Attached files

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EX-12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED) - OLIN Corpoln-ex12_2014930xq3.htm
EX-31.2 - SECTION 302 CERTIFICATION STATEMENT OF CFO - OLIN Corpoln-ex312_2014930xq3.htm
EX-32 - SECTION 906 CERTIFICATION STATEMENT OF CEO AND CFO - OLIN Corpoln-ex32_2014930xq3.htm
EX-31.1 - SECTION 302 CERTIFICATION STATEMENT OF CEO - OLIN Corpoln-ex311_2014930xq3.htm
EXCEL - IDEA: XBRL DOCUMENT - OLIN CorpFinancial_Report.xls

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014
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 September 30, 2014, 78,194,324 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)

 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
263.6

 
$
307.8

 
$
283.8

Receivables, net
333.4

 
280.1

 
343.8

Income tax receivable
4.3

 
1.9

 
4.0

Inventories
198.8

 
186.5

 
183.5

Current deferred income taxes
45.8

 
50.4

 
51.7

Other current assets
11.1

 
13.2

 
10.3

Total current assets
857.0

 
839.9

 
877.1

Property, plant and equipment (less accumulated depreciation of $1,324.6, $1,259.1 and $1,236.8)
936.4

 
987.8

 
991.7

Prepaid pension costs
1.6

 
1.7

 
2.1

Restricted cash
2.0

 
4.2

 
6.6

Deferred income taxes
11.2

 
9.0

 
8.4

Other assets
197.7

 
213.1

 
210.0

Goodwill
747.1

 
747.1

 
747.1

Total assets
$
2,753.0

 
$
2,802.8

 
$
2,843.0

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current installments of long-term debt
$
16.4

 
$
12.6

 
$
12.5

Accounts payable
165.5

 
148.7

 
170.4

Income taxes payable
0.5

 
1.7

 
0.8

Accrued liabilities
209.2

 
244.5

 
242.4

Total current liabilities
391.6

 
407.5

 
426.1

Long-term debt
672.7

 
678.4

 
690.5

Accrued pension liability
64.7

 
115.4

 
123.2

Deferred income taxes
139.0

 
117.6

 
134.3

Other liabilities
363.8

 
382.8

 
371.6

Total liabilities
1,631.8

 
1,701.7

 
1,745.7

Commitments and contingencies

 

 

Shareholders’ equity:
 
 
 
 
 
Common stock, par value $1 per share:  authorized, 120.0 shares;
   issued and outstanding 78.2, 79.4 and 79.6 shares
78.2

 
79.4

 
79.6

Additional paid-in capital
805.9

 
838.8

 
841.6

Accumulated other comprehensive loss
(356.4
)
 
(365.1
)
 
(363.1
)
Retained earnings
593.5

 
548.0

 
539.2

Total shareholders’ equity
1,121.2

 
1,101.1

 
1,097.3

Total liabilities and shareholders’ equity
$
2,753.0

 
$
2,802.8

 
$
2,843.0


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
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Sales
$
593.6

 
$
670.7

 
$
1,741.4

 
$
1,952.9

Operating expenses:
 
 
 
 
 
 
 
Cost of goods sold
492.3

 
528.5

 
1,431.3

 
1,564.0

Selling and administration
42.8

 
36.5

 
128.5

 
134.3

Restructuring charges
1.2

 
1.6

 
4.5

 
4.1

Other operating (expense) income

 
(0.4
)
 
0.8

 
1.3

Operating income
57.3

 
103.7

 
177.9

 
251.8

Earnings of non-consolidated affiliates
0.5

 
1.0

 
1.4

 
2.4

Interest expense
17.7

 
9.9

 
37.0

 
28.7

Interest income
0.2

 
0.1

 
0.9

 
0.3

Other (expense) income

 
(1.9
)
 
0.1

 
(6.3
)
Income from continuing operations before taxes
40.3

 
93.0

 
143.3

 
219.5

Income tax provision
14.2

 
23.3

 
51.1

 
65.6

Income from continuing operations
26.1

 
69.7

 
92.2

 
153.9

Income from discontinued operations, net

 

 
0.7

 

Net income
$
26.1

 
$
69.7

 
$
92.9

 
$
153.9

Net income per common share:
 
 
 
 
 
 
 
Basic income per common share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.33

 
$
0.87

 
$
1.17

 
$
1.92

Income from discontinued operations, net

 

 
0.01

 

Net income
$
0.33

 
$
0.87

 
$
1.18

 
$
1.92

Diluted income per common share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.33

 
$
0.86

 
$
1.15

 
$
1.90

Income from discontinued operations, net

 

 
0.01

 

Net income
$
0.33

 
$
0.86

 
$
1.16

 
$
1.90

Dividends per common share
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60

Average common shares outstanding:
 
 
 
 
 
 
 
Basic
78.4

 
79.8

 
78.8

 
80.1

Diluted
79.5

 
80.8

 
80.0

 
81.1


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
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
26.1

 
$
69.7

 
$
92.9

 
$
153.9

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1.5
)
 
0.4

 
(0.5
)
 
(1.8
)
Unrealized (losses) gains on derivative contracts
(2.0
)
 
4.1

 
(2.3
)
 
(5.3
)
Amortization of prior service costs and actuarial losses
3.5

 
4.9

 
11.5

 
15.3

Total other comprehensive income, net of tax

 
9.4

 
8.7

 
8.2

Comprehensive income
$
26.1

 
$
79.1

 
$
101.6

 
$
162.1


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, 2013
80.2

 
$
80.2

 
$
856.1

 
$
(371.3
)
 
$
433.4

 
$
998.4

Net income

 

 

 

 
153.9

 
153.9

Other comprehensive income

 

 

 
8.2

 

 
8.2

Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.60 per share)

 

 

 

 
(48.1
)
 
(48.1
)
Common stock repurchased and retired
(1.2
)
 
(1.2
)
 
(27.6
)
 

 

 
(28.8
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
0.4

 
0.4

 
7.2

 

 

 
7.6

Other transactions
0.2

 
0.2

 
3.0

 

 

 
3.2

Stock-based compensation

 

 
2.9

 

 

 
2.9

Balance at September 30, 2013
79.6

 
$
79.6

 
$
841.6

 
$
(363.1
)
 
$
539.2

 
$
1,097.3

Balance at January 1, 2014
79.4

 
$
79.4

 
$
838.8

 
$
(365.1
)
 
$
548.0

 
$
1,101.1

Net income

 

 

 

 
92.9

 
92.9

Other comprehensive income

 

 

 
8.7

 

 
8.7

Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.60 per share)

 

 

 

 
(47.4
)
 
(47.4
)
Common stock repurchased and retired
(1.7
)
 
(1.7
)
 
(43.0
)
 

 

 
(44.7
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
0.4

 
0.4

 
8.2

 

 

 
8.6

Other transactions
0.1

 
0.1

 
1.9

 

 

 
2.0

Balance at September 30, 2014
78.2

 
$
78.2

 
$
805.9

 
$
(356.4
)
 
$
593.5

 
$
1,121.2


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)

 
Nine Months Ended
September 30,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
92.9

 
$
153.9

Adjustments to reconcile net income to net cash and cash equivalents provided by (used for) operating activities:
 
 
 
Earnings of non-consolidated affiliates
(1.4
)
 
(2.4
)
Gains on disposition of property, plant and equipment
(0.6
)
 
(1.1
)
Stock-based compensation
3.5

 
6.4

Depreciation and amortization
104.3

 
101.2

Deferred income taxes
17.9

 
27.9

Qualified pension plan contributions
(0.6
)
 
(0.7
)
Qualified pension plan income
(21.4
)
 
(18.1
)
Change in:
 
 
 
Receivables
(46.7
)
 
(44.8
)
Income taxes receivable/payable
(10.2
)
 
(2.6
)
Inventories
(12.3
)
 
11.6

Other current assets
0.9

 
2.4

Accounts payable and accrued liabilities
(12.0
)
 
16.1

Other assets
5.1

 
2.5

Other noncurrent liabilities
(20.0
)
 
(10.6
)
Other operating activities
0.1

 

Net operating activities
99.5

 
241.7

Investing Activities
 
 
 
Capital expenditures
(49.7
)
 
(70.4
)
Proceeds from sale/leaseback of equipment

 
35.8

Proceeds from disposition of property, plant and equipment
4.0

 
4.3

Distributions from affiliated companies, net

 
0.9

Restricted cash activity
2.2

 
5.3

Other investing activities
(0.5
)
 
(1.8
)
Net investing activities
(44.0
)
 
(25.9
)
Financing Activities
 
 
 
Long-term debt:
 
 
 
Borrowings
150.0

 

Repayments
(149.2
)
 
(11.4
)
Earn out payment – SunBelt
(14.8
)
 
(17.1
)
Common stock repurchased and retired
(44.7
)
 
(28.8
)
Stock options exercised
6.5

 
6.8

Excess tax benefits from stock-based compensation
1.1

 
1.4

Dividends paid
(47.4
)
 
(48.1
)
Deferred debt issuance costs
(1.2
)
 

Net financing activities
(99.7
)
 
(97.2
)
Net (decrease) increase in cash and cash equivalents
(44.2
)
 
118.6

Cash and cash equivalents, beginning of period
307.8

 
165.2

Cash and cash equivalents, end of period
$
263.6

 
$
283.8

Cash paid for interest and income taxes:
 
 
 
Interest
$
30.8

 
$
31.3

Income taxes, net of refunds
$
42.7

 
$
43.1

Non-cash investing activities:
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
$
3.6

 
$
11.1


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-six 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, 2013.  Certain reclassifications were made to prior year amounts to conform to the 2014 presentation.

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 September 30, 2014 and 2013, we recorded pretax restructuring charges of $0.7 million and $1.3 million, respectively, for employee severance and related benefit costs, employee relocation costs, facility exit costs and lease and other contract termination costs related to these actions. For the nine months ended September 30, 2014 and 2013, we recorded pretax restructuring charges of $3.0 million and $2.7 million, respectively, for employee severance and related benefit costs, employee relocation costs, facility exit costs, write-off of equipment and facility and lease and other contract termination costs related to these actions.  We expect to incur additional restructuring charges through 2014 of less than $1 million related to exiting the use of mercury cell technology in the chlor alkali manufacturing process.


7



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 $35 million to $40 million.  Consistent with this decision we initiated an estimated $110 million five-year project, which includes approximately $80 million of capital spending.  The capital spending was partially financed by $31 million of grants provided by the State of Mississippi and local governments. The full amount of these grants were received in 2011.  We currently expect to complete this relocation by the end of 2016.  For the three months ended September 30, 2014 and 2013, we recorded pretax restructuring charges of $0.5 million and $0.3 million, respectively, for employee severance and related benefit costs, employee relocation costs and facility exit costs related to these actions. For the nine months ended September 30, 2014 and 2013, we recorded pretax restructuring charges of $1.5 million and $1.4 million, respectively, for employee severance and related benefit costs, employee relocation costs and facility exit costs related to these actions.  We expect to incur additional restructuring charges through 2016 of approximately $3 million related to the transfer of these operations.

The following table summarizes the activity by major component of these 2010 restructuring actions and the remaining balances of accrued restructuring costs as of September 30, 2014:
 
 
Employee severance and job related benefits
 
Lease and other contract termination costs
 
Employee relocation costs
 
Facility exit costs
 
Write-off of equipment and facility
 
Total
 
 
($ in millions)
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

 
Third quarter
0.2

 
(0.4
)
 
0.2

 
1.6

 

 
1.6

 
Amounts utilized
(2.8
)
 

 
(0.6
)
 
(3.8
)
 

 
(7.2
)
Balance at September 30, 2013
$
10.8

 
$

 
$

 
$

 
$

 
$
10.8

Balance at January 1, 2014
$
10.2

 
$

 
$

 
$

 
$

 
$
10.2

 
Restructuring charges:
 
 
 
 
 
 
 
 
 
 
 
 
First quarter
0.2

 

 
0.1

 
0.7

 

 
1.0

 
Second quarter
1.2

 

 

 
0.8

 
0.3

 
2.3

 
Third quarter
0.5

 

 
0.3

 
0.4

 

 
1.2

 
Amounts utilized
(1.9
)
 

 
(0.4
)
 
(1.9
)
 
(0.3
)
 
(4.5
)
Balance at September 30, 2014
$
10.2

 
$

 
$

 
$

 
$

 
$
10.2


The following table summarizes the cumulative restructuring charges of these 2010 restructuring actions by major component through September 30, 2014:
 
Chlor Alkali Products
 
Winchester
 
Total
 
($ in millions)
Write-off of equipment and facility
$
17.8

 
$

 
$
17.8

Employee severance and job related benefits
5.6

 
13.2

 
18.8

Facility exit costs
14.8

 
1.7

 
16.5

Pension and other postretirement benefits curtailment

 
4.1

 
4.1

Employee relocation costs
0.9

 
4.6

 
5.5

Lease and other contract termination costs
0.7

 

 
0.7

Total cumulative restructuring charges
$
39.8

 
$
23.6

 
$
63.4


As of September 30, 2014, we have incurred cash expenditures of $24.6 million and non-cash charges of $28.6 million related to these restructuring actions.  The remaining balance of $10.2 million is expected to be paid out through 2016.


8



DISCONTINUED OPERATIONS

In 2007 we sold our Metals business, which was a reportable segment, and accordingly it was reported as a discontinued operation. Metals produced and distributed copper and copper alloy sheet, strip, foil, rod, welded tube, fabricated parts, and stainless steel and aluminum strip. In conjunction with the sale of the Metals business, we retained certain assets and liabilities.

During the nine months ended September 30, 2014, we made a payment of $5.5 million to resolve certain indemnity obligations related to the sale. As a result of the favorable resolution, we recognized a pretax gain of $4.6 million included in income from discontinued operations. The tax provision from discontinued operations included expense of $2.2 million for changes in tax contingencies related to the Metals sale. Income from discontinued operations, net consisted of the following:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
 
($ in millions)
Income from discontinued operations
$

 
$

 
$
4.6

 
$

Tax provision

 

 
3.9

 

Income from discontinued operations, net
$

 
$

 
$
0.7

 
$


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.

Allowance for doubtful accounts receivable consisted of the following:
 
September 30,
 
2014
 
2013
 
($ in millions)
Balance at beginning of year
$
3.4

 
$
3.6

Provisions charged
0.5

 
0.2

Write-offs, net of recoveries
(0.4
)
 
(0.1
)
Balance at end of period
$
3.5

 
$
3.7


Provisions credited to operations were $0.2 million for both the three months ended September 30, 2014 and 2013.


9



INVENTORIES

Inventories consisted of the following:
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
 
($ in millions)
Supplies
$
42.2

 
$
40.5

 
$
41.2

Raw materials
66.9

 
76.5

 
70.7

Work in process
35.5

 
26.4

 
28.1

Finished goods
130.5

 
115.9

 
117.3

 
275.1

 
259.3

 
257.3

LIFO reserve
(76.3
)
 
(72.8
)
 
(73.8
)
Inventories, net
$
198.8

 
$
186.5

 
$
183.5


Inventories are valued at the lower of cost or market. The Chlor Alkali Products and Winchester segments inventory costs are determined principally by the dollar value last-in, first-out (LIFO) method of inventory accounting. The Chemical Distribution segment inventory costs are determined principally by the first-in, first-out (FIFO) method of inventory accounting.  Cost for other inventories has been determined principally by the average cost method, primarily 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 September 30, 2014 reflect certain estimates relating to inventory quantities and costs at December 31, 2014.  The replacement cost of our inventories would have been approximately $76.3 million, $72.8 million and $73.8 million higher than reported at September 30, 2014, December 31, 2013 and September 30, 2013, respectively.

OTHER ASSETS

Included in other assets were the following:
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
 
($ in millions)
Investments in non-consolidated affiliates
$
23.0

 
$
21.6

 
$
30.8

Intangible assets (less accumulated amortization of $38.9, $28.0 and $24.4)
127.2

 
138.1

 
141.7

Deferred debt issuance costs
11.1

 
14.4

 
15.1

Income tax receivable
6.6

 

 

Interest rate swaps
4.1

 
5.9

 
6.5

Other
25.7

 
33.1

 
15.9

Other assets
$
197.7

 
$
213.1

 
$
210.0



10



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
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Computation of Income per Share
($ and shares in millions, except per share data)
Income from continuing operations
$
26.1

 
$
69.7

 
$
92.2

 
$
153.9

Income from discontinued operations, net

 

 
0.7

 

Net income
$
26.1

 
$
69.7

 
$
92.9

 
$
153.9

Basic shares
78.4

 
79.8

 
78.8

 
80.1

Basic income per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.33

 
$
0.87

 
$
1.17

 
$
1.92

Income from discontinued operations, net

 

 
0.01

 

Net income
$
0.33

 
$
0.87

 
$
1.18

 
$
1.92

Diluted shares:
 
 
 
 
 
 
 
Basic shares
78.4

 
79.8

 
78.8

 
80.1

Stock-based compensation
1.1

 
1.0

 
1.2

 
1.0

Diluted shares
79.5

 
80.8

 
80.0

 
81.1

Diluted income per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.33

 
$
0.86

 
$
1.15

 
$
1.90

Income from discontinued operations, net

 

 
0.01

 

Net income
$
0.33

 
$
0.86

 
$
1.16

 
$
1.90


The computation of dilutive shares from stock-based compensation does not include 0.6 million shares and 0.9 million shares for the three months ended September 30, 2014 and 2013, respectively, and 0.6 million shares and 1.4 million shares for the nine months ended September 30, 2014 and 2013, 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 2014 and 2013.  The condensed balance sheets included reserves for future environmental expenditures to investigate and remediate known sites amounting to $139.7 million, $144.6 million and $143.0 million at September 30, 2014, December 31, 2013 and September 30, 2013, respectively, of which $121.7 million, $126.6 million and $122.0 million, respectively, were classified as other noncurrent liabilities.

Environmental provisions charged (credited) to income, which are included in cost of goods sold, were as follows:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
 
($ in millions)
Charges to income
$
1.6

 
$
2.0

 
$
6.3

 
$
6.2

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

 
(1.3
)
 

 
(1.3
)
Total environmental expense
$
1.6

 
$
0.7

 
$
6.3

 
$
4.9



11



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.

DEBT

In August 2014, we redeemed our $150.0 million 8.875% senior notes (2019 Notes), which would have matured on August 15, 2019. For the three months ended September 30, 2014, we recognized interest expense of $9.5 million for the call premium and the write-off of unamortized deferred debt issuance costs related to this action.

On June 24, 2014, we entered into a new five-year $415.0 million senior credit facility consisting of a $265.0 million senior revolving credit facility, which replaced our previous $265.0 million senior revolving credit facility, and a $150.0 million delayed-draw term loan facility. In August 2014, we drew the entire $150.0 million of the term loan and used the proceeds to redeem our 2019 Notes. The new senior credit facilities will expire in June 2019. The new $265.0 million senior revolving credit facility includes a $60.0 million letter of credit subfacility and the option to expand the facility by an additional $100.0 million. At September 30, 2014, we had $249.7 million available under our $265.0 million senior revolving credit facility because we had issued $15.3 million of letters of credit under the $60.0 million subfacility.  The $150.0 million term loan facility includes amortization in equal quarterly installments at a rate of 2.5% annually for the first two years increasing to 5% for the remaining three years. The terms and conditions of the new senior credit facilities are similar to those of our previous $265.0 million senior revolving credit facility except the addition of annual installments on the term loan facility. Under the new senior credit facilities, we may select various floating rate borrowing options.  The actual interest rate paid on borrowings under the senior credit facilities is based on a pricing grid which is dependent upon the leverage ratio as calculated under the terms of the facilities for the prior fiscal quarter.  The facilities include various customary restrictive covenants, including restrictions related to the ratio of debt to earnings before interest expense, taxes, depreciation and amortization (leverage ratio) and the ratio of earnings before interest expense, taxes, depreciation and amortization to interest expense (coverage ratio).  Compliance with these covenants is determined quarterly based on the operating cash flows for the last four quarters.  We were in compliance with all covenants and restrictions under all our outstanding credit agreements as of September 30, 2014 and 2013, and December 31, 2013, and no event of default had occurred that would permit the lenders under our outstanding credit agreements to accelerate the debt if not cured.  As of September 30, 2014, there were no covenants or other restrictions that limited our ability to borrow.

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 September 30, 2014, December 31, 2013 and September 30, 2013, our condensed balance sheets included liabilities for these legal actions of $22.6 million, $19.3 million and $16.7 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.

For the three months ended September 30, 2013, we recognized $11.0 million as a reduction to cost of goods sold related to a Chlor Alkali Products segment favorable contract settlement. Also for the three months ended September 30, 2013, we recognized $13.9 million as a reduction of selling and administration expenses related to the recovery of legacy legal costs.


12



SHAREHOLDERS’ EQUITY

On April 24, 2014, our board of directors authorized a new share repurchase program for up to 8 million shares of common stock that will terminate in three years for any of the remaining shares not yet repurchased. This authorization replaced the July 2011 share repurchase program.  For the nine months ended September 30, 2014 and 2013, 1.7 million and 1.2 million shares were purchased and retired at a cost of $44.7 million and $28.8 million, respectively.  As of September 30, 2014, we had purchased a total of 1.1 million shares under the April 2014 program, and 6.9 million shares remained authorized to be purchased.

We issued 0.4 million shares representing stock options exercised for both the nine months ended September 30, 2014 and 2013 with a total value of $8.6 million and $7.6 million, respectively.

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, 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
)
Third quarter
0.4

 
3.0

 

 
3.4

Reclassification adjustments into income:
 
 
 
 
 
 
 
First quarter

 
(1.0
)
 
5.2

 
4.2

Second quarter

 

 
5.2

 
5.2

Third quarter

 
1.1

 
4.9

 
6.0

Balance at September 30, 2013
$
0.3

 
$
(0.6
)
 
$
(362.8
)
 
$
(363.1
)
Balance at January 1, 2014
$
(0.5
)
 
$
0.9

 
$
(365.5
)
 
$
(365.1
)
Unrealized gains (losses):
 
 
 
 
 
 
 
First quarter
0.7

 
(3.5
)
 

 
(2.8
)
Second quarter
0.3

 
4.1

 

 
4.4

Third quarter
(1.5
)
 
(2.0
)
 

 
(3.5
)
Reclassification adjustments into income:
 
 
 
 
 
 
 
First quarter

 
0.4

 
4.0

 
4.4

Second quarter

 
(1.3
)
 
4.0

 
2.7

Third quarter

 

 
3.5

 
3.5

Balance at September 30, 2014
$
(1.0
)
 
$
(1.4
)
 
$
(354.0
)
 
$
(356.4
)

Net income and cost of goods sold included reclassification adjustments for realized gains and losses on derivative contracts from accumulated other comprehensive loss. Unrealized gains and losses on derivative contracts (net of taxes) activity in accumulated other comprehensive loss included deferred tax (benefits) provisions of $(1.3) million and $2.6 million for the three months ended September 30, 2014 and 2013, respectively, and $(1.5) million and $(3.4) million for the nine months ended September 30, 2014 and 2013, respectively.  

Net income, cost of goods sold and selling and administrative expenses included the amortization of prior service costs and actuarial losses from accumulated other comprehensive loss. This amortization is recognized equally in 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 $2.0 million and $3.2 million for the three months ended September 30, 2014 and 2013, respectively, and $7.3 million and $9.7 million for the nine months ended September 30, 2014 and 2013, respectively.


13



SEGMENT INFORMATION

We define segment results as income (loss) from continuing operations before interest expense, interest income, other operating (expense) income, other (expense) income and income taxes, and include the operating results of non-consolidated affiliates. Intersegment sales of $21.8 million and $18.5 million for the three months ended September 30, 2014 and 2013, respectively, and $67.2 million and $62.1 million for the nine months ended September 30, 2014 and 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.

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Sales:
($ in millions)
Chlor Alkali Products
$
329.2

 
$
374.2

 
$
996.0

 
$
1,090.1

Chemical Distribution
76.6

 
101.9

 
221.4

 
325.7

Winchester
209.6

 
213.1

 
591.2

 
599.2

Intersegment sales elimination
(21.8
)
 
(18.5
)
 
(67.2
)
 
(62.1
)
Total sales
$
593.6

 
$
670.7

 
$
1,741.4

 
$
1,952.9

Income (loss) from continuing operations before taxes:
 
 
 
 
 
 
 
Chlor Alkali Products
$
26.2

 
$
64.4

 
$
101.3

 
$
173.1

Chemical Distribution
0.8

 
3.4

 

 
9.7

Winchester
38.5

 
40.7

 
109.9

 
109.1

Corporate/other:
 
 
 
 
 
 
 
Pension income
8.8

 
7.3

 
24.2

 
20.0

Environmental expense
(1.6
)
 
(0.7
)
 
(6.3
)
 
(4.9
)
Other corporate and unallocated costs
(13.7
)
 
(8.4
)
 
(46.1
)
 
(50.0
)
Restructuring charges
(1.2
)
 
(1.6
)
 
(4.5
)
 
(4.1
)
Other operating (expense) income

 
(0.4
)
 
0.8

 
1.3

Interest expense
(17.7
)
 
(9.9
)
 
(37.0
)
 
(28.7
)
Interest income
0.2

 
0.1

 
0.9

 
0.3

Other (expense) income

 
(1.9
)
 
0.1

 
(6.3
)
Income from continuing operations before taxes
$
40.3

 
$
93.0

 
$
143.3

 
$
219.5


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
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
 
($ in millions)
Stock-based compensation
$
1.8

 
$
3.4

 
$
6.8

 
$
9.6

Mark-to-market adjustments
(0.8
)
 
(0.7
)
 
(1.9
)
 
0.6

Total expense
$
1.0

 
$
2.7

 
$
4.9

 
$
10.2



14



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
2014
 
2013
Dividend yield
3.13
%
 
3.44
%
Risk-free interest rate
2.13
%
 
1.35
%
Expected volatility
42
%
 
43
%
Expected life (years)
7.0

 
7.0

Grant fair value (per option)
$
8.30

 
$
7.05

Exercise price
$
25.57

 
$
23.28

Shares granted
589,000

 
621,000


Dividend yield for 2014 and 2013 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 $4.2 million and $4.0 million for the three months ended September 30, 2014 and 2013, respectively, and $12.6 million and $11.8 million for the nine months ended September 30, 2014 and 2013, 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).


15



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
September 30,
 
Three Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Components of Net Periodic Benefit (Income) Cost
($ in millions)
Service cost
$
1.3

 
$
1.6

 
$
0.2

 
$
0.3

Interest cost
21.5

 
20.2

 
0.5

 
0.6

Expected return on plans’ assets
(34.8
)
 
(34.4
)
 

 

Amortization of prior service cost

 

 

 

Recognized actuarial loss
5.4

 
7.4

 
0.1

 
0.7

Net periodic benefit (income) cost
$
(6.6
)
 
$
(5.2
)
 
$
0.8

 
$
1.6


 
Pension Benefits
 
Other Postretirement
Benefits
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Components of Net Periodic Benefit (Income) Cost
($ in millions)
Service cost
$
4.0

 
$
4.7

 
$
0.8

 
$
1.0

Interest cost
64.9

 
60.9

 
2.0

 
2.0

Expected return on plans’ assets
(104.6
)
 
(103.2
)
 

 

Amortization of prior service cost
0.1

 
0.1

 
(0.1
)
 
(0.1
)
Recognized actuarial loss
16.7

 
22.2

 
2.1

 
2.8

Net periodic benefit (income) cost
$
(18.9
)
 
$
(15.3
)
 
$
4.8

 
$
5.7


We made cash contributions to our Canadian qualified defined benefit pension plan of $0.6 million and $0.7 million for the nine months ended September 30, 2014 and 2013, respectively.

As part of the acquisition of K. A. Steel Chemicals Inc. (KA Steel), as of September 30, 2014, we have recorded a contingent liability of $9.0 million for the withdrawal from a multi-employer defined benefit pension plan.


16



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 35.0% to income from continuing operations before taxes.

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Effective Tax Rate Reconciliation (Percent)
2014
 
2013
 
2014
 
2013
Statutory federal tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
Foreign rate differential
(0.2
)
 
(0.1
)
 
(0.2
)
 
(0.1
)
Domestic manufacturing/export tax incentive
(1.7
)
 
(0.9
)
 
(2.1
)
 
(1.0
)
Dividends paid to CEOP
(0.6
)
 
(0.4
)
 
(0.4
)
 
(0.4
)
Return to provision
(0.3
)
 
(0.1
)
 
(0.8
)
 

State income taxes, net
1.7

 
2.1

 
2.0

 
2.2

Change in valuation allowance
1.0

 
1.2

 
1.7

 
(1.0
)
Change in tax contingencies
0.8

 
(9.5
)
 

 
(4.1
)
Section 41 research credit

 
(2.1
)
 

 
(0.9
)
Remeasurement of deferred taxes

 
0.2

 
0.3

 
0.1

Other, net
(0.5
)
 
(0.3
)
 
0.2

 
0.1

Effective tax rate
35.2
 %
 
25.1
 %
 
35.7
 %
 
29.9
 %

The effective tax rates from continuing operations for the three months ended September 30, 2014 and 2013 included the cumulative effect of changes to our annual estimated effective tax rate from continuing operations from prior quarters.

The effective tax rate from continuing operations for the nine months ended September 30, 2014 included a benefit of $1.2 million associated with return to provision adjustments for the finalization of our 2013 U.S. federal and state income tax returns. The effective tax rate from continuing operations for the nine months ended September 30, 2014 also included $1.6 million of expense primarily associated with increases in valuation allowances on certain state tax credit carryforwards associated with a change in a state tax law and $0.5 million of expense related to the remeasurement of deferred taxes due to an increase in state effective tax rates.

The effective tax rates from continuing operations for both the three and nine months ended September 30, 2013 included a benefit of $8.8 million and $9.1 million, respectively, primarily associated with decreases in unrecognized tax benefits due to the expiration of federal and state statutes of limitation. The effective tax rates from continuing operations for both the three and nine months ended September 30, 2013 included a benefit of $1.9 million associated with the Research Credit under Section 41 of the Internal Revenue Code (Research Credit) that was claimed on our 2011 and 2012 U.S. federal income tax returns. The effective tax rate from continuing operations for the nine months ended September 30, 2013 included a benefit of $3.4 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.

At September 30, 2014, the condensed balance sheet includes $6.6 million of income tax receivables that are classified as other noncurrent assets.


17



As of September 30, 2014, we had $36.5 million of gross unrecognized tax benefits, which would have a net $34.8 million impact on the effective tax rate from continuing operations, if recognized.  As of September 30, 2013, we had $34.9 million of gross unrecognized tax benefits, of which $32.1 million would have impacted the effective tax rate from continuing operations, if recognized.  The amount of unrecognized tax benefits was as follows:
 
September 30,
 
2014
 
2013
 
($ in millions)
Balance at beginning of year
$
34.5

 
$
40.1

Increases for prior year tax positions
0.2

 
3.2

Decreases for prior year tax positions
(0.2
)
 
(8.4
)
Increases for current year tax positions
2.2

 

Settlement with taxing authorities
(0.2
)
 

Balance at end of period
$
36.5

 
$
34.9


Income from discontinued operations, net for the nine months ended September 30, 2014, included $2.2 million of tax expense related to changes in tax contingencies.

As of September 30, 2014, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $7.2 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, 2010 and 2011. Our Canadian federal income tax returns are under examination by Canada Revenue Authority (CRA) for tax years 2010 and 2011. Our Canadian provincial income tax returns are under examination by Quebec Revenue Authority for tax years 2008 to 2011. We believe we have adequately provided for all tax positions; however, amounts asserted by taxing authorities could be greater than our accrued positions.  For our primary tax jurisdictions, the tax years that remain subject to examination are as follows:
 
Tax Years
U.S. federal income tax
2008; 2010 – 2013
U.S. state income tax
2006 – 2013
Canadian federal income tax
2010 – 2013
Canadian provincial income tax
2008 – 2013

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 material 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.


18



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 September 30, 2014, $4.3 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.

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 income 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:
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
 
($ in millions)
Copper
$
56.2

 
$
45.3

 
$
58.3

Zinc
5.9

 
4.5

 
5.8

Lead
16.4

 
22.8

 
28.8

Natural gas
7.4

 
5.5

 
7.4


As of September 30, 2014, the counterparty to $55.7 million of these commodity forward contracts is Wells Fargo Bank, N.A. (Wells Fargo), a major financial institution, and the counterparty to $30.2 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 September 30, 2014, we had open positions in futures contracts through 2018.  If all open futures contracts had been settled on September 30, 2014, we would have recognized a pretax loss of $2.6 million.

If commodity prices were to remain at September 30, 2014 levels, approximately $0.9 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 September 30, 2014, December 31, 2013 and September 30, 2013.

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 September 30, 2014, $0.9 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.  

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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.  

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
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
 
Balance Sheet Location
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
 
 
 
 
($ in millions)
 
 
 
($ in millions)
Interest rate contracts
 
Other assets
 
$

 
$

 
$

 
Long-term debt
 
$
5.2

 
$
7.3

 
$
8.1

Commodity contracts – losses
 
Other current assets
 

 
(2.4
)
 

 
Accrued liabilities
 
3.7

 

 
4.0

Commodity contracts – gains
 
Other current assets
 

 
3.6

 

 
Accrued liabilities
 
(1.1
)
 

 
(2.9
)
 
 
 
 
$

 
$
1.2

 
$

 
 
 
$
7.8

 
$
7.3

 
$
9.2

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts – gains
 
Other assets
 
$
4.9

 
$
7.6

 
$
8.4

 
Other liabilities
 
$

 
$

 
$

Interest rate contracts – losses
 
Other assets
 
(0.8
)
 
(1.7
)
 
(1.9
)
 
Other liabilities
 

 

 

Commodity contracts – losses
 
Other current assets
 

 
(0.1
)
 

 
Accrued liabilities
 
0.5

 

 
0.4

Commodity contracts – gains
 
Other current assets
 

 
0.2

 

 
Accrued liabilities
 

 

 

 
 
 
 
$
4.1

 
$
6.0

 
$
6.5

 
 
 
$
0.5

 
$

 
$
0.4

Total derivatives(1)
 
 
 
$
4.1

 
$
7.2

 
$
6.5

 
 
 
$
8.3

 
$
7.3

 
$
9.6


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


20



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
September 30,
 
Nine Months Ended
September 30,
 
Location of Gain (Loss)
 
2014
 
2013
 
2014
 
2013
Derivatives – Cash Flow Hedges
 
 
($ in millions)
Recognized in other comprehensive loss (effective portion)
———
 
$
(3.2
)
 
$
4.9

 
$
(5.2
)
 
$
(8.8
)
 
 
 
 
 
 
 
 
 
 
Reclassified from accumulated other comprehensive loss into income (effective portion)
Cost of goods sold