Attached files

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EX-4.1 - FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AND FUNDING AGREEMENT - OLIN Corpoln-ex41_2017331xq1.htm
EX-32 - SECTION 906 CERTIFICATION STATEMENT OF CEO AND CFO - OLIN Corpoln-ex32_2017331xq1.htm
EX-31.2 - CFO SECTION 302 CERTIFICATION STATEMENT - OLIN Corpoln-ex312_2017331xq1.htm
EX-31.1 - CEO SECTION 302 CERTIFICATION STATEMENT - OLIN Corpoln-ex311_2017331xq1.htm
EX-12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED) - OLIN Corpoln-ex12_2017331xq1.htm
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

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

For the quarterly period ended March 31, 2017
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
(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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ¨

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 March 31, 2017, 165,890,561 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)

 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
168.5

 
$
184.5

 
$
315.6

Receivables, net
774.5

 
675.0

 
813.2

Income taxes receivable
25.5

 
25.5

 
36.3

Inventories
656.3

 
630.4

 
679.5

Other current assets
44.9

 
30.8

 
32.8

Total current assets
1,669.7

 
1,546.2

 
1,877.4

Property, plant and equipment (less accumulated depreciation of $2,001.1, $1,891.6 and $1,587.9)
3,659.2

 
3,704.9

 
3,859.0

Deferred income taxes
112.7

 
119.5

 
107.4

Other assets
637.2

 
644.4

 
463.8

Intangible assets, net
615.4

 
629.6

 
663.2

Goodwill
2,119.0

 
2,118.0

 
2,146.1

Total assets
$
8,813.2

 
$
8,762.6

 
$
9,116.9

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current installments of long-term debt
$
81.8

 
$
80.5

 
$
205.1

Accounts payable
637.3

 
570.8

 
478.1

Income taxes payable
8.1

 
7.5

 
14.1

Accrued liabilities
258.2

 
263.8

 
352.3

Total current liabilities
985.4

 
922.6

 
1,049.6

Long-term debt
3,530.8

 
3,537.1

 
3,627.9

Accrued pension liability
627.5

 
638.1

 
635.2

Deferred income taxes
1,033.0

 
1,032.5

 
1,091.0

Other liabilities
364.9

 
359.3

 
340.4

Total liabilities
6,541.6

 
6,489.6

 
6,744.1

Commitments and contingencies

 

 

Shareholders’ equity:
 
 
 
 
 
Common stock, par value $1 per share:  authorized, 240.0 shares;
   issued and outstanding, 165.9, 165.4 and 165.2 shares
165.9

 
165.4

 
165.2

Additional paid-in capital
2,253.7

 
2,243.8

 
2,238.9

Accumulated other comprehensive loss
(502.1
)
 
(510.0
)
 
(470.2
)
Retained earnings
354.1

 
373.8

 
438.9

Total shareholders’ equity
2,271.6

 
2,273.0

 
2,372.8

Total liabilities and shareholders’ equity
$
8,813.2

 
$
8,762.6

 
$
9,116.9


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 Operations
(In millions, except per share data)
(Unaudited)

 
Three Months Ended
March 31,
 
2017
 
2016
Sales
$
1,567.1

 
$
1,348.2

Operating expenses:
 
 
 
Cost of goods sold
1,393.7

 
1,175.4

Selling and administration
88.2

 
88.1

Restructuring charges
8.2

 
92.8

Acquisition-related costs
7.0

 
10.2

Other operating (expense) income
(0.4
)
 
10.9

Operating income (loss)
69.6

 
(7.4
)
Earnings of non-consolidated affiliates
0.5

 
0.2

Interest expense
52.4

 
48.5

Interest income
0.2

 
0.3

Income (loss) before taxes
17.9

 
(55.4
)
Income tax provision (benefit)
4.5

 
(17.5
)
Net income (loss)
$
13.4

 
$
(37.9
)
Net income (loss) per common share:
 
 
 
Basic
$
0.08

 
$
(0.23
)
Diluted
$
0.08

 
$
(0.23
)
Dividends per common share
$
0.20

 
$
0.20

Average common shares outstanding:
 
 
 
Basic
165.6

 
165.1

Diluted
167.9

 
165.1


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 (Loss)
(In millions)
(Unaudited)

 
Three Months Ended
March 31,
 
2017
 
2016
Net income (loss)
$
13.4

 
$
(37.9
)
Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments, net
6.0

 
15.5

Unrealized (losses) gains on derivative contracts, net
(2.0
)
 
3.0

Amortization of prior service costs and actuarial losses, net
3.9

 
3.8

Total other comprehensive income, net of tax
7.9

 
22.3

Comprehensive income (loss)
$
21.3

 
$
(15.6
)

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, 2016
165.1

 
$
165.1

 
$
2,236.4

 
$
(492.5
)
 
$
509.8

 
$
2,418.8

Net loss

 

 

 

 
(37.9
)
 
(37.9
)
Other comprehensive income

 

 

 
22.3

 

 
22.3

Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.20 per share)

 

 

 

 
(33.0
)
 
(33.0
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
Other transactions
0.1

 
0.1

 
0.9

 

 

 
1.0

Stock-based compensation

 

 
1.6

 

 

 
1.6

Balance at March 31, 2016
165.2

 
$
165.2

 
$
2,238.9

 
$
(470.2
)
 
$
438.9

 
$
2,372.8

Balance at January 1, 2017
165.4

 
$
165.4

 
$
2,243.8

 
$
(510.0
)
 
$
373.8

 
$
2,273.0

Net income

 

 

 

 
13.4

 
13.4

Other comprehensive income

 

 

 
7.9

 

 
7.9

Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.20 per share)

 

 

 

 
(33.1
)
 
(33.1
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
0.5

 
0.5

 
8.3

 

 

 
8.8

Other transactions

 

 
0.6

 

 

 
0.6

Stock-based compensation

 

 
1.0

 

 

 
1.0

Balance at March 31, 2017
165.9

 
$
165.9

 
$
2,253.7

 
$
(502.1
)
 
$
354.1

 
$
2,271.6


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)

 
Three Months Ended
March 31,
 
2017
 
2016
Operating Activities
 
 
 
Net income (loss)
$
13.4

 
$
(37.9
)
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by (used for) operating activities:
 
 
 
Earnings of non-consolidated affiliates
(0.5
)
 
(0.2
)
Losses on disposition of property, plant and equipment
0.3

 
0.2

Stock-based compensation
1.5

 
2.2

Depreciation and amortization
135.1

 
129.7

Deferred income taxes
9.5

 
(14.7
)
Write-off of equipment and facility included in restructuring charges

 
76.6

Qualified pension plan contributions
(0.1
)
 
(0.5
)
Qualified pension plan income
(6.7
)
 
(9.0
)
Change in:
 
 
 
Receivables
(80.2
)
 
(16.8
)
Income taxes receivable/payable
0.1

 
5.6

Inventories
(23.8
)
 
6.3

Other current assets
(17.5
)
 
6.5

Accounts payable and accrued liabilities
56.3

 
(99.7
)
Other assets
3.1

 
2.1

Other noncurrent liabilities
4.6

 
(0.3
)
Other operating activities
4.8

 
(3.1
)
Net operating activities
99.9

 
47.0

Investing Activities
 
 
 
Capital expenditures
(83.0
)
 
(76.1
)
Proceeds from disposition of property, plant and equipment

 
0.1

Proceeds from disposition of affiliated companies

 
2.2

Net investing activities
(83.0
)
 
(73.8
)
Financing Activities
 
 
 
Long-term debt:
 
 
 
Borrowings
1,875.0

 

Repayments
(1,872.7
)
 
(17.1
)
Stock options exercised
8.8

 

Dividends paid
(33.1
)
 
(33.0
)
Debt issuance costs
(11.2
)
 

Net financing activities
(33.2
)
 
(50.1
)
Effect of exchange rate changes on cash and cash equivalents
0.3

 
0.5

Net decrease in cash and cash equivalents
(16.0
)
 
(76.4
)
Cash and cash equivalents, beginning of period
184.5

 
392.0

Cash and cash equivalents, end of period
$
168.5

 
$
315.6

Cash paid for interest and income taxes:
 
 
 
Interest
$
29.7

 
$
17.3

Income taxes, net of refunds
$
0.1

 
$
3.6

Non-cash investing activities:
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
$
20.9

 
$
2.1


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 (Olin) is a Virginia corporation, incorporated in 1892, having its principal executive offices in Clayton, MO.  We are a manufacturer concentrated in three business segments:  Chlor Alkali Products and Vinyls, Epoxy and Winchester.  The Chlor Alkali Products and Vinyls segment manufactures and sells chlorine and caustic soda, ethylene dichloride and vinyl chloride monomer, methyl chloride, methylene chloride, chloroform, carbon tetrachloride, perchloroethylene, trichloroethylene and vinylidene chloride, hydrochloric acid, hydrogen, bleach products and potassium hydroxide.  The Epoxy segment produces and sells a full range of epoxy materials, including allyl chloride, epichlorohydrin, liquid epoxy resins and downstream products such as converted epoxy resins and additives. The Winchester segment produces and sells sporting 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 U.S. Securities and Exchange Commission (SEC). The preparation of the 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, 2016. Certain reclassifications were made to prior year amounts to conform to the 2017 presentation.

ACQUISITION
On October 5, 2015 (the Closing Date), we completed the acquisition (the Acquisition) from The Dow Chemical Company (TDCC) of its U.S. Chlor Alkali and Vinyl, Global Chlorinated Organics and Global Epoxy businesses (collectively, the Acquired Business), whose operating results are included in the accompanying financial statements since the Closing Date.

For the three months ended March 31, 2017 and 2016, we incurred costs related to the integration of the Acquired Business of $7.0 million and $10.2 million, respectively, which consisted of advisory, legal, accounting and other professional fees.

RESTRUCTURING CHARGES

On March 21, 2016, we announced that we had made the decision to close a combined total of 433,000 tons of chlor alkali capacity across three separate locations. Associated with this action, we have permanently closed our Henderson, NV chlor alkali plant with 153,000 tons of capacity and have reconfigured the site to manufacture bleach and distribute caustic soda and hydrochloric acid. Also, the capacity of our Niagara Falls, NY chlor alkali plant has been reduced from 300,000 tons to 240,000 tons and the chlor alkali capacity at our Freeport, TX facility was reduced by 220,000 tons. This 220,000 ton reduction was entirely from diaphragm cell capacity. For the three months ended March 31, 2017 and 2016, we recorded pretax restructuring charges of $7.5 million and $92.2 million, respectively, for the write-off of equipment and facility costs, lease and other contract termination costs, 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 2020 of approximately $25 million related to these capacity reductions. This estimate of additional restructuring charges does not include any additional charges related to a contract termination that is currently in dispute. The other party to the contract has filed a demand for arbitration alleging, among other things, that Olin breached the related agreement and claimed damages in excess of the amount Olin believes it is obligated for under the contract. Any additional losses related to this contract dispute are not currently estimable because of unresolved questions of fact and law but, if resolved unfavorably to Olin, they could have a material effect on our financial results.

7




On December 12, 2014, we announced that we had made the decision to permanently close the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. This action reduced the facility’s chlor alkali capacity by 185,000 tons. Subsequent to the shut down, the plant predominantly focuses on bleach and hydrochloric acid, which are value-added products, as well as caustic soda. For the three months ended March 31, 2017 and 2016, we recorded pretax restructuring charges of $0.7 million and $0.3 million, respectively, for lease and other contract termination costs and facility exit costs related to these actions. We expect to incur additional restructuring charges through 2018 of approximately $6 million related to the shut down of this portion of the facility.

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. Consistent with this decision in 2010, we initiated an estimated $110 million five-year project, which included 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. During 2016, the final rifle ammunition production equipment relocation was completed. For the three months ended March 31, 2016, we recorded pretax restructuring charges of $0.3 million for employee relocation costs and facility exit costs related to these actions.

The following table summarizes the 2017 and 2016 activities by major component of these restructuring actions and the remaining balances of accrued restructuring costs as of March 31, 2017 and 2016:
 
 
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, 2016
$
4.6

 
$
2.1

 
$

 
$

 
$

 
$
6.7

 
Restructuring charges
3.9

 
9.2

 
0.2

 
2.9

 
76.6

 
92.8

 
Amounts utilized
(1.7
)
 
(0.1
)
 
(0.2
)
 
(0.6
)
 
(76.6
)
 
(79.2
)
 
Currency translation adjustments
0.1

 
0.1

 

 

 

 
0.2

Balance at March 31, 2016
$
6.9

 
$
11.3

 
$

 
$
2.3

 
$

 
$
20.5

Balance at January 1, 2017
$
3.4

 
$
7.5

 
$

 
$
1.8

 
$

 
$
12.7

 
Restructuring charges

 
5.7

 
0.2

 
2.3

 

 
8.2

 
Amounts utilized
(0.5
)
 
(1.7
)
 
(0.2
)
 
(4.1
)
 

 
(6.5
)
Balance at March 31, 2017
$
2.9

 
$
11.5

 
$

 
$

 
$

 
$
14.4


The following table summarizes the cumulative restructuring charges of these 2016, 2014 and 2010 restructuring actions by major component through March 31, 2017:
 
 
Chlor Alkali Products and Vinyls
 
Winchester
 
Total
 
 
Becancour
 
Capacity Reductions
 
 
 
 
($ in millions)
Write-off of equipment and facility
 
$
3.5

 
$
76.6

 
$

 
$
80.1

Employee severance and job related benefits
 
2.7

 
5.1

 
13.1

 
20.9

Facility exit costs
 
2.0

 
16.3

 
2.3

 
20.6

Pension and other postretirement benefits curtailment
 

 

 
4.1

 
4.1

Employee relocation costs
 

 
1.6

 
6.0

 
7.6

Lease and other contract termination costs
 
5.3

 
19.2

 

 
24.5

Total cumulative restructuring charges
 
$
13.5

 
$
118.8

 
$
25.5

 
$
157.8


As of March 31, 2017, we have incurred cash expenditures of $58.0 million and non-cash charges of $84.6 million related to these restructuring actions. The remaining balance of $14.4 million is expected to be paid out through 2020.


8



ACCOUNTS RECEIVABLES

On December 20, 2016, we entered into a three year, $250.0 million Receivables Financing Agreement with PNC Bank, National Association, as administrative agent (Receivables Financing Agreement). Under the Receivables Financing Agreement, our eligible trade receivables are used for collateralized borrowings and continue to be serviced by us. As of March 31, 2017, $316.5 million of our trade receivables were pledged as collateral and we had $210.0 million drawn under the agreement. As of March 31, 2017 we had additional borrowing capacity of $34.1 million under the Receivables Financing Agreement. As of December 31, 2016, $282.3 million of our trade receivables were pledged as collateral and $210.0 million was drawn under the agreement. For the year ended December 31, 2016, the proceeds of the Receivables Financing Agreement were used to repay $210.0 million of the $800.0 million Sumitomo term loan facility (the Sumitomo Credit Facility). In addition, the Receivables Financing Agreement incorporates the leverage and coverage covenants that are contained in the senior revolving credit facilities.

On June 29, 2016, we entered into a trade accounts receivable factoring arrangement which was amended on September 1, 2016 and, on December 22, 2016, we entered into a separate trade accounts receivable factoring arrangement which was amended on March 24, 2017 (collectively the AR Facilities). Pursuant to the terms of the AR Facilities, certain of our subsidiaries may sell their accounts receivable up to a maximum of $271.5 million. We will continue to service such accounts.  These receivables qualify for sales treatment under Accounting Standards Codification (ASC) 860 “Transfers and Servicing” (ASC 860) and, accordingly, the proceeds are included in net cash provided by operating activities in the condensed statements of cash flows.  The gross amount of receivables sold for the three months ended March 31, 2017 totaled $389.6 million.  The factoring discount paid under the AR Facilities is recorded as interest expense on the condensed statements of operations. The agreements are without recourse and therefore no recourse liability has been recorded as of March 31, 2017.  As of March 31, 2017 and December 31, 2016, $145.0 million and $126.1 million, respectively, of receivables qualifying for sale treatment were outstanding and will continue to be serviced by us.

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:
 
March 31,
 
2017
 
2016
 
($ in millions)
Balance at beginning of year
$
10.1

 
$
6.4

Provisions charged
1.4

 
1.4

Write-offs, net of recoveries

 
(1.5
)
Balance at end of period
$
11.5

 
$
6.3



9



INVENTORIES

Inventories consisted of the following:
 
March 31,
2017
 
December 31,
2016
 
March 31,
2016
 
($ in millions)
Supplies
$
60.1

 
$
58.1

 
$
73.7

Raw materials
68.9

 
72.6

 
88.0

Work in process
115.0

 
110.7

 
108.1

Finished goods
448.3

 
424.9

 
452.2

 
692.3

 
666.3

 
722.0

LIFO reserve
(36.0
)
 
(35.9
)
 
(42.5
)
Inventories, net
$
656.3

 
$
630.4

 
$
679.5


Inventories are valued at the lower of cost and net realizable value. For U.S. inventories, inventory costs are determined principally by the dollar value last-in, first-out (LIFO) method of inventory accounting while for international inventories, 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 March 31, 2017 reflect certain estimates relating to inventory quantities and costs at December 31, 2017. The replacement cost of our inventories would have been approximately $36.0 million, $35.9 million and $42.5 million higher than reported at March 31, 2017, December 31, 2016 and March 31, 2016, respectively.

OTHER ASSETS

Included in other assets were the following:
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
($ in millions)
Investments in non-consolidated affiliates
$
27.2

 
$
26.7

 
$
25.2

Deferred debt issuance costs
3.0

 
2.6

 
3.1

Tax-related receivables
16.1

 
17.5

 
14.4

Interest rate swaps
8.3

 
7.7

 

Supply contracts
560.4

 
566.7

 
402.2

Other
22.2

 
23.2

 
18.9

Other assets
$
637.2

 
$
644.4

 
$
463.8


In connection with the Acquisition, Olin and TDCC have agreed to enter into arrangements for the long-term supply of ethylene by TDCC to Olin, pursuant to which, among other things, Olin has made upfront payments of $433.5 million upon the Closing Date in order to receive ethylene at producer economics and for certain reservation fees for the option to obtain additional future ethylene supply at producer economics. The fair value of the long-term supply contracts recorded as of the Closing Date was a long-term asset of $416.1 million which will be amortized over the life of the contracts as ethylene is received. During 2016, one of the options to obtain additional future ethylene supply at producer economics was exercised by us and, accordingly, additional payments will be made to TDCC of approximately $209.4 million in 2017, which will increase the value of the long-term asset. On February 27, 2017, we exercised the remaining option to obtain additional future ethylene supply and in connection with the exercise we also secured a long-term customer arrangement. Consequently, additional payments will be made to TDCC of between $425 million and $465 million on or about the fourth quarter of 2020, which will increase the value of the long-term asset.

During 2016, Olin entered into arrangements to increase our supply of low cost electricity.  In conjunction with these arrangements, Olin made payments of $175.7 million in 2016.  The payments made under these arrangements will be amortized over the life of the contracts as electrical power is received.


10



Amortization expense of $6.3 million and $4.3 million was recognized within cost of goods sold for the three months ended March 31, 2017 and 2016, respectively, related to these supply contracts and is reflected in depreciation and amortization on the condensed statements of cash flows. The long-term supply contracts are monitored for impairment each reporting period.

GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying value of goodwill were as follows:

 
Chlor Alkali Products and Vinyls
 
Epoxy
 
Total
 
($ in millions)
Balance at January 1, 2016
$
1,877.5

 
$
296.6

 
$
2,174.1

Acquisition activity
(23.3
)
 
(5.5
)
 
(28.8
)
Foreign currency translation adjustment
0.6

 
0.2

 
0.8

Balance at March 31, 2016
$
1,854.8

 
$
291.3

 
$
2,146.1

Balance at January 1, 2017
$
1,831.3

 
$
286.7

 
2,118.0

Foreign currency translation adjustment
0.8

 
0.2

 
1.0

Balance at March 31, 2017
$
1,832.1

 
$
286.9

 
$
2,119.0


Intangible assets consisted of the following:

 
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
 
Gross Amount
Accumulated Amortization
Net
 
Gross Amount
Accumulated Amortization
Net
 
Gross Amount
Accumulated Amortization
Net
 
 
($ in millions)
Customers, customer contracts and relationships
 
$
669.2

 
$
(125.3
)
 
$
543.9

 
$
667.8

 
$
(112.9
)
 
$
554.9

 
$
643.8

 
$
(75.9
)
 
$
567.9

Trade name
 
6.9

 
(2.1
)
 
4.8

 
17.8

 
(12.7
)
 
5.1

 
17.9

 
(2.7
)
 
15.2

Acquired technology
 
84.4

 
(18.1
)
 
66.3

 
84.2

 
(15.0
)
 
69.2

 
85.2

 
(5.7
)
 
79.5

Other
 
2.3

 
(1.9
)
 
0.4

 
2.3

 
(1.9
)
 
0.4

 
2.3

 
(1.7
)
 
0.6

Total intangible assets
 
$
762.8

 
$
(147.4
)
 
$
615.4

 
$
772.1

 
$
(142.5
)
 
$
629.6

 
$
749.2

 
$
(86.0
)
 
$
663.2


Intangible assets with indefinite useful lives are reviewed annually in the fourth quarter and/or when circumstances or other events indicate the indefinite life is no longer supportable. In connection with the integration of the Acquired Business, in the first quarter of 2016, the K.A. Steel Chemicals Inc. trade name was changed from an indefinite life intangible asset to an intangible asset with a finite useful life of one year. Amortization expense of $2.7 million was recognized within cost of goods sold for the three months ended March 31, 2016 related to the change in useful life.


11



EARNINGS PER SHARE

Basic and diluted net income (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share reflects the dilutive effect of stock-based compensation.
 
Three Months Ended
March 31,
 
2017
 
2016
Computation of Income (Loss) per Share
(In millions, except per share data)
Net income (loss)
$
13.4

 
$
(37.9
)
Basic shares
165.6

 
165.1

Basic net income (loss) per share
$
0.08

 
$
(0.23
)
Diluted shares:
 
 
 
Basic shares
165.6

 
165.1

Stock-based compensation
2.3

 

Diluted shares
167.9

 
165.1

Diluted net income (loss) per share
$
0.08

 
$
(0.23
)

The computation of dilutive shares from stock-based compensation does not include 2.4 million shares and 7.0 million shares for the three months ended March 31, 2017 and 2016, 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. The condensed balance sheets included reserves for future environmental expenditures to investigate and remediate known sites amounting to $136.6 million, $137.3 million and $139.2 million at March 31, 2017, December 31, 2016 and March 31, 2016, respectively, of which $119.6 million, $120.3 million and $120.2 million, respectively, were classified as other noncurrent liabilities.

Environmental provisions charged to income, which are included in cost of goods sold, were $2.6 million and $2.7 million for the three months ended March 31, 2017 and 2016, respectively.

In connection with the Acquisition, TDCC retained liabilities relating to releases of hazardous materials and violations of environmental law to the extent arising prior to the Closing Date.

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.


12



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 March 31, 2017, December 31, 2016 and March 31, 2016, our condensed balance sheets included liabilities for these legal actions of $13.3 million, $13.6 million and $22.1 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. In connection with the Acquisition, TDCC retained liabilities related to litigation to the extent arising prior to the Closing Date. In addition to the aforementioned legal actions, we are party to a dispute relating to a contract termination. The other party to the contract has filed a demand for arbitration alleging, among other things, that Olin breached the related agreement and claimed damages in excess of the amount Olin believes it is obligated for under the contract. Any additional losses related to this contract dispute are not currently estimable because of unresolved questions of fact and law but, if resolved unfavorably to Olin, they could have a material effect on our financial results.

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 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 March 31, 2016, we recognized an insurance recovery of $11.0 million in other operating (expense) income for property damage and business interruption related to a 2008 chlor alkali facility incident.

SHAREHOLDERS’ EQUITY

On April 24, 2014, our board of directors authorized a share repurchase program for up to 8 million shares of common stock that terminated on April 24, 2017. For the three months ended March 31, 2017 and 2016, no shares were purchased and retired. As of March 31, 2017, we had purchased a total of 1.9 million shares under the April 2014 program, and 6.1 million shares remained authorized to be purchased. Related to the Acquisition, for a period of two years subsequent to the Closing Date, we are subject to certain restrictions on our ability to conduct share repurchases.

We issued 0.5 million shares representing stock options exercised for the three months ended March 31, 2017 with a total value of $8.8 million.

The following table represents the activity included in accumulated other comprehensive loss:
 
Foreign
Currency
Translation
Adjustment
(net of taxes)
 
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, 2016
$
(12.1
)
 
$
(6.9
)
 
$
(473.5
)
 
$
(492.5
)
Unrealized gains
24.0

 
1.1

 

 
25.1

Reclassification adjustments into income

 
3.7

 
6.1

 
9.8

Tax provision
(8.5
)
 
(1.8
)
 
(2.3
)
 
(12.6
)
Net Change
15.5

 
3.0

 
3.8

 
22.3

Balance at March 31, 2016
$
3.4

 
$
(3.9
)
 
$
(469.7
)
 
$
(470.2
)
Balance at January 1, 2017
$
(24.1
)
 
$
12.8

 
$
(498.7
)
 
$
(510.0
)
Unrealized gains (losses)
8.3

 
(3.1
)
 

 
5.2

Reclassification adjustments into income

 
(0.1
)
 
6.6

 
6.5

Tax (provision) benefit
(2.3
)
 
1.2

 
(2.7
)
 
(3.8
)
Net Change
6.0

 
(2.0
)
 
3.9

 
7.9

Balance at March 31, 2017
$
(18.1
)
 
$
10.8

 
$
(494.8
)
 
$
(502.1
)


13



Net income (loss) and cost of goods sold included reclassification adjustments for realized gains and losses on derivative contracts from accumulated other comprehensive loss.

Net income (loss), 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.

SEGMENT INFORMATION

We define segment results as income (loss) before interest expense, interest income, other operating (expense) income, and income taxes, and include the operating results of non-consolidated affiliates. Consistent with the guidance in ASC 280 “Segment Reporting” (ASC 280), we have determined it is appropriate to include the operating results of non-consolidated affiliates in the relevant segment financial results. We have three operating segments: Chlor Alkali Products and Vinyls, Epoxy and Winchester. The three operating segments reflect the organization used by our management for purposes of allocating resources and assessing performance. Chlorine used in our Epoxy segment is transferred at cost from the Chlor Alkali Products and Vinyls segment. Sales and profits are recognized in the Chlor Alkali Products and Vinyls segment for all caustic soda generated and sold by Olin.

 
Three Months Ended
March 31,
 
2017
 
2016
Sales:
($ in millions)
Chlor Alkali Products and Vinyls
$
836.9

 
$
704.3

Epoxy
567.6

 
460.2

Winchester
162.6

 
183.7

Total sales
$
1,567.1

 
$
1,348.2

Income (loss) before taxes:
 
 
 
Chlor Alkali Products and Vinyls
$
87.5

 
$
68.1

Epoxy
(1.2
)
 
8.2

Winchester
25.1

 
28.7

Corporate/other:
 
 
 
Pension income
10.3

 
12.2

Environmental expense
(2.6
)
 
(2.7
)
Other corporate and unallocated costs
(33.4
)
 
(29.6
)
Restructuring charges
(8.2
)
 
(92.8
)
Acquisition-related costs
(7.0
)
 
(10.2
)
Other operating (expense) income
(0.4
)
 
10.9

Interest expense
(52.4
)
 
(48.5
)
Interest income
0.2

 
0.3

Income (loss) before taxes
$
17.9

 
$
(55.4
)


14



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
March 31,
 
2017
 
2016
 
($ in millions)
Stock-based compensation
$
7.3

 
$
4.4

Mark-to-market adjustments
2.6

 
0.4

Total expense
$
9.9

 
$
4.8


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
2017
 
2016
Dividend yield
2.69
%
 
6.09
%
Risk-free interest rate
2.06
%
 
1.35
%
Expected volatility
34
%
 
32
%
Expected life (years)
6.0

 
6.0

Weighted average grant fair value (per option)
$
7.78

 
$
1.90

Weighted average exercise price
$
29.75

 
$
13.14

Shares granted
1,572,000

 
1,670,400


Dividend yield for 2017 and 2016 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.

DEBT

On March 9, 2017, we entered into a new five-year $1,975.0 million senior credit facility, which amended and restated the existing $1,850.0 million senior credit facility (the Senior Credit Facility). Pursuant to the agreement, the aggregate principal amount under the term loan facility was increased to $1,375.0 million (Term Loan Facility), and the aggregate commitments under the senior revolving credit facility were increased to $600.0 million (Senior Revolving Credit Facility and, together with the Term Loan Facility, the Amended Senior Credit Facility), from $500.0 million. In March 2017, we drew the entire $1,375.0 million term loan and used the proceeds to redeem the remaining balance of the existing Senior Credit Facility and a portion of the Sumitomo Credit Facility. The maturity date for the Amended Senior Credit Facility was extended from October 5, 2020 to March 9, 2022. The $600.0 million Senior Revolving Credit Facility includes a $100.0 million letter of credit subfacility. The Term Loan Facility includes amortization payable in equal quarterly installments at a rate of 5.0% per annum for the first two years, increasing to 7.5% per annum for the following year and to 10.0% per annum for the last two years.

Under the Amended Senior Credit Facility, we may select various floating rate borrowing options. The actual interest rate paid on borrowings under the Amended Senior Credit Facility is based on a pricing grid which is dependent upon the leverage ratio as calculated under the terms of the applicable facility for the prior fiscal quarter.  The facility includes 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. We were in compliance with all covenants and restrictions under all our outstanding credit agreements as of March 31, 2017, and no event of default had occurred that would permit the lenders under our outstanding credit agreements to accelerate the debt if not cured. In the future, our ability to generate sufficient operating cash flows, among other factors, will determine the amounts available to be borrowed under these facilities. As of March 31, 2017, as a result of our restrictive covenant related to the leverage ratio, the maximum additional borrowings available to us were $500.6 million.  This limitation would restrict our ability to borrow the maximum amounts available under the Senior Revolving Credit Facility and the Receivables Financing

15



Agreement.  As of March 31, 2017, there were no other covenants or other restrictions that would have limited our ability to borrow.

On March 9, 2017, Olin issued $500.0 million aggregate principal amount of 5.125% senior notes due September 15, 2027 (2027 Notes), which were registered under the Securities Act of 1933, as amended. Interest on the 2027 Notes began accruing from March 9, 2017 and is paid semi-annually beginning on September 15, 2017. Proceeds from the 2027 Notes were used to redeem the remaining balance of the Sumitomo Credit Facility.

For the three months ended March 31, 2017, we recognized interest expense of $2.7 million for the write-off of unamortized deferred debt issuance costs related to these actions. In March 2017, we paid debt issuance costs of $11.2 million relating to the Amended Senior Credit Facility and the 2027 Notes.

CONTRIBUTING EMPLOYEE OWNERSHIP PLAN

The Contributing Employee Ownership Plan (CEOP) is a defined contribution plan available to essentially all domestic employees.  We provide a contribution to an individual retirement contribution account maintained with the CEOP equal to an amount of between 5% and 10% of the employee’s eligible compensation.  The defined contribution plan expense for both the three months ended March 31, 2017 and 2016 was $6.6 million.

Company matching contributions are invested in the same investment allocation as the employee’s contribution.  Our matching contributions for eligible employees for both the three months ended March 31, 2017 and 2016 was $2.7 million.

PENSION PLANS AND RETIREMENT BENEFITS

We sponsor domestic and foreign defined benefit pension plans for eligible employees and retirees. Most of our domestic employees participate in defined contribution plans.  However, a portion of our bargaining hourly employees continue to participate in our domestic qualified defined benefit pension plans under a flat-benefit formula. Our funding policy for the qualified 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 domestic qualified 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).

We also provide certain postretirement healthcare (medical) and life insurance benefits for eligible active and retired domestic employees. The healthcare 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
March 31,

Three Months Ended
March 31,
 
2017

2016

2017

2016
Components of Net Periodic Benefit (Income) Cost
($ in millions)
Service cost
$
4.3


$
3.2


$
0.3


$
0.3

Interest cost
21.7


22.4


0.4


0.5

Expected return on plans’ assets
(39.1
)

(39.8
)




Amortization of prior service cost

 

 
(0.6
)
 

Recognized actuarial loss
6.6


5.3


0.6


0.8

Net periodic benefit (income) cost
$
(6.5
)

$
(8.9
)

$
0.7


$
1.6


We made cash contributions to our international qualified defined benefit pension plans of $0.1 million and $0.5 million for the three months ended March 31, 2017 and 2016, respectively.


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 before taxes.

 
Three Months Ended
March 31,
Effective Tax Rate Reconciliation (Percent)
2017
 
2016
Statutory federal tax rate
35.0
 %
 
35.0
 %
Salt depletion
(9.4
)
 
(3.4
)
Stock-based compensation
(8.4
)
 

Foreign rate differential
(3.1
)
 
(3.8
)
U.S. tax on foreign earnings
3.1

 
3.8

Dividends paid to CEOP
(0.4
)
 
(0.6
)
State income taxes, net
0.5

 
(1.4
)
Change in valuation allowance

 
0.1

Change in tax contingencies
1.1

 
1.6

Return to provision
5.8

 

Other, net
0.9

 
0.3

Effective tax rate
25.1
 %
 
31.6
 %

The effective tax rate for the three months ended March 31, 2017 included $1.5 million of tax benefit associated with stock-based compensation and $1.0 million of tax expense associated with prior year tax positions. The effective tax rate for the three months ended March 31, 2016 included $0.9 million of tax benefit associated with changes in uncertain tax positions primarily related to settlements with taxing authorities.

The condensed balance sheets include income tax receivables that are classified as other noncurrent assets of $1.5 million at March 31, 2016.

As of March 31, 2017, we had $43.3 million of gross unrecognized tax benefits, which would have a net $41.4 million impact on the effective tax rate, if recognized. As of March 31, 2016, we had $33.5 million of gross unrecognized tax benefits, of which $31.9 million would have impacted the effective tax rate, if recognized. The amount of unrecognized tax benefits was as follows:
 
March 31,
 
2017
 
2016
 
($ in millions)
Balance at beginning of year
$
38.4

 
$
35.1

Increases for prior year tax positions
4.9

 

Decreases for prior year tax positions
(0.7
)
 
(1.6
)
Increases for current year tax positions
0.7

 

Balance at end of period
$
43.3

 
$
33.5


As of March 31, 2017, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $12.9 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.


17



We operate globally 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 to 2012. In connection with the Acquisition, TDCC retained liabilities relating to taxes to the extent arising prior to the Closing Date. 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
2008; 2010 - 2016
U.S. state income tax
2006 - 2016
Canadian federal income tax
2012 - 2016
Brazil
2014 - 2016
Germany
2015 - 2016
China
2014 - 2016
The Netherlands
2014 - 2016
South Korea
2014 - 2016

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 condensed 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 derivative contracts as cash flow hedges of forecasted purchases of commodities and forecasted interest payments related to variable-rate borrowings and designate 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 and natural gas, and certain raw materials used in our production processes are subject to price volatility. Depending on market conditions, we may enter into futures contracts, forward contracts, commodity swaps 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.

Olin actively manages currency exposures that are associated with net monetary asset positions, currency purchases and sales commitments denominated in foreign currencies and foreign currency denominated assets and liabilities created in the normal course of business. We enter into forward sales and purchase contracts to manage currency risk to offset our net exposures, by currency, related to the foreign currency denominated monetary assets and liabilities of our operations. At March 31, 2017, we had outstanding forward contracts to buy foreign currency with a notional value of $33.8 million and to sell foreign currency with a notional value of $123.0 million. All of the currency derivatives expire within one year and are for U.S. dollar (USD) equivalents. The counterparties to the forward contracts are large financial institutions; however, the risk of loss to us in the event of nonperformance by a counterparty could be significant to our financial position or results of operations. At December 31, 2016, we had outstanding forward contracts to buy foreign currency with a notional value of $73.2 million and to sell foreign currency with a notional value of $100.8 million. At March 31, 2016, we had outstanding forward contracts to buy foreign currency with a notional value of $29.6 million and to sell foreign currency with a notional value of $98.9 million.

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 (loss) until the hedged item is recognized in earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized currently in earnings.


18



We had the following notional amount of outstanding commodity contracts that were entered into to hedge forecasted purchases:
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
($ in millions)
Copper
$
38.9

 
$
35.8

 
$
43.1

Zinc
8.0

 
8.0

 
8.5

Lead
1.4

 
3.4

 
9.1

Natural gas
53.0

 
54.4

 
0.9


As of March 31, 2017, the counterparties to these commodity contracts were Wells Fargo Bank, N.A. (Wells Fargo) ($34.4 million), Citibank ($23.5 million), Merrill Lynch Commodities, Inc. ($29.1 million) and JPMorgan Chase Bank, National Association ($14.3 million), all of which are major financial institutions.

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 March 31, 2017, we had open positions in futures contracts through 2021. If all open futures contracts had been settled on March 31, 2017, we would have recognized a pretax gain of $6.1 million.

If commodity prices were to remain at March 31, 2017 levels, approximately $2.6 million of deferred gains 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.

In April 2016, we entered into three tranches of forward starting interest rate swaps whereby we agreed to pay fixed rates to the counterparties who, in turn, pay us floating rates on $1,100.0 million, $900.0 million, and $400.0 million of our underlying floating-rate debt obligations. Each tranche’s term length is for twelve months beginning on December 31, 2016, December 31, 2017 and December 31, 2018, respectively. The counterparties to the agreements are SMBC Capital Markets, Inc., Wells Fargo, PNC Bank, National Association, and Toronto-Dominion Bank. These counterparties are large financial institutions; however, the risk of loss to us in the event of nonperformance by a counterparty could be significant to our financial position or results of operations. We have designated the swaps as cash flow hedges of the risk of changes in interest payments associated with our variable rate borrowings. Accordingly, the swap agreements have been recorded at their fair market value of $11.4 million and are included in other current assets and other assets on the accompanying condensed balance sheet as of March 31, 2017, with the corresponding gain deferred as a component of other comprehensive loss. For the three months ended March 31, 2017, less than $0.1 million of expense was recorded to interest expense on the accompanying condensed statement of operations related to these swap agreements. No gain or loss has been recorded in earnings as a result of ineffectiveness.

We use interest rate swaps as a means of minimizing significant unanticipated earnings fluctuations that may arise from volatility in interest rates of our variable-rate borrowings. These interest rate swaps are treated as cash flow hedges. At March 31, 2017, we had open interest rate swaps designated as cash flow hedges with maximum terms through 2019. If all open futures contracts had been settled on March 31, 2017, we would have recognized a pretax gain of $11.4 million.

If interest rates were to remain at March 31, 2017 levels, $2.7 million of deferred gains would be reclassified into earnings during the next twelve months. The actual effect on earnings will be dependent on actual interest rates when the forecasted transactions occur.


19



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. As of March 31, 2017, December 31, 2016 and March 31, 2016, the total notional amounts of our interest rate swaps designated as fair value hedges were $500.0 million, $500.0 million and zero, respectively.

In April 2016, we entered into interest rate swaps on $250.0 million of our underlying fixed-rate debt obligations, whereby we agreed to pay variable rates to the counterparties who, in turn, pay us fixed rates.  The counterparties to these agreements are Toronto-Dominion Bank and SMBC Capital Markets, Inc., both of which are major financial institutions.

In October 2016, we entered into interest rate swaps on an additional $250.0 million of our underlying fixed-rate debt obligations, whereby we agreed to pay variable rates to the counterparties who, in turn, pay us fixed rates.  The counterparties to these agreements are PNC Bank, National Association and Wells Fargo, both of which are major financial institutions.

We have designated the April 2016 and October 2016 interest rate swap agreements as fair value hedges of the risk of changes in the value of fixed rate debt due to changes in interest rates for a portion of our fixed rate borrowings. Accordingly, the swap agreements have been recorded at their fair market value of $29.6 million and are included in other long-term liabilities on the accompanying condensed balance sheet as of March 31, 2017, with a corresponding decrease in the carrying amount of the related debt. For the three months ended March 31, 2017, $1.2 million of income was recorded to interest expense on the accompanying condensed statement of operations related to these swap agreements. No gain or loss has been recorded in earnings as a result of ineffectiveness.

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 March 31, 2017, $0.1 million of this gain was included in current installments of long-term debt.

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 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.


20



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
 
 
Balance Sheet Location
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
Balance Sheet Location
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
 
 
 
($ in millions)
 
 
 
($ in millions)
Derivatives Designated as Hedging Instruments
Interest rate contracts
 
Other current assets
 
$
3.1

 
$
1.9

 
$

 
Current installments of long-term debt
 
$
0.1

 
$
0.1

 
$
0.6

Interest rate contracts
 
Other assets
 
8.3

 
7.7

 

 
Long-term debt
 

 

 
0.3

Interest rate contracts
 
Other assets
 

 

 

 
Other liabilities
 
29.6

 
28.5

 

Commodity contracts – gains
 
Other current assets
 
7.5

 
13.2

 

 
Accrued liabilities
 
(0.2
)
 

 
(1.0
)
Commodity contracts – losses
 
Other current assets
 
(1.2
)
 
(1.7
)
 

 
Accrued liabilities
 
0.4

 

 
7.6

 
 
 
 
$
17.7

 
$
21.1

 
$

 
 
 
$
29.9

 
$
28.6

 
$
7.5

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

 
$

 
$
0.9

 
Accrued liabilities
 
$

 
$

 
$

Interest rate contracts – losses
 
Other current assets
 

 

 
(0.4
)
 
Accrued liabilities
 

 

 

Commodity contracts – losses
 
Other current assets
 

 

 

 
Accrued liabilities
 

 

 
0.1

Foreign exchange contracts – gains
 
Other current assets
 
0.4

 
0.6

 
0.4

 
Accrued liabilities
 
(0.6
)
 
(0.5
)
 
(0.3
)
Foreign exchange contracts – losses
 
Other current assets
 
(0.2
)
 
(0.5
)
 
(0.4
)
 
Accrued liabilities
 
0.9

 
1.7

 
1.8

 
 
 
 
$
0.2

 
$
0.1

 
$
0.5

 
 
 
$
0.3

 
$
1.2

 
$
1.6

Total derivatives(1)
 
 
 
$
17.9

 
$
21.2

 
$
0.5

 
 
 
$
30.2

 
$
29.8

 
$
9.1


(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)
 
 
Three Months Ended
March 31,
 
Location of Gain (Loss)
2017
 
2016
Derivatives – Cash Flow Hedges
 
($ in millions)
Recognized in other comprehensive loss (effective portion):
 
 
 
Commodity contracts
———
$
(5.0
)
 
$
1.1

Interest rate contracts
———
1.9

 

 
 
$
(3.1
)
 
$
1.1

Reclassified from accumulated other comprehensive loss into income (effective portion):
 
 
 
Commodity contracts
Cost of goods sold
$
0.1

 
$
(3.7
)
Derivatives – Fair Value Hedges
 
 
 
 
Interest rate contracts
Interest expense
$
1.2

 
$
0.7

Derivatives Not Designated as Hedging Instruments
 
 
 
 
Commodity contracts
Cost of goods sold
$

 
$
(0.4
)
Foreign exchange contracts
Selling and administration
(4.5
)
 
(3.1
)
 
 
$
(4.5
)
 
$
(3.5
)

The ineffective portion of changes in fair value resulted in zero charged or credited to earnings for the three months ended March 31, 2017 and 2016.

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, exceeds 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 March 31, 2017, December 31, 2016 and March 31, 2016, this threshold was not exceeded. 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.


22



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.

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 for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred.

23



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 March 31, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Assets
($ in millions)
Interest rate swaps
$

 
$
11.4

 
$

 
$
11.4

Commodity contracts

 
6.3

 

 
6.3

Foreign exchange contracts

 
0.2

 

 
0.2

Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
29.7

 
$

 
$
29.7

Commodity contracts

 
0.2

 

 
0.2

Foreign exchange contracts

 
0.3

 

 
0.3

Balance at December 31, 2016
 
 
 
 
 
 
 
Assets
 
Interest rate swaps
$

 
$
9.6

 
$

 
$
9.6

Commodity contracts

 
11.5

 

 
11.5

Foreign exchange contracts

 
0.1

 

 
0.1

Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
28.6

 
$

 
$
28.6

Foreign exchange contracts

 
1.2

 

 
1.2

Balance at March 31, 2016
 
 
 
 
 
 
 
Assets
 
Interest rate swaps
$

 
$
0.5

 
$

 
$
0.5

Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
0.9

 
$

 
$
0.9

Commodity contracts

 
6.7

 

 
6.7

Foreign exchange contracts

 
1.5

 

 
1.5


For the three months ended March 31, 2017, there were no transfers into or out of Level 1, Level 2 or Level 3.

Interest Rate Swaps

Interest rate swap 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

Commodity contract 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 derivative 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

Foreign currency contract financial instruments were valued primarily based on relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for currencies. We enter into forward sales and purchase contracts to manage currency risk resulting from purchase and sale commitments denominated in foreign currencies.

24




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:
 
Fair Value Measurements
 
Amount recorded
on balance sheets
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
($ in millions)
Balance at March 31, 2017
$

 
$
3,759.2

 
$
153.0

 
$
3,912.2

 
$
3,612.6

Balance at December 31, 2016

 
3,703.7

 
153.0

 
3,856.7

 
3,617.6

Balance at March 31, 2016

 
3,778.5

 
153.0

 
3,931.5

 
3,833.0


Nonrecurring Fair Value Measurements

In addition to assets and liabilities that are recorded at fair value on a recurring basis, we record assets and liabilities at fair value on a nonrecurring basis as required by ASC 820. There were no assets measured at fair value on a nonrecurring basis as of March 31, 2017, December 31, 2016 and March 31, 2016.

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

In October 2015, Blue Cube Spinco Inc. (the Issuer) issued $720.0 million aggregate principal amount of 9.75% senior notes due October 15, 2023 (2023 Notes) and $500.0 million aggregate principal amount of 10.00% senior notes due October 15, 2025 (2025 Notes and, together with the 2023 Notes, the Notes). During 2016, the Notes were registered under the Securities Act of 1933, as amended. The Issuer was formed on March 13, 2015 as a wholly owned subsidiary of TDCC and upon closing of the Acquisition became a 100% owned subsidiary of Olin (the Parent Guarantor). The Exchange Notes are fully and unconditionally guaranteed by the Parent Guarantor.

The following condensed consolidating financial information presents the condensed consolidating balance sheets as of March 31, 2017, December 31, 2016 and March 31, 2016, the related condensed consolidating statements of operations and comprehensive income for each of the three months ended March 31, 2017 and 2016, and the related statements of cash flows for the three months ended March 31, 2017 and 2016, of (a) the Parent Guarantor, (b) the Issuer, (c) the non-guarantor subsidiaries, (d) elimination entries necessary to consolidate the Parent Guarantor with the Issuer and the non-guarantor subsidiaries and (e) Olin on a consolidated basis. Investments in consolidated subsidiaries are presented under the equity method of accounting.

25



CONDENSED CONSOLIDATING BALANCE SHEETS
March 31, 2017
(In millions)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Parent Guarantor
 
Issuer
 
Subsidiary
Non-Guarantor
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
27.5

 
$

 
$
141.0

 
$

 
$
168.5

Receivables, net
113.6

 

 
660.9

 

 
774.5

Intercompany receivables

 
1.6

 
1,976.8

 
(1,978.4
)
 

Income taxes receivable
21.7

 
0.7

 
6.9

 
(3.8
)
 
25.5

Inventories
181.3

 

 
475.0

 

 
656.3

Other current assets
182.1

 
3.4

 
4.4

 
(145.0
)
 
44.9

Total current assets
526.2

 
5.7

 
3,265.0

 
(2,127.2
)
 
1,669.7

Property, plant and equipment, net
509.2

 

 
3,150.0

 

 
3,659.2

Investment in subsidiaries
6,068.3

 
3,769.8

 

 
(9,838.1
)
 

Deferred income taxes
123.4

 

 
104.3

 
(115.0
)
 
112.7

Other assets
50.0

 

 
587.2

 

 
637.2

Long-term receivables—affiliates

 
2,227.6

 

 
(2,227.6
)
 

Intangible assets, net
0.4

 
5.7

 
609.3

 

 
615.4

Goodwill

 
966.3

 
1,152.7

 

 
2,119.0

Total assets
$
7,277.5

 
$
6,975.1

 
$
8,868.5

 
$
(14,307.9
)
 
$
8,813.2

Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities: