals and
the inclusion of OCG's operating results. Sales of its MQUAD(R) packaging system
increased but operating results were adversely affected by costs associated with
the introduction of its new Metal Ball Grid Array (MBGA(R)) package.
METALS AND AMMUNITION
RESULTS OF OPERATIONS
($ in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Sales $ 1,052 $1,164 $ 1,073
Operating Income 52 83 86
- --------------------------------------------------------------------------------
1996 Compared to 1995
Sales and operating income decreased 10% and 37%, respectively. Sales decline
was due to lower metal values and lower demand for brass products and a
significant decrease in commercial ammunition sales. Operating income declined
due to the lower volumes.
Reduced volumes in the electronics, ammunition and utilities businesses
contributed to Brass' sales decline. Operating income decreased due to the lower
volumes and the start-up cost associated with the new tube mill at Indianapolis,
IN. The A.J. Oster (Oster) operations achieved a record performance due to
higher shipments.
Winchester's domestic commercial ammunition sales were significantly lower
in the first half of the year, but were equal to 1995 levels in the second half.
Military ammunition sales were well below the prior year level due to the
substantial completion in 1995 of several large contracts. The significant
decrease in operating results was primarily attributable to the profit impact
from the lower volumes which offset the impact of lower commodity costs.
1995 Compared to 1994
Sales improved 8% while operating income decreased 3%. Sales improvement was due
to higher metal values, improved product mix and selling prices as the demand
for brass strip exceeded the historical average and more than offset the reduced
shipments of Winchester's domestic commercial ammunition. Operating income
declined due to the lower Winchester commercial sales and higher commodity
costs.
Increased sales, lower manufacturing costs and the benefit from cost
reduction programs were the main contributors to Brass' operating profit
increase. New financial records were established by several operations, such as
Indianapolis, Oster and Somers Thin Strip. The Indianapolis operation's
improvement was due to an improved product mix in its strip, rod, wire and tube
businesses. Oster benefited from the automotive and electronics demand. A strong
electronics market contributed to Somers' financial improvement.
Winchester's domestic commercial ammunition sales declined significantly.
In 1995, the marketplace for commercial sporting ammunition adjusted for the
heavy consumer buying patterns that occurred in 1994 as a result of a concern
over restrictive legislation and taxation. Domestic and military export
ammunition business achieved record sales performance and partially offset the
commercial sales decrease. The profit impact from the lower commercial sales and
the effect of higher commodity costs, primarily copper, accounted for the
significant decrease in operating income.
1997 OUTLOOK
CONSOLIDATED
The company's 1997 sales and net income are expected to be slightly lower than
1996, excluding the gain on the sale of the isocyanates business. The absence of
sales from the isocyanates business sold in 1996 is expected to be offset in
part by sales increases in Microelectronic Materials, Winchester and certain
Chemicals product lines. Earnings per share is expected in the $3.00 range,
assuming a 10% decline in Chlor Alkali's ECU pricing and with anticipated profit
increases in Microelectronic Materials, Pool Products, Biocides and Winchester.
These profit improvements along with the company's acquisition of the balance of
Niachlor and the interest income on the proceeds from the disposed businesses
are expected to offset in part the lost earnings on the businesses sold in 1996
and to be sold in 1997. In addition, the company's share repurchase program,
which commenced in January 1997, is expected to be beneficial to earnings per
share.
CHEMICALS
Chemicals segment sales and operating income are expected to decrease due
primarily to the sale of the isocyanates businesses. Chlor Alkali's performance
is expected to decrease from 1996 levels due to lower caustic prices and the
start-up costs of the new Sunbelt project with the Geon Company. Plant operating
rates are expected to be almost equal to 1996 levels as demand for chlorine and
caustic is estimated to moderate slightly. Subsequent to December 31, 1996, the
company acquired the remaining 50% of Niachlor (a joint venture) which will
contribute additional revenues and profits in 1997. Estimated higher volumes in
Pool Products is expected to enhance its operating performance and more than
offset the impact of expected higher raw material and packaging costs. In the
specialty chemicals business, sales and operating income are expected to
increase due to higher volumes, which will offset additional operating expenses
for new product introductions and market-entry costs. In the EO/PO derivative
products, the company announced in 1996 that it will seek a buyer for its
polyol, glycol and surfactants businesses at its Doe Run facility in
Brandenburg, KY. The company expects to complete this transaction during 1997.
As the semiconductor industry rebounds from its worst slump in 10 years,
stronger demand for electronic chemicals and lower manufacturing costs are
expected to enhance Microelectronic Materials' performance. During 1997, the
company will expand its ultra high-purity chemicals plant and distribution
center in Zwijndrecht, Belgium.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Metals and Ammunition
Sales for the Metals and Ammunitions segment are expected to increase slightly.
Assuming that the consumption level in the metals industry will mirror the
levels achieved over the past three years, Brass sales are estimated to increase
slightly as higher volumes offset lower average metal values. Over-capacity in
the metals industry is expected to create a competitive pricing environment.
Demand for Winchester's commercial ammunition is expected to increase as the
marketplace returns to more normal levels from the 1994 buying frenzy and its
subsequent market adjustment during the past two years. New product offerings
and an increased presence in the marketplace are also expected to contribute to
Winchester's sales increase. Operating income is expected to increase due to an
expected turnaround in the electronics industry, higher commercial ammunition
volumes, expected lower product costs and increased market share.
Cautionary Statement under Federal Securities Laws: The information in the
1997 Outlook section (and subsections thereof), the Environmental Matters
section, the Liquidity, Investment Activity and Other Financial Data section,
and the Environmental note and the Commitments and Contingencies note to the
Consolidated Financial Statements contains forward-looking statements that are
based on management's beliefs, certain assumptions made by management and
current expectations, estimates and projections about the markets and economy in
which the company and its various divisions operate. Words such as "expects,"
"believes," "should," "plans," "will," "estimates," and variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions ("Future Factors") which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expected or forecasted in such forward-looking
statements. The company undertakes no obligation to update publicly any forward-
looking statements, whether as a result of future events, new information or
otherwise. Future factors which could cause actual results to differ materially
from those discussed in these sections and notes include but are not limited to:
lack of moderate growth in the U.S. economy or even a slight recession in 1997;
competitive pricing pressures; the company's ability to maintain chemical price
increases; higher start-up cost than expected for the Sunbelt project; greater
than 10% decline in Chlor Alkali's ECU prices; higher-than-expected raw material
costs for certain chemical product lines; discontinuance of the recovery from
the 1996 semiconductor industry downturn and lack of growth in this industry; a
downturn in many of the markets the company serves such as electronics,
automotive, ammunition and housing; the supply/demand balance for the company's
products, including the impact of excess industry capacity; failure to achieve
targeted cost reduction programs; unsuccessful entry into new markets for
electronic chemicals; capital expenditures, such as cost overruns, in excess of
those scheduled; environmental costs in excess of those projected; and the
occurrence of unexpected manufacturing interruptions/outages.
DISCONTINUED OPERATIONS
RESULTS OF OPERATIONS
($ in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Sales $471 $508 $416
Operating Income 2 21 29
Net Income (Loss) (8) 6 12
- --------------------------------------------------------------------------------
1996 Compared to 1995
Sales declined 7%, principally attributable to lower shipments of combined
effects munitions, Ball Powder(R) propellant, and electromagnetic systems, which
more than offset higher tank ammunition sales to international customers. The
lower sales levels of combined effects munitions and electromagnetic systems
reflect the completion of major programs during 1996. Sales of commercial Ball
Powder(R) propellant declined 17% as sporting ammunition customers drastically
reduced their purchases. In 1994 and 1995, heavy consumer buying patterns for
sporting ammunition were driven by a concern over the threat of restrictive
legislation and taxation, which increased the demand for Ball Powder(R)
propellant.
Net income was adversely impacted by the lower sales volumes and the
provision for the settlement of claims relating to a government investigation of
certain testing irregularities at the Marion, IL facility and the charge for a
Belgian contract dispute.
1995 Compared to 1994
Sales increased 22% primarily due to additional shipments of medium caliber
ammunition, strong demand for electronic and solid propellant products and sales
under a combined effects munitions contract.
Net income decreased 50% due to higher operating expenses and additional
costs incurred on certain start-up and discontinued programs. A provision for
the settlement of claims relating to a government investigation at the Marion,
IL facility along with higher legal and consulting fees associated with this
investigation also reduced 1995's net income.
ENVIRONMENTAL MATTERS
($ in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Cash Outlays:
Remedial and
Investigatory Spending $30 $25 $37
Capital Spending 6 8 10
Plant Operations 35 34 32
- --------------------------------------------------------------------------------
Total Cash Outlays $71 $67 $79
- --------------------------------------------------------------------------------
20
The establishment and implementation of federal, state and local standards
to regulate air, water and land quality has affected and will continue to affect
substantially all of the company's manufacturing locations. Federal legislation
providing for regulation of the manufacture, transportation, use and disposal of
hazardous and toxic substances has imposed additional regulatory requirements on
industry, particularly the chemicals industry. In addition, implementation of
environmental laws, such as the Resource Conservation and Recovery Act and the
Clean Air Act, has required and will continue to require new capital
expenditures and will increase operating costs. The company employs waste
minimization and pollution prevention programs at its manufacturing sites.
The company is party to various governmental and private environmental
actions associated with waste disposal sites and manufacturing facilities.
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 efforts were material to operating results in 1996,
1995, and 1994 and may be material to net income in future years. Such charges
to income were $70 million, $24 million and $17 million in 1996, 1995 and 1994,
respectively. In connection with the sale of the isocyanates business at the
company's Lake Charles, LA facility, a $53 million provision was recorded to
provide for contractual liabilities related to future environmental spending at
the Lake Charles site.
Cash outlays for remedial and investigatory activities associated with
former waste sites and past operations were not charged to income but instead
were charged to reserves established for such costs identified and expensed to
income in prior years. Cash outlays for normal plant operations for the disposal
of waste and the operation and maintenance of pollution control equipment and
facilities to ensure compliance with mandated and voluntarily imposed
environmental quality standards were charged to income. Historically, the
company has funded its environmental capital expenditures through cash flow from
operations and expects to do so in the future.
The company's estimated environmental liability at the end of 1996 was
attributable to 55 sites, 24 of which were on the National Priority List (NPL).
Ten sites accounted for approximately 80% of such liability and, of the
remaining sites, no one site accounted for more than 3% of such liability. One
of these ten sites was in the investigatory stage of the remediation process. In
this stage, remedial investigation and feasibility studies are conducted by
either the company, the United States Environmental Protection Agency (EPA) or
other potentially responsible parties (PRPs) and a Record of Decision (ROD) or
its equivalent has not been issued. At seven of the ten sites, a ROD or its
equivalent has been issued by either the EPA or responsible state agency and the
company either alone, or as a member of a PRP group, was engaged in performing
the remedial measures required by that ROD. At the remaining two of the ten
sites, part of the site is subject to a ROD and another part is still in the
investigative stage of remediation. All ten sites were either former
manufacturing facilities or waste sites containing contamination generated by
those facilities.
The company's consolidated balance sheets included liabilities for future
environmental expenditures to investigate and remediate known sites amounting to
$148 million at December 31, 1996 and $108 million at December 31, 1995, of
which $113 million and $73 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 may be made for additional liabilities.
Total environmental-related cash outlays for 1997 are estimated to be $75
million, of which $35 million is expected to be spent on investigatory and
remedial efforts, $10 million on capital projects and $30 million on normal
plant operations.
Annual environmental-related cash outlays for site investigation and
remediation, capital projects, and normal plant operations are expected to range
between $75-$90 million over the next several years. While the company does not
anticipate a material increase in the projected annual level of its
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 the company's 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 the company. At December 31,
1996, the company had estimated additional contingent environmental liabilities
of $35 million.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY, INVESTMENT ACTIVITY
AND OTHER FINANCIAL DATA
CASH FLOW DATA
Provided By (Used For) ($ in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Net Cash and Cash Equivalents
Provided by Operating Activities
from Continuing Operations $ 266 $ 210 $ 176
Net Operating Activities 271 187 148
Capital Expenditures (126) (182) (131)
Net Investing Activities 274 (199) (77)
Net Financing Activities (29) 13 (67)
- --------------------------------------------------------------------------------
Cash flows from operations, proceeds from sales of businesses and
borrowings under the line of credit assumed by Primex were used to pay down
long-term debt and short-term borrowings as well as finance the company's major
funding needs, namely capital and investment projects, dividends to shareholders
and the purchase of short-term investments.
Operating Activities
In 1996, the increase in cash flow from operating activities of continuing
operations was primarily attributable to higher operating income and a reduced
investment in working capital compared to 1995. In 1995, the increase in cash
flow from operating activities from continuing operations was primarily
attributable to higher operating income.
Capital Expenditures
Capital spending in 1996 decreased 31% from the prior year due to planned
reduction to control capital costs. Also contributing to this lower level of
spending was the completion of two significant projects in 1995. Capital
spending in 1995 increased 39% from the prior year mainly to provide additional
capacity and improve product quality for selected product lines. Funds were
spent for the following: the manufacturing, distribution and laboratory complex
in Mesa, AZ for the Microelectronic Materials business and the modernization of
the seamless tube and wire facilities at Indianapolis, IN. In addition, funds
were used to relocate the corporate headquarters to Norwalk, CT.
Capital spending in 1997 is estimated to approximate 1996 levels. In
October 1996, the company's Board of Directors approved a capital project to
expand the size of the Microelectronic Materials' ultra high-purity chemicals
plant and distribution center in Zwijndrecht, Belgium to better serve the
semiconductor industry in Europe. This expansion is expected to be completed in
1998.
Investing Activities
In December 1996, the company sold its isocyanates business for $565 million in
cash. The sale includes all assets at the company's Lake Charles, LA facility
used in the manufacture and sale of toluene diisocyanate, aliphatic isocyanates
and nitric acid. Also in 1996, the company sold its electrostatics business,
which generated proceeds of $6 million. Proceeds of $23 million from the
disposition of property, plant and equipment consisted primarily from the sale
of the corporate headquarters.
In 1995, the company completed its acquisition for approximately $65
million of Ciba-Geigy's 50% share of OCG, a joint venture formed by Ciba-Geigy
and the company in 1990. Also, the company acquired the remaining 51% of Etoxyl,
C.A., a Latin American joint venture. The purchase price is contingent upon the
future earnings of this venture. During 1995, the company sold its Sun(R) brand
trademark and its dry sanitizer plant in South Charleston, WV, and a related
tableting operation in Livonia, MI. These divestments generated proceeds of $49
million.
During 1994, the company sold its conductive materials business including
the manufacturing facility in Ontario, CA and its trichloroisocyanurate
production facility in Lake Charles, LA. These transactions generated proceeds
of $41 million.
On December 31, 1996, the company made an advance payment to E.I. du Pont
de Nemours and Company (DuPont) of $75 million in connection with its
anticipated purchase of the remaining 50% of Niachlor (a joint venture formed by
DuPont and the company in 1984), which is included in Investments and Advances-
Affiliated Companies at Equity in the December 31, 1996 Consolidated Balance
Sheet. Subsequent to December 31, 1996, the company consummated this transaction
for approximately $77 million. This acquisition will be accounted for as a
purchase in 1997 and consists primarily of property, plant and equipment. In
1996, the company along with the Geon Company formed a joint venture (Sunbelt)
to construct and operate a Chlor Alkali plant at the company's existing
McIntosh, AL site. Geon will consume all of the chlorine produced by the project
and the company will be responsible for marketing the caustic soda. The company
invested approximately $27 million in this venture during 1996 and expects to
invest approximately $71 million in 1997. The plant start-up associated with
this venture is estimated to be in late 1997.
22
In 1995 and 1994, investment spending was minimal. The company's investment
in the ethylene oxide joint venture in Latin America totaled $19 million at
December 31, 1996. Throughout 1996, this venture continued to experience
liquidity difficulties due to high leverage. In Venezuela, general economic
conditions have been unstable. The government imposed currency exchange controls
in order to control capital flight and manage inflation. The company, along with
its venture partners, continued to address these difficulties in order to
protect its recorded investment.
In December 1996, the company purchased $87 million of short-term
investment securities using a portion of the proceeds from the sale of the
isocyanates business.
Financing Activities
At December 31, 1996, the company maintained committed credit facilities with
banks of $256 million, all of which was available. The company believes that
these credit facilities are adequate to satisfy its liquidity needs for the near
future. In June 1995, the company sold $50 million of 7.11% notes due June 2005.
The proceeds from this issue were used to reduce short-term debt incurred for
working capital purposes. Included in the $256 million committed credit facility
is an unsecured revolving credit agreement with a group of banks which provides
a maximum borrowing of $250 million, and expires in May 2000. The company may
select various floating rate borrowing options.
Prior to the distribution, Primex Technologies, Inc. assumed a $160 million
credit facility established by the company, under which the company had borrowed
$125 million. The company will use these funds to reduce its own borrowings in
1997.
In 1996, the board of directors authorized the company to purchase up to
10% of the company's common stock. A portion of the proceeds from the sales of
the businesses will be used for this program, which began in January 1997.
The percent of total debt to total capitalization (excluding the reduction
in equity for the Contributing Employee Ownership Plan (ESOP)) decreased to 30%
at December 31, 1996, from 38% at year-end 1995 and was 37% at year-end 1994.
Contributing to the decrease in 1996 was the liquidation of all short-term
borrowings as of December 31, 1996 and the repayment of the 7.077% note payable
in mid 1996.
In 1989 the company established an ESOP. The ESOP trust borrowed $100
million ($40 million from the company) to purchase 1.3 million shares of the
company's convertible preferred stock. The proceeds received by the company from
the issuance of its preferred stock were used to acquire shares of its common
stock. The ESOP trust has repaid in full its original loan from the company.
This loan to the ESOP was financed by the company through a long-term credit
facility and was repaid in July 1996. In December 1996, the Board of Directors
approved the redemption of all outstanding ESOP preferred stock with common
stock of equivalent value. Approximately 1.87 million shares of common stock at
a per share value of $40.19 were issued in exchange for approximately .9 million
shares of ESOP preferred stock at a per share value of $85.75. The annual fixed
dividend rate was $5.97 per share and during 1996, dividends were paid in the
first three quarters.
Dividends per common share were $1.20 in 1996 and 1995 and $1.10 in 1994.
Total dividends paid on common stock amounted to $60 million in 1996, $57
million in 1995 and $44 million in 1994, while total ESOP preferred dividends
amounted to $4 million in 1996, $6 million in 1995 and $7 million in 1994.
Dividends paid on Series A Stock were $3 million in 1995 and $10 million in 1994
(equal to $3.64 per share).
On March 1, 1995, 2.76 million shares of the company's $1 par value Series
A Conversion Preferred Stock was converted into shares of common stock on a one-
for-one basis. The last dividend on these preferred shares was paid in March
1995. During 1992, the company swapped interest payments on $50 million
principal amount of its 8% notes due 2002 to a floating rate (5.618% at December
31, 1996). In June 1995, the company offset this transaction by swapping
interest payments to a fixed rate of 6.485%.
The company periodically evaluates risk retention and insurance levels for
product liability, property damage and other potential areas of risk. Based on
the cost and availability of insurance and the likelihood of a loss occurring,
management decides the amount of insurance coverage to purchase from
unaffiliated companies and the appropriate amount of risk to retain. The current
levels of risk retention are believed to be appropriate and are consistent with
those of other companies in the various industries in which the company
operates.
23
INDUSTRY SEGMENTS
($ in millions) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------------------------------------
CHEMICALS
Sales $1,586 $1,501 $1,195 $ 1,117 $ 996 $ 960 $1,269 $1,302 $1,386 $1,232
Operating Income (Loss) 207 140 52 (166) 25 (74) 43 142 98 77
Assets 1,058 1,223 1,037 1,024 1,067 982 945 977 1,034 1,028
Capital Expenditures 78 126 91 75 115 131 144 95 96 83
Depreciation 86 81 82 83 73 70 75 74 77 82
- ---------------------------------------------------------------------------------------------------------------------
METALS AND AMMUNITION
Sales 1,052 1,164 1,073 951 972 869 854 809 681 467
Operating Income 52 83 86 36 68 46 65 54 67 65
Assets 648 639 601 564 587 597 506 491 484 391
Capital Expenditures 45 52 40 44 44 34 28 33 38 20
Depreciation 38 37 35 34 30 29 28 29 26 23
- ---------------------------------------------------------------------------------------------------------------------
CORPORATE AND OTHER
Assets 633 320 282 251 293 325 320 336 340 217
Capital Expenditures 3 4 -- -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Sales 2,638 2,665 2,268 2,068 1,968 1,829 2,123 2,111 2,067 1,699
Operating Income (Loss) 259 223 138 (130) 93 (28) 108 196 165 142
Assets 2,339 2,182 1,920 1,839 1,947 1,904 1,771 1,804 1,858 1,636
Capital Expenditures 126 182 131 119 159 165 172 128 134 103
Depreciation 124 118 117 117 103 99 103 103 103 105
- ---------------------------------------------------------------------------------------------------------------------
Intersegment sales, which are priced generally at prevailing prices and are
excluded from above, are not significant.
Segment operating income has been restated for the corporate expenses previously
allocated to the discontinued businesses.
Operating income (loss) of each segment includes an allocation of corporate
expenses.
1993 operating loss includes a charge for the strategic action plan of $200
($171 to Chemicals and $29 to Metals and Ammunition).
1991 operating loss includes a charge for the streamlining program of $129 ($118
to Chemicals and $11 to Metals and Ammunition).
Corporate and Other includes principally cash and cash equivalents, short-term
investments and the net assets of discontinued operations.
The Winchester division has been included with the Brass division to form the
Metals and Ammunition segment.
See Notes to Financial Statements for information relative to geographic segment
data.
24
TEN-YEAR FINANCIAL SUMMARY
($ and shares in millions,
except per share data) 1996 1995 1994 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Sales $ 2,638 $ 2,665 $ 2,268 $ 2,068 $ 1,968 $ 1,829 $ 2,123 $ 2,111
Cost of Goods Sold 2,021 2,115 1,844 1,862 1,612 1,587 1,690 1,613
Restructuring Charge -- -- -- 38 -- 22 -- --
Selling and Administration 319 293 256 262 230 213 267 244
Research and Development 39 34 30 36 33 35 58 58
- -------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 259 223 138 (130) 93 (28) 108 196
Interest Expense 29 35 28 30 31 37 42 44
Interest and Other Income 216 16 9 6 8 15 22 21
- -------------------------------------------------------------------------------------------------------------------------
Income (Loss) from
Continuing Operations
Before Taxes 446 204 119 (154) 70 (50) 88 173
Income Tax Provision (Benefit) 158 70 40 (61) 25 (25) 23 60
- -------------------------------------------------------------------------------------------------------------------------
Income (Loss) from
Continuing Operations
Before Cumulative Effect of
Accounting Changes 288 134 79 (93) 45 (25) 65 113
Accounting Changes -- -- -- -- (40) -- -- --
Discontinued Operations (8) 6 12 1 4 12 19 11
- -------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 280 140 91 (92) 9 (13) 84 124
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Working Capital 510(1) 153 164 60 78 (49) 83 90
Property, Plant and
Equipment, Net 657 841 765 787 826 791 721 674
Total Assets 2,339 2,182 1,920 1,839 1,947 1,904 1,771 1,804
Capitalization:
Short-Term Debt 139(1) 122 29 121 101 178 104 155
Long-Term Debt 276(1) 411 418 449 477 520 466 501
Shareholders' Equity 946 841 749 596 741 666 715 665
- -------------------------------------------------------------------------------------------------------------------------
Total Capitalization 1,361 1,374 1,196 1,166 1,319 1,364 1,285 1,321
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Income (Loss):
Primary:
Continuing Operations 5.52 2.63 1.57 (2.28) .86 (.78) 1.51 2.72
Accounting Changes -- -- -- -- (.93) -- -- --
Discontinued Operations (0.18) 0.12 0.26 .02 .10 .32 .51 .29
- -------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 5.34 2.75 1.83 (2.26) .03 (.46) 2.02 3.01
- -------------------------------------------------------------------------------------------------------------------------
Fully Diluted:
Continuing Operations 5.43 2.56 1.53 -- -- -- 1.46 2.65
Discontinued Operations (0.16) 0.11 0.24 -- -- -- .48 .28
- -------------------------------------------------------------------------------------------------------------------------
Net Income(2) 5.27 2.67 1.77 -- -- -- 1.94 2.93
- -------------------------------------------------------------------------------------------------------------------------
Cash Dividends:
Common 1.20 1.20 1.10 1.10 1.10 1.10 1.08 .98
ESOP Preferred (annual rate) 5.97 5.97 5.97 5.97 5.97 5.97 5.97 5.97
Series A Preferred (annual rate) -- 3.64 3.64 3.64 3.64 -- -- --
Shareholders' Equity(3) 18.13 17.03 15.43 13.62 16.96 17.51 18.83 17.50
Market Price of Common Stock:
High 48 385/8 301/8 251/4 273/8 27 303/8 341/8
Low 347/8 241/4 23 20 185/8 163/4 141/8 243/4
Year End 375/8 371/8 253/4 243/4 227/8 201/4 187/8 30
- -------------------------------------------------------------------------------------------------------------------------
OTHER
Capital Expenditures 126 182 131 119 159 165 172 128
Depreciation 124 118 117 117 103 99 103 103
Common Dividends Paid 60 57 44 42 41 41 41 39
Purchases of Common Stock -- -- -- -- -- 2 6 100
Current Ratio 1.6 1.2 1.3 1.1 1.2 1.0 1.2 1.2
Total Debt to Total
Capitalization(4) 30.4% 38.2% 36.5% 47.1% 42.0% 48.5% 41.5% 46.2%
Effective Tax Rate 35.4% 34.3% 33.6% 39.6% 35.7% 50.0% 26.1% 34.7%
Average Common Shares
Outstanding 50.0 48.8 41.0 38.2 38.2 38.0 38.2 40.0
- -------------------------------------------------------------------------------------------------------------------------
Shareholders 11,300 12,000 12,100 13,000 13,900 14,600 15,500 16,300
Employees(5) 9,300 10,400 10,300 10,100 10,800 11,400 12,100 13,200
- -------------------------------------------------------------------------------------------------------------------------
($ and shares in millions,
except per share data) 1988 1987
- -------------------------------------------------------
OPERATIONS
Sales $ 2,067 $ 1,699
Cost of Goods Sold 1,596 1,275
Restructuring Charge -- --
Selling and Administration 254 230
Research and Development 52 52
- -------------------------------------------------------
Operating Income (Loss) 165 142
Interest Expense 33 23
Interest and Other Income 14 9
- -------------------------------------------------------
Income (Loss) from
Continuing Operations
Before Taxes 146 128
Income Tax Provision (Benefit) 51 49
- -------------------------------------------------------
Income (Loss) from
Continuing Operations
Before Cumulative Effect of
Accounting Changes 95 79
Accounting Changes -- --
Discontinued Operations 3 (1)
- -------------------------------------------------------
Net Income (Loss) 98 78
- -------------------------------------------------------
FINANCIAL POSITION
Working Capital 84 221
Property, Plant and
Equipment, Net 696 646
Total Assets 1,858 1,636
Capitalization:
Short-Term Debt 211 50
Long-Term Debt 474 392
Shareholders' Equity 683 700
- -------------------------------------------------------
Total Capitalization 1,368 1,142
- -------------------------------------------------------
PER SHARE DATA
Net Income (Loss):
Primary:
Continuing Operations 2.25 1.72
Accounting Changes -- --
Discontinued Operations .07 (.03)
- -------------------------------------------------------
Net Income (Loss) 2.32 1.69
- -------------------------------------------------------
Fully Diluted:
Continuing Operations 2.23 1.69
Discontinued Operations .07 (.03)
- -------------------------------------------------------
Net Income(2) 2.30 1.66
- -------------------------------------------------------
Cash Dividends:
Common .85 .80
ESOP Preferred (annual rate) -- --
Series A Preferred (annual rate) -- --
Shareholders' Equity(3) 16.68 15.91
Market Price of Common Stock:
High 30 281/8
Low 20 163/8
Year End 251/2 21
- -------------------------------------------------------
OTHER
Capital Expenditures 134 103
Depreciation 103 105
Common Dividends Paid 36 37
Purchases of Common Stock 84 100
Current Ratio 1.2 1.6
Total Debt to Total
Capitalization(4) 50.1% 38.7%
Effective Tax Rate 34.9% 38.3%
Average Common Shares
Outstanding 42.2 46.2
- -------------------------------------------------------
Shareholders 17,600 20,700
Employees(5) 14,400 12,400
- -------------------------------------------------------
(1) Working Capital includes $524 of Cash and Cash Equivalents and $87 of
Short-Term Investments in 1996.
(2) Fully diluted income or loss per share is not presented for 1993, 1992
and 1991 as amounts are anti-dilutive.
(3) In 1994, 1993 and 1992, calculation is based on common shares and Series A
Conversion Preferred Stock outstanding.
(4) Excluding reduction to equity for the Employee Stock Ownership Plan from
1989 through 1996.
(5) Employee data excludes employees who work at government-owned/contractor-
operated facilities and includes employees of acquired businesses of 450 in
1995 and excludes employees of disposed businesses of 680 in 1996.
25
CONSOLIDATED BALANCE SHEETS
December 31 ($ in millions, except share data) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 524 $ 8
Short-Term Investments 87 --
Receivables, Net:
Trade 259 345
Other 62 56
Inventories, Net of LIFO Reserve of $154
($184 in 1995) 315 360
Other Current Assets 89 73
- --------------------------------------------------------------------------------
Total Current Assets 1,336 842
INVESTMENTS AND ADVANCES--AFFILIATED COMPANIES AT EQUITY 174 80
PROPERTY, PLANT AND EQUIPMENT, NET 657 841
OTHER ASSETS 172 136
NET ASSETS OF DISCONTINUED OPERATIONS -- 283
- --------------------------------------------------------------------------------
TOTAL ASSETS $2,339 $2,182
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings $ -- $ 56
Current Installments of Long-Term Debt 139 66
Accounts Payable 268 310
Income Taxes Payable 127 5
Accrued Liabilities 292 252
- --------------------------------------------------------------------------------
Total Current Liabilities 826 689
LONG-TERM SENIOR DEBT 276 286
LONG-TERM SUBORDINATED DEBT -- 125
OTHER LIABILITIES 291 241
- --------------------------------------------------------------------------------
Total Liabilities 1,393 1,341
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, Par Value $1 Per Share:
Authorized, 10,000,000 Shares
ESOP Preferred Stock
Issued 1,003,843 Shares in 1995 -- 77
Common Stock, Par Value $1 Per Share:
Authorized, 60,000,000 Shares
Issued 52,202,759 Shares (49,418,410 in 1995) 52 49
Additional Paid-In Capital 494 398
ESOP Obligations (5) (22)
Cumulative Translation Adjustment (9) (4)
Retained Earnings 414 343
- --------------------------------------------------------------------------------
Total Shareholders' Equity 946 841
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,339 $2,182
- --------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of
the financial statements.
26
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31
($ in millions, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------
SALES $2,638 $2,665 $2,268
OPERATING EXPENSES:
Cost of Goods Sold 2,021 2,115 1,844
Selling and Administration 319 293 256
Research and Development 39 34 30
- --------------------------------------------------------------------------------
OPERATING INCOME 259 223 138
Interest Expense 29 35 28
Interest and Other Income 216 16 9
- --------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 446 204 119
Income Taxes 158 70 40
- --------------------------------------------------------------------------------
Income from Continuing Operations 288 134 79
Income (Loss) from Discontinued Operations,
Net of Taxes (8) 6 12
- --------------------------------------------------------------------------------
NET INCOME 280 140 91
Preferred Dividends 4 6 7
- --------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 276 $ 134 $ 84
- --------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE:
Primary:
Continuing Operations $ 5.52 $ 2.63 $ 1.57
Discontinued Operations (0.18) .12 .26
- --------------------------------------------------------------------------------
Net Income $ 5.34 $ 2.75 $ 1.83
- --------------------------------------------------------------------------------
Fully Diluted:
Continuing Operations $ 5.43 $ 2.56 $ 1.53
Discontinued Operations (0.16) .11 .24
- --------------------------------------------------------------------------------
Net Income $ 5.27 $ 2.67 $ 1.77
- --------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of the
financial statements.
27
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Cumulative Preferred Stock
-------------------- ---------------------
Shares Par Paid-In Translation Retained Series A ESOP ESOP
($ in millions, except share data) Issued Value Capital Adjustment Earnings Par Value Par Value Obligations
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1994 38,204,540 $38 $278 $(9) $ 238 $ 3 $ 92 $(44)
Net Income -- -- -- -- 91 -- -- --
Dividends Paid:
Common Stock ($1.10 per share) -- -- -- -- (44) -- -- --
ESOP Preferred Stock
($5.97 per share) -- -- -- -- (7) -- -- --
Series A Conversion Preferred
Stock ($3.64 per share) -- -- -- -- (10) -- -- --
Issuance of Common Stock 4,427,500 5 93 -- -- -- -- --
Reduction in ESOP Obligations -- -- -- -- -- -- -- 17
Stock Options Exercised 174,204 -- 3 -- -- -- -- --
Translation Adjustment -- -- -- 6 -- -- -- --
Other Transactions 226,936 -- 4 -- 1 -- (6) --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 43,033,180 43 378 (3) 269 3 86 (27)
Net Income -- -- -- -- 140 -- -- --
Dividends Paid:
Common Stock ($1.20 per share) -- -- -- -- (57) -- -- --
ESOP Preferred Stock
($5.97 per share) -- -- -- -- (6) -- -- --
Series A Conversion Preferred Stock
($3.64 per share) -- -- -- -- (3) -- -- --
Conversion of Series A Conversion
Preferred Stock 5,520,000 5 (2) -- -- (3) -- --
Reduction in ESOP Obligations -- -- -- -- -- -- -- 5
Stock Options Exercised 612,936 1 12 -- -- -- -- --
Translation Adjustment -- -- -- (1) -- -- -- --
Other Transactions 252,294 -- 10 -- -- -- (9) --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 49,418,410 49 398 (4) 343 -- 77 (22)
Net Income -- -- -- -- 280 -- -- --
Dividends Paid:
Common Stock ($1.20 per share) -- -- -- -- (60) -- -- --
ESOP Preferred Stock
($5.97 per share) -- -- -- -- (4) -- -- --
Issuance of ESOP Preferred Stock -- -- -- -- -- -- 9 --
Redemption of ESOP Preferred Stock 2,343,401 2 84 -- -- -- (86) --
Spin-off of Primex Technologies, Inc. -- -- -- -- (145) -- -- --
Reduction in ESOP Obligations -- -- -- -- -- -- -- 17
Stock Options Exercised 347,232 1 10 -- -- -- -- --
Translation Adjustment -- -- -- (5) -- -- -- --
Other Transactions 93,716 -- 2 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 52,202,759 $52 $494 $(9) $ 414 $-- $ -- $ (5)
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of
the financial statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 ($ in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
- --------------------------------------------------------------------------------
Income from Continuing Operations $ 288 $ 134 $ 79
Adjustments to Reconcile Income from Continuing
Operations to Net Cash and Cash Equivalents
Provided by Operating Activities:
Earnings of Non-consolidated Affiliates (9) (6) (2)
Depreciation 124 118 117
Amortization of Intangibles 6 4 3
Deferred Taxes (74) 4 4
Gain on Disposition of Business (188) -- --
Change in Assets and Liabilities Net
of Purchase and Sales of Businesses:
Receivables 20 (56) (64)
Inventories (9) (13) (18)
Other Current Assets 6 (6) (2)
Accounts Payable and Accrued Liabilities (38) 33 34
Income Taxes Payable 122 2 5
Noncurrent Liabilities 11 9 5
Other Operating Activities 7 (13) 15
- --------------------------------------------------------------------------------
Net Cash and Cash Equivalents Provided by
Operating Activities from Continuing Operations 266 210 176
Discontinued Operations:
Net Income (Loss) (8) 6 12
Change in Net Assets 13 (29) (40)
- --------------------------------------------------------------------------------
Net Operating Activities 271 187 148
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
- --------------------------------------------------------------------------------
Capital Expenditures (126) (182) (131)
Disposition of Property, Plant and Equipment 23 -- 8
Business Acquired in Purchase Transaction -- (65) --
Proceeds From Sales of Businesses 571 49 41
Purchases of Short-Term Investments (87) -- --
Investments and Advances--Affiliated Companies
at Equity (102) 1 (2)
Other Investing Activities (5) (2) 7
- --------------------------------------------------------------------------------
Net Investing Activities 274 (199) (77)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
- --------------------------------------------------------------------------------
Long-Term Debt:
Borrowings -- 50 --
Repayments (62) (25) (29)
Short-Term Borrowings (Repayments) (56) 34 (94)
Borrowings under Line of Credit Assumed by
Primex Technologies, Inc. 125 -- --
Issuance of Common Stock -- -- 98
Repayment from ESOP 17 5 17
Stock Options Exercised 11 13 3
Dividends Paid (64) (66) (61)
Other Financing Activities -- 2 (1)
- --------------------------------------------------------------------------------
Net Financing Activities (29) 13 (67)
- --------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 516 1 4
- --------------------------------------------------------------------------------
Cash and Cash Equivalents, Beginning of Year 8 7 3
- --------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 524 $ 8 $ 7
- --------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid for Interest and Income Taxes:
Interest $40 $44 $37
Income Taxes, Net of Refunds $104 $67 $39
- --------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of
the financial statements.
29
NOTES TO FINANCIAL STATEMENTS
($ in millions, except share data)
ACCOUNTING POLICIES
The preparation of the consolidated financial statements requires estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from those estimates.
Certain reclassifications were made to prior year amounts to conform with the
1996 presentation. In addition, the financial statements have been restated to
reflect the spin-off of Primex Technologies, Inc. and share data has been
restated to reflect the stock split, effective October 30, 1996.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the company and
all majority-owned subsidiaries. Investments in 20-50% owned affiliates are
accounted for on the equity method. Accordingly, the company's share of earnings
or losses of these affiliates is included in consolidated net income.
FOREIGN CURRENCY TRANSLATION
Foreign affiliates' balance sheet amounts are translated at the exchange rates
in effect at year end, and income statement amounts are translated at the
average rates of exchange prevailing during the year. Translation adjustments
are recorded as a separate component of shareholders' equity.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents.
SHORT-TERM INVESTMENTS
Marketable debt securities are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, the company has
classified its marketable debt securities as available-for-sale which are
reported at fair market value with unrealized gains and losses included in
Shareholders' Equity net of applicable taxes. The fair value of marketable
securities are determined by quoted market prices. Realized gains and losses on
sales of investments, as determined on specific identification method and
declines in value of securities judged to be other-than-temporary are included
in Interest and Other Income in the Consolidated Statement of Income. Interest
and dividends on all securities are included in Interest and Other Income.
All investments which have original maturities between three and twelve
months are considered short-term investments and consist of debt securities such
as commercial paper, time deposits, certificates of deposit, bankers
acceptances, repurchase agreements, and marketable direct obligations of the
United States Treasury.
INVENTORIES
Inventories are valued principally by the dollar value last-in, first-out (LIFO)
method of inventory accounting; in aggregate, such valuations are not in excess
of market. Elements of costs in inventories include raw materials, direct labor
and manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is computed on
a straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the term of the lease or the estimated
useful life of the improvement, whichever is less. Start-up costs are expensed
as incurred.
GOODWILL
Goodwill, the excess of the purchase price of acquired businesses over fair
value of the respective net assets, is amortized principally over 30 years on a
straight-line basis. The company periodically reviews the value of its goodwill
to determine if any impairment has occurred. The company measures the potential
impairment of recorded goodwill by the undiscounted value of expected future
operating cash flows in relation to its net capital investment in the
subsidiary. An impairment would be recorded based on the estimated fair value.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated, based upon current law and existing technologies. These amounts,
which are not discounted and exclusive of claims against third parties, are
adjusted periodically as assessment and remediation efforts progress or
additional technical or legal information becomes available. Environmental
remediation costs are charged to expense. Environmental costs are capitalized if
the costs increase the value of the property and/or mitigate or prevent
contamination from future operations.
INCOME TAXES
Deferred taxes are provided for differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
30
DERIVATIVE FINANCIAL INSTRUMENTS
The company enters into forward sales and purchase contracts and currency
options to manage currency risk resulting from purchase and sale commitments
denominated in foreign currencies (principally Australian dollar, Belgian franc,
Canadian dollar and Japanese yen) and relating to particular anticipated but not
yet committed sales expected to be denominated in those currencies. All of the
currency derivatives expire within one year and are for United States dollar
equivalents. At December 31, 1996, the company had options and contracts to sell
foreign currencies with face values of $12 (1995 - $29) and $32 (1995 - $41),
respectively. In addition, the company had options and contracts to buy foreign
currencies with face values of $15 (1995 - $13) and $23 (1995 - $11),
respectively. The counterparties to the options and contracts are major
financial institutions. The risk of loss to the company in the event of
nonperformance by a counterparty is not significant. Premiums paid for currency
options and gains or losses on forward sales and purchase contracts are not
material to operating results.
Foreign currency exchange losses, net of taxes, were $4 in 1996, $1 in
1995, and $2 in 1994.
FINANCIAL INSTRUMENTS
Fair values are estimated based on quoted market prices, where available, or on
current rates offered to the company for debt with similar terms and maturities.
At December 31, 1996, the estimated fair value of debt was $421 (1995 - $495).
The fair value of the company's other financial instruments approximates
carrying value.
STOCK-BASED COMPENSATION
In 1996, the company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." As allowed under SFAS No. 123,
the company has chosen to continue to account for stock-based compensation cost
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Under this opinion, compensation cost is recorded
when the excess of the fair market value of the company's stock at the date of
grant for fixed options exceeds the exercise price of the stock option. The
company's policy is to grant stock options at a value equal to its common
stock's fair market value on the date of grant. Compensation cost for restricted
stock awards is accrued over the life of the award based on the quoted market
price of the company's stock at the date of the award.
EARNINGS PER SHARE
Primary earnings per share are computed by dividing net income less the ESOP
preferred stock dividend requirement (to the date of its redemption in 1996),
and the redemption adjustment (excess of fair value over book value of ESOP
shares redeemed) by the weighted average number of common shares outstanding. In
December 1996, the company redeemed the ESOP preferred stock with shares of
common stock of equivalent value. On March 1, 1995, the Series A stock was
converted on a one-for-one basis into common stock. In 1994, common shares
outstanding included an equivalent number (one-for-one) of common shares,
assuming the conversion of Series A stock.
Fully diluted earnings per share reflect the dilutive effect of stock
options and assume the conversion of outstanding ESOP preferred stock, until its
redemption in December 1996, into an equivalent number of common shares at the
date of issuance. Net income was reduced by an additional ESOP contribution
(differential between the common and the ESOP preferred dividend rates under an
assumed conversion) necessary to satisfy the debt service requirement.
AVERAGE COMMON SHARES AND
COMMON EQUIVALENTS OUTSTANDING
Fully
Years ended December 31 (In thousands) Primary Diluted
- --------------------------------------------------------------------------------
1996 49,992 52,311
1995 48,866 51,292
1994 46,606 49,650
- --------------------------------------------------------------------------------
MARKETABLE SECURITIES
The following is a summary of the fair market value of available-for-sale
short-term investments as of December 31, 1996:
1996
- --------------------------------------------------------------------------------
Tax exempt $ 6
Certificates of deposit 40
Commercial paper 19
Government and government agencies 20
Other 2
- --------------------------------------------------------------------------------
Total $87
- --------------------------------------------------------------------------------
TRADE RECEIVABLES
Allowance for doubtful items was $11 and $13 at December 31, 1996 and 1995,
respectively. Provisions charged to operations were $1 in 1996, $3
in 1995 and $2 in 1994. Bad debt write-offs, net
of recoveries, amounted to $3 in 1996 and $2 in 1995 and 1994.
31
NOTES TO FINANCIAL STATEMENTS (continued)
INVENTORIES
1996 1995
- --------------------------------------------------------------------------------
Raw materials and supplies $ 153 $ 167
Work in process 144 168
Finished goods 172 209
- --------------------------------------------------------------------------------
469 544
LIFO reserve (154) (184)
- --------------------------------------------------------------------------------
Inventory, net $ 315 $ 360
- --------------------------------------------------------------------------------
Inventories valued using the LIFO method comprised 71% and 76% of the total
inventories at December 31, 1996 and 1995, respectively. If the first-in, first-
out (FIFO) method of inventory accounting had been used, inventories would have
been approximately $154 and $184 higher than reported at December 31, 1996 and
1995, respectively.
PROPERTY, PLANT
AND EQUIPMENT
Useful Lives 1996 1995
- --------------------------------------------------------------------------------
Land and improvements to land 10-20 Years $ 79 $109
Buildings and building equipment 10-25 Years 257 266
Machinery and equipment 3-12 Years 1,532 1,802
Leasehold improvements 8 9
Construction in progress 134 220
- --------------------------------------------------------------------------------
Property, plant and equipment 2,010 2,406
Less accumulated depreciation 1,353 1,565
- --------------------------------------------------------------------------------
Property, plant and equipment, net $ 657 $ 841
- --------------------------------------------------------------------------------
Leased assets capitalized and included above are not significant.
Maintenance and repairs charged to operations amounted to $149, $158 and
$144 in 1996, 1995 and 1994, respectively.
SHORT-TERM BORROWINGS
There were no short-term borrowings at December 31, 1996. Short-term borrowings
at December 31, 1995 consisted of domestic bank loans of $46 at an interest rate
of 5.95% and domestic commercial paper of $10 at an interest rate of 5.97%.
At December 31, 1996, the company maintained committed credit facilities
with banks of $256, all of which was available, while comparable 1995 amounts
were $309 and $253, respectively.
LONG-TERM DEBT
1996 1995
- --------------------------------------------------------------------------------
Notes payable:
7.077%, due 1996 $ -- $ 40
7.11%, due 2005 50 50
7.75%, due 2005 11 11
7.97%, due 1997-2002 44 50
8%, due 2002 100 100
Industrial development and environmental
improvement obligations:
Payable at interest rates of 2% to 6%
which vary with short-term tax
exempt rates, due 2004-2017 35 35
Payable at interest rates of 6% to 7%,
due 1997-2008 38 39
Guarantee of ESOP debt varying with LIBOR,
due 1997 5 22
Notes floating with LIBOR, due 1999-2009 5 5
Mortgage, capitalized leases and other
indebtedness 2 --
- --------------------------------------------------------------------------------
Total senior debt 290 352
Subordinated notes 9.5%, due 1997 125 125
- --------------------------------------------------------------------------------
415 477
Amounts due within one year 139 66
- --------------------------------------------------------------------------------
Total long-term debt $ 276 $ 411
- --------------------------------------------------------------------------------
Among the provisions of certain note agreements are restrictions relating
to payment of dividends and acquisition of the company's capital stock. At
December 31, 1996, retained earnings of approximately $284 were not so
restricted under the provisions.
The ESOP's purchase of preferred stock in 1989 was financed by $60 of notes
(guaranteed by the company) and $40 of borrowings from the company. The loan
from the company to the ESOP was financed through a long-term credit facility
which was repaid in July 1996.
Included in the $256 committed credit facility is an unsecured revolving
credit agreement with a group of banks, which provides a maximum borrowing of
$250, and expires in May 2000. The company may select various floating rate
borrowing options.
In June 1995, the company sold $50 of 7.11% notes with a maturity date of
June 2005. The proceeds from this issue were used to reduce short-term debt
incurred for working capital purposes. There remains $248 unissued under the
medium-term note program registered in May 1994.
During 1992, the company swapped interest payments on $50 principal amount
of its 8% notes due 2002 to a floating rate (5.618% at December 31, 1996). In
June 1995, the company offset this transaction by swapping interest payments to
a fixed rate of 6.485%. Counterparties to interest rate swap contracts are major
financial institutions. The risk of loss to the company in the event of
nonperformance by a counterparty is not significant.
32
Annual maturities of long-term debt for the next five years are $139 in
1997, $7 in 1998 and $8 in 1999, 2000 and 2001.
Interest expense incurred on short-term borrowings and long-term debt
totaled $31 in 1996, $36 in 1995 and $28 in 1994, of which $2 was capitalized in
1996, $1 in 1995, and less than $1 in 1994.
PENSION PLANS AND RETIREMENT BENEFITS
Essentially all of the company's domestic pension plans are non-contributory
final-average-pay or flat-benefit plans and all domestic employees are covered.
The company's funding policy is consistent with the requirements of federal laws
and regulations.
COMPONENTS OF
NET PENSION EXPENSE
1996 1995 1994
- -------------------------------------------------------------------------------
Service cost (benefits earned
during the period) $ 28 $ 23 $ 25
Interest cost on the projected
benefit obligation 78 73 68
Actual loss (return) on assets (127) (260) 6
Actual (loss) return deferred for
later recognition 35 174 (89)
Net amortization of unrecognized
transition asset, prior service
cost and deferred gains
and losses 1 (2) (1)
- -------------------------------------------------------------------------------
Net pension expense $ 15 $ 8 $ 9
- -------------------------------------------------------------------------------
PRINCIPAL ASSUMPTIONS
1996 1995 1994
- --------------------------------------------------------------------------------
Weighted average discount rate 8.0% 7.5% 8.5%
Weighted average rate of
compensation increase 4.5% 4.5% 4.5%
Long-term rate of return on assets 9.5% 9.5% 9.5%
- --------------------------------------------------------------------------------
FUNDED STATUS OF THE PLANS
1996 1995
- --------------------------------------------------------------------------------
Accumulated benefit obligation
including vested benefits of
$1,015 and $983 $ 1,017 $ 985
- --------------------------------------------------------------------------------
Plan assets at fair value, primarily
equity and fixed-income securities $ 1,174 $ 1,115
Projected benefit obligation for service
rendered to date (1,078) (1,047)
- --------------------------------------------------------------------------------
Assets over projected benefit obligation 96 68
Unrecognized net transition asset (28) (35)
Unrecognized (gain) (138) (87)
Unrecognized prior service cost 36 28
- --------------------------------------------------------------------------------
Net pension liability $ (34) $ (26)
- --------------------------------------------------------------------------------
The company's common stock represents approximately 3% and 4% of the plan
assets at December 31, 1996 and 1995, respectively.
The company's foreign subsidiaries maintain pension and other benefit plans
which are consistent with statutory practices and are not significant.
The Pension Plan of Olin Corporation provides that if, within three years
following a change of control of the company, any corporate action is taken or
filing made in contemplation of, among other things, a plan termination or
merger or other transfer of assets or liabilities of the plan, and such
termination, merger or transfer thereafter takes place, plan benefits would
automatically be increased for affected participants (and retired participants)
to absorb any plan surplus.
In addition to the net pension expense above, during 1996 the company
recorded a $6 curtailment loss in connection with the sale of the isocyanates
business and the spin-off of the Ordnance and Aerospace divisions as Primex
Technologies, Inc.
The company provides certain postretirement health care and life insurance
benefits for eligible active and retired domestic employees.
COMPONENTS OF
POSTRETIREMENT EXPENSE
1996 1995 1994
- -------------------------------------------------------------------------------
Service cost-benefits earned
during year $ 3 $ 3 $ 3
Interest cost on accumulated
postretirement benefit obligation 5 4 4
Net amortization of unrecognized
prior service cost and deferred
gains and losses (1) (1) (1)
- -------------------------------------------------------------------------------
Net postretirement expense $ 7 $ 6 $ 6
- -------------------------------------------------------------------------------
33
NOTES TO FINANCIAL STATEMENTS (continued)
UNFUNDED LIABILITY FOR
POSTRETIREMENT BENEFITS
1996 1995
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $32 $42
Fully eligible active plan participants 15 9
Other active participants 20 16
- --------------------------------------------------------------------------------
Cumulative accumulated postretirement
benefit obligation 67 67
Unrecognized loss (5) (7)
Unrecognized prior service cost 6 9
- --------------------------------------------------------------------------------
Net postretirement benefit liability $68 $69
- --------------------------------------------------------------------------------
The accumulated postretirement benefit obligation was determined using
the projected unit credit method and an assumed discount rate of 8% in
1996, 7.5% in 1995 and 8.5% in 1994. The assumed health care cost trend
rate used for pre-65 retirees was 11% in 1996, 12.5% in 1995 and 13% in
1994, declining one-half percent per annum to 5.5%. For post-65 retirees,
the company provides a fixed dollar benefit which is not subject to
escalation.
A one percent increase each year in the health care cost trend rate used
would have resulted in a $1 increase in the aggregate service and interest
components of expense for the year 1996, and a $5 increase in the
accumulated postretirement benefit obligation at December 31, 1996.
During 1996 in connection with the spin-off of Primex Technologies,
Inc., the company transferred $8 of net postretirement benefit liability to
Primex Technologies, Inc.
INCOME TAXES
COMPONENTS OF PRETAX INCOME
FROM CONTINUING OPERATIONS
1996 1995 1994
- --------------------------------------------------------------------------------
Domestic $409 $172 $105
Foreign 37 32 14
- --------------------------------------------------------------------------------
Pretax income $446 $204 $119
- --------------------------------------------------------------------------------
COMPONENTS OF INCOME
TAX EXPENSE (BENEFIT)
1996 1995 1994
- --------------------------------------------------------------------------------
Currently payable:
Federal $185 $43 $23
State 36 13 6
Foreign 11 10 7
- --------------------------------------------------------------------------------
232 66 36
Deferred (74) 4 4
- --------------------------------------------------------------------------------
Income tax expense $158 $70 $40
- --------------------------------------------------------------------------------
The following table accounts for the difference between the actual tax
provision and the amounts obtained by applying the statutory U.S. federal
income tax of 35% to the income from continuing operations before taxes.
EFFECTIVE TAX RATE
RECONCILIATION
(Percent) 1996 1995 1994
- -------------------------------------------------------------------------------
Statutory federal tax rate 35.0 35.0 35.0
Foreign income tax (1.0) (.8) .1
State income taxes, net 3.3 3.7 2.4
Equity in net income of affiliates (.4) (.6) (.9)
Other, net (1.5) (3.0) (3.0)
- -------------------------------------------------------------------------------
Effective tax rate 35.4 34.3 33.6
- -------------------------------------------------------------------------------
COMPONENTS OF DEFERRED
TAX ASSETS AND LIABILITIES
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets
Postretirement benefits $ 40 $ 37
Environmental reserves 57 42
Non-deductible reserves 81 52
Tax credit carryforwards -- 5
Other miscellaneous items 17 19
- --------------------------------------------------------------------------------
Total deferred tax assets $195 $155
- --------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment $ 54 $ 88
Other miscellaneous items 6 6
- --------------------------------------------------------------------------------
Total deferred tax liabilities $ 60 $ 94
- --------------------------------------------------------------------------------
Included in Other Current Assets at December 31, 1996 and 1995 are $76 and
$53, respectively, of net current deferred assets. Taxable income is expected to
be sufficient to recover the net benefit therefore, no valuation allowance was
established.
At December 31, 1996, the company's share of the cumulative undistributed
earnings of foreign subsidiaries was approximately $103. No provision has been
made for U.S. or additional foreign taxes on the undistributed earnings of
foreign subsidiaries since the company intends to continue to reinvest these
earnings. Foreign tax credits would be available to substantially reduce or
eliminate any amount of additional U.S. tax that might be payable on these
foreign earnings in the event of distributions or sale.
CONTRIBUTING EMPLOYEE OWNERSHIP PLAN
The Contributing Employee Ownership Plan is a defined contribution plan
available to essentially all domestic employees which provides a match of
employee contributions. The plan purchased from the company approximately 1.3
million shares ($100) of a newly authorized 1.75 million share series of the
company's ESOP preferred stock, financed by $60 of notes guaranteed by the
company and a $40 loan from the company. This loan has been repaid in total to
the company as of December 31, 1992. In December 1996, the Board of Directors
approved the redemption of all outstanding
34
shares of ESOP preferred stock with common stock of equivalent value. Upon
redemption of the ESOP preferred stock, the company is matching employee
contributions with common stock. The annual fixed preferred dividend rate was
$5.97 per share and during 1996, dividends were paid in the first three
quarters. Expenses related to the plan are based on ESOP preferred and common
stock allocated to participants. These costs amounted to $11 in 1996, $12 in
1995, and $9 in 1994. Interest incurred by the plan totaled $1 in 1996, 1995 and
1994, which was funded by ESOP preferred dividends.
STOCK OPTIONS
Under the stock option plans, options may be granted to purchase shares of the
company's common stock at not less than fair market value at the date of grant,
and are exercisable for a period not exceeding ten years from that date. Options
granted under the 1996 stock option plan vest over three years. Stock option
transactions are as follows:
Weighted
Average
Option Price Option Price
Shares Per Share Per Share
- -----------------------------------------------------------------------------------
Outstanding at
January 1, 1994 1,842,978 $11.07-$32.50 $24.41
Granted 268,148 26.00 26.00
Exercised (174,204) 11.07-26.75 21.68
Canceled (25,714) 21.63-26.75 24.94
- -------------------------------------------------------------------
Outstanding at
December 31, 1994 1,911,208 15.41-32.50 24.87
Granted 272,508 27.82-32.41 27.99
Exercised (612,936) 15.41-31.80 24.43
Canceled (16,512) 15.41-27.82 25.05
- -------------------------------------------------------------------
Outstanding at
December 31, 1995 1,554,268 21.18-31.82 25.59
Granted 1,441,641 39.17-40.46 39.18
Exercised (347,232) 21.63-27.82 25.07
Canceled (250,958) 23.87-39.17 37.61
- -------------------------------------------------------------------
Outstanding at
December 31, 1996 2,397,719 $21.18-$40.46 $32.06
===================================================================================
Of the outstanding options at December 31, 1996, options covering 1,313,169
shares are currently exercisable.
At December 31, 1996, common shares reserved for issuance under these
plans were 5,345,386 and under additional remuneration agreements were
estimated to be 85,000.
In 1996, the company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." As allowed by SFAS No. 123, the company has not recognized
compensation cost for stock-based compensation arrangements. Pro forma net
income and earnings per share were calculated based on the following assumptions
as if the company had recorded compensation expense for the stock options
granted during the year. The fair value of each option granted during 1996 and
1995 was estimated on the date of grant, using the Black-Scholes option-pricing
model with the following weighted-average assumptions used: dividend yield of
4.0% (4.2% in 1995), risk-free interest rate of 6.5%, expected volatility of 22%
(20% in 1995) and an expected life of 7 years. The difference between reported
and pro forma net income and earnings per share for 1996 and 1995 was not
material.
COMMON STOCK
The Board of Directors approved a two-for-one split of the company's common
stock, effective October 30, 1996, for all shareholders of record on October 21,
1996. Shareholders' Equity has been restated to give retroactive recognition to
the stock split by reclassifying from additional paid-in capital to common stock
the par value of the additional shares as a result of the stock split.
In connection with the spin-off of Primex, its employees were allowed to
transfer their account balances from the company's CEOP into Primex's savings
and retirement plan. The company issued approximately .3 million shares of
common stock at a per share value of $40.50 in exchange for .2 million shares of
ESOP preferred stock at a per share value of $85.63 at the time of the transfer.
In December, the company's board of directors approved the redemption of
all outstanding shares of ESOP preferred stock with common stock of equivalent
value. Approximately 1.87 million shares of common stock at a per share value of
$40.19 were issued in exchange for approximately .9 million shares of ESOP
preferred stock at a per share value of $85.75.
SHAREHOLDER RIGHTS PLAN
Effective February 1996, the Board of Directors adopted a new Shareholder Rights
Plan to replace the prior plan which had been adopted in 1986. Like the former
plan, the new plan is designed to prevent an acquiror from gaining control of
the company without offering a fair price to all shareholders. Each right
entitles a shareholder (other than the acquiror) to buy one-five hundredth share
of Series A Participating Cumulative Preferred Stock at an exercise price of one
hundred twenty dollars. The rights are exercisable only if a person acquires
more than 15% of the company's common stock or if the Board of Directors so
determines following the commencement of a tender or exchange offer to acquire
more than 15% of the company's common stock. If any person acquires more than
15% of the company's common stock and in the event of a subsequent merger or
combination, each right will entitle the holder (other than the acquiror) to
purchase stock or other property of the acquiror having a value of twice the
exercise price. The company can redeem the rights at $.005 per right for a
certain period of time. The rights will expire on February 27, 2006, unless
earlier redeemed by the company.
35
NOTES TO FINANCIAL STATEMENTS (continued)
SEGMENT INFORMATION
Information relative to the various industries in which the company operates
appears on page 24 and is incorporated herein by reference.
GEOGRAPHIC SEGMENT DATA
1996 1995 1994
- -------------------------------------------------------------------------------
Sales
United States $2,251 $2,357 $2,061
Foreign 387 308 207
Transfers between areas
United States 158 102 74
Foreign 12 16 16
Eliminations (170) (118) (90)
- -------------------------------------------------------------------------------
Total sales $2,638 $2,665 $2,268
===============================================================================
Operating income
United States $ 231 $ 198 $ 125
Foreign 28 25 13
- -------------------------------------------------------------------------------
Operating income $ 259 $ 223 $ 138
===============================================================================
Assets
United States $1,492 $1,699 $1,610
Foreign 230 198 107
Investments 38 43 34
Corporate assets and eliminations 579 242 169
- -------------------------------------------------------------------------------
Total consolidated assets $2,339 $2,182 $1,920
===============================================================================
Transfers between geographic areas are priced generally at prevailing
market prices. Export sales from the United States to unaffiliated customers
were $212, $213 and $152 in 1996, 1995 and 1994, respectively.
ACQUISITIONS
On December 31, 1996, the company made an advance payment to E. I. du Pont de
Nemours and Company (DuPont) of $75 in connection with its anticipated purchase
of the remaining 50% of Niachlor (a joint venture formed by DuPont and the
company in 1984), which is included in Investments and Advances-Affiliated
Companies at Equity in the December 31, 1996 Consolidated Balance Sheet.
Subsequent to December 31, 1996, the company consummated this transaction for
approximately $77. This acquisition will be accounted for as a purchase in 1997
and consists primarily of property, plant and equipment.
In 1995, the company acquired the remaining 50% of OCG Microelectronic
Materials, a joint venture formed by Ciba-Geigy and the company in 1990, for
approximately $65. In addition, the company acquired the remaining 51% of
Etoxyl, C.A., a Latin American joint venture. The purchase price is contingent
upon the future earnings of this entity. These acquisitions were accounted for
as purchases and accordingly, their results of operations, which were not
material, are included in the consolidated financial statements from the dates
of acquisition.
Supplemental cash flow information on businesses acquired is as follows:
1995
- --------------------------------------------------------------------------------
Working capital $ 39
Property, plant and equipment 45
Other assets 14
Goodwill 17
Debt (27)
Investments and advances - affiliated companies (23)
- --------------------------------------------------------------------------------
Purchase price $ 65
================================================================================
DISPOSITIONS
In December of 1996 the company sold its isocyanates business for $565 in cash.
The sale included all assets at the company's Lake Charles, LA facility used in
the manufacture and sale of toluene diisocyanate, aliphatic isocyanates and
nitric acid. In connection with the transaction, the company recorded a pre-tax
gain of $188 ($115 after tax gain) which is included in Interest and Other
Income. The company's results of operations for 1996 and 1995 included sales of
$296 and $255 and operating income of $52 and $19, respectively, from the
isocyanates business.
Supplemental cash flow information on businesses disposed is as follows:
1996
- --------------------------------------------------------------------------------
Proceeds $ 571
Working capital (123)
Property, plant and equipment (177)
Other assets (5)
Other liabilities (78)
- --------------------------------------------------------------------------------
Gain on disposition of businesses $ 188
================================================================================
Also in 1996 the company announced it will seek a buyer for its polyol,
glycol and surfactants businesses at its Doe Run facility at Brandenburg, KY.
The company expects to complete this transaction during 1997.
During 1995, the company sold its dry sanitizer plant in South Charleston,
WV, a related tableting operation in Livonia, MI, and Sun(R) brand of
isocyanurates completing the final steps to comply with the Federal Trade
Commission order to divest chlorinated isocyanurate pool chemical assets that
were acquired in 1985. These transactions did not have a material impact on the
company's results of operations.
During 1994, the company sold its trichloroisocyanurate production
facility and conductive materials business including its manufacturing facility.
These transactions did not have a material impact on the company's results of
operations.
36
DISCONTINUED OPERATIONS
On December 31, 1996, the company completed the spin-off of its Ordnance and
Aerospace businesses as Primex Technologies, Inc. ("Primex"). Under the terms of
the spin-off, the company distributed to its holders of common stock as of the
close of business on December 19, 1996, one Primex common share for every ten
shares of Olin common stock. The spin-off distribution reduced shareholders'
equity by $145, which represents the book value of the net assets of Primex as
of December 31, 1996.
The historical operating results of these businesses are shown net of tax
as discontinued operations in the consolidated statements of income. Net assets
of discontinued operations in the consolidated balance sheet include those
assets and liabilities attributable to the Ordnance and Aerospace businesses.
The historical results for the discontinued operations include an
allocation of the company's interest expense based on an assumed debt level
providing a debt to capital ratio similar to that of the company as well as a
level of debt that Primex could maintain on an independent basis in the future.
The allocated debt of $125 represents the amount borrowed by the company under a
credit facility established by the company and assumed by Primex prior to the
distribution on December 31, 1996. The cash received by the company under this
credit facility will be used to liquidate its existing debt.
The company and Primex have entered into a tax sharing agreement
effectively providing that the company will be responsible for the tax liability
of Primex for the years that Primex was included in the company's consolidated
income tax returns. Income taxes have been allocated to Primex based on its
pretax income and calculated on a separate Company basis pursuant to the
requirements of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Income taxes allocated to Primex were $2, $7, $10 in 1996,
1995 and 1994, respectively.
In addition, the company and Primex have entered into several other
agreements which cover such matters as technology transfers, transition
services, covenants not to compete and powder and component supplies.
Condensed historical combined balance sheet and income statement data of
the discontinued operations are summarized below:
1996 1995
- --------------------------------------------------------------------------------
Combined Balance Sheets
Total assets $374 $381
Total liabilities 229 98
Equity 145 283
================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------
Combined Statements of Income
Sales $471 $508 $416
Operating income 2 21 29
Net income (loss) (8) 6 12
================================================================================
ENVIRONMENTAL
The company is party to various governmental and private environmental actions
associated with waste disposal sites and manufacturing facilities. Environmental
provisions charged to income amounted to $70 in 1996, $24 in 1995, and $17 in
1994. In connection with the sale of the isocyanates business at the company's
Lake Charles, LA facility, a $53 provision was recorded to provide for
contractual liabilities related to future environmental spending at the Lake
Charles site. Charges to income for investigatory and remedial efforts were
material to operating results in 1996, 1995 and 1994. The consolidated balance
sheets include reserves for future environmental expenditures to investigate and
remediate known sites amounting to $148 at December 31, 1996 and $108 at
December 31, 1995, of which $113 and $73 are 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 the company's 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
the company. At December 31, 1996, the company had estimated additional
contingent environmental liabilities of $35.
COMMITMENTS AND CONTINGENCIES
The company leases certain properties, such as manufacturing, warehousing and
office space, data processing and office equipment and railroad cars. Leases
covering these properties generally contain escalation clauses based on
increased costs of the lessor, primarily property taxes, maintenance and
insurance and have renewal or purchase options. Total rent expense charged to
operations amounted to $55 in 1996, $51 in 1995 and $49 in 1994, (sublease
income is not significant). Future minimum rent payments under operating leases
having initial or remaining noncancelable lease terms in excess of one year at
December 31, 1996 are as follows: $24 in 1997; $21 in 1998; $16 in 1999; $13 in
2000; $9 in 2001; and $36 thereafter.
There are a variety of non-environmental legal proceedings pending or
threatened against the company. Those matters that are probable have been
accrued for in the accompanying financial statements. Any contingent amounts in
excess of amounts accrued are not expected to have a material adverse effect on
results of operations, financial position or liquidity of the company.
37
OTHER FINANCIAL DATA
QUARTERLY DATA (UNAUDITED)
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------
Sales $693 $702 $652 $ 591 $ 2,638
Cost of goods sold 529 529 501 462 2,021
Income from continuing operations 51 51 41 145 288
Net income 45 52 38 145 280
Per common share:
Primary
Income from continuing operations .99 .99 .78 2.76 5.52
Net income .87 1.01 .72 2.74 5.34
Fully diluted
Income from continuing operations .96 .96 .75 2.76 5.43
Net income .85 .98 .70 2.74 5.27
Pro forma net income(1) .70 .90 .50 .50 2.60
Common dividends .30 .30 .30 .30 1.20
Market price of common stock(2)
High 44 3/8 48 45 1/4 45 1/8 48
Low 34 7/8 42 3/8 36 1/2 37 1/8 34 7/8
=============================================================================================
1995
- ---------------------------------------------------------------------------------------------
Sales $666 $678 $682 $639 $2,665
Cost of goods sold 534 528 548 505 2,115
Income from continuing operations 36 42 30 26 134
Net income 38 44 31 27 140
Per common share:
Primary
Income from continuing operations .70 .84 .59 .50 2.63
Net income .76 .87 .61 .51 2.75
Fully diluted
Income from continuing operations .68 .80 .58 .50 2.56
Net income .73 .83 .60 .51 2.67
Common dividends .30 .30 .30 .30 1.20
Market price of common stock(2)
High 27 1/8 28 7/8 36 3/8 38 5/8 38 5/8
Low 24 1/4 25 1/4 25 1/2 31 3/4 24 1/4
================================================================================================
(1) Pro forma net income per share for 1996 represents income from continuing
operations adjusted to exclude the net effect of the operations ($.47 per
share) of the isocyanates business and Primex and the gain ($2.20 per
share) on the sale of the isocyanates business. Pro forma net income per
share excludes the impact of interest income that would have been earned on
the proceeds from the sale.
(2) New York Stock Exchange composite transactions.
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Olin Corporation:
We have audited the accompanying consolidated balance sheets of Olin Corporation
and subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements, referred to above,
present fairly, in all material respects, the financial position of Olin
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Stamford, Connecticut
January 30, 1997
MANAGEMENT REPORT ON FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the
accompanying consolidated financial statements. These financial statements have
been prepared in conformity with generally accepted accounting principles and,
where necessary, involve amounts based on management's best judgments and
estimates. Management also prepared the other information in this annual report
and is responsible for its accuracy and consistency with the financial
statements.
The company's system of internal controls is designed to provide reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition, and the prevention
and detection of fraudulent financial reporting. This system, which is reviewed
regularly, consists of written policies and procedures, an organizational
structure providing delegation of authority and segregation of responsibility
and is monitored by an internal audit department. The company's independent
auditors also review and test the internal control system along with tests of
accounting procedures and records to the extent that they consider necessary in
order to issue their opinion on the financial statements. Management believes
that the system of internal accounting controls meets the objectives noted
above.
Management also recognizes its responsibility for fostering a strong
ethical climate so that the company's affairs are conducted according to the
highest standards of personal and corporate conduct. This responsibility is
communicated to all employees in a variety of ways, including personal training
sessions. The Ethics Program is based upon a document called "The Standards of
Ethical Business Practices." The standards address, among other things, the
necessity of ensuring open communication within the company; potential conflicts
of interest; compliance with all domestic and foreign laws, including those
relating to financial disclosure; and the confidentiality of proprietary
information. The company maintains a systematic program to assess compliance
with these standards.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with the independent auditors, management and the
company's internal auditors to review the work of each and to evaluate
accounting, auditing, internal controls and financial reporting matters. The
Audit Committee annually recommends to the Board of Directors the appointment of
independent auditors, subject to shareholder approval. The independent auditors
and the company's internal audit department have independent and free access to
the Audit Committee.
/s/ Donald W. Griffin /s/ Anthony W. Ruggiero
Donald W. Griffin Anthony W. Ruggiero
Chairman, Senior Vice President and
President and Chief Financial Officer
Chief Executive Officer
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