SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 1-1070
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Olin Corporation
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(Exact name of registrant as specified in its charter)
Virginia 13-1872319
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Merritt 7, Norwalk, CT 06851
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(Address of principal executive offices) (Zip Code)
(203) 750-3000
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(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 1999, there were outstanding 45,517,235 shares of the
registrant's common stock.
Part I - Financial Information
Item 1. Financial Statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Balance Sheets
(In millions)
Unaudited
March 31, December 31,
1999 1998
--------- ------------
ASSETS
- ------
Cash and cash equivalents $ 67.0 $ 50.2
Short-term investments 40.3 25.5
Accounts receivable, net 198.5 192.0
Inventories 206.9 198.8
Income taxes receivable 3.2 33.2
Other current assets 17.1 18.1
-------- --------
Total current assets 533.0 517.8
Investments and advances - affiliated companies at equity 7.0 11.9
Property, plant and equipment
(less accumulated depreciation
of $1,110.2 and $1,074.7) 465.2 475.0
Other assets 64.4 67.8
Net assets of discontinued operations - 504.5
-------- --------
Total assets $1,069.6 $1,577.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Short-term borrowings and current
installments of long-term debt $ 1.0 $ 1.0
Accounts payable 90.1 118.1
Income taxes payable 10.7 5.1
Accrued liabilities 150.6 168.1
-------- --------
Total current liabilities 252.4 292.3
Long-term debt 229.8 230.2
Other liabilities 242.6 264.3
Commitments and contingencies
Shareholders' equity:
Common stock, par value $1 per share:
Authorized 120.0 shares
Issued 45.7 shares (45.9 in 1998) 45.7 45.9
Additional paid-in capital 240.8 242.8
Accumulated other comprehensive loss (10.2) (24.8)
Retained earnings 68.5 526.3
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Total shareholders' equity 344.8 790.2
-------- --------
Total liabilities and
shareholders' equity $1,069.6 $1,577.0
======== ========
- -----------------------------------
The accompanying Notes to Condensed Financial Statements are an integral part of
the condensed financial statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Income (Unaudited)
(In millions, except per share amounts)
Three Months
Ended March 31,
----------------------
1999 1998
------- -------
Sales $ 304.8 $ 359.1
Cost of goods sold 262.9 287.4
Selling and administration 30.9 33.9
Research and development 2.0 1.6
Earnings(loss) of non-consolidated affiliates (2.5) 2.0
Interest expense 3.8 4.8
Interest income 0.7 1.2
Other income 0.1 0.3
-------- --------
Income from continuing operations before taxes 3.5 34.9
Income taxes 1.4 12.1
-------- --------
Income from continuing operations 2.1 22.8
Income from discontinued operations, net of taxes 4.4 16.3
-------- --------
Net income $ 6.5 $ 39.1
======== ========
Net income per common share:
Basic:
Continuing operations $ 0.05 $ 0.47
Discontinued operations 0.09 0.34
-------- --------
Total net income $ 0.14 $ 0.81
======== ========
Diluted:
Continuing operations $ 0.05 $ 0.46
Discontinued operations 0.09 0.34
-------- --------
Total net income $ 0.14 $ 0.80
======== ========
Dividends per common share $ 0.30 $ 0.30
Average common shares outstanding:
Basic 45.9 48.6
Diluted 45.9 49.0
- -----------------------------------
The accompanying Notes to Condensed Financial Statements are an integral part of
the condensed financial statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Cash Flows (Unaudited)
(In millions)
Three Months
Ended March 31,
-------------------------
1999 1998
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Operating activities
- --------------------
Net income $ 2.1 $ 22.8
Adjustments to reconcile income from continuing operations to
net cash and cash equivalents provided by operating activities
Loss(earnings) of non-consolidated affiliates 2.5 (2.0)
Depreciation and amortization 18.6 19.2
Deferred taxes (4.2) (1.6)
Change in:
Receivables (6.5) (2.7)
Inventories (8.1) (10.6)
Other current assets (0.3) 0.8
Accounts payable and accrued liabilities (45.5) (32.8)
Income taxes payable 22.5 13.5
Noncurrent liabilities (3.1) 0.9
Other operating activities 3.7 (2.7)
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Net cash and cash equivalents provided (used) by operating
activities from continuing operations (18.3) 4.8
Discontinued operations:
Net income 4.4 16.3
Change in net assets (7.3) (67.6)
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Net operating activities (21.2) (46.5)
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Investing activities
- --------------------
Capital expenditures (8.3) (7.9)
Purchases of short-term investments (25.2) (9.4)
Proceeds from sale of short-term investments 10.4 16.5
Investments and advances-affiliated companies at equity 2.4 (4.7)
Other investing activities 1.1 (1.7)
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Net investing activities (19.6) (7.2)
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Financing activities
- --------------------
Long-term debt repayments (0.4) -
Short-term debt repayments - (0.8)
Purchases of Olin common stock (3.2) (38.8)
Borrowings under line of credit assumed by Arch Chemicals, Inc. 75.0 -
Stock options exercised - 2.0
Dividends paid (13.8) (14.7)
Other financing activities - (0.5)
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Net financing activities 57.6 (52.8)
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Net increase(decrease) in cash and cash equivalents 16.8 (106.5)
Cash and cash equivalents, beginning of period 50.2 156.8
------- -------
Cash and cash equivalents, end of period $ 67.0 $ 50.3
======= =======
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The accompanying Notes to Condensed Financial Statements are an integral part of
the condensed financial statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of the Company,
reflect all adjustments (consisting only of normal accruals) which are
necessary to present fairly the results for interim periods. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements, accounting policies and the notes thereto and management's
discussion and analysis of financial condition and results of operations
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
2. Inventory consists of the following:
March 31, December 31,
1999 1998
--------- ------------
Raw materials and supplies $120.6 $113.1
Work in process 87.6 102.4
Finished goods 58.9 46.5
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267.1 262.0
LIFO reserve (60.2) (63.2)
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Inventory, net $206.9 $198.8
====== ======
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. Costs of other inventories have been determined
principally by the average cost and first-in, first-out (FIFO) methods.
Elements of costs in inventories include raw material, direct labor and
manufacturing overhead. Inventories under the LIFO method are based on annual
estimates of quantities and costs as of the year-end; therefore, the
condensed financial statements at March 31, 1999, reflect certain estimates
relating to inventory quantities and costs at December 31, 1999.
3. Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options.
Three Months
Ended March 31,
-----------------
Basic Earnings Per Share 1999 1998
- ------------------------ ---- -----
Basic earnings:
Income from continuing operations $ 2.1 $22.8
Net income $ 6.5 $39.1
Basic shares 45.9 48.6
Basic earnings per share:
Continuing operations $0.05 $ 0.47
Net income $0.14 $ 0.81
Three Months
Ended March 31,
----------------
1999 1998
---- ----
Diluted Earnings Per Share
- --------------------------
Diluted earnings:
Income from continuing operations $ 2.1 $22.8
Net income $ 6.5 $39.1
Diluted shares:
Basic shares 45.9 48.6
Stock options - .4
------ ------
Diluted shares 45.9 49.0
====== ======
Diluted earnings per share:
Continuing operations $ 0.05 $ 0.46
Net Income $ 0.14 $ 0.80
4. 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 $4 million for the
three months ended March 31, 1999 and 1998. Charges to income for
investigatory and remedial efforts were material to operating results in 1998
and may be material to operating results in 1999. The consolidated balance
sheets include reserves for future environmental expenditures to investigate
and remediate known sites amounting to $129 million at March 31, 1999 and
December 31, 1998, of which $99 million was classified as other noncurrent
liabilities.
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.
5. In April 1998, the Board of Directors authorized an additional share
repurchase program of up to 5 million shares of Olin common stock, from time
to time, as conditions warrant. Since January 1997 the Company has
repurchased 7,223,200 shares, of which 2,223,200 were under the April 1998
program.
6. Segment operating income is defined as earnings before interest, other income
and income taxes and includes earnings (losses) of non-consolidated
affiliates. Segment operating results include an allocation of corporate
operating expenses. Intersegment sales are not material.
Three Months
Ended March 31,
---------------
1999 1998
---- ----
Sales:
Chlor Alkali Products $ 66.9 $ 96.1
Metals 182.3 211.3
Winchester 55.6 51.7
------ ------
Total sales $304.8 $359.1
====== ======
Operating income(loss):
Chlor Alkali Products $(12.8) $ 21.7
Metals 18.0 18.2
Winchester 1.3 (1.7)
------ ------
Total operating income $ 6.5 $ 38.2
====== ======
Operating income $ 6.5 $ 38.2
Interest expense 3.8 4.8
Interest income 0.7 1.2
Other income 0.1 0.3
------ ------
Income from continuing operations before taxes $ 3.5 $ 34.9
====== ======
7. As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for the reporting and
display of comprehensive income and its components in the financial
statements. The Company does not provide for U.S. income taxes on foreign
currency translation adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries. The components of
comprehensive income for the three-month periods ended March 31, 1999 and
1998 are as follows:
Three Months
Ended March 31,
-------------------
1999 1998
----- -----
Net income $ 6.5 $39.1
Other comprehensive income (loss):
Cumulative translation adjustment 1.1 (2.7)
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Comprehensive income $ 7.6 $36.4
===== =====
8. On February 8, 1999, the Company completed the Spin-Off of its specialty
chemicals businesses as Arch Chemicals, Inc. ("Arch Chemicals"). Under the
terms of the Spin-Off, the Company distributed to its holders of common stock
of record at the close of business on February 1, 1999, one Arch Chemicals
common share for every two shares of Olin common stock. The results of
operations have been restated to reflect Arch Chemicals as discontinued
operations for all periods presented. The 1999 first quarter net income from
discontinued operations includes one month of operating results while the
comparable quarter in 1998 includes three months of operating results.
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
CONSOLIDATED RESULTS OF OPERATIONS
Three Months
Ended March 31,
----------------
($ in millions, except per share data) 1999 1998
- ------------------------------------------------------------------
Sales $304.8 $359.1
Gross Margin 41.9 71.7
Selling and Administration 30.9 33.9
Interest Expense, net 3.1 3.6
Income from Continuing Operations 2.1 22.8
Net Income Per Common Share: 6.5 39.1
Basic
Income from Continuing Operations $ 0.05 $ 0.47
Net Income $ 0.14 $ 0.81
Diluted
Income from Continuing Operations $ 0.05 $ 0.46
Net Income $ 0.14 $ 0.80
- ------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO 1998
Sales decreased 15% due to lower selling prices and metal values. The decrease
in selling prices was primarily related to lower Electrochemical Unit ("ECU")
prices in the Chlor Alkali Products segment. Also, sales were lower due to the
shut down of the rod, wire and tube business at Indianapolis, IN in the fourth
quarter of 1998 and the sale of the microelectronics packaging operation in
Manteca, CA.
Gross margin percentage decreased from 20% in 1998 to 14% in 1999 primarily due
to lower ECU prices.
Selling and Administration as a percentage of sales was 10% in 1999 up from 9%
in 1998 due to the lower sales base in 1999 as a result of lower ECU prices.
Selling and Administration was $3 million lower than in 1998 due to lower
administrative expenses, primarily pension and management compensation expenses.
Interest expense, net of interest income, decreased from 1998 due to lower
interest expense as a result of the repayment in May of 1998 of $38 million of
7.97% notes offset in part by lower interest income in 1999 due to lower average
cash, cash equivalent and short-term investment balances.
The decrease in operating results from the non-consolidated affiliates was due
primarily to the operating loss from the Sunbelt joint venture, which was
negatively impacted by the lower ECU pricing.
The effective tax rate increased to 40.0% from 34.7% due to higher non-
deductible expenses related to company-owned life insurance programs.
SEGMENT OPERATING RESULTS
Segment operating results are defined as earnings (losses) before interest,
other income and income taxes and include earnings (losses) of non-consolidated
affiliates. Segment operating results include an allocation of corporate
operating expenses.
CHLOR ALKALI PRODUCTS Three Months
Ended March 31,
-----------------
($ in millions) 1999 1998
- -------------------------------------------------
Sales $ 66.9 $96.1
Operating (Loss) Income (12.8) 21.7
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO 1998
Sales and operating results were lower than 1998 primarily due to lower pricing.
Average ECU prices in the first quarter of 1999 were approximately $230,
compared to $370 in the first quarter of 1998. Lingering effects of the Asian
situation and new chlor-alkali industry capacity additions have caused an
oversupply of chlorine and caustic, thereby exerting downward pressure on
pricing. The Company expects these influences to continue for several more
quarters.
METALS Three Months
Ended March 31,
-----------------
($ in millions) 1999 1998
- ------------------------------------------------
Sales $182.3 $211.3
Operating Income 18.0 18.2
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO 1998
Sales decreased 14% due primarily to lower metal values. Lower sales due to the
shut down of the rod, wire and tube business at Indianapolis, IN in the fourth
quarter of 1998 and the sale of the Company's microelectronic packaging
operation at Manteca, CA, also contributed to the sales decline. Lower demand
from the distribution market adversely impacted the sales performance at A.J.
Oster Company and was the primary reason for the slight decline in segment
operating income. The year-over-year comparisons are expected to improve over
the balance of the year primarily due to the benefits of the shut down of the
unprofitable rod, wire and tube business.
WINCHESTER Three Months
Ended March 31,
-----------------
($ in millions) 1999 1998
- -----------------------------------------------
Sales $55.6 $51.7
Operating Income (Loss) 1.3 (1.7)
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO 1998
Sales in 1999 were 8% higher than 1998 due to higher volumes in the commercial
markets, particularly in the retail and mass merchant channels offset in part by
lower selling prices in some product lines. Higher demand for centerfire rifle
and pistol products was driven by new product introductions and competitive
pricing. Operating income improved significantly from
1998 due to higher sales and lower manufacturing and commodity costs. In
Australia, profits were higher due in part to lower operating expenses.
Winchester is the operator of the U.S. Army's Lake City small caliber ammunition
plant in Independence, MO. The current five-year contract expires at the end of
this year. The Company is one of several bidders for a new ten-year, fixed price
contract, which the government expects to award during the third quarter of
1999.
1999 OUTLOOK
Lingering effects of the Asian situation and new Chlor-Alkali industry capacity
additions have significantly impacted the Company's Chlor-Alkali Products
business. The Company expects these influences to continue for several more
quarters, resulting in quarterly earnings per share in the 5 to 10 cent range,
if the Company's ECU prices continue at current levels.
DISCONTINUED OPERATIONS
On February 8, 1999, the Company completed the Spin-Off of its specialty
chemicals businesses as Arch Chemicals, Inc. ("Arch Chemicals") (the "Spin-
Off"). Under the terms of the Spin-Off, the Company distributed to its holders
of common stock of record at the close of business on February 1, 1999, one Arch
Chemicals common share for every two shares of Olin common stock. The 1999 first
quarter net income includes one month of operating results of the specialty
chemicals businesses while the comparable quarter in 1998 includes three months
of operating results.
ENVIRONMENTAL MATTERS
In the three months ended March 31, 1999 and 1998, the Company spent
approximately $4 million for investigatory and remediation activities associated
with former waste sites and past operations. Spending for environmental
investigatory and remedial efforts for the full year 1999 is estimated to be $30
million. Cash outlays for remedial and investigatory activities associated with
former waste sites and past operations were not charged to income but instead
were charged to reserves established for such costs identified and expensed to
income in prior periods. Associated costs of investigatory and remedial
activities are provided for in accordance with generally accepted accounting
principles governing probability and the ability to reasonably estimate future
costs. Charges to income for investigatory and remedial activities were $4
million for the three months ended March 31, 1999 and 1998. Charges to income
for investigatory and remedial efforts were material to operating results in
1998 and may be material to net income in 1999 and future years.
The Company's consolidated balance sheets included liabilities for future
environmental expenditures to investigate and remediate known sites amounting to
$129 million at March 31, 1999 and December 31, 1998, of which $99 million was
classified as other noncurrent liabilities. 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.
Annual environmental-related cash outlays for site investigation and
remediation, capital projects, and normal plant operations are expected to range
between $50 to $60 million over the next several years. While the Company does
not anticipate a material increase in the projected annual level of its
environmental-related costs, there is always the possibility that such increases
may occur in the future in view of the uncertainties associated with
environmental exposures. Environmental exposures are difficult to assess for
numerous reasons, including the identification of new sites, developments at
sites resulting from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, the scarcity of
reliable data pertaining to identified sites, the difficulty in assessing the
involvement and financial capability of other potentially responsible parties
and the Company's ability to obtain contributions from other parties and the
lengthy time periods over which site remediation occurs. It is possible that
some of these matters (the outcomes of which are subject to various
uncertainties) may be resolved unfavorably against the Company.
LIQUIDITY, INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA
CASH FLOW DATA
Three Months
Ended March 31,
-----------------
Provided By (Used For)($ in millions) 1999 1998
- --------------------------------------------------------------------
Net Cash and Cash Equivalents
Provided by (Used for) Operating
Activities from Continuing Operations $(18.3) $ 4.8
Net Operating Activities (21.2) (46.5)
Capital Expenditures (8.3) (7.9)
Net Investing Activities (19.6) (7.2)
Purchases of Olin Common Stock (3.2) (38.8)
Net Financing Activities 57.6 (52.8)
In 1999, income from continuing operations exclusive of non-cash charges,
borrowings under a line of credit assumed by Arch Chemicals and cash and cash
equivalents on hand were used to finance the Company's working capital
requirements, capital and investment projects, dividends and the purchase of the
Company's common stock.
OPERATING ACTIVITIES
In 1999, the decrease in cash flow from operating activities of continuing
operations was primarily attributable to lower operating income and a higher
investment in working capital. In the first quarter of 1999 the Company made
certain cash expenditures which were accrued at December 31, 1998, related to
the Spin-Off of Arch Chemicals, primarily legal and investment banking fees.
CAPITAL EXPENDITURES
Capital spending of $8.3 million in 1999 was $.4 million higher than 1998. For
the total year, capital spending is expected to be in the $80 million range and
should approximate annual depreciation expense.
FINANCING ACTIVITIES
At March 31, 1999, the Company has available a $165 million line of credit under
an unsecured revolving credit agreement with a group of banks. As a result of
the Spin-Off in February of 1999, the Company amended its revolving credit
agreement reducing the aggregate commitments from $250 million to $165 million.
The Company may select various floating rate borrowing options. The Company
believes that the credit facility is adequate to satisfy its liquidity needs for
the foreseeable future. The credit facility includes various customary
restrictive covenants including restrictions related to the ratio of debt to
earnings before interest, taxes, depreciation and amortization and the ratio of
earnings before interest, taxes, depreciation and amortization to interest.
During 1999, the Company used $3.2 million to repurchase 300,000 shares of the
Company's common stock, bringing the cumulative total shares repurchased to
7,223,200 since January 1997.
Prior to the Spin-Off in February, 1999, the Company borrowed $75 million under
a credit facility which liability was assumed by Arch Chemicals. The Company has
used a portion of and intends to use the balance of these funds for general
corporate purposes, which may include share repurchases and future acquisitions.
The percent of total debt to total capitalization increased to 40% at March 31,
1999, from 29% at year-end 1998 and 24% at March 31, 1998. Contributing to the
increase in 1999 was the reduction to equity resulting from the Spin-Off.
The Company paid a first quarter 1999 dividend of $0.30 per share on March 10,
1999 to shareholders of record on January 19, 1999. As announced previously,
following the Spin-Off, the Company's annual dividend is expected to be $0.80
per share. In April 1999, the Company's Board of Directors declared a quarterly
dividend of $.20 per share on its common stock, and the Board of Directors of
Arch Chemicals, Inc. declared a dividend of $.10 per equivalent Olin share ($.20
per Arch Chemicals, Inc. share). Accordingly, those stockholders who retained
their Olin and Arch Chemicals stock, will receive, in the aggregate, the same
total quarterly dividend of $.30 as before the Spin-Off. The Board of Directors
of either company, however, could change the dividend rate on the shares of
their respective companies at any time in the future.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement No. 133
("Statement 133") "Accounting for Derivative Instruments and Hedging
Activities." It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company is currently
evaluating the effect this statement will have on its financial position and
results of operations in the period of adoption.
Effective January 1, 1999, the Company adopted Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and Statement of Position 98-5, "Reporting on the Costs of Start-
up Activities." Adoption of these
statements did not have a material effect on the Company's results of operations
or financial position.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Company
does not expect the conversion to the Euro to have a material impact on its
business, operations, or financial position.
YEAR 2000 COMPUTER SYSTEMS
The Company views the impact of the Year 2000 as a critical business issue. It
manages the process by having each business segment identify its own Year 2000
issues and develop appropriate corrective action steps, while instituting a
series of management processes that coordinate and manage the process across
business segment boundaries and the corporate center. The process includes
corporate oversight and provides for consistent attention to progress made
against planned activities and a forum for issue resolution at the business
segment and corporate levels with periodic assessments made by independent
parties which are reported to the Board. As a result of the Spin-Off of Arch
Chemicals, the Company entered into an Information Technology Services Agreement
with Arch Chemicals stipulating that Arch Chemicals will provide various
information technology related services including maintenance of the centralized
computer center and the wide area network as well as provide services in support
of the Company's Year 2000 initiative.
The Company recognizes that the Year 2000 issue is not limited to computer
programs normally associated with the processing of business information, but
can also be found in certain equipment and processes used in manufacturing and
operation of facilities. It also recognizes that the potential exists for Year
2000 issues within the supply chain. The Company's approach was to subdivide
the program into four distinct segments: 1) Business Systems; 2) Manufacturing;
3) Supply Chain; and 4) Infrastructure.
In the business systems area, the Company has positioned itself very favorably
with respect to software and equipment that is Year 2000 compliant. In 1994,
the Company began implementing a Year 2000 compliant client-server system,
Peoplesoft, to address payroll and human resource needs and it presently uses
such system in all businesses. In 1993, the Company began implementing for all
domestic businesses, except the Metals segment, a client-server system, SAP, for
core business requirements as a vehicle to obtain certain improvements in the
business processes. With the exception of the Metals segment, SAP is currently
utilized in a majority of its domestic businesses. Since SAP was also a
certified Year 2000 compliant solution, migration plans were adjusted to take
advantage of the business benefit while eliminating the cost of remediating old
legacy system code. Deployment has been aggressive with all domestic functions
and locations (except Metals) transferred to SAP. In the few instances where
SAP is not utilized, replacement systems are scheduled for June 1999. Offshore
processing systems will continue using existing systems. All systems have been
examined with Year 2000 upgrades targeted for completion by the second quarter
of 1999.
The Metals segment is addressing the Year 2000 issue by converting existing
programs to be compliant. It has completed code converting its entire software
portfolio, and is currently heavily engaged in the testing phase of its plan.
Completion of all systems is targeted for June 1999.
In the manufacturing area, plant level employees and independent assessments
were used to identify places where embedded systems exist and categorize them by
the potential impact to the business. Six items, which have the potential
for causing process shut downs or unsafe conditions, remain to be remediated or
replaced. The plan, which takes maximum advantage of "planned outages" in order
to minimize the impact on operations, targets completion by June 1999.
The supply chain area has seen much activity in terms of assessing vendor Year
2000 preparedness, identifying alternate sources, as well as insertion of
certain Year 2000 compliance language in all purchase orders issued. The Company
has completed a review of single source and critical suppliers. During 1999,
the Company will continue to re-evaluate its suppliers on a periodic basis.
Personal computers, networks, and PBX's represent the majority of items in the
Company's infrastructure segment. The Company has deployed new Pentium Year 2000
compliant equipment in large numbers to support its SAP deployment program and
for internal standards compliance. In addition, the Company is currently
utilizing software tools to test the entire PC inventory for Year 2000
compliance and this is expected to be completed by the first quarter of 1999.
The Company's wide area network is already Year 2000 compliant as is most of its
PBX and voice mail systems. The non-compliant equipment is planned to be
replaced with compliant versions as leases expire, but no later than June 1999.
The Company believes its Year 2000 initiative is on track to address all
significant Year 2000 issues by the middle of 1999, and is supported by the
findings of an independent assessment completed in December 1998. Plans include
additional assessments throughout 1999.
Plans for a worst case scenario in the unlikely event of a major failure due to
a Year 2000 problem which causes significant disruptions to business operations
have been formulated. In the area of business systems, management believes that
the Company, with most of its operating units already migrated to Year 2000
compliant solutions, has already significantly reduced its potential risk. As
added protection, software migration plans to new releases of SAP and
Peoplesoft, which are planned in 1999, include Year 2000 testing scenarios. The
Company will continue to monitor progress in the system testing of the converted
legacy systems and will redirect existing resources and/or utilize outside
assistance in the event of slippage against plans.
The Company continues to focus attention on the manufacturing area. It has
deployed several independent initiatives to identify embedded systems, develop
comprehensive equipment lists, and obtain vendor certifications of Year 2000
compliance. It has developed plans for further testing with respect to key
manufacturing equipment and systems, during periods of scheduled outages.
The Company will continue to monitor progress against plans in the business
systems, manufacturing, infrastructure, and supply chain areas, and take
corrective action should slippage occur. The use of vendor-supplied Year 2000
compliant solutions, coupled with substantive pre-testing of key systems and a
strong management commitment and oversight are the cornerstone of the Company's
Year 2000 program.
Nonetheless, in the unlikely occurrence of some unforeseen event, emergency
teams skilled in each of the disciplines will be formed during the last half of
1999. They will be deployed to assist local personnel in the event of a Year
2000 issue at the turn of the millennium.
The Company does not expect Year 2000 initiative costs to exceed $5 million
inclusive of the cost for deploying SAP and Peoplesoft and related
infrastructure during 1999.
The dates on which the Company believes the Year 2000 Project will be completed
and the SAP computer systems will be implemented are based on management's best
estimates, which are derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Year 2000 Project.
Specific factors that might cause differences between the estimates and actual
results include, but are not limited to, the availability and cost of personnel
trained in these areas, the ability to locate and correct all relevant computer
codes, timely responses to and corrections by third-parties and suppliers, the
ability to implement interfaces between the new systems and the systems not
being replaced, and similar uncertainties. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third parties and the interconnection of global
businesses, the Company cannot ensure its ability to timely and cost-effectively
resolve the problems associated with the Year 2000 issue that may affect its
operations and business, or expose it to third-party liability.
CAUTIONARY STATEMENT UNDER FEDERAL SECURITIES LAWS: The information contained in
the 1999 Outlook section (and subsections thereof), the Environmental Matters
section, the Liquidity, Investment Activity and Other Financial Data section,
and the Environmental and Commitments and Contingencies notes 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 respective divisions operate. Words such as
"anticipates," "expects," "believes," "should," "plans," "will," "forecasts,"
"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 does not undertake
any 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: general economic and business and market conditions;
lack of moderate growth in the U.S. economy or even a slight recession in 1999;
worsening business conditions as a result of the Asian and Latin American
financial turmoil; competitive pricing pressures; declines in Chlor Alkali's ECU
prices below current levels; Chlor Alkali operating rates below the current
levels; higher-than-expected raw material costs; 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; efficacy of new technologies; changes in
U.S. laws and regulations; failure to achieve targeted cost reduction programs;
capital expenditures, such as cost overruns, in excess of those scheduled;
environmental costs in excess of those projected; and the occurrence of
unexpected manufacturing interruptions/outages.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk in the normal course of its business
operations due to its operations in different foreign currencies, its purchases
of certain commodities and its ongoing investing and financing activities. The
risk of loss can be assessed from the perspective of adverse changes in fair
values, cash flows and future earnings. The Company has established policies
and procedures governing its management of market risks and the uses of
financial instruments to manage exposure to such risks.
The primary purpose of the Company's foreign currency hedging activities is to
manage currency risks resulting from purchase and sale commitments in foreign
currencies (principally Australian dollar and Canadian dollar) and relating to
particular anticipated purchases and sales expected to be denominated in those
same foreign currencies. Foreign currency hedging activity is not material to
the Company's consolidated financial position, results of operations or cash
flow.
Certain materials, namely copper, lead and zinc, used primarily in the Company's
Metals and Winchester segments' products are subject to price volatility.
Depending on market conditions, the Company may enter into futures contracts and
put and call option contracts in order to reduce the impact of metal price
fluctuations. As of March 31, 1999, the Company maintained open positions on
futures contracts totalling $45 million. Assuming a hypothetical 10% increase
in commodity prices which are currently hedged, the Company would experience a
$4.5 million increase in its cost of inventory purchased, which would be offset
by a corresponding increase in the value of related hedging instruments.
The Company is exposed to changes in interest rates primarily as a result of its
investing and financing activities. Investing activity is not material to the
Company's consolidated financial position, results of operations or cash flow.
The financing activities of the Company are comprised primarily of long-term
fixed-rate debt utilized to fund business operations and to maintain liquidity.
As of March 31, 1999, the Company had long-term borrowings of $231 million
outstanding at varying fixed rates. The Company has interest rate swaps to
hedge underlying debt obligations. Interest rate swap activity is not material
to the Company's consolidated financial position, results of operations or cash
flow.
If the actual change in interest rates or commodities pricing is substantially
different than expected, the net impact of interest rate risk or commodity risk
on the Company's cash flow may be materially different than that disclosed
above.
The Company does not enter into any derivative financial instruments for trading
purposes.
Part II - Other Information
Item 1. Legal Proceedings.
-----------------
Not Applicable.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
Not Applicable.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not Applicable.
Item 5. Defaults Upon Senior Securities.
-------------------------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
3(b) Bylaws of Olin as amended effective April 29, 1999.
10(d) Olin Senior Executive Pension Plan, as Restated as of
February 8, 1999.
10(e) Olin Supplemental Contributing Employee Ownership Plan,
effective January 1, 1990 as Amended and Restated as of
February 8, 1999.
10(s) Olin Supplementary and Deferral Benefit Pension Plan, as
Restated as of February 8, 1999.
12. Computation of Ratio of Earnings to Fixed Charges
(Unaudited).
27. Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
Form 8-K filed February 23, 1999 with respect to a disposition
of assets (the spin-off of its specialty chemicals business to
existing shareholders).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OLIN CORPORATION
(Registrant)
By: /s/ A. W. Ruggiero
------------------------------------
Executive Vice President and
Chief Financial Officer
(Authorized Officer)
Date: May 17, 1999
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3(b) Bylaws of Olin as amended effective April 29, 1999.
10(d) Olin Senior Executive Pension Plan, as Restated as of February 8, 1999.
10(e) Olin Supplemental Contributing Employee Ownership Plan,
effective January 1, 1990 as Amended and Restated as of
February 8, 1999.
10(s) Olin Supplementary and Deferral Benefit Pension Plan, as
Restated as of February 8, 1999.
12. Computation of Ratio of Earnings to Fixed Charges (Unaudited).
27. Financial Data Schedule.