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 June 30, 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, address, and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of July 31, 1999, there were outstanding 45,248,494 shares of the
registrant's common stock.
Part I - Financial Information
Item 1. Financial Statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Balance Sheets
(In millions, except per share amounts)
Unaudited
June 30, December 31,
1999 1998
---- ----
ASSETS
- ------
Cash and cash equivalents $ 53.6 $ 50.2
Short-term investments 39.1 25.5
Accounts receivable, net 200.3 192.0
Inventories 208.8 198.8
Income taxes receivable 3.2 33.2
Other current assets 18.1 18.1
-------- --------
Total current assets 523.1 517.8
Investments and advances - affiliated companies at equity 6.2 11.9
Property, plant and equipment
(less accumulated depreciation
of $1,123.1 and $1,074.7) 462.7 475.0
Other assets 63.4 67.8
Net assets of discontinued operations - 504.5
-------- --------
Total assets $1,055.4 $1,577.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Short-term borrowings and current
installments of long-term debt $ 1.0 $ 1.0
Accounts payable 100.7 118.1
Income taxes payable 5.8 5.1
Accrued liabilities 157.1 168.1
-------- --------
Total current liabilities 264.6 292.3
Long-term debt 229.8 230.2
Other liabilities 227.7 264.3
Commitments and contingencies
Shareholders' equity:
Common stock, par value $1 per share:
Authorized 120.0 shares
Issued 45.3 shares (45.9 in 1998) 45.3 45.9
Additional paid-in capital 236.0 242.8
Accumulated other comprehensive loss (9.7) (24.8)
Retained earnings 61.7 526.3
-------- --------
Total shareholders' equity 333.3 790.2
-------- --------
Total liabilities and
shareholders' equity $1,055.4 $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 data)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Sales $314.8 $348.2 $619.6 $707.3
Cost of goods sold 271.3 283.9 534.2 572.1
Selling and administration 31.6 31.5 62.5 64.6
Research and development 2.1 3.1 4.1 4.7
Earnings(loss) of non-consolidated affiliates (3.4) 1.3 (5.9) 3.3
Interest expense 4.1 4.7 7.9 9.5
Interest income 0.9 0.2 1.6 1.4
Other income 0.6 0.6 0.7 0.9
------- ------- ------- -------
Income from continuing operations before taxes 3.8 27.1 7.3 62.0
Income taxes 1.5 9.6 2.9 21.7
------- ------- ------- -------
Income from continuing operations 2.3 17.5 4.4 40.3
Income from discontinued operations, net of taxes - 21.1 4.4 37.4
------- ------- ------- -------
Net income $ 2.3 $ 38.6 $ 8.8 $ 77.7
======= ======= ======= =======
Net income per common share:
Basic:
Continuing operations $ 0.05 $ 0.37 $ 0.10 $ 0.84
Discontinued operations - 0.44 0.09 0.77
------- ------- ------- -------
Total net income $ 0.05 $ 0.81 $ 0.19 $ 1.61
======= ======= ======= =======
Diluted:
Continuing operations $ 0.05 $ 0.37 $ 0.10 $ 0.83
Discontinued operations - 0.43 0.09 0.77
------- ------- ------- -------
Total net income $ 0.05 $ 0.80 $ 0.19 $ 1.60
======= ======= ======= =======
Dividends per common share $ 0.20 $ 0.30 $ 0.50 $ 0.60
Average common shares outstanding:
Basic 45.5 47.9 45.7 48.3
Diluted 45.5 48.3 45.7 48.7
___________________________________
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)
Six Months
Ended June 30,
--------------
1999 1998
---- ----
Operating activities
- --------------------
Income from continuing operations $ 4.4 $ 40.3
Adjustments to reconcile income from continuing operations to
net cash and cash equivalents provided by operating activities
Loss(earnings) of non-consolidated affiliates 5.9 (3.3)
Depreciation and amortization 38.1 38.9
Deferred taxes (4.2) 2.8
Change in:
Receivables (8.3) (3.5)
Inventories (10.0) (21.1)
Other current assets (1.2) 1.6
Accounts payable and accrued liabilities (39.1) (43.1)
Income taxes payable 17.6 2.9
Noncurrent liabilities (7.3) (8.2)
Other operating activities 4.0 (12.3)
-------- --------
Net cash and cash equivalents used by operating
activities from continuing operations (0.1) (5.0)
Discontinued operations:
Net income 4.4 37.4
Change in net assets (7.3) (44.2)
-------- --------
Net operating activities (3.0) (11.8)
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Investing activities
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Capital expenditures (24.5) (22.2)
Purchases of short-term investments (27.9) (9.4)
Proceeds from sale of short-term investments 14.3 17.5
Investments and advances-affiliated companies at equity (0.2) (1.5)
Other investing activities 1.6 (2.5)
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Net investing activities (36.7) (18.1)
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Financing activities
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Long-term debt repayments (0.4) (37.5)
Short-term debt repayments - (0.9)
Purchases of Olin common stock (8.6) (59.3)
Borrowings under line of credit assumed by Arch Chemicals, Inc. 75.0 -
Stock options exercised - 2.5
Dividends paid (22.9) (29.0)
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Net financing activities 43.1 (124.2)
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Net increase(decrease) in cash and cash equivalents 3.4 (154.1)
Cash and cash equivalents, beginning of period 50.2 156.8
-------- --------
Cash and cash equivalents, end of period $ 53.6 $ 2.7
======== ========
___________________________________
The accompanying Notes to Condensed Financial Statements are an
integral part of the condensed financial statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)
1. 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:
June 30, December 31,
1999 1998
---- ----
Raw materials and supplies $ 122.1 $ 113.1
Work in process 81.8 102.4
Finished goods 67.7 46.5
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271.6 262.0
LIFO reserve (62.8) (63.2)
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Inventory, net $ 208.8 $ 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 June 30, 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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
Basic Earnings Per Share 1999 1998 1999 1998
- ------------------------ ---- ---- ---- ----
Basic earnings:
Income from continuing operations $ 2.3 $ 17.5 $ 4.4 $ 40.3
Net income $ 2.3 $ 38.6 $ 8.8 $ 77.7
Basic shares 45.5 47.9 45.7 48.3
Basic earnings per share:
Continuing operations $ 0.05 $ 0.37 $ 0.10 $ 0.84
Net income $ 0.05 $ 0.81 $ 0.19 $ 1.61
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
Diluted Earnings Per Share 1999 1998 1999 1998
- -------------------------- ---- ---- ---- ----
Diluted earnings:
Income from continuing operations $ 2.3 $17.5 $ 4.4 $40.3
Net income $ 2.3 $38.6 $ 8.8 $77.7
Diluted shares:
Basic shares 45.5 47.9 45.7 48.3
Stock options --- 0.4 --- 0.4
Diluted shares ----- ----- ----- -----
45.5 48.3 45.7 48.7
===== ===== ===== =====
Diluted earnings per share:
Continuing operations $ 0.05 $ 0.37 $ 0.10 $ 0.83
Net income $ 0.05 $ 0.80 $ 0.19 $ 1.60
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 and $8
million for the three-month and six-month periods ended June 30, 1999 and
1998, respectively. 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 $130 million at June 30, 1999 and $129 million at
December 31, 1998, of which $105 million and $99 million were classified as
other noncurrent liabilities, respectively.
Environmental exposures are difficult to assess for numerous reasons,
including the identification of new sites, developments at sites resulting
from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, the scarcity of
reliable data pertaining to identified sites, the difficulty in assessing
the involvement and financial capability of other potentially responsible
parties and 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 7,647,300 shares, of which 2,647,300 were under the April 1998
program. During the first half of 1999, the Company repurchased 724,100
shares for $8.6 million.
6. Segment operating income is defined as earnings before interest income,
interest expense, 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 Six Months
Ended June 30, Ended June 30,
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Sales 1999 1998 1999 1998
---- ---- ---- ----
Chlor Alkali Products $ 62.6 $ 94.6 $129.5 $190.7
Metals 190.9 196.4 373.2 407.7
Winchester 61.3 57.2 116.9 108.9
------ ------ ------ ------
Total Sales $314.8 $348.2 $619.6 $707.3
====== ====== ====== ======
Operating income (loss):
Chlor Alkali Products $(19.7) $ 14.2 $(32.5) $ 35.9
Metals 21.7 14.1 39.7 32.3
Winchester 4.4 2.7 5.7 1.0
------ ------ ------ ------
Total operating income $ 6.4 $ 31.0 $ 12.9 $ 69.2
====== ====== ====== ======
Operating income $ 6.4 $ 31.0 $ 12.9 $ 69.2
Interest expense 4.1 4.7 7.9 9.5
Interest income 0.9 0.2 1.6 1.4
Other income 0.6 0.6 0.7 0.9
------ ------ ------ ------
Income from continuing operations
before taxes $ 3.8 $ 27.1 $ 7.3 $ 62.0
====== ====== ====== ======
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 and six-month periods ended June
30, 1999 and 1998 are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 2.3 $ 38.6 $ 8.8 $ 77.7
Other comprehensive income (loss):
Cumulative translation adjustment 0.5 (0.6) 1.6 (3.3)
----- ------ ----- ------
Comprehensive income $ 2.8 $ 38.0 $10.4 $ 74.4
===== ====== ===== ======
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. For the first half of
1999, net income from discontinued operations includes one month of
operating results while the comparable six-month period in 1998 includes
six months of operating results.
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
-------------- -----------------
($ in millions, except per share data) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------
Sales $314.8 $348.2 $619.6 $707.3
Gross Margin 43.5 64.3 85.4 135.2
Selling and Administration 31.6 31.5 62.5 64.6
Interest Expense, net 3.2 4.5 6.3 8.1
Income from Continuing Operations 2.3 17.5 4.4 40.3
Net Income 2.3 38.6 8.8 77.7
Net Income Per Common Share:
Diluted
Continuing Operations $ 0.05 $ 0.37 $ 0.10 $ 0.83
Net Income $ 0.05 $ 0.80 $ 0.19 $ 1.60
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Sales decreased 10% due to lower selling prices and metal values, which were
partially offset by increased volumes. 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 shutdown of the rod,
wire and tube business at Indianapolis, IN, in the fourth quarter of 1998.
Sales volumes were higher across all segments.
Gross margin percentage decreased from 18% 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 the factors noted
above.
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.
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 and higher interest income in 1999 due to higher average cash, cash
equivalent and short-term investment balances.
The effective tax rate increased to 40.0% from 35.1% due to higher non-
deductible expenses related to company-owned life insurance programs.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Sales decreased 12% due to lower ECU prices and metal values, the shutdown of
the rod, wire and tube business and the sale of the microelectronics packaging
operation in Manteca, CA, offset in part by higher strip and commercial
ammunition volumes.
Gross margin percentage decreased from 19% 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 due to the factors noted above.
Selling and Administration was $2.1 million lower than in 1998 due to lower
administrative expenses, primarily pension and management incentive compensation
expenses.
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.
Interest expense, net of interest income, decreased from 1998 due to lower
interest expense as a result of the repayment of the $38 million of 7.97% notes
in May 1998 and slightly higher interest income in 1999 due to higher average
cash, cash equivalent and short-term investment balances.
The effective tax rate increased to 40.0% from 34.7% due to higher non-
deductible expenses related to company-owned life insurance programs.
SEGMENT OPERATING RESULTS
Segment operating results are defined as earnings (losses) before interest
income, interest expense, other income and income taxes and include earnings
(losses) of non-consolidated affiliates. Segment operating results include an
allocation of corporate operating expenses.
CHLOR ALKALI PRODUCTS Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
($ in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------
Sales $ 62.6 $94.6 $129.5 $190.7
Operating (Loss) Income (19.7) 14.2 (32.5) 35.9
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Sales and operating results were lower than 1998 primarily due to lower ECU
pricing, offset in part by higher volumes and cost reduction initiatives. The
economic slowdown in Asia and Latin America and new chlor-alkali industry
capacity additions have caused an oversupply of chlorine and caustic, thereby
exerting downward pressure on pricing. Average ECU prices in the second quarter
of 1999 were approximately $210, compared to $360 in the second quarter of 1998.
In addition to the lower pricing, the equity losses in 1999 (compared to profits
in 1998) from the
Sunbelt joint venture due to the decline in ECU prices, contributed to the
decline in operating results.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Sales and operating results were lower than 1998 primarily due to lower ECU
pricing, offset in part by higher volumes and cost reduction initiatives.
Average ECU prices for the first half of 1999 were approximately $220, compared
to $360 in the first half of 1998. The factors mentioned above, which impacted
the 1999 second quarter's operating results, were also responsible for adversely
impacting the 1999 year-to-date operating results. The Company believes that
ECU prices over the balance of the year will improve slightly over second
quarter levels; however, this will be offset by the normal increase in
electricity costs in the summer.
METALS Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
($ in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------
Sales $190.9 $196.4 $373.2 $407.7
Operating Income 21.7 14.1 39.7 32.3
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Sales decreased 3% due to lower metal values and the shutdown of the rod, wire
and tube business at Indianapolis, IN in the fourth quarter of 1998, offset in
part by increased volumes from brass strip operations and the A.J. Oster
Company. Also, sales to the coinage and ammunition markets were ahead of last
year. Strong demand from the automotive, housing and ammunition markets
resulted in higher brass strip volumes, while increased demand from the
distribution market improved A.J. Oster's performance. Operating income
improved from 1998 due to higher volumes, cost reductions and the successful
shutdown of the unprofitable rod, wire and tube business.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Sales decreased 8% due primarily to lower metal values and the shutdown of the
rod, wire and tube business. The lower demand in the distribution markets that
adversely impacted A.J. Oster's sales in the first quarter had rebounded in the
second quarter with A.J. Oster posting record shipments in the month of June.
This resulted in slightly higher overall volumes in 1999. Operating income
improved due to the shutdown of the unprofitable rod, wire and tube business,
favorable sales mix, and lower administrative and operating expenses.
WINCHESTER Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
($ in millions) 1999 1998 1999 1998
- --------------------------------------------------------------
Sales $61.3 $57.2 $116.9 $108.9
Operating Income 4.4 2.7 5.7 1.0
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Sales in 1999 were 7% higher than 1998 due to higher volumes of commercial
ammunition, which more than offset lower selling prices in some product lines
and a decline in military sales. Operating income improved significantly from
1998 due to higher sales volumes and lower commodity costs.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Sales in 1999 were 7% higher than 1998 due to higher commercial ammunition
volumes partially offset by lower military sales. Operating income improved
significantly from 1998 due to higher sales volumes, manufacturing cost
reductions and lower commodity costs.
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 and represents approximately $5 million in annual pretax profits. The
Company was one of several bidders for a new ten-year, fixed price contract to
commence at the end of the existing contract with Olin. On July 30, 1999, the
Department of the Army awarded this contract to a competitor. Olin has filed a
protest to this award which should be resolved during the fourth quarter of
1999.
1999 OUTLOOK
Lingering effects of the economic difficulties in Asia and Latin America 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 cent range, assuming the Company's ECU prices improve slightly over
second-quarter 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. For the first
half of 1999, net income includes one month of operating results of the
specialty chemicals business while the comparable six-month period in 1998
includes six months of operating results.
ENVIRONMENTAL MATTERS
In the six months ended June 30, 1999 and 1998, the Company spent approximately
$7 million and $9 million, respectively, for investigatory and remediation
activities associated with former waste sites and past operations. Spending for
environmental investigatory and remedial efforts for the full year 1999 is
estimated to be $25 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 $8 million for the six months ended June 30, 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
$130 million at June 30, 1999 and $129 million at December 31, 1998, of which
$105 million and $99 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.
Annual environmental-related cash outlays for site investigation and
remediation, capital projects, and normal plant operations are expected to range
between $50 to $60 million over the next several years. While the Company does
not anticipate a material increase in the projected annual level of its
environmental-related costs, there is always the possibility that such increases
may occur in the future in view of the uncertainties associated with
environmental exposures. Environmental exposures are difficult to assess for
numerous reasons, including the identification of new sites, developments at
sites resulting from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, the scarcity of
reliable data pertaining to identified sites, the difficulty in assessing the
involvement and financial capability of other potentially responsible parties
and the Company's ability to obtain contributions from other parties and the
lengthy time periods over which site remediation occurs. It is possible that
some of these matters (the outcomes of which are subject to various
uncertainties) may be resolved unfavorably against the Company.
LIQUIDITY, INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA
CASH FLOW DATA
Six Months
Ended June 30,
--------------
Provided By (Used For) ($ in millions) 1999 1998
- ----------------------------------------------------------
Net Cash and Cash Equivalents
Used for Operating Activities
from Continuing Operations $ (0.1) $ (5.0)
Net Operating Activities (3.0) (11.8)
Capital Expenditures (24.5) (22.2)
Net Investing Activities (36.7) (18.1)
Purchases of Olin Common Stock (8.6) (59.3)
Net Financing Activities 43.1 (124.2)
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 used by operating activities of continuing
operations was primarily attributable to a lower investment in working capital
(including an income tax refund), offset in part by lower operating income.
Metals' inventory levels were unusually low at June 30, 1999 due to lower metal
prices and higher levels of customer-owned inventory. This lower spending level
for working capital in the first half of 1999 included certain cash expenditures
which were accrued at December 31, 1998 and related to the Spin-Off of Arch
Chemicals, primarily legal and investment banking fees.
CAPITAL EXPENDITURES
Capital spending of $24.5 million in 1999 was $2.3 million higher than 1998.
For the total year, capital spending is expected to be in the $75 million range
and should approximate annual depreciation expense.
FINANCING ACTIVITIES
At June 30, 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 $8.6 million to repurchase 724,100 shares of the
Company's common stock, bringing the cumulative total shares repurchased to
7,647,300 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 41% at June 30,
1999, from 29% at year-end 1998 and 21% at June 30, 1998, primarily due to the
reduction to equity resulting from the Spin-Off.
In 1999, the Company paid first and second quarter dividends of $0.30 and $0.20
per share, respectively. As announced previously, following the Spin-Off, the
Company's quarterly dividend is expected to be $0.20 per share. In July 1999,
the Company's Board of Directors
declared a quarterly dividend of $.20 per share on its common stock, which is
payable on September 10, 1999, to shareholders of record on August 10, 1999.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement No.
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. The
FASB has postponed the implementation date of this statement, which will now be
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Effective January 1, 1999, the Company adopted Statement of Position 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 most domestic functions and locations
(except Metals) transferred to SAP. In the few instances where SAP was not
utilized, replacement systems were implemented in the first half of 1999.
Offshore processing systems will continue using existing systems. All systems
have been examined; and those requiring Year 2000 upgrades were substantially
completed by the end of the second quarter of 1999.
The Metals segment is addressing the Year 2000 issue by converting existing
programs to be compliant. The conversion and testing was substantially
completed in 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. All major items, identified as having a
Year 2000 compliance issue, have been remediated, tested and placed in
operations.
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 PBXs 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 utilized
software tools to test the entire PC inventory for Year 2000 compliance. This
test work was completed during the second quarter of 1999. The Company's wide
area network is Year 2000 compliant as are all of its PBX and voice mail
systems.
The Company believes its Year 2000 initiative is on track and has addressed all
significant Year 2000 issues. Additional assessments of all significant issues
will continue 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.
The Company will continue to monitor progress against plans in the business
systems, manufacturing, infrastructure, and supply chain areas, and take
corrective action as required.
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. If a broad
interruption of rail or utility services were to occur, it would likely have a
material adverse effect on the Company's operations, as it would interfere with
the Company's ability to produce products, ship materials and finished goods
and fulfill customer orders.
CAUTIONARY STATEMENT UNDER FEDERAL SECURITIES LAWS: The information contained in
the 1999 Outlook section, the Environmental Matters section, the Liquidity,
Investment Activity and Other Financial Data section (and subsections thereof),
and Notes to Condensed 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 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 June 30, 1999, the Company maintained open positions on
futures contracts totalling $64 million. Assuming a hypothetical 10% increase
in commodity prices which are currently hedged, the Company would experience a
$6.4 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 June 30, 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.
---------------------------------------------------
The Company held its Annual Meeting of Shareholders on April 29,
1999. Of the 45,963,259 shares of Common Stock entitled to vote at such meeting,
at least 43,094,710 shares were present for purposes of a quorum. At the
meeting, shareholders elected to the Board of Directors A. W. Ruggiero as a
Class I director with a term expiring in 2001 and D. W. Griffin, G. J.
Ratcliffe, Jr. and R. M. Rompala as Class II directors with terms expiring in
2002. Votes cast for and votes withheld in the election of Directors were as
follows:
Votes For Votes Withheld
---------- --------------
A. W. Ruggiero 41,284,083 1,810,627
D. W. Griffin 42,653,935 440,775
G. J. Ratcliffe, Jr. 41,606,497 1,488,213
R. M. Rompala 41,599,986 1,494,724
There were no abstentions or broker nonvotes.
The shareholders also ratified the appointment of KPMG LLP as
independent auditors for the Corporation for 1999. Voting for the resolution
ratifying the appointment were 42,240,204 shares. Voting against were 612,367
shares. Abstaining were 242,140 shares. There were no broker nonvotes.
Item 5. Other Information.
-----------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
10(n) 1997 Stock Plan for Non-Employee Directors as Amended
Effective July 28, 1999.
12. Computation of Ratio of Earnings to Fixed Charges
(Unaudited).
27. Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended June
30, 1999.
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: August 13, 1999
EXHIBIT INDEX
Exhibit
No. Description
- --------- -----------
10(n) 1997 Stock Plan for Non-Employee Directors as Amended
Effective July 28, 1999.
12. Computation of Ratio of Earnings to Fixed Charges (Unaudited).
27. Financial Data Schedule.