OLN-2013.6.30-10Q

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, 2013
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             
Commission file number 1-1070

Olin Corporation
(Exact name of registrant as specified in its charter)

Virginia
13-1872319
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

190 Carondelet Plaza, Suite 1530, Clayton, MO
63105-3443
(Address of principal executive offices)
(Zip Code)

(314) 480-1400
(Registrant’s telephone number, including area code)

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x Accelerated filer  ¨ Non-accelerated filer  ¨ (Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x

As of June 30, 2013, 80,014,352 shares of the registrant’s common stock were outstanding.

1



Part I — Financial Information

Item 1.  Financial Statements.

OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Balance Sheets
(In millions, except per share data)
(Unaudited)

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
141.6

 
$
165.2

 
$
198.6

Receivables, net
370.0

 
299.0

 
279.4

Income tax receivable
10.6

 
8.2

 
6.3

Inventories
204.8

 
195.1

 
197.6

Current deferred income taxes
53.6

 
61.3

 
56.0

Other current assets
13.3

 
20.3

 
11.4

Total current assets
793.9

 
749.1

 
749.3

Property, plant and equipment (less accumulated depreciation of $1,220.2, $1,164.0 and $1,192.1)
1,013.5

 
1,034.3

 
961.4

Prepaid pension costs
2.1

 
2.1

 
40.5

Restricted cash
6.6

 
11.9

 
25.4

Deferred income taxes
8.8

 
9.1

 

Other assets
214.5

 
224.1

 
81.9

Goodwill
747.1

 
747.1

 
627.4

Total assets
$
2,786.5

 
$
2,777.7

 
$
2,485.9

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current installments of long-term debt
$
12.2

 
$
23.6

 
$
23.6

Accounts payable
189.7

 
174.3

 
130.0

Income taxes payable
3.5

 
7.6

 

Accrued liabilities
231.6

 
228.5

 
234.8

Total current liabilities
437.0

 
434.0

 
388.4

Long-term debt
689.1

 
690.1

 
503.9

Accrued pension liability
137.0

 
164.3

 
57.6

Deferred income taxes
118.7

 
110.4

 
128.7

Other liabilities
359.7

 
380.5

 
359.6

Total liabilities
1,741.5

 
1,779.3

 
1,438.2

Commitments and contingencies

 

 

Shareholders’ equity:
 
 
 
 
 
Common stock, par value $1 per share:  authorized, 120.0 shares;
   issued and outstanding 80.0, 80.2 and 80.0 shares
80.0

 
80.2

 
80.0

Additional paid-in capital
852.0

 
856.1

 
851.4

Accumulated other comprehensive loss
(372.5
)
 
(371.3
)
 
(285.9
)
Retained earnings
485.5

 
433.4

 
402.2

Total shareholders’ equity
1,045.0

 
998.4

 
1,047.7

Total liabilities and shareholders’ equity
$
2,786.5

 
$
2,777.7

 
$
2,485.9


The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.

2



OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Income
(In millions, except per share data)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Sales
$
652.2

 
$
508.7

 
$
1,282.2

 
$
1,015.9

Operating expenses:

 
 
 
 
 
 
Cost of goods sold
531.1

 
391.4

 
1,035.5

 
784.3

Selling and administration
48.7

 
45.1

 
97.8

 
88.8

Restructuring charges
0.2

 
1.8

 
2.5

 
3.7

Other operating income (expense)
1.5

 
(0.1
)
 
1.7

 
0.4

Operating income
73.7

 
70.3

 
148.1

 
139.5

Earnings of non-consolidated affiliates
0.8

 
0.6

 
1.4

 
0.8

Interest expense
9.7

 
5.8

 
18.8

 
12.3

Interest income
0.1

 
0.3

 
0.2

 
0.5

Other expense
2.2

 
2.1

 
4.4

 
4.7

Income before taxes
62.7

 
63.3

 
126.5

 
123.8

Income tax provision
19.0

 
15.7

 
42.3

 
37.5

Net income
$
43.7

 
$
47.6

 
$
84.2

 
$
86.3

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.59

 
$
1.05

 
$
1.08

Diluted
$
0.54

 
$
0.59

 
$
1.04

 
$
1.07

Dividends per common share
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40

Average common shares outstanding:

 
 
 
 
 
 
Basic
80.2

 
80.1

 
80.2

 
80.1

Diluted
81.2

 
80.7

 
81.2

 
80.8


The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.

3



OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Comprehensive Income
(In millions)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
43.7

 
$
47.6

 
$
84.2

 
$
86.3

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2.3
)
 
(0.8
)
 
(2.2
)
 
(0.5
)
Unrealized (losses) gains on derivative contracts
(4.3
)
 
(3.0
)
 
(9.4
)
 
1.3

Amortization of prior service costs and actuarial losses
5.2

 
4.3

 
10.4

 
7.5

Total other comprehensive (loss) income, net of tax
(1.4
)
 
0.5

 
(1.2
)
 
8.3

Comprehensive income
$
42.3

 
$
48.1

 
$
83.0

 
$
94.6


The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.

4



OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Shareholders’ Equity
(In millions, except per share data)
(Unaudited)

 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Shareholders’
Equity
 
Shares
Issued
 
Par
Value
Balance at January 1, 2012
80.1

 
$
80.1

 
$
852.0

 
$
(294.2
)
 
$
347.9

 
$
985.8

Net income

 

 

 

 
86.3

 
86.3

Other comprehensive income

 

 

 
8.3

 

 
8.3

Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.40 per share)

 

 

 

 
(32.0
)
 
(32.0
)
Common stock repurchased and retired
(0.2
)
 
(0.2
)
 
(2.9
)
 

 

 
(3.1
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised

 

 
0.5

 

 

 
0.5

Other transactions
0.1

 
0.1

 
0.9

 

 

 
1.0

Stock-based compensation

 

 
0.9

 

 

 
0.9

Balance at June 30, 2012
80.0

 
$
80.0

 
$
851.4

 
$
(285.9
)
 
$
402.2

 
$
1,047.7

Balance at January 1, 2013
80.2

 
$
80.2

 
$
856.1

 
$
(371.3
)
 
$
433.4

 
$
998.4

Net income

 

 

 

 
84.2

 
84.2

Other comprehensive loss

 

 

 
(1.2
)
 

 
(1.2
)
Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.40 per share)

 

 

 

 
(32.1
)
 
(32.1
)
Common stock repurchased and retired
(0.6
)
 
(0.6
)
 
(14.1
)
 

 

 
(14.7
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
0.3

 
0.3

 
6.5

 

 

 
6.8

Other transactions
0.1

 
0.1

 
1.3

 

 

 
1.4

Stock-based compensation

 

 
2.2

 

 

 
2.2

Balance at June 30, 2013
80.0

 
$
80.0

 
$
852.0

 
$
(372.5
)
 
$
485.5

 
$
1,045.0


The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.

5



OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Cash Flows
(In millions)
(Unaudited)

 
Six Months Ended
June 30,
 
2013
 
2012
Operating Activities
 
 
 
Net income
$
84.2

 
$
86.3

Adjustments to reconcile net income to net cash and cash equivalents provided by (used for) operating activities:
 
 
 
Earnings of non-consolidated affiliates
(1.4
)
 
(0.8
)
(Gains) losses on disposition of property, plant and equipment
(1.5
)
 
0.1

Stock-based compensation
4.1

 
2.5

Depreciation and amortization
67.1

 
52.1

Deferred income taxes
15.7

 
18.6

Qualified pension plan contributions
(0.5
)
 
(0.4
)
Qualified pension plan income
(12.1
)
 
(12.5
)
Change in:
 
 
 
Receivables
(71.0
)
 
(42.3
)
Income taxes receivable/payable
(6.5
)
 
(5.6
)
Inventories
(9.7
)
 
(21.0
)
Other current assets
(0.6
)
 
(1.2
)
Accounts payable and accrued liabilities
22.3

 
(7.2
)
Other assets
2.2

 
4.3

Other noncurrent liabilities
(0.7
)
 
(4.3
)
Other operating activities
0.2

 
(0.2
)
Net operating activities
91.8

 
68.4

Investing Activities
 
 
 
Capital expenditures
(54.6
)
 
(145.8
)
Proceeds from sale/leaseback of equipment

 
3.5

Proceeds from disposition of property, plant and equipment
4.0

 
0.9

Distributions from affiliated companies, net
0.1

 

Restricted cash activity
5.3

 
26.3

Other investing activities
(2.2
)
 
(0.5
)
Net investing activities
(47.4
)
 
(115.6
)
Financing Activities
 
 
 
Long-term debt repayments
(11.4
)
 
(7.7
)
Earn out payment – SunBelt
(17.1
)
 
(15.3
)
Common stock repurchased and retired
(14.7
)
 
(3.1
)
Stock options exercised
6.2

 
0.5

Excess tax benefits from stock-based compensation
1.1

 
0.4

Dividends paid
(32.1
)
 
(32.0
)
Deferred debt issuance costs

 
(1.8
)
Net financing activities
(68.0
)
 
(59.0
)
Net decrease in cash and cash equivalents
(23.6
)
 
(106.2
)
Cash and cash equivalents, beginning of period
165.2

 
304.8

Cash and cash equivalents, end of period
$
141.6

 
$
198.6

Cash paid for interest and income taxes:
 
 
 
Interest
$
16.3

 
$
11.0

Income taxes, net of refunds
$
30.1

 
$
20.7

Non-cash investing activities:
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
$
13.3

 
$
14.2


The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.

6



OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)

DESCRIPTION OF BUSINESS

Olin Corporation is a Virginia corporation, incorporated in 1892.  We are a manufacturer concentrated in three business segments:  Chlor Alkali Products, Chemical Distribution and Winchester.  Chlor Alkali Products, with nine U.S. manufacturing facilities and one Canadian manufacturing facility, produces chlorine and caustic soda, hydrochloric acid, hydrogen, bleach products and potassium hydroxide.  Chemical Distribution, with twenty-seven owned and leased terminal facilities, manufactures bleach products and distributes caustic soda, bleach products, potassium hydroxide and hydrochloric acid. Winchester, with its principal manufacturing facilities in East Alton, IL and Oxford, MS, produces and distributes sporting ammunition, law enforcement ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges.

We have prepared the condensed financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  The preparation of the consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes.  In our opinion, these financial statements reflect all adjustments (consisting only of normal accruals), which are necessary to present fairly the results for interim periods.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are appropriate.  We recommend that you read these condensed financial statements in conjunction with the financial statements, accounting policies and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.  Certain reclassifications were made to prior year amounts to conform to the 2013 presentation.

On August 22, 2012, we acquired 100% of privately-held K. A. Steel Chemicals Inc. (KA Steel), whose operating results are included in the accompanying financial statements since the date of the acquisition.

ACQUISITION

On August 22, 2012, we acquired 100% of privately-held KA Steel, on a debt free basis, for $336.6 million in cash, after receiving the final working capital adjustment of $1.9 million. The purchase price is still subject to certain post-closing adjustments associated with a contingent liability related to the withdrawal from a multi-employer defined benefit pension plan. As of the date of acquisition, KA Steel had cash and cash equivalents of $26.2 million. KA Steel is one of the largest distributors of caustic soda in North America and manufactures and sells bleach in the Midwest.

The acquisition was partially financed with proceeds from the $200.0 million of 5.50% senior notes (2022 Notes) sold on August 22, 2012 with a maturity date of August 15, 2022. Proceeds from the 2022 Notes were $196.0 million, after expenses of $4.0 million.

For segment reporting purposes, KA Steel comprises the newly created Chemical Distribution segment. The KA Steel results of operations have been included in our consolidated results for the period subsequent to the effective date of the acquisition.


7



The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.  We finalized our purchase price allocation during the fourth quarter of 2012, except for resolving a contingent liability related to the withdrawal from a multi-employer defined benefit pension plan. The following table summarizes the allocation of the purchase price to KA Steel’s assets and liabilities:
 
August 22, 2012
 
($ in millions)
Total current assets
$
128.1

Property, plant and equipment
25.1

Deferred taxes
1.6

Intangible assets
139.3

Total assets acquired
294.1

Total current liabilities
64.2

Other liabilities
10.4

Total liabilities assumed
74.6

Net identifiable assets acquired
219.5

Goodwill
119.7

Fair value of net assets acquired
$
339.2

Supplemental Data
 
Cash paid
$
336.6

Olin trade accounts receivable from KA Steel
2.6

Total fair value of consideration
$
339.2


Included in total current assets is cash and cash equivalents of $26.2 million and receivables of $63.1 million with a contracted value of $63.5 million. Included in other liabilities is an accrued pension withdrawal liability of $10.0 million for the withdrawal from a multi-employer defined benefit pension plan.

Based on final valuations, we allocated $128.0 million of the purchase price to intangible assets relating to customers, customer contracts and relationships, which management estimates to have a useful life of ten years, $10.9 million to intangible assets associated with the KA Steel trade name, which management estimates to have an indefinite useful life, and $0.4 million associated with a favorable lease agreement that will be amortized over the remaining life of the lease term (approximately four years) on a straight line basis. These identifiable intangible assets were included in other assets. Based on final valuations, $119.7 million was assigned to goodwill, all of which is deductible for tax purposes.  The primary reasons for the acquisition and the principal factors that contributed to a KA Steel purchase price that resulted in the recognition of goodwill are the expanded capability to market and sell caustic soda, bleach, potassium hydroxide, and hydrochloric acid, as well as the geographic diversification the KA Steel locations provide us, and the strengthened position in the industrial bleach segment.

Goodwill and the indefinite-lived trade name intangible asset recorded in the acquisition are not amortized but will be reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred.

The following pro forma summary presents the condensed statement of income as if the acquisition of KA Steel had occurred on January 1, 2012 (unaudited).
 
 
Three Months Ended June 30, 2012
 
Six Months Ended June 30, 2012
 
 
($ in millions, except per share data)
Sales
 
$
617.0

 
$
1,230.9

Net income
 
48.3

 
86.9

Net income per common share:
 
 
 
 
Basic
 
$
0.60

 
$
1.08

Diluted
 
$
0.60

 
$
1.08



8



The pro forma statement of income was prepared based on historical financial information and has been adjusted to give effect to pro forma adjustments that are (i) directly attributable to the transaction, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results.  The pro forma statement of income uses estimates and assumptions based on information available at the time.  Management believes the estimates and assumptions to be reasonable; however, actual results may differ significantly from this pro forma financial information.  The pro forma information is not intended to reflect the actual results that would have occurred had the companies actually been combined during the periods presented.  The pro forma data reflect the application of the following adjustments:

Additional amortization expense related to the fair value of acquired identifiable intangible assets ($3.1 million and $6.4 million for the three and six months ended June 30, 2012, respectively).
Additional depreciation expense related to the fair value adjustment to property, plant and equipment and conforming KA Steel’s useful lives to ours ($0.1 million for both the three and six months ended June 30, 2012).
Increase in interest expense related to the 2022 Notes issued in conjunction with this acquisition ($2.8 million and $5.5 million for the three and six months ended June 30, 2012, respectively).
Elimination of intersegment sales of caustic soda and bleach to KA Steel from Chlor Alkali Products at prices that approximate market ($9.1 million and $18.6 million for the three and six months ended June 30, 2012, respectively).

In addition, the pro forma data reflect the tax effect of all of the above adjustments.  The pro forma tax provision reflects a decrease of $1.4 million and $2.5 million for the three and six months ended June 30, 2012, respectively, associated with the incremental pretax income, the fair value adjustments for acquired intangible assets and property, plant and equipment, and the interest expense of the 2022 Notes issued in conjunction with this acquisition, which reflects the marginal tax of the adjustments in the various jurisdictions where such adjustments occurred.

RESTRUCTURING CHARGES

On December 9, 2010, our board of directors approved a plan to eliminate our use of mercury in the manufacture of chlor alkali products.  Under the plan, the 260,000 tons of mercury cell capacity at our Charleston, TN facility was converted to 200,000 tons of membrane capacity capable of producing both potassium hydroxide and caustic soda.  The board of directors also approved plans to reconfigure our Augusta, GA facility to manufacture bleach and distribute caustic soda, while discontinuing chlor alkali manufacturing at this site.  We based our decision to convert and reconfigure on several factors.  First, during 2009 and 2010 we had experienced a steady increase in the number of customers unwilling to accept our products manufactured using mercury cell technology.  Second, there was federal legislation passed in 2008 governing the treatment of mercury that significantly limited our recycling options after December 31, 2012.  We concluded that exiting mercury cell technology production after 2012 represented an unacceptable future cost risk.  Further, the conversion of the Charleston, TN plant to membrane technology reduced the electricity usage per ECU produced by approximately 25%.  The decision to reconfigure the Augusta, GA facility to manufacture bleach and distribute caustic soda removed the highest cost production capacity from our system.  Mercury cell chlor alkali production at the Augusta, GA facility was discontinued at the end of September 2012 and the conversion at Charleston, TN was completed in the second half of 2012 with the successful start-up of two new membrane cell lines. These actions reduced our Chlor Alkali capacity by 160,000 tons. The completion of these projects eliminated our chlor alkali production using mercury cell technology. For the three months ended June 30, 2013 and 2012, we recorded pretax restructuring (credits) charges of $(0.1) million and $0.2 million, respectively, for employee severance and related benefit costs, employee relocation and facility exit costs.  For the six months ended June 30, 2013 and 2012, we recorded pretax restructuring charges of $1.4 million and $0.5 million, respectively, for employee severance and related benefit costs, employee relocation and facility exit costs.  We expect to incur additional restructuring charges through 2014 of approximately $5 million related to exiting the use of mercury cell technology in the chlor alkali manufacturing process.

On November 3, 2010, we announced that we made the decision to relocate the Winchester centerfire pistol and rifle ammunition manufacturing operations from East Alton, IL to Oxford, MS.  This relocation, when completed, is forecast to reduce Winchester’s annual operating costs by approximately $30 million.  Consistent with this decision we have initiated an estimated $110 million five-year project, which includes approximately $80 million of capital spending.  The State of Mississippi and local governments have provided incentives which should offset approximately 40 percent of the capital spending.  We currently expect to complete this relocation by the end of 2016.  For the three months ended June 30, 2013 and 2012, we recorded pretax restructuring charges of $0.3 million and $1.6 million, respectively, for employee severance and related benefit costs, employee relocation costs and facility exit costs.  For the six months ended June 30, 2013 and 2012, we recorded pretax restructuring charges of $1.1 million and $3.2 million, respectively, for employee severance and related benefit costs, employee relocation costs and facility exit costs.  We expect to incur additional restructuring charges through 2016 of approximately $7 million related to the transfer of these operations.


9



The following table summarizes the activity by major component of these 2010 restructuring actions and the remaining balances of accrued restructuring costs as of June 30, 2013:
 
 
Employee severance and job related benefits
 
Lease and other contract termination costs
 
Employee relocation costs
 
Facility exit costs
 
Total
 
 
($ in millions)
Balance at January 1, 2012
$
11.3

 
$
0.8

 
$

 
$

 
$
12.1

 
Restructuring charges:
 
 
 
 
 
 
 
 
 
 
First quarter
0.9

 

 
0.8

 
0.2

 
1.9

 
Second quarter
1.0

 

 
0.7

 
0.1

 
1.8

 
Amounts utilized
(1.3
)
 

 
(1.5
)
 
(0.3
)
 
(3.1
)
Balance at June 30, 2012
$
11.9

 
$
0.8

 
$

 
$

 
$
12.7

Balance at January 1, 2013
$
13.5

 
$
0.4

 
$

 
$

 
$
13.9

 
Restructuring charges (credits):
 
 
 
 
 
 
 
 
 
 
First quarter
0.6

 

 
0.1

 
1.6

 
2.3

 
Second quarter
(0.7
)
 

 
0.3

 
0.6

 
0.2

 
Amounts utilized
(1.8
)
 

 
(0.4
)
 
(2.2
)
 
(4.4
)
Balance at June 30, 2013
$
11.6

 
$
0.4

 
$

 
$

 
$
12.0


The following table summarizes the cumulative restructuring charges of these 2010 restructuring actions by major component through June 30, 2013:
 
Chlor Alkali Products
 
Winchester
 
Total
 
($ in millions)
Write-off of equipment and facility
$
17.5

 
$

 
$
17.5

Employee severance and job related benefits
4.7

 
11.7

 
16.4

Facility exit costs
10.8

 
1.2

 
12.0

Pension and other postretirement benefits curtailment

 
4.1

 
4.1

Employee relocation costs
0.4

 
4.4

 
4.8

Lease and other contract termination costs
1.1

 

 
1.1

Total cumulative restructuring charges
$
34.5

 
$
21.4

 
$
55.9


As of June 30, 2013, we have incurred cash expenditures of $15.6 million and non-cash charges of $28.3 million related to these restructuring actions.  The remaining balance of $12.0 million is expected to be paid out through 2016.

ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLES

We evaluate the collectibility of accounts receivable based on a combination of factors.  We estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience.  This estimate is periodically adjusted when we become aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts receivable.  While we have a large number of customers that operate in diverse businesses and are geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and, therefore, the need to revise estimates for the provision for doubtful accounts could occur.


10



Allowance for doubtful accounts receivable consisted of the following:
 
June 30,
 
2013
 
2012
 
($ in millions)
Balance at beginning of year
$
3.6

 
$
3.2

Provisions charged
0.4

 
1.0

Write-offs, net of recoveries
(0.1
)
 
(0.1
)
Balance at end of period
$
3.9

 
$
4.1


Provisions (credited) charged to operations were $(0.1) million and $0.6 million for the three months ended June 30, 2013 and 2012, respectively.

INVENTORIES

Inventories consisted of the following:
 
June 30,
2013
 
December 31,
2012
 
June 30,
2012
 
($ in millions)
Supplies
$
40.8

 
$
36.4

 
$
36.6

Raw materials
73.1

 
70.5

 
79.2

Work in process
28.5

 
25.2

 
35.7

Finished goods
141.6

 
141.0

 
120.8

 
284.0

 
273.1

 
272.3

LIFO reserve
(79.2
)
 
(78.0
)
 
(74.7
)
Inventories, net
$
204.8

 
$
195.1

 
$
197.6


In conjunction with the acquisition of KA Steel, we obtained inventories with a fair value of $36.4 million as of August 22, 2012. Inventories are valued at the lower of cost or market, with cost being determined principally by the dollar value last-in, first-out (LIFO) method of inventory accounting.  Cost for other inventories has been determined principally by the average cost method, primarily Chemical Distribution inventories, operating supplies, spare parts and maintenance parts.  Elements of costs in inventories included raw materials, direct labor and manufacturing overhead.  Inventories under the LIFO method are based on annual estimates of quantities and costs as of year-end; therefore, the condensed financial statements at June 30, 2013 reflect certain estimates relating to inventory quantities and costs at December 31, 2013.  The replacement cost of our inventories would have been approximately $79.2 million, $78.0 million and $74.7 million higher than reported at June 30, 2013, December 31, 2012 and June 30, 2012, respectively.


11



OTHER ASSETS

Included in other assets were the following:
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
($ in millions)
Investments in non-consolidated affiliates
$
30.6

 
$
29.3

 
$
28.5

Intangible assets (less accumulated amortization of $20.7 million, $13.4 million and $7.8 million, respectively)
145.4

 
152.7

 
18.2

Deferred debt issuance costs
15.9

 
17.5

 
14.7

Interest rate swaps
7.0

 
8.3

 
9.4

Other
15.6

 
16.3

 
11.1

Other assets
$
214.5

 
$
224.1

 
$
81.9


EARNINGS PER SHARE

Basic and diluted net income per share are computed by dividing net income by the weighted average number of common shares outstanding.  Diluted net income per share reflects the dilutive effect of stock-based compensation.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Computation of Income per Share
($ and shares in millions, except per share data)
Net income
$
43.7

 
$
47.6

 
$
84.2

 
$
86.3

Basic shares
80.2

 
80.1

 
80.2

 
80.1

Basic net income per share
$
0.54

 
$
0.59

 
$
1.05

 
$
1.08

Diluted shares:

 
 
 
 
 
 
Basic shares
80.2

 
80.1

 
80.2

 
80.1

Stock-based compensation
1.0

 
0.6

 
1.0

 
0.7

Diluted shares
81.2

 
80.7

 
81.2

 
80.8

Diluted net income per share
$
0.54

 
$
0.59

 
$
1.04

 
$
1.07


The computation of dilutive shares from stock-based compensation does not include 0.6 million shares and 1.8 million shares for the three months ended June 30, 2013 and 2012, respectively, and 1.4 million shares and 0.8 million shares for the six months ended June 30, 2013 and 2012, respectively, as their effect would have been anti-dilutive.

ENVIRONMENTAL

We are party to various government and private environmental actions associated with past manufacturing facilities and former waste disposal sites.  Charges to income for investigatory and remedial efforts were material to operating results in 2012 and are expected to be material to operating results in 2013.  The condensed balance sheets included reserves for future environmental expenditures to investigate and remediate known sites amounting to $144.5 million, $146.5 million and $154.0 million at June 30, 2013, December 31, 2012 and June 30, 2012, respectively, of which $123.5 million, $125.5 million and $123.0 million, respectively, were classified as other noncurrent liabilities.


12



Environmental provisions charged (credited) to income, which are included in cost of goods sold, were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
($ in millions)
Charges to income
$
2.4

 
$
0.3

 
$
4.2

 
$
3.2

Recoveries from third parties of costs incurred and expensed in prior periods

 

 

 
(0.1
)
Total environmental expense
$
2.4

 
$
0.3

 
$
4.2

 
$
3.1


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, changes in regulatory authorities, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties (PRPs), our ability to obtain contributions from other parties and the lengthy time periods over which site remediation occurs.  It is possible that some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably to us, which could materially adversely affect our financial position or results of operations.

COMMITMENTS AND CONTINGENCIES

We, and our subsidiaries, are defendants in various legal actions (including proceedings based on alleged exposures to asbestos) incidental to our past and current business activities.  As of June 30, 2013, December 31, 2012 and June 30, 2012, our condensed balance sheets included liabilities for these legal actions of $15.1 million, $15.2 million and $19.6 million, respectively.  These liabilities do not include costs associated with legal representation.  Based on our analysis, and considering the inherent uncertainties associated with litigation, we do not believe that it is reasonably possible that these legal actions will materially adversely affect our financial position, cash flows or results of operations.

During the ordinary course of our business, contingencies arise resulting from an existing condition, situation or set of circumstances involving an uncertainty as to the realization of a possible gain contingency.  In certain instances such as environmental projects, we are responsible for managing the cleanup and remediation of an environmental site.  There exists the possibility of recovering a portion of these costs from other parties.  We account for gain contingencies in accordance with the provisions of Accounting Standards Codification (ASC) 450 “Contingencies” (ASC 450) and therefore do not record gain contingencies and recognize income until it is earned and realizable.

SHAREHOLDERS’ EQUITY

On July 21, 2011, our board of directors authorized a share repurchase program of up to 5 million shares of common stock that will terminate in three years for any of the remaining shares not yet repurchased.  For the six months ended June 30, 2013 and 2012, 0.6 million and 0.2 million shares were purchased and retired under this program at a cost of $14.7 million and $3.1 million, respectively.  As of June 30, 2013, we had purchased a total of 1.0 million shares under this program and 4.0 million shares remained authorized to be purchased.

We issued 0.3 million and less than 0.1 million shares representing stock options exercised for the six months ended June 30, 2013 and 2012, respectively, with a total value of $6.8 million and $0.5 million, respectively.


13



The following table represents the activity included in accumulated other comprehensive loss:
 
Foreign
Currency
Translation
Adjustment
 
Unrealized
Gains (Losses)
on Derivative
Contracts
(net of taxes)
 
Pension and
Postretirement
Benefits
(net of taxes)
 
Accumulated
Other Comprehensive
Loss
 
($ in millions)
Balance at January 1, 2012
$
1.8

 
$
(5.3
)
 
$
(290.7
)
 
$
(294.2
)
Unrealized gains (losses):
 
 
 
 
 
 
 
First quarter
0.3

 
2.6

 

 
2.9

Second quarter
(0.8
)
 
(4.1
)
 

 
(4.9
)
Reclassification adjustments into income:
 
 
 
 
 
 
 
First quarter

 
1.7

 
3.2

 
4.9

Second quarter

 
1.1

 
4.3

 
5.4

Balance at June 30, 2012
$
1.3

 
$
(4.0
)
 
$
(283.2
)
 
$
(285.9
)
Balance at January 1, 2013
$
2.1

 
$
4.7

 
$
(378.1
)
 
$
(371.3
)
Unrealized gains (losses)
 
 
 
 
 
 
 
First quarter
0.1

 
(4.1
)
 

 
(4.0
)
Second quarter
(2.3
)
 
(4.3
)
 

 
(6.6
)
Reclassification adjustments into income
 
 
 
 
 
 
 
First quarter

 
(1.0
)
 
5.2

 
4.2

Second quarter

 

 
5.2

 
5.2

Balance at June 30, 2013
$
(0.1
)
 
$
(4.7
)
 
$
(367.7
)
 
$
(372.5
)

Unrealized gains and losses on derivative contracts (net of taxes) activity in accumulated other comprehensive loss included reclassification adjustments into net income of gains and losses on commodity forward contracts and are recognized into cost of goods sold. Unrealized gains and losses on derivative contracts (net of taxes) activity in accumulated other comprehensive loss included deferred tax benefits of $2.6 million and $1.7 million for the three months ended June 30, 2013 and 2012, respectively.  Unrealized gains and losses on derivative contracts (net of taxes) activity in accumulated other comprehensive loss included deferred tax (benefit) provision of $(6.0) million and $0.9 million for the six months ended June 30, 2013 and 2012, respectively.  

Pension and postretirement benefits (net of taxes) activity in accumulated other comprehensive loss included the amortization of prior service costs and actuarial losses into net income and are recognized equally into cost of goods sold and selling and administrative expenses. Pension and postretirement benefits (net of taxes) activity in accumulated other comprehensive loss included deferred tax provisions of $3.2 million and $2.6 million for the three months ended June 30, 2013 and 2012, respectively, and $6.5 million and $4.6 million for the six months ended June 30, 2013 and 2012, respectively.


14



SEGMENT INFORMATION

We define segment results as income before interest expense, interest income, other operating income (expense), other expense and income taxes, and include the operating results of non-consolidated affiliates. Intersegment sales of $26.3 million and $43.6 million for the three and six months ended June 30, 2013, respectively, have been eliminated. These represent the sale of caustic soda, bleach, potassium hydroxide and hydrochloric acid between Chemical Distribution and Chlor Alkali Products, at prices that approximate market. Consistent with management’s monitoring of the operating segments, synergies realized of $3.3 million and $6.2 million for the three and six months ended June 30, 2013, respectively, have been transferred from the Chlor Alkali Products segment to the Chemical Distribution segment, representing incremental earnings on volumes sold of caustic soda, bleach, potassium hydroxide and hydrochloric acid.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Sales:
($ in millions)
Chlor Alkali Products
$
367.0

 
$
363.2

 
$
715.9

 
$
722.9

Chemical Distribution
113.4

 

 
223.8

 

Winchester
198.1

 
145.5

 
386.1

 
293.0

Intersegment sales elimination
(26.3
)
 

 
(43.6
)
 

Total sales
$
652.2

 
$
508.7

 
$
1,282.2

 
$
1,015.9

Income before taxes:
 
 
 
 
 
 
 
Chlor Alkali Products
$
50.2

 
$
75.0

 
$
108.7

 
$
149.4

Chemical Distribution
2.2

 

 
6.3

 

Winchester
37.1

 
11.9

 
68.4

 
22.7

Corporate/other:
 
 
 
 
 
 
 
Pension income
6.4

 
7.0

 
12.7

 
13.3

Environmental expense
(2.4
)
 
(0.3
)
 
(4.2
)
 
(3.1
)
Other corporate and unallocated costs
(20.3
)
 
(20.8
)
 
(41.6
)
 
(38.7
)
Restructuring charges
(0.2
)
 
(1.8
)
 
(2.5
)
 
(3.7
)
Other operating income (expense)
1.5

 
(0.1
)
 
1.7

 
0.4

Interest expense
(9.7
)
 
(5.8
)
 
(18.8
)
 
(12.3
)
Interest income
0.1

 
0.3

 
0.2

 
0.5

Other expense
(2.2
)
 
(2.1
)
 
(4.4
)
 
(4.7
)
Income before taxes
$
62.7

 
$
63.3

 
$
126.5

 
$
123.8



15



STOCK-BASED COMPENSATION

Stock-based compensation granted includes stock options, performance stock awards, restricted stock awards and deferred directors’ compensation.  Stock-based compensation expense was as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
($ in millions)
Stock-based compensation
$
3.5

 
$
1.9

 
$
6.2

 
$
3.8

Mark-to-market adjustments
(0.5
)
 
(0.4
)
 
1.3

 
0.5

Total expense
$
3.0

 
$
1.5

 
$
7.5

 
$
4.3


The fair value of each stock option granted, which typically vests ratably over three years, but not less than one year, was estimated on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Grant date
2013
 
2012
Dividend yield
3.44
%
 
3.65
%
Risk-free interest rate
1.35
%
 
1.36
%
Expected volatility
43
%
 
43
%
Expected life (years)
7.0

 
7.0

Grant fair value (per option)
$
7.05

 
$
6.55

Exercise price
$
23.28

 
$
21.92

Shares granted
621,000

 
480,250


Dividend yield for 2013 and 2012 was based on a historical average.  Risk-free interest rate was based on zero coupon U.S. Treasury securities rates for the expected life of the options.  Expected volatility was based on our historical stock price movements, as we believe that historical experience is the best available indicator of the expected volatility.  Expected life of the option grant was based on historical exercise and cancellation patterns, as we believe that historical experience is the best estimate of future exercise patterns.

PENSION PLANS AND RETIREMENT BENEFITS

Most of our employees participate in defined contribution pension plans.  We provide a contribution to an individual retirement contribution account maintained with the Contributing Employee Ownership Plan (CEOP) primarily equal to 5% of the employee’s eligible compensation if such employee is less than age 45, and 7.5% of the employee’s eligible compensation if such employee is age 45 or older.  The defined contribution pension plans expense was $4.0 million and $3.6 million for the three months ended June 30, 2013 and 2012, respectively, and $7.8 million and $7.1 million for the six months ended June 30, 2013 and 2012, respectively.

A portion of our bargaining hourly employees continue to participate in our domestic defined benefit pension plans under a flat-benefit formula.  Our funding policy for the defined benefit pension plans is consistent with the requirements of federal laws and regulations.  Our foreign subsidiaries maintain pension and other benefit plans, which are consistent with statutory practices.  Our defined benefit pension plan provides that if, within three years following a change of control of Olin, any corporate action is taken or filing made in contemplation of, among other things, a plan termination or merger or other transfer of assets or liabilities of the plan, and such termination, merger, or transfer thereafter takes place, plan benefits would automatically be increased for affected participants (and retired participants) to absorb any plan surplus (subject to applicable collective bargaining requirements).


16



We also provide certain postretirement health care (medical) and life insurance benefits for eligible active and retired domestic employees.  The health care plans are contributory with participants’ contributions adjusted annually based on medical rates of inflation and plan experience.
 
Pension Benefits
 
Other Postretirement
Benefits
 
Three Months Ended
June 30,

Three Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit (Income) Cost
($ in millions)
Service cost
$
1.4

 
$
1.6

 
$
0.3

 
$
0.3

Interest cost
20.5

 
22.6

 
0.7

 
0.8

Expected return on plans’ assets
(34.4
)
 
(35.6
)
 

 

Amortization of prior service cost
0.1

 
0.1

 
(0.1
)
 
(0.1
)
Recognized actuarial loss
7.3

 
5.9

 
1.1

 
1.0

Net periodic benefit (income) cost
$
(5.1
)
 
$
(5.4
)
 
$
2.0

 
$
2.0

 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Postretirement
Benefits
 
Six Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit (Income) Cost
($ in millions)
Service cost
$
3.1

 
$
3.1

 
$
0.7

 
$
0.7

Interest cost
40.7

 
46.1

 
1.4

 
1.7

Expected return on plans’ assets
(68.8
)
 
(69.8
)
 

 

Amortization of prior service cost
0.1

 
0.1

 
(0.1
)
 
(0.1
)
Recognized actuarial loss
14.8

 
10.2

 
2.1

 
1.9

Net periodic benefit (income) cost
$
(10.1
)
 
$
(10.3
)
 
$
4.1

 
$
4.2


We made cash contributions to our Canadian qualified defined benefit pension plan of $0.5 million and $0.4 million for the six months ended June 30, 2013 and 2012, respectively.

As part of the acquisition of KA Steel, as of June 30, 2013, we have recorded a preliminary contingent liability of $10.0 million for the withdrawal from a multi-employer defined benefit pension plan.

As of June 30, 2013, we have recorded a $1.3 million liability associated with an agreement to withdraw our Henderson, NV chlor alkali hourly workforce from a multi-employer defined benefit pension plan.


17



INCOME TAXES

The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% to income before taxes.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Effective Tax Rate Reconciliation (Percent)
2013
 
2012
 
2013
 
2012
Statutory federal tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
Foreign rate differential
(0.1
)
 
(0.1
)
 
(0.1
)
 
(0.1
)
Domestic manufacturing/export tax incentive
(1.1
)
 
(1.6
)
 
(1.1
)
 
(1.3
)
Dividends paid to CEOP
(0.3
)
 
(0.4
)
 
(0.3
)
 
(0.4
)
State income taxes, net
2.3

 
0.2

 
2.4

 
0.8

Return to provision

 
0.2

 

 
0.1

Remeasurement of deferred taxes

 
1.3

 

 
0.9

Section 45O tax credit

 
(9.5
)
 

 
(4.9
)
Change in tax contingencies
(0.2
)
 
1.7

 
(0.1
)
 
1.0

Change in valuation allowance
(5.5
)
 
(1.4
)
 
(2.5
)
 
(0.7
)
Other, net
0.2

 
(0.6
)
 
0.1

 
(0.1
)
Effective tax rate
30.3
 %
 
24.8
 %
 
33.4
 %
 
30.3
 %

The effective tax rates for the three months ended June 30, 2012 included the cumulative effect of changes to our annual estimated effective tax rate from prior quarters.

The effective tax rates for both the three and six months ended June 30, 2013 included a benefit of $3.8 million associated with the reduction of valuation allowance against certain capital loss carryforwards that we believe are more likely than not to be realized in future periods.

The effective tax rate for the three and six months ended June 30, 2012 included a $6.0 million benefit associated with the Agricultural Chemicals Security Tax Credit under Section 45O of the Internal Revenue Code (Section 45O) that will be claimed on our 2008 to 2012 U.S. federal income tax returns and a $0.8 million benefit associated with the reduction of valuation allowance against certain state tax credit carryforwards that we believe are more likely than not to be realized in future periods. The effective tax rate for the three and six months ended June 30, 2012 included expenses of $1.1 million and $1.2 million, respectively, associated primarily with increases in unrecognized tax benefits associated with prior years' tax positions. The effective tax rate for the three and six months ended June 30, 2012 also included expenses of $0.8 million and $1.2 million, respectively, related to the remeasurement of deferred taxes due to an increase in state effective tax rates.

As of June 30, 2013, we had $41.0 million of gross unrecognized tax benefits, which would have a net $39.2 million impact on the effective tax rate, if recognized.  As of June 30, 2012, we had $40.3 million of gross unrecognized tax benefits, of which $38.5 million would have impacted the effective tax rate, if recognized.  The amount of unrecognized tax benefits was as follows:
 
June 30,
 
2013
 
2012
 
($ in millions)
Balance at beginning of year
$
40.1

 
$
37.9

Increases for prior year tax positions
1.0

 
2.8

Decreases for prior year tax positions
(0.1
)
 
(0.3
)
Increases for current year tax positions

 
0.1

Settlement with taxing authorities

 
(0.2
)
Balance at end of period
$
41.0

 
$
40.3



18



As of June 30, 2013, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $11.1 million over the next twelve months.  The anticipated reduction primarily relates to settlements with taxing authorities and the expiration of federal, state and foreign statutes of limitation.

We operate primarily in North America and file income tax returns in numerous jurisdictions.  Our tax returns are subject to examination by various federal, state and local tax authorities.  Our U.S. federal income tax returns are under examination by the Internal Revenue Service (IRS) for tax years 2008 and 2010. We believe we have adequately provided for all tax positions; however, amounts asserted by taxing authorities could be greater than our accrued position.  For our primary tax jurisdictions, the tax years that remain subject to examination are as follows:
 
Tax Years
U.S. federal income tax
2007 – 2012
U.S. state income tax
2004 – 2012
Canadian federal income tax
2007 – 2012
Canadian provincial income tax
2007 – 2012

DERIVATIVE FINANCIAL INSTRUMENTS

We are exposed to market risk in the normal course of our business operations due to our purchases of certain commodities, our ongoing investing and financing activities and our operations that use foreign currencies.  The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings.  We have established policies and procedures governing our management of market risks and the use of financial instruments to manage exposure to such risks.  ASC 815 “Derivatives and Hedging” (ASC 815) 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.  We use hedge accounting treatment for substantially all of our business transactions whose risks are covered using derivative instruments.  In accordance with ASC 815, we designate commodity forward contracts as cash flow hedges of forecasted purchases of commodities and certain interest rate swaps as fair value hedges of fixed-rate borrowings.  We do not enter into any derivative instruments for trading or speculative purposes.

Energy costs, including electricity used in our Chlor Alkali Products segment, and certain raw materials and energy costs, namely copper, lead, zinc, electricity and natural gas used in our Winchester and Chemical Distribution segments, are subject to price volatility.  Depending on market conditions, we may enter into futures contracts and put and call option contracts in order to reduce the impact of commodity price fluctuations.  The majority of our commodity derivatives expire within one year.  Those commodity contracts that extend beyond one year correspond with raw material purchases for long-term fixed-price sales contracts.

We enter into forward sales and purchase contracts to manage currency risk resulting from purchase and sale commitments denominated in foreign currencies (principally Canadian dollar and Australian dollar).  All of the currency derivatives expire within one year and are for United States dollar equivalents.  Our foreign currency forward contracts do not meet the criteria to qualify for hedge accounting.  At June 30, 2013, December 31, 2012 and June 30, 2012, we had forward contracts to sell foreign currencies with a notional value of zero, zero and $8.1 million, respectively.  We had no forward contracts to buy foreign currencies at June 30, 2013, December 31, 2012 and June 30, 2012.

In March 2010, we entered into interest rate swaps on $125 million of our underlying fixed-rate debt obligations, whereby we agreed to pay variable rates to a counterparty who, in turn, pays us fixed rates.  The counterparty to these agreements is Citibank, N.A. (Citibank), a major financial institution.  In October 2011, we entered into $125 million of interest rate swaps with equal and opposite terms as the $125 million variable interest rate swaps on the 6.75% senior notes due 2016 (2016 Notes).  We have agreed to pay a fixed rate to a counterparty who, in turn, pays us variable rates.  The counterparty to these agreements is also Citibank.  The result was a gain of $11.0 million on the $125 million variable interest rate swaps, which will be recognized through 2016.  As of June 30, 2013, $7.2 million of this gain was included in long-term debt.  In October 2011, we de-designated our $125 million interest rate swaps that had previously been designated as fair value hedges.  The $125 million variable interest rate swaps and the $125 million fixed interest rate swaps do not meet the criteria for hedge accounting.  All changes in the fair value of these interest rate swaps are recorded currently in earnings.


19



Cash flow hedges

ASC 815 requires that all derivative instruments be recorded on the balance sheet at their fair value.  For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative is recognized as a component of other comprehensive loss until the hedged item is recognized in earnings.  Gains and losses on the derivatives representing hedge ineffectiveness are recognized currently in earnings.

We had the following notional amount of outstanding commodity forward contracts that were entered into to hedge forecasted purchases:
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
($ in millions)
Copper
$
61.2

 
$
53.6

 
$
68.3

Zinc
6.6

 
6.3

 
6.7

Lead
34.6

 
48.3

 
34.3

Natural gas
7.8

 
6.0

 
10.8


As of June 30, 2013, the counterparty to $64.0 million of these commodity forward contracts is Wells Fargo Bank, N.A. (Wells Fargo), a major financial institution, and the counterparty to $42.5 million of these commodity forward contracts is Citibank, a major financial institution.

We use cash flow hedges for certain raw material and energy costs such as copper, zinc, lead, electricity and natural gas to provide a measure of stability in managing our exposure to price fluctuations associated with forecasted purchases of raw materials and energy used in the company’s manufacturing process.  At June 30, 2013, we had open positions in futures contracts through 2017.  If all open futures contracts had been settled on June 30, 2013, we would have recognized a pretax loss of $7.8 million.

If commodity prices were to remain at June 30, 2013 levels, approximately $7.0 million of deferred losses would be reclassified into earnings during the next twelve months.  The actual effect on earnings will be dependent on actual commodity prices when the forecasted transactions occur.

Fair value hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.  We include the gain or loss on the hedged items (fixed-rate borrowings) in the same line item, interest expense, as the offsetting loss or gain on the related interest rate swaps.  We had no interest rate swaps designated as fair value hedges as of June 30, 2013, December 31, 2012 and June 30, 2012.

In June 2012, we terminated $73.1 million of interest rate swaps with Wells Fargo that had been entered into on the SunBelt Notes in May 2011. The result was a gain of $2.2 million, which will be recognized through 2017. As of June 30, 2013, $1.6 million of this gain was included in long-term debt. Pursuant to a note purchase agreement dated December 22, 1997, the SunBelt Chlor Alkali Partnership (SunBelt) sold $97.5 million of Guaranteed Senior Secured Notes due 2017, Series O, and $97.5 million of Guaranteed Senior Secured Notes due 2017, Series G.  We refer to these notes as the SunBelt Notes.  The SunBelt Notes bear interest at a rate of 7.23%% per annum, payable semi-annually in arrears on each June 22 and December 22.  

In March 2012, Citibank terminated $7.7 million of interest rate swaps on our industrial development and environmental improvement tax-exempt bonds (industrial revenue bonds) due in 2017.  The result was a gain of $0.2 million, which would have been recognized through 2017. In June 2012, the industrial revenue bonds were redeemed by us, and as a result, the remaining $0.2 million deferred gain was recognized in interest expense during the three months ended June 30, 2012.

We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels.  These interest rate swaps are treated as fair value hedges.  The accounting for gains and losses associated with changes in fair value of the derivative and the effect on the condensed financial statements will depend on the hedge designation and whether the hedge is effective in offsetting changes in fair value of cash flows of the asset or liability being hedged.  


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Financial statement impacts

We present our derivative assets and liabilities in our condensed balance sheets on a net basis.  We net derivative assets and liabilities whenever we have a legally enforceable master netting agreement with the counterparty to our derivative contracts.  We use these agreements to manage and substantially reduce our potential counterparty credit risk.

The following table summarizes the location and fair value of the derivative instruments on our condensed balance sheets.  The table disaggregates our net derivative assets and liabilities into gross components on a contract-by-contract basis before giving effect to master netting arrangements:

 
 
Asset Derivatives
 
Liability Derivatives
 
 
 
 
Fair Value
 
 
 
Fair Value
Derivatives Designated as Hedging
Instruments
 
Balance
Sheet
Location
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
Balance
Sheet
Location
 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
 
 
 
 
($ in millions)
 
 
 
($ in millions)
Interest rate contracts
 
Other assets
 
$

 
$

 
$

 
Long-term debt
 
$
8.8

 
$
10.2

 
$
11.6

Commodity contracts – gains
 
Other current assets
 

 
9.6

 

 
Accrued liabilities
 
(1.5
)
 

 
(2.0
)
Commodity contracts – losses
 
Other current assets
 

 
(2.1
)
 

 
Accrued liabilities
 
9.2

 

 
8.7

 
 
 
 
$

 
$
7.5

 
$

 
 
 
$
16.5

 
$
10.2

 
$
18.3

Derivatives Not Designated as Hedging
Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts – gains
 
Other assets
 
$
8.5

 
$
11.9

 
$
12.1

 
Other liabilities
 
$

 
$

 
$

Interest rate contracts – losses
 
Other assets
 
(1.5
)
 
(3.6
)
 
(2.7
)
 
Other liabilities
 

 

 

Commodity contracts – gains
 
Other current assets
 

 
0.1

 

 
Accrued liabilities
 
(0.1
)
 

 
(0.1
)
Commodity contracts – losses
 
Other current assets
 

 

 

 
Accrued liabilities
 
0.3

 

 
1.1

 
 
 
 
$
7.0

 
$
8.4

 
$
9.4

 
 
 
$
0.2

 
$

 
$
1.0

Total derivatives(1)
 
 
 
$
7.0

 
$
15.9

 
$
9.4

 
 
 
$
16.7

 
$
10.2

 
$
19.3


(1)
Does not include the impact of cash collateral received from or provided to counterparties.


21



The following table summarizes the effects of derivative instruments on our condensed statements of income:

 
 
 
Amount of Gain (Loss)
 
Amount of Gain (Loss)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
Location of Gain (Loss)
 
2013
 
2012
 
2013
 
2012
Derivatives – Cash Flow Hedges
 
 
($ in millions)
Recognized in other comprehensive loss (effective portion)
———
 
$
(6.9
)
 
$
(6.6
)
 
$
(13.7
)
 
$
(2.4
)
 
 
 
 
 
 
 
 
 
 
Reclassified from accumulated other comprehensive loss into income (effective portion)
Cost of goods sold
 
$

 
$
(1.9
)
 
$
1.7

 
$
(4.6
)
Derivatives – Fair Value Hedges
 
 
 
 
 
 
 
 
 
Interest rate contracts
Interest expense
 
$
0.7

 
$
1.0

 
$
1.4

 
$
1.9

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
Commodity contracts
Cost of goods sold
 
$
(0.8
)
 
$
0.5

 
$
0.1

 
$
(2.4
)

Credit risk and collateral

By using derivative instruments, we are exposed to credit and market risk.  If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair-value gain in a derivative.  Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes us, thus creating a repayment risk for us.  When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, assume no repayment risk.  We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties.  We monitor our positions and the credit ratings of our counterparties and we do not anticipate non-performance by the counterparties.

Based on the agreements with our various counterparties, cash collateral is required to be provided when the net fair value of the derivatives, with the counterparty, exceed a specific threshold.  If the threshold is exceeded, cash is either provided by the counterparty to us if the value of the derivatives is our asset, or cash is provided by us to the counterparty if the value of the derivatives is our liability.  As of June 30, 2013 and June 30, 2012, the amounts recognized in accrued liabilities for cash collateral provided by us to counterparties were $0.3 million and $1.1 million, respectively.  As of December 31, 2012, the amount recognized in other current assets for collateral provided by counterparties to us was $0.1 million. In all instances where we are party to a master netting agreement, we offset the receivable or payable recognized upon payment of cash collateral against the fair value amounts recognized for derivative instruments that have also been offset under such master netting agreements.

FAIR VALUE MEASUREMENTS

Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties or the amount that would be paid to transfer a liability to a new obligor, not the amount that would be paid to settle the liability with the creditor.  Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters.  Where observable prices or inputs are not available, valuation models are applied.  These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

Assets and liabilities recorded at fair value in the condensed balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  Hierarchical levels, defined by ASC 820 “Fair Value Measurements and Disclosures” (ASC 820) are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, and are as follows:

Level 1 — Inputs were unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.


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Level 2 — Inputs (other than quoted prices included in Level 1) were either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 — Inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

We are required to separately disclose assets and liabilities measured at fair value on a recurring basis, from those measured at fair value on a nonrecurring basis.  Nonfinancial assets measured at fair value on a nonrecurring basis are intangible assets and goodwill, which are reviewed annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred.

Determining which hierarchical level an asset or liability falls within requires significant judgment.  We evaluate our hierarchy disclosures each quarter.  The following table summarizes the assets and liabilities measured at fair value in the condensed balance sheets:
 
Fair Value Measurements
Balance at June 30, 2013
Level 1
 
Level 2
 
Level 3
 
Total
Assets
($ in millions)
Interest rate swaps
$

 
$
7.0

 
$

 
$
7.0

Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
8.8

 
$

 
$
8.8

Commodity forward contracts
0.3

 
7.6

 

 
7.9

Earn out

 

 
23.3

 
23.3

Balance at December 31, 2012
 
 
 
 
 
 
 
Assets
 
Interest rate swaps
$

 
$
8.3

 
$

 
$
8.3

Commodity forward contracts
0.1

 
7.5

 

 
7.6

Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
10.2

 
$

 
$
10.2

Earn out

 

 
42.0

 
42.0

Balance at June 30, 2012
 
 
 
 
 
 
 
Assets
 
Interest rate swaps
$

 
$
9.4

 
$

 
$
9.4

Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
11.6

 
$

 
$
11.6

Commodity forward contracts
1.3

 
6.4

 

 
7.7

Earn out

 

 
35.3

 
35.3


For the six months ended June 30, 2013, there were no transfers into or out of Level 1 and Level 2.

The following table summarizes the activity for our earn out liability measured at fair value using Level 3 inputs:
 
June 30,
 
2013
 
2012
 
($ in millions)
Balance at beginning of year
$
42.0

 
$
49.0

Settlements
(23.2
)
 
(18.5
)
Unrealized losses included in other expense
4.5

 
4.8

Balance at end of period
$
23.3

 
$
35.3



23



Interest Rate Swaps

The fair value of the interest rate swaps was included in other assets and long-term debt as of June 30, 2013, December 31, 2012 and June 30, 2012.  These financial instruments were valued using the “income approach” valuation technique.  This method used valuation techniques to convert future amounts to a single present amount.  The measurement was based on the value indicated by current market expectations about those future amounts.  We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels.

Commodity Forward Contracts

The fair value of the commodity forward contracts was classified in other current assets and accrued liabilities as of June 30, 2013, December 31, 2012 and June 30, 2012, with unrealized gains and losses included in accumulated other comprehensive loss, net of applicable taxes.  These financial instruments were valued primarily based on prices and other relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for commodities.  We use commodity forward contracts for certain raw materials and energy costs such as copper, zinc, lead, electricity and natural gas to provide a measure of stability in managing our exposure to price fluctuations.

Foreign Currency Contracts

We had no fair value of foreign currency contracts as of June 30, 2013, December 31, 2012 and June 30, 2012.  The gains and losses of foreign currency contracts were included in selling and administration expense as these financial instruments do not meet the criteria to qualify for hedge accounting.  These financial instruments were valued primarily based on prices and other relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for foreign currencies.  We enter into forward sales and purchase contracts to manage currency risk resulting from purchase and sale commitments denominated in foreign currencies (principally Canadian dollar and Australian dollar).

Financial Instruments

The carrying values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments.  The fair value of our long-term debt was determined based on current market rates for debt of similar risk and maturities.  The following table summarizes the fair value measurements of debt and the actual debt recorded on our condensed balance sheets: