UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the fiscal year ended December 31, 20152016 |
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the transition period from to |
Commission file number 1-1070
OLIN CORPORATION
(Exact name of registrant as specified in its charter)
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| Virginia | 13-1872319 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
190 Carondelet Plaza, Suite 1530, Clayton, MO (Address of principal executive offices) | 63105 (Zip code) |
Registrant’s telephone number, including area code: (314) 480-1400
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Name of each exchange on which registered |
Common Stock, par value $1 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 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 ¨ Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x
As of June 30, 2015,2016, the aggregate market value of registrant’s common stock, par value $1 per share, held by non-affiliates of registrant was approximately $2,060,950,212$4,062,589,377 based on the closing sale price as reported on the New York Stock Exchange.
As of January 29, 2016, 165,113,90631, 2017, 165,430,330 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference in this Form 10-K
as indicated herein:
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| Document | Part of 10-K into which incorporated |
Proxy Statement relating to Olin’s Annual Meeting of Shareholders to be held in 20162017 | Part III |
PART I
Item 1. BUSINESS
GENERAL
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, which represent 54% of 2016 sales. 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, which represent 33% of 2016 sales. The Winchester segment produces and sells sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges, which represent 13% of 2016 sales. See our discussion of our segment disclosures contained in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
On October 5, 2015 (the Closing Date), we acquired from The Dow Chemical Company (TDCC) its U.S. Chlor Alkali and Vinyl, Global Chlorinated Organics and Global Epoxy businesses (collectively, the Acquired Business) using a Reverse Morris Trust Structure (collectively, the Acquisition). The Acquired Business’s operating results are included in the accompanying financial statements since the Closing Date of the Acquisition. For segment reporting purposes, the Acquired Business’s Global Epoxy operating results comprise the newly created Epoxy segment and U.S. Chlor Alkali and Vinyl and Global Chlorinated Organics (Acquired Chlor Alkali Business) operating results combined with our former Chlor Alkali Products and Chemical Distribution segments to comprise the newly created Chlor Alkali Products and Vinyls segment.
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, which represent 54% of fourth quarter 2015 sales. 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, which represent 34% of fourth quarter 2015 sales. The Winchester segment produces and sells sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges, which represent 12% of fourth quarter 2015 sales. See our discussion of our segment disclosures contained in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
GOVERNANCE
We maintain an Internet website at www.olin.com. Our reports on Form 10-K, Form 10-Q and Form 8-K, as well as amendments to those reports, are available free of charge on our website, as soon as reasonably practicable after we file the reports with the Securities and Exchange Commission (SEC). Additionally, a copy of our SEC filings can be accessed from the SEC at their Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling that office of the SEC at 1-800-SEC-0330. Also, a copy of our electronically filed materials can be obtained at www.sec.gov. Our Principles of Corporate Governance, Committee Charters and Code of Conduct are available on our website at www.olin.com in the Governance Section under Governance Documents and Committees.
In May 2015,2016, our Chief Executive Officer executed the annual Section 303A.12(a) CEO Certification required by the New York Stock Exchange (NYSE), certifying that he was not aware of any violation of the NYSE’s corporate governance listing standards by us. Additionally, our Chief Executive Officer and Chief Financial Officer executed the required Sarbanes-Oxley Act of 2002 (SOX) Sections 302 and 906 certifications relating to this Annual Report on Form 10-K, which are filed with the SEC as exhibits to this Annual Report on Form 10-K.
PRODUCTS, SERVICES AND STRATEGIES
Chlor Alkali Products and Vinyls
Products and Services
We have been involved in the chlor alkali industry for more than 120 years and are a major participant in the global chlor alkali industry. Chlorine, caustic soda and hydrogen are co-produced commercially by the electrolysis of salt. These co-produced products are produced simultaneously, and in a fixed ratio of 1.0 ton of chlorine to 1.1 tons of caustic soda and 0.03 tons of hydrogen. The industry refers to this as an Electrochemical Unit or ECU. With the additiona demonstrated capacity of 5.8 million ECUs as of the Acquired Business to Olin,end of 2016, we now have the largest global chlor alkali capacity, according to data from IHS, Inc. (IHS), with a demonstrated capacity of 6.2 million ECUs for 2015.. IHS is a global information consulting company established in 1959 that provides information to a variety of industries.
Chlorine is used as a raw material in the production of thousands of products, including vinyls, urethanes, epoxy, water treatment chemicals and a variety of other organic and inorganic chemicals. A significant portion of chlorine production is consumed in the manufacture of ethylene dichloride (EDC) and vinyl chloride monomer (VCM), both of which Chlor Alkali Products and Vinyls produces. A large portion of our EDC production is utilized in the production of VCM, but we are also one of the largest global participants in merchant EDC sales. EDC and VCM are precursors for polyvinyl chloride, or PVC. PVC is a plastic used in applications such as vinyl siding, pipe, pipe fittings and automotive parts.
We also manufacture and sell other chlor alkali-related products, which we refer to as co-products. The production of chlorinated organics, epoxy products, hydrochloric acid, sodium hypochlorite (bleach), and potassium hyrdroxide also consume chlorine as a raw material creating downstream applications for the upgrading of chlorine and the enablement of caustic soda production. As industry leaders in chlorinated organics and epoxy, the addition of the Acquired Business creates integrated outlets for our captive chlorine. With the addition of the Acquired Business, we have increased the diversification of our high value outlets for chlorine from three to nineteen.
Our Chlor Alkali Products and Vinyls segment is also one of the largest global marketers of caustic soda, including caustic soda produced by TDCC in Brazil. The off-take arrangement with TDCC in Brazil entitles the Chlor Alkali Products and Vinyls segment the right to market and sell the caustic soda produced at TDCC’s Aratu, Brazil site throughout Latin America.site. The diversity of caustic sourcing allows us to cost effectively supply customers worldwide. Caustic soda has a wide variety of end-use applications, the largest of which include water treatment, alumina, pulp and paper, urethanes, detergents and soaps and a variety of other organic and inorganic chemicals.
Our Chlor Alkali Products and Vinyls segment also includes the acquired chlorinated organics business which is the largest global producer of chlorinated organic products that include chloromethanes (methyl chloride, methylene chloride, chloroform and carbon tetrachloride) and chloroethenes (perchloroethylene, trichloroethylene, and vinylidene chloride). Chlorinated organics participates in both the solvent segment, as well as the intermediate segment of the global chlorocarbon industry with a focus on sustainable applications and in applications where we can benefit from our cost advantages. Intermediate products are used as feedstocks in the production of fluoropolymers, fluorocarbon refrigerants and blowing agents, silicones, cellulosics and agricultural chemicals. Solvent products are sold into end uses such as surface preparation, dry cleaning, pharmaceuticals and regeneration of refining catalysts. This business’s unique technology allows us to utilize both hydrochloric acid and chlorinated hydrocarbon byproducts (RCl), produced by our other production processes, as raw materials in an integrated system. These manufacturing facilities also consume chlorine, which generates caustic soda production and sales.
We also manufacture and sell other chlor alkali-related products, including hydrochloric acid, sodium hypochlorite (bleach) and potassium hyrdroxide, which we refer to as co-products. The production of co-products, chlorinated organics and epoxy generally consume chlorine as a raw material creating downstream applications that upgrade the value of chlorine and enable caustic soda production. As industry leaders in chlorinated organics and epoxy resins, the addition of the Acquired Business creates integrated outlets for our captive chlorine. With the addition of the Acquired Business, we have increased the diversification of our high value outlets for chlorine from three to nineteen.
The Chlor Alkali Products and Vinyls segment’s products are delivered by pipeline, marine vessel, deep-water and coastal barge, railcar and truck. Our chemical distribution infrastructure provides us with geographically advantaged storage capacity and provides us with a private fleet of trucks, tankers and trailers that expands our geographic coverage.coverage and enhance our service capabilities. At our largest integrated product sites, our deep-water access enables us to reach global markets.
Our Chlor Alkali Products and Vinyls segment maintains strong relationships with TDCC as both a customer and supplier. These relationships are maintained through long-term cost based contracts that provide us with a reliable supply of key raw materials and predictable and consistent demand for our end use products. Key products sold to TDCC include chlorine, cell effluent, global chlorinated organics and VCM and keyVCM. Key raw materials received from TDCC include ethylene.ethylene and electricity. Ethylene is supplied for the vinyl business under a long-term supply arrangement with TDCC whereby we receive ethylene at integrated producer economics.
Electricity, salt and ethylene are the major purchased raw materials for our Chlor Alkali Products and Vinyls segment. Electricity is the single largest raw material component in the production of chlor alkali vinyl products. Approximately 85%76% of our electricity is generated from natural gas or hydroelectric sources. Approximately 80%85% of our salt requirements are met by internal supply. The high volume nature of this industry places an emphasis on cost management and we believe that our scale, integration and raw material positions make us one of the low cost producers in the industry.
The following table lists products and services of our Chlor Alkali Products and Vinyls segment, with principal products on the basis of annual sales highlighted in bold face.
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| Products & Services | | Major End Uses | | Plants & Facilities | | Major Raw Materials & Components for Products/Services |
| Chlorine/caustic soda | | Pulp & paper processing, chemical manufacturing, water purification, manufacture of vinyl chloride, bleach, swimming pool chemicals and urethane chemicals | | Becancour, Canada Charleston, TN Freeport, TX Henderson, NV
McIntosh, AL Niagara Falls, NY Plaquemine, LA St. Gabriel, LA | | salt, electricity |
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Ethylene dichloride/vinyl chloride monomer
| | Precursor to polyvinyl chloride used in vinyl siding, plumbing and automotive parts
| | Freeport, TX Plaquemine, LA
| | chlorine, ethylene
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Chlorinated organics intermediates
| | Used as feedstocks in the production of fluoropolymers, fluorocarbon refrigerants and blowing agents, silicones, cellulosics and agricultural chemicals
| | Freeport, TX Plaquemine, LA Stade, Germany
| | chlorine, ethylene dichloride, hydrochloric acid, methanol, RCls
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Chlorinated organics solvents
| | Surface preparation, dry cleaning, pharmaceuticals and regeneration of refining catalysts
| | Freeport, TX Plaquemine, LA Stade, Germany
| | chlorine, ethylene dichloride, hydrochloric acid, RCls
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Sodium hypochlorite (bleach) | | Household cleaners, laundry bleaching, swimming pool sanitizers, semiconductors, water treatment, textiles, pulp & paper and food processing | | Augusta, GA Becancour, Canada Charleston, TN Henderson, NV*NV Lemont, IL McIntosh, AL* Niagara Falls, NY* Santa Fe Springs, CA Tracy, CA
| | caustic soda, chlorine |
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| Hydrochloric acid | | Steel, oil & gas, plastics, organic chemical synthesis, water & wastewater treatment, brine treatment, artificial sweeteners, pharmaceuticals, food processing and ore & mineral processing | | Becancour, Canada Charleston, TN Henderson, NV
McIntosh, AL Niagara Falls, NY | | chlorine, hydrogen |
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| Potassium hydroxide | | Fertilizer manufacturing, soaps, detergents & cleaners, battery manufacturing, food processing chemicals and deicers | | Charleston, TN | | electricity, potassium chloride |
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| Hydrogen | | Fuel source, hydrogen peroxide and hydrochloric acid | | Becancour, Canada Charleston, TN Freeport, TX Henderson, NV
McIntosh, AL Niagara Falls, NY Plaquemine, LA St. Gabriel, LA | | electricity, salt |
| * Includes low salt, high strength bleach manufacturing. |
Strategies
Strengthen Our Role as Preferred Supplier in North America. Take maximum advantage of our world-scale integrated facilities on the U.S. Gulf Coast, our geographically-advantaged plants across North America and our extensive distribution network to provide a reliable and preferred supply position to our North American customers.
Capitalize on Our Low Cost Position. Our advantaged cost position is derived from shale gas, scale, integration, and deep-water ports. We expect to maximize our low cost position to export caustic soda, chlorinated organics and EDC to customers worldwide.
Optimize the Breadth of Products and Pursue Incremental Expansion Opportunities. Fully utilize the portfolio of co-products and integrated derivatives to continually upgrade chlorine and caustic soda to the highest value applications and provide expansion opportunities.
Epoxy
Products and Services
With the addition of the Acquired Business, we acquired TDCC’s Global Epoxy business. The Epoxy business was one of the first major manufacturers of epoxy products, and has continued to build on a half a century of history through product innovation and technical excellence. According to data from IHS, the Epoxy segment is one of the largest fully integrated global producers of epoxy resins, curing agents and intermediates. The Epoxy segment has a favorable manufacturing cost position which is driven by a combination of scale and integration into low cost feedstocks (including chlorine, caustic soda, allylics and aromatics). The Epoxy segment produces and sells a full range of epoxy materials, including upstream products such as allyl chloride (Allyl) and epichlorohydrin (EPI), midstream products such as liquid epoxy resins (LER), and downstream products such as converted epoxy resins (CER) and additives.
The Epoxy segment serves a diverse array of applications, including wind energy, electrical laminates, marine coatings, consumer goods and composites, as well as numerous applications in civil engineering and protective coating. The Epoxy segment has important relationships with established customers, some of which span decades. Geographically, the Epoxy segment’s primary markets are North America and Western Europe. The segment’s product is delivered primarily by marine vessel, deep-water and coastal barge, railcar and truck.
Allyl has use, not only as a feedstock in the production of EPI, but also as a chemical intermediate in multiple industries and applications, including water purification chemicals. EPI is primarily produced as a feedstock for use in the business’s epoxy resins, and also sold to epoxy producers globally who produce their own resins for end use segments such as coatings and adhesives. LER is manufactured in liquid form and cures with the addition of a hardener into a thermoset solid material offering a distinct combination of strength, adhesion and chemical resistance that is well-suited to coatings and composites applications. While LER is sold externally, a large shareportion of LER production is further converted into CER where value-added modifications produce higher margin customer-specific resins.
Our Epoxy segment maintains strong relationships with TDCC as both a customer and supplier. These relationships are maintained through long-term cost based contracts that provide us with a reliable supply of key raw materials. Key products sold to TDCC include aromatics and key raw materials received from TDCC include propylene and benzene.
The Epoxy segment’s production economics benefit from its integration into chlor alkali and aromatics which are key inputs in epoxy production. This fully integrated structure provides both access to low cost materials and significant operational flexibility. The Epoxy segment operates an integrated aromatics production chain producing cumene, phenol, acetone and bisphenol (BisA) for internal consumption and sale. The Epoxy segment’s consumption of chlorine allows the Chlor Alkali Products and Vinyls segment to generate caustic soda production and sales. Chlorine used in our Epoxy segment is transferred at cost from the Chlor Alkali Products and Vinyls segment.
The following table lists products and services of our Epoxy segment, with principal products on the basis of annual sales highlighted in bold face.
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| Products & Services | | Major End Uses | | Plants & Facilities | | Major Raw Materials & Components for Products/Services |
| Allylics (allyl chloride & epichlorohydrin) | | Manufacturers of polymers, resins and other plastic materials, water purification, and pesticides | | Freeport, TX Stade, Germany Terneuzen, Netherlands | | chlor alkali, propylene |
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| Liquid epoxy resin | | Adhesives, paint and coatings, composites and flooring | | Freeport, TX Guaruja, Brazil Stade, Germany
| | acetone, benzene, bisphenol, chlor alkali, cumene, phenol |
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| Converted epoxy resins | | Electrical laminates, paint and coatings, wind blades, electronics and construction | | Baltringen, Germany Freeport, TX Guaruja, Brazil Gumi, South Korea Pisticci, Italy Rheinmunster, Germany Roberta, GA Stade, Germany Zhangjigang, China | | acetone, benzene, bisphenol, chlor alkali, cumene, phenol |
Strategies
Optimize Existing Cost Position. The Epoxy segment continues to drive productivity cost improvements through the entire supply chain, enhancing reliability and delivering yield improvements. With its advantaged cost position, the business will continue its focus to sell products through improved margin discipline and optimization of our integrated aromatics capabilities.
Continued Focus on Product Innovation. With a long history of leading technology and quality, the Epoxy segment is a leading global innovator. Innovation capture in resins and systems improvements, combined with process, geographic and asset mix, provide the road map to improving the profitability of the Epoxy portfolio.
Take Maximum Advantage of Our Geographical Presence. Operating nineten strategically-located sites on four continents with reliable production and delivery of product enables the business to increase market share in strategic international markets and expand into attractive new emerging markets.
Winchester
Products and Services
In 2016,2017, Winchester is celebratingin its 150151thst year of operation and its 8687th year as part of Olin. Winchester is a premier developer and manufacturer of small caliber ammunition for sale to domestic and international retailers (commercial customers), law enforcement agencies and domestic and international militaries. We believe we are a leading U.S. producer of ammunition for recreational shooters, hunters, law enforcement agencies and the U.S. Armed Forces. Winchester also manufacturers industrial products that have various applications in the construction industry.
In January 2017, SIG Sauer, Inc. was awarded a $580 million, ten-year contract for the modular handgun system pistol contract by the U.S. Army. Winchester will supply the pistol ammunition as a subcontractor to SIG Sauer, Inc.
In February 2016, Winchester was awarded a five-year contract for .38 caliber, .45 caliber and 9mm ammunition to be used by the U.S. Army. The contract has the potential to generate approximately $75 million of sales over the five-year contract.
In January 2016, Winchester was awarded a five-year contract for 5.56mm, 7.62mm and .50 caliber ammunition to be used by the U.S. Army. The contract has the potential to generate approximately $300 million of sales over the five-year contract.
In March 2015, Winchester was awarded a five-year contract for 5.56mm frangible ammunition to be used for training by the U.S. Navy and U.S. Marine Corp. The contract has the potential to generate approximately $45 million of sales over the five-year contract.
In September 2014, Winchester was awarded a five-year contract to produce training ammunition for the U.S. Department of Homeland Security. The contract has the potential to generate $50 million of sales over the five-year contract.
Our legendary Winchester® product line includes all major gauges and calibers of shotgun shells, rimfire and centerfire ammunition for pistols and rifles, reloading components and industrial cartridges. We believe we are a leading U.S. supplier of small caliber commercial ammunition.
In 2015, Winchester was recognized with the Strategic Partnership award by Cabela’s Incorporated (Cabela’s), one of the country’s largest retailers of hunting, fishing and outdoor gear. The Strategic Partnership award is given to partners who demonstrate superior performance metrics and overall contribution to the company. In April 2014, Winchester was recognized with the exclusive Overall Vendor of the Year award by Cabela’s. The Overall Vendor of the Year is Cabela’s highest merchandising vendor award across all categories and departments. Winchester was chosen from more than 3,500 merchandise suppliers for superior performance, partnership and overall contribution to the retailer.
In October 2014, and 2013, Winchester was recognized by the National Association of Sporting Goods Wholesalers (NASGW) with the group’s Excellence in Ammunition Manufacturing award. The NASGW presents the award to manufacturers who best demonstrate outstanding value and service to NASGW distributor members.
Our legendary Winchester® product line includes all major gauges and calibers of shotgun shells, rimfire and centerfire ammunition for pistols and rifles, reloading components and industrial cartridges. We believe we are the leading U.S. supplier of small caliber commercial ammunition.
Winchester has strong relationships throughout the sales and distribution chain and strong ties to traditional dealers and distributors. Winchester has also built its business with key high-volume mass merchants and specialty sporting goods retailers. Winchester has consistently developed industry-leading ammunition, which is recognized in the industry for manufacturing excellence, design innovation and consumer value. Winchester’s new ammunition products continue to receive awards from major industry publications, with recent awards including: American Hunter magazine’s Golden Bullseye Award as “Ammunition Product of the Year” in 2016; Predator Xtreme magazine’s “2015 Readers’ Choice Gold” award; American Rifleman magazine’s Golden Bullseye Award as “Ammunition Product of the Year” in 2015 and 2014; one of Outdoor Life magazine’s “Best New Hunting Loads” in 2015; Field & Stream magazine’s “Best of the Best” award in 20142015 and 2013;2014; Petersen's Hunting magazine’s 2014 “Editor’s Choice” award; Guns & Ammo magazine’s “2014 Ammunition of the Year” award; and Shooting Illustrated magazine’s “Ammunition Product of the Year” in 2014.
Winchester purchases raw materials such as copper-based strip and ammunition cartridge case cups and lead from vendors based on a conversion charge or premium. These conversion charges or premiums are in addition to the market prices for metal as posted on exchanges such as the Commodity Exchange, or COMEX, and London Metals Exchange, or LME. Winchester’s other main raw material is propellant, which is purchased predominantly from one of the U.S.’s largest propellant suppliers.
The following table lists products and services of our Winchester segment, with principal products on the basis of annual sales highlighted in bold face.
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| Products & Services | | Major End Uses | | Plants & Facilities | | Major Raw Materials & Components for Products/Services |
| Winchester® sporting ammunition (shotshells, small caliber centerfire & rimfire ammunition) | | Hunters & recreational shooters, law enforcement agencies | | East Alton, IL Geelong, Australia Oxford, MS
| | brass, lead, steel, plastic, propellant, explosives |
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| Small caliber military ammunition | | Infantry and mounted weapons | | East Alton, IL Oxford, MS | | brass, lead, propellant, explosives |
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| Industrial products (8 gauge loads & powder-actuated tool loads) | | Maintenance applications in power & concrete industries, powder-actuated tools in construction industry | | East Alton, IL Geelong, Australia Oxford, MS | | brass, lead, plastic, propellant, explosives |
On November 3, 2010, we announced that we had made the decision to relocate the Winchester centerfire pistol and rifle ammunition manufacturing operations from East Alton, IL to Oxford, MS. In October 2011, we opened the new centerfire pistol and rifle production facility in Oxford, MS and, during 2013, we completed the relocation of the centerfire pistol manufacturing equipment. During 2014, the centerfire rifle manufacturing equipment was in the process of being relocated, and by December 1, 2014, all commercial centerfire rifle ammunition was manufactured in Oxford, MS. During 2015 and 2016, all of Winchester’s commercial centerfire pistol and rifle ammunition were manufactured in Oxford, MS. The annual savings from the Oxford relocation project reached $35 million in 2015. During the first half of 2016, the final rifle ammunition production equipment relocation will bewas completed and it is expected that the annual cost savings for the project could reachreached approximately $40 million. OnceIn 2017, we expect the cost savings from the completed project to reach approximately $45 million. With the completion of the facility, we believe Winchester expects to havehas the most modern centerfire ammunition production facility in North America.
Strategies
Maximize Existing Strengths. Winchester plans to seek new opportunities to fully utilize the legendary Winchester brand name and will continue to offer a full line of ammunition products to the markets we serve, with specific focus on investments that make Winchester ammunition the retail brand of choice.
Focus on Product Line Growth. With a long record of pioneering new product offerings, Winchester has built a strong reputation as an industry innovator. This includes the introduction of reduced-lead and non-lead products, which are growing in popularity for use in indoor shooting ranges and for outdoor hunting.
Cost Reduction Strategy. Winchester plans to continue to focus on strategies that will lower our costs, includingcosts. During 2016, we completed the ongoing relocation of our centerfire pistol and rifle ammunition manufacturing operations from East Alton, IL to Oxford, MS. Our focus will continue to optimize the Oxford facility and maximize production output.
INTERNATIONAL OPERATIONS
With the addition of the Acquired Business, our international presence increased, including the geographic regions of Europe, Asia Pacific and Latin America. Approximately 39%40% of Olin’s fourth quarter2016 sales were generated outside of the U.S., including 23%28% of our Chlor Alkali Products and Vinyls fourth quarter2016 segment sales, 75%71% of our Epoxy fourth quarter2016 segment sales and 10%9% of our Winchester fourth quarter2016 segment sales, were generated outside of the U.S.sales. See the Note “Segment Information” of the notes to consolidated financial statements contained in Item 8, for geographic segment data. We are incorporating our segment information from that Note into this section of our Form 10-K.
CUSTOMERS AND DISTRIBUTION
During 2015, no single customer accounted for more than 8% of sales. Sales to all U.S. Government agencies and sales under U.S. Government contracting activities in total accounted for approximately 3% of sales in 2015. Products we sell to industrial or commercial users or distributors for use in the production of other products constitute a major part of our total sales. We sell some of our products, such as epoxy resins, caustic soda and sporting ammunition, to a large number of users or distributors, while we sell others, such as chlorine and chlorinated organics in substantial quantities to a relatively small number of industrial users. With the addition of the Acquired Business, we entered into or have significant relationships with a few customers including TDCC, who was our largest customer by revenue in 2015.2016. We expect thisthese relationships to continue to be significant to Olin in the future and to represent more than 10% of our annual sales in the future. During 2016, sales to TDCC represented approximately 15% of our total sales. No other single customer accounted for more than 4% of sales. We discuss the customers for each of our three business segments in more detail above under “Products and Services.”
We market most of our products and services primarily through our sales force and sell directly to various industrial customers, mass merchants, retailers, wholesalers, other distributors and the U.S. Government and its prime contractors.
Sales to all U.S. Government agencies and sales under U.S. Government contracting activities in total accounted for approximately 2% of sales in 2016. Because we engage in some government contracting activities and make sales to the U.S. Government, we are subject to extensive and complex U.S. Government procurement laws and regulations. These laws and regulations provide for ongoing government audits and reviews of contract procurement, performance and administration.
Failure to comply, even inadvertently, with these laws and regulations and with laws governing the export of munitions and other controlled products and commodities could subject us or one or more of our businesses to civil and criminal penalties, and under certain circumstances, suspension and debarment from future government contracts and the exporting of products for a specified period of time.
BACKLOG
The total amount of contracted backlog was approximately $312.5$316.7 million and $289.0$312.5 million as of January 31, 20162017 and 2015,2016, respectively. The backlog orders are in our Winchester business. BeginningBacklogs in November 2012, consumer purchases of ammunition surged significantly above historical demand levels. The surge in demand was across all of Winchester’s commercial product offerings. Beginning in the third quarter of 2014, Winchester began to experience a decline in commercial demand from the 2013 level. However, for 2015 and the second half of 2014 commercial demand remained stronger than 2011 levels. The increase above historical levels of commercial demand can be illustrated by the increase in Winchester’s commercial backlog, which was $230.5 million and $192.4 million at January 31, 2016 and 2015, respectively, compared to $29.4 million at December 31, 2011 and $37.6 million at January 31, 2012. The orders included in the commercial backlog may be canceled by the customer.our other businesses are not significant. Backlog is comprised of all open customer orders not yet shipped. Approximately 88%75% of contracted backlog as of January 31, 20162017 is expected to be filled during 2016.2017.
COMPETITION
We are in active competition with businesses producing or distributing the same or similar products, as well as, in some instances, with businesses producing or distributing different products designed for the same uses.
Chlor alkali manufacturers in North America, with approximately 1817 million tons of chlorine and 1918 million tons of caustic soda capacity, account for approximately 18%17% of worldwide chlor alkali production capacity. With the addition of the Acquired Business, accordingAccording to IHS, we now have the largest chlor alkali capacity in North America and globally. While the technologies to manufacture and transport chlorine and caustic soda are widely available, the production facilities require large capital investments, and are subject to significant regulatory and permitting requirements. Approximately 75%76% of the total North American chlor alkali capacity is located in the U.S. Gulf Coast region. There is a worldwide market for caustic soda, which attracts imports and allows exports depending on market conditions. Other large chlor alkali producers in North America include The Occidental Petroleum Corporation (Oxy) and AxiallWestlake Chemical Corporation (Axiall)(Westlake).
We are also a leading integrated global producer of chlorinated organic products with a strong cost position due to our scale and access to chlor alkali feedstocks. This industry includes large diversified producers such as Oxy, AxiallWestlake and Solvay S.A., as well as multiple producers located in China.
We are a major global fully integrated major epoxy producer, in the world, with access to key low cost feedstocks and a cost a advantaged infrastructure. The markets in which our Epoxy segment operates are highly competitive and are dependent on significant capital investment, the development of proprietary technology and maintenance of product research and development. Among our competitors are Huntsman Corporation, Trinseo S.A. and Hexion, Inc.
We are among the largest manufacturers in the U.S. of commercial small caliber ammunition based on independent market research sponsored by the National Shooting Sports Foundation (NSSF). Formed in 1961, NSSF has a membership of more than 8,000 manufacturers, distributors, firearms retailers, shooting ranges, sportsman’s organizations and publishers. According to NSSF, our Winchester business, Vista Outdoor Inc. (Vista), and Remington Outdoor Company, Inc. (Remington) are the three largest commercial ammunition manufacturers in the U.S. The ammunition industry is highly competitive with us, Vista, Remington, numerous smaller domestic manufacturers and foreign producers competing for sales to the commercial ammunition customers. Many factors influence our ability to compete successfully, including price, delivery, service, performance, product innovation and product recognition and quality, depending on the product involved.
EMPLOYEES
As of December 31, 2015,2016, we had approximately 6,2006,400 employees, with 5,2005,300 working in the U.S. and 1,0001,100 working in foreign countries. Various labor unions represent a majoritysignificant number of our hourly-paid employees for collective bargaining purposes.
The following labor contract iscontracts are scheduled to expire in 2016:early 2018:
|
| | | | |
| Location | | Number of Employees | | Expiration Date |
East Alton (Winchester)Lemont (Chlor Alkali Products and Vinyls) | | 67620 | | December 2016March 2018 |
| Becancour (Chlor Alkali Products and Vinyls) | | 97 | | April 2018 |
While we believe our relations with our employees and their various representatives are generally satisfactory, we cannot assure that we can conclude thisthese labor contractcontracts or any other labor agreements without work stoppages and cannot assure that any work stoppages will not have a material adverse effect on our business, financial condition or results of operations.
RESEARCH ACTIVITIES; PATENTS
Our research activities are conducted on a product-group basis at a number of facilities. Company-sponsored research expenditures were $10.9 million in 2016, $4.9 million in 2015 and $4.1 million in 2014 and $2.5 million in 2013.2014.
We own or license a number of patents, patent applications and trade secrets covering our products and processes. We believe that, in the aggregate, the rights under our patents and licenses are important to our operations, but we do not consider any individual patent, or license or group of patents and licenses related to a specific process or product to be of material importance to our total business.
SEASONALITY
Our sales are affected by the cyclicality of the economy and the seasonality of several industries we serve, including building and construction, coatings, infrastructure, electronics, automotive, bleach, refrigerants and ammunition. The seasonality of the ammunition business is typically driven by the U.S. fall hunting season. Our chlor alkali businesses generally experience their highest level of activity during the spring and summer months, particularly when construction, refrigerants, coatings and infrastructure activity is higher. The chlor alkali industry is cyclical, both as a result of changes in demand for each of the co-produced products and as a result of the large increments in which new capacity is added and removed. Because chlorine and caustic soda are produced in a fixed ratio, the supply of one product can be constrained both by the physical capacity of the production facilities and/or by the ability to sell the co-produced product. Prices for both products respond rapidly to changes in supply and demand. The cyclicality of the chlor alkali industry has further impacts on downstream products. In general, our chlor alkali businesses experience their highest level of activity during the spring and summer months, particularly when construction, refrigerants, coatings and infrastructure activity is higher. With the addition of the Acquired Business, we have significantly increased the diversification of our chlorine outlets allowing us to better manage the cyclical nature of the industry.
RAW MATERIALS AND ENERGY
Basic raw materials are processed through an integrated manufacturing process to produce a number of products that are sold at various points throughout the process. We purchase a portion of our raw material requirements and also utilize internal resources, co-products and finished goods as raw materials for downstream products. We believe we have reliable sources of supply for our raw materials under normal market conditions. However, we cannot predict the likelihood or impact of any future raw material shortages.
The principal basic raw materials for our production of Chlor Alkali Products and Vinyls’ products are electricity, salt, ethylene, potassium chloride, methanol and hydrogen. A portion of our purchases of our raw materials, including ethylene and electricity, are made under long-term supply agreements, while approximately 80%85% of the salt used in our Chlor Alkali Products and Vinyls segment is produced from internal resources.
The Epoxy segment’s principal raw materials are chlorine, benzene, propylene and aromatics which consist of cumene, phenol, acetone and BisA. A portion of our purchases of our raw materials, including benzene, propylene and a portion of our aromatics requirements, are made under long-term supply agreements, while a portion of our aromatics requirements are produced from our integrated production chain. Chlorine is predominately sourced from our Chlor Alkali Products and Vinyls segment.
Lead, brass and propellant are the principal raw materials used in the Winchester business. We typically purchase our ammunition cartridge case cups and copper-based strip, and propellants pursuant to multi-year contracts.
Electricity is the predominant energy source for our manufacturing facilities. Approximately 85%76% of our electricity is generated from natural gas or hydroelectric sources. In conjunction with the Acquisition, we entered into long-term power supply contracts with TDCC in addition to acquiring power assets which allow for cost differentiation at specific U.S. manufacturing sites. During 2016, Olin entered into additional arrangements to increase our supply of low cost electricity.
We provide additional information with respect to specific raw materials in the tables set forth under “Products and Services.”
ENVIRONMENTAL AND TOXIC SUBSTANCES CONTROLS
As is common in our industry, we are subject to environmental laws and regulations related to the use, storage, handling, generation, transportation, emission, discharge, disposal and remediation of, and exposure to, hazardous and non-hazardous substances and wastes in all of the countries in which we do business.
The establishment and implementation of national, state or provincial and local standards to regulate air, water and land quality affect substantially all of our manufacturing locations around the world. Laws providing for regulation of the manufacture, transportation, use and disposal of hazardous and toxic substances, and remediation of contaminated sites have imposed additional regulatory requirements on industry, particularly the chemicals industry. In addition, implementation of environmental laws has required and will continue to require new capital expenditures and will increase operating costs.
We employ waste minimization and pollution prevention programs at our manufacturing sites and we are a party to various governmental and private environmental actions associated with former waste disposal sites and past manufacturing facilities. Charges to income for investigatory and remedial efforts were material to operating results in$9.2 million, $15.7 million and $9.6 million for the past three years ended December 31, 2016, 2015 and 2014, respectively. These charges may be material to operating results in future years.
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.
See our discussion of our environmental matters contained in Item 3—“Legal Proceedings” below, the Note “Environmental” of the notes to consolidated financial statements contained in Item 8 and Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 1A. RISK FACTORS
In addition to the other information in this Form 10-K, the following factors should be considered in evaluating Olin and our business. All of our forward-looking statements should be considered in light of these factors. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect us.
Sensitivity to Global Economic Conditions and Cyclicality—Our operating results could be negatively affected during economic downturns.
The business of most of our customers, particularly our vinyl, urethanes and pulp and paper customers are, to varying degrees, cyclical and have historically experienced periodic downturns. These economic and industry downturns have been characterized by diminished product demand, excess manufacturing capacity and, in some cases, lower average selling prices. Therefore, any significant downturn in our customers’ businesses or in global economic conditions could result in a reduction in demand for our products and could adversely affect our results of operations or financial condition.
Although we historically have not sold a large percentage of our products directly to customers abroad, a large part of our financial performance is dependent upon a healthy economy beyond North America because our customers sell their products abroad. Additionally, the percentage of our sales to customers abroad is expected to increasehas increased significantly since the
Acquired Business derives a larger portion of its sales from customers outside the U.S. As a result, our business is and will continue to be affected by general economic conditions and other factors in Europe, Asia Pacific, particularly China and Japan, and Latin America, including fluctuations in interest rates, customer demand, labor and energy costs, currency changes and other factors beyond our control. The demand for our customers’ products, and therefore, our products, is directly affected by such fluctuations. In addition, our customers could decide to move some or all of their production to lower cost, offshore locations, and this could reduce demand in North America for our products. We cannot assure you that events having an adverse effect on the industries in which we operate will not occur or continue, such as a downturn in the European, Asia Pacific, particularly China and Japan, Latin American, or world economies, increases in interest rates or unfavorable currency fluctuations. Economic conditions in other regions of the world, predominantly Asia and Europe, can increase the amount of caustic soda produced and available for export to North America. The increased caustic soda supply can put downward pressure on our caustic soda prices, negatively impacting our profitability.
Cyclical Pricing Pressure—Our profitability could be reduced by declines in average selling prices of our products, particularly declines in ECU netbacks for chlorine and caustic soda.
Our historical operating results reflect the cyclical and sometimes volatile nature of the chemical and ammunition industries. We experience cycles of fluctuating supply and demand in each of our business segments, particularly in our Chlor Alkali Products and Vinyls segment, which result in changes in selling prices. Periods of high demand, tight supply and increasing operating margins tend to result in increases in capacity and production until supply exceeds demand, generally followed by periods of oversupply and declining prices. Another factor influencing demand and pricing for chlorine and caustic soda is the price of natural gas. Higher natural gas prices increase our customers’ and competitors’ manufacturing costs, and depending on the ratio of crude oil to natural gas prices, could make them less competitive in world markets. Continued expansion offshore, particularly in Asia, will continue to have an impact on the ECU values as imported caustic soda replaces some capacity in North America.
In the chlor alkali industry, price is the major supplier selection criterion. We have little or no ability to influence prices in these large commodity markets. Decreases in the average selling prices of our products could have a material adverse effect on our profitability. While we strive to maintain or increase our profitability by reducing costs through improving production efficiency, emphasizing higher margin products and by controlling transportation, selling and administration expense, we cannot assure you that these efforts will be sufficient to offset fully the effect of possible decreases in pricing on operating results.
Because of the cyclical nature of our businesses, we cannot assure you that pricing or profitability in the future will be comparable to any particular historical period, including the most recent period shown in our operating results. We cannot assure you that the chlor alkali industry will not experience adverse trends in the future, or that our business, financial condition and results of operations will not be adversely affected by them.
Our Winchester and Epoxy segments are also subject to changes in operating results as a result of cyclical pricing pressures, but to a lesser extent than our Chlor Alkali Products and Vinyls segment. Selling prices of ammunition and epoxy materials are affected by changes in raw material costs and availability and customer demand, and declines in average selling prices of products of our Winchester and Epoxy segments could adversely affect our profitability.
Indebtedness—Our indebtedness could adversely affect our financial condition.
As of December 31, 2015, we had $3,881.7 million of indebtedness outstanding. Outstanding indebtedness does not include amounts that could be borrowed under our $500.0 million senior revolving credit facility, under which $489.6 million was available for borrowing as of December 31, 2015 because we had issued $10.4 million of letters of credit. As of December 31, 2015, our indebtedness represented 61.6% of our total capitalization. At December 31, 2015, $206.5 million of our indebtedness was due within one year. Despite our level of indebtedness, we expect to continue to have the ability to borrow additional debt.
Our indebtedness could have important consequences, including but not limited to:
limiting our ability to fund working capital, capital expenditures, and other general corporate purposes;
limiting our ability to accommodate growth by reducing funds otherwise available for other corporate purposes and to compete, which in turn could prevent us from fulfilling our obligations under our indebtedness;
limiting our operational flexibility due to the covenants contained in our debt agreements;
to the extent that our debt is subject to floating interest rates, increasing our vulnerability to fluctuations in market interest rates;
limiting our ability to pay cash dividends;
limiting our flexibility for, or reacting to, changes in our business or industry or economic conditions, thereby limiting our ability to compete with companies that are not as highly leveraged; and
increasing our vulnerability to economic downturns.
Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt will depend on a range of economic, competitive and business factors, many of which are outside our control. There can be no assurance that our business will generate sufficient cash flow from operations to make these payments. If we are unable to meet our expenses and debt obligations, we may need to refinance all or a portion of our indebtedness before maturity, sell assets or issue additional equity. We may not be able to refinance any of our indebtedness, sell assets or issue additional equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our debt obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our debt obligations.
Credit Facilities—Weak industry conditions could affect our ability to comply with the financial maintenance covenants in our senior credit facilities.
Our senior credit facilities include certain financial maintenance covenants requiring us to not exceed a maximum leverage ratio and to maintain a minimum coverage ratio.
Depending on the magnitude and duration of chlor alkali cyclical downturns, including deterioration in prices and volumes, there can be no assurance that we will continue to be in compliance with these ratios. If we failed to comply with either of these covenants in a future period and were not able to obtain waivers from the lenders, we would need to refinance our current senior credit facilities. However, there can be no assurance that such refinancing would be available to us on terms that would be acceptable to us or at all.
Integration—Our integration of the Acquired Business may not be successful or the anticipated benefits from the Acquisition may not be realized.
As a result of the addition of the Acquired Business, we have significantly more sales, assets and employees than we did prior to the Closing Date. The integration process will require us to expend capital and significantly expand the scope of our operations and financial systems. Our management will be required to devote a significant amount of time and attention to the process of integrating the operations of our business and the Acquired Business. There is a significant degree of difficulty and management involvement inherent in that process. These difficulties include, but are not limited to:
integrating the operations of the Acquired Business while carrying on the ongoing operations of our existing business;
managing a significantly larger company than before the Closing Date;
the possibility of faulty assumptions underlying our expectations regarding the integration process;
coordinating a greater number of diverse businesses located in a greater number of geographic locations, including in global regions and countries in which we have not previously had operations;
operating in geographic markets or industry sectors in which we may have little or no experience;
complying with laws of new jurisdictions in which we have not previously operated;
integrating business systems and models;
attracting and retaining the necessary personnel associated with the Acquired Business following the Closing Date;
creating and implementing uniform standards, controls, procedures, policies and information systems and controlling the costs associated with such matters; and
integrating information technology, purchasing, accounting, finance, sales, billing, payroll and regulatory compliance systems, and meeting external reporting requirements following the Closing Date.
All of the risks associated with the integration process could be exacerbated by the fact that we may not have a sufficient number of employees with the requisite expertise to integrate the businesses or to operate our business after the Closing Date. If we do not hire or retain employees with the requisite skills and knowledge to run our business, it may have a material adverse effect on our business, financial condition and results of operations.
Even if we are able to combine the two business operations successfully, it may not be possible to realize the benefits of the increased sales volume and other benefits, including the expected synergies that are expected to result from the addition of the Acquired Business, or realize these benefits within the time frame that is expected. The costs to realize the anticipated synergies, including integration fees and capital spending, may be greater than anticipated. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Acquisition may be offset by costs incurred or delays in integrating the companies. In addition, the quantification of synergies expected to result from the Acquisition is based on significant estimates and assumptions that are subjective in nature and inherently uncertain. The amount of synergies actually realized, if any, and the time periods in which any such synergies are realized, could differ materially from the expected synergies discussed in this document, regardless of whether we are able to combine the two business operations successfully.
If we are unable to successfully integrate the Acquired Business or if we are unable to realize the anticipated synergies and other benefits of the Acquisition, there could be a material adverse effect on our business, financial condition and results of operations.
Raw Materials—Availability of purchased feedstocks and energy, and the volatility of these costs, impact our operating costs and add variability to earnings.
Purchased feedstock and energy costs account for a substantial portion of our total production costs and operating expenses. We purchase certain raw materials as feedstocks.
Feedstock and energy costs generally follow price trends in crude oil and natural gas, which are sometimes volatile. Ultimately, the ability to pass on underlying cost increases is dependent on market conditions. Conversely, when feedstock and energy costs decline, selling prices generally decline as well. As a result, volatility in these costs could impact our business, financial condition and results of operations.
If the availability of any of our principal feedstocks is limited or we are unable to obtain natural gas or energy from any of our energy sources, we may be unable to produce some of our products in the quantities demanded by our customers, which could have a material adverse effect on plant utilization and our sales of products requiring such raw materials. In connection with the Acquisition, we entered into long-term supply agreements with TDCC for certain raw materials, including ethylene, propylene and benzene. The initial term of the majority of these supply agreements is either five or ten years (a small number of agreements have shorter or longer initial terms) beginning on the Closing Date. As these contracts with TDCC and other third-party contracts expire, we may be unable to renew these contracts or obtain new long-term supply agreements on terms comparable or as favorable to us, depending on market conditions, which may have a material adverse effect on our business, financial condition and results of operations. In addition, many of our long-term contracts contain provisions that allow their suppliers to limit the amount of raw materials shipped to us below the contracted amount in force majeure circumstances. If we are required to obtain alternate sources for raw materials because TDCC or any other supplier is unwilling or unable to perform under raw material supply agreements or if a supplier terminates its agreements with us, we may not be able to obtain these raw materials from alternative suppliers or obtain new long-term supply agreements on terms comparable or favorable to us.
Indebtedness—Our indebtedness could adversely affect our financial condition.
As of December 31, 2016, we had $3,617.6 million of indebtedness outstanding. Outstanding indebtedness does not include amounts that could be borrowed under our $500.0 million senior revolving credit facility, under which $483.4 million was available for borrowing as of December 31, 2016 because we had issued $16.6 million of letters of credit. As of December 31, 2016, our indebtedness represented 61.4% of our total capitalization. At December 31, 2016, $80.5 million of our indebtedness was due within one year. Despite our level of indebtedness, we expect to continue to have the ability to borrow additional debt.
Our indebtedness could have important consequences, including but not limited to:
limiting our ability to fund working capital, capital expenditures, and other general corporate purposes;
limiting our ability to accommodate growth by reducing funds otherwise available for other corporate purposes and to compete, which in turn could prevent us from fulfilling our obligations under our indebtedness;
limiting our operational flexibility due to the covenants contained in our debt agreements;
to the extent that our debt is subject to floating interest rates, increasing our vulnerability to fluctuations in market interest rates;
limiting our ability to pay cash dividends;
limiting our flexibility for, or reacting to, changes in our business or industry or economic conditions, thereby limiting our ability to compete with companies that are not as highly leveraged; and
increasing our vulnerability to economic downturns.
Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt will depend on a range of economic, competitive and business factors, many of which are outside our control. There can be no assurance that our business will generate sufficient cash flow from operations to make these payments. If we are unable to meet our expenses and debt obligations, we may need to refinance all or a portion of our indebtedness before maturity, sell assets or issue additional equity. We may not be able to refinance any of our indebtedness, sell assets or issue additional equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our
inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our debt obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our debt obligations.
Credit Facilities—Weak industry conditions could affect our ability to comply with the financial maintenance covenants in our senior credit facilities.
Our senior credit facilities include certain financial maintenance covenants requiring us to not exceed a maximum leverage ratio and to maintain a minimum coverage ratio.
Depending on the magnitude and duration of chlor alkali cyclical downturns, including deterioration in prices and volumes, there can be no assurance that we will continue to be in compliance with these ratios. If we failed to comply with either of these covenants in a future period and were not able to obtain waivers from the lenders, we would need to refinance our current senior credit facilities. However, there can be no assurance that such refinancing would be available to us on terms that would be acceptable to us or at all.
Suppliers—We rely on a limited number of outside suppliers for specified feedstocks and services.
We obtain a significant portion of our raw materials from a few key suppliers. If any of these suppliers are unable to meet their obligations under present or any future supply agreements, we may be forced to pay higher prices to obtain the necessary raw materials. Any interruption of supply or any price increase of raw materials could have a material adverse effect on our business, financial condition and results of operations. In connection with the Acquisition, we entered into agreements with TDCC to provide specified feedstocks and services for the facilities operated by the Acquired Business. T heseThese facilities will be dependent upon TDCC’s infrastructure for services such as wastewater and ground water treatment. Any failure of
TDCC to perform its obligations under those agreements could adversely affect the operation of the affected facilities and our business, financial condition and results of operations. Many of the agreements relating to these feedstocks and services have initial terms ranging from several years to 20 years. Most of these agreements are automatically renewable, but may be terminated by us or TDCC after specified notice periods. If we are required to obtain an alternate source for these feedstocks or services, we may not be able to obtain pricing on as favorable terms. A dditionally,Additionally, we may be forced to pay additional transportation costs or to invest in capital projects for pipelines or alternate facilities to accommodate railcar or other delivery methods or to replace other services.
A vendor may choose, subject to existing contracts, to modify its relationship due to general economic concerns or concerns relating to the vendor or us, at any time. Any significant change in the terms that we have with our key suppliers could materially adversely affect our business, financial condition and results of operation, as could significant additional requirements from its suppliers that we provide them additional security in the form of prepayments or posting letters of credit.
ImbalanceCost Control—Our profitability could be reduced if we experience increasing raw material, utility, transportation or logistics costs, or if we fail to achieve targeted cost reductions.
Our operating results and profitability are dependent upon our continued ability to control, and in Demandsome cases reduce, our costs. In addition, our expected benefits from the Acquisition are dependent upon our ability to reduce our costs following the Closing Date. If we are unable to do so, or if costs outside of our control, particularly our costs of raw materials, utilities, transportation and similar costs, increase beyond anticipated levels, our profitability will decline and we will not realize the level of cost reductions anticipated following the Closing Date.
For example, our chlor alkali product transportation costs, particularly railroad shipment costs, are a significant portion of our cost of goods sold, and have been increasing over the past several years. Part of the anticipated cost reductions from the Acquisition are due to transportation cost efficiencies from the increased number of manufacturing locations and the Acquired Business’s utilization of diverse modes of delivery for Ourproducts, which we currently deliver by rail. If transportation costs continue to increase, and we are unable to control those costs or pass the increased costs on to customers, our profitability in our Chlor Alkali Products—A lossProducts and Vinyls and Epoxy segments would be negatively affected. Similarly, costs of commodity metals and other materials used in our Winchester business, such as copper and lead, can vary. If we experience significant increases in these costs and are unable to raise our prices to offset the higher costs, the profitability in our Winchester business would be negatively affected.
Production Hazards—Our facilities are subject to operating hazards, which may disrupt our business.
We are dependent upon the continued safe operation of our production facilities. Our production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products and ammunition, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unexpected utility disruptions or outages, unscheduled downtime, transportation interruptions, transportation accidents involving our chemical products, chemical spills and other discharges or releases of toxic or hazardous substances or gases and environmental hazards. From time to time in the past, we have had incidents that have temporarily shut down or otherwise disrupted our manufacturing, causing production delays and resulting in liability for workplace injuries and fatalities. Some of our products involve the manufacture and/or handling of a substantial customer for our chlorine or caustic soda could cause an imbalance in customer demand forvariety of explosive and flammable materials. Use of these products whichby our customers could also result in liability if an explosion, fire, spill or other accident were to occur. We cannot assure you that we will not experience these types of incidents in the future or that these incidents will not result in production delays or otherwise have ana material adverse effect on our business, results of operations or financial condition. In the past, major hurricanes have caused significant disruption in the Acquired Business’s operations on the U.S. Gulf Coast, logistics across the region and the supply of certain raw materials, which had an adverse impact on volume and cost for some of the Acquired Business’s products. Due to the substantial presence we have on the U.S. Gulf Coast, similar severe weather conditions or other natural phenomena in the future could negatively affect our results of operations.
ChlorineThird Party Transportation—We rely heavily on third party transportation, which subjects us to risks and caustic sodacosts that we cannot control, and which risks and costs may have a material adverse effect on our financial position or results of operations.
We rely heavily on railroad, truck, marine vessel, barge and other shipping companies to transport finished products to customers and to transport raw materials to the manufacturing facilities used by each of our businesses. These transport operations are produced simultaneouslysubject to various hazards and in a fixed ratiorisks, including extreme weather conditions, work stoppages and operating hazards, as well as interstate transportation regulations. In addition, the methods of 1.0 ton of chlorine to 1.1 tons of caustic soda. The loss of a substantial chlorine or caustic soda customer could cause an imbalance in customer demand for ourtransportation we utilize, including shipping chlorine and caustic soda products. An imbalanceother chemicals by railroad and by barge, may be subject to additional, more stringent and more costly regulations in customer demand may require Olinthe future. If we are delayed or unable to reduce productionship finished products or unable to obtain raw materials as a result of both chlorine and caustic sodaany such new regulations or take other stepspublic policy changes related to correcttransportation safety, or these transportation companies’ failure to operate properly, or if there were significant changes in the imbalance. Since Olin cannot store large quantitiescost of chlorine,these services due to new additional regulations, or otherwise, we may not be able to respondarrange efficient alternatives and timely means to an imbalanceobtain raw materials or ship goods, which could result in customer demand for these products as quickly or efficiently as some of our competitors. If a substantial imbalance occurred, we would need to reduce prices or take other actions that could have a material adverse impacteffect on our business, financial position or results of operationsoperations. If any third-party railroad which we utilize to transport chlorine and other chemicals ceases to transport toxic-by-inhalation hazardous (“TIH”) materials, or if there are significant changes in the cost of shipping TIH materials by rail or otherwise, we may not be able to arrange efficient alternatives and timely means to deliver our products or at all, which could result in a material adverse effect on our business, financial condition.position or results of operations.
Security and Chemicals Transportation—New regulations on the transportation of hazardous chemicals and/or the security of chemical manufacturing facilities and public policy changes related to transportation safety could result in significantly higher operating costs.
The transportation of our products and feedstocks, including transportation by pipeline, and the security of our chemical manufacturing facilities are subject to extensive regulation. Government authorities at the local, state and federal levels could implement new or stricter regulations that would impact the security of chemical plant locations and the transportation of hazardous chemicals. Our Chlor Alkali Products and Vinyls segment could be adversely impacted by the cost of complying with any new regulations. Our business also could be adversely affected if an incident were to occur at one of our facilities or while transporting product. The extent of the impact would depend on the requirements of future regulations and the nature of an incident, which are unknown at this time.
Effects of Regulation—Changes in legislation or government regulations or policies could have a material adverse effect on our financial position or results of operations.
Legislation that may be passed by Congress or other legislative bodies or new regulations that may be issued by federal and other administrative agencies, including import and export duties and quotas, anti-dumping regulations and related tariffs, could significantly affect the sales, costs and profitability of our business. The chemical and ammunition industries are subject to legislative and regulatory actions, which could have a material adverse effect on our business, financial position or results of operations. Existing and future government regulations and laws may reduce the demand for our products, including certain chlorinated organic products, such as dry cleaning solvents. Any decrease in the demand for chlorinated organic products could result in lower unit sales and lower selling prices for such chlorinated organic products, which would have a material adverse effect on our business, financial condition and results of operations.
Cost Control—
Imbalance in Demand for Our profitabilityChlor Alkali Products—A loss of a substantial customer for our chlorine or caustic soda could be reduced if we experience increasing raw material, utility, transportation or logistics costs, or if we fail to achieve targeted cost reductions.cause an imbalance in customer demand for these products, which could have an adverse effect on our results of operations.
Our operating resultsChlorine and profitabilitycaustic soda are dependent upon our continued ability to control,produced simultaneously and in a fixed ratio of 1.0 ton of chlorine to 1.1 tons of caustic soda. The loss of a substantial chlorine or caustic soda customer could cause an imbalance in customer demand for our chlorine and caustic soda products. An imbalance in customer demand may require Olin to reduce production of both chlorine and caustic soda or take other steps to correct the imbalance. Since Olin cannot store large quantities of chlorine, we may not be able to respond to an imbalance in customer demand for these products as quickly or efficiently as some casesof our competitors. If a substantial imbalance occurred, we would need to reduce prices or take other actions that could have a material adverse impact on our costs. In addition,business, results of operations and financial condition.
Integration of Information Technology Systems—Operation on multiple Enterprise Resource Planning (“ERP”) information systems, and the conversion from multiple systems to a single system, may negatively impact our expected benefitsoperations.
We are highly dependent on our information systems infrastructure in order to process orders, track inventory, ship products in a timely manner, prepare invoices to our customers, maintain regulatory compliance and otherwise carry on our business in the ordinary course. We currently operate on an ERP information system and the Acquired Business operates on a separate ERP system. Since we are required to process and reconcile our information from multiple systems, the Acquisition are dependent uponchance of errors has increased, and we may incur significant additional costs related thereto. Inconsistencies in the information from multiple ERP systems could adversely impact our ability to reducemanage our costs following the Closing Date. If we are unablebusiness efficiently and may result in heightened risk to do so, or if costs outside of our control, particularly our costs of raw materials, utilities, transportation and similar costs, increase beyond anticipated levels, our profitability will decline and we will not realize the level of cost reductions anticipated following the Closing Date.
For example, our chlor alkali product transportation costs, particularly railroad shipment costs, are a significant portion of our cost of goods sold, and have been increasing over the past several years. Part of the anticipated cost reductions from the Acquisition are due to transportation cost efficiencies from the increased number of manufacturing locations and the Acquired
Business’s utilization of diverse modes of delivery for products which we currently deliver by rail. If transportation costs continue to increase, and we are unable to control those costs or pass the increased costs on to customers, our profitability in our Chlor Alkali Products and Vinyls and Epoxy segments would be negatively affected. Similarly, costs of commodity metals and other materials used in our Winchester business, such as copper and lead, can vary. If we experience significant increases in these costs and are unable to raise our prices to offset the higher costs, the profitability in our Winchester business would be negatively affected.
Credit and Capital Market Conditions—Adverse conditions in the credit and capital markets may limit or prevent our ability to borrowmaintain our books and records and comply with regulatory requirements. We expect that we will transition all or raise capital.a portion of the operations of the Acquired Business from one ERP system to another. The transition to a different ERP system involves numerous risks, including:
While we believe wediversion of management’s attention away from normal daily business operations;
loss of, or delays in accessing, data;
increased demand on our operations support personnel;
increased costs;
initial dependence on unfamiliar systems while training personnel to use new systems; and
increased operating expenses resulting from training, conversion and transition support activities.
Any of the foregoing could result in a material increase in information technology compliance or other related costs, and could materially and negatively impact our business, results of operations or financial condition.
Information Security—A failure of our information technology systems, or an interruption in their operation due to internal or external factors including cyber-attacks, could have facilities in place that should allow us to borrow funds as needed to meet our ordinary course business activities, adverse conditions in the credit and financial markets could prevent us from obtaining financing, if the need arises. Our ability to invest in our businesses and refinance or repay maturing debt obligations could require access to the credit and capital markets and sufficient bank credit lines to support cash requirements. If we are unable to access the credit and capital markets on commercially reasonable terms, we could experience a material adverse effect on our business, financial condition or results of operations.
Our operations are dependent on our ability to protect our information systems, computer equipment and information databases from systems failures. We rely on our information technology systems generally to manage the day-to-day operation of our business, operate elements of our manufacturing facilities, manage relationships with our customers, fulfill customer orders and maintain our financial and accounting records. Failure of our information technology systems could be caused by internal or external events, such as incursions by intruders or hackers, computer viruses, cyber-attacks, failures in hardware or software, or power or telecommunication fluctuations or failures. The failure of our information technology systems to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse consequences, including reduced effectiveness and efficiency of operations, increased costs or loss of important information, any of which could have a material adverse effect on our business, financial condition or results of operations. We have technology and information security processes and disaster recovery plans in place to mitigate our risk to these vulnerabilities. However, these measures may not be adequate to ensure that our operations will not be disrupted, should such an event occur.
Litigation and Claims—We are subject to litigation and other claims, which could cause us to incur significant expenses.
We are a defendant in a number of pending legal proceedings relating to our present and former operations. These include product liability claims relating to ammunition and firearms and proceedings alleging injurious exposure of plaintiffs to various chemicals and other substances (including proceedings based on alleged exposures to asbestos). Frequently, the proceedings alleging injurious exposure involve claims made by numerous plaintiffs against many defendants. Because of the inherent uncertainties of litigation, we are unable to predict the outcome of these proceedings and therefore cannot determine whether the financial impact, if any, will be material to our financial position, cash flows or results of operations.
Environmental Costs—We have ongoing environmental costs, which could have a material adverse effect on our financial position or results of operations.
Our operations and assets are subject to extensive environmental, health and safety regulations, including laws and regulations related to air emissions, water discharges, waste disposal and remediation of contaminated sites. The nature of our operations and products, including the raw materials we handle, exposes us to the risk of liabilities, obligations or claims under these laws and regulations due to the production, storage, use, transportation and sale of materials that can cause contamination or personal injury, including, in the case of chemicals, potential releases into the environment. Environmental laws may have a significant effect on the costs of use, transportation and storage of raw materials and finished products, as well as the costs of the storage and disposal of wastes. In addition, we are party to various governmental and private environmental actions associated with past manufacturing facilities and former waste disposal sites. We have incurred, and expect to incur, significant costs and capital expenditures in complying with environmental laws and regulations.
The ultimate costs and timing of environmental liabilities are difficult to predict. Liabilities under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis. One liable party could be held responsible for all costs at a site, regardless of fault, percentage of contribution to the site or the legality of the original disposal. We could incur significant costs, including clean-up costs, natural resource damages, civil or criminal fines and sanctions and third-party lawsuits claiming, for example, personal injury and/or property damage, as a result of past or future violations of, or liabilities under, environmental or other laws.
In addition, future events, such as changes to or more rigorous enforcement of environmental laws, could require us to make additional expenditures, modify or curtail our operations and/or install pollution control equipment. It is possible that regulatory agencies may enact new or more stringent clean-up standards for chemicals of concern, including chlorinated organic products that we manufacture. This could lead to expenditures for environmental remediation in the future that are additional to existing estimates.
Accordingly, it is possible that some of the matters in which we are involved or may become involved may be resolved unfavorably to us, which could materially adversely affect our business, financial position, cash flows or results of operations. See “Environmental Matters” contained in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
LitigationIntegration—Our integration of the Acquired Business may not be successful in realizing the anticipated benefits from the Acquisition.
As a result of the addition of the Acquired Business, we have significantly more sales, assets and Claims—We are subjectemployees than we did prior to litigationthe Closing Date. The integration process requires us to expend capital and significantly expand the scope of our operations and financial systems.
It may not be possible to realize the benefits of the increased sales volume and other claims, which could cause usbenefits, including the expected synergies that are expected to incur significant expenses.
We are a defendantresult from the addition of the Acquired Business, or realize these benefits within the time frame that is expected. The costs to realize the anticipated synergies, including integration fees and capital spending, may be greater than anticipated. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Acquisition may be offset by costs incurred or delays in a numberintegrating the companies. In addition, the quantification of pending legal proceedings relatingsynergies expected to our present and former operations. These include product liability claims relating to ammunition and firearms and proceedings alleging injurious exposure of plaintiffs to various chemicals and other substances (including proceedingsresult from the Acquisition is based on alleged exposuressignificant estimates and assumptions that are subjective in nature and inherently uncertain. The amount of synergies actually realized, if any, and the time periods in which any such synergies are realized, could differ materially from the expected synergies discussed in this document, regardless of whether we are able to asbestos). Frequently,combine the proceedings alleging injurious exposure involve claims made by numerous plaintiffs against many defendants. Because of the inherent uncertainties of litigation,two business operations successfully.
If we are unable to predictsuccessfully realize the outcome of these proceedingsanticipated synergies and therefore cannot determine whether the financial impact, if any, will be material to our financial position, cash flows or results of operations.
Integration of Information Technology Systems—Operation on multiple Enterprise Resource Planning (“ERP”) information systems, and the conversion from multiple systems to a single system, may negatively impact our operations.
We are highly dependent on our information systems infrastructure in order to process orders, track inventory, ship products in a timely manner, prepare invoices to our customers, maintain regulatory compliance and otherwise carry on our business in the ordinary course. We currently operate on an ERP information system and the Acquired Business operates on a separate ERP system. Since we will be required to process and reconcile our information from multiple systems, the chance of errors has increased, and we may incur significant additional costs related thereto. Inconsistencies in the information from multiple ERP systems could adversely impact our ability to manage our business efficiently and may result in heightened risk to our ability to maintain our books and records and comply with regulatory requirements. We expect that we may transition all or a portionother benefits of the operations of the Acquired Business from one ERP system to another. The transition to a different ERP system involves numerous risks, including:
diversion of management’s attention away from normal daily business operations;
loss of, or delays in accessing, data;
increased demand on our operations support personnel;
increased costs;
initial dependence on unfamiliar systems while training personnel to use new systems; and
increased operating expenses resulting from training, conversion and transition support activities.
Any of the foregoingAcquisition, there could result in a material increase in information technology compliance or other related costs, and could materially and negatively impact our business, results of operations or financial condition.
Information Security—A failure of our information technology systems, or an interruption in their operation, could havebe a material adverse effect on our business, financial condition orand results of operations.
Our operations are dependent on our ability to protect our information systems, computer equipment and information databases from systems failures. We rely on our information technology systems generally to manage the day-to-day operation of our business, operate elements of our manufacturing facilities, manage relationships with our customers, fulfill customer orders and maintain our financial and accounting records. Failure of our information technology systems could be caused by internal or external events, such as incursions by intruders or hackers, computer viruses, cyber-attacks, failures in hardware or software, or power or telecommunication fluctuations or failures. The failure of our information technology systems to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse consequences, including reduced effectiveness and efficiency of operations, increased costs or loss of important information, any of which could have a material adverse effect on our business, financial condition or results of operations. We have technology and information security processes and disaster recovery plans in place to mitigate our risk to these vulnerabilities. However, these measures may not be adequate to ensure that our operations will not be disrupted, should such an event occur.
Production Hazards—Our facilities are subject to operating hazards, which may disrupt our business.
We are dependent upon the continued safe operation of our production facilities. Our production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products and ammunition, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unexpected utility disruptions or outages, unscheduled downtime, transportation interruptions, transportation accidents involving our chemical products, chemical spills and other discharges or releases of toxic or hazardous substances or gases and environmental hazards. From time to time in the past, we have had incidents that have temporarily shut down or otherwise disrupted our manufacturing, causing production delays and resulting in liability for workplace injuries and fatalities. Some of our products involve the manufacture and/or handling of a variety of explosive and flammable materials. Use of these products by our customers could also result in liability if an explosion, fire, spill or other accident were to occur. We cannot assure you that we will not experience these types of incidents in the future or that these incidents will not result in production delays or otherwise have a material adverse effect on our business, results of operations or financial condition. In the past, major hurricanes have caused significant disruption in the Acquired Business’s operations on the U.S. Gulf Coast, logistics across the region and the supply of certain raw materials, which had an adverse impact on volume and cost for some of the Acquired Business’s
products. Due to the substantial presence we have on the U.S. Gulf Coast, similar severe weather conditions or other natural phenomena in the future could negatively affect our results of operations.
Third Party Transportation—We rely heavily on third party transportation, which subjects us to risks and costs that we cannot control, and which risks and costs may have a material adverse effect on our financial position or results of operations.
We rely heavily on railroad, truck, marine vessel, barge and other shipping companies to transport finished products to customers and to transport raw materials to the manufacturing facilities used by each of our businesses. These transport operations are subject to various hazards and risks, including extreme weather conditions, work stoppages and operating hazards, as well as interstate transportation regulations. In addition, the methods of transportation we utilize, including shipping chlorine and other chemicals by railroad and by barge, may be subject to additional, more stringent and more costly regulations in the future. If we are delayed or unable to ship finished products or unable to obtain raw materials as a result of any such new regulations or public policy changes related to transportation safety, or these transportation companies’ failure to operate properly, or if there were significant changes in the cost of these services due to new additional regulations, or otherwise, we may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship goods, which could result in a material adverse effect on our business, financial position or results of operations. If any third-party railroad which we utilize to transport chlorine and other chemicals ceases to transport toxic-by-inhalation hazardous (“TIH”) materials, or if there are significant changes in the cost of shipping TIH materials by rail or otherwise, we may not be able to arrange efficient alternatives and timely means to deliver our products or at all, which could result in a material adverse effect on our business, financial position or results of operations.
Pension Plans—The impact of declines in global equity and fixed income markets on asset values and any declines in interest rates and/or improvements in mortality assumptions used to value the liabilities in our pension plans may result in higher pension costs and the need to fund the pension plans in future years in material amounts.
Under Accounting StandardStandards Codification (ASC) 715 “Compensation-Retirement Benefits” (ASC 715), we recorded an after-tax charge of $37.5 million ($61.0 million pretax) to shareholders’ equity as of December 31, 2016 for our pension and other postretirement plans. This charge primarily reflected a 30-basis point decrease in the domestic pension plans’ discount rate, partially offset by favorable performance on plan assets during 2016. In 2015, we recorded an after-tax charge of $78.8 million ($125.3 million pretax) to shareholders’ equity as of December 31, 2015 for our pension and other postretirement plans. This charge reflected unfavorable performance on plan assets during 2015, partially offset by a 50-basis point increase in the domestic pension plans’ discount rate. In 2014, we recorded an after-tax charge of $86.6 million ($142.0 million pretax) to shareholders’ equity as of December 31, 2014 for our pension and other postretirement plans. This charge reflected a 60-basis point decrease in the plans’ discount rate and the negative impact of the newly mandatedupdated mortality tables, partially offset by favorable performance on plan assets during 2014. In 2013, we recorded an after-tax charge of $7.7 million ($12.5 million pretax) to shareholders’ equity as of December 31, 2013 for our pension and other postretirement plans. This charge reflected unfavorable performance on plan assets during 2013, partially offset by a 60-basis point increase in the plans’ discount rate. These non-cash charges to shareholders’ equity do not affect our ability to borrow under our senior credit facility.
The determinations of pension expense and pension funding are based on a variety of rules and regulations. Changes in these rules and regulations could impact the calculation of pension plan liabilities and the valuation of pension plan assets. They may also result in higher pension costs, additional financial statement disclosure, and the need to fund the pension plan. Effective as of the Closing Date, we changed the approach used to measure service and interest costs for our defined benefit pension plans and on December 31, 2015 changed this approach for our other postretirement benefits. Prior to the Closing Date, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Subsequent to the Closing Date for our defined benefit pension plans and beginning in 2016 for our other postretirement benefits, we elected to measure service and interest costs by applying the specific spot rates along the yield curve to the plans’ estimated cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.
During the fourth quarter of 2014, the Society of Actuaries (SOA) issued the final report of its mortality tables and mortality improvement scales. The updated mortality data reflected increasing life expectancies in the U.S. During the third quarter of 2012, the “Moving Ahead for Progress in the 21st Century Act” (MAP-21) became law. The law changed the mechanism for determining interest rates to be used for calculating minimum defined benefit pension plan funding requirements. Interest rates are determined using an average of rates for a 25-year period, which can have the effect of increasing the annual discount rate, reducing the defined benefit pension plan obligation and potentially reducing or eliminating the minimum annual funding requirement. The law also increased premiums paid to the Pension Benefit Guaranty Corporation (PBGC). During the third quarter of 2014, the “Highway and Transportation Funding Act” (HATFA 2014) became law, which includes an extension of MAP-21’s defined benefit plan funding stabilization relief.
During 2016, we made a discretionary cash contribution to our domestic qualified defined benefit pension plan of $6.0 million. Based on our plan assumptions and estimates, we will not be required to make any cash contributions to the domestic qualified defined benefit pension plan at least through 2016.2017.
We have several international qualified defined benefit pension plans to which we made cash contributions of $1.3 million in 2016, $0.9 million in 2015 and $0.8 million in 2014, and $1.0 million in 2013, and we anticipate less than $5 million of cash contributions to international qualified defined benefit pension plans in 2016.2017.
At December 31, 2015,2016, the projected benefit obligation of $2,680.8$2,711.7 million exceeded the market value of assets in our qualified defined benefit pension plans by $644.3$633.2 million, as calculated under ASC 715.
In addition, the impact of declines in global equity and fixed income markets on asset values may result in higher pension costs and may increase and accelerate the need to fund the pension plans in future years. For example, holding all other assumptions constant, a 100-basis point decrease or increase in the assumed long-term rate of return on plan assets for our domestic qualified defined benefit pension plan would have decreased or increased, respectively, the 20152016 defined benefit pension plansplan income by approximately $18.7$19.8 million.
Holding all other assumptions constant for our domestic qualified defined benefit pension plan, a 50-basis point decrease in the discount rate used to calculate pension income for 20152016 and the projected benefit obligation as of December 31, 20152016 would have decreased pension income by $1.4$0.7 million and increased the projected benefit obligation by $146.0$147.0 million. A 50-basis point increase in the discount rate used to calculate pension income for 20152016 and the projected benefit obligation as of December 31, 20152016 for our domestic qualified defined benefit pension plan would have increased pension income by $1.5$0.8 million and decreased the projected benefit obligation by $133.0 million.
We assumed certain material pension benefit obligations associated with the Acquired Business. These liabilities and the related future funding obligations could restrict cash available for our operations, capital expenditures and other requirements, and may materially adversely affect its financial condition and liquidity.
In accordance with TDCC’s election, our U.S. tax-qualified defined benefit pension plan assumed certain U.S. tax-qualified defined benefit pension obligations related to active employees and certain terminated, vested retirees of the Acquired Business with a net liability of approximately $286.5 million, which amount remains subject to adjustment. In connection therewith, pension assets will be transferred from TDCC’s U.S. tax-qualified defined benefit pension plans to our U.S. tax-qualified defined benefit pension plan. In addition to the standard minimum funding requirements, the Pension Protection Act of 2006 (as amended by the Worker, Retiree and Employer Recovery Act of 2008) (the Pension Act) requires companies with U.S. tax-qualified defined benefit pension plans to make contributions to such plans as frequently as quarterly in order to meet the “funding target” for such plans, as defined in the Pension Act. The failure to meet a minimum required percentage of the funding target in any given year could result in adverse consequences, including the imposition of fines or penalties. Funding obligations with respect to U.S. tax-qualified defined benefit pension plans change due to, among other things, the actual investment return on plan assets and changes in interest rates and/or mortality assumptions. Continued volatility in the capital markets may have a further negative impact on the funded status of U.S. tax-qualified defined benefit pension plans, which may in turn increase attendant funding obligations. Given the amount of pension assets that may be transferred from TDCC’s U.S. tax-qualified defined benefit pension plans to our U.S. tax-qualified defined benefit pension plan, and subject to the foregoing and other variables, and the associated uncertainties, it is possible that we could be required to make substantial additional contributions in future years to our tax-qualified defined benefit pension plan attributable to the transferred pension liabilities. These contributions could restrict available cash for our operations, capital expenditures and other requirements, and may materially adversely affect its financial condition and liquidity.
In addition, we assumed certain accrued defined benefit pension liabilities relating to employees of TDCC in Germany, Switzerland and other international locations who transferred as part of the Acquired Business. These liabilities and the related future payment obligations could restrict cash available for our operations, capital expenditures and other requirements, and may materially adversely affect its financial condition and liquidity.
Foreign Exchange Rates—Fluctuations in foreign currency exchange could affect our consolidated financial results.
We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the USD.U.S. dollar (USD). Because our consolidated financial statements are presented in USD, we must translate revenues and expenses into USD at the average exchange rate during each reporting period, as well as assets and liabilities into USD at exchange rates in effect at the end of each reporting period. Therefore, increases or decreases in the value of the USD against other major currencies will affect our net revenues, operating income and the value of balance sheet items denominated in foreign currencies. Because of the geographic diversity of our operations, weaknesses in various currencies might occur in one or many of such currencies over time. From time to time, we may use derivative financial instruments to further reduce our net exposure to currency exchange rate fluctuations. However, we cannot assure you that fluctuations in foreign currency exchange rates, particularly the strengthening of the USD against major currencies, would not materially adversely affect our financial results.
Credit and Capital Market Conditions—Adverse conditions in the credit and capital markets may limit or prevent our ability to borrow or raise capital.
19While we believe we have facilities in place that should allow us to borrow funds as needed to meet our ordinary course business activities, adverse conditions in the credit and financial markets could prevent us from obtaining financing, if the need arises. Our ability to invest in our businesses and refinance or repay maturing debt obligations could require access to the credit and capital markets and sufficient bank credit lines to support cash requirements. If we are unable to access the credit and capital markets on commercially reasonable terms, we could experience a material adverse effect on our business, financial position or results of operations.
Labor Matters—We cannot assure you that we can conclude future labor contracts or any other labor agreements without work stoppages.
Various labor unions represent a majoritysignificant number of our hourly paid employees for collective bargaining purposes. The following labor contract iscontracts are scheduled to expire in 2016:early 2018:
|
| | | | |
| Location | | Number of Employees | | Expiration Date |
East Alton (Winchester)Lemont (Chlor Alkali Products and Vinyls) | | 67620 | | December 2016March 2018 |
| Becancour (Chlor Alkali Products and Vinyls) | | 97 | | April 2018 |
While we believe our relations with our employees and their various representatives are generally satisfactory, we cannot assure that we can conclude any labor agreements without work stoppages and cannot assure that any work stoppages will not have a material adverse effect on our business, financial condition or results of operations.
Ability to Attract and Retain Qualified Employees—We must attract, retain and motivate key employees, and the failure to do so may adversely affect our business, financial condition or results of operations.
We feel our success depends on hiring, retaining and motivating key employees, including executive officers. We may have difficulty locating and hiring qualified personnel. In addition, we may have difficulty retaining such personnel once hired, and key people may leave and compete against us. The loss of key personnel or our failure to attract and retain other qualified and experienced personnel could disrupt or materially adversely affect our business, financial condition or results of operations. In addition, our operating results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover, which may result in the loss of significant customer business or increased costs.
We
If our goodwill, other intangible assets or property plant and equipment become impaired in the future, we may be unablerequired to provide the same types and level of benefits, services and resourcesrecord non-cash charges to the Acquired Business that historically have been provided by TDCC, or mayearnings, which could be unable to provide them at the same cost.
As part of TDCC, the Acquired Business was historically able to receive benefits and services from TDCC and was able to benefit from TDCC’s financial strength and extensive business relationships. The Acquired Business is now owned by Olin and will no longer benefit from TDCC’s resources. While we have entered into agreements under which TDCC has agreed to provide certain transition services and site-related services following the Closing Date, we cannot assure that we will be able to adequately replace those resources or replace them at the same cost. If we are not able to replace the resources provided by TDCC or are unable to replace them at the same cost or are delayed in replacing the resources provided by TDCC, our business, financial condition and results of operations may be materially adversely impacted.significant.
The historical financial informationprocess of the Acquired Business may not be representativeimpairment testing for our goodwill involves a number of its results or financial condition if it had been operated independently of TDCCjudgments and as a result, may not be a reliable indicator of itsestimates made by management including future results.
The financial information of the Acquired Business prior to the Closing Date and included within the unaudited pro forma financial information within this document has been derived from the consolidated financial statements and accounting records of TDCC and reflects all direct costs as well ascash flows, discount rates, profitability assumptions and allocations made by TDCC management. The financial position, results of operationsterminal growth rates with regards to our reporting units. Our internally generated long-range plan includes cyclical assumptions regarding pricing and cash flows of the Acquired Business presented may be different from those that would have resulted had the Acquired Business been operated independently of TDCC during the applicable periods or at the applicable dates.
The unaudited pro forma financial information of Olin and the Acquired Business is not intended to reflect what actual results of operations and financial condition would have been had Olin and the Acquired Business been a combined companyoperating forecasts for the periods presented,chlor alkali industry. If the judgments and therefore theseestimates used in our analysis are not realized or are affected by external factors, then actual results may not be indicative of Olin’s future operating performance.
The unaudited pro forma financial information presented in this document is for illustrative purposes onlyconsistent with these judgments and is not intended to,estimates, and does not purport to, represent what our actual results or financial condition would have been if the Acquisition had occurred on the relevant date. The unaudited pro forma financial information has been prepared using the acquisition method of accounting. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values with any excess purchase price allocated to goodwill. The pro forma purchase price allocation was based on the preliminary fair value of the tangible and intangible assets and liabilities of the Acquired Business. The final purchase price allocationwe may be different than that reflectedrequired to record a goodwill impairment charge in the pro forma purchase price allocation presented herein,future, which could be significant and this difference may be material.
The unaudited pro formahave an adverse effect on our financial information does not reflect the costs of any integration activities or transaction-related costs or incremental capital spending that Olin management believes are necessary to realize the anticipated synergies from the Acquisition. Accordingly, the unaudited pro forma financial information included in this document does not reflect what our results of operations or operating condition would have been had Olin and the Acquired Business been a consolidated entity during all periods presented, or what our results of operations and financial condition will be in the future.
Olin’s business, financial conditionposition and results of operationsoperations.
We review long-lived assets, including property, plant and equipment and identifiable amortizing intangible assets, for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. If the fair value is less than the carrying amount of the asset, an impairment is recognized for the difference. Factors which may cause an impairment of long-lived assets include significant changes in the manner of use of these assets, negative industry or market trends, a significant underperformance relative to historical or projected future operating results, extended period of idleness or a likely sale or disposal of the asset before the end of its estimated useful life. If our property, plant and equipment and identifiable amortizing intangible assets are determined to be impaired in the future, we may be adversely affected following the Closing Date if we cannot negotiate contract terms that are as favorable as those TDCC had received when we replace certain contracts after the Closing Date.
Prior to the Closing Date, certain functions (such as purchasing, accounts payable processing, accounts receivable management, information systems, logistics and distribution) for the Acquired Business were generally being performed under TDCC’s centralized systems and, in some cases, under contracts that are also used for TDCC’s other businesses and which were not intended to be assigned in whole or in part to the combined business. In addition, some other contracts to which TDCC is a party on behalf of the Acquired Business will require consents of third parties to assign them to us or our subsidiaries. There can be no assurance that we will be able to negotiate contract terms that are as favorable as those TDCC received when and if we replace these contracts with our own agreements for similar services, including any contracts that may need to be replaced as a result of a failure to obtain required third-party consents. Although we believe that we will be able to enter into new agreements for similar services and that we will be able to obtain all material third-party consents required to assign contractsrecord non-cash charges to us, itearnings during the period in which the impairment is possible that the failure to enter into new agreements for similar services or to obtain required consents to assign contractsdetermined, which could be significant and have a materialan adverse impacteffect on our business, financial conditionposition and results of operations following the Closing Date.operations.
We may be affected by significant restrictions following the Closing Date in order to avoid significant tax-related liabilities.
In connection with the Acquisition, we entered into a Tax Matters Agreement (the Tax Matters Agreement) with TDCC. The Tax Matters Agreement generally prohibits us and our affiliates from taking certain actions that could cause certain related transactions consummated on the Closing Date, to fail to qualify as tax-free transactions. In particular, unless an exception applies, for a two-year period following the Closing Date, we may not:
enter into any transaction or series of transactions (or any agreement, understanding or arrangement) as a result of which one or more persons would acquire (directly or indirectly) stock comprising 50 percent or more of the vote or value of Blue Cube Spinco Inc. (Spinco) (taking into account the stock of Spinco acquired pursuant to the Agreement and Plan of Merger (Merger Agreement) and Separation Agreement dated March 26, 2015);
redeem or repurchase any stock or stock rights;
amend our certificate of incorporation or take any other action affecting the relative voting rights of our capital stock;
merge or consolidate with any other person (other than pursuant to the Merger Agreement and Separation Agreement dated March 26, 2015);
take any other action that would, when combined with any other direct or indirect changes in ownership of Spinco capital stock (including pursuant to the Merger Agreement and Separation Agreement dated March 26, 2015), have the effect of causing one or more persons to acquire stock comprising 50 percent or more of the vote or value of Spinco, or would reasonably be expected to adversely affect the tax-free status of the related transactions consummated on the Closing Date;
discontinue the active conduct of the Acquired Business; or
sell, transfer or otherwise dispose of assets (including stock of subsidiaries) that constitute more than 35 percent of the consolidated gross assets of Spinco and/or its subsidiaries (subject to exceptions for, among other things, ordinary course dispositions and repayments or prepayments of Spinco debt).
If we decide to take any such restricted action, we will be required to cooperate with TDCC in obtaining a supplemental Internal Revenue Service (IRS) ruling or an unqualified tax opinion acceptable to TDCC to the effect that such action will not affect the status of certain related transactions consummated on the Closing Date as tax-free transactions. However, if we take any of the above actions and such action results in tax-related losses to TDCC, then we generally will be required to indemnify TDCC for such losses, without regard to whether TDCC has given us prior consent.
Due to these restrictions and indemnification obligations under the Tax Matters Agreement, we may be limited in our ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may otherwise be in our best interests. Also, our potential indemnity obligation to TDCC might discourage, delay or prevent a change of control during this two-year period that our shareholders may consider favorable to our ability to pursue strategic transactions, equity or convertible debt financings, or other transactions that may otherwise be in our best interests.
The historical financial information of the Acquired Business may not be representative of its results or financial condition if it had been operated independently of TDCC and, as a result, may not be a reliable indicator of its future results.
The financial information of the Acquired Business prior to the Closing Date and included within the unaudited pro forma financial information within this document has been derived from the consolidated financial statements and accounting records of TDCC and reflects all direct costs as well as assumptions and allocations made by TDCC management. The financial position, results of operations and cash flows of the Acquired Business presented may be different from those that would have resulted had the Acquired Business been operated independently of TDCC during the applicable periods or at the applicable dates.
The unaudited pro forma financial information of Olin and the Acquired Business is not intended to reflect what actual results of operations and financial condition would have been had Olin and the Acquired Business been a combined company for the periods presented, and therefore these results may not be indicative of Olin’s future operating performance.
The unaudited pro forma financial information presented in this document is for illustrative purposes only and is not intended to, and does not purport to, represent what our actual results or financial condition would have been if the Acquisition had occurred on the relevant date. The unaudited pro forma financial information has been prepared using the acquisition method of accounting. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values with any excess purchase price allocated to goodwill.
The unaudited pro forma financial information does not reflect the costs of any integration activities or transaction-related costs or incremental capital spending that Olin management believes are necessary to realize the anticipated synergies from the Acquisition. Accordingly, the unaudited pro forma financial information included in this document does not reflect what our results of operations or operating condition would have been had Olin and the Acquired Business been a consolidated entity during all periods presented, or what our results of operations and financial condition will be in the future.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2. PROPERTIES
Information concerning our principal locations at or from which our products and services are manufactured, distributed or marketed are included in the tables set forth under the caption “Products and Services” contained in Item 1—“Business.” Generally, these facilities are well maintained, in good operating condition, and suitable and adequate for their use. Our two largest facilities are co-located with TDCC. The land in which these facilities are located is leased with a 99 year term.term, commencing on the Closing Date. Additionally, we lease warehouses, terminals and distribution offices and space for executive and branch sales offices and service departments. We believe our current facilities are adequate to meet the requirements of our present operations.
Item 3. LEGAL PROCEEDINGS
Saltville
We have completed all work in connection with remediation of mercury contamination at the site of our former mercury cell chlor alkali plant in Saltville, VA required to date. In mid-2003, the Trustees for natural resources in the North Fork Holston River, the Main Stem Holston River and associated floodplains, located in Smyth and Washington Counties in Virginia and in Sullivan and Hawkins Counties in Tennessee notified us of, and invited our participation in, an assessment of alleged damages to natural resources resulting from the release of mercury. The Trustees also notified us that they have made a preliminary determination that we are potentially liable for natural resource damages in said rivers and floodplains. We agreed to participate in the assessment. We and the Trustees have entered into discussions concerning a resolution of this matter. In light of the ongoing discussions and inherent uncertainties of the assessment, we cannot at this time determine whether the financial impact, if any, of this matter will be material to our financial position or results of operations. See “Environmental Matters” contained in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Other
As part of the continuing environmental investigation by federal, state and local governments of waste disposal sites, we have entered into a number of settlement agreements requiring us to participate in the investigation and cleanup of a number of sites. Under the terms of such settlements and related agreements, we may be required to manage or perform one or more elements of a site cleanup, or to manage the entire remediation activity for a number of parties, and subsequently seek recovery of some or all of such costs from other Potentially Responsible Parties (PRPs). In many cases, we do not know the ultimate costs of our settlement obligations at the time of entering into particular settlement agreements, and our liability accruals for our obligations under those agreements are often subject to significant management judgment on an ongoing basis. Those cost accruals are provided for in accordance with generally accepted accounting principles and our accounting policies set forth in “Environmental Matters” contained in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We, and our subsidiaries, are defendants in various other legal actions (including proceedings based on alleged exposures to asbestos) incidental to our past and current business activities. At December 31, 20152016 and 2014,2015, our consolidated balance sheets included liabilities for these legal actions of $21.2$13.6 million and $22.1$21.2 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 relating to the Acquired Business for litigation, releases of hazardous materials and violations of environmental law to the extent arising prior to the Closing Date.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Executive Officers of the Registrant as of February 29, 2016
|
| | | | |
Name and Age | | Office | | Served as an Olin Officer Since |
Joseph D. Rupp (65) | | Chairman and Chief Executive Officer | | 1996 |
Scott R. Abel (52) | | Vice President and Vice President, Chlorine, Co-Products and Distribution
| | 2014 |
Frank W. Chirumbole (57) | | Vice President and President, Chlor Alkali Products | | 2011 |
Stephen C. Curley (64) | | Vice President and Treasurer | | 2005 |
Pat D. Dawson (58) | | Executive Vice President and President, Epoxy and International
| | 2015 |
Dolores J. Ennico (63) | | Vice President, Human Resources | | 2009 |
John E. Fischer (60) | | President and Chief Operating Officer | | 2004 |
Clive A. Grannum (50) | | Vice President and President, Global Chlorinated Organics
| | 2015 |
G. Bruce Greer, Jr. (55) | | Vice President, Strategic Planning and Information Technology | | 2005 |
John L. McIntosh (61) | | Executive Vice President and President, Chemicals and Ammunition
| | 1999 |
Thomas J. O’Keefe (57) | | Vice President and President, Winchester | | 2011 |
George H. Pain (65) | | Senior Vice President, General Counsel and Secretary | | 2002 |
John M. Sampson (55) | | Vice President and Vice President, Manufacturing and Engineering, Chlor Alkali Vinyls, Epoxy and Global Chlorinated Organics
| | 2015 |
Todd A. Slater (52) | | Vice President and Chief Financial Officer | | 2005 |
Randee N. Sumner (41) | | Vice President and Controller | | 2014 |
James A. Varilek (57) | | Executive Vice President and President, Chlor Alkali Vinyls and Services
| | 2015 |
No family relationship exists between any of the above named executive officers or between any of them and any of our directors. Such officers were elected to serve, subject to the Bylaws, until their respective successors are chosen.
All executive officers, except Messrs. Abel, Chirumbole, Dawson, Grannum, O’Keefe, Sampson and Varilek and Ms. Sumner, have served as executive officers for more than five years.
All executive officers who have been employed by Olin for over five years, except Messrs. Chirumbole, Fischer, McIntosh, O’Keefe and Slater and Ms Sumner, have served in their current position for more than five years.
Scott R. Abel was appointed Vice President, Chlorine, Co-Products and Distribution effective January 29, 2016, adding business responsibility for chlorine and co-products to the duties he assumed in April 2014 of leading the Chemical Distribution business, which commenced on April 24, 2015 when he became Vice President of Olin and President, Chemical Distribution. From 2012 to 2014, he served as Commercial Vice President at KOST USA, Inc. From 2009 to 2012, he served as Business Director – Glycols at Archer Daniels Midland Company. From 2008 to 2009, he served as Global Marketing Director – Acrylic Monomers; and from 1989 through 2007, he served in various sales and commercial management positions including marketing roles in Chlor-Alkali and Global Chlorinated Organics, all at TDCC.
Frank W. Chirumbole assumed his current duties on April 28, 2011 and was appointed Vice President of Olin and President, Chlor Alkali Products effective April 26, 2012. From October 2010 until April 2012, he served as President, Chlor Alkali Products; from 2009 until September 2010, he served as Vice President, General Manager - Bleach; from 2007 to 2009, he served as Vice President, Supply Chain Management; and from 2001 to 2007, he served as Vice President, Manufacturing and Engineering, all at Olin Chlor Alkali Products.
Pat D. Dawson was appointed Executive Vice President of Olin and President, Epoxy and International effective October 5, 2015. From July 2013 through September 2015, he was Senior Vice President, Epoxy and Corporate Project Development; from 2010 to 2013, he served as the President of Dow Asia Pacific; and from 2004 to 2010, he served as Group President for the Polyurethanes Business, all at TDCC. His career began in 1980 at TDCC.
John E. Fischer has served as President and Chief Operating Officer since May 2014 and will become President and Chief Executive Officer effective May 1, 2016. From October 2010 until May 2014, he served as Senior Vice President and Chief Financial Officer; from May 2005 to October 2010, he served as Vice President and Chief Financial Officer; and from June 2004 until May 2005, he served as Vice President, Finance and Controller, all at Olin.
Clive A. Grannum was appointed Vice President of Olin and President, Global Chlorinated Organics effective October 5, 2015. From December 2013 to October 2015, he served as Business President, Global Chlorinated Organics; from 2011 to 2013, he was the business leader for Global Chlorinated Organics and Plastics additives businesses, all at TDCC. He retained the Plastics Additives leadership role after TDCC’s acquisition of Rohm and Haas in 2009. From 2008 to 2009, he served as the Vice President of Plastic Additives for Rohm and Haas. Prior to Rohm and Haas, he held multiple roles of increasing responsibilities at The BOC Group and The ICI Group with the last role being Vice President of ICI and Senior Vice President, Uniqema Americas.
John L. McIntosh was appointed Executive Vice President, Chemicals and Ammunition effective October 5, 2015. From May 2014 until October 4, 2015, he served as Senior Vice President, Chemicals; from January 2011 until April 2014, he served as Senior Vice President, Operations; and from October 2010 until December 2010, he served as Senior Vice President, Chemicals, all at Olin.
Thomas J. O’Keefe assumed his current duties on April 28, 2011 and was appointed Vice President of Olin and President, Winchester effective April 26, 2012. From 2010 to 2011, he served as President, Winchester; from 2008 to 2010, he served as Vice President, Operations and Planning; and from 2006 to 2008 he was Vice President, Manufacturing Operations, in each case, at Winchester. From 2001 to 2006, he was Vice President, Manufacturing and Engineering for Olin’s former Brass Division.
John M. Sampson was appointed Vice President of Olin and Vice President, Manufacturing and Engineering, Chlor Alkali Vinyls, Epoxy and Global Chlorinated Organics effective October 5, 2015. From February 2014 to October 2015, he served as Vice President, Dow Chlorine Products Operations; from November 2012 to February 2014, he served as Vice President of Environmental, Health, & Safety Operations; from 2011 to 2012, he served as Manufacturing Vice President for Chemicals & Energy; and from 2007 to 2011, he served as Global Business Director for Chlor-Alkali, all at TDCC. His career began at TDCC in 1983.
Todd A. Slater was appointed Vice President and Chief Financial Officer effective May 4, 2014. From October 2010 until May 3, 2014, he served as Vice President, Finance and Controller; and from May 2005 until September 2010, he served as Vice President and Controller, all at Olin.
Randee N. Sumner was appointed Vice President and Controller effective May 4, 2014. From December 2012 until April 2014, she served as Division Financial Officer for Chemical Distribution. From 2010 until December 2012, she served as Assistant Controller; from 2008 to 2010, she served as Director, Corporate Accounting and Financial Reporting; and from 2006 to 2008, she served as Manager, Corporate Accounting and Financial Reporting, all at Olin.
James A. Varilek was appointed Executive Vice President of Olin and President, Chlor Alkali Vinyls and Services effective October 5, 2015. In November 2013, he was named President of the U.S. Chlor Alkali & Vinyl Business and in March 2015, he assumed additional responsibilities as Chief Operating Officer of Dow Chlorine Products; from December 2010 to November 2013, he was Business Vice President for the Dow Services Business, adding Vice President for Procurement in July 2013; from November 2008 to December 2010, he was Vice President for Business Services, Advanced Materials Division; and from February 2006 to November 2008, he was Vice President of Global Supply Chain, all at TDCC. His career began at TDCC in 1982.
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of January 29, 2016,31, 2017, we had 4,4454,220 record holders of our common stock.
Our common stock is traded on the New York Stock Exchange.
The high and low sales prices of our common stock during each quarterly period in 20152016 and 20142015 are listed below. A dividend of $0.20 per common share was paid during each of the four quarters in 20152016 and 2014.2015.
| | | 2015 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| 2016 | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Market price of common stock per New York Stock Exchange composite transactions | | | | | | | | | | | | | | | | |
| High | | $ | 34.34 |
| | $ | 32.56 |
| | $ | 27.18 |
| | $ | 22.13 |
| | $ | 17.75 |
| | $ | 24.99 |
| | $ | 26.46 |
| | $ | 26.93 |
|
| Low | | 22.00 |
| | 26.77 |
| | 15.73 |
| | 16.60 |
| | 12.29 |
| | 16.55 |
| | 18.24 |
| | 19.62 |
|
| | | 2014 | | | | | | | | | |
| 2015 | | | | | | | | | |
| Market price of common stock per New York Stock Exchange composite transactions | | | | | | | | | | | | | | | | |
| High | | $ | 29.18 |
| | $ | 29.28 |
| | $ | 28.08 |
| | $ | 25.97 |
| | $ | 34.34 |
| | $ | 32.56 |
| | $ | 27.18 |
| | $ | 22.13 |
|
| Low | | 24.51 |
| | 26.42 |
| | 25.23 |
| | 20.43 |
| | 22.00 |
| | 26.77 |
| | 15.73 |
| | 16.60 |
|
Issuer Purchases of Equity Securities
|
| | | | | | | | | | |
| Period | | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
October 1-31, 20152016 | | — |
| | — | | — |
| | |
November 1-30, 20152016 | | — |
| | — | | — |
| | |
December 1-31, 20152016 | | — |
| | — | | — |
| | |
| Total | | | | | | | | 6,062,657 (1) |
| |
| (1) | On April 24, 2014, we announced a share repurchase program approved by the board of directors for the purchase of up to 8 million shares of common stock that will terminate on April 24, 2017. Through December 31, 2015,2016, 1,937,343 shares had been repurchased, and 6,062,657 shares remained available for purchase under this program. Under the Merger Agreement relating to the Acquisition, we were restricted from repurchasing shares of our common stock prior to the consummation of the merger. For a period of two years subsequent to the Closing Date, we will continue to be subject to certain restrictions on our ability to conduct share repurchases. |
Performance Graph
This graph compares the total shareholder return on our common stock with the cumulative total return of the Standard & Poor’s 1000 Index (the S&P 1000), our current peer group (the 2016 Peer Group) and our prior peer group (the 2015 Peer Group). The 2015 Peer Group consists of a customized peer group of four companies comprised of: Orbital ATK, Inc., TDCC, Oxy, and Westlake. The 2016 Peer Group consists of a customized peer group of five companies comprised of: Orbital ATK, Inc.TDCC, Huntsman Corporation, Trinseo S.A., Axiall, TDCC, Oxy and Westlake Chemical Corporation.Westlake.
Data is for the five-year period from December 31, 20102011 through December 31, 2015.2016. The cumulative return includes reinvestment of dividends. The Peer Group isGroups are weighted in accordance with market capitalization (closing stock price multiplied by the number of shares outstanding) as of the beginning of each of the five years covered by the performance graph. We calculated the weighted return for each year by multiplying (a) the percentage that each corporation’s market capitalization represented of the total market capitalization for all corporations in the Peer GroupGroups for such year by (b) the total shareholder return for that corporation for such year.
Item 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
| | | | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| Operations | | ($ and shares in millions, except per share data) | | ($ and shares in millions, except per share data) |
| Sales | | $ | 2,854 |
| | $ | 2,241 |
| | $ | 2,515 |
| | $ | 2,185 |
| | $ | 1,961 |
| | $ | 5,551 |
| | $ | 2,854 |
| | $ | 2,241 |
| | $ | 2,515 |
| | $ | 2,185 |
|
| Cost of goods sold | | 2,487 |
| | 1,853 |
| | 2,034 |
| | 1,748 |
| | 1,574 |
| | 4,924 |
| | 2,487 |
| | 1,853 |
| | 2,034 |
| | 1,748 |
|
| Selling and administration | | 187 |
| | 166 |
| | 190 |
| | 169 |
| | 161 |
| | 323 |
| | 186 |
| | 166 |
| | 190 |
| | 169 |
|
| Restructuring charges | | 3 |
| | 16 |
| | 6 |
| | 9 |
| | 11 |
| | 113 |
| | 3 |
| | 16 |
| | 6 |
| | 9 |
|
| Acquisition-related costs | | 123 |
| | 4 |
| | — |
| | 8 |
| | — |
| | 49 |
| | 123 |
| | 4 |
| | — |
| | 8 |
|
| Other operating income | | 46 |
| | 2 |
| | 1 |
| | 8 |
| | 9 |
| | 11 |
| | 46 |
| | 2 |
| | 1 |
| | 8 |
|
| Earnings of non-consolidated affiliates | | 2 |
| | 2 |
| | 3 |
| | 3 |
| | 10 |
| | 2 |
| | 2 |
| | 2 |
| | 3 |
| | 3 |
|
| Interest expense | | 97 |
| | 44 |
| | 39 |
| | 26 |
| | 30 |
| | 192 |
| | 97 |
| | 44 |
| | 39 |
| | 26 |
|
| Interest and other income (expense) | | 2 |
| | 1 |
| | — |
| | (10 | ) | | 176 |
| |
| Income before taxes from continuing operations | | 7 |
| | 163 |
| | 250 |
| | 226 |
|
| 380 |
| |
| Income tax provision | | 8 |
| | 58 |
| | 71 |
| | 76 |
| | 138 |
| |
| Interest income and other income (expense) | | | 3 |
| | 1 |
| | 1 |
| | — |
| | (10 | ) |
| Income (loss) before taxes from continuing operations | | | (34 | ) | | 7 |
| | 163 |
| | 250 |
|
| 226 |
|
| Income tax (benefit) provision | | | (30 | ) | | 8 |
| | 58 |
| | 71 |
| | 76 |
|
| Income (loss) from continuing operations | | (1 | ) | | 105 |
| | 179 |
| | 150 |
| | 242 |
| | (4 | ) | | (1 | ) | | 105 |
| | 179 |
| | 150 |
|
| Discontinued operations, net | | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
| Net (loss) income | | $ | (1 | ) | | $ | 106 |
| | $ | 179 |
| | $ | 150 |
| | $ | 242 |
| | $ | (4 | ) | | $ | (1 | ) | | $ | 106 |
| | $ | 179 |
| | $ | 150 |
|
| Financial position | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents, short-term investments and restricted cash | | $ | 392 |
| | $ | 257 |
| | $ | 312 |
| | $ | 177 |
| | $ | 357 |
| |
| Working capital, excluding cash and cash equivalents and short-term investments | | 394 |
| | 182 |
| | 125 |
| | 150 |
| | 76 |
| |
| Cash and cash equivalents and restricted cash | | | $ | 185 |
| | $ | 392 |
| | $ | 257 |
| | $ | 312 |
| | $ | 177 |
|
| Working capital, excluding cash and cash equivalents | | | 439 |
| | 395 |
| | 182 |
| | 125 |
| | 150 |
|
| Property, plant and equipment, net | | 3,953 |
| | 931 |
| | 988 |
| | 1,034 |
| | 885 |
| | 3,705 |
| | 3,953 |
| | 931 |
| | 988 |
| | 1,034 |
|
| Total assets | | 9,322 |
| | 2,698 |
| | 2,803 |
| | 2,778 |
| | 2,450 |
| | 8,763 |
| | 9,289 |
| | 2,689 |
| | 2,790 |
| | 2,762 |
|
| Capitalization: | | | | | | | | | | | | | | | | | | | | |
| Short-term debt | | 207 |
| | 16 |
| | 13 |
| | 24 |
| | 12 |
| | 81 |
| | 205 |
| | 16 |
| | 13 |
| | 24 |
|
| Long-term debt | | 3,675 |
| | 659 |
| | 678 |
| | 690 |
| | 524 |
| | 3,537 |
| | 3,644 |
| | 650 |
| | 665 |
| | 674 |
|
| Shareholders’ equity | | 2,419 |
| | 1,013 |
| | 1,101 |
| | 998 |
| | 986 |
| | 2,273 |
| | 2,419 |
| | 1,013 |
| | 1,101 |
| | 998 |
|
| Total capitalization | | $ | 6,301 |
| | $ | 1,688 |
| | $ | 1,792 |
| | $ | 1,712 |
| | $ | 1,522 |
| | $ | 5,891 |
| | $ | 6,268 |
| | $ | 1,679 |
| | $ | 1,779 |
| | $ | 1,696 |
|
| Per share data | | | | | | | | | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.24 |
| | $ | 1.87 |
| | $ | 3.02 |
| | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.24 |
| | $ | 1.87 |
|
| Discontinued operations, net | | — |
| | 0.01 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.01 |
| | — |
| | — |
|
| Net (loss) income | | $ | (0.01 | ) | | $ | 1.34 |
| | $ | 2.24 |
| | $ | 1.87 |
| | $ | 3.02 |
| | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.34 |
| | $ | 2.24 |
| | $ | 1.87 |
|
| Diluted: | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.01 | ) | | $ | 1.32 |
| | $ | 2.21 |
| | $ | 1.85 |
| | $ | 2.99 |
| | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.32 |
| | $ | 2.21 |
| | $ | 1.85 |
|
| Discontinued operations, net | | — |
| | 0.01 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.01 |
| | — |
| | — |
|
| Net (loss) income | | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.21 |
| | $ | 1.85 |
| | $ | 2.99 |
| | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.21 |
| | $ | 1.85 |
|
| Common Cash Dividends | | 0.80 |
| | 0.80 |
| | 0.80 |
| | 0.80 |
| | 0.80 |
| | 0.80 |
| | 0.80 |
| | 0.80 |
| | 0.80 |
| | 0.80 |
|
| Market price of common stock: | | | | | | | | | | | | | | | | | | | | |
| High | | 34.34 |
| | 29.28 |
| | 29.52 |
| | 23.48 |
| | 27.16 |
| | 26.93 |
| | 34.34 |
| | 29.28 |
| | 29.52 |
| | 23.48 |
|
| Low | | 15.73 |
| | 20.43 |
| | 21.29 |
| | 18.40 |
| | 16.11 |
| | 12.29 |
| | 15.73 |
| | 20.43 |
| | 21.29 |
| | 18.40 |
|
| Year end | | 17.26 |
| | 22.77 |
| | 28.85 |
| | 21.59 |
| | 19.65 |
| | 25.61 |
| | 17.26 |
| | 22.77 |
| | 28.85 |
| | 21.59 |
|
| Other | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | $ | 131 |
| | $ | 72 |
| | $ | 91 |
| | $ | 256 |
| | $ | 201 |
| | $ | 278 |
| | $ | 131 |
| | $ | 72 |
| | $ | 91 |
| | $ | 256 |
|
| Depreciation and amortization | | 229 |
| | 139 |
| | 135 |
| | 111 |
| | 99 |
| | 534 |
| | 229 |
| | 139 |
| | 135 |
| | 111 |
|
| Common dividends paid | | 80 |
| | 63 |
| | 64 |
| | 64 |
| | 64 |
| | 132 |
| | 80 |
| | 63 |
| | 64 |
| | 64 |
|
| Repurchases of common stock | | — |
| | 65 |
| | 36 |
| | 3 |
| | 4 |
| | — |
| | — |
| | 65 |
| | 36 |
| | 3 |
|
| Current ratio | | 1.7 |
| | 2.2 |
| | 2.1 |
| | 1.7 |
| | 2.0 |
| | 1.7 |
| | 1.7 |
| | 2.2 |
| | 2.1 |
| | 1.7 |
|
| Total debt to total capitalization | | 61.6 | % | | 40.0 | % | | 38.6 | % | | 41.7 | % | | 35.2 | % | | 61.4 | % | | 61.4 | % | | 39.7 | % | | 38.1 | % | | 41.1 | % |
| Effective tax rate | | 120.9 | % | | 35.5 | % | | 28.6 | % | | 33.6 | % | | 36.3 | % | | 88.6 | % | | 120.9 | % | | 35.5 | % | | 28.6 | % | | 33.6 | % |
| Average common shares outstanding - diluted | | 103.4 |
| | 79.7 |
| | 80.9 |
| | 81.0 |
| | 80.8 |
| | 165.2 |
| | 103.4 |
| | 79.7 |
| | 80.9 |
| | 81.0 |
|
| Shareholders | | 4,500 |
| | 3,600 |
| | 3,900 |
| | 4,100 |
| | 4,400 |
| | 4,200 |
| | 4,500 |
| | 3,600 |
| | 3,900 |
| | 4,100 |
|
| Employees | | 6,200 |
| | 3,900 |
| | 4,100 |
| | 4,100 |
| | 3,800 |
| | 6,400 |
| | 6,200 |
| | 3,900 |
| | 4,100 |
| | 4,100 |
|
Since February 28, 2011, our Selected Financial Data reflects the acquisition of the remaining 50% of the SunBelt Chlor Alkali Partnership, which we refer to as SunBelt. Since August 22, 2012, our Selected Financial Data reflects the acquisition of K.A. Steel Chemicals Inc. (KA Steel). Since October 5, 2015, our Selected Financial Data reflects the operating results of the Acquired Business. Our Selected Financial Data also reflects the adoption of Accounting Standard Update (ASU) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” which required retrospective application. See the Note “Recent Accounting Pronouncements” of the notes to consolidated financial statements contained in Item 8.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS BACKGROUND
We are a leading vertically-integrated global manufacturer and distributor of chemical products and a leading U.S. manufacturer of ammunition. Our operations are concentrated in three business segments: Chlor Alkali Products and Vinyls, Epoxy and Winchester. All of our business segments are capital intensive manufacturing businesses. Chlor Alkali Products and Vinyls operating rates are closely tied to the general economy. Each segment has a commodity element to it, and therefore, our ability to influence pricing is quite limited on the portion of the segment’s business that is strictly commodity.
Our Chlor Alkali Products and Vinyls segment is a commodity business where all supplier products are similar and price is the major supplier selection criterion. We have little or no ability to influence prices in the large, global commodity markets. Our Chlor Alkali Products and Vinyls segment produces some of the most widely used chemicals in the world that can be upgraded into a wide variety of downstream chemical products used in many end-markets. Cyclical price swings, driven by changes in supply/demand, can be abrupt and significant and, given capacity in our Chlor Alkali Products and Vinyls segment, can lead to very significant changes in our overall profitability.
The Epoxy segment consumes products manufactured by the Chlor Alkali Products and Vinyls segment. While competitive differentiation exists through downstream customization and product development opportunities, pricing is extremely competitive with a broad range of competitors across the globe.
Winchester also has a commodity element to its business, but a majority of Winchester ammunition is sold as a branded consumer product where there are opportunities to differentiate certain offerings through innovative new product development and enhanced product performance. While competitive pricing versus other branded ammunition products is important, it is not the only factor in product selection.
RECENT DEVELOPMENTS AND HIGHLIGHTS
2016 Overview
In 2016, Chlor Alkali Products and Vinyls generated segment income of $224.9 million compared to $115.5 million for 2015. The improvement in the Chlor Alkali Products and Vinyls segment income reflects the inclusion of a full year of the Acquired Chlor Alkali Business and lower freight costs, primarily driven by the realization of synergies, partially offset by lower product prices. The lower product prices were primarily due to caustic soda, hydrochloric acid and potassium hydroxide prices, partially offset by increased chlorine prices. The Chlor Alkali Products and Vinyls segment income in 2015 was also impacted by the recognition of $6.7 million of additional costs of goods sold related to the fair value adjustment related to the purchase accounting for inventory and insurance recoveries of $11.4 million. Chlor Alkali Products and Vinyls segment income included depreciation and amortization expense of $418.1 million and $186.1 million in 2016 and 2015, respectively.
During the second half of 2016, Chlor Alkali Products and Vinyls segment results began to reflect improvements in caustic soda prices. For the final nine months of 2016, caustic soda price indices have increased resulting in positive product price momentum into 2017. During the fourth quarter of 2016, a caustic soda price increase was announced for $40 per ton and, during February 2016, an additional caustic soda price increase of $60 per ton was announced. While the success of these caustic soda price increases are not yet known, the majority of the benefit, if realized, would impact 2017 results.
In 2016, Epoxy generated segment income of $15.4 million compared to a segment loss of $7.5 million for 2015. The fourth quarter of 2015 was impacted by the recognition of $17.3 million of additional costs of goods sold related to the fair value adjustment related to the purchase accounting for inventory. Additionally, Epoxy segment results were higher than the prior year due to the ownership of the Acquired Business for the full year. Epoxy segment results included depreciation and amortization expense of $90.0 million and $20.9 million in 2016 and 2015, respectively.
Winchester reported segment income of $120.9 million for 2016 compared to $115.6 million for 2015. The increase in segment income in 2016 compared to 2015 reflects lower commodity and other material costs and increased volumes. These increases were partially offset by lower product prices and higher operating costs. Winchester’s segment income included depreciation and amortization expense of $18.5 million and $17.4 million in 2016 and 2015, respectively.
Other operating income for 2016 included an $11.0 million insurance recovery for property damage and business interruption related to a 2008 chlor alkali facility incident.
During 2016, Olin entered into arrangements to increase our supply of low cost electricity. These arrangements improve manufacturing flexibility at our Freeport, TX and Plaquemine, LA facilities, reduce our overall electricity cost and accelerate the realization of cost synergies available from the Acquired Business. In conjunction with these arrangements, Olin made payments of $175.7 million during 2016.
In 2016, we entered into sale/leaseback transactions for railcars that we acquired in connection with the Acquisition. We received proceeds from the sales of $40.4 million.
Financing
During 2016, we repaid $125.0 million of 6.75% senior notes due 2016 (2016 Notes), which became due, $67.5 million under the required quarterly installments of the $1,350.0 million senior term loan facility and $12.2 million due under the annual requirements of the SunBelt Notes.
On December 20, 2016, we entered into a three year, $250.0 million Receivables Financing Agreement. As of December 31, 2016, $210.0 million was drawn under this program and the proceeds were used to repay a portion of the Sumitomo Credit Facility.
Restructuring
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 year ended December 31, 2016, we recorded pretax restructuring charges of $111.3 million, of which $76.6 million of these charges were non-cash asset impairment charges for equipment and facilities. We expect to incur additional restructuring charges through 2020 of approximately $33 million related to these capacity reductions.
Acquisition
On the Closing Date, we acquired from TDCC the Acquired Business, whose operating results are included in the accompanying financial statements since the date of the Acquisition. For segment reporting purposes, the Acquired Business’s Global Epoxy operating results comprise the newly created Epoxy segment and the Acquired Chlor Alkali Business operating results combined with our former Chlor Alkali Products and Chemical Distribution segments to comprise the newly created Chlor Alkali Products and Vinyls segment.
Under the Merger Agreement dated March 26, 2015, the aggregate purchase price for the Acquired Business was $5,162.2$5,136.7 million, subject to certain post-closingafter the final post closing adjustments. The $5,162.2$5,136.7 million consisted of $2,095.0 million of cash and debt transferred to TDCC and approximately 87.5 million shares of Olin common stock valued at approximately $1,527.4 million, plus the assumption of pension liabilities of approximately $447.1$442.3 million and long-term debt of $569.0 million. During 2016, payments of $69.5 million were made related to certain acquisition related liabilities including the final working capital adjustment. The value of the common stock was based on the closing stock price on the last trading day prior to the Closing Date of $17.46.
Certain additional agreements were entered into, including, among others, an Employee Matters Agreement, a Tax Matters Agreement, site, transitional and other service agreements, supply and purchase agreements, real estate agreements, technology licenses and intellectual property agreements. In addition, Olin and TDCC agreed in connection with the Acquisition to enter into arrangements for the long-term supply of ethylene by TDCC to Olin, pursuant to which, among other things, Olin made upfront payments on the Closing Date of $433.5 million 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. 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 $209.4 million in 2017. 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.
In connection with the Acquisition, TDCC retained liabilities relating to the Acquired Business for litigation, releases of hazardous materials and violations of environmental law to the extent arising prior to the Closing Date. The value of the common stock was based on the closing stock price on the last trading day prior to the Closing Date of $17.46.
Certain additional agreements have been entered into, including, among others, an Employee Matters Agreement, a Tax Matters Agreement, site, transitional and other service agreements, supply and purchase agreements, real estate agreements, technology licenses and intellectual property agreements. Payments of approximately $90.2 million, subject to certain post-closing adjustments, will be made related to certain acquisition related liabilities including the estimated working capital adjustment. In addition, Olin and TDCC have agreed in connection with the Acquisition to enter into arrangements for the long-term supply of ethylene by TDCC to Olin, pursuant to which, among other things, Olin made upfront payments of $433.5 million 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.
In connection with the Acquisition, we filed a Certificate of Amendment to our Articles of Incorporation to increase the number of authorized shares of Olin common stock from 120.0 million shares to 240.0 million shares. Olin issued approximately 87.5 million shares of Olin common stock on the Closing Date that represented approximately 53% of the outstanding shares of Olin common stock. Olin’s pre-merger shareholders continued to hold the remaining approximately 47% of the outstanding shares of Olin common stock.
We financed the cash and debt portion of the Acquisition with new long-term debt which consisted of $720.0 million aggregate principal amount of 9.75% senior notes due October 15, 2023, $500.0 million aggregate principal amount of 10.00% senior notes due October 15, 2025 and a $1,350.0 million five-year senior term loan facility, a portion of which was used to refinance the remaining $146.3 million outstanding on an existing term loan facility. Also in connection with the Acquisition, we obtained a three-year senior term loan facility in an aggregate principal amount of $800.0 million, which was primarily used to refinance existing indebtedness of the Acquired Business outstanding that was assumed by Olin.
The Acquired Business’s results of operations have been included in our consolidated results for the period subsequent to the Closing Date. Our results for the yearyears ended December 31, 2016 and 2015 includeincludes Epoxy sales of $1,822.0 million and $429.6 million, respectively, and a segment lossincome (loss) of $7.5$15.4 million and $(7.5) million, respectively. For the years ended December 31, 2016 and 2015, Chlor Alkali Products and Vinyls include sales of the Acquired Chlor Alkali Business sales of $1,715.7 million and $373.0 million, respectively, and segment income of $164.5 million and $37.2 million.million, respectively.
During
For the years ended December 31, 2016, 2015 and 2014, we incurred acquisition-related costs in connection with the Acquisition and related transactions, including $48.8 million, $76.3 million and $4.2 million, respectively, of advisory, legal, accounting, integration and other professional fees and $30.5 millionfees. For the year ended December 31, 2015, we also incurred acquisition-related costs of financing-related fees. In addition, $47.1 million of costs were incurred as a result of the change in control, which created a mandatory acceleration of expenses under deferred compensation plans as a result of the Acquisition.transactions and $30.5 million of financing-related fees.
As a result of the Acquisition, we believe we can generate at least $250 million in annual cost synergies by 2019, or if we are able to increase sales to new third-party customers and access new product markets as a result of the Acquisition, the potential for additional annual synergies of up to $100 million. WeSynergies realized in 2016 were approximately $75 million primarily related to cost savings. During the first three years we expect to incur $100 million to $150 million in transition-related costs during the first three years and $200$255 million in incremental capital spending during the first three yearsand payments under electricity supply contracts which we believe are necessary to realize the anticipated synergies.
2015 Overview
In 2015, Chlor Alkali Products and Vinyls generated segment income of $115.5 million for 2015 compared to $130.1 million for 2014. Chlor Alkali Products and Vinyls segment income was lower than the prior year due to decreased chlorine, caustic soda, potassium hydroxide and hydrochloric acid volumes and lower product prices. These decreases were partially offset by the contributions of the Acquired Chlor Alkali Business, lower operating costs, primarily due to lower energy costs, and insurance recoveries. Chlor Alkali Products and Vinyls segment income also included $6.7 million of additional costs of goods sold related to the fair value adjustment related to the preliminary purchase accounting for inventory. The lower product prices were predominantly due to caustic soda, partially offset by higher chlorine prices. The insurance recoveries represent reimbursement of costs incurred and expensed in prior periods, primarily related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. Chlor Alkali Products and Vinyls segment income included depreciation and amortization expense of $186.1 million and $119.4 million for 2015 and 2014, respectively.
Epoxy segment loss for 2015 was $7.5 million, respectively, which represent the segment’s operating results from the Closing Date through December 31, 2015. Epoxy segment loss included $17.3 million of additional costs of goods sold related to the fair value adjustment related to the preliminary purchase accounting for inventory. Epoxy segment loss included depreciation and amortization expense of $20.9 million for 2015.
Winchester reported segment income of $115.6 million for 2015 compared to $127.3 million for 2014. The decrease in segment income in 2015 compared to 2014 reflects lower volumes and a less favorable product mix for pistol and shotshell ammunition and lower product pricing. These decreases were partially offset by decreased commodity and other material costs. Winchester’s segment income included depreciation and amortization expense of $17.4 million and $16.3 million for 2015 and 2014, respectively.
Other operating income in 2015 included insurance recoveries for property damage and business interruption of $42.3 million related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014 and $3.7 million related to the McIntosh, AL chlor alkali facility.
PENSION AND POSTRETIREMENT BENEFITS
Under ASC 715, we recorded an after-tax charge of $37.5 million ($61.0 million pretax) to shareholders’ equity as of December 31, 2016 for our pension and other postretirement plans. This charge primarily reflected a 30-basis point decrease in the domestic pension plans’ discount rate, partially offset by favorable performance on plan assets during 2016. In 2015, we recorded an after-tax charge of $78.8 million ($125.3 million pretax) to shareholders’ equity as of December 31, 2015 for our pension and other postretirement plans. This charge reflected unfavorable performance on plan assets during 2015, partially offset by a 50-basis point increase in the domestic pension plans’ discount rate. In 2014, we recorded an after-tax charge of $86.6 million ($142.0 million pretax) to shareholders’ equity as of December 31, 2014 for our pension and other postretirement plans. This charge reflected a 60-basis point decrease in the plans’ discount rate and the negative impact of the newly mandatedupdated mortality tables, partially offset by favorable performance on plan assets during 2014. Our benefit obligation as of December 31, 2014 increased approximately $90 million pretax as a result of the newly mandatedupdated mortality tables. In 2013, we recorded an after-tax charge of $7.7 million ($12.5 million pretax) to shareholders’ equity as of December 31, 2013 for our pension and other postretirement plans. This charge reflected unfavorable performance on plan assets during 2013, partially offset by a 60-basis point increase in the plans’ discount rate. The non-cash charges to shareholders’ equity do not affect our ability to borrow under our senior credit facility.
Effective as of the Closing Date, we changed the approach used to measure service and interest costs for our defined benefit pension plans and on December 31, 2015 changed this approach for our other postretirement benefits. Prior to the Closing Date, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Subsequent to the Closing Date for our defined benefit pension plans and beginning in 2016 for our other postretirement benefits, we elected to measure service and interest costs by applying the specific spot rates along the yield curve to the plans’ estimated cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.
During the fourth quarter of 2014, the SOA issued the final report of its mortality tables and mortality improvement scales. The updated mortality data reflected increasing life expectancies in the U.S. During the third quarter of 2012, the MAP-21 became law. The law changed the mechanism for determining interest rates to be used for calculating minimum defined benefit pension plan funding requirements. Interest rates are determined using an average of rates for a 25-year period, which can have the effect of increasing the annual discount rate, reducing the defined benefit pension plan obligation, and potentially reducing or eliminating the minimum annual funding requirement. The law also increased premiums paid to the PBGC. During the third quarter of 2014, HATFA 2014 became law, which includes an extension of MAP-21’s defined benefit plan funding stabilization relief.
As of the Closing Date and as part of the Acquisition, our U.S. qualified defined benefit pension plan assumed certain U.S. qualified defined benefit pension obligations and assets related to active employees and certain terminated, vested retirees of the Acquired Business with an estimateda net liability of $286.5 million, subject to certain post-closing adjustments.$281.7 million. In connection therewith, pension assets will bewere transferred from TDCC’s U.S. qualified defined benefit pension plans to our U.S. qualified defined benefit pension plan.plan during 2016. Immediately prior to the Acquisition, the Acquired Business’s participant accounts assumed in the Acquisition were closed to new participants and were no longer accruing additional benefits.
During 2016, we made a discretionary cash contribution to our domestic qualified defined benefit pension plan of $6.0 million. Based on our plan assumptions and estimates, we will not be required to make any cash contributions to the domestic qualified defined benefit pension plan at least through 2016.2017.
As of the Closing Date, we assumed certain accrued defined benefit pension liabilities relating to employees of TDCC in Germany, Switzerland and other international locations who transferred to Olin in connection with the Acquisition. The estimated net liability assumed as of the Closing Date was $160.6 million, subject to post-closing adjustments.million. We also have a small Canadian defined benefit pension liability. In connection with international qualified defined benefit pension plans, we made cash contributions of $1.3 million, $0.9 million 0.8 million and $1.0$0.8 million in 2016, 2015, 2014, and 2013,2014, respectively, and we anticipate less than $5 million of cash contributions to international qualified defined benefit pension plans in 2016.2017.
At December 31, 2015,2016, the projected benefit obligation of $2,680.8$2,711.7 million exceeded the market value of assets in our qualified defined benefit pension plans by $644.3$633.2 million, as calculated under ASC 715.
Components of net periodic benefit (income) costs (income) were:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | ($ in millions) |
| Pension costs (benefits) | $ | 18.7 |
| | $ | (25.0 | ) | | $ | (20.5 | ) |
| Other postretirement benefits | 6.7 |
| | 6.6 |
| | 7.5 |
|
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | ($ in millions) |
| Pension (benefits) costs | $ | (37.1 | ) | | $ | 18.7 |
| | $ | (25.0 | ) |
| Other postretirement benefit costs | 2.5 |
| | 6.7 |
| | 6.6 |
|
For the year ended December 31, 2015, pension costs included $47.1 million of costs incurred as a result of the change in control, which created a mandatory acceleration of expenses under our domestic non-qualified pension plan as a result of the Acquisition. These charges were included in acquisition-related costs.
For both the years ended December 31, 2015 and 2014, we recorded a curtailment charge of $0.2 million associated with permanently closing a portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. These charges were included in restructuring charges.
The service cost and the amortization of prior service cost components of pension expense related to employees of the operating segments are allocated to the operating segments based on their respective estimated census data.
CONSOLIDATED RESULTS OF OPERATIONS
| | | | Years ended December 31, | Years ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| | ($ in millions, except per share data) | ($ in millions, except per share data) |
| Sales | $ | 2,854.4 |
| | $ | 2,241.2 |
| | $ | 2,515.0 |
| $ | 5,550.6 |
| | $ | 2,854.4 |
| | $ | 2,241.2 |
|
| Cost of goods sold | 2,486.8 |
| | 1,853.2 |
| | 2,033.7 |
| 4,923.7 |
| | 2,486.8 |
| | 1,853.2 |
|
| Gross margin | 367.6 |
| | 388.0 |
| | 481.3 |
| 626.9 |
| | 367.6 |
| | 388.0 |
|
| Selling and administration | 186.5 |
| | 166.2 |
| | 190.0 |
| 323.2 |
| | 186.3 |
| | 166.1 |
|
| Restructuring charges | 2.7 |
| | 15.7 |
| | 5.5 |
| 112.9 |
| | 2.7 |
| | 15.7 |
|
| Acquisition-related costs | 123.4 |
| | 4.2 |
| | — |
| 48.8 |
| | 123.4 |
| | 4.2 |
|
| Other operating income | 45.7 |
| | 1.5 |
| | 0.7 |
| 10.6 |
| | 45.7 |
| | 1.5 |
|
| Operating income | 100.7 |
| | 203.4 |
| | 286.5 |
| 152.6 |
| | 100.9 |
| | 203.5 |
|
| Earnings of non-consolidated affiliates | 1.7 |
| | 1.7 |
| | 2.8 |
| 1.7 |
| | 1.7 |
| | 1.7 |
|
| Interest expense | 97.0 |
| | 43.8 |
| | 38.6 |
| 191.9 |
| | 97.0 |
| | 43.8 |
|
| Interest income | 1.1 |
| | 1.3 |
| | 0.6 |
| 3.4 |
| | 1.1 |
| | 1.3 |
|
| Other income (expense) | 0.2 |
| | 0.1 |
| | (1.3 | ) | |
| Income from continuing operations before taxes | 6.7 |
| | 162.7 |
| | 250.0 |
| |
| Income tax provision | 8.1 |
| | 57.7 |
| | 71.4 |
| |
| Income (loss) from continuing operations before taxes | | (34.2 | ) | | 6.7 |
| | 162.7 |
|
| Income tax (benefit) provision | | (30.3 | ) | | 8.1 |
| | 57.7 |
|
| Income (loss) from continuing operations | (1.4 | ) | | 105.0 |
| | 178.6 |
| (3.9 | ) | | (1.4 | ) | | 105.0 |
|
| Income from discontinued operations, net | — |
| | 0.7 |
| | — |
| — |
| | — |
| | 0.7 |
|
| Net (loss) income | $ | (1.4 | ) | | $ | 105.7 |
| | $ | 178.6 |
| $ | (3.9 | ) | | $ | (1.4 | ) | | $ | 105.7 |
|
| Net (loss) income per common share: | | | | | | | | | | |
| Basic (loss) income per common share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.24 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.33 |
|
| Income from discontinued operations, net | — |
| | 0.01 |
| | — |
| — |
| | — |
| | 0.01 |
|
| Net (loss) income | $ | (0.01 | ) | | $ | 1.34 |
| | $ | 2.24 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.34 |
|
| Diluted (loss) income per common share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (0.01 | ) | | $ | 1.32 |
| | $ | 2.21 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.32 |
|
| Income from discontinued operations, net | — |
| | 0.01 |
| | — |
| — |
| | — |
| | 0.01 |
|
| Net (loss) income | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.21 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.33 |
|
2016 Compared to 2015
Sales for 2016 were $5,550.6 million compared to $2,854.4 million last year, an increase of $2,696.2 million, or 94%. The sales increase was primarily due to the inclusion of a full year of the Acquired Business of $2,735.1 million. Chlor Alkali Products and Vinyls sales generated from legacy businesses decreased $56.8 million due to lower product prices and volumes. The lower volumes were primarily due to hydrochloric acid and potassium hydroxide volumes, partially offset by increased chlorine and caustic soda volumes. The lower product prices were primarily due to caustic soda, hydrochloric acid and potassium hydroxide prices, partially offset by increased chlorine prices. Winchester sales increased by $17.9 million from the prior year due to increased shipments to commercial customers and law enforcement agencies, partially offset by decreased shipments to industrial and military customers.
Gross margin increased $259.3 million, or 71%, from 2015 primarily due to the inclusion of a full year of the Acquired Business of $264.2 million which includes the fourth quarter of 2015 impact of additional costs of goods sold related to the fair value adjustment related to the purchase accounting for inventory of $24.0 million. Chlor Alkali Products and Vinyls gross margin generated from legacy businesses decreased $16.1 million primarily due to lower product prices and insurance recoveries recognized in 2015, partially offset by lower freight costs, primarily driven by the realization of synergies. The insurance recoveries represented reimbursement of costs incurred and expensed in prior periods, primarily related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. Winchester gross margin increased $7.6 million primarily due to lower commodity and other material costs and increased volumes, partially offset by lower product prices and higher operating costs. Gross margin was also impacted by lower environmental costs of $6.5 million. Gross margin as a percentage of sales decreased to 11% in 2016 from 13% in 2015.
Selling and administration expenses in 2016 increased $136.9 million, or 73%, from 2015, primarily due to the inclusion of a full year of the Acquired Business’s selling and administration costs of $100.6 million, increased consulting fees of $11.6 million, increased legal and legal-related settlement expenses of $7.3 million, increased stock-based compensation expense of $6.8 million, which includes mark-to-market adjustments, and increased non-income tax expense of $4.0 million. Selling and administration expenses as a percentage of sales were 6% in 2016 and 7% in 2015.
Restructuring charges in 2016 of $112.9 million were primarily associated with the closure of 433,000 tons of chlor alkali capacity across three separate locations, of which $76.6 million were non-cash asset impairment charges. Restructuring charges for 2016 and 2015 were also associated with permanently closing a portion of the Becancour, Canada chlor alkali facility and the relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS which was completed during 2016.
Acquisition-related costs for the years ended December 31, 2016 and 2015 were associated with the Acquisition and consisted of advisory, legal, accounting, integration and other professional fees. For the year ended December 31, 2015, acquisition-related costs also included $47.1 million of costs incurred as a result of the change in control, which created a mandatory acceleration of expenses under deferred compensation plans.
Other operating income in 2016 included an $11.0 million insurance recovery for property damage and business interruption related to a 2008 chlor alkali facility incident. Other operating income in 2015 included insurance recoveries for property damage and business interruption of $42.3 million related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014 and $3.7 million related to the McIntosh, AL chlor alkali facility.
Interest expense increased by $94.9 million in 2016 due to a higher level of debt outstanding due to the financing of the Acquisition and higher interest rates. These increases were partially offset by acquisition financing expenses incurred in 2015 of $30.5 million primarily for the Bridge Financing associated with the Acquisition.
The effective tax rate from continuing operations for 2016 included a benefit of $4.8 million associated with return to provision adjustments for the finalization of our prior years’ U.S. federal and state income tax returns. The return to provision adjustment for 2016 included $14.9 million of benefit primarily associated with a change in estimate related to the calculation of salt depletion and $9.7 million of expense associated with the correction of an immaterial error related to non-deductible acquisition costs. The effective tax rate from continuing operations for 2016 also included an expense of $4.1 million related to changes in uncertain tax positions for prior tax years and a benefit of $3.2 million related to the remeasurement of deferred taxes due to a decrease in our state effective tax rates. After giving consideration to these items, the effective tax rate from continuing operations for 2016 of 77.2% was higher than the 35% U.S. federal statutory rate, primarily due to favorable permanent salt depletion deductions in combination with a pretax loss. The effective tax rate from continuing operations for 2015 included $8.9 million of expense associated with certain transaction costs related to the Acquisition that are not deductible for U.S. tax purposes partially offset by $2.6 million of benefit associated with salt depletion deductions. After giving consideration to these items, the effective tax rate from continuing operations for 2015 of 26.9% was lower than the 35% U.S. federal statutory rate, primarily due to favorable permanent tax deduction items, such as the domestic manufacturing deduction and tax deductible dividends paid to the Contributing Employee Ownership Plan (CEOP).
2015 Compared to 2014
Sales for 2015 were $2,854.4 million compared to $2,241.2 million last year,in 2014, an increase of $613.2 million, or 27%. Sales of the Acquired Business were $802.6 million. Chlor Alkali Products and Vinyls sales generated from legacy businesses decreased by $162.4 million primarily due to lower chlorine, caustic soda, potassium hydroxide and hydrochloric acid volumes and lower product prices, predominantly caustic soda and bleach partially offset by higher chlorine prices. Winchester sales decreased by $27.0 million primarily due to lower shipments to commercial customers, partially offset by increased shipments to military customers.
Gross margin decreased $20.4 million, or 5%, from 2014. Gross margin of the Acquired Business was $52.8 million, which included additional costs of goods sold of $24.0 million related to the fair value adjustment related to the preliminary purchase accounting for inventory. Chlor Alkali Products and Vinyls gross margin from our legacy businessbusinesses declined $55.4 million, primarily due to decreased chlorine, caustic soda, potassium hydroxide and hydrochloric acid volumes and lower product prices, partially offset by lower operating costs and property damage and business interruption insurance recoveries. The lower product prices were predominantly due to caustic soda and bleach, partially offset by higher chlorine prices. Winchester gross margin was lower by $12.1 million primarily due to lower volumes and a less favorable product mix for pistol and shotshell ammunition, partially offset by decreased commodity and other material costs. Gross margin was also negatively impacted by higher environmental costs of $7.5 million. Gross margin as a percentage of sales was 13% in 2015 and 17% in 2014.
Selling and administration expenses in 2015 increased $20.3$20.2 million, or 12%, from 2014, primarily due to selling and administration costs of the Acquired Business of $25.4 million and an increase in stock-based compensation expense of $3.2 million, which includes mark-to-market adjustments, partially offset by decreased consulting fees of $4.8 million and lower legal and legal-related settlement expenses of $4.3 million. Selling and administration expenses as a percentage of sales were 7% for both 2015 and 2014.
Restructuring charges in 2015 and 2014 of $2.7 million and $15.7 million, respectively, were associated with permanently closing a portion of the Becancour, Canada chlor alkali facility and the ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.MS which was completed during 2016. Restructuring charges in 2014 were also associated with exiting the use of mercury cell technology in the chlor alkali manufacturing process.
Acquisition-related costs for the years ended December 31, 2015 and 2014 were associated with the Acquisition. For the years ended December 31, 2015 and 2014 acquisition-related costs included $76.3 million and $4.2 million, respectively, for advisory, legal, accounting, integration and other professional fees. For the year ended December 31, 2015 acquisition-related costs also included $47.1 million of costs incurred as a result of the change in control, which created a mandatory acceleration of expenses under deferred compensation plans. For the years ended December 31, 2015 and 2014 acquisition-related costs also included $76.3 million and $4.2 million, respectively, for advisory, legal, accounting, integration and other professional fees.
Other operating income in 2015 included insurance recoveries for property damage and business interruption of $42.3 million related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014 and $3.7 million related to the McIntosh, AL chlor alkali facility. Other operating income in 2014 included a gain of $1.0 million for the resolution of a contract matter.
Interest expense increased by $53.2 million in 2015 due to acquisition financing expenses of $30.5 million primarily for the Bridge Financing associated with the Acquisition, a higher level of debt outstanding due to the financing of the Acquisition and higher interest rates. This increase was partially offset by $9.5 million related to the call premium and the write-off of unamortized deferred debt issuance costs associated with the redemption of our $150.0 million 8.875% senior notes (2019 Notes) that occurred in August 2014.
The effective tax rate from continuing operations for 2015 included $8.9 million of expense associated with certain transaction costs related to the Acquisition that are not deductible for U.S. tax purposes and $8.6 million of expense associated with incremental U.S. tax on foreign earnings. These items were partially offset by $8.7 million of benefit associated with foreign earnings taxed at a lower rate than the U.S. statutory rate and $2.6 million of benefit associated with salt depletion deductions. After giving consideration to these four items, of $6.2 million, the effective tax rate from continuing operations for 2015 of 28.4%26.9% was lower than the 35% U.S. federal statutory rate, primarily due to favorable permanent tax deduction items, such as the domestic manufacturing deduction and tax deductible dividends paid to the Contributing Employee Ownership Plan (CEOP).CEOP. The effective tax rate from continuing operations for 2014 included $1.2 million of benefit associated with the return to provision adjustment for the finalization of our 2013 U.S. federal and state income tax returns and $0.7 million of benefit associated with the expiration of the statutes of limitations in federal and state jurisdictions. These items were partially offset by $0.8 million of expense associated with increases in valuation allowances on certain state tax credit balances primarily associated with a change in state tax law and $0.6 million of expense related to the remeasurement of deferred taxes due to an increase in state effective tax rates. After giving consideration to these four items of $0.5 million, the effective tax rate from continuing operations for 2014 of 35.8% was slightly higher than the 35% U.S. federal statutory rate, primarily due to state income taxes net of utilization of certain state tax credits, partially offset by favorable permanent tax deduction items, such as the domestic manufacturing deduction and tax deductible dividends paid to the CEOP.
2014 Compared to 2013
Sales for 2014 were $2,241.2 million compared to $2,515.0 million in 2013, a decrease of $273.8 million, or 11%. Chlor Alkali Products and Vinyls sales decreased by $234.6 million primarily due to lower product prices, predominantly caustic soda, and decreased chlorine and caustic soda volumes, partially offset by increased shipments of hydrochloric acid and potassium hydroxide. Winchester sales decreased by $39.2 million primarily due to decreased shipments of shotshell and rifle ammunition, partially offset by increased shipments of pistol ammunition to domestic commercial customers. The decreased commercial volumes were partially offset by higher selling prices and increased shipments to international and other customers.
Gross margin decreased $93.3 million, or 19%, from 2013. Chlor Alkali Products and Vinyls gross margin decreased by $86.0 million, primarily due to lower product prices, predominantly caustic soda, and decreased chlorine and caustic soda volumes, which were partially offset by decreased operating costs and increased shipments of hydrochloric acid and potassium hydroxide. Winchester gross margin was lower by $14.2 million primarily due to decreased shipments of shotshell and rifle ammunition to domestic commercial customers, which was partially offset by higher selling prices. Gross margin as a percentage of sales was 17% in 2014 and 19% in 2013.
Selling and administration expenses in 2014 decreased $23.8 million, or 13%, from 2013, primarily due to decreased management incentive compensation expense of $18.1 million, which includes mark-to-market adjustments on stock-based compensation, decreased legal and legal-related settlement expenses of $17.1 million and decreased non-income tax expense of $3.7 million. These decreases were partially offset by the recovery of legacy legal costs of $13.9 million during 2013 and increased consulting fees of $1.3 million. Selling and administration expenses as a percentage of sales were 7% in 2014 and 8% in 2013.
Restructuring charges in 2014 included $10.0 million associated with permanently closing a portion of the Becancour, Canada chlor alkali facility. Restructuring charges in 2014 and 2013 also included $5.7 million and $5.5 million, respectively, associated with exiting the use of mercury cell technology in the chlor alkali manufacturing process and the ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.
Acquisition-related costs for the year ended December 31, 2014 were associated with the Acquisition. For the year ended December 31, 2014 acquisition-related costs included advisory, legal, accounting, integration and other professional fees.
Other operating income in 2014 included a gain of $1.0 million for the resolution of a contract matter. Other operating income in 2013 included a gain of $1.5 million on the sale of two former manufacturing sites.
Interest expense increased by $5.2 million in 2014, primarily due to the call premium and the write-off of unamortized deferred debt issuance costs and unamortized discount of $9.5 million associated with the redemption of the 2019 Notes and a decrease in capitalized interest of $0.9 million primarily due to the completion of the low salt, high strength bleach facility and hydrochloric acid expansion project at our Henderson, NV chlor alkali site in the first quarter of 2013. These increases were partially offset by lower interest rates.
Other income (expense) in 2013 included $7.9 million of expense for our earn out liability from the SunBelt acquisition and a gain of $6.5 million on the sale of our equity interest in a bleach joint venture.
The effective tax rate from continuing operations for 2014 included $1.2 million of benefit associated with the return to provision adjustment for the finalization of our 2013 U.S. federal and state income tax returns and $0.7 million of benefit associated with the expiration of the statutes of limitations in federal and state jurisdictions. These items were partially offset by $0.8 million of expense associated with increases in valuation allowances on certain state tax credit balances primarily associated with a change in state tax law and $0.6 million of expense related to the remeasurement of deferred taxes due to an increase in state effective tax rates. After giving consideration to these four items of $0.5 million, the effective tax rate from continuing operations for 2014 of 35.8% was slightly higher than the 35% U.S. federal statutory rate, primarily due to state income taxes net of utilization of certain state tax credits, partially offset by favorable permanent tax deduction items, such as the domestic manufacturing deduction and tax deductible dividends paid to the CEOP. The effective tax rate from continuing operations for 2013 included $11.4 million of benefit associated with the expiration of the statutes of limitations in federal and state jurisdictions, $8.3 million of benefit associated with reductions in valuation allowances on our capital loss carryforwards and $1.9 million of benefit associated with the Research Credit. These items were partially offset by $1.8 million of expense associated with changes in tax contingencies and $1.3 million of expense associated with increases in valuation allowances on certain state tax credit carryforwards. After giving consideration to these five items of $18.5 million, the effective tax rate from continuing operations for 2013 of 36.0% was slightly higher than the 35% U.S. federal statutory rate, primarily due to state income taxes net of utilization of certain state tax credits, partially offset by favorable permanent tax deduction items, such as the domestic manufacturing deduction and tax deductible dividends paid to the CEOP.
Income from discontinued operations, net for the year ended December 31, 2014 included an after tax gain of $0.7 million ($4.6 million pretax) for the favorable resolution of certain indemnity obligations related to our Metals business sold in 2007.
SEGMENT RESULTS
We define segment results as income (loss) from continuing operations before interest expense, interest income, other operating income, other income (expense) and income taxes, and include the results of non-consolidated affiliates. Consistent with the guidance in ASC 280 “Segment Reporting” (ASC 280), we have determined it is appropriate to include the operating results of non-consolidated affiliates in the relevant segment financial results. Beginning in the fourth quarter of 2015, we modified our reportable segments due to changes in our organization resulting from the Acquisition. We have three operating segments: Chlor Alkali Products and Vinyls, Epoxy and Winchester. For segment reporting purposes, the Acquired Business’s Global Epoxy operating results comprise the newly created Epoxy segment and the Acquired Chlor Alkali Business operating results combined with our former Chlor Alkali Products and Chemical Distribution segments comprise the newly created Chlor Alkali Products and Vinyls segment. The newThis reporting structure has been retrospectively applied to financial results for all periods presented. The three operating segments reflect the organization used by our management for purposes of allocating resources and assessing performance. Chlorine used in our Epoxy segment is transferred at cost from the Chlor Alkali Products and Vinyls segment. Sales and profits are recognized in the Chlor Alkali Products and Vinyls segment for all caustic soda generated and sold by Olin.
| | | | Years ended December 31, | Years ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Sales: | ($ in millions) | ($ in millions) |
| Chlor Alkali Products and Vinyls | $ | 1,713.4 |
| | $ | 1,502.8 |
| | $ | 1,737.4 |
| $ | 2,999.3 |
| | $ | 1,713.4 |
| | $ | 1,502.8 |
|
| Epoxy | 429.6 |
| | — |
| | — |
| 1,822.0 |
| | 429.6 |
| | — |
|
| Winchester | 711.4 |
| | 738.4 |
| | 777.6 |
| 729.3 |
| | 711.4 |
| | 738.4 |
|
| Total sales | $ | 2,854.4 |
| | $ | 2,241.2 |
| | $ | 2,515.0 |
| $ | 5,550.6 |
| | $ | 2,854.4 |
| | $ | 2,241.2 |
|
| Income (loss) from continuing operations before taxes: | | | | | | | | | | |
Chlor Alkali Products and Vinyls(1) | $ | 115.5 |
| | $ | 130.1 |
| | $ | 213.5 |
| $ | 224.9 |
| | $ | 115.5 |
| | $ | 130.1 |
|
| Epoxy | (7.5 | ) | | — |
| | — |
| 15.4 |
| | (7.5 | ) | | — |
|
| Winchester | 115.6 |
| | 127.3 |
| | 143.2 |
| 120.9 |
| | 115.6 |
| | 127.3 |
|
| Corporate/Other: | | | | | | | | | | |
Pension income(2) | 35.2 |
| | 32.4 |
| | 26.6 |
| 53.6 |
| | 35.2 |
| | 32.4 |
|
Environmental expense(3) | (15.7 | ) | | (8.2 | ) | | (10.2 | ) | (9.2 | ) | | (15.7 | ) | | (8.2 | ) |
| Other corporate and unallocated costs | (60.3 | ) | | (58.1 | ) | | (79.0 | ) | (100.2 | ) | | (60.1 | ) | | (58.0 | ) |
Restructuring charges(4) | (2.7 | ) | | (15.7 | ) | | (5.5 | ) | (112.9 | ) | | (2.7 | ) | | (15.7 | ) |
Acquisition-related costs(5) | (123.4 | ) | | (4.2 | ) | | — |
| (48.8 | ) | | (123.4 | ) | | (4.2 | ) |
Other operating income(6) | 45.7 |
| | 1.5 |
| | 0.7 |
| 10.6 |
| | 45.7 |
| | 1.5 |
|
Interest expense(7) | (97.0 | ) | | (43.8 | ) | | (38.6 | ) | (191.9 | ) | | (97.0 | ) | | (43.8 | ) |
| Interest income | 1.1 |
| | 1.3 |
| | 0.6 |
| 3.4 |
| | 1.1 |
| | 1.3 |
|
Other income (expense)(8) | 0.2 |
| | 0.1 |
| | (1.3 | ) | |
| Income from continuing operations before taxes | $ | 6.7 |
| | $ | 162.7 |
| | $ | 250.0 |
| |
| Income (loss) from continuing operations before taxes | | $ | (34.2 | ) | | $ | 6.7 |
| | $ | 162.7 |
|
| |
| (1) | Earnings of non-consolidated affiliates are included in the Chlor Alkali Products and Vinyls segment results consistent with management’s monitoring of the operating segment. The earnings from non-consolidated affiliates were $1.7 million $1.7 million and $2.8 million for each of the years ended December 31, 2016, 2015 2014 and 2013, respectively. During October 2013, we sold our equity interest in a bleach joint venture.2014. |
| |
| (2) | The service cost and the amortization of prior service cost components of pension expense related to the employees of the operating segments are allocated to the operating segments based on their respective estimated census data. All other components of pension costs are included in corporate/other and include items such as the expected return on plan assets, interest cost and recognized actuarial gains and losses. |
| |
| (3) | Environmental expense for the yearsyear ended December 31, 2014 and 2013 included $1.4 million and $1.3 million, respectively, of recoveries from third parties for costs incurred and expensed in prior periods. Environmental expense is included in cost of goods sold in the consolidated statements of operations. |
| |
| (4) | Restructuring charges for the year ended 2015December 31, 2016 were associated with permanently closing a portionthe closure of the Becancour, Canada433,000 tons of chlor alkali facility and the ongoing relocationcapacity across three separate locations, of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS. Restructuringwhich $76.6 million of these charges for the years ended 2014 and 2013 were associated with exiting the use of mercury cell technology in the chlor alkali manufacturing process and the ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS. Restructuring charges in 2014 were also associated with permanently closing a portion of the Becancour, Canada chlor alkali facility.non-cash asset impairment |
charges for equipment and facilities, permanently closing a portion of the Becancour, Canada chlor alkali facility and the relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS which was completed during 2016. Restructuring charges for the year ended December 31, 2015 were associated with permanently closing a portion of the Becancour, Canada chlor alkali facility and the relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS. Restructuring charges for the year ended December 31, 2014 were associated with the relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS and exiting the use of mercury cell technology in the chlor alkali manufacturing process.
| |
| (5) | Acquisition-related costs infor the years ended December 31, 2016, 2015 and 2014 were related to the Acquisition. For the years ended December 31, 2015Acquisition and 2014 acquisition-related costs includedconsisted of advisory, legal, accounting, integration and other professional fees. For the year ended December 31, 2015 acquisition-related costs also included $47.1 million of costs incurred as a result of the change in control, which created a mandatory acceleration of expenses under deferred compensation plans. |
| |
| (6) | Other operating income infor the year ended December 31, 2016 included an $11.0 million insurance recovery for property damage and business interruption related to a 2008 chlor alkali facility incident. Other operating income for the year ended December 31, 2015 included insurance recoveries for property damage and business interruption of $42.3 million related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014 and $3.7 million related to the McIntosh, AL chlor alkali facility. Other operating income for the year ended December 31, 2014 included a gain of $1.0 million for the resolution of a contract matter. Other operating income for the year ended 2013 included a gain of $1.5 million on the sale of two former manufacturing sites. |
| |
| (7) | Interest expense for the year ended December 31, 2015 included acquisition financing expenses of $30.5 million primarily for the Bridge Financing associated with the Acquisition. Interest expense for the year ended December 31, 2014 included $9.5 million for the call premium and the write-off of unamortized deferred debt issuance costs and unamortized discount associated with the redemption of our 2019 Notes, which would have matured on August 15, 2019. Interest expense was reduced by capitalized interest of $1.9 million, $1.1 million $0.2 million and $1.1$0.2 million for the years ended December 31, 2016, 2015 and 2014, and 2013, respectively. |
| |
(8) | Other income (expense) for the year ended 2013 included $7.9 million of expense for our earn out liability from the SunBelt acquisition and a gain of $6.5 million on the sale of our equity interest in a bleach joint venture. |
Chlor Alkali Products and Vinyls
2016 Compared to 2015
Chlor Alkali Products and Vinyls sales for 2016 were $2,999.3 million compared to $1,713.4 million for 2015, an increase of $1,285.9 million, or 75%. Sales of the Acquired Chlor Alkali Business were $1,715.7 million compared to $373.0 million for 2015, an increase of $1,342.7 million, which was primarily due to the inclusion of a full year of the Acquired Chlor Alkali Business. Chlor Alkali Products and Vinyls sales generated from legacy businesses decreased $56.8 million from 2015. The decrease was primarily due to lower product prices ($35.3 million) and lower volumes ($21.5 million). The lower product prices were primarily due to caustic soda, hydrochloric acid and potassium hydroxide prices, partially offset by increased chlorine prices. The lower volumes were primarily due to hydrochloric acid and potassium hydroxide volumes, partially offset by increased chlorine and caustic soda volumes.
Chlor Alkali Products and Vinyls generated segment income of $224.9 million for 2016 compared to $115.5 million for 2015, an increase of $109.4 million, or 95%. Chlor Alkali Products and Vinyls segment income was higher primarily due to the inclusion of a full year of the Acquired Chlor Alkali Business ($127.2 million) which included the fourth quarter of 2015 impact of additional costs of goods sold related to the fair value adjustment related to the purchase accounting for inventory ($6.7 million). Chlor Alkali Products and Vinyls segment income generated from legacy businesses decreased $17.8 million primarily due to lower product prices ($35.3 million), insurance recoveries recognized in 2015 ($11.4 million), and lower volumes ($0.3 million). The lower product prices were primarily due to caustic soda, hydrochloric acid and potassium hydroxide prices, partially offset by increased chlorine prices. The insurance recoveries represented reimbursement of costs incurred and expensed in prior periods, primarily related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. These decreases were partially offset by lower freight costs, primarily driven by the realization of synergies ($24.2 million) and lower operating and material costs ($5.0 million). Chlor Alkali Products and Vinyls segment income included depreciation and amortization expense of $418.1 million and $186.1 million in 2016 and 2015, respectively.
2015 Compared to 2014
Chlor Alkali Products and Vinyls sales for 2015 were $1,713.4 million compared to $1,502.8 million for 2014, an increase of $210.6 million, or 14%. The sales increase was primarily due to the inclusion of the Acquired Chlor Alkali Business ($373.0 million), partially offset by lower product prices ($39.3 million) and lower volumes of chlorine and caustic soda ($96.9 million), potassium hydroxide ($17.3 million) and hydrochloric acid ($9.4 million). The lower product prices were predominantly due to caustic soda and bleach prices, partially offset by increased chlorine prices.
Chlor Alkali Products and Vinyls generated segment income of $115.5 million for 2015 compared to $130.1 million for 2014, a decrease of $14.6 million, or 11%. Chlor Alkali Products and Vinyls segment income was lower primarily due to decreased volumes ($56.9 million) and lower product prices ($39.3 million). These decreases were partially offset by the contributions of the Acquired Chlor Alkali Business ($37.2 million), lower operating costs ($22.1 million), primarily due to lower energy costs, insurance recoveries ($11.4 million) and reduced costs associated with material purchased from other parties ($10.9 million). Segment income also included $6.7 million of additional costs of goods sold related to the fair value adjustment related to the preliminary purchase accounting for inventory. The decreased volumes were primarily due to chlorine and caustic soda, potassium hydroxide and hydrochloric acid. The lower product prices were predominantly due to lower caustic soda and bleach prices, partially offset by increased chlorine prices. The insurance recoveries represent reimbursement of costs incurred and expensed in prior periods primarily related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. Chlor Alkali Products and Vinyls segment income included depreciation and amortization expense of $186.1 million and $119.4 million forin 2015 and 2014, respectively.
Epoxy
36
20142016 Compared to 2013
Chlor Alkali Products and Vinyls sales for 2014 were $1,502.8 million compared to $1,737.4 million for 2013, a decrease of $234.6 million, or 14%. The sales decrease was primarily due to lower shipments of chlorine and caustic soda ($157.1 million) and lower product prices ($112.3 million), predominantly caustic soda. These decreases were partially offset by increased shipments of hydrochloric acid ($23.2 million) and potassium hydroxide ($15.5 million). Our operating rates were 80% in 2014 and 84% in 2013. The lower operating rate in 2014 was affected by planned and unplanned customer outages in the second half of 2014.
Chlor Alkali Products and Vinyls generated segment income of $130.1 million for 2014 compared to $213.5 million for 2013, a decrease of $83.4 million. Chlor Alkali Products and Vinyls segment income was lower primarily due to lower product prices ($112.3 million), predominantly caustic soda, decreased volumes ($19.4 million), primarily chlorine and caustic soda, which were partially offset by increased shipments of hydrochloric acid and potassium hydroxide, and the recognition of a favorable contract settlement during 2013 ($11.0 million). These decreases were partially offset by reduced costs associated with material purchased from other parties ($38.7 million) and lower operating costs ($20.6 million), primarily related to cost reduction efforts that were implemented during 2014.
Epoxy2015
Epoxy sales andwere $1,822.0 million for 2016 compared to $429.6 million for 2015, an increase of $1,392.4 million, or 324%. Epoxy sales were higher than the prior year primarily due to the inclusion of a full year of the Acquired Business.
Epoxy reported segment income of $15.4 million for 2016 compared to a segment loss of $7.5 million for 2015, were $429.6 million and $7.5 million, respectively, which representan increase of $22.9 million. The fourth quarter of 2015 was impacted by the segment’s operating results from the Closing Date through December 31, 2015. Epoxy segment income included $17.3 millionrecognition of additional costs of goods sold related to the fair value adjustment related to the preliminary purchase accounting for inventory.inventory ($17.3 million). Additionally, Epoxy segment income was higher than the prior year due to the inclusion of a full year of the Acquired Business. Epoxy segment results included depreciation and amortization expense of $90.0 million and $20.9 million in 2016 and 2015, respectively.
Winchester
2016 Compared to 2015
Winchester sales were $729.3 million for 2016 compared to $711.4 million for 2015, an increase of $17.9 million, or 3%. The sales increase was primarily due to increased shipments of ammunition to commercial customers ($19.7 million) and law enforcement agencies ($1.3 million). These increases were partially offset by decreased shipments to military ($2.6 million) and industrial customers ($0.5 million).
Winchester reported segment income of $120.9 million for 2016 compared to $115.6 million for 2015, an increase of $5.3 million, or 5%. The increase in segment income in 2016 compared to 2015 reflected the impact of lower commodity and other material costs ($15.8 million) and increased volumes ($13.4 million). These increases were partially offset by the impact of lower selling prices ($13.8 million) and higher operating costs ($10.1 million). Winchester segment income included depreciation and amortization expense of $20.9$18.5 million for 2015.
Winchesterand $17.4 million in 2016 and 2015, respectively.
2015 Compared to 2014
Winchester sales were $711.4 million for 2015 compared to $738.4 million for 2014, a decrease of $27.0 million, or 4%. The sales decrease was primarily due to lower shipments of ammunition to domestic and international commercial customers ($26.2 million), law enforcement agencies ($12.7 million) and industrial customers ($1.2 million). These decreases were partially offset by increased shipments to military customers ($13.1 million).
Winchester reported segment income of $115.6 million for 2015 compared to $127.3 million for 2014, a decrease of $11.7 million, or 9%. The decrease in segment income in 2015 compared to 2014 reflected the impact of decreased volumes and a less favorable product mix for pistol and shotshell ammunition ($16.3 million), lower selling prices ($7.7 million) and higher operating costs ($1.0 million), which include the impact of decreased costs associated with our new centerfire operation
in Oxford, MS ($10.9 million). These decreases were partially offset by lower commodity and other material costs ($13.3 million). Winchester segment income included depreciation and amortization expense of $17.4 million and $16.3 million forin 2015 and 2014, respectively.
2014Corporate/Other
2016 Compared to 20132015
Winchester sales were $738.4For 2016, pension income included in corporate/other, was $53.6 million compared to $35.2 million for 20142015, which excludes the impact of the change in control, which created a mandatory acceleration of expenses under deferred compensation plans associated with the Acquisition. On a total company basis, defined benefit pension income was $37.1 million compared to $777.6an expense of $18.7 million for 2013,2015, which includes the impact of the change in control which created a decreasemandatory acceleration of $39.2expenses under deferred compensation plans of $47.1 million or 5%. Sales of ammunition to domestic commercial customers were lower ($61.8 million),associated with the Acquisition, and was included in acquisition-related costs. On a total company basis, defined benefit pension income without this charge, was $28.4 million for 2015. The increase in pension income from 2015 was primarily due to a lower level of demandthe change in approach used to measure service and interest costs for shotshell and rifle ammunition, partially offset by higher pistol ammunition. Beginning with the third quarter of 2014, Winchester began to experience a decline in commercial demand from the 2013 levels. This decrease was partially offset by increased shipments to international customers ($11.8 million), law enforcement agencies ($7.7 million), industrial customers ($2.4 million), who primarily supply the construction sector, and military customers ($0.7 million).our defined benefit pension plans.
Winchester reported segmentCharges to income of $127.3for environmental investigatory and remedial activities were $9.2 million for 20142016 compared to $143.2$15.7 million for 2013, a decrease2015. These charges related primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites.
For 2016, other corporate and unallocated costs were $100.2 million compared to $60.1 million for 2015, an increase of $15.9$40.1 million, or 11%67%. The decrease in segment income in 2014 compared to 2013 reflected the impact of decreased volumes ($29.6 million),increase was primarily due to a lower levelincreased corporate infrastructure costs of demand for shotshell$21.4 million, such as personnel, consulting and rifle ammunition,professional fees, that are necessary to support the Acquired Business, higher stock-based compensation expense of $6.9 million, which includes mark-to-market adjustments, increased legal and higher commoditylegal-related settlement expenses of $7.0 million and other material costs ($4.9 million). These decreases were partially offset by higher selling prices ($17.0 million) and lower operating costs ($1.6 million), which include the impactincreased non-income tax expense of decreased costs associated with the ongoing relocation of our centerfire ammunition manufacturing operations to Oxford, MS ($7.4 million).
Corporate/Other$4.3 million.
2015 Compared to 2014
For 2015, pension income included in corporate/other, excluding the impact of the change in control which created a mandatory acceleration of expenses under deferred compensation plans associated with the Acquisition, was $35.2 million compared to $32.4 million for 2014. On a total company basis, defined benefit pension expense was $18.7 million which includes the impact of the change in control which created a mandatory acceleration of expenses under deferred compensation plans of $47.1 million associated with the Acquisition, and was included in acquisition-related costs. On a total company basis, defined benefit pension income without this charge, was $28.4 million for 2015 compared to $25.0 million for 2014. For the years ended December 31, 2015 and 2014, pension income included a curtailment charge of $0.1 million and $0.2 million, respectively, associated with permanently closing a portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. These charges were included in restructuring charges.
Charges to income for environmental investigatory and remedial activities were $15.7 million for 2015 compared to $8.2 million for 2014 which included $1.4 million of recoveries from third parties for costs incurred and expensed in prior periods. Without these recoveries, charges to income for environmental investigatory and remedial activities would have been $9.6 million for 2014. These charges related primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites.
For 2015, other corporate and unallocated costs were $60.3$60.1 million compared to $58.1$58.0 million for 2014, an increase of $2.2$2.1 million, or 4%. The increase was primarily due to increased stock-based compensation expense of $3.2 million, which includes mark-to-market adjustments, higher non-income tax expense of $2.2 million and increased audit fees of $2.2 million. These increases were partially offset by decreased legal and legal-related settlement expenses of $5.8 million.
2014 Compared to 2013
For 2014, pension income included in corporate/other was $32.4 million compared to $26.6 million for 2013. On a total company basis, defined benefit pension income for 2014 was $25.0 million compared to $20.5 million for 2013. Pension income for 2014 included a curtailment charge of $0.2 million associated with permanently closing a portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. This charge was included in restructuring charges for 2014.
Charges to income for environmental investigatory and remedial activities were $8.2 million for 2014 compared to $10.2 million for 2013, which included $1.4 million and $1.3 million, respectively, of recoveries from third parties for costs incurred and expensed in prior periods. Without these recoveries, charges to income for environmental investigatory and remedial activities would have been $9.6 million for 2014 compared to $11.5 million for 2013. These charges related primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites.
For 2014, other corporate and unallocated costs were $58.1 million compared to $79.0 million for 2013, a decrease of $20.9 million, or 26%. The decrease was primarily due to lower stock-based compensation expense of $13.9 million, which includes mark-to-market adjustments, decreased legal and legal-related settlement expenses of $12.8 million, decreased non-income tax expense of $3.7 million and lower insurance costs of $2.1 million. These decreases were partially offset by the recovery of legacy legal costs of $13.9 million during 2013.
Restructurings
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 year ended December 31, 2016, we recorded pretax restructuring charges of $111.3 million 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 $33 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.
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. In the fourth quarter of 2014, we recorded pretax restructuring charges of $10.0 million for the write-off of equipment and facility costs, employee severance and related benefit costs and lease and other contract termination costs related to these actions. For the yearyears ended December 31, 2016 and 2015, we recorded pretax restructuring charges of $0.8 million and $2.0 million, respectively, for the write-off of equipment and facility costs, lease and other contract termination costs and facility exit costs. We expect to incur additional restructuring charges through 20162018 of approximately $4$7 million related to the shut down of this portion of the facility.
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. The completion of these projects eliminated our chlor alkali production using mercury cell technology. For the years ended December 31, 2014 and 2013, we recorded pretax restructuring charges of $3.8 million and $3.7 million, respectively, for employee severance and related benefit costs, employee relocation costs, facility exit costs, write-off of equipment and facility costs and lease and other contract termination costs related to these actions.
On November 3, 2010, we announced that we had 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 relocation decision in 2010, 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. We currently expect to complete this relocation in the first half of 2016. For the years ended December 31, 2015, 2014 and 2013, we recorded pretax restructuring charges of $0.7 million, $1.9 million and $1.8 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 $1 million related to the transfer of these operations.
20162017 OUTLOOK
Net income in the first quarter of 20162017 is projected to be in the $0.05$0.70 to $0.15$1.15 per diluted share range, which includes pretax restructuring charges and pretax acquisition-related integration costs oftotaling approximately $10 million and estimated step-up acquisition depreciation and amortization expense of approximately $35$50 million. Net incomeloss in the first quarter of 20152016 was $0.17$0.02 per diluted share, which included pretax acquisition-related costs of $10.4$48.8 million and pretax restructuring charges of $112.9 million.
We currently expect the first quarter 2017 to have the lowest earnings per diluted share amount during 2017 due to the timing of planned maintenance turnaround expenses.
Chlor Alkali Products and Vinyls first quarter 20162017 segment income is expected to improvebe higher compared with the fourth quarter of 2015to 2016 segment income of $46.6 million. The expected increase in segment income anticipates$224.9 million reflecting higher caustic soda and EDC prices and improved volumes across the chlorine envelope, which will be partially offset by increased maintenance turnaround expenses of approximately $10 million. The fourth quarter of 2015 segment income included $6.7 million of additional costs of goods sold relatedexpected benefits due to the fair value adjustment related to the preliminary purchase accounting for inventory.lower purchased ethylene prices.
Epoxy first quarter 2016 segment income is expected to improve compared to the fourth quarter of 2015 segment loss of $7.5 million. The expected increase in segment income is due to improved volumes across all product lines, which will be partially offset by increased maintenance turnaround expenses of approximately $10 million. The fourth quarter of 2015 segment loss included $17.3 million of additional costs of goods sold related to the fair value adjustment related to the preliminary purchase accounting for inventory.
Winchester first quarter 20162017 segment income is expected to be higher than 2016 segment income of $15.4 million as improved volumes and lower operating costs are partially offset by higher raw material costs.
Winchester 2017 segment income is expected to be lower than the $29.8$120.9 million of segment income achieved during the first quarter of 20152016 primarily duedriven by lower ammunition demand, driven by customer efforts to improved sales volumes. Winchester full year 2016 segment income is expected to be higher than the full year 2015 segment income of $115.6 million, primarily due to lower operating costs, incremental savings from the Oxford relocationreduce inventory, and higher volumes, partially offset by lower pricing.commodity and material costs. The Oxford, MS relocation project is expected to bewas completed during the first halfsecond quarter of 2016. During 2015, all commercial centerfire pistol and rifle ammunition was produced in Oxford. TheThis relocation is forecast to reducereduced Winchester's annual operating costs by approximately $40 million comparedin 2016 and, in 2017, we expect the cost savings from the completed project to $35.0 million realizedreach approximately $45 million.
Other Corporate and Unallocated costs in 2015.
We anticipate that full year2017 are expected to be higher than 2016 Other Corporate Costs, including pension income and environmentalUnallocated costs to be inof $100.2 million driven by stock-based compensation, timing of legal and litigation costs and the $65 million to $85 million range compared to full year 2015 Other Corporate Costseffect of $40.8 million. Thethe increased corporate infrastructure costs are necessary to support the newly acquired TDCC businesses. Fourth quarter of 2015 Other Corporate Costs, including pension income andAcquisition.
During 2017, we are anticipating environmental costs, were $5.0 million.
We anticipate first quarter 2016 to include approximately $10 million of acquisition-related integration costs. We anticipate full year 2016 to include approximately $40 million of acquisition-related integration costs associated with outside consulting and professional fees and non-recurring personnel related-costs.
We anticipate that full year 2016 charges for environmental investigatory and remedial activities will beexpenses in the $15 million to $20 million range.range compared to $9.2 million in 2016. We do not believe that there will be recoveries of environmental costs incurred and expensed in prior periods in 2016.2017. In connection with the Acquisition, TDCC has retained liabilities relating to litigation, releases of hazardous materials and violations of environmental law to the extent arising prior to the Closing Date.
We expect qualified defined benefit pension plan income in 20162017 to be higherlower than the 20152016 level by approximately $10 million duemillion. During 2016, we made a discretionary cash contribution to the impactour domestic qualified defined benefit pension plan of an actuarial change in the calculation of the plan discount rates, partially offset by the costs associated with the acquired plans.$6.0 million. Based on our plan assumptions and estimates, we will not be required to make any cash contributions to our domestic qualified defined benefit pension plan in 2016.2017. We do have several international qualified defined benefit pension plans to which we anticipate cash contributions of less than $5 million in 2016.2017.
We have approximately 60% variable rate debt in our new debt profile. As a result, we are estimating our first quarter 20162017 interest rate will be in the 4.5% range.approximately 5%. During 2016,2017, a total of $205approximately $80 million of debt will mature that is expected to be repaid using available cash.
In 2016,2017, we currently expect our capital spending to be in the $300 million to $340$350 million range, which includes approximately $60$30 million of synergy-related capital, which we believe is necessary to realize the anticipated synergies. Based on the preliminary valuationIn 2017, we also expect to make payments of the newly acquired fixed assets and intangible assets, we estimate our$209.4 million associated with long-term supply contracts. We expect 2017 depreciation and amortization expense in 2016 to be in the $490$530 range to $540 million to $500 million range, including approximately $145 million of acquisition step-up depreciation and amortization expense.
range.
We currently believe the 20162017 effective tax rate will be in the 35%25% to 38%30% range.
ENVIRONMENTAL MATTERS
| | | | Years ended December 31, | Years ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Cash outlays (receipts): | ($ in millions) | ($ in millions) |
| Remedial and investigatory spending (charged to reserve) | $ | 14.1 |
| | $ | 14.9 |
| | $ | 12.4 |
| $ | 10.3 |
| | $ | 14.1 |
| | $ | 14.9 |
|
| Recoveries from third parties | — |
| | (1.4 | ) | | (1.3 | ) | — |
| | — |
| | (1.4 | ) |
| Capital spending | 2.0 |
| | 2.7 |
| | 0.9 |
| 3.5 |
| | 2.0 |
| | 2.7 |
|
| Plant operations (charged to cost of goods sold) | 71.9 |
| | 24.2 |
| | 25.4 |
| 192.6 |
| | 71.9 |
| | 24.2 |
|
| Total cash outlays | $ | 88.0 |
| | $ | 40.4 |
| | $ | 37.4 |
| $ | 206.4 |
| | $ | 88.0 |
| | $ | 40.4 |
|
Cash outlays for remedial and investigatory activities associated with former waste sites and past operations were not charged to income but instead were charged to reserves established for such costs identified and expensed to income in prior years. Cash outlays for normal plant operations for the disposal of waste and the operation and maintenance of pollution control equipment and facilities to ensure compliance with mandated and voluntarily imposed environmental quality standards were charged to income.
Total environmental-related cash outlays in 20152016 were higher than 20142015 primarily due to environmental spending for plant operations related to the Acquired Business. 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. Total environmental-related cash outlays for 20162017 are estimated to be approximately $240$210 million, of which approximately $20$17 million is expected to be spent on investigatory and remedial efforts, approximately $10$3 million on capital projects and approximately $210$190 million on normal plant operations. Remedial and investigatory spending is anticipated to be higher in 20162017 than 20152016 due to the timing of continuing remedial action plans and investigations. Historically, we have funded our environmental capital expenditures through cash flow from operations and expect to do so in the future.
Annual environmental-related cash outlays for site investigation and remediation, capital projects and normal plant operations are expected to range between $230$190 million to $250$210 million over the next several years, $15 million to $25 million of which is for investigatory and remedial efforts, which are expected to be charged against reserves recorded on our consolidated balance sheet. While we do not anticipate a material increase in the projected annual level of our environmental-related cash outlays for site investigation and remediation, there is always the possibility that such an increase may occur in the future in view of the uncertainties associated with environmental exposures.
Our liabilities for future environmental expenditures were as follows:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| | ($ in millions) | ($ in millions) |
| Beginning balance | $ | 138.3 |
| | $ | 144.6 |
| | $ | 146.5 |
| $ | 138.1 |
| | $ | 138.3 |
| | $ | 144.6 |
|
| Charges to income | 15.7 |
| | 9.6 |
| | 11.5 |
| 9.2 |
| | 15.7 |
| | 9.6 |
|
| Remedial and investigatory spending | (14.1 | ) | | (14.9 | ) | | (12.4 | ) | (10.3 | ) | | (14.1 | ) | | (14.9 | ) |
| Currency translation adjustments | (1.8 | ) | | (1.0 | ) | | (1.0 | ) | 0.3 |
| | (1.8 | ) | | (1.0 | ) |
| Ending balance | $ | 138.1 |
| | $ | 138.3 |
| | $ | 144.6 |
| $ | 137.3 |
| | $ | 138.1 |
| | $ | 138.3 |
|
As is common in our industry, we are subject to environmental laws and regulations related to the use, storage, handling, generation, transportation, emission, discharge, disposal and remediation of, and exposure to, hazardous and non-hazardous substances and wastes in all of the countries in which we do business.
The establishment and implementation of national, state or provincial and local standards to regulate air, water and land quality affect substantially all of our manufacturing locations around the world. Laws providing for regulation of the manufacture, transportation, use and disposal of hazardous and toxic substances, and remediation of contaminated sites, have imposed additional regulatory requirements on industry, particularly the chemicals industry. In addition, implementation of environmental laws has required and will continue to require new capital expenditures and will increase plant operating costs. We employ waste minimization and pollution prevention programs at our manufacturing sites.
We are party to various governmental and private environmental actions associated with past manufacturing facilities and former waste disposal sites. Associated costs of investigatory and remedial activities are provided for in accordance with generally accepted accounting principles governing probability and the ability to reasonably estimate future costs. Our ability to estimate future costs depends on whether our investigatory and remedial activities are in preliminary or advanced stages. With respect to unasserted claims, we accrue liabilities for costs that, in our experience, we mayexpect to incur to protect our interests against those unasserted claims. Our accrued liabilities for unasserted claims amounted to $1.8$2.0 million at December 31, 2015.2016. With respect to asserted claims, we accrue liabilities based on remedial investigation, feasibility study, remedial action and operation, maintenance and monitoring (OM&M) expenses that, in our experience, we mayexpect to incur in connection with the asserted claims. Required site OM&M expenses are estimated and accrued in their entirety for required periods not exceeding 30 years, which reasonably approximates the typical duration of long-term site OM&M. Charges to income for investigatory and remedial efforts were material to operating results in 2015, 2014 and 2013 and may be material to operating results in future years.
Environmental provisions charged (credited) to income, which are included in cost of goods sold, were as follows:
| | | | Years ended December 31, | Years ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| | ($ in millions) | ($ in millions) |
| Charges to income | $ | 15.7 |
| | $ | 9.6 |
| | $ | 11.5 |
| $ | 9.2 |
| | $ | 15.7 |
| | $ | 9.6 |
|
| Recoveries from third parties of costs incurred and expensed in prior periods | — |
| | (1.4 | ) | | (1.3 | ) | — |
| | — |
| | (1.4 | ) |
| Total environmental expense | $ | 15.7 |
| | $ | 8.2 |
| | $ | 10.2 |
| $ | 9.2 |
| | $ | 15.7 |
| | $ | 8.2 |
|
These charges relate primarily to remedial and investigatory activities associated with past manufacturing operations and former waste disposal sites.sites and may be material to operating results in future years.
Our total estimated environmental liability at the end of 20152016 was attributable to 6964 sites, 1416 of which were USEPA National Priority List (NPL) sites. Nine sites accounted for 79% of our environmental liability and, of the remaining 6055 sites, no one site accounted for more than 3% of our environmental liability. At four of the nine sites, part of the site is subject to a remedial investigation and another part is in the long-term OM&M stage. At one of the nine sites, a remedial action plan is being developed for part of the site and at another part a remedial design is being developed. At one of the nine sites, part of the site is subject to a remedial investigation and another part a remedial design is being developed. At one of these nine sites, a remedial investigation is being performed. The two remaining sites are in long-term OM&M. All nine sites are either associated with past manufacturing operations or former waste disposal sites. None of
the nine largest sites represents more than 23% of the liabilities reserved on our consolidated balance sheet at December 31, 20152016 for future environmental expenditures.
Our consolidated balance sheets included liabilities for future environmental expenditures to investigate and remediate known sites amounting to $137.3 million at December 31, 2016, and $138.1 million at December 31, 2015, and $138.3 million at December 31, 2014, of which $119.1$120.3 million and $119.3$119.1 million, respectively, were classified as other noncurrent liabilities. Our environmental liability amounts do not take into account any discounting of future expenditures or any consideration of insurance recoveries or advances in technology. These liabilities are reassessed periodically to determine if environmental circumstances have changed and/or remediation efforts and our estimate of related costs have changed. As a result of these reassessments, future charges to income may be made for additional liabilities. Of the $138.1$137.3 million included on our consolidated balance sheet at December 31, 20152016 for future environmental expenditures, we currently expect to utilize $81.1$77.8 million of the reserve for future environmental expenditures over the next 5 years, $16.7$16.1 million for expenditures 6 to 10 years in the future, and $40.3$43.4 million for expenditures beyond 10 years in the future. These estimates are subject to a number of risks and uncertainties, as described in “Environmental Costs” contained in Item 1A—“Risk Factors.”
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 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. At December 31, 2015,2016, we estimate it is reasonably possible that we may have additional contingent environmental liabilities of $60 million in addition to the amounts for which we have already recorded as a reserve.
LEGAL MATTERS 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. We describe some of these matters in Item 3—“Legal Proceedings.” At December 31, 20152016 and 2014,2015, our consolidated balance sheets included liabilities for these legal actions of $21.2$13.6 million and $22.1$21.2 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 clean-up 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 year ended December 31, 2016, we recognized an insurance recovery of $11.0 million in other operating income for property damage and business interruption related to a 2008 chlor alkali facility incident.
For the year ended December 31, 2015, we recognized insurance recoveries of $57.4 million for property damage and business interruption related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014 and the McIntosh, AL chlor alkali facility. Cost of goods sold was reduced by $10.5 million and selling and administration was reduced by $0.9 million for the reimbursement of costs incurred and expensed in prior periods and other operating income included a gain of $46.0 million.
For the year ended December 31, 2013, we recognized $11.0 million as a reduction of cost of goods sold related to a Chlor Alkali Products and Vinyls favorable contract settlement. Also for the year ended December 31, 2013, we recognized $13.9 million as a reduction of selling and administration expense related to the recovery of legacy legal costs.
LIQUIDITY, INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA
Cash Flow Data
| | | | Years ended December 31, | Years ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Provided by (used for) | ($ in millions) | ($ in millions) |
| Net operating activities | $ | 217.1 |
| | $ | 159.2 |
| | $ | 317.0 |
| $ | 603.2 |
| | $ | 217.1 |
| | $ | 159.2 |
|
| Capital expenditures | (130.9 | ) | | (71.8 | ) | | (90.8 | ) | (278.0 | ) | | (130.9 | ) | | (71.8 | ) |
| Business acquired and related transactions, net of cash acquired | (408.1 | ) | | — |
| | — |
| (69.5 | ) | | (408.1 | ) | | — |
|
| Payments under long-term supply contract | | (175.7 | ) | | — |
| | — |
|
| Proceeds from sale/leaseback of equipment | — |
| | — |
| | 35.8 |
| 40.4 |
| | — |
| | — |
|
| Proceeds from disposition of property, plant and equipment | 26.2 |
| | 5.6 |
| | 4.6 |
| 0.5 |
| | 26.2 |
| | 5.6 |
|
| Restricted cash activity, net | — |
| | 4.2 |
| | 7.7 |
| |
| Net investing activities | (504.0 | ) | | (61.7 | ) | | (43.8 | ) | (473.5 | ) | | (504.0 | ) | | (61.7 | ) |
| Long-term debt borrowings (repayments), net | 544.3 |
| | (12.4 | ) | | (23.7 | ) | |
| Long-term debt (repayments) borrowings, net | | (205.3 | ) | | 544.3 |
| | (12.4 | ) |
| Earn out payment - SunBelt | — |
| | (14.8 | ) | | (17.1 | ) | — |
| | — |
| | (14.8 | ) |
| Common stock repurchased and retired | — |
| | (64.8 | ) | | (36.2 | ) | — |
| | — |
| | (64.8 | ) |
| Dividends paid | | (132.1 | ) | | (79.5 | ) | | (63.0 | ) |
| Debt and equity issuance costs | (45.2 | ) | | (1.2 | ) | | — |
| (1.0 | ) | | (45.2 | ) | | (1.2 | ) |
| Net financing activities | 422.2 |
| | (148.5 | ) | | (130.6 | ) | (337.5 | ) | | 422.2 |
| | (148.5 | ) |
Operating Activities
For 2016, cash provided by operating activities increased by $386.1 million from 2015, primarily due to an increase in our operating results. Our net loss for 2016 included $76.6 million of non-cash impairment charges for equipment and facilities and a $304.6 million increase in depreciation and amortization as compared to the prior year. For 2016, working capital decreased $80.9 million compared to a decrease of $25.1 million in 2015. Receivables decreased from December 31, 2015 by $38.5 million primarily as a result of receivables sold under the new accounts receivable factoring arrangements, which was partially offset by higher sales in the fourth quarter of 2016 compared with fourth quarter of 2015.
For 2015, cash provided by operating activities increased by $57.9 million from 2014, primarily due to a decrease in working capital in 2015. For 2015, working capital decreased $25.1 million compared to an increase of $62.4 million in 2014. The decrease in 2015 primarily reflects a change in accounts receivable and accounts payable for the Acquired Business principally representing converting transactions with TDCC to third party transactions after the Closing Date. The 2015 cash from operations was also impacted by a $43.7 million decrease in cash tax payments.
For 2014, cash provided by operating activities decreased by $157.8 million from 2013, primarily due to lower earnings and an increase in working capital in 2014 compared to a decrease in working capital in 2013. For 2014, working capital increased $62.4 million compared to a decrease of $29.6 million in 2013. Inventories increased $23.6 million, primarily due to the return to a more normal level of inventory at Winchester. Accounts payable and accrued liabilities decreased by $38.5 million, primarily due to the final earn out payment related to the SunBelt performance. The 2014 cash from operations was also impacted by a $12.3 million decrease in cash tax payments.
Capital Expenditures
Capital spending was $278.0 million, $130.9 million and $71.8 million in 2016, 2015 and $90.8 million in 2015, 2014, and 2013, respectively. The increased capital spending in 2016 and 2015 was primarily due to capital spending of the Acquired Business of $187.8 million and $26.6 million, of the Acquired Business. The decreased capitalrespectively. Capital spending in 2014 was primarily due2016 included approximately $35 million of synergy-related capital we believe is necessary to realize the completion of the low salt, high strength bleach facility and the hydrochloric acid expansion project at our Henderson, NV chlor alkali site during the first quarter of 2013.anticipated synergies. Capital spending was 66%64%, 58%66% and 75%58% of depreciation in 2016, 2015 2014 and 2013,2014, respectively.
In 2016,2017, we expect our capital spending to be in the $300 million to $340$350 million range, which includes approximately $60$30 million of synergy-related capital which we believe is necessary to realize the anticipated synergies. In 2017, we also expect to make payments of $209.4 million associated with long-term supply contracts.
Investing Activities
AsIn 2016, payments of $69.5 million were made related to the Acquisition for certain acquisition-related liabilities including the final working capital adjustment. In 2015, as part of the Acquisition, we paid cash of $408.1 million, net of $25.4 million of cash acquired. The purchase price is subject to certain post-closing adjustments.
DuringIn 2016, payments of $175.7 million were made related to arrangements for the long-term supply of low cost electricity.
In 2016, we entered into sale/leaseback transactions for railcars that we acquired in connection with the Acquisition. We received proceeds from the sales of $40.4 million.
In 2015, proceeds from disposition of property, plant and equipment included $25.8 million of insurance recoveries for property damage related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014 and our McIntosh, AL chlor alkali facility.
DuringIn both 2016 and 2015, we received $8.8 million from the October 2013 sale of a bleach joint venture.
During 2013, we entered into sale/leaseback agreements for bleach trailers and chlorine, caustic soda and bleach railcars. In 2013, we received proceeds from the sales of $35.8 million.
In 2014 and 2013, we utilized $4.2 million and $7.7 million, respectively, of the Go Zone and Recovery Zone proceeds to fund qualifying capital spending. The proceeds of these bonds were required to be used to fund capital projects in Alabama, Mississippi and Tennessee and were fully utilized as of December 31, 2014.
Financing Activities
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 are continued to be serviced by us. As of December 31, 2016, $282.3 million of our trade receivables have been pledged as collateral. During 2016 we drew $230.0 million under the agreement and subsequently repaid $20.0 million. As of December 31, 2016, $210.0 million was drawn under the Receivables Financing Agreement. The net $210.0 million proceeds were used to repay a portion of the Sumitomo Credit Facility.
On the Closing Date, Spinco 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) to TDCC. TDCC transferred the Notes to certain unaffiliated securityholders in satisfaction of existing debt obligations of TDCC held or acquired by those unaffiliated securityholders. On October 5, 2015, certain initial purchasers purchased the Notes from the unaffiliated securityholders. During 2016, the Notes were registered under the Securities Act of 1933, as amended. Interest on the Notes began accruing from October 1, 2015 and will beis paid semi-annually beginning on April 15, 2016. The Notes are not redeemable at any time prior to October 15, 2020. Neither Olin nor Spinco received any proceeds from the sale of the Notes. Upon the consummation of the Acquisition, Olin became guarantor of the Notes.
On June 23, 2015, Spinco entered into a new five-year delayed-draw term loan facility of up to $1,050.0 million. As of the Closing Date, Spinco drew $875.0 million to finance the cash portion of the distributions of cash and debt instruments of Spinco with an aggregate value of $2,095.0 million (Cash and Debt Distribution). Also on June 23, 2015, Olin and Spinco entered into a new five-year $1,850.0 million senior credit facility consisting of a $500.0 million senior revolving credit facility, which replaced Olin’s $265.0 million senior revolving credit facility on the Closing Date, and a $1,350.0 million (subject to reduction by the aggregate amount of the term loans funded to Spinco under the Spinco term loan facility) delayed-draw term loan facility. As of the Closing Date, we drew an additional $475.0 million under this term loan facility which was used to pay fees and expenses of the Acquisition, obtain additional funds for general corporate purposes and refinance Olin’s existing senior term loan facility due in 2019 of $146.3 million. Subsequent to the Closing Date, these senior credit facilities were consolidated into a single $1,850.0 million senior credit facility. This new senior credit facility will expire in 2020. During 2016, we repaid $67.5 million under the required quarterly installments of this new senior credit facility.
On August 25, 2015, Olin entered into a Credit Agreement (the Credit Agreement) with a syndicate of lenders and Sumitomo Mitsui Banking Corporation, as administrative agent, in connection with the Acquisition. The Credit Agreement provides for a term credit facility (the Sumitomo Credit Facility) under which Olin obtained term loans in an aggregate amount of $600.0 million. On November 3, 2015, we entered into an amendment to the Sumitomo Credit Facility which increased the aggregate amount of term loans available by $200.0 million. On the Closing Date, $600.0 million of loans under the Credit Agreement were made available and borrowed upon and on November 5, 2015, $200.0 million of loans under the Credit Agreement were made available and borrowed upon. The term loans under the Sumitomo Credit Facility will mature on October 5, 2018 and will have no scheduled amortization payments. The proceeds of the Sumitomo Credit Facility were used to refinance existing Spinco indebtedness outstanding at the Closing Date of $569.0 million, to pay fees and expenses in connection with the Acquisition and for general corporate purposes. During 2016, $210.0 million was repaid under the Sumitomo Credit Facility using proceeds from the Receivables Financing Agreement.
In December 2016, 2015 2014 and 2013,2014, we repaid $12.2 million due under the annual requirements of the SunBelt Notes. In January 2013,June 2016, we also repaid $11.4$125.0 million of 6.5% Senior2016 Notes, (2013 Notes), which became due.
In August 2014, we redeemed our $150.0 million 2019 Notes, which would have matured on August 15, 2019. We recognized interest expense of $9.5 million for the call premium ($6.7 million) and, the write-off of unamortized deferred debt issuance costs ($2.1 million) and unamortized discount ($0.7 million) related to this action during 2014. On June 24, 2014, we entered into a 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. In 2015 and 2014, we repaid $2.8 million and $0.9 million, respectively, under the required quarterly installments of the $150.0 million term loan facility and, on the Closing Date of the Acquisition, the remaining $146.3 term loan facility was refinanced using the proceeds of the new senior credit facility. We recognized interest expense of $0.5 million for the write-off of unamortized deferred debt issuance costs related to this action issued in conjunction with the Acquisition.
During 2014, and 2013, we paid $26.7 million and $23.2 million, respectively, for the earn out related to the 2013 and 2012 SunBelt Chlor Alkali Partnership (SunBelt) performance. The earn out paymentspayment for the yearsyear ended December 31, 2014 and 2013 included $14.8 million and $17.1 million, respectively, that werewas recognized as part of the original purchase price. The $14.8 million and $17.1 million areis included as a financing activity in the statement of cash flows.
We repurchased and retired 2.5 million and 1.5 million shares in 2014 and 2013, respectively, with a total value of $64.8 million and $36.2 million, respectively.million.
In 2016, 2015 2014 and 2013,2014, we issued 0.10.3 million, 0.50.1 million and 0.5 million shares, respectively, with a total value of $4.1 million, $3.1 million $12.1 million and $9.7$12.1 million, respectively, representing stock options exercised.
In 2016, we paid debt issuance costs of $1.0 million for the registration of the Notes. In 2015, we paid debt issuance costs of $13.3 million relating to the Notes, the Sumitomo Credit Facility and the $1,850.0 million senior credit facility. In additionfacility and we paid $1.9 million of equity issuance costs for the issuance of approximately 87.5 million shares. In 2014, we paid debt issuance costs of $1.2 million related to the five-year $415.0 million senior credit facility.
On March 26, 2015, we and certain financial institutions executed commitment letters pursuant to which the financial institutions agreed to provide $3,354.5 million of financing to Spinco to finance the amount of the Cash and Debt Distribution and to provide financing, if needed, to Olin to refinance certain of our existing debt (the Bridge Financing), in each case on the terms and conditions set forth in the commitment letters. The Bridge Financing was not drawn on to facilitate the Acquisition, and the commitments for the Bridge Financing have beenwere terminated as of the Closing Date. For the year ended December 31, 2015, we paid debt issuance costs of $30.0 million associated with the Bridge Financing, which are included in interest expense.
In 2014, we paidThe percent of total debt issuance coststo total capitalization of $1.2 million related61.4% was consistent at December 31, 2016 and 2015 as a result of a lower level of long-term debt at December 31, 2016 resulting from the repayments of maturing debt, offset by lower shareholders’ equity primarily due to the five-year $415.0 million senior credit facility.
payment of dividends. The percent of total debt to total capitalization increased to 61.6% at61.4% as of December 31, 2015 from 40.0%39.7% at year-end 2014. The percent of total debt to total capitalization was 38.6% at year-end 2013. The 2015 increase from 2014 was primarily a result of a higher level of long-term debt which was issued to finance the Acquisition. The 2014 increase from 2013 was due to lower shareholders’ equity primarily resulting from the $86.6 million after-tax charge for our pension and other postretirement plans. This increase was partially offset by a lower level of long-term debt at December 31, 2014 resulting from the repayments of maturing debt.
Dividends per common share were $0.80 in 2016, 2015 2014 and 2013.2014. Total dividends paid on common stock amounted to $132.1 million, $79.5 million and $63.0 million in 2016, 2015 and $64.0 million in 2015, 2014, and 2013, respectively. On January 29, 2016,26, 2017, our board of directors declared a dividend of $0.20 per share on our common stock, payable on March 10, 20162017 to shareholders of record on February 10, 2016.2017.
The payment of cash dividends is subject to the discretion of our board of directors and will be determined in light of then-current conditions, including our earnings, our operations, our financial condition, our capital requirements and other factors deemed relevant by our board of directors. In the future, our board of directors may change our dividend policy, including the frequency or amount of any dividend, in light of then-existing conditions.
LIQUIDITY AND OTHER FINANCING ARRANGEMENTS
Our principal sources of liquidity are from cash and cash equivalents, cash flow from operations and short-term borrowings under our senior revolving credit facility. Additionally, we believe that we have access to the debt and equity markets.
The aggregate purchase price of the Acquired Business was $5,162.2$5,136.7 million, subject to certainafter the final post-closing adjustments. The $5,162.2$5,136.7 million consisted of $2,095.0 million of cash and debt transferred to TDCC and approximately 87.5 million shares of Olin common stock valued at approximately $1,527.4 million, plus the assumption of pension liabilities of approximately $447.1$442.3 million and long-term debt of $569.0 million. During 2016, payments of $69.5 million were made related to certain acquisition related liabilities including the final working capital adjustment. The value of the common stock was based on the closing stock price on the last trading day prior to the Closing Date of $17.46.
Certain additional agreements have beenwere entered into, including, among others, an Employee Matters Agreement, a Tax Matters Agreement, site, transitional and other service agreements, supply and purchase agreements, real estate agreements,
technology licenses and intellectual property agreements. Payments of approximately $90.2 million, subject to certain post-closing adjustments, will be made related to certain acquisition related liabilities including the estimated working capital adjustment. In addition, Olin and TDCC have agreed in connection with the Acquisition to enter into arrangementarrangements for the long-term supply of ethylene by TDCC to Olin, pursuant to which, among other things, Olin made upfront payments of $433.5 million 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. IfDuring 2016, one of the options areto obtain additional future ethylene supply at producer economics was exercised by us and, accordingly, additional payments will be made to TDCC
of between $230$209.4 million in 2017. On February 27, 2017, we exercised the remaining option to obtain additional future ethylene supply and $250 million on or aboutin connection with the fourth quarterexercise we also secured a long-term customer arrangement. Consequently, additional payments will be made to TDCC of 2017 and between $425 million and $465 million on or about the fourth quarter of 2020.
Debt that was issued in the fourth quarter of 2015 relating to the Acquisition totaled $3,370.0 million, consisting of $1,350.0 million of term loans under senior credit facilities, an $800.0 million term loan under the Sumitomo Credit Facility and $1,220.0 million under the Notes. The new debt was used for the cash and debt transferred to TDCC, refinancing existing Spinco indebtedness outstanding at the Closing Date of the Acquisition, refinancing our existing senior term loan facility due in 2019, paying fees and expenses in connection with the Acquisition and for general corporate purposes.
During 2016, Olin entered into arrangements to increase our supply of low cost electricity. These arrangements improve manufacturing flexibility at our Freeport, TX and Plaquemine, LA facilities, reduce our overall electricity cost and accelerate the realization of cost synergies available from the Acquired Business. In conjunction with these arrangements, Olin made payments of $175.7 million during 2016.
The overall cash increasedecrease of $135.2$207.5 million in 20152016 primarily reflects capital spending, which includes capital spending of the Acquired Business, repayment of long-term debt, payments made under arrangements to increase our supply of low cost electricity and payments to TDCC related to certain acquisition related liabilities, including the final working capital adjustment. These decreases were partially offset by our operating results.results, proceeds under sale/leaseback transactions, proceeds of the Receivables Financing Agreement and receivables sold under the new accounts receivable factoring arrangements. We believe, based on current and projected levels of cash flow from our operations, together with our cash and cash equivalents on hand and the availability to borrow under our senior revolving credit facility, we have sufficient liquidity to meet our short-term and long-term needs to make required payments of interest on our debt, make amortization payments under the senior credit facilities, fund our operating needs, fund working capital and capital expenditure requirements and comply with the financial ratios in our debt agreements.
On December 20, 2016, we entered into a three year, $250.0 million Receivables Financing Agreement. Under the Receivables Financing Agreement, our eligible trade receivables are used for collateralized borrowings and are continued to be serviced by us. As of December 31, 2016, $282.3 million of our trade receivables have been pledged as collateral. During 2016 we drew $230.0 million under the agreement and subsequently repaid $20.0 million. As of December 31, 2016, $210.0 million was drawn under the Receivables Financing Agreement. In addition, the Receivables Financing Agreement incorporates the leverage and coverage covenants that are contained in the senior revolving credit facility. The net $210.0 million proceeds were used to repay a portion of the Sumitomo Credit Facility.
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 (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 $242.0 million. We will continue to service such accounts. These receivables qualify for sales treatment under ASC 860 “Transfers and Servicing” (ASC 860) and, accordingly, the proceeds are included in net cash provided by operating activities in the consolidated statements of cash flows. The gross amount of receivables sold for the year ended December 31, 2016 totaled $533.6 million. The factoring discount paid under the AR Facilities is recorded as interest expense on the consolidated statements of operations. The agreements are without recourse and therefore no recourse liability has been recorded as of December 31, 2016. As of December 31, 2016, $126.1 million of receivables qualifying for sale treatment were outstanding and will continue to be serviced by us.
On the Closing Date, Spinco issued $720.0 million aggregate principal amount of the 2023 Notes and $500.0 million aggregate principal amount of the 2025 Notes to TDCC. TDCC transferred the Notes to certain unaffiliated securityholders in satisfaction of existing debt obligations of TDCC held or acquired by those unaffiliated securityholders. On October 5, 2015, certain initial purchasers purchased the Notes from the unaffiliated securityholders. During 2016, the Notes were registered under the Securities Act of 1933, as amended. Interest on the Notes will accruebegan accruing from October 1, 2015 and will beare paid semi-annually beginning on April 15, 2016. The Notes are not redeemable at any time prior to October 15, 2020. Neither Olin nor Spinco received any proceeds from the sale of the Notes. Upon the consummation of the Acquisition, Olin became guarantor of the Notes.
On June 23, 2015, Spinco entered into a new five-year delayed-draw term loan facility of up to $1,050.0 million. As of the Closing Date, Spinco drew $875.0 million to finance the cash portion of the Cash and Debt Distribution. Also on June 23, 2015, Olin and Spinco entered into a new five-year $1,850.0 million senior credit facility consisting of a $500.0 million senior revolving credit facility, which replaced Olin’s $265.0 million senior revolving credit facility at the Closing Date, and a $1,350.0 million (subject to reduction by the aggregate amount of the term loans funded to Spinco under the Spinco term loan facility) delayed-draw term loan facility. As of the Closing Date, an additional $475.0 million was drawn by Olin under this term loan facility which was used to pay fees and expenses of the Acquisition, obtain additional funds for general corporate purposes and refinance Olin’s existing senior term loan facility due in 2019. As of the Closing Date, total borrowings under the term loan facilities were $1,350.0 million. Subsequent to the Closing Date, these senior credit facilities were consolidated into a single $1,850.0 million senior credit facility. This new senior credit facility will expire in 2020. The $500.0 million senior revolving credit facility includes a $100.0 million letter of credit subfacility. At December 31, 2015,2016, we had $489.6$483.4 million available under our $500.0 million senior revolving credit facility because we had issued $10.4$16.6 million of letters of credit under the $100.0 million 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. During 2016, we repaid $67.5 million under the required quarterly installments of this new senior credit facility.
Under the new senior credit facility, we may select various floating rate borrowing options. The actual interest rate paid on borrowings under the 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 December 31, 20152016 and 2014,2015, 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 December 31, 2016, there were no covenants or restrictions that limited our ability to borrow. 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.
On August 25, 2015, Olin entered into a Credit Agreement with a syndicate of lenders and Sumitomo Mitsui Banking Corporation, as administrative agent, in connection with the Acquisition. Olin obtained term loans in an aggregate amount of $600.0 million under the Sumitomo Credit Facility. On November 3, 2015, we entered into an amendment to the Sumitomo Credit Facility which increased the aggregate amount of term loans available by $200.0 million. On the Closing Date, $600.0 million of loans under the Credit Agreement were made available and borrowed upon and on November 5, 2015, $200.0 million of loans under the Credit Agreement were made available and borrowed upon. The term loans under the Sumitomo Credit Facility will mature on October 5, 2018 and will have no scheduled amortization payments. The proceeds of the Sumitomo Credit Facility were used to refinance existing Spinco indebtedness outstanding at the Closing Date, to pay fees and expenses in connection with the Acquisition and for general corporate purposes. The Credit Agreement contains customary representations, warranties and affirmative and negative covenants which are substantially similar to those included in the new $1,850.0 million senior credit facility.
On March 26, 2015, we and certain financial institutions executed commitment letters pursuant to which During 2016, $210.0 million was repaid under the financial institutions agreed to provide $3,354.5 million of BridgeSumitomo Credit Facility using proceeds from the Receivables Financing in each case on the terms and conditions set forth in the commitment letters. The Bridge Financing was not drawn on to facilitate the Acquisition and the commitments for the Bridge Financing have been terminated as of the Closing Date.Agreement.
Cash flow from operations is variable as a result of both the seasonal and the cyclical nature of our operating results, which have been affected by seasonal and economic cycles in many of the industries we serve, such as the vinyls, urethanes, bleach, ammunition and pulp and paper. The Acquired Business has significantly diversified our product and geographic base, which should enable us to be less cyclical.Cashcyclical. Cash flow from operations is affected by changes in chlorine, caustic soda and EDC selling prices caused by the changes in the supply/demand balance of these products, resulting in the Chlor Alkali Products and Vinyls segment having significant leverage on our earnings and cash flow. For example, assuming all other costs remain constant, internal consumption remains approximately the same and we are operating at full capacity, a $10 selling price change per ton of chlorine equates to an approximate $10 million annual change in our revenues and pretax profit, a $10 selling price change per ton of caustic soda equates to an approximate $30 million annual change in our revenues and pretax profit, and a $0.01 selling price change per pound of EDC equates to an approximate $20 million annual change in our revenues and pretax profit .profit.
For 2015,2016, cash provided by operating activities increased by $57.9$386.1 million from 2014,2015, primarily due to an increase in our operating results. Our net loss for 2016 included $76.6 million of non-cash impairment charges for equipment and facilities and a decrease$304.6 million increase in working capital in 2015.depreciation and amortization as compared to the prior year. For 2015,2016, working capital decreased $25.1$80.9 million compared to an increasea decrease of $62.4$25.1 million in 2014. The decrease2015. Receivables decreased from December 31, 2015 by $38.5 million primarily as a result of receivables sold under the new AR Facilities, which was partially offset by higher sales in 2015 primarily reflects a change in accounts receivable and accounts payable for the Acquired Business principally representing converting transactionsfourth quarter of 2016 compared with TDCC to third party transactions after the Closing Date. The 2015 cash from operations was also impacted by a $43.7 million decrease in cash tax payments.fourth quarter of 2015.
Capital spending was $278.0 million, $130.9 million and $71.8 million in 2016, 2015 and $90.8 million in 2015, 2014, and 2013, respectively. The increased capital spending in 2016 and 2015 was primarily due to capital spending of the Acquired Business of $187.8 million and $26.6 million, of the Acquired Business. The decreased capitalrespectively. Capital spending in 2014 was primarily due2016 included approximately $35 million of synergy-related capital we believe is necessary to realize the completion of the low salt, high strength bleach facility and the hydrochloric acid expansion project at our Henderson, NV chlor alkali site in the first quarter of 2013.anticipated synergies. Capital spending was 66%64%, 58%66% and 75%58% of depreciation in 2016, 2015 2014 and 2013,2014, respectively.
In 2016,2017, we expect our capital spending to be in the $300 million to $340$350 million range, which includes approximately $60$30 million of synergy-related capital which we believe is necessary to realize the anticipated synergies. In 2017, we also expect to make payments of $209.4 million associated with long-term supply contracts.
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 yearson April 24, 2017 for any remaining shares not yet repurchased. This authorization replaced the July 2011 program. No shares were purchased and retired in 2016 or 2015. We repurchased and retired 2.5 million and 1.5 million shares in 2014 and 2013, respectively, at a cost of $64.8 million and $36.2 million, respectively.million. As of December 31, 2015,2016, we had repurchased a total of 1.9 million shares under the April 2014 program, and 6.1 million shares remained authorized to be purchased. The repurchases will be effected from time to time on the open market, or in privately negotiated transactions. Under the Merger Agreement relating to the Acquisition, we were restricted from repurchasing shares of our common stock prior to the consummation of the Acquisition. For a period of two years subsequent to the Closing Date, we will continue to be subject to certain restrictions on our ability to conduct share repurchases.
In August 2014, we redeemed our $150.0 million 2019 Notes, which would have matured on August 15, 2019. We recognized interest expense of $9.5 million for the call premium ($6.7 million) and, the write-off of unamortized deferred debt issuance costs ($2.1 million) and unamortized discount ($0.7 million) related to this action during 2014. On June 24, 2014, we entered into a 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. In 2015 and 2014, we repaid $2.8 million and $0.9 million, respectively, under the required quarterly installments of the $150.0 million term loan facility and, on the Closing Date of the Acquisition, the remaining $146.3 million was refinanced using the proceeds of the new senior credit facility. We recognized interest expense of $0.5 million for the write-off of unamortized deferred debt issuance costs related to this action issued in conjunction with the Acquisition.
Pursuant to a note purchase agreement dated December 22, 1997, 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. Beginning on December 22, 2002 and each year through 2017, SunBelt is required to repay $12.2 million of the SunBelt Notes, of which $6.1 million is attributable to the Series O Notes and of which $6.1
million is attributable to the Series G Notes. In December 2016, 2015 2014 and 2013,2014, $12.2 million was repaid on these SunBelt Notes.
We have guaranteed the Series O Notes, and PolyOne Corporation (PolyOne), our former SunBelt partner, has guaranteed the Series G Notes, in both cases pursuant to customary guaranty agreements. We have agreed to indemnify PolyOne for any payments or other costs under the guarantee in favor of the purchasers of the Series G Notes, to the extent any payments or other costs arise from a default or other breach under the SunBelt Notes. If SunBelt does not make timely payments on the SunBelt Notes, whether as a result of a failure to pay on a guarantee or otherwise, the holders of the SunBelt Notes may proceed against the assets of SunBelt for repayment.
In January 2013,June 2016, we repaid $11.4$125.0 million of 20132016 Notes, which became due.
At December 31, 2015,2016, we had total letters of credit of $27.6$73.3 million outstanding, of which $10.4$16.6 million were issued under our $500.0 million senior revolving credit facility. The letters of credit were used to support certain long-term debt, certain workers compensation insurance policies, certain plant closure and post-closure obligations and certain international pension funding requirements.
Our current debt structure is used to fund our business operations. As of December 31, 2015,2016, we had long-term borrowings, including the current installment and capital lease obligations, of $3,881.7$3,617.6 million, of which $2,305.9$2,238.4 million was at variable rates. Annual maturities of long-term debt, including capital lease obligations, are $206.5 million in 2016, $80.9$80.3 million in 2017, $901.9$691.9 million in 2018, $135.7$345.7 million in 2019, $980.3 million in 2020, $0.2 million in 2021 and a total of $1,576.4$1,576.1 million thereafter. Commitments from banks under our senior revolving credit facility are an additional source of liquidity. Included within the $3,617.6 million of long-term borrowings on the consolidated balance sheet as of December 31, 2016 were deferred debt issuance costs, deferred gains and losses on fair value interest rate swaps and unamortized fair value premium of $56.9 million.
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 Bank, N.A. (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 $9.6 million and are included in other current assets and other assets on the accompanying consolidated balance sheet, with the corresponding gain deferred as a component of other comprehensive loss. No gain or loss has been recorded in earnings as a result of ineffectiveness.
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 $28.5 million and are included in other long-term liabilities on the accompanying consolidated balance sheet, with a corresponding decrease in the carrying amount of the related debt. For the year ended December 31, 2016, $2.6 million of income has been recorded to interest expense on the accompanying consolidated 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 Bank, N.A. (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 December 31, 2015, $0.4 million of this gain was included in long-term debt.
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 this agreement 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 December 31, 2015, $1.2$0.1 million of this gain was included in current installments of 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 $125 million fixed interest rate swaps do not meet the criteria for hedge accounting. All changes in the fair value of these interest rate swaps are recorded currently in earnings.
We have registered an undetermined amount of securities with the SEC, so that, from time-to-time, we may issue debt securities, preferred stock and/or common stock and associated warrants in the public market under that registration statement.
OFF-BALANCE SHEET ARRANGEMENTS
Our operating lease commitments are primarily for railroad cars but also include distribution, warehousing and office space and data processing and office equipment. Virtually none of our lease agreements contain escalation clauses or step rent provisions.
Our long-term contractual commitments, including the on and off-balance sheet arrangements, consisted of the following:
| | | | Payments Due by Period | Payments Due by Period |
| Contractual Obligations | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
| | ($ in millions) | ($ in millions) |
Debt obligations, including capital lease obligations | $ | 3,881.7 |
| | $ | 206.5 |
| | $ | 982.8 |
| | $ | 1,116.0 |
| | $ | 1,576.4 |
| $ | 3,674.5 |
| | $ | 80.3 |
| | $ | 1,037.6 |
| | $ | 980.5 |
| | $ | 1,576.1 |
|
Interest payments under debt obligations and interest rate swap agreements(a)(b) | 1,321.6 |
| | 181.4 |
| | 349.0 |
| | 318.5 |
| | 472.7 |
| 1,139.5 |
| | 186.1 |
| | 332.3 |
| | 287.6 |
| | 333.5 |
|
| Contingent tax liability | 37.5 |
| | 9.4 |
| | 4.7 |
| | 4.9 |
| | 18.5 |
| 41.3 |
| | 12.3 |
| | 6.1 |
| | 4.0 |
| | 18.9 |
|
Qualified pension plan contributions(b)(c) | 5.0 |
| | 5.0 |
| | — |
| | — |
| | — |
| 5.0 |
| | 5.0 |
| | — |
| | — |
| | — |
|
| Non-qualified pension plan payments | 5.1 |
| | 0.5 |
| | 0.9 |
| | 1.1 |
| | 2.6 |
| 5.5 |
| | 0.6 |
| | 1.1 |
| | 0.9 |
| | 2.9 |
|
| Postretirement benefit payments | 62.0 |
| | 5.7 |
| | 10.7 |
| | 9.1 |
| | 36.5 |
| 52.2 |
| | 5.2 |
| | 9.1 |
| | 7.2 |
| | 30.7 |
|
| Off-Balance Sheet Commitments: | | | | | | | | | | | | | | | | | | |
| Non-cancelable operating leases | 333.3 |
| | 73.7 |
| | 112.6 |
| | 66.8 |
| | 80.2 |
| 339.6 |
| | 78.8 |
| | 117.8 |
| | 65.4 |
| | 77.6 |
|
| Long-term supply contracts | | 674.4 |
| | 209.4 |
| | — |
| | 465.0 |
| | — |
|
| Purchasing commitments: | | | | | | | | | | | | | | | | | | |
| Raw materials | 5,297.5 |
| | 554.6 |
| | 955.6 |
| | 882.4 |
| | 2,904.9 |
| 5,588.2 |
| | 596.9 |
| | 1,011.4 |
| | 987.7 |
| | 2,992.2 |
|
| Capital expenditures | 4.9 |
| | 4.9 |
| | — |
| | — |
| | — |
| 5.7 |
| | 5.7 |
| | — |
| | — |
| | — |
|
| Utilities | 0.8 |
| | 0.7 |
| | 0.1 |
| | — |
| | — |
| 1.9 |
| | 0.5 |
| | 0.9 |
| | 0.5 |
| | — |
|
| Total | $ | 10,949.4 |
| | $ | 1,042.4 |
| | $ | 2,416.4 |
| | $ | 2,398.8 |
| | $ | 5,091.8 |
| $ | 11,527.8 |
| | $ | 1,180.8 |
| | $ | 2,516.3 |
| | $ | 2,798.8 |
| | $ | 5,031.9 |
|
| |
| (a) | Excludes debt issuance costs, deferred gains and losses on fair value interest rate swaps and unamortized fair value premium of $56.9 million. |
| |
| (b) | For the purposes of this table, we have assumed for all periods presented that there are no changes in the principal amount of any variable rate debt from the amounts outstanding on December 31, 2015 and that there are no changes in the rates from those in effect at December 31, 20152016 which ranged from 0.27%0.25% to 10.00%. |
| |
(b)(c) | These amounts are only estimated payments assuming for our domestic qualified pension plan an annual expected rate of return on pension plan assets for the domestic qualified pension plan of 7.75%, and a discount rate on pension plan obligations of 4.4%4.1% and for our foreign qualified pension plans a weighted average annual expected rate of return on pension plan assets of 6.0%, and a discount rate on pension plan obligations of 2.3%. These estimated payments are subject to significant variation and the actual payments may be more than the amounts estimated. Given the inherent uncertainty as to actual minimum funding requirements for qualified defined benefit pension plans, no amounts are included in this table for any period beyond one year. During 2016, we made a discretionary cash contribution to our domestic qualified defined benefit pension plan of $6.0 million. Based on the current funding requirements, we will not be required to make any cash contributions to the domestic qualified defined benefit pension plan at least through 2016. We do have several2017. In connection with international qualified defined benefit pension plans to which we made cash contributions of $1.3 million and $0.9 million in 2016 and $0.8 million in 2015, and 2014, respectively, and we anticipate less than $5 million of cash contributions to international qualified defined benefit pension plans in 2016.2017. See discussion on MAP-21 and HATFA 2014 in “Pension Plans” in the notes to consolidated financial statements contained in Item 8. |
Non-cancelable operating leases and purchasing commitments are utilized in our normal course of business for our projected needs. In connection with the Acquisition, certain additional agreements have been entered into with TDCC, including long-term purchase agreements for raw materials. These agreements are maintained through long-term cost based contracts that provide us with a reliable supply of key raw materials. Key raw materials received from TDCC include ethylene, electricity, propylene and benzene. For losses that we believe are probable and which are estimable, we have accrued for such amounts in our consolidated balance sheets. In addition to the table above, we have various commitments and contingencies including: defined benefit and postretirement healthcare plans (as described below), environmental matters (see discussion above under “Environmental Matters”) and litigation claims (see Item 3—“Legal Proceedings”).
We have several defined benefit and defined contribution pension plans, as described in the “Pension Plans” note in the notes to consolidated financial statements contained in Item 8. We fund the defined benefit pension plans based on the minimum amounts required by law plus such amounts we deem appropriate. We have postretirement healthcare plans that
provide health and life insurance benefits to certain retired employees and their beneficiaries, as described in the “Postretirement Benefits” note in the notes to consolidated financial statements contained in Item 8. These other postretirement plans are not pre-funded and expenses are paid by us as incurred.
We also have standby letters of credit of $27.6$73.3 million of which $10.4$16.6 million have been issued through our senior revolving credit facility. At December 31, 2015,2016, we had $489.6$483.4 million available under our senior revolving credit facility.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. Significant estimates in our consolidated financial statements include goodwill recoverability, environmental, restructuring and other unusual items, litigation, income tax reserves including deferred tax asset valuation allowances, pension, postretirement and other benefits and allowance for doubtful accounts. We base our estimates on prior experience, current facts and circumstances and other assumptions. Actual results may differ from these estimates.
We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.
Goodwill
Goodwill is not amortized, but is reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred. On January 1, 2012, we adopted Accounting Standards Update (ASU) 2011-08 “Testing ASC 350 “Intangibles—Goodwill for Impairment” (ASU 2011-08), whichand Other” permits entities to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Circumstances that are considered as part of the qualitative assessment and could trigger the two-step impairment test include, but are not limited to: a significant adverse change in the business climate; a significant adverse legal judgment; adverse cash flow trends; an adverse action or assessment by a government agency; unanticipated competition; decline in our stock price; and a significant restructuring charge within a reporting unit. We define reporting units at the business segment level or one level below the business segment level. For purposes of testing goodwill for impairment, goodwill has been allocated to our reporting units to the extent it relates to each reporting unit. Based upon our qualitative assessment, it is more likely than not that the fair value of our reporting units are greater than their carrying amounts as of December 31, 2015. No impairment charges were recorded for 2015, 2014 or 2013.
It is our practice, at a minimum, to perform a quantitative goodwill impairment test in the fourth quarter every three years. In the fourth quarter of 2014,2016, we performed our trienniala quantitative goodwill impairment test for our reporting units. We use a discounted cash flow approach to develop the estimated fair value of a reporting unit when a quantitative review is performed. Management judgment is required in developing the assumptions for the discounted cash flow model. We also corroborate our discounted cash flow analysis by evaluating a market-based approach that considers earnings before interest, taxes, depreciation and amortization (EBITDA) multiples from a representative sample of comparable public companies. As a further indicator that each reporting unit has been valued appropriately using a discounted cash flow model, the aggregate fair value of all reporting units is reconciled to the total market value of Olin. An impairment would be recorded if the carrying amount of a reporting unit exceeded the estimated fair value. Based on the aforementioned analysis, the estimated fair value of our reporting units substantially exceeded the carrying value of the reporting units. No impairment charges were recorded for 2016, 2015 or 2014.
The discount rate, profitability assumptions and terminal growth rate of our reporting units and the cyclical nature of the chlor alkali industry were the material assumptions utilized in the discounted cash flow model used to estimate the fair value of each reporting unit. The discount rate reflects a weighted-average cost of capital, which is calculated based on observable market data. Some of thesethis data (such as the risk free or treasury rate and the pretax cost of debt) are based on the market data at a point in time. Other data (such as the equity risk premium) are based upon market data over time for a peer group of companies in the chemical manufacturing or distribution industries with a market capitalization premium added, as applicable.
The discounted cash flow analysis requires estimates, assumptions and judgments about future events. Our analysis uses our internally generated long-range plan. Our discounted cash flow analysis uses the assumptions in our long-range plan about terminal growth rates, forecasted capital expenditures and changes in future working capital requirements to determine the implied fair value of each reporting unit. The long-range plan reflects management judgment, supplemented by independent chemical industry analyses which provide multi-year chlor alkali industry operating and pricing forecasts.
We believe the assumptions used in our goodwill impairment analysis are appropriate and result in reasonable estimates of the implied fair value of each reporting unit. However, given the economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions, made for purposes of our goodwill impairment testing, will prove to be an accurate prediction of the future. In order to evaluate the sensitivity of the fair value calculation on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair value of each reporting unit. We also applied a hypothetical decrease of 100-basis points in our terminal growth rate or an increase of 100-basis points in our weighted-average cost of capital to test the fair value calculation. In all cases, the estimated fair value of our reporting units derived in these sensitivity calculations exceeded the carrying value in excess of 10%. If our assumptions regarding future performance are not achieved, we may be required to record goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
Environmental
Accruals (charges to income) for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based upon current law and existing technologies. These amounts, which are not discounted and are exclusive of claims against third parties, are adjusted periodically as assessments and remediation efforts progress or additional technical or legal information becomes available. Environmental costs are capitalized if the costs increase the value of the property and/or mitigate or prevent contamination from future operations. Environmental costs and recoveries are included in costs of goods sold.
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 PRPs and 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, cash flows or results of operations.
Pension and Postretirement Plans
We account for our defined benefit pension plans and non-pension postretirement benefit plans using actuarial models required by ASC 715. These models use an attribution approach that generally spreads the financial impact of changes to the plan and actuarial assumptions over the average remaining service lives of the employees in the plan. Changes in liability due to changes in actuarial assumptions such as discount rate, rate of compensation increases and mortality, as well as annual deviations between what was assumed and what was experienced by the plan are treated as actuarial gains or losses. The principle underlying the required attribution approach is that employees render service over their average remaining service lives on a relatively smooth basis and, therefore, the accounting for benefits earned under the pension or non-pension postretirement benefits plans should follow the same relatively smooth pattern. Substantially all domestic defined benefit pension plan participants are no longer accruing benefits; therefore, actuarial gains and losses are amortized based upon the remaining life expectancy of the inactive plan participants. For both the years ended December 31, 20152016 and 2014,2015, the average remaining life expectancy of the inactive participants in the domestic defined benefit pension plan was 19 years and 18 years, respectively.years.
One of the key assumptions for the net periodic pension calculation is the expected long-term rate of return on plan assets, used to determine the “market-related value of assets.” (TheThe “market-related value of assets” recognizes differences between the plan’s actual return and expected return over a five year period).period. The required use of an expected long-term rate of return on the market-related value of plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees. As differences between actual and expected returns are recognized over five years, they subsequently generate gains and losses that are subject to amortization over the average remaining life expectancy of the inactive plan participants, as described in the preceding paragraph.
We use long-term historical actual return information, the mix of investments that comprise plan assets, and future estimates of long-term investment returns and inflation by reference to external sources to develop the expected long-term rate of return on plan assets as of December 31.
The discount rate assumptions used for pension and non-pension postretirement benefit plan accounting reflect the rates available on high-quality fixed-income debt instruments on December 31 of each year. The rate of compensation increase is
based upon our long-term plans for such increases. For retiree medical plan accounting, we review external data and our own historical trends for healthcare costs to determine the healthcare cost trend rates.
Effective as of the Closing Date, we changed the approach used to measure service and interest costs for our defined benefit pension plans and on December 31, 2015 changed this approach for our other postretirement benefits. Prior to the Closing Date, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Subsequent to the Closing Date for our defined benefit pension plans and beginning in 2016 for our other postretirement benefits, we elected to measure service and interest costs by applying the specific spot rates along the yield curve to the plans’ estimated cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot
rates on the yield curve. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.
Changes in pension costs may occur in the future due to changes in these assumptions resulting from economic events. For example, holding all other assumptions constant, a 100-basis point decrease or increase in the assumed long-term rate of return on plan assets for our domestic qualified defined benefit pension plan would have decreased or increased, respectively, the 20152016 defined benefit pension plan income by approximately $18.7$19.8 million. Holding all other assumptions constant for our domestic qualified defined benefit pension plan, a 50-basis point decrease in the discount rate used to calculate pension income for 20152016 and the projected benefit obligation as of December 31, 20152016 would have decreased pension income by $1.4$0.7 million and increased the projected benefit obligation by $146.0$147.0 million. A 50-basis point increase in the discount rate used to calculate pension income for 20152016 and the projected benefit obligation as of December 31, 20152016 for our domestic qualified defined benefit pension plan would have increased pension income by $1.5$0.8 million and decreased the projected benefit obligation by $133.0 million. For additional information on long-term rates of return, discount rates and projected healthcare costs projections, see “Pension Plans” and “Postretirement Benefits” in the notes to the consolidated financial statements contained in Item 8.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” which amends ASC 350 “Intangibles—Goodwill and Other.” This update will simplify the measurement of goodwill impairment by eliminating Step 2 from the goodwill impairment test. This update will require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carry amount exceeds the reporting unit’s fair value. The update does not modify the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The guidance in this update is applied on a prospective basis with earlier application permitted. We are currently evaluating the effect of this update on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” which amends ASC 230 “Statement of Cash Flows.” This update will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We are currently evaluating the effect of this update on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting,” which amends ASC 718 “Compensation—Stock Compensation.” This update will simplify the income tax consequences, accounting for forfeitures and classification on the statements of cash flows of share-based payment arrangements. This standard is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier application permitted. We will adopt this update in the first quarter of 2017.
In February 2016, the FASB issued ASU 2016-02 “Leases,"” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 "Leases."“Leases.” This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the effect of this update on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes” (ASU 2015-17), which amends ASC 740 “Income Taxes” (ASC 740). This update requires deferred income tax liabilities and assets, and any related valuation allowance, to be classified as noncurrent on the balance sheet. This update simplifies the current guidance requiring the deferred taxes for each jurisdiction to be presented as a net current asset or liability and net noncurrent asset or liability. This update is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The guidance may be applied either prospectively or retrospectively, with earlier application permitted. We adopted the provisions of ASU 2015-17 as ofon December 31, 2015, which was applied prospectively, and, therefore, all prior periods have not been retrospectively adjusted.
In September 2015, the FASB issued ASU 2015-16 “Simplifying the Accounting for Measurement - Measurement—Period Adjustments” (ASU 2015-16), which amends ASC 805 “Business Combinations.” This update requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. We adopted ASU 2015-16 on January 1, 2016. This update is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. This update should be applied prospectively to adjustments of provisional amounts that occur after the effective date with earlier application permitted. The adoption of this standard could impactThis update did not have a material effect on our consolidated financial statements as we finalize the preliminary purchase accounting for the Acquired Business.statements.
In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory,” which amends ASC 330 “Inventory.” This update requires entities to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. This update simplifies the current guidance under which an entity must measure inventory at the lower of cost or market. This update does not impact inventory measured using LIFO. This update is effective for fiscal years beginning after December 15, 2016. ThisWe are currently evaluating the effect of this update will not have a material effect on our consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07 “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (ASU 2015-07) which amends ASC 820 “Fair Value Measurement.” This update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This update is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years and impacts the disclosure requirements surrounding certain assets held by our pension plans. The new guidance will be applied on a retrospective basis. We adopted ASU 2015-07 on January 1, 2016 which was applied retrospectively, and, therefore, all prior periods have been retrospectively adjusted.
In April 2015, the FASB issued ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs” and, in August 2015, the FASB issued ASU 2015-15 “Interest - “Interest—Imputation of Interest,” which both amend ASC 835-30 “Interest - “Interest—Imputation of Interest.” These updates require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability while debt issuance costs related to line-of-credit arrangements will continue to be presented as an asset. These updates are effective for fiscal years beginning afterWe adopted ASU 2015-03 and ASU 2015-15 on January 1, 2016 which required retrospective application. As of December 15, 2015. These updates will require certain reclassifications on31, 2015, debt issuance costs of $31.4 million were reclassified within our consolidated balance sheets.sheet from other assets to long-term debt and $1.5 million were reclassified within our consolidated balance sheet from other assets to current installments of long-term debt.
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers,”Customers” (ASU 2014-09), which amends ASC 605 “Revenue Recognition” and creates a new topic, ASC 606 “Revenue from Contracts with Customers.” This update providesCustomers” (ASC 606). Subsequent to the issuance of ASU 2014-09, ASC 606 was amended by various updates that amend and clarify the impact and implementation of the aforementioned standard. These updates provide guidance on how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Upon initial application, the provisions of this updatethese updates are required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. This updateThese updates also expandsexpand the disclosure requirements surrounding revenue recorded from contracts with customers. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers” (ASU 2015-14), which amends ASC 606. This update defers theThese updates are effective date of ASU 2014-09 for fiscal years, and interim periods within those years, beginning after December 15, 2017. We are currently evaluatingcontinue to evaluate the effect of this updateimpact these updates will have on our consolidated financial statements. Based on the analysis conducted to date, we believe the most significant impact the updates will have will be on our accounting policies and disclosures on revenue recognition. Preliminarily, we do not expect that these updates will materially impact our consolidated financial statements and we have not yet determined the method of initial application we will use.
DERIVATIVE FINANCIAL INSTRUMENTS
ASC 815 “Derivatives and Hedging” (ASC 815) required 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. The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge and, if so, the type of hedge. For derivatives designated as a fair value hedge, the changes in the fair value of both the derivative and the hedged item are recognized in earnings. For derivatives designated as a cash flow hedge, the change in fair value of the derivative is recognized in other comprehensive (loss) income until the hedged item is recognized in earnings. Ineffective portions are recognized currently in earnings. Unrealized gains and losses on derivatives not qualifying for hedge accounting are recognized currently in earnings. All derivatives recognized in earnings impact the expense line item on our consolidated statement of operations that is consistent with the nature of the underlying hedged item.
The company 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 to offset our net exposures, by currency, related to the foreign currency denominated monetary assets and liabilities of our 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. All of the currency derivatives expire within one year and are for USD equivalents. The counterparties to the forward contracts were large financial institutions; however, the risk resulting from purchase and sale commitments denominatedof loss to us in foreign currencies.the event of nonperformance by a counterparty could be significant to our financial position or results of operations. At December 31, 2015, we had outstanding forward contracts to buy foreign currency with a notional value of $21.7 million and to sell foreign currency with a notional value of $10.1 million. All of the currency derivatives expire within one year and are for USD equivalents. The counterparties to the forward contracts were large financial institutions. At December 31, 2014, we had no forward contracts to buy or sell foreign currencies.
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 costs used in our manufacturing process. For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative is recognized as a component of other comprehensive (loss) income until the hedged item is recognized into earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized currently in earnings. Losses on settled futuresderivative contracts were $5.8 million ($3.6 million, net of taxes), $9.7 million ($5.9 million, net of taxes), and $1.8 million ($1.1 million, net of taxes) in 2016, 2015 and $1.4 million ($0.9 million, net of taxes) in 2015, 2014, and 2013, respectively, which were included in cost of goods sold. At December 31, 2015,2016, we had open positions in futures contracts through 2021 totaling $63.6$101.6 million (2014—(2015—$89.363.6 million). If all open futures contracts had been settled on December 31, 2015,2016, we would have recognized a pretax lossgain of $11.4$11.1 million.
At December 31, 2015,2016, accumulated other comprehensive loss included a loss,gain, net of taxes, in fair value on commodity forwardderivative contracts of $6.9$6.8 million. If commodity prices were to remain at the levels they were at December 31, 2015,2016, approximately $5.0$6.2 million of deferred losses,gains, net of tax, would be reclassified into earnings during the next twelve months. The actual effect on earnings will be dependent on commodity prices when the forecasted transactions occur. At December 31, 2014,2015, accumulated other comprehensive loss included a loss, net of taxes, in fair value on commodity forward contracts of $4.2$6.9 million.
We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels. The accounting for gains and losses associated with changes in fair value of the derivative and the effect on the consolidated 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. 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 noAs of December 31, 2016 and 2015, the total notional amounts of our interest rate swaps designated as fair value hedges as of December 31, 2015were $500.0 million and 2014.zero, respectively.
In March 2010, we entered intoWe also use interest rate swaps on $125 millionas a means of minimizing significant unanticipated earnings fluctuations that may arise from volatility in interest rates of our underlying fixed-rate debt obligations, wherebyvariable-rate borrowings. For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative is recognized as a component of other comprehensive (loss) income until the hedged item is recognized into earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized currently in earnings. At December 31, 2016, we agreed to pay variable rates to a counterparty who, in turn, pays us fixed rates. The counterparty to these agreements is Citibank. In October 2011, we entered into $125 million ofhad open interest rate swaps designated as cash flow hedges with equal and oppositemaximum terms as the $125 million variable interest rate swapsthrough 2019. If all open futures contracts had been settled on theDecember 31, 2016, Notes. Wewe would have agreed to payrecognized a fixed rate to a counterparty who, in turn, pays us variable rates. The counterparty to this agreement is also Citibank. The result was apretax gain of $11.0$9.6 million. If interest rates were to remain at December 31, 2016 levels, $1.1 million of deferred gains
would be reclassified into earnings during the next twelve months. The actual effect on the $125 million variable interest rate swaps, whichearnings will be recognized through 2016. As of December 31, 2015, $1.2 million of this gain was included in current installments of long-term debt. In October 2011, we de-designated our $125 milliondependent on actual interest rate swaps that had previously been designated as fair value hedges. The $125 million variable interest rate swaps andrates when the $125 million fixed interest rate swaps do not meet the criteria for hedge accounting. All changes in the fair value of these interest rate swaps are recorded currently in earnings.forecasted transactions occur.
The fair value of our derivative asset and liability balances were:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Other current assets | $ | 1.2 |
| | $ | — |
| $ | 13.5 |
| | $ | 1.2 |
|
| Other assets | — |
| | 3.5 |
| 7.7 |
| | — |
|
| Total derivative asset | $ | 1.2 |
| | $ | 3.5 |
| $ | 21.2 |
| | $ | 1.2 |
|
| Current installments of long-term debt | $ | 1.2 |
| | $ | — |
| $ | 0.1 |
| | $ | 1.2 |
|
| Accrued liabilities | 11.6 |
| | 8.6 |
| 1.2 |
| | 11.6 |
|
| Long-term debt | 0.4 |
| | 4.5 |
| — |
| | 0.4 |
|
| Other liabilities | | 28.5 |
| | — |
|
| Total derivative liability | $ | 13.2 |
| | $ | 13.1 |
| $ | 29.8 |
| | $ | 13.2 |
|
The ineffective portion of changes in fair value resulted in zero charged or credited to earnings for the years ended December 31, 2016, 2015 2014 and 2013.2014.
Our foreign currency forward contracts and certain commodity derivatives and our $125 million fixed and variable interest rate swaps did not meet the criteria to qualify for hedge accounting. The effect on operating results of items not qualifying for hedge accounting was a charge (benefit) of $11.5 million, $2.1 million and $1.4 million in 2016, 2015 and ($0.4 million) in 2015, 2014, and 2013, respectively.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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. As of December 31, 2015,2016, we maintained open positions on futurescommodity contracts with a notional value totaling $63.6$101.6 million ($89.363.6 million at December 31, 2014)2015). Assuming a hypothetical 10% increase in commodity prices, which are currently hedged, as of December 31, 2015,2016, we would experience an $6.4a $10.2 million ($8.96.4 million at December 31, 2014)2015) increase in our cost of inventory purchased, which would be substantially offset by a corresponding increase in the value of related hedging instruments.
We transact business in various foreign currencies other than the USD which exposes us to movements in exchange rates which may impact revenue and expenses, assets and liabilities and cash flows. Our significant foreign currency exposure is denominated with European currencies, primarily the Euro, although exposures also exist in other currencies of Asia Pacific, Latin America, Middle East and Africa. For all derivative positions, we evaluated the effects of a 10% shift in exchange rates between those currencies and the USD, holding all other assumptions constant. Unfavorable currency movements of 10% would negatively affect the fair values of the derivatives held to hedge currency exposures by $3.3$16.1 million. These unfavorable changes would generally have been offset by favorable changes in the values of the underlying exposures.
We are exposed to changes in interest rates primarily as a result of our investing and financing activities. The effect of interest rates on our investing activity is not material to our consolidated financial position, results of operations or cash flows. Our current debt structure is used to fund business operations, and commitments from banks under our senior revolving credit facility are a source of liquidity. As of December 31, 2015,2016, we had long-term borrowings, including current installments and capital lease obligations, of $3,881.7$3,617.6 million ($675.13,848.8 million at December 31, 2014)2015) of which $2,305.9$2,238.4 million ($305.02,305.9 million at December 31, 2014)2015) was issued at variable rates.
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.
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 also 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.
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 December 31, 2015, $0.4 million of this gain was included in long-term debt.
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. 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 2016, Notes. We have agreed to pay a fixed rate to a counterparty who, in turn, pays us variable rates. The counterparty to this agreement 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 December 31, 2015, $1.2$0.1 million of this gain was included in current installments of 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.
Assuming no changes in the $2,305.9$2,238.4 million of variable-rate debt levels from December 31, 2015,2016, we estimate that a hypothetical change of 100-basis points in the LIBOR interest rates from 20152016 would impact annual interest expense by $23.1$22.4 million. A portion of this hypothetical change would be offset by our interest rate swaps.
The following table reflects the swap activity related to certain debt obligations:
|
| | | | | | | | | |
| Underlying Debt Instrument | | Swap Amount | | Date of Swap | | December 31, 2015 |
| | | ($ in millions) | | | | Olin Pays Floating Rate: |
| 6.75%, due 2016 | | $ | 65.0 |
| | March 2010 | | 3.75 - 4.75% | (a) |
| 6.75%, due 2016 | | $ | 60.0 |
| | March 2010 | | 3.75 - 4.75% | (a) |
| | | | | | | Olin Receives Floating Rate: |
| 6.75%, due 2016 | | $ | 65.0 |
| | October 2011 | | 3.75 - 4.75% | (a) |
| 6.75%, due 2016 | | $ | 60.0 |
| | October 2011 | | 3.75 - 4.75% | (a) |
| |
(a) | Actual rate is set in arrears. We project the rate will fall within the range shown. |
TheseOur interest rate swaps reduced interest expense by $3.7 million, $2.8 million in 2015 and $2.9 million in both2016, 2015 and 2014, and 2013.respectively.
If the actual changes in commodities, foreign currency, or interest pricing is substantially different than expected, the net impact of commodity risk, foreign currency risk, or interest rate risk on our cash flow may be materially different than that disclosed above.
We do not enter into any derivative financial instruments for speculative purposes.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS:
This report includes forward-looking statements. These statements relate to analyses and other information that are based on management’s beliefs, certain assumptions made by management, forecasts of future results and current expectations, estimates and projections about the markets and economy in which we and our various segments operate. The statements contained in this report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties.
We have used the words “anticipate,” “intend,” “may,” “expect,” “believe,” “should,” “plan,” “estimate,” “project,” “forecast,” “optimistic” and variations of such words and similar expressions in this report to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.
The risks, uncertainties, and assumptions involved in our forward-looking statements include those discussed under Item 1A—“Risk Factors.” You should consider all of our forward-looking statements in light of these factors. In addition, other risks and uncertainties not presently known to us or that we consider immaterial could affect the accuracy of our forward-looking statements.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Olin Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Olin’s internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect all misstatements.
During the year ended December 31, 2015, we completed a series of transactions consummated on October 5, 2015 which resulted in 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). In accordance with the SEC’s published guidance, management’s assessment of the effectiveness of internal control over financial reporting did not include consideration of the internal controls of the Acquired Business. The Acquired Business’s financial results are included in Olin’s consolidated financial statements and constituted total assets of $6,360.3 million as of December 31, 2015 and $802.6 million of sales for the year then ended.
The management of Olin Corporation has assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2015.2016. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013) to guide our analysis and assessment. Based on our assessment as of December 31, 2015,2016, the company’s internal control over financial reporting was effective based on those criteria.
Our independent registered public accountants, KPMG LLP, have audited and issued a report on our internal control over financial reporting, which appears in this Form 10-K.
/s/ Joseph D. RuppJohn E. Fischer
ChairmanPresident and Chief Executive Officer
/s/ Todd A. Slater
Vice President and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Olin Corporation:
We have audited the accompanying consolidated balance sheets of Olin Corporation and subsidiaries as of December 31, 20152016 and 2014,2015, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015.2016. We also have audited Olin Corporation’s internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Olin Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on Olin Corporation’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Olin Corporation and subsidiaries as of December 31, 20152016 and 2014,2015, and the results of itstheir operations and itstheir cash flows for each of the years in the three-year period ended December 31, 2015,2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Olin Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Olin Corporation acquired the U.S. Chlor Alkali and Vinyl, Global Chlorinated Organics, and Global Epoxy businesses from The Dow Chemical Company (collectively, the Acquired Business) during 2015, and management excluded from its assessment of the effectiveness of Olin Corporation’s internal control over financial reporting as of December 31, 2015, the Acquired Business’ internal control over financial reporting associated with total assets of $6,360.3 million and total sales of $802.6 million included in the consolidated financial statements of Olin Corporation as of and for the year ended December 31, 2015. Our audit of internal control over financial reporting of Olin Corporation also excluded an evaluation of the internal control over financial reporting of the Acquired Business.
/s/ KPMG LLP
St. Louis, Missouri
February 29, 201627, 2017
CONSOLIDATED BALANCE SHEETS
December 31
(In millions, except per share data)
| | | Assets | 2015 | | 2014 | 2016 | | 2015 |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 392.0 |
| | $ | 256.8 |
| $ | 184.5 |
| | $ | 392.0 |
|
| Receivables, net | 783.4 |
| | 263.1 |
| 675.0 |
| | 783.4 |
|
| Income taxes receivable | 32.9 |
| | 21.6 |
| 25.5 |
| | 32.9 |
|
| Inventories | 685.2 |
| | 210.1 |
| 630.4 |
| | 685.2 |
|
| Current deferred income taxes | — |
| | 54.2 |
| |
| Other current assets | 39.9 |
| | 10.3 |
| 30.8 |
| | 39.9 |
|
| Total current assets | 1,933.4 |
| | 816.1 |
| 1,546.2 |
| | 1,933.4 |
|
| Property, plant and equipment, net | 3,953.4 |
| | 931.0 |
| 3,704.9 |
| | 3,953.4 |
|
| Deferred income taxes | 95.9 |
| | 12.5 |
| 119.5 |
| | 95.9 |
|
| Other assets | 487.5 |
| | 67.9 |
| 644.4 |
| | 454.6 |
|
| Intangible assets, net | 677.5 |
| | 123.5 |
| 629.6 |
| | 677.5 |
|
| Goodwill | 2,174.1 |
| | 747.1 |
| 2,118.0 |
| | 2,174.1 |
|
| Total assets | $ | 9,321.8 |
| | $ | 2,698.1 |
| $ | 8,762.6 |
| | $ | 9,288.9 |
|
| Liabilities and Shareholders’ Equity | | | | | | |
| Current liabilities: | | | | | | |
| Current installments of long-term debt | $ | 206.5 |
| | $ | 16.4 |
| $ | 80.5 |
| | $ | 205.0 |
|
| Accounts payable | 608.2 |
| | 146.8 |
| 570.8 |
| | 608.2 |
|
| Income taxes payable | 4.9 |
| | 0.2 |
| 7.5 |
| | 4.9 |
|
| Accrued liabilities | 328.1 |
| | 214.3 |
| 263.8 |
| | 328.1 |
|
| Total current liabilities | 1,147.7 |
| | 377.7 |
| 922.6 |
| | 1,146.2 |
|
| Long-term debt | 3,675.2 |
| | 658.7 |
| 3,537.1 |
| | 3,643.8 |
|
| Accrued pension liability | 648.9 |
| | 182.0 |
| 638.1 |
| | 648.9 |
|
| Deferred income taxes | 1,095.2 |
| | 107.1 |
| 1,032.5 |
| | 1,095.2 |
|
| Other liabilities | 336.0 |
| | 359.3 |
| 359.3 |
| | 336.0 |
|
| Total liabilities | 6,903.0 |
| | 1,684.8 |
| 6,489.6 |
| | 6,870.1 |
|
| Commitments and contingencies | | | | | | |
| Shareholders’ equity: | | | | | | |
| Common stock, par value $1 per share: | | | | | | |
| Authorized, 240.0 shares (120.0 in 2014); | | | | |
| Issued and outstanding, 165.1 shares (77.4 in 2014) | 165.1 |
| | 77.4 |
| |
| Authorized, 240.0 shares; | | | | |
| Issued and outstanding, 165.4 shares (165.1 in 2015) | | 165.4 |
| | 165.1 |
|
| Additional paid-in capital | 2,236.4 |
| | 788.3 |
| 2,243.8 |
| | 2,236.4 |
|
| Accumulated other comprehensive loss | (492.5 | ) | | (443.1 | ) | (510.0 | ) | | (492.5 | ) |
| Retained earnings | 509.8 |
| | 590.7 |
| 373.8 |
| | 509.8 |
|
| Total shareholders’ equity | 2,418.8 |
| | 1,013.3 |
| 2,273.0 |
| | 2,418.8 |
|
| Total liabilities and shareholders’ equity | $ | 9,321.8 |
| | $ | 2,698.1 |
| $ | 8,762.6 |
| | $ | 9,288.9 |
|
The accompanying notes to consolidated financial statements are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31
(In millions, except per share data)
| | | | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Sales | $ | 2,854.4 |
| | $ | 2,241.2 |
| | $ | 2,515.0 |
| $ | 5,550.6 |
| | $ | 2,854.4 |
| | $ | 2,241.2 |
|
| Operating expenses: | | | | | | | | | | |
| Cost of goods sold | 2,486.8 |
| | 1,853.2 |
| | 2,033.7 |
| 4,923.7 |
| | 2,486.8 |
| | 1,853.2 |
|
| Selling and administration | 186.5 |
| | 166.2 |
| | 190.0 |
| 323.2 |
| | 186.3 |
| | 166.1 |
|
| Restructuring charges | 2.7 |
| | 15.7 |
| | 5.5 |
| 112.9 |
| | 2.7 |
| | 15.7 |
|
| Acquisition-related costs | 123.4 |
| | 4.2 |
| | — |
| 48.8 |
| | 123.4 |
| | 4.2 |
|
| Other operating income | 45.7 |
| | 1.5 |
| | 0.7 |
| 10.6 |
| | 45.7 |
| | 1.5 |
|
| Operating income | 100.7 |
| | 203.4 |
| | 286.5 |
| 152.6 |
| | 100.9 |
| | 203.5 |
|
| Earnings of non-consolidated affiliates | 1.7 |
| | 1.7 |
| | 2.8 |
| 1.7 |
| | 1.7 |
| | 1.7 |
|
| Interest expense | 97.0 |
| | 43.8 |
| | 38.6 |
| 191.9 |
| | 97.0 |
| | 43.8 |
|
| Interest income | 1.1 |
| | 1.3 |
| | 0.6 |
| 3.4 |
| | 1.1 |
| | 1.3 |
|
| Other income (expense) | 0.2 |
| | 0.1 |
| | (1.3 | ) | |
| Income from continuing operations before taxes | 6.7 |
| | 162.7 |
| | 250.0 |
| |
| Income tax provision | 8.1 |
| | 57.7 |
| | 71.4 |
| |
| Income (loss) from continuing operations before taxes | | (34.2 | ) | | 6.7 |
| | 162.7 |
|
| Income tax (benefit) provision | | (30.3 | ) | | 8.1 |
| | 57.7 |
|
| Income (loss) from continuing operations | (1.4 | ) | | 105.0 |
| | 178.6 |
| (3.9 | ) | | (1.4 | ) | | 105.0 |
|
| Income from discontinued operations, net | — |
| | 0.7 |
| | — |
| — |
| | — |
| | 0.7 |
|
| Net (loss) income | $ | (1.4 | ) | | $ | 105.7 |
| | $ | 178.6 |
| $ | (3.9 | ) | | $ | (1.4 | ) | | $ | 105.7 |
|
| Net (loss) income per common share: | | | | | | | | | | |
| Basic (loss) income per common share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.24 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.33 |
|
| Income from discontinued operations, net | — |
| | 0.01 |
| | — |
| — |
| | — |
| | 0.01 |
|
| Net (loss) income | $ | (0.01 | ) | | $ | 1.34 |
| | $ | 2.24 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.34 |
|
| Diluted (loss) income per common share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (0.01 | ) | | $ | 1.32 |
| | $ | 2.21 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.32 |
|
| Income from discontinued operations, net | — |
| | 0.01 |
| | — |
| — |
| | — |
| | 0.01 |
|
| Net (loss) income | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.21 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.33 |
|
| Average common shares outstanding: | | | | | | | | | | |
| Basic | 103.4 |
| | 78.6 |
| | 79.9 |
| 165.2 |
| | 103.4 |
| | 78.6 |
|
| Diluted | 103.4 |
| | 79.7 |
| | 80.9 |
| 165.2 |
| | 103.4 |
| | 79.7 |
|
The accompanying notes to consolidated financial statements are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31
(In millions)
| | | | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Net (loss) income | $ | (1.4 | ) | | $ | 105.7 |
| | $ | 178.6 |
| $ | (3.9 | ) | | $ | (1.4 | ) | | $ | 105.7 |
|
| Other comprehensive (loss) income, net of tax: | | | | | | |
| Other comprehensive loss, net of tax: | | | | | | |
| Foreign currency translation adjustments, net | (9.8 | ) | | (1.8 | ) | | (2.6 | ) | (12.0 | ) | | (9.8 | ) | | (1.8 | ) |
| Unrealized losses on derivative contracts, net | (2.7 | ) | | (5.1 | ) | | (3.8 | ) | |
| Unrealized gains (losses) on derivative contracts, net | | 19.7 |
| | (2.7 | ) | | (5.1 | ) |
| Pension and postretirement liability adjustments, net | (78.8 | ) | | (86.6 | ) | | (7.7 | ) | (37.5 | ) | | (78.8 | ) | | (86.6 | ) |
| Amortization of prior service costs and actuarial losses, net | 41.9 |
| | 15.5 |
| | 20.3 |
| 12.3 |
| | 41.9 |
| | 15.5 |
|
| Total other comprehensive (loss) income, net of tax | (49.4 | ) | | (78.0 | ) | | 6.2 |
| |
| Total other comprehensive loss, net of tax | | (17.5 | ) | | (49.4 | ) | | (78.0 | ) |
| Comprehensive (loss) income | $ | (50.8 | ) | | $ | 27.7 |
| | $ | 184.8 |
| $ | (21.4 | ) | | $ | (50.8 | ) | | $ | 27.7 |
|
The accompanying notes to consolidated financial statements are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In millions, except per share data) | CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In millions, except per share data) | CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In millions, except per share data) |
| | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Shareholders’ Equity | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Shareholders’ Equity |
Shares Issued | | Par Value | | Shares Issued | | Par Value | |
| Balance at January 1, 2013 | 80.2 |
| | $ | 80.2 |
| | $ | 856.1 |
| | $ | (371.3 | ) | | $ | 433.4 |
| | $ | 998.4 |
| |
| Net income | — |
| | — |
| | — |
| | — |
| | 178.6 |
| | 178.6 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | 6.2 |
| | — |
| | 6.2 |
| |
| Dividends paid: | | | | | | | | | | | | |
| Common stock ($0.80 per share) | — |
| | — |
| | — |
| | — |
| | (64.0 | ) | | (64.0 | ) | |
| Common stock repurchased and retired | (1.5 | ) | | (1.5 | ) | | (34.7 | ) | | — |
| | — |
| | (36.2 | ) | |
| Common stock issued for: | | | | | | | | | | | | |
| Stock options exercised | 0.5 |
| | 0.5 |
| | 9.2 |
| | — |
| | — |
| | 9.7 |
| |
| Other transactions | 0.2 |
| | 0.2 |
| | 3.0 |
| | — |
| | — |
| | 3.2 |
| |
| Stock-based compensation | — |
| | — |
| | 5.2 |
| | — |
| | — |
| | 5.2 |
| |
| Balance at December 31, 2013 | 79.4 |
| | 79.4 |
| | 838.8 |
| | (365.1 | ) | | 548.0 |
| | 1,101.1 |
| |
| Balance at January 1, 2014 | | 79.4 |
| | $ | 79.4 |
| | $ | 838.8 |
| | $ | (365.1 | ) | | $ | 548.0 |
| | $ | 1,101.1 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 105.7 |
| | 105.7 |
| — |
| | — |
| | — |
| | — |
| | 105.7 |
| | 105.7 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | (78.0 | ) | | — |
| | (78.0 | ) | — |
| | — |
| | — |
| | (78.0 | ) | | — |
| | (78.0 | ) |
| Dividends paid: | | | | | | | | | | | | | | | | | | | | | | |
| Common stock ($0.80 per share) | — |
| | — |
| | — |
| | — |
| | (63.0 | ) | | (63.0 | ) | — |
| | — |
| | — |
| | — |
| | (63.0 | ) | | (63.0 | ) |
| Common stock repurchased and retired | (2.5 | ) | | (2.5 | ) | | (62.3 | ) | | — |
| | — |
| | (64.8 | ) | (2.5 | ) | | (2.5 | ) | | (62.3 | ) | | — |
| | — |
| | (64.8 | ) |
| Common stock issued for: | | | | | | | | | | | | | | | | | | | | | | |
| Stock options exercised | 0.5 |
| | 0.5 |
| | 11.6 |
| | — |
| | — |
| | 12.1 |
| 0.5 |
| | 0.5 |
| | 11.6 |
| | — |
| | — |
| | 12.1 |
|
| Other transactions | — |
| | — |
| | (1.4 | ) | | — |
| | — |
| | (1.4 | ) | — |
| | — |
| | (1.4 | ) | | — |
| | — |
| | (1.4 | ) |
| Stock-based compensation | — |
| | — |
| | 1.6 |
| | — |
| | — |
| | 1.6 |
| — |
| | — |
| | 1.6 |
| | — |
| | — |
| | 1.6 |
|
| Balance at December 31, 2014 | 77.4 |
| | 77.4 |
| | 788.3 |
| | (443.1 | ) | | 590.7 |
| | 1,013.3 |
| 77.4 |
| | 77.4 |
| | 788.3 |
| | (443.1 | ) | | 590.7 |
| | 1,013.3 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (1.4 | ) | | (1.4 | ) | — |
| | — |
| | — |
| | — |
| | (1.4 | ) | | (1.4 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | (49.4 | ) | | — |
| | (49.4 | ) | — |
| | — |
| | — |
| | (49.4 | ) | | — |
| | (49.4 | ) |
| Dividends paid: | | | | | | | | | | | | | | | | | | | | | | |
| Common stock ($0.80 per share) | — |
| | — |
| | — |
| | — |
| | (79.5 | ) | | (79.5 | ) | — |
| | — |
| | — |
| | — |
| | (79.5 | ) | | (79.5 | ) |
| Common stock issued for: | | | | | | | | | | | | | | | | | | | | | | |
| Stock options exercised | 0.1 |
| | 0.1 |
| | 3.0 |
| | — |
| | — |
| | 3.1 |
| 0.1 |
| | 0.1 |
| | 3.0 |
| | — |
| | — |
| | 3.1 |
|
| Other transactions | 0.1 |
| | 0.1 |
| | 2.2 |
| | — |
| | — |
| | 2.3 |
| 0.1 |
| | 0.1 |
| | 2.2 |
| | — |
| | — |
| | 2.3 |
|
| Business acquired in purchase transaction, net of issuance costs | 87.5 |
| | 87.5 |
| | 1,438.0 |
| | — |
| | — |
| | 1,525.5 |
| 87.5 |
| | 87.5 |
| | 1,438.0 |
| | — |
| | — |
| | 1,525.5 |
|
| Stock-based compensation | — |
| | — |
| | 4.9 |
| | — |
| | — |
| | 4.9 |
| — |
| | — |
| | 4.9 |
| | — |
| | — |
| | 4.9 |
|
| Balance at December 31, 2015 | 165.1 |
| | $ | 165.1 |
| | $ | 2,236.4 |
| | $ | (492.5 | ) | | $ | 509.8 |
| | $ | 2,418.8 |
| 165.1 |
| | 165.1 |
| | 2,236.4 |
| | (492.5 | ) | | 509.8 |
| | 2,418.8 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | (3.9 | ) | | (3.9 | ) |
| Other comprehensive loss | | — |
| | — |
| | — |
| | (17.5 | ) | | — |
| | (17.5 | ) |
| Dividends paid: | | | | | | | | | | | | |
| Common stock ($0.80 per share) | | — |
| | — |
| | — |
| | — |
| | (132.1 | ) | | (132.1 | ) |
| Common stock issued for: | | | | | | | | | | | | |
| Stock options exercised | | 0.3 |
| | 0.3 |
| | 3.8 |
| | — |
| | — |
| | 4.1 |
|
| Other transactions | | — |
| | — |
| | (0.8 | ) | | — |
| | — |
| | (0.8 | ) |
| Stock-based compensation | | — |
| | — |
| | 4.4 |
| | — |
| | — |
| | 4.4 |
|
| Balance at December 31, 2016 | | 165.4 |
| | $ | 165.4 |
| | $ | 2,243.8 |
| | $ | (510.0 | ) | | $ | 373.8 |
| | $ | 2,273.0 |
|
The accompanying notes to consolidated financial statements are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 (In millions) | CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 (In millions) | CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 (In millions) |
| | | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Operating Activities | | | | | | | | | | |
| Net (loss) income | $ | (1.4 | ) | | $ | 105.7 |
| | $ | 178.6 |
| $ | (3.9 | ) | | $ | (1.4 | ) | | $ | 105.7 |
|
| Adjustments to reconcile net (loss) income to net cash and cash equivalents provided by (used for) operating activities: | | | | | | | | | | |
| Earnings of non-consolidated affiliates | (1.7 | ) | | (1.7 | ) | | (2.8 | ) | (1.7 | ) | | (1.7 | ) | | (1.7 | ) |
| Gain on disposition of non-consolidated affiliate | — |
| | — |
| | (6.5 | ) | |
| Gains on disposition of property, plant and equipment | (25.2 | ) | | (1.1 | ) | | (0.4 | ) | |
| Losses (gains) on disposition of property, plant and equipment | | 0.7 |
| | (25.2 | ) | | (1.1 | ) |
| Stock-based compensation | 7.6 |
| | 5.1 |
| | 8.8 |
| 7.5 |
| | 7.6 |
| | 5.1 |
|
| Depreciation and amortization | 228.9 |
| | 139.1 |
| | 135.3 |
| 533.5 |
| | 228.9 |
| | 139.1 |
|
| Deferred income taxes | 5.6 |
| | 31.0 |
| | 12.4 |
| (32.7 | ) | | 5.6 |
| | 31.0 |
|
| Write-off of equipment and facility included in restructuring charges | 0.5 |
| | 3.3 |
| | — |
| 76.6 |
| | 0.5 |
| | 3.3 |
|
| Qualified pension plan contributions | (0.9 | ) | | (0.8 | ) | | (1.0 | ) | (7.3 | ) | | (0.9 | ) | | (0.8 | ) |
| Qualified pension plan income | (32.0 | ) | | (28.5 | ) | | (24.1 | ) | (37.5 | ) | | (32.0 | ) | | (28.5 | ) |
| Change in assets and liabilities: | | | | | | | | | | |
| Receivables | (115.1 | ) | | 25.8 |
| | 18.9 |
| 38.5 |
| | (115.1 | ) | | 25.8 |
|
| Income taxes receivable/payable | (12.6 | ) | | (27.8 | ) | | 0.4 |
| 10.7 |
| | (12.6 | ) | | (27.8 | ) |
| Inventories | (1.7 | ) | | (23.6 | ) | | 8.6 |
| 23.9 |
| | (1.7 | ) | | (23.6 | ) |
| Other current assets | (30.6 | ) | | 1.7 |
| | 0.7 |
| 20.9 |
| | (30.6 | ) | | 1.7 |
|
| Accounts payable and accrued liabilities | 185.1 |
| | (38.5 | ) | | 1.0 |
| (13.1 | ) | | 185.1 |
| | (38.5 | ) |
| Other assets | 37.6 |
| | 5.2 |
| | 1.3 |
| (4.3 | ) | | 37.6 |
| | 5.2 |
|
| Other noncurrent liabilities | (32.5 | ) | | (33.2 | ) | | (14.5 | ) | (12.1 | ) | | (32.5 | ) | | (33.2 | ) |
| Other operating activities | 5.5 |
| | (2.5 | ) | | 0.3 |
| 3.5 |
| | 5.5 |
| | (2.5 | ) |
| Net operating activities | 217.1 |
| | 159.2 |
| | 317.0 |
| 603.2 |
| | 217.1 |
| | 159.2 |
|
| Investing Activities | | | | | | | | | | |
| Capital expenditures | (130.9 | ) | | (71.8 | ) | | (90.8 | ) | (278.0 | ) | | (130.9 | ) | | (71.8 | ) |
| Business acquired and related transactions, net of cash acquired | (408.1 | ) | | — |
| | — |
| (69.5 | ) | | (408.1 | ) | | — |
|
| Payments under long-term supply contract | | (175.7 | ) | | — |
| | — |
|
| Proceeds from sale/leaseback of equipment | — |
| | — |
| | 35.8 |
| 40.4 |
| | — |
| | — |
|
| Proceeds from disposition of property, plant and equipment | 26.2 |
| | 5.6 |
| | 4.6 |
| 0.5 |
| | 26.2 |
| | 5.6 |
|
| Distributions from affiliated companies, net | 8.8 |
| | — |
| | 1.5 |
| |
| Proceeds from disposition of investments in non-consolidated equity affiliate | | 8.8 |
| | 8.8 |
| | — |
|
| Restricted cash activity, net | — |
| | 4.2 |
| | 7.7 |
| — |
| | — |
| | 4.2 |
|
| Other investing activities | — |
| | 0.3 |
| | (2.6 | ) | — |
| | — |
| | 0.3 |
|
| Net investing activities | (504.0 | ) | | (61.7 | ) | | (43.8 | ) | (473.5 | ) | | (504.0 | ) | | (61.7 | ) |
| Financing Activities | | | | | | | | | | |
| Long-term debt: | | | | | | | | | | |
| Borrowings | 1,275.0 |
| | 150.0 |
| | — |
| 230.0 |
| | 1,275.0 |
| | 150.0 |
|
| Repayments | (730.7 | ) | | (162.4 | ) | | (23.7 | ) | (435.3 | ) | | (730.7 | ) | | (162.4 | ) |
| Earn out payment - SunBelt | — |
| | (14.8 | ) | | (17.1 | ) | — |
| | — |
| | (14.8 | ) |
| Common stock repurchased and retired | — |
| | (64.8 | ) | | (36.2 | ) | — |
| | — |
| | (64.8 | ) |
| Stock options exercised | 2.2 |
| | 6.6 |
| | 8.8 |
| 0.5 |
| | 2.2 |
| | 6.6 |
|
| Excess tax benefits from stock-based compensation | 0.4 |
| | 1.1 |
| | 1.6 |
| 0.4 |
| | 0.4 |
| | 1.1 |
|
| Dividends paid | (79.5 | ) | | (63.0 | ) | | (64.0 | ) | (132.1 | ) | | (79.5 | ) | | (63.0 | ) |
| Debt and equity issuance costs | (45.2 | ) | | (1.2 | ) | | — |
| (1.0 | ) | | (45.2 | ) | | (1.2 | ) |
| Net financing activities | 422.2 |
| | (148.5 | ) | | (130.6 | ) | (337.5 | ) | | 422.2 |
| | (148.5 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (0.1 | ) | | — |
| | — |
| 0.3 |
| | (0.1 | ) | | — |
|
| Net increase (decrease) in cash and cash equivalents | 135.2 |
| | (51.0 | ) | | 142.6 |
| |
| Net (decrease) increase in cash and cash equivalents | | (207.5 | ) | | 135.2 |
| | (51.0 | ) |
| Cash and cash equivalents, beginning of year | 256.8 |
| | 307.8 |
| | 165.2 |
| 392.0 |
| | 256.8 |
| | 307.8 |
|
| Cash and cash equivalents, end of year | $ | 392.0 |
| | $ | 256.8 |
| | $ | 307.8 |
| $ | 184.5 |
| | $ | 392.0 |
| | $ | 256.8 |
|
| Cash paid for interest and income taxes: | | | | | | | | | | |
| Interest | $ | 32.3 |
| | $ | 36.8 |
| | $ | 37.2 |
| $ | 200.8 |
| | $ | 32.3 |
| | $ | 36.8 |
|
| Income taxes, net of refunds | $ | 5.3 |
| | $ | 49.0 |
| | $ | 61.3 |
| $ | (2.6 | ) | | $ | 5.3 |
| | $ | 49.0 |
|
The accompanying notes to consolidated financial statements are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS
Olin Corporation (Olin) is a Virginia corporation, incorporated in 1892, having its principal executive offices in Clayton, MO. On October 5, 2015 (the Closing Date), we acquired from The Dow Chemical Company (TDCC) 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 segment reporting purposes, a portion of the Acquired Business’s operating results comprise the newly created Epoxy segment with the remaining operating results combined with Olin’s Chlor Alkali Products and Chemical Distribution segments to comprise the newly created Chlor Alkali Products and Vinyls segment.
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 products includeproduces and sells sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges. See our discussion of our segment disclosures contained in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
On October 5, 2015 (the Closing Date), we acquired from The Dow Chemical Company (TDCC) 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 segment reporting purposes, a portion of the Acquired Business’s operating results comprise the Epoxy segment with the remaining operating results combined with Olin’s Chlor Alkali Products and Chemical Distribution segments to comprise the Chlor Alkali Products and Vinyls segment.
ACCOUNTING POLICIES
The preparation of the consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from those estimates.
Basis of Presentation
The consolidated financial statements include the accounts of Olin Corporation and all majority-owned subsidiaries. Investment in our affiliates are accounted for on the equity method. Accordingly, we include only our share of earnings or losses of these affiliates in consolidated net (loss) income. Certain reclassifications were made to prior year amounts to conform to the 20152016 presentation.
Revenue Recognition
Revenues are recognized on sales of product at the time the goods are shipped and the risks of ownership have passed to the customer. Shipping and handling fees billed to customers are included in sales. Allowances for estimated returns, discounts and rebates are recognized when sales are recorded and are based on various market data, historical trends and information from customers. Actual returns, discounts and rebates have not been materially different from estimates.
Cost of Goods Sold and Selling and Administration Expenses
Cost of goods sold includes the costs of inventory sold, related purchasing, distribution and warehousing costs, costs incurred for shipping and handling, depreciation and amortization expense related to these activities and environmental remediation costs and recoveries. Selling and administration expenses include personnel costs associated with sales, marketing and administration, research and development, legal and legal-related costs, consulting and professional services fees, advertising expenses, depreciation expense related to these activities, foreign currency translation and other similar costs.
Acquisition-related Costs
Acquisition-related costs include advisory, legal, accounting and other professional fees incurred in connection with the purchase and integration of our acquisitions. Acquisition-related costs also may include costs which arise as a result of acquisitions, including contractual change in control provisions, contract termination costs, compensation payments related to the acquisition or pension and other postretirement benefit plan settlements. Acquisition-related costs for the years ended December 31, 2016, 2015 and 2014 of $48.8 million, $123.4 million and $4.2 million, respectively, were associated with the Acquisition.
Other Operating Income
Other operating income consists of miscellaneous operating income items, which are related to our business activities, and gains (losses) gains on disposition of property, plant and equipment.
Included in other operating income were the following:
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| | ($ in millions) | ($ in millions) |
| (Losses) gains on disposition of property, plant and equipment, net | $ | (0.6 | ) | | $ | 0.2 |
| | $ | (1.1 | ) | |
| Gains on dispositions of former manufacturing facilities | — |
| | — |
| | 1.5 |
| |
| Gains (losses) on disposition of property, plant and equipment, net | | $ | (0.7 | ) | | $ | (0.6 | ) | | $ | 0.2 |
|
| Gains on insurance recoveries | 46.0 |
| | — |
| | — |
| 11.0 |
| | 46.0 |
| | — |
|
| Gain on resolution of a contract matter | — |
| | 1.0 |
| | — |
| — |
| | — |
| | 1.0 |
|
| Other | 0.3 |
| | 0.3 |
| | 0.3 |
| 0.3 |
| | 0.3 |
| | 0.3 |
|
| Other operating income | $ | 45.7 |
| | $ | 1.5 |
| | $ | 0.7 |
| $ | 10.6 |
| | $ | 45.7 |
| | $ | 1.5 |
|
The gains on insurance recoveries in 2016 included insurance recoveries for property damage and business interruption related to a 2008 Henderson, NV chlor alkali facility incident. The gains on insurance recoveries in 2015 included insurance recoveries for property damage and business interruption of $42.3 million related to the portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014 and $3.7 million related to the McIntosh, AL chlor alkali facility.
Other Income (Expense)
Other income (expense) consists of non-operating income items which are not related to our primary business activities. Other income (expense) in 2013 included $7.9 million of expense for our earn out liability from the acquisition of the remaining 50% of the SunBelt Chlor Alkali Partnership, which we refer to as SunBelt. Other income (expense) in 2013 also included a gain of $6.5 million on the sale of our equity interest in a bleach joint venture.
Foreign Currency Translation
Our worldwide operations utilize the U.S. dollar (USD) or local currency as the functional currency, where applicable. For foreign entities where the USD is the functional currency, gains and losses resulting from balance sheet translations are included in selling and administration. For foreign entities where the local currency is the functional currency, assets and liabilities denominated in local currencies are translated into USD at end-of-period exchange rates and the resultant translation adjustments are included in accumulated other comprehensive loss. Assets and liabilities denominated in other than the local currency are remeasured into the local currency prior to translation into USD and the resultant exchange gains or losses are included in income in the period in which they occur. Income and expenses are translated into USD using an approximation of the average rate prevailing during the period. We change the functional currency of our separate and distinct foreign entities only when significant changes in economic facts and circumstances indicate clearly that the functional currency has changed.
Cash and Cash Equivalents
All highly liquid investments, with a maturity of three months or less at the date of purchase, are considered to be cash equivalents.
Short-Term Investments
We classify our marketable securities as available-for-sale, which are reported at fair market value with unrealized gains and losses included in accumulated other comprehensive loss, net of applicable taxes. The fair value of marketable securities is determined by quoted market prices. Realized gains and losses on sales of investments, as determined on the specific identification method, and declines in value of securities judged to be other-than-temporary are included in other income (expense) in the consolidated statements of operations. Interest and dividends on all securities are included in interest income and other income (expense), respectively. As of December 31, 2016 and 2015, we had no short-term investments recorded on our consolidated balance sheets.
Allowance for Doubtful Accounts Receivable
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.
Inventories
Inventories are valued at the lower of cost or market. 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 include raw materials, direct labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. Interest costs incurred to finance expenditures for major long-term construction projects are capitalized as part of the historical cost and included in property, plant and equipment and are depreciated over the useful lives of the related assets. Leasehold improvements are amortized over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Start-up costs are expensed as incurred. Expenditures for maintenance and repairs are charged to expense when incurred while the costs of significant improvements, which extend the useful life of the underlying asset, are capitalized.
Property, plant and equipment are reviewed for impairment when conditions indicate that the carrying values of the assets may not be recoverable. Such impairment conditions include an extended period of idleness or a plan of disposal. If such impairment indicators are present or other factors exist that indicate that the carrying amount of an asset may not be recoverable, we determine whether impairment has occurred through the use of an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. For our Chlor Alkali Products and Vinyls, Epoxy and Winchester segments, the lowest level for which identifiable cash flows exist is the operating facility level or an appropriate grouping of operating facilities level. The amount of impairment loss, if any, is measured by the difference between the net book value of the assets and the estimated fair value of the related assets.
Restricted Cash
Restricted cash, which is restricted as to withdrawal or usage, is classified on our consolidated balance sheet as a noncurrent asset separately from cash and cash equivalents.
Asset Retirement Obligations
We record the fair value of an asset retirement obligation associated with the retirement of a tangible long-lived asset as a liability in the period incurred. The liability is measured at discounted fair value and is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life. Asset retirement obligations are reviewed annually in the fourth quarter and/or when circumstances or other events indicate that changes underlying retirement assumptions may have occurred.
The activity of our asset retirement obligation was as follows:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Beginning balance | $ | 54.4 |
| | $ | 60.8 |
| $ | 53.5 |
| | $ | 54.4 |
|
| Accretion | 3.6 |
| | 3.5 |
| 3.1 |
| | 3.6 |
|
| Spending | (8.2 | ) | | (11.2 | ) | (8.8 | ) | | (8.2 | ) |
| Currency translation adjustments | (1.1 | ) | | (0.7 | ) | 0.2 |
| | (1.1 | ) |
| Acquisition activity | 1.7 |
| | — |
| — |
| | 1.7 |
|
| Adjustments | 3.1 |
| | 2.0 |
| 7.4 |
| | 3.1 |
|
| Ending balance | $ | 53.5 |
| | $ | 54.4 |
| $ | 55.4 |
| | $ | 53.5 |
|
At December 31, 20152016 and 2014,2015, our consolidated balance sheets included an asset retirement obligation of $46.2$42.8 million and $44.2$46.2 million, respectively, which were classified as other noncurrent liabilities.
In 2015,2016, we had net adjustments that increased the asset retirement obligation by $3.1$7.4 million, which were primarily comprised of increases in estimated costs for certain assets. In 2014,2015, we had net adjustments that increased the asset retirement obligation by $2.0$3.1 million, which were primarily due to changes in the estimated timing of payments for certain assets.
Comprehensive Income (Loss)
Accumulated other comprehensive loss consists of foreign currency translation adjustments, pension and postretirement liability adjustments, pension and postretirement amortization of prior service costs and actuarial losses and net unrealized (losses) gains on derivative contracts.
Goodwill and Intangible Assets
Goodwill is not amortized, but is reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred. On January 1, 2012, we adopted Accounting Standards Update (ASU) 2011-08 “Testing Codification (ASC) 350 “Intangibles—Goodwill for Impairment” (ASU 2011-08) whichand Other” permits entities to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Circumstances that are considered as part of the qualitative assessment and could trigger the two-step impairment test include, but are not limited to: a significant adverse change in the business climate; a significant adverse legal judgment; adverse cash flow trends; an adverse action or assessment by a government agency; unanticipated competition; decline in our stock price; and a significant restructuring charge within a reporting unit. We define reporting units at the business segment level or one level below the business segment level. For purposes of testing goodwill for impairment, goodwill has been allocated to our reporting units to the extent it relates to each reporting unit. Based upon our qualitative assessment, it is more likely than not that the fair value of our reporting units are greater than their carrying value at December 31, 2015. No impairment charges were recorded for 2015, 2014 or 2013.
It is our practice, at a minimum, to perform a quantitative goodwill impairment test in the fourth quarter every three years. In the fourth quarter of 2014,2016, we performed our trienniala quantitative goodwill impairment test for our reporting units. We use a discounted cash flow approach to develop the estimated fair value of a reporting unit when a quantitative test is performed. Management judgment is required in developing the assumptions for the discounted cash flow model. We also corroborate our discounted cash flow analysis by evaluating a market-based approach that considers earnings before interest, taxes, depreciation and amortization (EBITDA) multiples from a representative sample of comparable public companies. As a further indicator that each reporting unit has been valued appropriately using a discounted cash flow model, the aggregate fair value of all reporting units is reconciled to the total market value of Olin. An impairment would be recorded if the carrying amount exceeded the estimated fair value. Based on the aforementioned analysis, the estimated fair value of our reporting units substantially exceeded the carrying value of the reporting units. No impairment charges were recorded for 2016, 2015 or 2014.
The discount rate, profitability assumptions and terminal growth rate of our reporting units and the cyclical nature of the chlor alkali industry were the material assumptions utilized in the discounted cash flow model used to estimate the fair value of each reporting unit. The discount rate reflects a weighted-average cost of capital, which is calculated based on observable market data. Some of thesethis data (such as the risk free or treasury rate and the pretax cost of debt) are based on the market data at a point in time. Other data (such as the equity risk premium) are based upon market data over time for a peer group of companies in the chemical manufacturing or distribution industries with a market capitalization premium added, as applicable.
The discounted cash flow analysis requires estimates, assumptions and judgments about future events. Our analysis uses our internally generated long-range plan. Our discounted cash flow analysis uses the assumptions in our long-range plan about terminal growth rates, forecasted capital expenditures and changes in future working capital requirements to determine the implied fair value of each reporting unit. The long-range plan reflects management judgment, supplemented by independent chemical industry analyses which provide multi-year industry operating and pricing forecasts.
We believe the assumptions used in our goodwill impairment analysis are appropriate and result in reasonable estimates of the implied fair value of each reporting unit. However, given the economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions, made for purposes of our goodwill impairment testing will prove to be an accurate prediction of the future. In order to evaluate the sensitivity of the fair value calculation on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair value of each reporting unit. We also applied a hypothetical decrease of 100-basis points in our terminal growth rate or an increase of 100-basis points in our weighted-average cost of capital to test the fair value calculation. In all cases, the estimated fair value of our reporting units derived in these sensitivity calculations exceeded the carrying value in excess of 10%. If our assumptions regarding future performance are not achieved, we may be required to record goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
During 2012,Intangible Assets
In conjunction with our acquisitions, we adopted ASU 2012-02 “Testing Indefinite Lived have obtained access to the customer contracts and relationships, trade names, acquired technology and other intellectual property of the acquired companies. These relationships are expected to provide economic benefit for future periods. Amortization expense is recognized on a straight-line basis over the estimated lives of the related assets. The amortization period of customer contracts and relationships, trade names, acquired technology and other intellectual property represents our best estimate of the expected usage or consumption of the economic benefits of the acquired assets, which is based on the company’s historical experience.
Intangible Assetsassets with finite lives are reviewed for Impairment” (ASU 2012-02) which permits entities to make a qualitative assessmentimpairment when conditions indicate that the carrying values of whether it is more likely thanthe assets may not that an indefinite-lived intangible asset’s fair value is less than its carrying amount before performing a quantitative impairment test.be recoverable. Circumstances that are considered as part of the qualitative assessment and could trigger a quantitative impairment test include, but are not limited to: a significant adverse change in the business climate; a significant adverse legal judgment including asset specific factors; adverse cash flow trends; an adverse action or assessment by a government agency; unanticipated competition; decline in our stock price; and a significant restructuring charge within a reporting unit. Based upon our qualitative assessment, it is more likely than not that the fair value of our indefinite-lived intangible asset isassets are greater than itsthe carrying amount as of December 31, 2015.2016. No impairment of our intangible assets were recorded in 2016, 2015 2014 or 2013.2014.
Other Assets
Included in other assets were the following:
|
| | | | | | | |
| | December 31, |
| | 2015 | | 2014 |
| | ($ in millions) |
| Investments in non-consolidated affiliates | $ | 25.0 |
| | $ | 23.3 |
|
| Deferred debt issuance costs | 34.2 |
| | 10.3 |
|
| Bleach joint venture receivable | — |
| | 7.8 |
|
| Income tax receivable | 1.5 |
| | 6.6 |
|
| Interest rate swaps | — |
| | 3.5 |
|
| Supply contracts | 406.5 |
| | — |
|
| Other | 20.3 |
| | 16.4 |
|
| Other assets | $ | 487.5 |
| | $ | 67.9 |
|
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 $410.8 million which will be amortized over the life of the contracts as ethylene is received. If the options are exercised by us, additional payments will be made to TDCC of between $230 million and $250 million on or about the fourth quarter of 2017 and between $425 million and $465 million on or about the fourth quarter of 2020, which will increase the value of the long-term asset. Amortization expense of $4.3 million was recognized within cost of goods sold in 2015 related to these supply contracts and is reflected in depreciation and amortization on the consolidated statements of cash flows. The long-term supply contracts are monitored for impairment each reporting period.
Environmental Liabilities and Expenditures
Accruals (charges to income) for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based upon current law and existing technologies. These amounts, which are not discounted and are exclusive of claims against third parties, are adjusted periodically as assessment and remediation efforts progress or additional technical or legal information becomes available. Environmental costs are capitalized if the costs increase the value of the property and/or mitigate or prevent contamination from future operations.
Discontinued Operations
We present the results of operations, financial position and cash flows that have either been sold or that meet the criteria for “held for sale” accounting as discontinued operations. At the time an operation qualifies for held for sale accounting, the operation is evaluated to determine whether or not the carrying value exceeds its fair value less cost to sell. Any loss as a result of carrying value in excess of fair value less cost to sell is recorded in the period the operation meets held for sale accounting. Management judgment is required to assess the criteria required to meet held for sale accounting, and estimate fair value. Changes to the operation could cause it to no longer qualify for held for sale accounting and changes to fair value or adjustments to amounts previously reported as discontinued operations could result in an increase or decrease to previously recognized losses.
Income Taxes
Deferred taxes are provided for differences between the financial statement and tax basesbasis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided to
offset deferred tax assets if, based on the available evidence, it is more likely than not that some or all of the value of the deferred tax assets will not be realized.
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. We use hedge accounting treatment for substantially all of our business transactions whose risks are covered using derivative instruments. The hedge accounting treatment provides for the deferral of gains or losses on derivative instruments until such time as the related transactions occur.
Concentration of Credit Risk
Accounts receivable is the principal financial instrument which subjects us to a concentration of credit risk. Credit is extended based upon the evaluation of a customer’s financial condition and, generally, collateral is not required. Concentrations of credit risk with respect to receivables are somewhat limited due to our large number of customers, the diversity of these customers’ businesses and the geographic dispersion of such customers. Our accounts receivable are predominantly derived from sales denominated in USD or the Euro. We maintain an allowance for doubtful accounts based upon the expected collectibility of all trade receivables.
Fair Value
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 consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by Accounting Standards Codification (ASC)ASC 820 “Fair Value Measurement” (ASC 820), and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, 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.
Retirement-Related Benefits
We account for our defined benefit pension plans and non-pension postretirement benefit plans using actuarial models required by ASC 715 “Compensation-Retirement Benefits” (ASC 715). These models use an attribution approach that generally spreads the financial impact of changes to the plan and actuarial assumptions over the average remaining service lives of the employees in the plan. Changes in liability due to changes in actuarial assumptions such as discount rate, rate of compensation increases and mortality, as well as annual deviations between what was assumed and what was experienced by the plan are treated as actuarial gains or losses. The principle underlying the required attribution approach is that employees render service over their average remaining service lives on a relatively smooth basis and, therefore, the accounting for benefits earned under the pension or non-pension postretirement benefits plans should follow the same relatively smooth pattern. Substantially all domestic defined benefit pension plan participants are no longer accruing benefits; therefore, actuarial gains and losses are amortized based upon the remaining life expectancy of the inactive plan participants. For both the years
ended December 31, 20152016 and 2014,2015, the average remaining life expectancy of the inactive participants in the domestic defined benefit pension plan was 19 years and 18 years, respectively.years.
One of the key assumptions for the net periodic pension calculation is the expected long-term rate of return on plan assets, used to determine the “market-related value of assets.” The “market-related value of assets” recognizes differences between the plan’s actual return and expected return over a five year period. The required use of an expected long-term rate of return on the market-related value of plan assets may result in a recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees. As differences between actual and expected returns are recognized over five years, they subsequently generate gains and losses that are subject to amortization over the average remaining life expectancy of the inactive plan participants, as described in the preceding paragraph.
We use long-term historical actual return information, the mix of investments that comprise plan assets, and future estimates of long-term investment returns and inflation by reference to external sources to develop the expected long-term rate of return on plan assets as of December 31.
The discount rate assumptions used for pension and non-pension postretirement benefit plan accounting reflect the rates available on high-quality fixed-income debt instruments on December 31 of each year. The rate of compensation increase is based upon our long-term plans for such increases. For retiree medical plan accounting, we review external data and our own historical trends for healthcare costs to determine the healthcare cost trend rates.
Stock-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments, such as stock options, performance shares and restricted stock, based on the grant-date fair value of the award. This cost is recognized over the period during which an employee is required to provide service in exchange for the award, the requisite service period (usually the vesting period). An initial measurement is made of the cost of employee services received in exchange for an award of liability instruments based on its current fair value and the value of that award is subsequently remeasured at each reporting date through the settlement date. Changes in fair value of liability awards during the requisite service period are recognized as compensation cost over that period.
The fair value of each 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 assumptions:
| | | | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Dividend yield | 2.92 | % | | 3.13 | % | | 3.44 | % | 6.09 | % | | 2.92 | % | | 3.13 | % |
| Risk-free interest rate | 1.69 | % | | 2.13 | % | | 1.35 | % | 1.35 | % | | 1.69 | % | | 2.13 | % |
| Expected volatility | 34 | % | | 42 | % | | 43 | % | 32 | % | | 34 | % | | 42 | % |
| Expected life (years) | 6.0 |
| | 7.0 |
| | 7.0 |
| 6.0 |
| | 6.0 |
| | 7.0 |
|
| Weighted-average grant fair value (per option) | $ | 6.80 |
| | $ | 8.34 |
| | $ | 7.05 |
| $ | 1.90 |
| | $ | 6.80 |
| | $ | 8.34 |
|
| Weighted-average exercise price | $ | 27.40 |
| | $ | 25.69 |
| | $ | 23.28 |
| $ | 13.14 |
| | $ | 27.40 |
| | $ | 25.69 |
|
| Shares granted | 776,750 |
| | 624,200 |
| | 621,000 |
| 1,670,400 |
| | 776,750 |
| | 624,200 |
|
Dividend yield 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 for future exercise patterns.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” which amends ASC 350 “Intangibles—Goodwill and Other.” This update will simplify the measurement of goodwill impairment by eliminating Step 2 from the goodwill impairment test. This update will require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carry amount exceeds the reporting unit’s fair value. The update does not modify the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The guidance in this update is applied on a prospective basis with earlier application permitted. We are currently evaluating the effect of this update on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments” which amends ASC 230 “Statement of Cash Flows.” This update will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We are currently evaluating the effect of this update on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting,” which amends ASC 718 “Compensation—Stock Compensation.” This update will simplify the income tax consequences, accounting for forfeitures and classification on the statements of cash flows of share-based payment arrangements. This standard is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier application permitted. We will adopt this update in the first quarter of 2017.
In February 2016, the FASB issued ASU 2016-02 “Leases,"” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 "Leases."“Leases.” This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the effect of this update on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes” (ASU 2015-17), which amends ASC 740 “Income Taxes” (ASC 740). This update requires deferred income tax liabilities and assets, and any related valuation allowance, to be classified as noncurrent on the balance sheet. This update simplifiedsimplifies the current guidance requiring the deferred taxes for each jurisdiction to be presented as a net current asset or liability and net noncurrent asset or liability. This update is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The guidance may be applied either prospectively or retrospectively, with earlier application permitted. We adopted the provisions of ASU 2015-17 as ofon December 31, 2015, which was applied prospectively, and, therefore, all prior periods have not been retrospectively adjusted.
In September 2015, the FASB issued ASU 2015-16 “Simplifying the Accounting for Measurement - Measurement—Period Adjustments” (ASU 2015-16), which amends ASC 805 “Business Combinations.” This update requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. We adopted ASU 2015-16 on January 1, 2016. This update is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. This update should be applied prospectively to adjustments of provisional amounts that occur after the effective date with earlier application permitted. The adoption of this standard could impactThis update did not have a material effect on our consolidated financial statements as we finalize the preliminary purchase accounting for the Acquired Business.statements.
In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory,” which amends ASC 330 “Inventory.” This update requires entities to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. This update simplifies the current guidance under which an entity must measure inventory at the lower of cost or market. This update does not impact inventory measured using LIFO. This update is effective for fiscal years beginning after December 15, 2016. ThisWe are currently evaluating the effect of this update will not have a material effect on our consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07 “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (ASU 2015-07) which amends ASC 820 “Fair Value Measurement.” This update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This update is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years and impacts the disclosure requirements surrounding certain assets held by our pension plans. The new guidance will be applied on a retrospective basis. We adopted ASU 2015-07 on January 1, 2016 which was applied retrospectively, and, therefore, all prior periods have been retrospectively adjusted.
In April 2015, the FASB issued ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs” and, in August 2015, the FASB issued ASU 2015-15 “Interest - “Interest—Imputation of Interest,” which both amend ASC 835-30 “Interest - “Interest—Imputation of Interest.” These updates require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability while debt issuance costs related to line-of-credit arrangements will continue to be presented as an asset. These updates are effective for fiscal years beginning afterWe adopted ASU 2015-03 and ASU 2015-15 on January 1, 2016 which required retrospective application. As of December 15, 2015. These updates will require certain reclassifications on31, 2015, debt issuance costs of $31.4 million were reclassified within our consolidated balance sheets.sheet from other assets to long-term debt and $1.5 million were reclassified within our consolidated balance sheet from other assets to current installments of long-term debt.
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers,”Customers” (ASU 2014-09), which amends ASC 605 “Revenue Recognition” and creates a new topic, ASC 606 “Revenue from Contracts with Customers.” This update providesCustomers” (ASC 606). Subsequent to the issuance of ASU 2014-09, ASC 606 was amended by various updates that amend and clarify the impact and implementation of the aforementioned standard. These updates provide guidance on how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Upon initial application, the provisions of this updatethese updates are required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. This updateThese updates also expandsexpand the disclosure requirements surrounding revenue recorded from contracts with customers. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers” (ASU 2015-14), which amends ASC 606. This update defers theThese updates are effective date of ASU 2014-09 for fiscal years, and interim periods within those years, beginning after December 15, 2017. We are currently evaluatingcontinue to evaluate the effect of this updateimpact these updates will have on our consolidated financial statements. Based on the analysis conducted to date, we believe the most significant impact the updates will have will be on our accounting policies and disclosures on revenue recognition. Preliminarily, we do not expect that these updates will materially impact our consolidated financial statements and we have not yet determined the method of initial application we will use.
ACQUISITION
On the Closing Date, Olin consummated the previously announced merger (the Merger), using a Reverse Morris Trust structure, of our wholly owned subsidiary, Blue Cube Acquisition Corp. (Merger Sub), with and into Blue Cube Spinco Inc. (Spinco), with Spinco as the surviving corporation and a wholly owned subsidiary of Olin, as contemplated by the Agreement and Plan of Merger (the Merger Agreement) dated March 26, 2015, among Olin, TDCC, Merger Sub and Spinco (collectively, the Acquisition). Pursuant to the Merger Agreement and a Separation Agreement dated March 26, 2015 between TDCC and Spinco (the Separation Agreement), prior to the Merger, (1) TDCC transferred the Acquired Business to Spinco and (2) TDCC distributed Spinco’s stock to TDCC’s shareholders by way of a split-off (the Distribution). Upon consummation of the transactions contemplated by the Merger Agreement and the Separation Agreement (the Transactions), the shares of Spinco common stock then outstanding were automatically converted into the right to receive approximately 87.5 million shares of Olin common stock, which were issued by Olin on the Closing Date, and represented approximately 53% of the then outstanding shares of Olin common stock, together with cash in lieu of fractional shares. Olin’s pre-Merger shareholders continued to hold the remaining approximately 47% of the then outstanding shares of Olin common stock. On the Closing Date, Spinco became a wholly owned subsidiary of Olin.
The following table summarizes the aggregate purchase price for the Acquired Business and related transactions, subject to certainafter the final post-closing adjustments:
| | | | October 5, 2015 | October 5, 2015 |
| | (In millions, except per share data) | (In millions, except per share data) |
| Shares | 87.5 |
| 87.5 |
|
| Value of common stock on October 2, 2015 | 17.46 |
| 17.46 |
|
| Equity consideration by exchange of shares | $ | 1,527.4 |
| $ | 1,527.4 |
|
| Cash and debt instruments received by TDCC | 2,095.0 |
| 2,095.0 |
|
| Accrual for future payments | 90.2 |
| |
| Payment for certain liabilities including the final working capital adjustment | | 69.5 |
|
| Up-front payments under the ethylene agreements | 433.5 |
| 433.5 |
|
| Total cash, debt and equity consideration | $ | 4,146.1 |
| $ | 4,125.4 |
|
| Long-term debt assumed | 569.0 |
| 569.0 |
|
| Pension liabilities assumed | 447.1 |
| 442.3 |
|
| Aggregate purchase price | $ | 5,162.2 |
| $ | 5,136.7 |
|
The value of the common stock was based on the closing stock price on the last trading day prior to the Closing Date. The aggregate purchase price was adjusted for the final working capital adjustment and the final valuation for the pension liabilities assumed from TDCC which resulted in a payment of $69.5 million for the year ended December 31, 2016.
In connection with the Acquisition, TDCC retained liabilities relating to the Acquired Business for litigation, releases of hazardous materials and violations of environmental law to the extent arising prior to the Closing Date.
DuringFor the years ended December 31, 2016, 2015 and 2014, we incurred costs in connection with the Merger and related transactions, including $48.8 million, $76.3 million and $4.2 million, respectively, of advisory, legal, accounting, integration and other professional fees andfees. For the year ended December 31, 2015, we also incurred $30.5 million of financing-related fees. In addition,fees and $47.1 million of costs were incurred as a result of the change in control which created a mandatory acceleration of expenses under deferred compensation plans as a result of the Transactions.
For segment reporting purposes, the Acquired Business’s Global Epoxy operating results comprise the newly created Epoxy segment and U.S. Chlor Alkali and Vinyl and Global Chlorinated Organics (Acquired Chlor Alkali Business) operating results combined with our former Chlor Alkali Products and Chemical Distribution segments to comprise the newly created Chlor Alkali Products and Vinyls segment. The Acquired Business’s results of operations have been included in our consolidated results for the period subsequent to the Closing Date. Our results for the yearyears ended December 31, 2016 and 2015 include Epoxy sales of $1,822.0 million and $429.6 million, respectively, and a segment lossincome (loss) of $7.5$15.4 million and $(7.5) million, respectively. For the years ended December 31, 2016 and 2015, Chlor Alkali Products and Vinyls include sales of the Acquired Chlor Alkali Business of $1,715.7 million and $373.0 million, respectively, and segment income of $164.5 million and $37.2 million.million, respectively.
The Transactions have been accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. We are infinalized our purchase price allocation during the processthird quarter of determining the fair values of the Acquired Business’s tangible and intangible assets and liabilities. Initial estimates of those fair values are included in these consolidated financial statements; however, the valuation process is not complete, and we expect that adjustments to the initial valuation will be required.2016. The following table summarizes the preliminaryfinal allocation of the purchase price to the Acquired Business’s assets and liabilities:liabilities on the Closing Date:
| | | | October 5, 2015 | Initial Valuation | | Measurement Period Adjustments | | Final Valuation |
| | ($ in millions) | ($ in millions) |
| Total current assets | $ | 921.7 |
| $ | 921.7 |
| | $ | (38.0 | ) | | $ | 883.7 |
|
| Property, plant and equipment | 3,090.8 |
| 3,090.8 |
| | (11.7 | ) | | 3,079.1 |
|
| Deferred taxes | 76.8 |
| |
| Deferred tax assets | | 76.8 |
| | 8.2 |
| | 85.0 |
|
| Intangible assets | 582.3 |
| 582.3 |
| | 30.3 |
| | 612.6 |
|
| Other assets | 426.5 |
| 426.5 |
| | 12.4 |
| | 438.9 |
|
| Total assets acquired | 5,098.1 |
| 5,098.1 |
| | 1.2 |
| | 5,099.3 |
|
| Total current liabilities | 357.6 |
| 357.6 |
| | 2.3 |
| | 359.9 |
|
| Long-term debt | 517.9 |
| 517.9 |
| | — |
| | 517.9 |
|
| Accrued pension liability | 447.1 |
| 447.1 |
| | (4.8 | ) | | 442.3 |
|
| Deferred tax liability | 1,054.9 |
| |
| Deferred tax liabilities | | 1,054.9 |
| | (37.2 | ) | | 1,017.7 |
|
| Other liabilities | 2.0 |
| 2.0 |
| | 6.6 |
| | 8.6 |
|
| Total liabilities assumed | 2,379.5 |
| 2,379.5 |
| | (33.1 | ) | | 2,346.4 |
|
| Net identifiable assets acquired | 2,718.6 |
| 2,718.6 |
| | 34.3 |
| | 2,752.9 |
|
| Goodwill | 1,427.5 |
| 1,427.5 |
| | (55.0 | ) | | 1,372.5 |
|
| Fair value of net assets acquired | $ | 4,146.1 |
| $ | 4,146.1 |
| | $ | (20.7 | ) | | $ | 4,125.4 |
|
Measurement period adjustments to the initial valuation primarily consisted of the final working capital adjustment, the final valuation for the pension liabilities assumed from TDCC, changes in the estimated fair value of acquired intangible assets and property, plant and equipment, and the finalization of deferred tax assets and liabilities. Included in total current assets are cash and cash equivalents of $25.4 million, inventories of $477.1$456.4 million and receivables of $418.9$401.6 million with a contracted value of $423.5$403.8 million. Included in total current liabilities are current installments of long-term debt of $51.1 million.
Based on preliminaryfinal valuations, purchase price was allocated to intangible assets as follows:
| | | | October 5, 2015 | October 5, 2015 |
| | Weighted-Average Amortization Period (Years) | | Gross Amount | Weighted-Average Amortization Period (Years) | | Gross Amount |
| | | ($ in millions) | | ($ in millions) |
| Customers, customer contracts and relationships | 15 Years | | $ | 490.3 |
| 15 Years | | $ | 520.5 |
|
| Acquired technology | 7 Years | | 85.0 |
| 7 Years | | 85.1 |
|
| Trade name | Indefinite | | 7.0 |
| 5 Years | | 7.0 |
|
| Total acquired intangible assets | | $ | 582.3 |
| | $ | 612.6 |
|
Based on preliminaryfinal valuations, $1,427.5$1,372.5 million was assigned to goodwill, none of which is deductible for tax purposes. The primary reasons for the Acquisition and the principal factors that contributed to the Acquired Business purchase price that resulted in the recognition of goodwill are due to the providing of increased production capacity and diversification of Olin’s product portfolio, cost-saving opportunities and enhanced size and geographic presence. The cost-saving opportunities include improved operating efficiencies and asset optimization.
Goodwill recorded in the Acquisition is not amortized but will be reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred.
Transaction financing
Prior to the Distribution, TDCC received from Spinco distributions of cash and debt instruments of Spinco with an aggregate value of $2,095.0 million (collectively, the Cash and Debt Distribution). On the Closing Date, Spinco 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%10.0% senior notes due October 15, 2025 (2025 Notes and, together with the 2023 Notes, the Notes) to TDCC. TDCC transferred the Notes to certain unaffiliated securityholders in satisfaction of existing debt obligations of TDCC held or acquired by those unaffiliated securityholders. On October 5, 2015, certain initial purchasers purchased the Notes from the unaffiliated securityholders. During 2016, the Notes were registered under the Securities Act of 1933, as amended. Interest on the Notes began accruing from October 1, 2015 and will beare paid semi-annually beginning on April 15, 2016. The Notes are not redeemable at any time prior to October 15, 2020. Neither Olin nor Spinco received any proceeds from the sale of the Notes. Upon the consummation of the Transactions, Olin became guarantor of the Notes.
On June 23, 2015, Spinco entered into a new five-year delayed-draw term loan facility of up to $1,050.0 million. As of the Closing Date, Spinco drew $875.0 million to finance the cash portion of the Cash and Debt Distribution. Also on June 23, 2015, Olin and Spinco entered into a new five-year $1,850.0 million senior credit facility consisting of a $500.0 million senior revolving credit facility, which replaced Olin’s $265.0 million senior revolving credit facility at the closing of the Merger, and a $1,350.0 million (subject to reduction by the aggregate amount of the term loans funded to Spinco under the Spinco term loan facility) delayed-draw term loan facility. As of the Closing Date, an additional $475.0 million was drawn by Olin under this term loan facility which was used to pay fees and expenses of the Transactions, obtain additional funds for general corporate purposes and refinance Olin’s existing senior term loan facility due in 2019. Subsequent to the Closing Date, these senior credit facilities were consolidated into a single $1,850.0 million senior credit facility, which includes a $1,350.0 million term loan facility. This new senior credit facility will expire in 2020. The $500.0 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 new senior credit facility, we may select various floating rate borrowing options. The actual interest rate paid on borrowings under the senior credit facility is based on a pricing grid which is dependent upon the leverage ratio as calculated under the terms of the 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.
On August 25, 2015, Olin entered into a Credit Agreement (the Credit Agreement) with a syndicate of lenders and Sumitomo Mitsui Banking Corporation (Sumitomo), as administrative agent, in connection with the Transactions. The Credit Agreement provides for a term credit facility (the Sumitomo Credit Facility) under which Olin obtained term loans in an aggregate amount of $600.0 million. On November 3, 2015, we entered into an amendment to the Sumitomo Credit Facility which increased the aggregate amount of term loans available by $200.0 million. On the Closing Date, $600.0 million of loans under the Credit Agreement were made available and borrowed upon and on November 5, 2015, $200.0 million of loans under the Credit Agreement were made available and borrowed upon. The term loans under the Sumitomo Credit Facility will mature on October 5, 2018 and will have no scheduled amortization payments. The proceeds of the Sumitomo Credit Facility were used to refinance existing Spinco indebtedness outstanding at the Closing Date, to pay fees and expenses in connection with the Transactions and for general corporate purposes. The Credit Agreement contains customary representations, warranties and affirmative and negative covenants which are substantially similar to those included in the new $1,850.0 million senior credit facility.
On March 26, 2015, we and certain financial institutions executed commitment letters pursuant to which the financial institutions agreed to provide $3,354.5 million of financing to Spinco to finance the amount of the Cash and Debt Distribution and to provide financing, if needed, to Olin to refinance certain of our existing debt (the Bridge Financing), in each case on the terms and conditions set forth in the commitment letters. The Bridge Financing was not drawn on to facilitate the Transactions, and the commitments for the Bridge Financing have beenwere terminated as of the Closing Date. For the year ended December 31, 2015, we paid debt issuance costs of $30.0 million associated with the Bridge Financing, which arewere included in interest expense.
Other acquisition-related transactions
In connection with the Transactions, certain additional agreements have been entered into, including, among others, an Employee Matters Agreement, a Tax Matters Agreement, site, transitional and other services agreements, supply and purchase agreements, real estate agreements, technology licenses and intellectual property agreements. Payments of approximately
$90.2 million, subject to certain post-closing adjustments, will be made related to certain acquisition related liabilities including the estimated working capital adjustment.
In addition, 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 of the Merger 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 $410.8$416.1 million which will be amortized over the life of the contracts as ethylene is received. IfDuring 2016, one of the options areto obtain additional future ethylene supply at producer economics was exercised by us and, accordingly, additional payments will be made to TDCC of $209.4 million in 2017, which will increase the carrying 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 $230$425.0 million and $250 million on or about the fourth quarter of 2017 and between $425 million and $465$465.0 million on or about the fourth quarter of 2020, which will increase the value of the long-term asset.
In connection with the Transactions and effective October 1, 2015, we filed a Certificate of Amendment to our Articles of Incorporation to increase the number of authorized shares of Olin common stock from 120.0 million shares to 240.0 million shares.
Pro forma financial information
The following pro forma summary reflects consolidated results of operation as if the Acquisition had occurred on January 1, 2014 (unaudited).
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2015 | | 2014 | 2015 | | 2014 |
| | ($ in millions, except per share data) | ($ in millions, except per share data) |
| Sales | $ | 5,681.8 |
| | $ | 6,948.2 |
| $ | 5,681.8 |
| | $ | 6,948.2 |
|
| Net (loss) income | (36.4 | ) | | 2.4 |
| (36.6 | ) | | 0.8 |
|
| Net (loss) income per common share: | | | | | | |
| Basic | $ | (0.22 | ) | | $ | 0.01 |
| $ | (0.22 | ) | | $ | — |
|
| Diluted | $ | (0.22 | ) | | $ | 0.01 |
| $ | (0.22 | ) | | $ | — |
|
The pro forma financial information was prepared based on historical financial information and have been adjusted to give effect to pro forma adjustments that are (i) directly attributable to the Transactions, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The pro forma statements of income use estimates and assumptions based on information available at the time. Management believes the estimates and assumptions to be reasonable; however, actual results may differ significantly from this pro forma financial information. The pro forma results presented do not include any anticipated synergies or other expected benefits that may be realized from the Transactions. The pro forma information is not intended to reflect the actual results that would have occurred had the companies actually been combined during the periods presented.
The pro forma results for the years ended December 31, 2015 and 2014 primarily include recurring adjustments for re-pricing of sales, raw materials and services to/from TDCC relating to arrangements for long-term supply agreements for the sale of raw materials, including ethylene and benzene, and services pursuant to the Separation Agreement, adjustments to eliminate historical sales between the Acquired Business and Olin, additional amortization expense related to the fair value of acquired identifiable intangible assets, additional depreciation expense related to the fair value adjustment to property, plant and equipment, interest expense related to the incremental debt issued in conjunction with the Acquisition and an adjustment to tax-effect the aforementioned pro forma adjustments using an estimated aggregate statutory income tax rate of the jurisdictions to which the above adjustments relate.
In addition to the above recurring adjustments, the pro forma results for the years ended December 31, 2015 and 2014 included non-recurring adjustments of $47.0 million and $4.2 million, respectively, relating to the elimination of transaction costs incurred that are directly related to the Transactions, and do not have a continuing impact on our combined operating results. The pro forma results for the year ended December 31, 2015 also included non-recurring adjustments of $47.1 million relating to the impact of costs incurred as a result of the change in control which created a mandatory acceleration of expenses under deferred compensation plans and $24.0 million related to additional costs of goods sold related to the increase of inventory to fair value at the acquisition date related to the preliminary purchase accounting for inventory.
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 year ended December 31, 2016, we recorded pretax restructuring charges of $111.3 million 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 $33 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.
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. In the fourth quarter of 2014, we recorded pretax restructuring charges of $10.0 million for the write-off of equipment and facility costs, employee severance and related benefit costs and lease and other contract termination costs related to these actions. For the yearyears ended December 31, 2016 and 2015, we recorded pretax restructuring charges of $0.8 million and $2.0 million, respectively, for the write-off of equipment and facility costs, lease and other contract termination costs and facility exit costs. We expect to incur additional restructuring charges through 20162018 of approximately $4$7 million related to the shut down of this portion of the facility.
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. The completion of these projects eliminated our chlor alkali production using mercury cell technology. For the yearsyear ended December 31, 2014, and 2013, we recorded pretax restructuring charges of $3.8 million and $3.7 million, respectively, for employee severance and related benefit costs, employee relocation costs, facility exit costs, write-off of equipment and facility costs and lease and other contract termination costs related to these actions.
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 in 2010, 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. We currently expect to complete thisDuring 2016, the final rifle ammunition production equipment relocation in the first half of 2016.was completed. For the years ended December 31, 2016, 2015 2014 and 2013,2014, we recorded pretax restructuring charges of $0.8 million, $0.7 million $1.9 million and $1.8$1.9 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 $1 million related to the transfer of these operations.
The following table summarizes the 2016, 2015 2014 and 20132014 activities by major component of these 2014 and 2010 restructuring actions and the remaining balances of accrued restructuring costs as of December 31, 2015:2016:
| | | | Employee severance and job related benefits | | Lease and other contract termination costs | | Employee relocation costs | | Facility exit costs | | Write-off of equipment and facility | | Total | Employee severance and job related benefits | | Lease and other contract termination costs | | Employee relocation costs | | Facility exit costs | | Write-off of equipment and facility | | Total |
| | ($ in millions) | ($ in millions) |
| Balance January 1, 2013 | $ | 13.5 |
| | $ | 0.4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13.9 |
| |
| 2013 restructuring charges (credits) | 0.4 |
| | (0.4 | ) | | 0.6 |
| | 4.9 |
| | — |
| | 5.5 |
| |
| Amounts utilized | (3.7 | ) | | — |
| | (0.6 | ) | | (4.9 | ) | | — |
| | (9.2 | ) | |
| Balance at December 31, 2013 | 10.2 |
| | — |
| | — |
| | — |
| | — |
| | 10.2 |
| |
| Balance January 1, 2014 | | $ | 10.2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10.2 |
|
| 2014 restructuring charges | 4.5 |
| | 4.5 |
| | 0.5 |
| | 2.9 |
| | 3.3 |
| | 15.7 |
| 4.5 |
| | 4.5 |
| | 0.5 |
| | 2.9 |
| | 3.3 |
| | 15.7 |
|
| Amounts utilized | (3.5 | ) | | — |
| | (0.5 | ) | | (2.9 | ) | | (3.3 | ) | | (10.2 | ) | (3.5 | ) | | — |
| | (0.5 | ) | | (2.9 | ) | | (3.3 | ) | | (10.2 | ) |
| Balance at December 31, 2014 | 11.2 |
| | 4.5 |
| | — |
| | — |
| | — |
| | 15.7 |
| 11.2 |
| | 4.5 |
| | — |
| | — |
| | — |
| | 15.7 |
|
| 2015 restructuring charges | — |
| | 0.7 |
| | 0.6 |
| | 0.9 |
| | 0.5 |
| | 2.7 |
| — |
| | 0.7 |
| | 0.6 |
| | 0.9 |
| | 0.5 |
| | 2.7 |
|
| Amounts utilized | (6.0 | ) | | (2.9 | ) | | (0.6 | ) | | (0.9 | ) | | (0.5 | ) | | (10.9 | ) | (6.0 | ) | | (2.9 | ) | | (0.6 | ) | | (0.9 | ) | | (0.5 | ) | | (10.9 | ) |
| Currency translation adjustments | (0.6 | ) | | (0.2 | ) | | — |
| | — |
| | — |
| | (0.8 | ) | (0.6 | ) | | (0.2 | ) | | — |
| | — |
| | — |
| | (0.8 | ) |
| Balance at December 31, 2015 | $ | 4.6 |
| | $ | 2.1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6.7 |
| 4.6 |
| | 2.1 |
| | — |
| | — |
| | — |
| | 6.7 |
|
| 2016 restructuring charges | | 5.1 |
| | 13.6 |
| | 2.1 |
| | 15.5 |
| | 76.6 |
| | 112.9 |
|
| Amounts utilized | | (6.3 | ) | | (8.2 | ) | | (2.1 | ) | | (13.7 | ) | | (76.6 | ) | | (106.9 | ) |
| Balance at December 31, 2016 | | $ | 3.4 |
| | $ | 7.5 |
| | $ | — |
| | $ | 1.8 |
| | $ | — |
| | $ | 12.7 |
|
The following table summarizes the cumulative restructuring charges of these 2016, 2014 and 2010 restructuring actions by major component through December 31, 2015:2016:
| | | | | Chlor Alkali Products and Vinyls | | Winchester | | Total | | Chlor Alkali Products and Vinyls | | Winchester | | Total |
| | | Becancour | | Mercury | | | Becancour | | Capacity Reductions | | Mercury | |
| | | ($ in millions) | | ($ in millions) |
| Write-off of equipment and facility | | $ | 3.5 |
| | $ | 17.8 |
| | $ | — |
| | $ | 21.3 |
| | $ | 3.5 |
| | $ | 76.6 |
| | $ | 17.8 |
| | $ | — |
| | $ | 97.9 |
|
| Employee severance and job related benefits | | 2.7 |
| | 5.6 |
| | 13.1 |
| | 21.4 |
| | 2.7 |
| | 5.1 |
| | 5.6 |
| | 13.1 |
| | 26.5 |
|
| Facility exit costs | | 0.6 |
| | 15.6 |
| | 2.2 |
| | 18.4 |
| | 1.3 |
| | 14.7 |
| | 15.6 |
| | 2.3 |
| | 33.9 |
|
| Pension and other postretirement benefits curtailment | | — |
| | — |
| | 4.1 |
| | 4.1 |
| | — |
| | — |
| | — |
| | 4.1 |
| | 4.1 |
|
| Employee relocation costs | | — |
| | 0.9 |
| | 5.3 |
| | 6.2 |
| | — |
| | 1.4 |
| | 0.9 |
| | 6.0 |
| | 8.3 |
|
| Lease and other contract termination costs | | 5.2 |
| | 0.7 |
| | — |
| | 5.9 |
| | 5.3 |
| | 13.5 |
| | 0.7 |
| | — |
| | 19.5 |
|
| Total cumulative restructuring charges | | $ | 12.0 |
| | $ | 40.6 |
| | $ | 24.7 |
| | $ | 77.3 |
| | $ | 12.8 |
| | $ | 111.3 |
| | $ | 40.6 |
| | $ | 25.5 |
| | $ | 190.2 |
|
As of December 31, 2015,2016, we have incurred cash expenditures of $37.3$67.6 million and non-cash charges of $32.5$109.1 million related to these restructuring actions. The remaining balance of $6.7$12.7 million is expected to be paid out through 2016.2020.
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 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 $2.2 million for changes in tax contingencies related to the Metals sale. Income from discontinued operations, net consisted of the following:
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| | ($ in millions) | ($ in millions) |
| Income from discontinued operations | $ | — |
| | $ | 4.6 |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | 4.6 |
|
| Tax provision | — |
| | 3.9 |
| | — |
| — |
| | — |
| | 3.9 |
|
| Income from discontinued operations, net | $ | — |
| | $ | 0.7 |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | 0.7 |
|
EARNINGS PER SHARE
Basic and diluted (loss) income per share are computed by dividing net (loss) income by the weighted-average number of common shares outstanding. Diluted net income per share reflects the dilutive effect of stock-based compensation.
| | | | Years ended December 31, | Years ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Computation of Income (loss) per Share | (In millions, except per share data) | (In millions, except per share data) |
| Income (loss) from continuing operations, net | $ | (1.4 | ) | | $ | 105.0 |
| | $ | 178.6 |
| $ | (3.9 | ) | | $ | (1.4 | ) | | $ | 105.0 |
|
| Income from discontinued operations, net | — |
| | 0.7 |
| | — |
| — |
| | — |
| | 0.7 |
|
| Net (loss) income | $ | (1.4 | ) | | $ | 105.7 |
| | $ | 178.6 |
| $ | (3.9 | ) | | $ | (1.4 | ) | | $ | 105.7 |
|
| Basic shares | 103.4 |
| | 78.6 |
| | 79.9 |
| 165.2 |
| | 103.4 |
| | 78.6 |
|
| Basic (loss) income per share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.24 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.33 |
|
| Income from discontinued operations, net | — |
| | 0.01 |
| | — |
| — |
| | — |
| | 0.01 |
|
| Net (loss) income | $ | (0.01 | ) | | $ | 1.34 |
| | $ | 2.24 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.34 |
|
| Diluted shares: | | | | | | | | | | |
| Basic shares | 103.4 |
| | 78.6 |
| | 79.9 |
| 165.2 |
| | 103.4 |
| | 78.6 |
|
| Stock-based compensation | — |
| | 1.1 |
| | 1.0 |
| — |
| | — |
| | 1.1 |
|
| Diluted shares | 103.4 |
| | 79.7 |
| | 80.9 |
| 165.2 |
| | 103.4 |
| | 79.7 |
|
| Diluted (loss) income per share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (0.01 | ) | | $ | 1.32 |
| | $ | 2.21 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.32 |
|
| Income from discontinued operations, net | — |
| | 0.01 |
| | — |
| — |
| | — |
| | 0.01 |
|
| Net (loss) income | $ | (0.01 | ) | | $ | 1.33 |
| | $ | 2.21 |
| $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 1.33 |
|
The computation of dilutive shares from stock-based compensation does not include 6.5 million, 5.2 million shares in 2015 and 0.6 million shares in both2016, 2015 and 2014, and 2013respectively, as their effect would have been anti-dilutive.
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 are continued to be serviced by us. As of December 31, 2016, $282.3 million of our trade receivables have been pledged as collateral and we had $210.0 million drawn
under the agreement. In addition, the Receivables Financing Agreement incorporates the leverage and coverage covenants that are contained in the senior revolving credit facility.
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 (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 $242.0 million. We will continue to service such accounts. These receivables qualify for sales treatment under ASC 860 “Transfers and Servicing” (ASC 860) and, accordingly, the proceeds are included in net cash provided by operating activities in the consolidated statements of cash flows. The gross amount of receivables sold for the year ended December 31, 2016 totaled $533.6 million. The factoring discount paid under the AR Facilities is recorded as interest expense on the consolidated statements of operations. The agreements are without recourse and therefore no recourse liability has been recorded as of December 31, 2016. As of December 31, 2016, $126.1 million of receivables qualifying for sale treatment were outstanding and will continue to be serviced by us.
In conjunction with the Acquisition, we obtained receivables with a fair value of $401.6 million as of October 5, 2015. At December 31, 2016 and 2015, our consolidated balance sheets included other receivables of $95.6 million and $94.8 million, respectively, which were classified as receivables, net.
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLES
Allowance for doubtful accounts receivable consisted of the following:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Beginning balance | $ | 3.0 |
| | $ | 3.4 |
| $ | 6.4 |
| | $ | 3.0 |
|
| Provisions charged | 5.2 |
| | 0.2 |
| 4.5 |
| | 5.2 |
|
| Write-offs, net of recoveries | (1.8 | ) | | (0.6 | ) | (0.8 | ) | | (1.8 | ) |
| Ending balance | $ | 6.4 |
| | $ | 3.0 |
| $ | 10.1 |
| | $ | 6.4 |
|
At December 31, 2015 and 2014, our consolidated balance sheets included other receivables of $71.1 million and $21.2 million, respectively, which were classified as receivables, net.
INVENTORIES
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Supplies | $ | 86.5 |
| | $ | 39.2 |
| $ | 58.1 |
| | $ | 86.5 |
|
| Raw materials | 91.5 |
| | 63.3 |
| 72.6 |
| | 91.5 |
|
| Work in process | 105.8 |
| | 31.8 |
| 110.7 |
| | 105.8 |
|
| Finished goods | 445.3 |
| | 141.5 |
| 435.1 |
| | 445.3 |
|
| | 729.1 |
| | 275.8 |
| 676.5 |
| | 729.1 |
|
| LIFO reserves | (43.9 | ) | | (65.7 | ) | (46.1 | ) | | (43.9 | ) |
| Inventories, net | $ | 685.2 |
| | $ | 210.1 |
| $ | 630.4 |
| | $ | 685.2 |
|
In conjunction with the Acquisition, we obtained inventories with a fair value of $477.1$456.4 million as of October 5, 2015. Inventories valued using the LIFO method comprised 49%54% and 58%49% of the total inventories at December 31, 20152016 and 2014,2015, respectively. The replacement cost of our inventories would have been approximately $43.9$46.1 million and $65.7$43.9 million higher than that reported at December 31, 20152016 and 2014,2015, respectively. During 2014 the reduction in LIFO inventory quantities resulted in LIFO inventory liquidation losses of $1.5 million.
OTHER ASSETS
Included in other assets were the following:
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | ($ in millions) |
| Investments in non-consolidated affiliates | $ | 26.7 |
| | $ | 25.0 |
|
| Deferred debt issuance costs | 2.6 |
| | 3.3 |
|
| Tax-related receivables | 17.5 |
| | 1.5 |
|
| Interest rate swaps | 7.7 |
| | — |
|
| Supply contracts | 566.7 |
| | 406.5 |
|
| Other | 23.2 |
| | 18.3 |
|
| Other assets | $ | 644.4 |
| | $ | 454.6 |
|
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 $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 $425.0 million and $465.0 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.
The weighted-average useful life of long-term supply contracts at December 31, 2016 was 21 years. For the years ended December 31, 2016 and 2015, amortization expense of $21.5 million and $4.3 million, respectively, was recognized within cost of goods sold related to these supply contracts and is reflected in depreciation and amortization on the consolidated statements of cash flows. We estimate that amortization expense will be approximately $25.0 million in 2017, 2018, 2019, 2020 and 2021 related to these long-term supply contracts. The long-term supply contracts are monitored for impairment each reporting period.
PROPERTY, PLANT AND EQUIPMENT
| | | | | December 31, | | December 31, |
| | Useful Lives | | 2015 | | 2014 | Useful Lives | | 2016 | | 2015 |
| | | ($ in millions) | | ($ in millions) |
| Land and improvements to land | 10-20 Years | | $ | 280.4 |
| | $ | 157.3 |
| 10-20 Years | | $ | 281.2 |
| | $ | 280.4 |
|
| Buildings and building equipment | 10-30 Years | | 380.4 |
| | 212.1 |
| 10-30 Years | | 375.0 |
| | 380.4 |
|
| Machinery and equipment | 3-15 Years | | 4,665.8 |
| | 1,846.1 |
| 3-15 Years | | 4,765.9 |
| | 4,665.8 |
|
| Leasehold improvements | | 2.7 |
| | 2.6 |
| | 3.4 |
| | 2.7 |
|
| Construction in progress | | 123.5 |
| | 43.6 |
| | 171.0 |
| | 123.5 |
|
| Property, plant and equipment | | 5,452.8 |
| | 2,261.7 |
| | 5,596.5 |
| | 5,452.8 |
|
| Accumulated depreciation | | (1,499.4 | ) | | (1,330.7 | ) | | (1,891.6 | ) | | (1,499.4 | ) |
| Property, plant and equipment, net | | $ | 3,953.4 |
| | $ | 931.0 |
| | $ | 3,704.9 |
| | $ | 3,953.4 |
|
In conjunction with the Acquisition, we obtained property, plant and equipment with a fair value of $3,090.8$3,079.1 million as of October 5, 2015.
The weighted-average useful life of machinery and equipment at December 31, 20152016 was 12 years. Depreciation expense was $435.7 million, $198.1 million and $124.5 million for 2016, 2015 and $120.7 million for 2015, 2014, and 2013, respectively. Interest capitalized was $1.9 million, $1.1 million and $0.2 million for 2016, 2015 and $1.1 million for 2015, 2014, and 2013, respectively. Maintenance and repairs charged to operations amounted to $236.4 million, $158.5 million and $125.0 million in 2016, 2015 and $134.7 million in 2015, 2014, and 2013, respectively.
The consolidated statements of cash flows for the years ended December 31, 2016, 2015 and 2014, and 2013, included a $(7.4)decreases of $29.9 million, $(0.5)$7.4 million and $7.9$0.5 million, respectively, (decrease) increase to capital expenditures, with the corresponding change to accounts payable and accrued liabilities, related to purchases of property, plant and equipment included in accounts payable at December 31, 2016, 2015 2014 and 2013.2014.
During 20132016, we entered into sale/leaseback transactions for bleach trailers and chlorine, caustic soda and bleach railcars.railcars that we acquired in connection with the Acquisition. We received proceeds from the sales of $35.8$40.4 million for the year ended December 31, 2013.2016.
During 2015, assets of $1.4 million were acquired under capital leases and are included in machinery and equipment as of December 31, 2015.
INVESTMENTS—AFFILIATED COMPANIES
On November 16, 2007, we purchased for cash an $11.6 million equity interest in a bleach joint venture. As part of the investment we also entered into several commercial agreements, including agreements by which we would supply raw materials and services, and we would have marketing responsibility for bleach and caustic soda. During 2013, we sold our equity interest in thea bleach joint venture which resulted in a gain of $6.5 million. As a result of the sale, as of December 31, 2015, we have recorded a receivable of $8.5 million which is included within other current assets on our consolidated balance sheet. During both 2016 and 2015, we received $8.8 million as a result of the sale. As of December 31, 2016, all amounts have been collected under the sale arrangement.
On February 11, 2011, we acquired PolyOne’s 50% interest in SunBelt. With this acquisition, we agreed to a three-year earn out, which had no guaranteed minimum or maximum, based on the performance of SunBelt Chlor Alkali Partnership (SunBelt). For the year ended December 31, 2014, we paid the final payment of $26.7 million for the earn out related to the 2013 SunBelt performance. The earn out payment for 2014 included $14.8 million that was recognized as part of the original purchase price. The $14.8 million is included as a financing activity in the statement of cash flows.
We hold a 9.1% limited partnership interest in Bay Gas Storage Company, Ltd. (Bay Gas), an Alabama limited partnership, in which EnergySouth, Inc. (EnergySouth) is the general partner with interest of 90.9%. Bay Gas owns, leases and operates underground gas storage and related pipeline facilities, which are used to provide storage in the McIntosh, AL area and delivery of natural gas to EnergySouth customers.
The following table summarizes our investment in our non-consolidated equity affiliate:
|
| | | | | | | |
| | December 31, |
| | 2015 | | 2014 |
| | ($ in millions) |
| Bay Gas | $ | 25.0 |
| | $ | 23.3 |
|
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | ($ in millions) |
| Bay Gas | $ | 26.7 |
| | $ | 25.0 |
|
The following table summarizes our equity earnings of our non-consolidated affiliates:affiliate:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | ($ in millions) |
| Bay Gas | $ | 1.7 |
| | $ | 1.7 |
| | $ | 2.1 |
|
| Bleach joint venture | — |
| | — |
| | 0.7 |
|
| Equity earnings of non-consolidated affiliates | $ | 1.7 |
| | $ | 1.7 |
| | $ | 2.8 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | ($ in millions) |
| Bay Gas | $ | 1.7 |
| | $ | 1.7 |
| | $ | 1.7 |
|
We received netdid not receive any distributions from our non-consolidated affiliates of zero, zeroin 2016, 2015 and $1.5 million for 2015, 2014 and 2013, respectively.2014.
GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of goodwill were as follows:
| | | | Chlor Alkali Products and Vinyls | | Epoxy | | Total | Chlor Alkali Products and Vinyls | | Epoxy | | Total |
| | ($ in millions) | ($ in millions) |
| Balance at January 1, 2014 | $ | 747.1 |
| | $ | — |
| | $ | 747.1 |
| |
| Acquisition activity | — |
| | — |
| | — |
| |
| Balance at December 31, 2014 | 747.1 |
| | — |
| | 747.1 |
| |
| Balance at January 1, 2015 | | $ | 747.1 |
| | $ | — |
| | $ | 747.1 |
|
| Acquisition activity | 1,130.8 |
| | 296.7 |
| | 1,427.5 |
| 1,130.8 |
| | 296.7 |
| | 1,427.5 |
|
| Foreign currency translation adjustment | (0.4 | ) | | (0.1 | ) | | (0.5 | ) | (0.4 | ) | | (0.1 | ) | | (0.5 | ) |
| Balance at December 31, 2015 | $ | 1,877.5 |
| | $ | 296.6 |
| | $ | 2,174.1 |
| 1,877.5 |
| | 296.6 |
| | 2,174.1 |
|
| Acquisition activity | | (45.3 | ) | | (9.7 | ) | | (55.0 | ) |
| Foreign currency translation adjustment | | (0.9 | ) | | (0.2 | ) | | (1.1 | ) |
| Balance at December 31, 2016 | | $ | 1,831.3 |
| | $ | 286.7 |
| | $ | 2,118.0 |
|
The decrease in goodwill during 2016 was a result of measurement period adjustments from the preliminary valuation of the Acquisition and the effects of foreign currency translation adjustments. We finalized our purchase price allocation of the Acquisition during the third quarter of 2016. The increase in goodwill during 2015 was a result of the Acquisition and iswas based upon the preliminary valuation partially offset by the effects of foreign currency translation adjustments.
Intangible assets consisted of the following:
| | | | | December 31, | | December 31, |
| | | 2015 | | 2014 | | 2016 | | 2015 |
| | Useful Lives | | Gross Amount | | Accumulated Amortization | | Net | | Gross Amount | | Accumulated Amortization | | Net | Useful Lives | | Gross Amount | | Accumulated Amortization | | Net | | Gross Amount | | Accumulated Amortization | | Net |
| | | ($ in millions) | | ($ in millions) |
| Customers, customer contracts and relationships | (10-15 years) | | $ | 641.0 |
| | $ | (64.0 | ) | | $ | 577.0 |
| | $ | 152.9 |
| | $ | (41.0 | ) | | $ | 111.9 |
| (10-15 years) | | $ | 667.8 |
| | $ | (112.9 | ) | | $ | 554.9 |
| | $ | 641.0 |
| | $ | (64.0 | ) | | $ | 577.0 |
|
| Trade name | (indefinite) | | 17.9 |
| | — |
| | 17.9 |
| | 10.9 |
| | — |
| | 10.9 |
| (5 years) | | 17.8 |
| | (12.7 | ) | | 5.1 |
| | 17.9 |
| | — |
| | 17.9 |
|
| Acquired technology | (7 years) | | 84.7 |
| | (2.7 | ) | | 82.0 |
| | — |
| | — |
| | — |
| (7 years) | | 84.2 |
| | (15.0 | ) | | 69.2 |
| | 84.7 |
| | (2.7 | ) | | 82.0 |
|
| Other | (4-10 years) | | 2.3 |
| | (1.7 | ) | | 0.6 |
| | 2.3 |
| | (1.6 | ) | | 0.7 |
| (4-10 years) | | 2.3 |
| | (1.9 | ) | | 0.4 |
| | 2.3 |
| | (1.7 | ) | | 0.6 |
|
| Total intangible assets | | $ | 745.9 |
| | $ | (68.4 | ) | | $ | 677.5 |
| | $ | 166.1 |
| | $ | (42.6 | ) | | $ | 123.5 |
| | $ | 772.1 |
| | $ | (142.5 | ) | | $ | 629.6 |
| | $ | 745.9 |
| | $ | (68.4 | ) | | $ | 677.5 |
|
In conjunction with the Acquisition, we obtained intangible assets with a fair value of $582.3$612.6 million as of October 5, 2015. In connection with the integration of the Acquired Business, in the first quarter of 2016, the K.A. Steel Chemicals Inc. (KA Steel) 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 $10.9 million was recognized within cost of goods sold for the year ended December 31, 2016 related to the change in useful life.
Amortization expense relating to intangible assets was $73.8 million, $25.8 million in 2015 and $14.6 million in both2016, 2015 and 2014, and 2013.respectively. We estimate that amortization expense will be approximately $59.3 million in 2016 and approximately $59.2$62.8 million in 2017, 2018 and 2019, approximately $62.3 million in 2020 and 2020.approximately $61.4 million in 2021. Intangible assets with finite lives are reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred.
DEBT
Long-Term Debt
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| Notes payable: | ($ in millions) | ($ in millions) |
| Variable-rate Senior Term Loan facility, due 2020 (2.17% at December 31, 2015) | $ | 1,350.0 |
| | $ | — |
| |
| Variable-rate Sumitomo credit facility, due 2018 (1.77% at December 31, 2015) | 800.0 |
| | — |
| |
| Variable-rate Recovery Zone bonds, due 2024-2035 (1.40% and 1.31% at December 31, 2015 and 2014, respectively) | 103.0 |
| | 103.0 |
| |
| Variable-rate Go Zone bonds, due 2024 (1.40% and 1.31% at December 31, 2015 and 2014, respectively) | 50.0 |
| | 50.0 |
| |
| Variable-rate Industrial development and environmental improvement obligations, due 2025 (0.27% and 0.20% at December 31, 2015 and 2014, respectively) | 2.9 |
| | 2.9 |
| |
| Variable-rate Senior Term Loan facility, due 2019 (1.66% at December 31, 2014) | — |
| | 149.1 |
| |
| Variable-rate Senior Term Loan facility, due 2020 (2.77% and 2.17% at December 31, 2016 and 2015, respectively) | | $ | 1,282.5 |
| | $ | 1,350.0 |
|
| Variable-rate Sumitomo credit facility, due 2018 (2.27% and 1.77% at December 31, 2016 and 2015, respectively) | | 590.0 |
| | 800.0 |
|
| Variable-rate Recovery Zone bonds, due 2024-2035 (2.47% and 1.40% at December 31, 2016 and 2015, respectively) | | 103.0 |
| | 103.0 |
|
| Variable-rate Go Zone bonds, due 2024 (2.47% and 1.40% at December 31, 2016 and 2015, respectively) | | 50.0 |
| | 50.0 |
|
| Variable-rate Industrial development and environmental improvement obligations, due 2025 (0.25% and 0.27% at December 31, 2016 and 2015, respectively) | | 2.9 |
| | 2.9 |
|
| 9.75%, due 2023 | 720.0 |
| | — |
| 720.0 |
| | 720.0 |
|
| 10.00%, due 2025 | 500.0 |
| | — |
| 500.0 |
| | 500.0 |
|
| 5.50%, due 2022 | 200.0 |
| | 200.0 |
| 200.0 |
| | 200.0 |
|
| 6.75%, due 2016 (includes interest rate swaps of $1.2 million and $3.7 million in 2015 and 2014, respectively) | 126.2 |
| | 128.7 |
| |
| 7.23%, SunBelt Notes due 2013-2017 (includes unamortized fair value premium of $0.2 million and $0.5 million and interest rate swaps of $0.4 million and $0.8 million in 2015 and 2014, respectively) | 25.0 |
| | 37.8 |
| |
| 6.75%, due 2016 | | — |
| | 125.0 |
|
| 7.23%, SunBelt Notes due 2013-2017 | | 12.2 |
| | 24.4 |
|
| Receivables financing agreement | | 210.0 |
| | — |
|
| Capital lease obligations | 4.6 |
| | 3.6 |
| 3.9 |
| | 4.6 |
|
| Total notes payable | | 3,674.5 |
| | 3,879.9 |
|
| Deferred debt issuance costs and unamortized fair value premium | | (28.5 | ) | | (32.7 | ) |
| Interest rate swaps | | (28.4 | ) | | 1.6 |
|
| Total debt | 3,881.7 |
| | 675.1 |
| 3,617.6 |
| | 3,848.8 |
|
| Amounts due within one year | 206.5 |
| | 16.4 |
| 80.5 |
| | 205.0 |
|
| Total long-term debt | $ | 3,675.2 |
| | $ | 658.7 |
| $ | 3,537.1 |
| | $ | 3,643.8 |
|
On December 20, 2016, we entered into a three year, $250.0 million Receivables Financing Agreement. Under the Receivables Financing Agreement, our eligible trade receivables are used for collateralized borrowings and are continued to be serviced by us. As of December 31, 2016, $282.3 million of our trade receivables have been pledged as collateral. During 2016 we drew $230.0 million under the agreement and subsequently repaid $20.0 million. As of December 31, 2016, $210.0 million was drawn under the Receivables Financing Agreement. In addition, the Receivables Financing Agreement incorporates the leverage and coverage covenants that are contained in the senior revolving credit facility. The net $210.0 million proceeds were used to repay a portion of the Sumitomo Credit Facility.
On the Closing Date, Spinco issued $720.0 million aggregate principal 2023 Notes and $500.0 million aggregate principal 2025 Notes to TDCC. TDCC transferred the Notes to certain unaffiliated securityholders in satisfaction of existing debt obligations of TDCC held or acquired by those unaffiliated securityholders. On October 5, 2015, certain initial purchasers purchased the Notes from the unaffiliated securityholders. During 2016, the Notes were registered under the Securities Act of 1933, as amended. Interest on the Notes began accruing from October 1, 2015 and will beare paid semi-annually beginning on April 15, 2016. The Notes are not redeemable at any time prior to October 15, 2020. Neither Olin nor Spinco received any proceeds from the sale of the Notes. Upon the consummation of the Transactions, Olin became guarantor of the Notes.
On June 23, 2015, Spinco entered into a new five-year delayed-draw term loan facility of up to $1,050.0 million. As of the Closing Date, Spinco drew $875.0 million to finance the cash portion of the Cash and Debt Distribution. Also on June 23, 2015, Olin and Spinco entered into a new five-year $1,850.0 million senior credit facility consisting of a $500.0 million senior revolving credit facility, which replaced Olin’s $265.0 million senior revolving credit facility at the closing of the Merger, and a $1,350.0 million (subject to reduction by the aggregate amount of the term loans funded to Spinco under the Spinco term loan facility) delayed-draw term loan facility. As of the Closing Date, an additional $475.0 million was drawn by Olin under this term loan facility which was used to pay fees and expenses of the Transactions, obtain additional funds for general corporate purposes and refinance Olin’s existing senior term loan facility due in 2019. Subsequent to the Closing Date, these
senior credit facilities were consolidated into a single senior credit facility. This new senior credit facility will expire in 2020. The $500.0 million senior revolving credit facility includes a $100.0 million letter of credit subfacility. At December 31, 2015,2016, we had $489.6$483.4 million available under our $500.0 million senior revolving credit facility because we had issued $10.4$16.6 million of letters of credit under the $100.0 million 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. During 2016, we repaid $67.5 million under the required quarterly installments of this new senior credit facility.
Under the new senior credit facility, we may select various floating rate borrowing options. The actual interest rate paid on borrowings under the 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 December 31, 20152016 and 2014,2015, 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 December 31, 2015,2016, there were no covenants or other restrictions that limited our ability to borrow.
On August 25, 2015, Olin entered into a Credit Agreement with a syndicate of lenders and Sumitomo Mitsui Banking Corporation, as administrative agent, in connection with the Transactions. Olin obtained term loans in an aggregate amount of $600.0 million under the Sumitomo Credit Facility. On November 3, 2015, we entered into an amendment to the Sumitomo Credit Facility which increased the aggregate amount of term loans available by $200.0 million. On the Closing Date, $600.0 million of loans under the Credit Agreement were made available and borrowed upon and on November 5, 2015, $200.0 million of loans under the Credit Agreement were made available and borrowed upon. The term loans under the Sumitomo Credit Facility will mature on October 5, 2018 and will have no scheduled amortization payments. The proceeds of the Sumitomo Credit Facility were used to refinance existing Spinco indebtedness outstanding at the Closing Date of $569.0 million, to pay fees and expenses in connection with the Transactions and for general corporate purposes. The Credit Agreement contains customary representations, warranties and affirmative and negative covenants which are substantially similar to those included in the new $1,850.0 million senior credit facility. During 2016, $210.0 million was repaid under the Sumitomo Credit Facility using proceeds from the Receivables Financing Agreement.
In June 2016, we repaid $125.0 million of 6.75% senior notes due 2016 (2016 Notes), which became due.
In 2016, we paid debt issuance costs of $1.0 million for the registration of the Notes. In 2015, we paid debt issuance costs of $13.3 million relating to the Notes, the Sumitomo Credit Facility and the new $1,850.0 million senior credit facility.
On March 26, 2015, we and certain financial institutions executed commitment letters pursuant to which the financial institutions agreed to provide $3,354.5 million of Bridge Financing, in each case on the terms and conditions set forth in the commitment letters. The Bridge Financing was not drawn on to facilitate the Acquisition and the commitments for the Bridge Financing have been terminated as of the Closing Date. For the year ended December 31, 2015, we paid debt issuance costs of $30.0 million associated with the Bridge Financing, which are included in interest expense.
In August 2014, we redeemed our $150.0 million 2019 Notes, which would have matured on August 15, 2019. We recognized interest expense of $9.5 million for the call premium ($6.7 million) and, the write-off of unamortized deferred debt issuance costs ($2.1 million) and unamortized discount ($0.7 million) related to this action during 2014. On June 24, 2014, we entered into a 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. In 2015 and 2014, we repaid $2.8 million and $0.9 million, respectively, under the required quarterly installments of the $150.0 million term loan facility and, on the Closing Date of the Acquisition, the remaining $146.3 million was refinanced using the proceeds of the new senior credit facility. We recognized interest expense of $0.5 million for the write-off of unamortized deferred debt issuance costs related to this action.
Pursuant to a note purchase agreement dated December 22, 1997, 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. Beginning on December 22, 2002 and each year through 2017, SunBelt is required to repay $12.2 million of the SunBelt Notes, of which $6.1 million is attributable to the Series O Notes and of which $6.1 million is attributable to the Series G Notes. In December 2016, 2015 2014 and 2013,2014, $12.2 million was repaid on these SunBelt Notes.
We have guaranteed the Series O Notes, and PolyOne, our former SunBelt partner, has guaranteed the Series G Notes, in both cases pursuant to customary guaranty agreements. We have agreed to indemnify PolyOne for any payments or other costs under the guarantee in favor of the purchasers of the Series G Notes, to the extent any payments or other costs arise from a default or other breach under the SunBelt Notes. If SunBelt does not make timely payments on the SunBelt Notes, whether as a result of a failure to pay on a guarantee or otherwise, the holders of the SunBelt Notes may proceed against the assets of SunBelt for repayment.
In January 2013, we repaid the $11.4 million 6.5% Senior Notes, which became due.
During 2015, assets of $1.4 million were acquired under capital leases with terms between 6 years and 7 years. During 2013, assets of $4.2 million were acquired under capital leases with terms of 7 years.
At December 31, 2015,2016, we had total letters of credit of $27.6$73.3 million outstanding, of which $10.4$16.6 million were issued under our $500.0 million senior revolving credit facility. The letters of credit are used to support certain long-term debt, certain workers compensation insurance policies, certain plant closure and post-closure obligations and certain Canadianinternational pension funding requirements.
Annual maturities of long-term debt, including capital lease obligations, are $206.5 million in 2016, $80.9$80.3 million in 2017, $901.9$691.9 million in 2018, $135.7$345.7 million in 2019, $980.3 million in 2020, $0.2 million in 2021 and a total of $1,576.4$1,576.1 million thereafter.
We haveIn April 2016, we entered into three tranches of forward starting interest rate swaps as disclosed below, whereby we agreeagreed to pay variable and fixed rates to a counterpartythe counterparties who, in turn, payspay us fixedfloating rates on $1,100.0 million, $900.0 million, and variable rates. In all cases$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 underlying index for variable rates isagreements are SMBC Capital Markets, Inc., Wells Fargo Bank, N.A. (Wells Fargo), PNC Bank, National Association, and Toronto-Dominion Bank. These counterparties are large financial institutions. We have designated the six-month LIBOR. Accordingly, payments are settled every six months and the termsswaps as cash flow hedges of the swaps are the same as the underlying debt instruments.
The following table reflectsrisk of changes in interest payments associated with our variable rate borrowings. Accordingly, the swap activity related to certain debt obligations:agreements have been recorded at their fair market value of $9.6 million and are included in other current assets and other assets on the accompanying consolidated balance sheet, with the corresponding gain deferred as a component of other comprehensive loss. No gain or loss has been recorded in earnings as a result of ineffectiveness.
|
| | | | | | | | | |
| Underlying Debt Instrument | | Swap Amount | | Date of Swap | | December 31, 2015 |
| | | ($ in millions) | | | | Olin Pays Floating Rate: |
| 6.75%, due 2016 | | $ | 65.0 |
| | March 2010 | | 3.75 - 4.75% | (a) |
| 6.75%, due 2016 | | $ | 60.0 |
| | March 2010 | | 3.75 - 4.75% | (a) |
| | | | | | | Olin Receives Floating Rate: |
| 6.75%, due 2016 | | $ | 65.0 |
| | October 2011 | | 3.75 - 4.75% | (a) |
| 6.75%, due 2016 | | $ | 60.0 |
| | October 2011 | | 3.75 - 4.75% | (a) |
| |
(a) | Actual rate is set in arrears. We project the rate will fall within the range shown. |
In March 2010,April 2016, we entered into interest rate swaps on $125$250.0 million of our underlying fixed-rate debt obligations, whereby we agreed to pay variable rates to a counterpartythe counterparties who, in turn, payspay us fixed rates. The counterpartycounterparties to these agreements is Citibank, N.A. (Citibank). are Toronto-Dominion Bank and SMBC Capital Markets, Inc., both of which are major financial institutions.
In October 2011,2016, we entered into $125 million of interest rate swaps with equal and opposite terms as the $125 million variable interest rate swaps on the 2016 Notes. We havean additional $250.0 million of our underlying fixed-rate debt obligations, whereby we agreed to pay a fixed ratevariable rates to a counterpartythe counterparties who, in turn, payspay us variablefixed rates. The counterpartycounterparties to this agreement is also Citibank. The result was a gainthese agreements are PNC Bank, National Association and Wells Fargo, both of $11.0 million onwhich are major financial institutions.
We have designated the $125 million variableApril 2016 and October 2016 interest rate swaps, which will be recognized through 2016. As of December 31, 2015, $1.2 million of this gain was included in current installments of long-term debt. In October 2011, we de-designated our $125 million interest rate swaps that had previously been designatedswap agreements as fair value hedges. The $125 million variable interest rate swaps andhedges of the $125 million fixed interest rate swaps do not meet the criteria for hedge accounting. Allrisk of changes in the fair 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 $28.5 million and are included in other long-term liabilities on the accompanying consolidated balance sheet, with a corresponding decrease in the carrying amount of the related debt. For the year ended December 31, 2016, $2.6 million of income has been recorded to interest expense on the accompanying consolidated statement of operations related to these interest rate swaps areswap agreements. No gain or loss has been recorded currently in earnings.earnings as a result of ineffectiveness.
In June 2012, we terminated $73.1 million of interest rate swaps with Wells Fargo N.A. (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 December 31, 2015, $0.42016, $0.1 million of this gain was included in current installments of long-term debt.
Our loss in the event of nonperformance by these counterparties could be significant to our financial position and results of operations. These interest rate swaps reduced interest expense by $3.7 million, $2.8 million in 2015 and $2.92.9 million in both2016, 2015
and 2014, and 2013.respectively. The difference between interest paid and interest received is included as an adjustment to interest expense.
PENSION PLANS
We sponsor domestic and foreign defined benefit pension plans for eligible employees and retirees. Most of our domestic employees participate in defined contribution pension plans. We provideHowever, a contribution to an individual retirement contribution account maintained with the Contributing Employee Ownership Plan (CEOP) equal to an amount of between 5% and 10% of the employee’s eligible compensation. The defined contribution pension plans expense was $18.1 million, $16.1 million and $15.4 million for 2015, 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 domestic 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).
Effective as of the Closing Date, we changed the approach used to measure service and interest costs for our defined benefit pension plans. Prior to the Closing Date, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Subsequent to the Closing Date, we elected to measure service and interest costs by applying the specific spot rates along the yield curve to the plans’ estimated cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.
During the fourth quarter of 2014, the Society of Actuaries (SOA) issued the final report of its mortality tables and mortality improvement scales. The updated mortality data reflected increasing life expectancies in the U.S. During the third quarter of 2012, the “Moving Ahead for Progress in the 21st Century Act” (MAP-21) became law. The law changed the mechanism for determining interest rates to be used for calculating minimum defined benefit pension plan funding requirements. Interest rates are determined using an average of rates for a 25-year period, which can have the effect of increasing the annual discount rate, reducing the defined benefit pension plan obligation, and potentially reducing or eliminating the minimum annual funding requirement. The law also increased premiums paid to the PBGC. During the third quarter of 2014, the “Highway and Transportation Funding Act” (HATFA 2014) became law, which includes an extension of MAP-21’s defined benefit plan funding stabilization relief.
During 2016, we made a discretionary cash contribution to our domestic qualified defined benefit pension plan of $6.0 million. Based on our plan assumptions and estimates, we will not be required to make any cash contributions to the domestic qualified defined benefit pension plan at least through 2016.2017.
We have international qualified defined benefit pension plans to which we made cash contributions of $1.3 million and $0.9 million in 2016 and 2015, respectively, and we anticipate less than $5 million of cash contributions to international qualified defined benefit pension plans in 2017.
As of the Closing Date and as part of the Acquisition, our U.S.domestic qualified defined benefit pension plan assumed certain U.S.domestic qualified defined benefit pension obligations and assets related to active employees and certain terminated, vested retirees of the Acquired Business with an estimateda net liability of $286.5 million, subject to certain post-closing adjustments.$281.7 million. In connection therewith, pension assets will bewere transferred from TDCC’s U.S.domestic qualified defined benefit pension plans to our U.S.domestic qualified defined benefit pension plan. Immediately prior to the Acquisition, the Acquired Business’s participant accounts assumed in the Acquisition were closed to new participants and were no longer accruing additional benefits.
Also as of the Closing Date, we assumed certain accrued defined benefit pension liabilities relating to employees of TDCC in Germany, Switzerland and other international locations who transferred to Olin in connection with the Acquisition. The estimated net liability assumed as of the Closing Date was $160.6 million, subject to post-closing adjustments.million.
Pension Obligations and Funded Status
Changes in the benefit obligation and plan assets were as follows:
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2016 | | December 31, 2015 |
| | ($ in millions) | | ($ in millions) | ($ in millions) | | ($ in millions) |
| Change in Benefit Obligation | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total |
| Benefit obligation at beginning of year | $ | 2,116.5 |
| | $ | 66.3 |
| | $ | 2,182.8 |
| | $ | 1,916.5 |
| | $ | 62.2 |
| | $ | 1,978.7 |
| $ | 2,458.5 |
| | $ | 227.4 |
| | $ | 2,685.9 |
| | $ | 2,116.5 |
| | $ | 66.3 |
| | $ | 2,182.8 |
|
| Service cost | 2.1 |
| | 2.2 |
| | 4.3 |
| | 2.3 |
| | 0.5 |
| | 2.8 |
| 1.3 |
| | 7.6 |
| | 8.9 |
| | 2.1 |
| | 2.2 |
| | 4.3 |
|
| Interest cost | 80.2 |
| | 3.1 |
| | 83.3 |
| | 83.8 |
| | 2.7 |
| | 86.5 |
| 82.4 |
| | 5.3 |
| | 87.7 |
| | 80.2 |
| | 3.1 |
| | 83.3 |
|
| Actuarial (gain) loss | (45.8 | ) | | 1.8 |
| | (44.0 | ) | | 245.8 |
| | 9.8 |
| | 255.6 |
| 88.7 |
| | 20.4 |
| | 109.1 |
| | (45.8 | ) | | 1.8 |
| | (44.0 | ) |
| Benefits paid | (205.6 | ) | | (2.8 | ) | | (208.4 | ) | | (131.9 | ) | | (3.6 | ) | | (135.5 | ) | (132.2 | ) | | (3.4 | ) | | (135.6 | ) | | (205.6 | ) | | (2.8 | ) | | (208.4 | ) |
| Curtailments/settlements | 12.6 |
| | 0.1 |
| | 12.7 |
| | — |
| | 0.2 |
| | 0.2 |
| — |
| | — |
| | — |
| | 12.6 |
| | 0.1 |
| | 12.7 |
|
| Plan participant’s contributions | | — |
| | 0.9 |
| | 0.9 |
| | — |
| | — |
| | — |
|
| Plan amendments | | — |
| | (1.2 | ) | | (1.2 | ) | | — |
| | — |
| | — |
|
| Business combination | 498.5 |
| | 171.4 |
| | 669.9 |
| | — |
| | — |
| | — |
| (32.5 | ) | | — |
| | (32.5 | ) | | 498.5 |
| | 171.4 |
| | 669.9 |
|
| Currency translation adjustments | — |
| | (14.7 | ) | | (14.7 | ) | | — |
| | (5.5 | ) | | (5.5 | ) | — |
| | (6.0 | ) | | (6.0 | ) | | — |
| | (14.7 | ) | | (14.7 | ) |
| Benefit obligation at end of year | $ | 2,458.5 |
| | $ | 227.4 |
| | $ | 2,685.9 |
| | $ | 2,116.5 |
| | $ | 66.3 |
| | $ | 2,182.8 |
| $ | 2,466.2 |
| | $ | 251.0 |
| | $ | 2,717.2 |
| | $ | 2,458.5 |
| | $ | 227.4 |
| | $ | 2,685.9 |
|
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2016 | | December 31, 2015 |
| | ($ in millions) | | ($ in millions) | ($ in millions) | | ($ in millions) |
| Change in Plan Assets | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total |
| Fair value of plans’ assets at beginning of year | $ | 1,915.4 |
| | $ | 63.3 |
| | $ | 1,978.7 |
| | $ | 1,798.6 |
| | $ | 62.1 |
| | $ | 1,860.7 |
| $ | 1,974.0 |
| | $ | 62.5 |
| | $ | 2,036.5 |
| | $ | 1,915.4 |
| | $ | 63.3 |
| | $ | 1,978.7 |
|
| Actual return on plans’ assets | (25.4 | ) | | 0.4 |
| | (25.0 | ) | | 244.2 |
| | 9.4 |
| | 253.6 |
| 191.5 |
| | 3.5 |
| | 195.0 |
| | (25.4 | ) | | 0.4 |
| | (25.0 | ) |
| Employer contributions | 77.6 |
| | 1.0 |
| | 78.6 |
| | 4.5 |
| | 0.9 |
| | 5.4 |
| 6.4 |
| | 2.0 |
| | 8.4 |
| | 77.6 |
| | 1.0 |
| | 78.6 |
|
| Benefits paid | (205.6 | ) | | (2.8 | ) | | (208.4 | ) | | (131.9 | ) | | (3.6 | ) | | (135.5 | ) | (132.2 | ) | | (3.4 | ) | | (135.6 | ) | | (205.6 | ) | | (2.8 | ) | | (208.4 | ) |
| Business combination | 212.0 |
| | 10.8 |
| | 222.8 |
| | — |
| | — |
| | — |
| (27.7 | ) | | — |
| | (27.7 | ) | | 212.0 |
| | 10.8 |
| | 222.8 |
|
| Currency translation adjustments | — |
| | (10.2 | ) | | (10.2 | ) | | — |
| | (5.5 | ) | | (5.5 | ) | — |
| | 1.9 |
| | 1.9 |
| | — |
| | (10.2 | ) | | (10.2 | ) |
| Fair value of plans’ assets at end of year | $ | 1,974.0 |
| | $ | 62.5 |
| | $ | 2,036.5 |
| | $ | 1,915.4 |
| | $ | 63.3 |
| | $ | 1,978.7 |
| $ | 2,012.0 |
| | $ | 66.5 |
| | $ | 2,078.5 |
| | $ | 1,974.0 |
| | $ | 62.5 |
| | $ | 2,036.5 |
|
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2016 | | December 31, 2015 |
| | ($ in millions) | | ($ in millions) | ($ in millions) | | ($ in millions) |
| Funded Status | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total |
| Qualified plans | $ | (480.8 | ) | | $ | (163.5 | ) | | $ | (644.3 | ) | | $ | (137.5 | ) | | $ | (1.2 | ) | | $ | (138.7 | ) | $ | (450.6 | ) | | $ | (182.6 | ) | | $ | (633.2 | ) | | $ | (480.8 | ) | | $ | (163.5 | ) | | $ | (644.3 | ) |
| Non-qualified plans | (3.7 | ) | | (1.4 | ) | | (5.1 | ) | | (63.6 | ) | | (1.8 | ) | | (65.4 | ) | (3.6 | ) | | (1.9 | ) | | (5.5 | ) | | (3.7 | ) | | (1.4 | ) | | (5.1 | ) |
| Total funded status | $ | (484.5 | ) | | $ | (164.9 | ) | | $ | (649.4 | ) | | $ | (201.1 | ) | | $ | (3.0 | ) | | $ | (204.1 | ) | $ | (454.2 | ) | | $ | (184.5 | ) | | $ | (638.7 | ) | | $ | (484.5 | ) | | $ | (164.9 | ) | | $ | (649.4 | ) |
Under ASC 715 we recorded a $40.7 million after-tax charge ($66.1 million pretax) to shareholders’ equity as of December 31, 2016 for our pension plans. This charge reflected a 30-basis point decrease in the domestic pension plans’ discount rate, partially offset by favorable performance on plan assets during 2016. In 2015, we recorded a $78.8 million after-tax charge ($125.4 million pretax) to shareholders’ equity as of December 31, 2015 for our pension plans. This charge reflected unfavorable performance on plan assets during 2015 partially offset by a 50-basis point increasedecrease in the domestic pension plans’ discount rate. In 2014, we recorded an $84.8
The $109.1 million after-tax charge ($138.9 million pretax)actuarial loss for 2016 was primarily due to shareholders’ equity as of December 31, 2014 for our pension plans. This charge reflected a 60-basis30-basis point decrease in the domestic pension plans’ discount rate and the negative impact of the newly mandated mortality tables, partially offset by favorable performance on plan assets during rate.
The $44.0 million actuarial gain for 2015 was primarily due to a 50-basis point increase in the domestic pension plans’ discount
rate. The $12.7 million curtailments/settlements for 2015 was primarily due to the change in control which created a mandatory acceleration of payments under the domestic non-qualified pension plan as a result of the Acquisition. The $255.6 million actuarial loss for 2014 was primarily due to a 60-basis point decrease in the plans’ discount rate and the negative impact
of the newly mandated mortality tables. Our benefit obligation as of December 31, 2014 increased approximately $90.0 as a result of the newly mandated mortality tables.
Amounts recognized in the consolidated balance sheets consisted of:
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2016 | | December 31, 2015 |
| | ($ in millions) | | ($ in millions) | ($ in millions) | | ($ in millions) |
| | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total |
| Accrued benefit in current liabilities | $ | (0.4 | ) | | $ | (0.1 | ) | | $ | (0.5 | ) | | $ | (21.8 | ) | | $ | (0.3 | ) | | $ | (22.1 | ) | $ | (0.4 | ) | | $ | (0.2 | ) | | $ | (0.6 | ) | | $ | (0.4 | ) | | $ | (0.1 | ) | | $ | (0.5 | ) |
| Accrued benefit in noncurrent liabilities | (484.1 | ) | | (164.8 | ) | | (648.9 | ) | | (179.3 | ) | | (2.7 | ) | | (182.0 | ) | (453.8 | ) | | (184.3 | ) | | (638.1 | ) | | (484.1 | ) | | (164.8 | ) | | (648.9 | ) |
| Accumulated other comprehensive loss | 714.2 |
| | 26.6 |
| | 740.8 |
| | 654.8 |
| | 23.0 |
| | 677.8 |
| 743.1 |
| | 43.5 |
| | 786.6 |
| | 714.2 |
| | 26.6 |
| | 740.8 |
|
| Net balance sheet impact | $ | 229.7 |
| | $ | (138.3 | ) | | $ | 91.4 |
| | $ | 453.7 |
| | $ | 20.0 |
| | $ | 473.7 |
| $ | 288.9 |
| | $ | (141.0 | ) | | $ | 147.9 |
| | $ | 229.7 |
| | $ | (138.3 | ) | | $ | 91.4 |
|
At December 31, 20152016 and 2014,2015, the benefit obligation of non-qualified pension plans was $5.1$5.5 million and $65.4$5.1 million, respectively, and was included in the above pension benefit obligation. There were no plan assets for these non-qualified pension plans. Benefit payments for the non-qualified pension plans are expected to be as follows: 2016—2017—$0.6 million; 2018—$0.5 million; 2017—2019—$0.50.6 million; 2018—2020—$0.4 million; 2019—$0.50.6 million; and 2020—2021—$0.60.3 million. Benefit payments for the qualified plans are projected to be as follows: 2016—$135.9 million; 2017—$135.7135.5 million; 2018—$136.5136.8 million; 2019—$136.6136.9 million; 2020—$137.7 million; and 2020—2021—$136.7136.5 million.
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Projected benefit obligation | $ | 2,685.9 |
| | $ | 2,182.8 |
| $ | 2,717.2 |
| | $ | 2,685.9 |
|
| Accumulated benefit obligation | 2,655.0 |
| | 2,170.8 |
| 2,685.7 |
| | 2,655.0 |
|
| Fair value of plan assets | 2,036.5 |
| | 1,978.7 |
| 2,078.5 |
| | 2,036.5 |
|
| | | | Years Ended December 31, | Years Ended December 31, |
| 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
Components of Net Periodic Benefit Costs (Income)
| ($ in millions) | ($ in millions) |
| Service cost | $ | 7.8 |
| | $ | 5.3 |
| | $ | 6.2 |
| $ | 12.3 |
| | $ | 7.8 |
| | $ | 5.3 |
|
| Interest cost | 83.3 |
| | 86.5 |
| | 81.1 |
| 87.7 |
| | 83.3 |
| | 86.5 |
|
| Expected return on plans’ assets | (147.4 | ) | | (139.5 | ) | | (137.5 | ) | (157.8 | ) | | (147.4 | ) | | (139.5 | ) |
| Amortization of prior service cost | 1.6 |
| | 2.2 |
| | 1.9 |
| — |
| | 1.6 |
| | 2.2 |
|
| Recognized actuarial loss | 26.2 |
| | 20.3 |
| | 27.8 |
| 20.7 |
| | 26.2 |
| | 20.3 |
|
| Curtailments/settlements | 47.2 |
| | 0.2 |
| | — |
| — |
| | 47.2 |
| | 0.2 |
|
| Net periodic benefit costs (income) | $ | 18.7 |
| | $ | (25.0 | ) | | $ | (20.5 | ) | $ | (37.1 | ) | | $ | 18.7 |
| | $ | (25.0 | ) |
| | | | | | | | | | | |
| Included in Other Comprehensive Loss (Pretax) | | | | | | | | | | |
| Liability adjustment | $ | 125.4 |
| | $ | 138.9 |
| | $ | 14.4 |
| $ | 66.1 |
| | $ | 125.4 |
| | $ | 138.9 |
|
| Amortization of prior service costs and actuarial losses | (62.4 | ) | | (22.7 | ) | | (29.7 | ) | (20.7 | ) | | (62.4 | ) | | (22.7 | ) |
The $47.2 million curtailments/settlements for 2015 were due to a settlement of $47.1 million of costs incurred as a result of the change in control which created a mandatory acceleration of payments under the domestic non-qualified pension plan as a result of the Acquisition. These charges were included in acquisition-related costs. Also, for the years ended December 31, 2015 and 2014, we recorded a curtailment charge of $0.1 million and $0.2 million, respectively, associated with permanently closing a portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. These charges were included in restructuring charges.
The defined benefit pension plans’ actuarial loss that will be recognized from accumulated other comprehensive loss into net periodic benefit income in 20162017 will be approximately $22$27 million.
The service cost and the amortization of prior service cost components of pension expense related to the employees of the operating segments are allocated to the operating segments based on their respective estimated census data.
Pension Plan Assumptions
Certain actuarial assumptions, such as discount rate and long-term rate of return on plan assets, have a significant effect on the amounts reported for net periodic benefit cost and accrued benefit obligation amounts. We use a measurement date of December 31 for our pension plans.
| | | | U.S. Pension Benefits | | Foreign Pension Benefits | U.S. Pension Benefits | | Foreign Pension Benefits |
| Weighted-Average Assumptions | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Discount rate—periodic benefit cost | 3.9 | % | | 4.5 | % | | 3.9 | % | | 2.8 | % | | 4.8 | % | | 4.2 | % | 4.4%(1) |
| | 3.9 | % | | 4.5 | % | | 2.7 | % | | 2.8 | % | | 4.8 | % |
| Expected return on assets | 7.75 | % | | 7.75 | % | | 7.75 | % | | 6.0 | % | | 7.5 | % | | 7.75 | % | 7.75 | % | | 7.75 | % | | 7.75 | % | | 6.0 | % | | 6.0 | % | | 7.50 | % |
| Rate of compensation increase | 3.0 | % | | 3.0 | % | | 3.0 | % | | 3.0 | % | | 3.5 | % | | 3.5 | % | 3.0 | % | | 3.0 | % | | 3.0 | % | | 3.0 | % | | 3.0 | % | | 3.5 | % |
| Discount rate—benefit obligation | 4.4 | % | | 3.9 | % | | 4.5 | % | | 2.7 | % | | 3.9 | % | | 4.8 | % | 4.1 | % | | 4.4 | % | | 3.9 | % | | 2.3 | % | | 2.7 | % | | 3.9 | % |
(1) The discount rate—periodic benefit cost for our domestic qualified pension plan is comprised of the discount rate used to determine interest costs of 3.5% and the discount rate used to determine service costs of 4.6%.
The discount rate is based on a hypothetical yield curve represented by a series of annualized individual zero-coupon bond spot rates for maturities ranging from one-half to thirty years. The bonds used in the yield curve must have a rating of AA or better per Standard & Poor’s, be non-callable, and have at least $250 million par outstanding. The yield curve is then applied to the projected benefit payments from the plan. Based on these bonds and the projected benefit payment streams, the single rate that produces the same yield as the matching bond portfolio rounded to the nearest quarter point, is used as the discount rate.
The long-term expected rate of return on plan assets represents an estimate of the long-term rate of returns on the investment portfolio consisting of equities, fixed income and alternative investments. We use long-term historical actual return information, the allocation mix of investments that comprise plan assets, and forecast estimates of long-term investment returns, including inflation rates, by reference to external sources. The historic rates of return on plan assets have been 7.5%7.0% for the last 5 years, 9.3%9.1% for the last 10 years and 8.0%9.0% for the last 15 years. The following rates of return by asset class were considered in setting the long-term rate of return assumption:
|
| | | | | |
| U.S. equities | 9% | | to | | 13% |
| Non-U.S. equities | 10% | | to | | 14% |
| Fixed income/cash | 5% | | to | | 9% |
| Alternative investments | 5% | | to | | 15% |
| Absolute return strategies | 8% | | to | | 12% |
Plan Assets
Our pension plan asset allocation at December 31, 20152016 and 2014,2015 by asset class was as follows:
| | | | Percentage of Plan Assets | Percentage of Plan Assets |
| Asset Class | 2015 | | 2014 | 2016 | | 2015 |
| U.S. equities | 4 | % | | 4 | % | 19 | % | | 4 | % |
| Non-U.S. equities | 6 | % | | 7 | % | 15 | % | | 6 | % |
| Fixed income/cash | 47 | % | | 52 | % | 35 | % | | 47 | % |
Acquisition plan receivable
| 10 | % | | — | % | — | % | | 10 | % |
| Alternative investments | 19 | % | | 21 | % | 20 | % | | 19 | % |
| Absolute return strategies | 14 | % | | 16 | % | 11 | % | | 14 | % |
| Total | 100 | % | | 100 | % | 100 | % | | 100 | % |
The Alternative Investments asset class includes hedge funds, real estate and private equity investments. The Alternative Investments class is intended to help diversify risk and increase returns by utilizing a broader group of assets.
Absolute Return Strategies further diversify the plan’s assets through the use of asset allocations that seek to provide a targeted rate of return over inflation. The investment managers allocate funds within asset classes that they consider to be undervalued in an effort to preserve gains in overvalued asset classes and to find opportunities in undervalued asset classes.
A master trust was established by our pension plan to accumulate funds required to meet benefit payments of our plan and is administered solely in the interest of our plan’s participants and their beneficiaries. The master trust’s investment horizon is long term. Its assets are managed by professional investment managers or invested in professionally managed investment vehicles.
Our pension plan maintains a portfolio of assets designed to achieve an appropriate risk adjusted return. The portfolio of assets is also structured to protect the funding level from the negative impacts of interest rate changes on the asset and liability values. This is accomplished by investing in a portfolio of assets with a maturity duration that approximately matches the duration of the plan liabilities. Risk is managedmanage risk by diversifying assets across asset classes whose return patterns are not highly correlated, investing in passively and actively managed strategies and in value and growth styles, and by periodic rebalancing of asset classes, strategies and investment styles to objectively set targets.
As of December 31, 2015,2016, the following target allocation and ranges have been set for each asset class:
|
| | | | |
| Asset Class | Target Allocation | | Target Range |
| U.S. equities | 627 | % | | 0-1419-35 |
| Non-U.S. equities | 18 | % | | 4-35 |
| Fixed income/cash | 29 | % | | 20-80 |
| Alternative investments | 6 | % | | 0-14 |
Fixed income/cash | 61 | % | | 48-80 |
Alternative investments | 7 | % | | 0-280-32 |
| Absolute return strategies | 20 | % | | 10-30 |
We have international qualified defined benefit pension plans to which we made cash contributions of $0.9 million and $0.8 million in 2015 and 2014, respectively, and we anticipate less than $5 million of cash contributions to international qualified defined benefit pension plans in 2016.
Determining which hierarchical level an asset or liability falls within requires significant judgment. The following table summarizes our domestic and foreign defined benefit pension plan assets measured at fair value as of December 31, 2015:2016:
| | | Asset Class | Quoted Prices
In Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total | Investments Measured at NAV(1) | | Quoted Prices
In Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| | ($ in millions) | | | ($ in millions) |
| Equity securities | | | | | | | | | | | | | | | | |
| U.S. equities | $ | 36.4 |
| | $ | 43.2 |
| | $ | — |
| | $ | 79.6 |
| $ | 241.4 |
| | $ | 143.2 |
| | $ | — |
| | $ | — |
| | $ | 384.6 |
|
| Non-U.S. equities | 0.8 |
| | 121.9 |
| | — |
| | 122.7 |
| 248.6 |
| | 38.6 |
| | 29.9 |
| | — |
| | 317.1 |
|
| Acquisition plan receivable | — |
| | — |
| | 212.0 |
| | 212.0 |
| |
| Fixed income/cash | | | | | | | |
|
| | | | | | | | |
| Cash | 60.1 |
| | — |
| | — |
| | 60.1 |
| — |
| | 259.6 |
| | — |
| | — |
| | 259.6 |
|
| Government treasuries | — |
| | 425.6 |
| | 2.0 |
| | 427.6 |
| 18.2 |
| | — |
| | 169.4 |
| | — |
| | 187.6 |
|
| Corporate debt instruments | 0.3 |
| | 301.9 |
| | 12.0 |
| | 314.2 |
| 51.8 |
| | 0.2 |
| | 129.6 |
| | — |
| | 181.6 |
|
| Asset-backed securities | — |
| | 155.6 |
| | — |
| | 155.6 |
| 61.4 |
| | — |
| | 36.4 |
| | — |
| | 97.8 |
|
| Alternative investments | | | | | | | |
|
| | | | | | | | |
| Hedge fund of funds | — |
| | — |
| | 335.6 |
| | 335.6 |
| 380.6 |
| | — |
| | — |
| | — |
| | 380.6 |
|
| Real estate funds | — |
| | — |
| | 27.4 |
| | 27.4 |
| 22.5 |
| | — |
| | — |
| | — |
| | 22.5 |
|
| Private equity funds | — |
| | — |
| | 18.4 |
| | 18.4 |
| 16.4 |
| | — |
| | — |
| | — |
| | 16.4 |
|
| Absolute return strategies | — |
| | 264.6 |
| | 18.7 |
| | 283.3 |
| 230.7 |
| | — |
| | — |
| | — |
| | 230.7 |
|
| Total assets | $ | 97.6 |
| | $ | 1,312.8 |
| | $ | 626.1 |
| | $ | 2,036.5 |
| $ | 1,271.6 |
| | $ | 441.6 |
| | $ | 365.3 |
| | $ | — |
| | $ | 2,078.5 |
|
The following table summarizes our domestic and foreign defined benefit pension plan assets measured at fair value as of December 31, 2014:2015:
| | | Asset Class | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | Investments Measured at NAV(1) | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| | ($ in millions) | | | ($ in millions) |
| Equity securities | | | | | | | | | | | | | | | | |
| U.S. equities | $ | 69.8 |
| | $ | 12.4 |
| | $ | — |
| | $ | 82.2 |
| $ | 43.2 |
| | $ | 36.4 |
| | $ | — |
| | $ | — |
| | $ | 79.6 |
|
| Non-U.S. equities | 35.4 |
| | 115.5 |
| | — |
| | 150.9 |
| 118.2 |
| | 0.8 |
| | 3.7 |
| | — |
| | 122.7 |
|
| Acquisition plan receivable | | — |
| | — |
| | — |
| | 212.0 |
| | 212.0 |
|
| Fixed income/cash | | | | | | | |
|
| | | | | | | | |
| Cash | 65.7 |
| | — |
| | — |
| | 65.7 |
| — |
| | 60.1 |
| | — |
| | — |
| | 60.1 |
|
| Government treasuries | — |
| | 465.6 |
| | 4.3 |
| | 469.9 |
| 41.7 |
| | — |
| | 385.9 |
| | — |
| | 427.6 |
|
| Corporate debt instruments | 0.4 |
| | 329.7 |
| | 9.6 |
| | 339.7 |
| 52.8 |
| | 0.3 |
| | 261.1 |
| | — |
| | 314.2 |
|
| Asset-backed securities | — |
| | 150.5 |
| | — |
| | 150.5 |
| 118.6 |
| | — |
| | 37.0 |
| | — |
| | 155.6 |
|
| Alternative investments | | | | | | | |
|
| | | | | | | | |
| Hedge fund of funds | — |
| | — |
| | 358.8 |
| | 358.8 |
| 335.6 |
| | — |
| | — |
| | — |
| | 335.6 |
|
| Real estate funds | — |
| | — |
| | 34.0 |
| | 34.0 |
| 27.4 |
| | — |
| | — |
| | — |
| | 27.4 |
|
| Private equity funds | — |
| | — |
| | 17.7 |
| | 17.7 |
| 18.4 |
| | — |
| | — |
| | — |
| | 18.4 |
|
| Absolute return strategies | — |
| | 289.0 |
| | 20.3 |
| | 309.3 |
| 283.3 |
| | — |
| | — |
| | — |
| | 283.3 |
|
| Total assets | $ | 171.3 |
| | $ | 1,362.7 |
| | $ | 444.7 |
| | $ | 1,978.7 |
| $ | 1,039.2 |
| | $ | 97.6 |
| | $ | 687.7 |
| | $ | 212.0 |
| | $ | 2,036.5 |
|
| |
| (1) | Investments measured at net asset value (NAV) as a practical expedient reflect the adoption of ASU 2015-07, which was applied retrospectively, and, therefore, all prior periods have been retrospectively adjusted. |
U.S. equities—This class included actively and passively managed equity investments in common stock and commingled funds comprised primarily of large-capitalization stocks with value, core and growth strategies.
Non-U.S. equities—This class included actively managed equity investments in commingled funds comprised primarily of international large-capitalization stocks from both developed and emerging markets.
Acquisition plan receivable—This class included pension assets which will be transferred from TDCC’s U.S. qualified defined benefit pension plan trustee to our qualified defined benefit pension plan trustee in the form of cash related to the Acquisition. ThisAs of December 31, 2015, this amount iswas subject to certain post-closing adjustments. During 2016, assets of $184.3 million were transferred from TDCC’s U.S. qualified defined benefit pension plan trustee to our qualified defined benefit pension plan trustee, resulting in the settlement of the acquisition plan receivable.
Fixed income and cash—This class included commingled funds comprised of debt instruments issued by the U.S. and Canadian Treasuries, U.S. Agencies, corporate debt instruments, asset- and mortgage-backed securities and cash.
Hedge fund of funds—This class included a hedge fund which invests in the following types of hedge funds:
Event driven hedge funds—This class included hedge funds that invest in securities to capture excess returns that are driven by market or specific company events including activist investment philosophies and the arbitrage of equity and private and public debt securities.
Market neutral hedge funds—This class included investments in U.S. and international equities and fixed income securities while maintaining a market neutral position in those markets.
Other hedge funds—This class primarily included long-short equity strategies and a global macro fund which invested in fixed income, equity, currency, commodity and related derivative markets.
Real estate funds—This class included several funds that invest primarily in U.S. commercial real estate.
Private equity funds—This class included several private equity funds that invest primarily in infrastructure and U.S. power generation and transmission assets.
Absolute return strategies—This class included multiple strategies which use asset allocations that seek to provide a targeted rate of return over inflation. The investment managers allocate funds within asset classes that they consider to be undervalued in an effort to preserve gains in overvalued asset classes and to find opportunities in undervalued asset classes.
U.S. equities and non-U.S. equities are primarily valued at the net asset value provided by the independent administrator or custodian of the commingled fund. The net asset value is based on the value of the underlying equities, which are traded on an active market. U.S. equities are also valued at the closing price reported in an active market on which the individual securities are traded. FixedA portion of our fixed income investments are primarily valued at the net asset value provided by the independent administrator or custodian of the fund. The net asset value is based on the underlying assets, which are valued using inputs such as the closing price reported, if traded on an active market, values derived from comparable securities of issuers with similar credit ratings, or under a discounted cash flow approach that utilizes observable inputs, such as current yields of similar instruments, but includes adjustments for risks that may not be observable such as certain credit and liquidity risks. Alternative investments are primarily valued at the net asset value as determined by the independent administrator or custodian of the fund. The net asset value is based on the underlying investments, which are valued using inputs such as quoted market prices of identical instruments, discounted future cash flows, independent appraisals and market-based comparable data. Absolute return strategies are commingled funds which reflect the fair value of our ownership interest in these funds. The investments in these commingled funds include some or all of the above asset classes and are primarily valued at net asset values based on the underlying investments, which are valued consistent with the methodologies described above for each asset class.
The following table summarizes the activity for our defined benefit pension plans level 3 assets for the year ended December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | Realized
Gain/(Loss) | | Unrealized Gain/(Loss) Relating to Assets Held at Period End | | Purchases, Sales, Settlements, and Other | | Transfers
In/(Out) | | December 31, 2016 |
| | ($ in millions) |
| Acquisition plan receivable | $ | 212.0 |
| | $ | — |
| | $ | — |
| | $ | (212.0 | ) | | $ | — |
| | $ | — |
|
The following table summarizes the activity for our defined benefit pension plans level 3 assets for the year ended December 31, 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | | Realized
Gain/(Loss) | | Unrealized Gain/(Loss) Relating to Assets Held at Period End | | Purchases, Sales, Settlements, and Other | | Transfers
In/(Out) | | December 31, 2015 |
| | ($ in millions) |
| Acquisition plan receivable | $ | — |
| | $ | — |
| | $ | — |
| | $ | 212.0 |
| | $ | — |
| | $ | 212.0 |
|
| Fixed income/cash | | | | | | | | | | | |
| Government treasuries | 4.3 |
| | — |
| | (0.7 | ) | | (1.6 | ) | | — |
| | 2.0 |
|
| Corporate debt instruments | 9.6 |
| | 0.5 |
| | (0.2 | ) | | 2.1 |
| | — |
| | 12.0 |
|
| Alternative investments | | | | | | | | | | | |
| Hedge fund of funds | 358.8 |
| | 7.2 |
| | (3.4 | ) | | (27.0 | ) | | — |
| | 335.6 |
|
| Real estate funds | 34.0 |
| | 2.4 |
| | 3.7 |
| | (12.7 | ) | | — |
| | 27.4 |
|
| Private equity funds | 17.7 |
| | 0.2 |
| | 0.8 |
| | (0.3 | ) | | — |
| | 18.4 |
|
| Absolute return strategies | 20.3 |
| | — |
| | (0.5 | ) | | (1.1 | ) | | — |
| | 18.7 |
|
| Total level 3 assets | $ | 444.7 |
| | $ | 10.3 |
| | $ | (0.3 | ) | | $ | 171.4 |
| | $ | — |
| | $ | 626.1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | | Realized Gain/(Loss) | | Unrealized Gain/(Loss) Relating to Assets Held at Period End | | Purchases, Sales, Settlements, and Other | | Transfers In/(Out) | | December 31, 2015 |
| | ($ in millions) |
| Acquisition plan receivable | $ | — |
| | $ | — |
| | $ | — |
| | $ | 212.0 |
| | $ | — |
| | $ | 212.0 |
|
The following table summarizes the activity for our defined benefit pension plans level 3 assets for the year ended December 31, 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | | Realized Gain/(Loss) | | Unrealized Gain/(Loss) Relating to Assets Held at Period End | | Purchases, Sales, Settlements, and Other | | Transfers In/(Out) | | December 31, 2014 |
| | ($ in millions) |
| Fixed income/cash | | | | | | | | | | | |
| Government treasuries | $ | 4.5 |
| | $ | — |
| | $ | (0.3 | ) | | $ | 0.1 |
| | $ | — |
| | $ | 4.3 |
|
| Corporate debt instruments | 21.5 |
| | 2.0 |
| | (1.3 | ) | | (12.6 | ) | | — |
| | 9.6 |
|
| Alternative investments | | | | | | | | | | | |
| Hedge fund of funds | 315.9 |
| | — |
| | 17.9 |
| | 25.0 |
| | — |
| | 358.8 |
|
| Real estate funds | 35.7 |
| | 1.6 |
| | 2.0 |
| | (5.3 | ) | | — |
| | 34.0 |
|
| Private equity funds | 17.9 |
| | — |
| | (0.2 | ) | | — |
| | — |
| | 17.7 |
|
| Absolute return strategies | 18.7 |
| | — |
| | 0.8 |
| | 0.8 |
| | — |
| | 20.3 |
|
| Total level 3 assets | $ | 414.2 |
| | $ | 3.6 |
| | $ | 18.9 |
| | $ | 8.0 |
| | $ | — |
| | $ | 444.7 |
|
POSTRETIREMENT BENEFITS
We 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. We use a measurement date of December 31 for our postretirement plans.
Effective as of December 31, 2015, we changed the approach used to measure service and interest costs for our other postretirement benefits. For the year ended December 31, 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Beginning in 2016 for our other postretirement benefits, we elected to measure service and interest costs by applying the specific spot rates along the yield curve to the plans’ estimated cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.
Other Postretirement Benefits Obligations and Funded Status
Changes in the benefit obligation were as follows:
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2016 | | December 31, 2015 |
| | ($ in millions) | | ($ in millions) | ($ in millions) | | ($ in millions) |
| Change in Benefit Obligation | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total |
| Benefit obligation at beginning of year | $ | 58.5 |
| | $ | 8.7 |
| | $ | 67.2 |
| | $ | 59.0 |
| | $ | 8.6 |
| | $ | 67.6 |
| $ | 53.9 |
| | $ | 8.1 |
| | $ | 62.0 |
| | $ | 58.5 |
| | $ | 8.7 |
| | $ | 67.2 |
|
| Service cost | 1.1 |
| | 0.1 |
| | 1.2 |
| | 1.0 |
| | 0.1 |
| | 1.1 |
| 0.8 |
| | 0.4 |
| | 1.2 |
| | 1.1 |
| | 0.1 |
| | 1.2 |
|
| Interest cost | 2.0 |
| | 0.3 |
| | 2.3 |
| | 2.3 |
| | 0.4 |
| | 2.7 |
| 1.2 |
| | 0.4 |
| | 1.6 |
| | 2.0 |
| | 0.3 |
| | 2.3 |
|
| Actuarial loss (gain) | (0.7 | ) | | 0.7 |
| | — |
| | 2.4 |
| | 0.7 |
| | 3.1 |
| (5.1 | ) | | — |
| | (5.1 | ) | | (0.7 | ) | | 0.7 |
| | — |
|
| Benefits paid | (7.0 | ) | | (0.3 | ) | | (7.3 | ) | | (6.2 | ) | | (0.4 | ) | | (6.6 | ) | (7.2 | ) | | (0.4 | ) | | (7.6 | ) | | (7.0 | ) | | (0.3 | ) | | (7.3 | ) |
| Currency translation adjustments | — |
| | (1.5 | ) | | (1.5 | ) | | — |
| | (0.7 | ) | | (0.7 | ) | — |
| | 0.1 |
| | 0.1 |
| | — |
| | (1.5 | ) | | (1.5 | ) |
| Curtailment | — |
| | 0.1 |
| | 0.1 |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
|
| Benefit obligation at end of year | $ | 53.9 |
| | $ | 8.1 |
| | $ | 62.0 |
| | $ | 58.5 |
| | $ | 8.7 |
| | $ | 67.2 |
| $ | 43.6 |
| | $ | 8.6 |
| | $ | 52.2 |
| | $ | 53.9 |
| | $ | 8.1 |
| | $ | 62.0 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| | ($ in millions) | | ($ in millions) |
| | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total |
| Funded status | $ | (53.9 | ) | | $ | (8.1 | ) | | $ | (62.0 | ) | | $ | (58.5 | ) | | $ | (8.7 | ) | | $ | (67.2 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | ($ in millions) | | ($ in millions) |
| | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total |
| Funded status | $ | (43.6 | ) | | $ | (8.6 | ) | | $ | (52.2 | ) | | $ | (53.9 | ) | | $ | (8.1 | ) | | $ | (62.0 | ) |
Under ASC 715 we recorded a $3.2 million after-tax benefit ($5.1 million pretax) to shareholders’ equity as of December 31, 2016 for our other postretirement plans. In 2015, we recorded an after-tax benefit of less than $0.1 million ($0.1 million pretax) to shareholders’ equity as of December 31, 2015 for our other postretirement plans. In 2014, we recorded a $1.8 million after-tax charge ($3.1 million pretax) to shareholders’ equity as of December 31, 2014 for our other postretirement plans.
Amounts recognized in the consolidated balance sheets consisted of:
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2016 | | December 31, 2015 |
| | ($ in millions) | | ($ in millions) | ($ in millions) | | ($ in millions) |
| | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total |
| Accrued benefit in current liabilities | $ | (5.3 | ) | | $ | (0.3 | ) | | $ | (5.6 | ) | | $ | (5.2 | ) | | $ | (0.3 | ) | | $ | (5.5 | ) | $ | (4.8 | ) | | $ | (0.3 | ) | | $ | (5.1 | ) | | $ | (5.3 | ) | | $ | (0.3 | ) | | $ | (5.6 | ) |
| Accrued benefit in noncurrent liabilities | (48.6 | ) | | (7.8 | ) | | (56.4 | ) | | (53.3 | ) | | (8.4 | ) | | (61.7 | ) | (38.8 | ) | | (8.3 | ) | | (47.1 | ) | | (48.6 | ) | | (7.8 | ) | | (56.4 | ) |
| Accumulated other comprehensive loss | 29.7 |
| | 0.2 |
| | 29.9 |
| | 33.6 |
| | (0.4 | ) | | 33.2 |
| 24.8 |
| | 0.3 |
| | 25.1 |
| | 29.7 |
| | 0.2 |
| | 29.9 |
|
| Net balance sheet impact | $ | (24.2 | ) | | $ | (7.9 | ) | | $ | (32.1 | ) | | $ | (24.9 | ) | | $ | (9.1 | ) | | $ | (34.0 | ) | $ | (18.8 | ) | | $ | (8.3 | ) | | $ | (27.1 | ) | | $ | (24.2 | ) | | $ | (7.9 | ) | | $ | (32.1 | ) |
| | | | Years Ended December 31, | Years Ended December 31, |
| 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Components of Net Periodic Benefit Cost | ($ in millions) | ($ in millions) |
| Service cost | $ | 1.2 |
| | $ | 1.1 |
| | $ | 1.3 |
| $ | 1.2 |
| | $ | 1.2 |
| | $ | 1.1 |
|
| Interest cost | 2.3 |
| | 2.7 |
| | 2.6 |
| 1.6 |
| | 2.3 |
| | 2.7 |
|
| Amortization of prior service cost | — |
| | (0.1 | ) | | (0.1 | ) | (2.6 | ) | | — |
| | (0.1 | ) |
| Recognized actuarial loss | 3.1 |
| | 2.9 |
| | 3.7 |
| 2.3 |
| | 3.1 |
| | 2.9 |
|
| Curtailment | 0.1 |
| | — |
| | — |
| — |
| | 0.1 |
| | — |
|
| Net periodic benefit cost | $ | 6.7 |
| | $ | 6.6 |
| | $ | 7.5 |
| $ | 2.5 |
| | $ | 6.7 |
| | $ | 6.6 |
|
| | | | | | | | | | | |
| Included in Other Comprehensive Loss (Pretax) | | | | | | | | | | |
| Liability adjustment | $ | (0.1 | ) | | $ | 3.1 |
| | $ | (1.9 | ) | $ | (5.1 | ) | | $ | (0.1 | ) | | $ | 3.1 |
|
| Amortization of prior service costs and actuarial losses | (3.2 | ) | | (2.8 | ) | | (3.6 | ) | 0.3 |
| | (3.2 | ) | | (2.8 | ) |
For the year ended December 31, 2015, we recorded a curtailment charge of $0.1 million associated with permanently closing a portion of the Becancour, Canada chlor alkali facility that has been shut down since late June 2014. This charge was included in restructuring charges.
The other postretirement plans’ actuarial loss that will be recognized from accumulated other comprehensive loss into net periodic benefit cost in 20162017 will be approximately $3 million.
The service cost and amortization of prior service cost components of postretirement benefit expense related to the employees of the operating segments are allocated to the operating segments based on their respective estimated census data.
Other Postretirement Benefits Plan Assumptions
Certain actuarial assumptions, such as discount rate, have a significant effect on the amounts reported for net periodic benefit cost and accrued benefit obligation amounts.
| | | | December 31, | December 31, |
| Weighted-Average Assumptions | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Discount rate—periodic benefit cost | 3.7 | % | | 4.3 | % | | 3.6 | % | 4.1 | % | | 3.7 | % | | 4.3 | % |
| Discount rate—benefit obligation | 4.1 | % | | 3.7 | % | | 4.3 | % | 3.8 | % | | 4.1 | % | | 3.7 | % |
The discount rate is based on a hypothetical yield curve represented by a series of annualized individual zero-coupon bond spot rates for maturities ranging from one-half to thirty years. The bonds used in the yield curve must have a rating of AA or better per Standard & Poor’s, be non-callable, and have at least $250 million par outstanding. The yield curve is then applied to the projected benefit payments from the plan. Based on these bonds and the projected benefit payment streams, the single rate that produces the same yield as the matching bond portfolio rounded to the nearest quarter point, is used as the discount rate.
We review external data and our own internal trends for healthcare costs to determine the healthcare cost for the post retirement benefit obligation. The assumed healthcare cost trend rates for pre-65 retirees were as follows:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| Healthcare cost trend rate assumed for next year | 8.5 | % | | 8.5 | % | 8.0 | % | | 8.5 | % |
| Rate that the cost trend rate gradually declines to | 5.0 | % | | 5.0 | % | 5.0 | % | | 5.0 | % |
| Year that the rate reaches the ultimate rate | 2022 |
| | 2021 |
| 2022 |
| | 2022 |
|
For post-65 retirees, we provide a fixed dollar benefit, which is not subject to escalation.
Assumed healthcare cost trend rates have an effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
| | | | One-Percentage
Point Increase | | One-Percentage
Point Decrease | One-Percentage
Point Increase | | One-Percentage
Point Decrease |
| | ($ in millions) | ($ in millions) |
| Effect on total of service and interest costs | $ | 0.2 |
| | $ | (0.2 | ) | $ | 0.6 |
| | $ | (0.4 | ) |
| Effect on postretirement benefit obligation | 3.1 |
| | (2.6 | ) | 2.1 |
| | (1.8 | ) |
We expect to make payments of approximately $5 million for each of the next five years under the provisions of our other postretirement benefit plans.
INCOME TAXES
| | | | Years ended December 31, | Years ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Components of Income from Continuing Operations Before Taxes | ($ in millions) | |
| Components of Income (Loss) from Continuing Operations Before Taxes | | ($ in millions) |
| Domestic | $ | (66.9 | ) | | $ | 164.4 |
| | $ | 222.2 |
| $ | (23.3 | ) | | $ | (66.9 | ) | | $ | 164.4 |
|
| Foreign | 73.6 |
| | (1.7 | ) | | 27.8 |
| (10.9 | ) | | 73.6 |
| | (1.7 | ) |
| Income from continuing operations before taxes | $ | 6.7 |
| | $ | 162.7 |
| | $ | 250.0 |
| |
| Components of Income Tax Provision | | | | | | |
| Income (loss) from continuing operations before taxes | | $ | (34.2 | ) | | $ | 6.7 |
| | $ | 162.7 |
|
| Components of Income Tax (Benefit) Provision | | | | | | |
| Current expense (benefit): | | | | | | | | | | |
| Federal | $ | (16.6 | ) | | $ | 25.9 |
| | $ | 42.1 |
| $ | (11.6 | ) | | $ | (16.6 | ) | | $ | 25.9 |
|
| State | 1.2 |
| | 1.3 |
| | 9.4 |
| 0.9 |
| | 1.2 |
| | 1.3 |
|
| Foreign | 14.4 |
| | 5.3 |
| | 8.5 |
| 15.7 |
| | 14.4 |
| | 5.3 |
|
| | (1.0 | ) | | 32.5 |
| | 60.0 |
| 5.0 |
| | (1.0 | ) | | 32.5 |
|
| Deferred expense (benefit): | | | | | | |
| Deferred (benefit) expense: | | | | | | |
| Federal | $ | 8.9 |
| | $ | 26.9 |
| | $ | 10.4 |
| $ | (10.1 | ) | | $ | 8.9 |
| | $ | 26.9 |
|
| State | (2.4 | ) | | 3.0 |
| | 1.9 |
| (5.1 | ) | | (2.4 | ) | | 3.0 |
|
| Foreign | 2.6 |
| | (4.7 | ) | | (0.9 | ) | (20.1 | ) | | 2.6 |
| | (4.7 | ) |
| 9.1 |
| | 25.2 |
| | 11.4 |
| (35.3 | ) | | 9.1 |
| | 25.2 |
|
| Income tax provision | $ | 8.1 |
| | $ | 57.7 |
| | $ | 71.4 |
| |
| Income tax (benefit) provision | | $ | (30.3 | ) | | $ | 8.1 |
| | $ | 57.7 |
|
The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% to the income (loss) from continuing operations before taxes.
| | | | Years ended December 31, | Years ended December 31, |
| Effective Tax Rate Reconciliation (Percent) | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Statutory federal tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income taxes, net | (38.2 | ) | | 2.4 |
| | 2.3 |
| 8.0 |
| | (38.2 | ) | | 2.4 |
|
| Foreign rate differential | (129.8 | ) | | 0.4 |
| | (0.9 | ) | (25.1 | ) | | (129.8 | ) | | 0.4 |
|
| U.S. tax on foreign earnings | 128.6 |
| | (0.6 | ) | | 0.8 |
| 24.4 |
| | 128.6 |
| | (0.6 | ) |
| Domestic manufacturing/export tax incentive | — |
| | (1.8 | ) | | (1.6 | ) | — |
| | — |
| | (1.8 | ) |
| Salt depletion | (38.8 | ) | | (0.5 | ) | | (0.3 | ) | 45.4 |
| | (38.8 | ) | | (0.5 | ) |
| Non-deductible transaction costs | 133.1 |
| | — |
| | — |
| — |
| | 133.1 |
| | — |
|
| Change in valuation allowance | 27.9 |
| | 1.1 |
| | (2.1 | ) | (0.7 | ) | | 27.9 |
| | 1.1 |
|
| Remeasurement of deferred taxes | 7.6 |
| | 0.4 |
| | 0.1 |
| 9.4 |
| | 7.6 |
| | 0.4 |
|
| Change in tax contingencies | 5.0 |
| | (0.3 | ) | | (3.8 | ) | (9.7 | ) | | 5.0 |
| | (0.3 | ) |
| Dividends paid to CEOP | (11.1 | ) | | (0.5 | ) | | (0.3 | ) | 2.8 |
| | (11.1 | ) | | (0.5 | ) |
| Return to provision | (4.2 | ) | | (0.7 | ) | | (0.1 | ) | 5.3 |
| | (4.2 | ) | | (0.7 | ) |
| Research tax credit | (3.1 | ) | | — |
| | (0.8 | ) | 0.6 |
| | (3.1 | ) | | — |
|
| Other, net | 8.9 |
| | 0.6 |
| | 0.3 |
| (6.8 | ) | | 8.9 |
| | 0.6 |
|
| Effective tax rate | 120.9 | % | | 35.5 | % | | 28.6 | % | 88.6 | % | | 120.9 | % | | 35.5 | % |
The effective tax rate from continuing operations for 2016 included a benefit of $4.8 million associated with return to provision adjustments for the finalization of our prior years’ U.S. federal and state income tax returns. The return to provision adjustment for 2016 included $14.9 million of benefit primarily associated with a change in estimate related to the calculation of salt depletion and $9.7 million of expense associated with the correction of an immaterial error related to non-deductible acquisition costs. The effective tax rate from continuing operations for 2016 also included an expense of $4.1 million related to changes in uncertain tax positions for prior tax years and a benefit of $3.2 million related to the remeasurement of deferred taxes due to a decrease in our state effective tax rates. The effective tax rate from continuing operations for 2015 included $8.9 million of expense associated with certain transaction costs related to the Acquisition that are not deductible for U.S. tax purposes and $8.6 million of expense associated with incremental U.S. tax on foreign earnings. These items were partially offset by $8.7 million of benefit associated with foreign earnings taxed at a lower rate than the U.S. statutory rate and $2.6 million of benefit associated with salt depletion deductions. The effective tax rate from continuing operations for 2014 included $1.2 million of benefit associated with return to provision adjustments for the
finalization of our 2013 U.S. federal and state income tax returns and $0.7 million of benefit associated with the expiration of the statutes of limitations in federal and state jurisdictions. These items were partially offset by $0.8 million of expense associated with increases in valuation allowances on certain state tax credit balances, primarily due to a change in state tax law, and $0.6 million of expense related to the remeasurement of deferred taxes due to an increase in state effective tax rates. The effective tax rate from continuing operations for 2013 included $11.4 million of benefit associated with the expiration of the statutes of limitations in federal and state jurisdictions, $8.3 million of benefit associated with reductions in valuation allowances on our capital loss carryforwards and $1.9 million of benefit associated with the Research Credit, which were partially offset by $1.8 million of expense associated with changes in tax contingencies and $1.3 million of expense associated with increases in valuation allowances on certain state tax credits carryforwards.
| | | | December 31, | December 31, |
| Components of Deferred Tax Assets and Liabilities | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Deferred tax assets: | | |
| Pension and postretirement benefits | $ | 235.2 |
| | $ | 108.0 |
| $ | 226.1 |
| | $ | 235.2 |
|
| Environmental reserves | 55.3 |
| | 56.5 |
| 54.5 |
| | 55.3 |
|
| Asset retirement obligations | 21.0 |
| | 22.9 |
| 22.0 |
| | 21.0 |
|
| Accrued liabilities | 53.7 |
| | 52.5 |
| 53.0 |
| | 53.7 |
|
| Tax credits | 23.3 |
| | 9.2 |
| 13.2 |
| | 23.3 |
|
| Federal and state net operating losses | 40.1 |
| | 3.3 |
| |
| Net operating losses | | 105.3 |
| | 40.1 |
|
| Capital loss carryforward | 4.7 |
| | 4.8 |
| 2.8 |
| | 4.7 |
|
| Other miscellaneous items | 18.5 |
| | 10.0 |
| — |
| | 18.5 |
|
| Total deferred tax assets | 451.8 |
| | 267.2 |
| 476.9 |
| | 451.8 |
|
| Valuation allowance | (29.3 | ) | | (16.6 | ) | (29.0 | ) | | (29.3 | ) |
| Net deferred tax assets | 422.5 |
| | 250.6 |
| 447.9 |
| | 422.5 |
|
| Deferred tax liabilities: | | | | | | |
| Property, plant and equipment | 875.6 |
| | 174.5 |
| 875.5 |
| | 875.6 |
|
| Intangible amortization | 138.4 |
| | 14.2 |
| 137.3 |
| | 138.4 |
|
| Inventory and prepaids | 11.6 |
| | 4.5 |
| 13.6 |
| | 11.6 |
|
| Partnerships | 101.4 |
| | 97.8 |
| 106.3 |
| | 101.4 |
|
| Taxes on unremitted earnings | 294.8 |
| | — |
| 223.6 |
| | 294.8 |
|
| Other miscellaneous items | | 4.6 |
| | — |
|
| Total deferred tax liabilities | 1,421.8 |
| | 291.0 |
| 1,360.9 |
| | 1,421.8 |
|
| Net deferred tax liability | $ | (999.3 | ) | | $ | (40.4 | ) | $ | (913.0 | ) | | $ | (999.3 | ) |
Realization of the net deferred tax assets, irrespective of indefinite-lived deferred tax liabilities, is dependent on future reversals of existing taxable temporary differences and adequate future taxable income, exclusive of reversing temporary differences and carryforwards. Although realization is not assured, we believe that it is more likely than not that the net deferred tax assets will be realized.
At December 31, 2015,2016, we had a U.S. net operating loss carryforward (NOL) of approximately $75.9$198.0 million (representing $26.6$69.3 million of deferred tax assets), that will expire in years 2017 through 2035,2036, if not utilized. The utilization of $2.5 million of the deferred tax assets are limited under Section 382 of the U.S. Internal Revenue Code to $1.0 million in 2017 and $0.5 million in each year2018 through 2020.
At December 31, 2015,2016, we had deferred state tax benefits of $9.3$13.2 million relating to state NOLs, which are available to offset future state taxable income through 2035.2036.
At December 31, 2015,2016, we had deferred state tax benefits of $13.6$12.9 million relating to state tax credits, which are available to offset future state tax liabilities through 2030.2031.
At December 31, 2015,2016, we had a capital loss carryforward of $12.3$7.3 million (representing $4.7$2.8 million of deferred tax assets) that iswhich are available to offset future consolidated capital gains that will expire in years 20162018 through 20202021, if not utilized.
At December 31, 2015,2016, we had a NOL of approximately $23.1$89.0 million (representing $4.2$22.8 million of deferred tax assets) in various foreign jurisdictions. Of these, $8.2$21.6 million (representing $1.7$5.4 million of deferred tax assets) expire in various years from 2020 to 2025.2026. The remaining $14.9$67.4 million (representing $2.5$17.4 million of deferred tax assets) do not expire.
The activity of our deferred income tax valuation allowance was as follows:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Beginning balance | $ | 16.6 |
| | $ | 13.4 |
| $ | 29.3 |
| | $ | 16.6 |
|
| Charged to income tax provision | 1.8 |
| | 4.1 |
| 8.4 |
| | 1.8 |
|
| Acquisition activity | 12.3 |
| | — |
| (4.3 | ) | | 12.3 |
|
| Deductions from reserves - credited to income tax provision | (1.4 | ) | | (0.9 | ) | (4.4 | ) | | (1.4 | ) |
| Ending balance | $ | 29.3 |
| | $ | 16.6 |
| $ | 29.0 |
| | $ | 29.3 |
|
As of December 31, 2016, we had $38.4 million of gross unrecognized tax benefits, which would have a net $36.7 million impact on the effective tax rate from continuing operations, if recognized. As of December 31, 2015, we had $35.1 million of gross unrecognized tax benefits, which would have a net $33.5 million impact on the effective tax rate from continuing operations, if recognized. As of December 31, 2014, we had $36.1 million ofThe change for 2016 primarily relates to additional gross unrecognized benefits for prior year tax benefits, which would have a net $35.0 million impact onpositions, as well as the effective tax rate from continuing operations, if recognized.settlement of ongoing audits. The change for 2015 primarily relates to additional gross unrecognized benefits for prior year tax positions, as well as the settlement of ongoing audits. The change for 2014 primarily relates to additional gross unrecognized benefits for current year and prior year tax positions, as well as the expiration of statute of limitations in domestic jurisdictions and settlement of ongoing audits. The amounts of unrecognized tax benefits were as follows:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Beginning balance | $ | 36.1 |
| | $ | 34.5 |
| $ | 35.1 |
| | $ | 36.1 |
|
| Increase for current year tax positions | — |
| | 2.2 |
| 1.7 |
| | — |
|
| Increase for prior year tax positions | 0.2 |
| | 0.2 |
| 5.8 |
| | 0.2 |
|
| Reductions due to statute of limitations | — |
| | (0.4 | ) | (0.3 | ) | | — |
|
| Decrease for prior year tax positions | — |
| | (0.3 | ) | (1.8 | ) | | — |
|
| Decrease due to tax settlements | (1.2 | ) | | (0.1 | ) | (2.1 | ) | | (1.2 | ) |
| Ending balance | $ | 35.1 |
| | $ | 36.1 |
| $ | 38.4 |
| | $ | 35.1 |
|
Income from discontinued operations, net for the year ended December 31, 2014 included $2.2 million of tax expense related to changes in tax contingencies.
We recognize interest and penalty expense related to unrecognized tax positions as a component of the income tax provision. As of December 31, 20152016 and 2014,2015, interest and penalties accrued were $3.4$3.0 million and $3.2$3.4 million, respectively. For 2016, 2015 2014 and 2013,2014, we recorded (benefit) expense (benefit) related to interest and penalties of $(0.4) million, $0.2 million $0.4 million and $(0.5)$0.4 million, respectively.
As of December 31, 2015,2016, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $9.4$12.3 million over the next twelve months. The anticipated reduction primarily relates to settlements with tax authorities and the expiration of federal, state and foreign statutes of limitation.
We operate globally and file income tax returns in numerous jurisdictions. Our tax returns are subject to examination by various federal, state and local tax authorities. Our U.S. federal income tax returns are under examination by the Internal Revenue Service (IRS) for tax years 2008 and 2010 to 2012. Our Canadian federal income tax returns are under examination by Canada Revenue Authority (CRA) for tax years 2010 and 2011. In connection with the Acquisition, TDCC retained liabilities relating to taxes to the extent arising prior to the Closing Date. We believe we have adequately provided for all tax positions; however, amounts asserted by taxing authorities could be greater than our accrued position. For our primary tax jurisdictions, the tax years that remain subject to examination are as follows:
|
| |
| | Tax Years |
| U.S. federal income tax | 2008; 2010 - 2015 |
| U.S. state income tax | 2006 - 20142015 |
| Canadian federal income tax | 20102012 - 20142015 |
| Brazil | 2014 - 2015 |
| Germany | 2015 |
| China | 2014 - 2015 |
| The Netherlands | 2014 - 2015 |
| South Korea | 2014 - 2015 |
Hong Kong | 2015 |
ACCRUED LIABILITIES
Included in accrued liabilities were the following:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Acquisition-related accruals | $ | 90.2 |
| | $ | — |
| $ | — |
| | $ | 90.2 |
|
| Accrued compensation and payroll taxes | 53.4 |
| | 40.4 |
| 77.8 |
| | 53.4 |
|
| Tax-related accruals | | 40.9 |
| | 29.5 |
|
| Accrued interest | 35.0 |
| | 4.7 |
| 30.7 |
| | 35.0 |
|
| Legal and professional costs | 32.0 |
| | 26.3 |
| 21.2 |
| | 32.0 |
|
| Accrued employee benefits | 24.4 |
| | 41.5 |
| 21.2 |
| | 24.4 |
|
| Environmental (current portion only) | 19.0 |
| | 19.0 |
| 17.0 |
| | 19.0 |
|
| Asset retirement obligation (current portion only) | 7.3 |
| | 10.2 |
| 12.6 |
| | 7.3 |
|
| Other | 66.8 |
| | 72.2 |
| 42.4 |
| | 37.3 |
|
| Accrued liabilities | $ | 328.1 |
| | $ | 214.3 |
| $ | 263.8 |
| | $ | 328.1 |
|
CONTRIBUTING EMPLOYEE OWNERSHIP PLAN
The CEOPContributing 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 was $28.2 million, $18.1 million and $16.1 million for 2016, 2015 and 2014, respectively. The increase in defined contribution plan expense was due to the additional employees added in conjunction with the Acquired Business.
Company matching contributions are invested in the same investment allocation as the employee’s contribution. Our matching contributions for eligible employees amounted to $11.2 million, $6.9 million and $5.7 million in 2016, 2015 and $5.2 million in 2015, 2014, and 2013, respectively.
Employees generally become vested in the value of the contributions we make to the CEOP according to a schedule based on service. After two years of service, participants are 25% vested. They vest in increments of 25% for each additional year and after five years of service, they are 100% vested in the value of the contributions that we have made to their accounts.
Employees may transfer any or all of the value of the investments, including Olin common stock, to any one or combination of investments available in the CEOP. Employees may transfer balances daily and may elect to transfer any percentage of the balance in the fund from which the transfer is made. However, when transferring out of a fund, employees are prohibited from trading out of the fund to which the transfer was made for seven calendar days. This limitation does not apply to trades into the money market fund or the Olin Common Stock Fund.
STOCK-BASED COMPENSATION
Stock-based compensation expense was allocated to the operating segments for the portion related to employees whose compensation would be included in cost of goods sold with the remainder recognized in corporate/other. There were no significant capitalized stock-based compensation costs. Stock-based compensation granted includes stock options, performance stock awards, restricted stock awards and deferred directors’ compensation. Stock-based compensation expense was as follows:
| | | | Years ended December 31, | Years ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| | ($ in millions) | ($ in millions) |
| Stock-based compensation | $ | 11.5 |
| | $ | 9.2 |
| | $ | 13.3 |
| $ | 11.2 |
| | $ | 11.5 |
| | $ | 9.2 |
|
| Mark-to-market adjustments | (3.0 | ) | | (3.6 | ) | | 4.2 |
| 3.0 |
| | (3.0 | ) | | (3.6 | ) |
| Total expense | $ | 8.5 |
| | $ | 5.6 |
| | $ | 17.5 |
| $ | 14.2 |
| | $ | 8.5 |
| | $ | 5.6 |
|
Stock Plans
Under the stock option and long-term incentive plans, options may be granted to purchase shares of our common stock at an exercise price not less than fair market value at the date of grant, and are exercisable for a period not exceeding ten years from that date. Stock options, restricted stock and performance shares typically vest over three years. We issue shares to settle stock options, restricted stock and share-based performance awards. In 2016, 2015 2014 and 20132014 long-term incentive awards included stock options, performance share awards and restricted stock. The stock option exercise price was set at the fair market value of common stock on the date of the grant, and the options have a ten-year term.
Stock option transactions were as follows:
| | | | | | | | | | Exercisable | | | | | | | Exercisable |
| | Shares | | Option Price | | Weighted-Average
Option Price | | Options | | Weighted-Average
Exercise Price | Shares | | Option Price | | Weighted-Average
Option Price | | Options | | Weighted-Average
Exercise Price |
| Outstanding at January 1, 2015 | 4,133,753 |
| | $14.28-27.64 |
| | $ | 20.14 |
| | 2,976,870 |
| | $ | 18.50 |
| |
| Outstanding at January 1, 2016 | | 4,720,105 |
| | $14.28-27.65 |
| | $ | 21.29 |
| | 3,371,449 |
| | $ | 19.28 |
|
| Granted | 776,750 |
| | 27.40 |
| | 27.40 |
| | | | | 1,670,400 |
| | 13.14 |
| | 13.14 |
| | | | |
| Exercised | (147,608 | ) | | 14.28-25.57 |
| | 20.11 |
| | | | | (267,082 | ) | | 14.28-23.28 |
| | 16.48 |
| | | | |
| Canceled | (42,790 | ) | | 23.28-27.40 |
| | 25.14 |
| | | | | (388,683 | ) | | 13.14-25.57 |
| | 19.77 |
| | | | |
| Outstanding at December 31, 2015 | 4,720,105 |
| | $14.28-27.65 |
| | $ | 21.29 |
| | 3,371,449 |
| | $ | 19.28 |
| |
| Outstanding at December 31, 2016 | | 5,734,740 |
| | $13.14-27.65 |
| | $ | 19.25 |
| | 3,407,300 |
| | $ | 20.56 |
|
At December 31, 2015,2016, the average exercise period for all outstanding and exercisable options was 6575 months and 5054 months, respectively. At December 31, 2015,2016, the aggregate intrinsic value (the difference between the exercise price and market value) for outstanding options was $2.5$39.1 million and exercisable options was $2.5$18.4 million. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 and 2013 was $2.1 million, $1.3 million $3.9 million and $4.2$3.9 million, respectively.
The total unrecognized compensation cost related to unvested stock options at December 31, 20152016 was $5.3$4.1 million and was expected to be recognized over a weighted-average period of 1.3 years.
The following table provides certain information with respect to stock options exercisable at December 31, 2015:2016:
| | Range of
Exercise Prices | | Options
Exercisable | | Weighted-Average
Exercise Price | | Options
Outstanding | | Weighted-Average
Exercise Price | | Options
Exercisable | | Weighted-Average
Exercise Price | | Options
Outstanding | | Weighted-Average
Exercise Price |
| Under $16.00 | | 916,046 |
| | $ | 15.05 |
| | 916,046 |
| | $ | 15.05 |
| | 897,129 |
| | $ | 15.06 |
| | 2,518,379 |
| | $ | 13.82 |
|
| $16.00 – $22.00 | | 1,870,281 |
| | 19.85 |
| | 1,870,281 |
| | 19.85 |
| | 1,286,916 |
| | 20.25 |
| | 1,286,916 |
| | 20.25 |
|
| Over $22.00 | | 585,122 |
| | 24.11 |
| | 1,933,778 |
| | 25.65 |
| | 1,223,255 |
| | 24.92 |
| | 1,929,445 |
| | 25.66 |
|
| | | 3,371,449 |
| | | | 4,720,105 |
| | | | 3,407,300 |
| | | | 5,734,740 |
| | |
At December 31, 2015,2016, common shares reserved for issuance and available for grant or purchase under the following plans consisted of:
| | | | Number of Shares | Number of Shares |
| Stock Option Plans | Reserved for Issuance | | Available for
Grant or Purchase(1) | Reserved for Issuance | | Available for
Grant or Purchase(1) |
| 2000 long term incentive plan | 277,586 |
| | 2,911 |
| 245,486 |
| | 97,444 |
|
| 2003 long term incentive plan | 389,921 |
| | 10,138 |
| 365,005 |
| | 235,305 |
|
| 2006 long term incentive plan | 1,591,479 |
| | 168,783 |
| 1,360,312 |
| | 87,116 |
|
| 2009 long term incentive plan | 2,762,161 |
| | 506,610 |
| 2,660,662 |
| | 122,710 |
|
| 2014 long term incentive plan | 3,000,000 |
| | 2,009,000 |
| 3,000,000 |
| | 244,975 |
|
| 2016 long term incentive plan | | 6,000,000 |
| | 6,000,000 |
|
| Total under stock option plans | 8,021,147 |
| | 2,697,442 |
| 13,631,465 |
| | 6,787,550 |
|
| | | | Number of Shares | Number of Shares |
| Stock Purchase Plans | Reserved for Issuance | | Available for
Grant or Purchase | Reserved for Issuance | | Available for
Grant or Purchase |
| 1997 stock plan for non-employee directors | 572,978 |
| | 567,476 |
| 553,402 |
| | 460,663 |
|
| Employee deferral plan | 45,627 |
| | 45,623 |
| 45,627 |
| | 45,623 |
|
| Total under stock purchase plans | 618,605 |
| | 613,099 |
| 599,029 |
| | 506,286 |
|
| |
| (1) | All available to be issued as stock options, but includes a sub-limit for all types of stock awards of 1,420,4423,287,550 shares. |
Under the stock purchase plans, our non-employee directors may defer certain elements of their compensation into shares of our common stock based on fair market value of the shares at the time of deferral. Non-employee directors annually receive stock grants as a portion of their director compensation. Of the shares reserved under the stock purchase plans at December 31, 2015, 5,5012016, 92,739 shares were committed.
Performance share awards are denominated in shares of our stock and are paid half in cash and half in stock. Payouts are based on Olin’s average annual return on capital over a three-year performance cycle in relation to the average annual return on capital over the same period among a portfolio of public companies which are selected in concert with outside compensation consultants. The expense associated with performance shares is recorded based on our estimate of our performance relative to the respective target. If an employee leaves the company before the end of the performance cycle, the performance shares may be prorated based on the number of months of the performance cycle worked and are settled in cash instead of half in cash and half in stock when the three-year performance cycle is completed. Performance share transactions were as follows:
| | | | To Settle in Cash | | To Settle in Shares | To Settle in Cash | | To Settle in Shares |
| | Shares | | Weighted-Average
Fair Value per Share | | Shares | | Weighted-Average
Fair Value per Share | Shares | | Weighted-Average
Fair Value per Share | | Shares | | Weighted-Average
Fair Value per Share |
| Outstanding at January 1, 2015 | 290,917 |
| | $ | 23.04 |
| | 281,000 |
| | $ | 23.46 |
| |
| Outstanding at January 1, 2016 | | 311,528 |
| | $ | 17.48 |
| | 302,000 |
| | $ | 25.59 |
|
| Granted | 126,000 |
| | 27.40 |
| | 126,000 |
| | 27.40 |
| 339,619 |
| | 15.28 |
| | 340,925 |
| | 15.39 |
|
| Paid/Issued | (105,611 | ) | | 23.04 |
| | (101,000 | ) | | 21.92 |
| (103,417 | ) | | 17.48 |
| | (96,500 | ) | | 23.28 |
|
| Converted from shares to cash | 2,111 |
| | 24.42 |
| | (2,111 | ) | | 24.42 |
| 2,474 |
| | 13.14 |
| | (2,474 | ) | | 13.14 |
|
| Canceled | (1,889 | ) | | 25.83 |
| | (1,889 | ) | | 26.49 |
| (7,376 | ) | | 13.14 |
| | (7,376 | ) | | 13.14 |
|
| Outstanding at December 31, 2015 | 311,528 |
| | $ | 17.48 |
| | 302,000 |
| | $ | 25.59 |
| |
| Total vested at December 31, 2015 | 201,528 |
| | $ | 17.48 |
| | 192,000 |
| | $ | 24.81 |
| |
| Outstanding at December 31, 2016 | | 542,828 |
| | $ | 25.84 |
| | 536,575 |
| | $ | 16.18 |
|
| Total vested at December 31, 2016 | | 241,299 |
| | $ | 25.84 |
| | 235,046 |
| | $ | 18.62 |
|
The summary of the status of our unvested performance shares to be settled in cash were as follows:
| | | | Shares | | Weighted-Average
Fair Value per Share | Shares | | Weighted-Average
Fair Value per Share |
| Unvested at January 1, 2015 | 87,334 |
| | $ | 23.04 |
| |
| Unvested at January 1, 2016 | | 110,000 |
| | $ | 17.48 |
|
| Granted | 126,000 |
| | 27.40 |
| 408,431 |
| | 13.63 |
|
| Vested | (101,445 | ) | | 17.48 |
| (209,526 | ) | | 25.84 |
|
| Canceled | (1,889 | ) | | 25.83 |
| (7,376 | ) | | 13.14 |
|
| Unvested at December 31, 2015 | 110,000 |
| | $ | 17.48 |
| |
| Unvested at December 31, 2016 | | 301,529 |
| | $ | 25.84 |
|
At December 31, 2015,2016, the liability recorded for performance shares to be settled in cash totaled $3.5$6.2 million. The total unrecognized compensation cost related to unvested performance shares at December 31, 20152016 was $4.9$12.1 million and was expected to be recognized over a weighted-average period of 1.21.1 years.
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 yearson April 24, 2017 for any of the remaining shares not yet repurchased. This authorization replaced the July 2011 share repurchase program. For the yearyears ended December 31, 2016 and 2015, no shares were purchased and retired. We repurchased and retired 2.5 million and 1.5 million shares in 2014 and 2013, respectively, at a cost of $64.8 million and $36.2 million, respectively.million. As of December 31, 2015,2016, we had repurchased a total of 1.9 million shares under the April 2014 program, and 6.1 million shares remained authorized to be purchased. Under the Merger Agreement relating to the Acquisition, we were restricted from repurchasing shares of our common stock prior to the consummation of the Merger. For a period of two years subsequent to the Closing Date of the Merger, we will continue to be subject to certain restrictions on our ability to conduct share repurchases.
During 2016, 2015 2014 and 2013,2014, we issued 0.10.3 million, 0.50.1 million and 0.5 million shares, respectively, with a total value of $4.1 million, $3.1 million $12.1 million and $9.7$12.1 million, respectively, representing stock options exercised.
We have registered an undetermined amount of securities with the SEC, so that, from time-to-time, we may issue debt securities, preferred stock and/or common stock and associated warrants in the public market under that registration statement.
The following table represents the activity included in accumulated other comprehensive loss:
| | | | Foreign
Currency
Translation
Adjustment
(net of taxes) | | Unrealized
Gains (Losses)
on Derivative
Contracts
(net of taxes) | | Pension and
Postretirement
Benefits
(net of taxes) | | Accumulated
Other
Comprehensive
Loss | Foreign
Currency
Translation
Adjustment
(net of taxes) | | Unrealized
Gains (Losses)
on Derivative
Contracts
(net of taxes) | | Pension and
Postretirement
Benefits
(net of taxes) | | Accumulated
Other
Comprehensive
Loss |
| | ($ in millions) | ($ in millions) |
| Balance at January 1, 2013 | $ | 2.1 |
| | $ | 4.7 |
| | $ | (378.1 | ) | | $ | (371.3 | ) | |
| Unrealized losses | (2.6 | ) | | (7.7 | ) | | (12.5 | ) | | (22.8 | ) | |
| Reclassification adjustments into income | — |
| | 1.4 |
| | 33.3 |
| | 34.7 |
| |
| Tax benefit (provision) | — |
| | 2.5 |
| | (8.2 | ) | | (5.7 | ) | |
| Net change | (2.6 | ) | | (3.8 | ) | | 12.6 |
| | 6.2 |
| |
| Balance at December 31, 2013 | (0.5 | ) | | 0.9 |
| | (365.5 | ) | | (365.1 | ) | |
| Balance at January 1, 2014 | | $ | (0.5 | ) | | $ | 0.9 |
| | $ | (365.5 | ) | | $ | (365.1 | ) |
| Unrealized losses | (1.8 | ) | | (10.2 | ) | | (142.0 | ) | | (154.0 | ) | (1.8 | ) | | (10.2 | ) | | (142.0 | ) | | (154.0 | ) |
| Reclassification adjustments into income | — |
| | 1.8 |
| | 25.5 |
| | 27.3 |
| — |
| | 1.8 |
| | 25.5 |
| | 27.3 |
|
| Tax benefit | — |
| | 3.3 |
| | 45.4 |
| | 48.7 |
| — |
| | 3.3 |
| | 45.4 |
| | 48.7 |
|
| Net change | (1.8 | ) | | (5.1 | ) | | (71.1 | ) | | (78.0 | ) | (1.8 | ) | | (5.1 | ) | | (71.1 | ) | | (78.0 | ) |
| Balance at December 31, 2014 | (2.3 | ) | | (4.2 | ) | | (436.6 | ) | | (443.1 | ) | (2.3 | ) | | (4.2 | ) | | (436.6 | ) | | (443.1 | ) |
| Unrealized losses | (15.7 | ) | | (13.9 | ) | | (125.3 | ) | | (154.9 | ) | (15.7 | ) | | (13.9 | ) | | (125.3 | ) | | (154.9 | ) |
| Reclassification adjustments into income | — |
| | 9.7 |
| | 65.6 |
| | 75.3 |
| — |
| | 9.7 |
| | 65.6 |
| | 75.3 |
|
| Tax benefit | 5.9 |
| | 1.5 |
| | 22.8 |
| | 30.2 |
| 5.9 |
| | 1.5 |
| | 22.8 |
| | 30.2 |
|
| Net change | (9.8 | ) | | (2.7 | ) | | (36.9 | ) | | (49.4 | ) | (9.8 | ) | | (2.7 | ) | | (36.9 | ) | | (49.4 | ) |
| Balance at December 31, 2015 | $ | (12.1 | ) | | $ | (6.9 | ) | | $ | (473.5 | ) | | $ | (492.5 | ) | (12.1 | ) | | (6.9 | ) | | (473.5 | ) | | (492.5 | ) |
| Unrealized (losses) gains | | (22.4 | ) | | 26.3 |
| | (61.0 | ) | | (57.1 | ) |
| Reclassification adjustments into income | | — |
| | 5.8 |
| | 20.4 |
| | 26.2 |
|
| Tax benefit (provision) | | 10.4 |
| | (12.4 | ) | | 15.4 |
| | 13.4 |
|
| Net change | | (12.0 | ) | | 19.7 |
| | (25.2 | ) | | (17.5 | ) |
| Balance at December 31, 2016 | | $ | (24.1 | ) | | $ | 12.8 |
| | $ | (498.7 | ) | | $ | (510.0 | ) |
Net (loss) income and cost of goods sold included reclassification adjustments for realized gains and losses on derivative contracts from accumulated other comprehensive loss.
Net (loss) income, cost of goods sold and selling and administration 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 administration expenses.
SEGMENT INFORMATION
We define segment results as income (loss) from continuing operations before interest expense, interest income, other operating income, other income (expense) and income taxes, and include the 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. Beginning in the fourth quarter of 2015, we modified our reportable segments due to changes in our organization resulting from the Acquisition. We have three operating segments: Chlor Alkali Products and Vinyls, Epoxy and Winchester. For segment reporting purposes, the Acquired Business’s Global Epoxy operating results comprise the newly created Epoxy segment and the Acquired Chlor Alkali Business operating results combined with our former Chlor Alkali Products and Chemical Distribution segments comprise the newly created Chlor Alkali Products and Vinyls segment. The newThis reporting structure has been retrospectively applied to financial results for all periods presented. 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.
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Sales: | ($ in millions) |
| Chlor Alkali Products and Vinyls | $ | 1,713.4 |
| | $ | 1,502.8 |
| | $ | 1,737.4 |
|
| Epoxy | 429.6 |
| | — |
| | — |
|
| Winchester | 711.4 |
| | 738.4 |
| | 777.6 |
|
| Total sales | $ | 2,854.4 |
| | $ | 2,241.2 |
| | $ | 2,515.0 |
|
| Income (loss) from continuing operations before taxes: | | | | | |
| Chlor Alkali Products and Vinyls | $ | 115.5 |
| | $ | 130.1 |
| | $ | 213.5 |
|
| Epoxy | (7.5 | ) | | — |
| | — |
|
| Winchester | 115.6 |
| | 127.3 |
| | 143.2 |
|
| Corporate/Other | (40.8 | ) | | (33.9 | ) | | (62.6 | ) |
| Restructuring charges | (2.7 | ) | | (15.7 | ) | | (5.5 | ) |
| Acquisition-related costs | (123.4 | ) | | (4.2 | ) | | — |
|
| Other operating income | 45.7 |
| | 1.5 |
| | 0.7 |
|
| Interest expense | (97.0 | ) | | (43.8 | ) | | (38.6 | ) |
| Interest income | 1.1 |
| | 1.3 |
| | 0.6 |
|
| Other income (expense) | 0.2 |
| | 0.1 |
| | (1.3 | ) |
| Income from continuing operations before taxes | $ | 6.7 |
| | $ | 162.7 |
| | $ | 250.0 |
|
| Earnings of non-consolidated affiliates: | | | | | |
| Chlor Alkali Products and Vinyls | $ | 1.7 |
| | $ | 1.7 |
| | $ | 2.8 |
|
| Depreciation and amortization expense: | | | | | |
| Chlor Alkali Products and Vinyls | $ | 186.1 |
| | $ | 119.4 |
| | $ | 117.5 |
|
| Epoxy | 20.9 |
| | — |
| | — |
|
| Winchester | 17.4 |
| | 16.3 |
| | 14.9 |
|
| Corporate/Other | 4.5 |
| | 3.4 |
| | 2.9 |
|
| Total depreciation and amortization expense | $ | 228.9 |
| | $ | 139.1 |
| | $ | 135.3 |
|
| Capital spending: | | | | | |
| Chlor Alkali Products and Vinyls | $ | 94.5 |
| | $ | 49.6 |
| | $ | 68.0 |
|
| Epoxy | 7.7 |
| | — |
| | — |
|
| Winchester | 25.6 |
| | 21.4 |
| | 21.2 |
|
| Corporate/Other | 3.1 |
| | 0.8 |
| | 1.6 |
|
| Total capital spending | $ | 130.9 |
| | $ | 71.8 |
| | $ | 90.8 |
|
| | | | December 31, | | Years ended December 31, |
| | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Assets: | ($ in millions) | | |
| Sales: | | ($ in millions) |
| Chlor Alkali Products and Vinyls | | $ | 2,999.3 |
| | $ | 1,713.4 |
| | $ | 1,502.8 |
|
| Epoxy | | 1,822.0 |
| | 429.6 |
| | — |
|
| Winchester | | 729.3 |
| | 711.4 |
| | 738.4 |
|
| Total sales | | $ | 5,550.6 |
| | $ | 2,854.4 |
| | $ | 2,241.2 |
|
| Income (loss) from continuing operations before taxes: | | | | | | |
| Chlor Alkali Products and Vinyls | $ | 6,690.7 |
| | $ | 1,939.0 |
| | $ | 224.9 |
| | $ | 115.5 |
| | $ | 130.1 |
|
| Epoxy | 1,591.2 |
| | — |
| | 15.4 |
| | (7.5 | ) | | — |
|
| Winchester | 411.9 |
| | 361.0 |
| | 120.9 |
| | 115.6 |
| | 127.3 |
|
| Corporate/Other | 628.0 |
| | 398.1 |
| | (55.8 | ) | | (40.6 | ) | | (33.8 | ) |
| Total assets | $ | 9,321.8 |
| | $ | 2,698.1 |
| | |
| | | | | | |
| Investments—affiliated companies (at equity): | | | | | |
| Restructuring charges | | (112.9 | ) | | (2.7 | ) | | (15.7 | ) |
| Acquisition-related costs | | (48.8 | ) | | (123.4 | ) | | (4.2 | ) |
| Other operating income | | 10.6 |
| | 45.7 |
| | 1.5 |
|
| Interest expense | | (191.9 | ) | | (97.0 | ) | | (43.8 | ) |
| Interest income | | 3.4 |
| | 1.1 |
| | 1.3 |
|
| Income (loss) from continuing operations before taxes | | $ | (34.2 | ) | | $ | 6.7 |
| | $ | 162.7 |
|
| Earnings of non-consolidated affiliates: | | | | | | |
| Chlor Alkali Products and Vinyls | $ | 25.0 |
| | $ | 23.3 |
| | $ | 1.7 |
| | $ | 1.7 |
| | $ | 1.7 |
|
| Depreciation and amortization expense: | | | | | | |
| Chlor Alkali Products and Vinyls | | $ | 418.1 |
| | $ | 186.1 |
| | $ | 119.4 |
|
| Epoxy | | 90.0 |
| | 20.9 |
| | — |
|
| Winchester | | 18.5 |
| | 17.4 |
| | 16.3 |
|
| Corporate/Other | | 6.9 |
| | 4.5 |
| | 3.4 |
|
| Total depreciation and amortization expense | | $ | 533.5 |
| | $ | 228.9 |
| | $ | 139.1 |
|
| Capital spending: | | | | | | |
| Chlor Alkali Products and Vinyls | | $ | 195.1 |
| | $ | 94.5 |
| | $ | 49.6 |
|
| Epoxy | | 45.4 |
| | 7.7 |
| | — |
|
| Winchester | | 19.5 |
| | 25.6 |
| | 21.4 |
|
| Corporate/Other | | 18.0 |
| | 3.1 |
| | 0.8 |
|
| Total capital spending | | $ | 278.0 |
| | $ | 130.9 |
| | $ | 71.8 |
|
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Assets: | ($ in millions) |
| Chlor Alkali Products and Vinyls | $ | 6,521.4 |
| | $ | 6,690.7 |
|
| Epoxy | 1,514.3 |
| | 1,591.2 |
|
| Winchester | 424.0 |
| | 411.9 |
|
| Corporate/Other | 302.9 |
| | 595.1 |
|
| Total assets | $ | 8,762.6 |
| | $ | 9,288.9 |
|
| | | | |
| Investments—affiliated companies (at equity): | | | |
| Chlor Alkali Products and Vinyls | $ | 26.7 |
| | $ | 25.0 |
|
Segment assets include only those assets which are directly identifiable to an operating segment. Assets of the corporate/other segment include primarily such items as cash and cash equivalents, deferred taxes, restricted cash and other assets.
| | | | Years ended December 31, | Years ended December 31, |
| Geographic Data | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Sales: | ($ in millions) | ($ in millions) |
| United States | $ | 2,208.5 |
| | $ | 2,051.4 |
| | $ | 2,316.2 |
| $ | 3,356.8 |
| | $ | 2,208.5 |
| | $ | 2,051.4 |
|
| Foreign | 645.9 |
| | 189.8 |
| | 198.8 |
| 2,193.8 |
| | 645.9 |
| | 189.8 |
|
| Total sales | $ | 2,854.4 |
| | $ | 2,241.2 |
| | $ | 2,515.0 |
| $ | 5,550.6 |
| | $ | 2,854.4 |
| | $ | 2,241.2 |
|
| | | | December 31, | | December 31, |
| | 2015 | | 2014 | | 2016 | | 2015 |
| Long-lived assets: | ($ in millions) | | ($ in millions) |
| United States | $ | 3,561.7 |
| | $ | 889.6 |
| | $ | 3,352.2 |
| | $ | 3,561.7 |
|
| Foreign | 391.7 |
| | 41.4 |
| | 352.7 |
| | 391.7 |
|
| Total long-lived assets | $ | 3,953.4 |
| | $ | 931.0 |
| | $ | 3,704.9 |
| | $ | 3,953.4 |
|
Sales are attributed to geographic areas based on customer location and long-lived assets are attributed to geographic areas based on asset location.
ENVIRONMENTAL
As is common in our industry, we are subject to environmental laws and regulations related to the use, storage, handling, generation, transportation, emission, discharge, disposal and remediation of, and exposure to, hazardous and non-hazardous substances and wastes in all of the countries in which we do business.
The establishment and implementation of national, state or provincial and local standards to regulate air, water and land quality affect substantially all of our manufacturing locations around the world. Laws providing for regulation of the manufacture, transportation, use and disposal of hazardous and toxic substances, and remediation of contaminated sites, have imposed additional regulatory requirements on industry, particularly the chemicals industry. In addition, implementation of environmental laws has required and will continue to require new capital expenditures and will increase plant operating costs. We employ waste minimization and pollution prevention programs at our manufacturing sites.
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.
We are party to various governmental and private environmental actions associated with past manufacturing facilities and former waste disposal sites. Associated costs of investigatory and remedial activities are provided for in accordance with generally accepted accounting principles governing probability and the ability to reasonably estimate future costs. Our ability to estimate future costs depends on whether our investigatory and remedial activities are in preliminary or advanced stages. With respect to unasserted claims, we accrue liabilities for costs that, in our experience, we mayexpect to incur to protect our interests against those unasserted claims. Our accrued liabilities for unasserted claims amounted to $1.8$2.0 million at December 31, 2015.2016. With respect to asserted claims, we accrue liabilities based on remedial investigation, feasibility study, remedial action and operation, maintenance and monitoring (OM&M) expenses that, in our experience, we mayexpect to incur in connection with the asserted claims. Required site OM&M expenses are estimated and accrued in their entirety for required periods not exceeding 30 years, which reasonably approximates the typical duration of long-term site OM&M.
Our liabilities for future environmental expenditures were as follows:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | ($ in millions) | ($ in millions) |
| Beginning balance | $ | 138.3 |
| | $ | 144.6 |
| $ | 138.1 |
| | $ | 138.3 |
|
| Charges to income | 15.7 |
| | 9.6 |
| 9.2 |
| | 15.7 |
|
| Remedial and investigatory spending | (14.1 | ) | | (14.9 | ) | (10.3 | ) | | (14.1 | ) |
| Currency translation adjustments | (1.8 | ) | | (1.0 | ) | 0.3 |
| | (1.8 | ) |
| Ending balance | $ | 138.1 |
| | $ | 138.3 |
| $ | 137.3 |
| | $ | 138.1 |
|
At December 31, 20152016 and 2014,2015, our consolidated balance sheets included environmental liabilities of $119.1$120.3 million and $119.3$119.1 million, respectively, which were classified as other noncurrent liabilities. Our environmental liability amounts do not take into account any discounting of future expenditures or any consideration of insurance recoveries or advances in technology. These liabilities are reassessed periodically to determine if environmental circumstances have changed and/or remediation efforts and our estimate of related costs have changed. As a result of these reassessments, future charges to income may be made for additional liabilities. Of the $138.1$137.3 million included on our consolidated balance sheet at December 31, 20152016 for future environmental expenditures, we currently expect to utilize $81.1$77.8 million of the reserve for future environmental expenditures over the next 5 years, $16.7$16.1 million for expenditures 6 to 10 years in the future, and $40.3$43.4 million for expenditures beyond 10 years in the future.
Our total estimated environmental liability at December 31, 20152016 was attributable to 6964 sites, 1416 of which were USEPA NPL sites. Nine sites accounted for 79% of our environmental liability and, of the remaining 6055 sites, no one site accounted for more than 3% of our environmental liability. At four of the nine sites, part of the site is subject to a remedial investigation and another part is in the long-term OM&M stage. At one of the nine sites, a remedial action plan is being developed for part of the site and another part a remedial design is being developed. At one of the nine sites, part of the site is subject to a remedial investigation and another part a remedial design is being developed. At one of these nine sites, a remedial investigation is being performed. The two remaining sites are in long-term OM&M. All nine sites are either associated with past manufacturing operations or former waste disposal sites. None of the nine largest sites represents more than 23% of the liabilities reserved on our consolidated balance sheet at December 31, 20152016 for future environmental expenditures.
Charges to income for investigatory and remedial efforts were material to operating results in 2015, 2014 and 2013 and may be material to operating results in future years.
Environmental provisions charged (credited) to income, which are included in cost of goods sold, were as follows:
| | | | Years ended December 31, | Years ended December 31, |
| | 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| | ($ in millions) | ($ in millions) |
| Charges to income | $ | 15.7 |
| | $ | 9.6 |
| | $ | 11.5 |
| $ | 9.2 |
| | $ | 15.7 |
| | $ | 9.6 |
|
| Recoveries from third parties of costs incurred and expensed in prior periods | — |
| | (1.4 | ) | | (1.3 | ) | — |
| | — |
| | (1.4 | ) |
| Total environmental expense | $ | 15.7 |
| | $ | 8.2 |
| | $ | 10.2 |
| $ | 9.2 |
| | $ | 15.7 |
| | $ | 8.2 |
|
These charges relate primarily to remedial and investigatory activities associated with past manufacturing operations and former waste disposal sites.sites and may be material to operating results in future years.
Annual environmental-related cash outlays for site investigation and remediation are expected to range between approximately $15 million to $25 million over the next several years, which are expected to be charged against reserves recorded on our consolidated balance sheet. While we do not anticipate a material increase in the projected annual level of our environmental-related cash outlays for site investigation and remediation, there is always the possibility that such an increase may occur in the future in view of the uncertainties associated with environmental exposures. Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies, advances in technology, changes in environmental laws and regulations and their application, changes in regulatory authorities, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other 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. At December 31, 2015,2016, we estimate that it is reasonably possible that we may have additional contingent environmental liabilities of $60 million in addition to the amounts for which we have already recorded as a reserve.
COMMITMENTS AND CONTINGENCIES
The following table summarizes our contractual commitments under non-cancelable operating leases and purchase contracts as of December 31, 2015:2016:
| | | | Operating Leases | | Purchase Commitments | Operating Leases | | Purchase Commitments |
| | ($ in millions) | ($ in millions) |
| 2016 | $ | 73.7 |
| | $ | 560.2 |
| |
| 2017 | 60.9 |
| | 506.4 |
| $ | 78.8 |
| | $ | 603.1 |
|
| 2018 | 51.7 |
| | 449.3 |
| 65.9 |
| | 514.8 |
|
| 2019 | 39.5 |
| | 442.1 |
| 51.9 |
| | 497.5 |
|
| 2020 | 27.3 |
| | 440.3 |
| 38.5 |
| | 494.4 |
|
| 2021 | | 26.9 |
| | 493.8 |
|
| Thereafter | 80.2 |
| | 2,904.9 |
| 77.6 |
| | 2,992.2 |
|
| Total commitments | $ | 333.3 |
| | $ | 5,303.2 |
| $ | 339.6 |
| | $ | 5,595.8 |
|
Our operating lease commitments are primarily for railroad cars but also include distribution, warehousing and office space and data processing and office equipment. Virtually none of our lease agreements contain escalation clauses or step rent provisions. Total rent expense charged to operations amounted to $95.5 million, $75.1 million and $66.8 million in 2016, 2015 and $64.2 million in 2015, 2014, and 2013, respectively (sublease income is not significant). The above purchase commitments include raw material, capital expenditure and utility purchasing commitments utilized in our normal course of business for our projected needs. In connection with the Acquisition, certain additional agreements have been entered into with TDCC, including, long-term purchase agreements for raw materials. These agreements are maintained through long-term cost based contracts that provide us with a reliable supply of key raw materials. Key raw materials received from TDCC include ethylene, electricity, propylene and benzene. Additionally, 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 $209.4 million in 2017. 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 $425.0 million and $465.0 million on or about the fourth quarter of 2020.
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. At December 31, 20152016 and 2014,2015, our consolidated balance sheets included liabilities for these legal actions of $21.2$13.6 million and $22.1$21.2 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.
104For the year ended December 31, 2016, we recognized an insurance recovery of $11.0 million in other operating income for property damage and business interruption related to a 2008 chlor alkali facility incident.
For the year ended December 31, 2015 we recognized insurance recoveries of $57.4 million for property damage and business interruption related to the Becancour, Canada and McIntosh, AL chlor alkali facilities. Cost of goods sold was reduced by $10.5 million and selling and administration was reduced by $0.9 million for the reimbursement of costs incurred and expensed in prior periods and other operating income included a gain of $46.0 million. The consolidated statement of cash flows for the year ended December 31, 2015 included $25.8 million for the property damage portion of the insurance recoveries within proceeds from disposition of property, plant and equipment and gains on disposition of property, plant and equipment.
For the year ended December 31, 2013, we recognized $11.0 million as a reduction of cost of goods sold related to a Chlor Alkali Products and Vinyls favorable contract settlement. Also for the year ended December 31, 2013, we recognized $13.9 million as a reduction of selling and administration expense related to the recovery of legacy legal costs.
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) required 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 forwardderivative 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.
The company 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 resulting from purchaseto offset our net exposures, by currency, related to the foreign currency denominated monetary assets and sale commitments denominated in foreign currencies.liabilities of our operations. At December 31, 20152016, we had outstanding forward contracts to buy foreign currency with a notional value of $21.7$73.2 million and to sell foreign currency with a notional value of $10.1$100.8 million. All of the currency derivatives expire within one year and are for USD equivalents. The counterparties to the forward contracts were 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, 2014,2015, we had nooutstanding forward contracts to buy orforeign currency with a notional value of $21.7 million and to sell foreign currencies.currency with a notional value of $10.1 million.
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. 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 2016 Notes. We have agreed to pay a fixed rate to a counterparty who, in turn, pays us variable rates. The counterparty to this agreement 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 December 31, 2015, $1.2 million of this gain was included in current installments of 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 $125 million fixed interest rate swaps do not meet the criteria for hedge accounting. All changes in the fair value of these interest rate swaps are recorded currently in earnings.
Cash Flow Hedges
ASC 815 requires that all derivative instruments be recorded on the balance sheet at their fair value. For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative is recognized as a component of other comprehensive income (loss) until the hedged item is recognized into earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized currently in earnings.
We had the following notional amount of outstanding commodity forward contracts that were entered into to hedge forecasted purchases:
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| ($ in millions) | ($ in millions) |
| Copper | $ | 43.6 |
| | $ | 62.7 |
| $ | 35.8 |
| | $ | 43.6 |
|
| Zinc | 8.7 |
| | 6.8 |
| 8.0 |
| | 8.7 |
|
| Lead | 9.3 |
| | 14.1 |
| 3.4 |
| | 9.3 |
|
| Natural gas | 2.0 |
| | 5.7 |
| 54.4 |
| | 2.0 |
|
As of December 31, 2015,2016, the counterpartycounterparties to $43.3 million of these commodity forward contracts waswere Wells Fargo a($41.7 million), Citibank ($22.0 million), Merrill Lynch Commodities, Inc. ($19.8 million) and JPMorgan Chase Bank, National Association ($18.1 million), all of which are major financial institution, and the counterparty to $20.3 million of these commodity forward contracts was Citibank, a major financial institution.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 our manufacturing process. At December 31, 2015,2016, we had open positions in futures contracts through 2021. If all open futures contracts had been settled on December 31, 2015,2016, we would have recognized a pretax lossgain of $11.4$11.1 million.
If commodity prices were to remain at December 31, 20152016 levels, approximately $5.0$6.2 million of deferred lossesgains 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 $9.6 million and are included in other current assets and other assets on the accompanying consolidated balance sheet, with the corresponding gain deferred as a component of other comprehensive loss. 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 December 31, 2016, 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 December 31, 2016, we would have recognized a pretax gain of $9.6 million.
If interest rates were to remain at December 31, 2016 levels, $1.1 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.
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 noAs of December 31, 2016 and 2015, the total notional amounts of our interest rate swaps designated as fair value hedges were $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 $28.5 million and are included in other long-term liabilities on the accompanying consolidated balance sheet, with a corresponding decrease in the carrying amount of the related debt. For the year ended December 31, 2015 and 2014.2016, $2.6 million of income has been recorded to interest expense on the accompanying consolidated 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 December 31, 2015, $0.42016, $0.1 million of this gain was included in current installments of long-term debt.
We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels. These interest rate swaps are treated as fair value hedges. The accounting for gains and losses associated with changes in fair value of the derivative and the effect on the consolidated financial statements will depend on the hedge designation and whether the hedge is effective in offsetting changes in fair value of cash flows of the asset or liability being hedged.
Financial Statement Impacts
We present our derivative assets and liabilities in our consolidated balance sheets on a net basis whenever we have a legally enforceable master netting agreement with the counterparty to our derivative contracts. We use these agreements to manage and substantially reduce our potential counterparty credit risk.
The following table summarizes the location and fair value of the derivative instruments on our consolidated balance sheets. The table disaggregates our net derivative assets and liabilities into gross components on a contract-by-contract basis before giving effect to master netting arrangements:
| | | | | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
| | | Fair Value | | Fair Value | | Fair Value | | Fair Value |
| | | December 31, | | December 31, | | December 31, | | December 31, |
Derivatives Designated
as Hedging Instruments | | Balance Sheet Location | | 2015 | | 2014 | | Balance Sheet Location | | 2015 | | 2014 | | Balance Sheet Location | | 2016 | | 2015 | | Balance Sheet Location | | 2016 | | 2015 |
| | | ($ in millions) | | ($ in millions) | | ($ in millions) | | ($ in millions) |
| Interest rate contracts | | Other current assets | | $ | — |
| | $ | — |
| | Current installments of long-term debt | | $ | 1.2 |
| | $ | — |
| | Other current assets | | $ | 1.9 |
| | $ | — |
| | Current installments of long-term debt | | $ | 0.1 |
| | $ | 1.2 |
|
| Interest rate contracts | | Other assets | | — |
| | — |
| | Long-term debt | | 0.4 |
| | 4.5 |
| | Other assets | | 7.7 |
| | — |
| | Long-term debt | | — |
| | 0.4 |
|
| Interest rate contracts | | | Other assets | | — |
| | — |
| | Other liabilities | | 28.5 |
| | — |
|
| Commodity contracts – gains | | | Other current assets | | 13.2 |
| | — |
| | Accrued liabilities | | — |
| | (0.1 | ) |
| Commodity contracts – losses | | Other current assets | | — |
| | — |
| | Accrued liabilities | | 11.5 |
| | 7.2 |
| | Other current assets | | (1.7 | ) | | — |
| | Accrued liabilities | | — |
| | 11.5 |
|
| Commodity contracts – gains | | Other current assets | | — |
| | — |
| | Accrued liabilities | | (0.1 | ) | | (0.1 | ) | |
| | | $ | — |
| | $ | — |
| | $ | 13.0 |
| | $ | 11.6 |
| | $ | 21.1 |
| | $ | — |
| | $ | 28.6 |
| | $ | 13.0 |
|
Derivatives Not Designated
as Hedging Instruments | | | | | | | | | | | | | | | | |
| Interest rate contracts – gains | | Other current assets | | $ | 1.2 |
| | $ | — |
| | Accrued liabilities | | $ | — |
| | $ | — |
| | Other current assets | | $ | — |
| | $ | 1.2 |
| | Accrued liabilities | | $ | — |
| | $ | — |
|
| Interest rate contracts – losses | | Other current assets | | (0.1 | ) | | — |
| | Accrued liabilities | | — |
| | — |
| | Other current assets | | — |
| | (0.1 | ) | | Accrued liabilities | | — |
| | — |
|
| Interest rate contracts – gains | | Other assets | | — |
| | 4.3 |
| | Other liabilities | | — |
| | — |
| |
| Interest rate contracts – losses | | Other assets | | — |
| | (0.8 | ) | | Other liabilities | | — |
| | — |
| |
| Commodity contracts – losses | | Other current assets | | — |
| | — |
| | Accrued liabilities | | 0.2 |
| | 1.5 |
| | Other current assets | | — |
| | — |
| | Accrued liabilities | | — |
| | 0.2 |
|
| Foreign exchange contracts – losses | | | Other current assets | | (0.5 | ) | | — |
| | Accrued liabilities | | 1.7 |
| | — |
|
| Foreign exchange contracts – gains | | Other current assets | | 0.1 |
| | — |
| | Accrued liabilities | | — |
| | — |
| | Other current assets | | 0.6 |
| | 0.1 |
| | Accrued liabilities | | (0.5 | ) | | — |
|
| | | $ | 1.2 |
| | $ | 3.5 |
| | $ | 0.2 |
| | $ | 1.5 |
| | $ | 0.1 |
| | $ | 1.2 |
| | $ | 1.2 |
| | $ | 0.2 |
|
Total derivatives(1) | | $ | 1.2 |
| | $ | 3.5 |
| | $ | 13.2 |
| | $ | 13.1 |
| | $ | 21.2 |
| | $ | 1.2 |
| | $ | 29.8 |
| | $ | 13.2 |
|
| |
| (1) | Does not include the impact of cash collateral received from or provided to counterparties. |
The following table summarizes the effects of derivative instruments on our consolidated statements of operations:
| | | | | Amount of Gain (Loss) | | Amount of Gain (Loss) |
| | | Years Ended December 31, | | Years Ended December 31, |
| | Location of Gain (Loss) | | 2015 | | 2014 | | 2013 | Location of Gain (Loss) | | 2016 | | 2015 | | 2014 |
| Derivatives – Cash Flow Hedges | | ($ in millions) | | ($ in millions) |
| Recognized in other comprehensive loss (effective portion) | ——— | | $ | (13.9 | ) | | $ | (10.2 | ) | | $ | (7.7 | ) | |
| Reclassified from accumulated other comprehensive loss into income (effective portion) | Cost of goods sold | | $ | (9.7 | ) | | $ | (1.8 | ) | | $ | (1.4 | ) | |
| Recognized in other comprehensive loss (effective portion): | | | | | | | |
| Commodity contracts | | ——— | | $ | 16.7 |
| | $ | (13.9 | ) | | $ | (10.2 | ) |
| Interest rate contracts | | ——— | | 9.6 |
| | — |
| | — |
|
| | | | $ | 26.3 |
| | $ | (13.9 | ) | | $ | (10.2 | ) |
| Reclassified from accumulated other comprehensive loss into income (effective portion): | | | | | | | |
| Commodity contracts | | Cost of goods sold | | $ | (5.8 | ) | | $ | (9.7 | ) | | $ | (1.8 | ) |
| Derivatives – Fair Value Hedges | | | | | | | | | | | | |
| Interest rate contracts | Interest expense | | $ | 2.8 |
| | $ | 2.9 |
| | $ | 2.9 |
| Interest expense | | $ | 3.7 |
| | $ | 2.8 |
| | $ | 2.9 |
|
| Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | | |
| Commodity contracts | Cost of goods sold | | $ | (2.2 | ) | | $ | 1.4 |
| | $ | 0.4 |
| Cost of goods sold | | $ | (0.4 | ) | | $ | (2.2 | ) | | $ | 1.4 |
|
| Foreign exchange contracts | Selling and administration | | 0.1 |
| | — |
| | — |
| Selling and administration | | (11.1 | ) | | 0.1 |
| | — |
|
| | | $ | (2.1 | ) | | $ | 1.4 |
| | $ | 0.4 |
| | $ | (11.5 | ) | | $ | (2.1 | ) | | $ | 1.4 |
|
The ineffective portion of changes in fair value resulted in zero charged or credited to earnings for the years ended December 31, 2016, 2015 2014 and 2013.2014.
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, exceedexceeds 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 December 31, 2016, this threshold was not exceeded. As of December 31, 2015, the amount recognized in accrued liabilities for cash collateral provided by us to counterparties was $5.6 million. As of December 31, 2014, this threshold was not exceeded. In all instances where we are party to a master netting agreement, we offset the receivable or payable recognized upon payment of cash collateral against the fair value amounts recognized for derivative instruments that have also been offset under such master netting agreements.
FAIR VALUE MEASUREMENTS
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities. We are required to separately disclose assets and liabilities measured at fair value on a recurring basis, from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis are intangible assets and goodwill, which are reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred. Determining which hierarchical level an asset or liability falls within requires significant judgment. The following table summarizes the assets and liabilities measured at fair value in the consolidated balance sheets:
| |
Balance at December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Assets | | ($ in millions) |
| 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 December 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | |
| Assets | ($ in millions) | | | | | | | |
| Interest rate swaps | $ | — |
| | $ | 1.1 |
| | $ | — |
| | $ | 1.1 |
| $ | — |
| | $ | 1.1 |
| | $ | — |
| | $ | 1.1 |
|
| Foreign exchange contracts | — |
| | 0.1 |
| | — |
| | 0.1 |
| — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Liabilities | |
| | |
| | |
| | |
| | | | | | | |
| Interest rate swaps | — |
| | 1.6 |
| | — |
| | 1.6 |
| — |
| | 1.6 |
| | — |
| | 1.6 |
|
| Commodity forward contracts | — |
| | 11.6 |
| | — |
| | 11.6 |
| |
| Balance at December 31, 2014 | | |
| Assets | | | | | | | | |
| Interest rate swaps | $ | — |
| | $ | 3.5 |
| | $ | — |
| | $ | 3.5 |
| |
| Liabilities | | | | | | | | |
| Interest rate swaps | — |
| | 4.5 |
| | — |
| | 4.5 |
| |
| Commodity forward contracts | — |
| | 8.6 |
| | — |
| | 8.6 |
| |
| Commodity contracts | | — |
| | 11.6 |
| | — |
| | 11.6 |
|
For the yearyears ended December 31, 2016 and 2015, there were no transfers into or out of Level 1, Level 2 and Level 2.
The following table summarizes the activity for our earn out liability measured at fair value using Level 3 inputs:
|
| | | | | | | |
| | December 31, |
| | 2015 | | 2014 |
| | ($ in millions) |
| Beginning balance | $ | — |
| | $ | 26.7 |
|
| Settlements | — |
| | (26.7 | ) |
| Ending balance | $ | — |
| | $ | — |
|
Interest Rate Swaps
The fair value of the interestInterest rate swaps was included in other current assets, current installments of long-term debt and long-term debt as of December 31, 2015. The fair value of the interest rate swaps was included in other assets and long-term debt as of December 31, 2014. Theseswap financial instruments were valued using the “income approach” valuation technique. This method used valuation techniques to convert future amounts to a single present amount. The measurement was based on the value indicated by current market expectations about those future amounts. We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels.
Commodity Forward Contracts
The fair value of the commodity forward contracts was classified in accrued liabilities as of December 31, 2015 and 2014, with unrealized gains and losses included in accumulated other comprehensive loss, net of applicable taxes. TheseCommodity 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 forwardderivative 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
The fair value of foreignForeign currency contracts was classified within other current assets as of December 31, 2015, with gains and losses included in selling and administration expense as thesecontract financial instruments do not meet the criteria to qualifywere valued primarily based on relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for hedge accounting. We had no fair value of foreign currency contracts as of December 31, 2014.currencies. We enter into forward sales and purchase contracts to manage currency risk resulting from purchase and sale commitments denominated in foreign currencies.
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 balance sheets:
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements | | |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Amount recorded
on balance sheets |
| | ($ in millions) |
| Balance at December 31, 2015 | $ | — |
| | $ | 3,826.9 |
| | $ | 153.0 |
| | $ | 3,979.9 |
| | $ | 3,881.7 |
|
| Balance at December 31, 2014 | — |
| | 531.9 |
| | 153.0 |
| | 684.9 |
| | 675.1 |
|
Earn Out
On February 11, 2011 we acquired PolyOne’s 50% interest in SunBelt. With this acquisition, we agreed to a three-year earn out, which had no guaranteed minimum or maximum, based on the performance of SunBelt. The fair value of the earn out was estimated using a probability-weighted discounted cash flow model. This fair value measurement was based on significant inputs not observed in the market. Key assumptions in determining the fair value of the earn out included the discount rate and cash flow projections. The final earn out payment was made in 2014.
For the year ended December 31, 2014, we paid $26.7 million for the earn out related to the 2013 SunBelt performance. The earn out payment for 2014 included $14.8 million that was recognized as part of the original purchase price. The $14.8 million is included as a financing activity in the statement of cash flows. |
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements | | |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Amount recorded
on balance sheets |
| | ($ in millions) |
| Balance at December 31, 2016 | $ | — |
| | $ | 3,703.7 |
| | $ | 153.0 |
| | $ | 3,856.7 |
| | $ | 3,617.6 |
|
| Balance at December 31, 2015 | — |
| | 3,826.9 |
| | 153.0 |
| | 3,979.9 |
| | 3,848.8 |
|
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 December 31, 2016 and 2015.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
In October 2015, Spinco (the Issuer) issued $720.0 million aggregate principal amount of the 2023 Notes and $500.0 million aggregate principal amount of the 2025 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 December 31, 2016 and 2015, and 2014.the related condensed consolidating statements of operations, comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 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.
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING BALANCE SHEETS |
| December 31, 2016 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Assets |
| |
| |
| |
| |
|
| Current assets: |
| |
| |
| |
| |
|
| Cash and cash equivalents | $ | 25.2 |
| | — |
| | $ | 159.3 |
| | — |
| | $ | 184.5 |
|
| Receivables, net | 88.3 |
| | — |
| | 586.7 |
| | — |
| | 675.0 |
|
| Intercompany receivables | — |
| | — |
| | 1,912.3 |
| | (1,912.3 | ) | | — |
|
| Income taxes receivable | 19.0 |
| | — |
| | 7.3 |
| | (0.8 | ) | | 25.5 |
|
| Inventories | 167.7 |
| | — |
| | 462.7 |
| | — |
| | 630.4 |
|
| Other current assets | 164.7 |
| | 3.4 |
| | 1.2 |
| | (138.5 | ) | | 30.8 |
|
| Total current assets | 464.9 |
| | 3.4 |
| | 3,129.5 |
| | (2,051.6 | ) | | 1,546.2 |
|
| Property, plant and equipment, net | 510.1 |
| | — |
| | 3,194.8 |
| | — |
| | 3,704.9 |
|
| Investment in subsidiaries | 6,035.2 |
| | 3,734.7 |
| | — |
| | (9,769.9 | ) | | — |
|
| Deferred income taxes | 133.5 |
| | — |
| | 103.5 |
| | (117.5 | ) | | 119.5 |
|
| Other assets | 48.1 |
| | — |
| | 596.3 |
| | — |
| | 644.4 |
|
| Long-term receivables—affiliates | — |
| | 2,194.2 |
| | — |
| | (2,194.2 | ) | | — |
|
| Intangible assets, net | 0.4 |
| | 5.7 |
| | 623.5 |
| | — |
| | 629.6 |
|
| Goodwill | — |
| | 966.3 |
| | 1,151.7 |
| | — |
| | 2,118.0 |
|
| Total assets | $ | 7,192.2 |
| | $ | 6,904.3 |
| | $ | 8,799.3 |
| | $ | (14,133.2 | ) | | $ | 8,762.6 |
|
| Liabilities and Shareholders' Equity |
| |
| |
| |
| |
|
| Current liabilities: |
| |
| |
| |
| |
|
| Current installments of long-term debt | $ | 0.6 |
| | $ | 67.5 |
| | $ | 12.4 |
| | — |
| | $ | 80.5 |
|
| Accounts payable | 45.3 |
| | — |
| | 527.4 |
| | (1.9 | ) | | 570.8 |
|
| Intercompany payables | 1,882.8 |
| | 29.5 |
| | — |
| | (1,912.3 | ) | | — |
|
| Income taxes payable | — |
| | — |
| | 8.3 |
| | (0.8 | ) | | 7.5 |
|
| Accrued liabilities | 124.9 |
| | — |
| | 277.5 |
| | (138.6 | ) | | 263.8 |
|
| Total current liabilities | 2,053.6 |
| | 97.0 |
| | 825.6 |
| | (2,053.6 | ) | | 922.6 |
|
| Long-term debt | 913.9 |
| | 2,413.3 |
| | 209.9 |
| | — |
| | 3,537.1 |
|
| Accrued pension liability | 453.7 |
| | — |
| | 184.4 |
| | — |
| | 638.1 |
|
| Deferred income taxes | — |
| | 223.6 |
| | 926.4 |
| | (117.5 | ) | | 1,032.5 |
|
| Long-term payables—affiliates | 1,209.1 |
| | — |
| | 985.1 |
| | (2,194.2 | ) | | — |
|
| Other liabilities | 288.9 |
| | 6.6 |
| | 63.8 |
| | — |
| | 359.3 |
|
| Total liabilities | 4,919.2 |
| | 2,740.5 |
| | 3,195.2 |
| | (4,365.3 | ) | | 6,489.6 |
|
| Commitments and contingencies |
| |
| |
| |
| |
|
| Shareholders' equity: |
| |
| |
| |
| |
|
| Common stock | 165.4 |
| | — |
| | 14.6 |
| | (14.6 | ) | | 165.4 |
|
| Additional paid-in capital | 2,243.8 |
| | 4,125.7 |
| | 4,808.2 |
| | (8,933.9 | ) | | 2,243.8 |
|
| Accumulated other comprehensive loss | (510.0 | ) | | — |
| | (7.0 | ) | | 7.0 |
| | (510.0 | ) |
| Retained earnings | 373.8 |
| | 38.1 |
| | 788.3 |
| | (826.4 | ) | | 373.8 |
|
| Total shareholders' equity | 2,273.0 |
| | 4,163.8 |
| | 5,604.1 |
| | (9,767.9 | ) | | 2,273.0 |
|
| Total liabilities and shareholders' equity | $ | 7,192.2 |
| | $ | 6,904.3 |
| | $ | 8,799.3 |
| | $ | (14,133.2 | ) | | $ | 8,762.6 |
|
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING BALANCE SHEETS |
| December 31, 2015 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Assets |
| |
| |
| |
| |
|
| Current assets: |
| |
| |
| |
| |
|
| Cash and cash equivalents | $ | 119.4 |
| | — |
| | $ | 272.6 |
| | — |
| | $ | 392.0 |
|
| Receivables, net | 107.7 |
| | — |
| | 679.4 |
| | (3.7 | ) | | 783.4 |
|
| Intercompany receivables | — |
| | 76.1 |
| | 1,093.1 |
| | (1,169.2 | ) | | — |
|
| Income taxes receivable | 27.3 |
| | — |
| | 5.7 |
| | (0.1 | ) | | 32.9 |
|
| Inventories | 166.0 |
| | — |
| | 519.2 |
| | — |
| | 685.2 |
|
| Current deferred income taxes | — |
| | — |
| | 2.7 |
| | (2.7 | ) | | — |
|
| Other current assets | 152.1 |
| | 5.0 |
| | 4.6 |
| | (121.8 | ) | | 39.9 |
|
| Total current assets | 572.5 |
| | 81.1 |
| | 2,577.3 |
| | (1,297.5 | ) | | 1,933.4 |
|
| Property, plant and equipment, net | 508.7 |
| | — |
| | 3,444.7 |
| | — |
| | 3,953.4 |
|
| Investment in subsidiaries | 5,905.0 |
| | 3,636.3 |
| | — |
| | (9,541.3 | ) | | — |
|
| Deferred income taxes | 155.6 |
| | — |
| | 84.9 |
| | (144.6 | ) | | 95.9 |
|
| Other assets | 43.5 |
| | — |
| | 411.1 |
| | — |
| | 454.6 |
|
| Long-term receivables—affiliates | — |
| | 2,562.6 |
| | — |
| | (2,562.6 | ) | | — |
|
| Intangible assets, net | 0.5 |
| | — |
| | 677.0 |
| | — |
| | 677.5 |
|
| Goodwill | — |
| | 990.2 |
| | 1,183.9 |
| | — |
| | 2,174.1 |
|
| Total assets | $ | 7,185.8 |
| | $ | 7,270.2 |
| | $ | 8,378.9 |
| | $ | (13,546.0 | ) | | $ | 9,288.9 |
|
| Liabilities and Shareholders' Equity |
| |
| |
| |
| |
|
| Current liabilities: |
| |
| |
| |
| |
|
| Current installments of long-term debt | $ | 192.8 |
| | — |
| | $ | 12.2 |
| | — |
| | $ | 205.0 |
|
| Accounts payable | 37.3 |
| | — |
| | 576.6 |
| | (5.7 | ) | | 608.2 |
|
| Intercompany payables | 1,169.2 |
| | — |
| | — |
| | (1,169.2 | ) | | — |
|
| Income taxes payable | 1.5 |
| | — |
| | 6.1 |
| | (2.7 | ) | | 4.9 |
|
| Accrued liabilities | 227.8 |
| | — |
| | 221.3 |
| | (121.0 | ) | | 328.1 |
|
| Total current liabilities | 1,628.6 |
| | — |
| | 816.2 |
| | (1,298.6 | ) | | 1,146.2 |
|
| Long-term debt | 1,084.0 |
| | 2,547.4 |
| | 12.4 |
| | — |
| | 3,643.8 |
|
| Accrued pension liability | 484.3 |
| | — |
| | 164.6 |
| | — |
| | 648.9 |
|
| Deferred income taxes | — |
| | 294.8 |
| | 945.1 |
| | (144.7 | ) | | 1,095.2 |
|
| Long-term payables—affiliates | 1,296.4 |
| | 286.5 |
| | 979.7 |
| | (2,562.6 | ) | | — |
|
| Other liabilities | 273.7 |
| | — |
| | 61.1 |
| | 1.2 |
| | 336.0 |
|
| Total liabilities | 4,767.0 |
| | 3,128.7 |
| | 2,979.1 |
| | (4,004.7 | ) | | 6,870.1 |
|
| Commitments and contingencies |
| |
| |
| |
| |
|
| Shareholders' equity: |
| |
| |
| |
| |
|
| Common stock | 165.1 |
| | — |
| | 14.6 |
| | (14.6 | ) | | 165.1 |
|
| Additional paid-in capital | 2,236.4 |
| | 4,146.1 |
| | 4,789.6 |
| | (8,935.7 | ) | | 2,236.4 |
|
| Accumulated other comprehensive loss | (492.5 | ) | | — |
| | (31.7 | ) | | 31.7 |
| | (492.5 | ) |
| Retained earnings | 509.8 |
| | (4.6 | ) | | 627.3 |
| | (622.7 | ) | | 509.8 |
|
| Total shareholders' equity | 2,418.8 |
| | 4,141.5 |
| | 5,399.8 |
| | (9,541.3 | ) | | 2,418.8 |
|
| Total liabilities and shareholders' equity | $ | 7,185.8 |
| | $ | 7,270.2 |
| | $ | 8,378.9 |
| | $ | (13,546.0 | ) | | $ | 9,288.9 |
|
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS |
| Year Ended December 31, 2016 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Sales | $ | 1,321.3 |
| | — |
| | $ | 4,720.2 |
| | $ | (490.9 | ) | | $ | 5,550.6 |
|
| Operating expenses: |
| |
| |
| |
| |
|
| Cost of goods sold | 1,128.7 |
| | — |
| | 4,285.9 |
| | (490.9 | ) | | 4,923.7 |
|
| Selling and administration | 138.1 |
| | — |
| | 185.1 |
| | — |
| | 323.2 |
|
| Restructuring charges | 0.8 |
| | — |
| | 112.1 |
| | — |
| | 112.9 |
|
| Acquisition-related costs | 47.4 |
| | — |
| | 1.4 |
| | — |
| | 48.8 |
|
| Other operating (loss) income | (2.2 | ) | | — |
| | 12.8 |
| | — |
| | 10.6 |
|
| Operating income | 4.1 |
| | — |
| | 148.5 |
| | — |
| | 152.6 |
|
| Earnings of non-consolidated affiliates | 1.7 |
| | — |
| | — |
| | — |
| | 1.7 |
|
| Equity income (loss) in subsidiaries | 16.2 |
| | 139.0 |
| | — |
| | (155.2 | ) | | — |
|
| Interest expense | 38.8 |
| | 153.9 |
| | 4.7 |
| | (5.5 | ) | | 191.9 |
|
| Interest income | 4.7 |
| | — |
| | 4.2 |
| | (5.5 | ) | | 3.4 |
|
| Income (loss) before taxes | (12.1 | ) | | (14.9 | ) | | 148.0 |
| | (155.2 | ) | | (34.2 | ) |
| Income tax (benefit) provision | (8.2 | ) | | (57.6 | ) | | 35.5 |
| | — |
| | (30.3 | ) |
| Net (loss) income | $ | (3.9 | ) | | $ | 42.7 |
| | $ | 112.5 |
| | $ | (155.2 | ) | | $ | (3.9 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS |
| Year Ended December 31, 2015 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Sales | $ | 1,215.4 |
| | — |
| | $ | 2,002.5 |
| | $ | (363.5 | ) | | $ | 2,854.4 |
|
| Operating expenses: |
| |
| |
| |
| |
|
| Cost of goods sold | 1,057.8 |
| | — |
| | 1,792.5 |
| | (363.5 | ) | | 2,486.8 |
|
| Selling and administration | 110.0 |
| | — |
| | 76.3 |
| | — |
| | 186.3 |
|
| Restructuring charges | 0.7 |
| | — |
| | 2.0 |
| | — |
| | 2.7 |
|
| Acquisition-related costs | 117.9 |
| | — |
| | 5.5 |
| | — |
| | 123.4 |
|
| Other operating (loss) income | (4.0 | ) | | — |
| | 49.7 |
| | — |
| | 45.7 |
|
| Operating (loss) income | (75.0 | ) | | — |
| | 175.9 |
| | — |
| | 100.9 |
|
| Earnings of non-consolidated affiliates | 1.7 |
| | — |
| | — |
| | — |
| | 1.7 |
|
| Equity income (loss) in subsidiaries | 90.2 |
| | 19.7 |
| | — |
| | (109.9 | ) | | — |
|
| Interest expense | 60.9 |
| | 37.0 |
| | 4.5 |
| | (5.4 | ) | | 97.0 |
|
| Interest income | 3.1 |
| | — |
| | 3.4 |
| | (5.4 | ) | | 1.1 |
|
| Income (loss) before taxes | (40.9 | ) | | (17.3 | ) | | 174.8 |
| | (109.9 | ) | | 6.7 |
|
| Income tax (benefit) provision | (39.5 | ) | | (12.7 | ) | | 60.3 |
| | — |
| | 8.1 |
|
| Net (loss) income | $ | (1.4 | ) | | $ | (4.6 | ) | | $ | 114.5 |
| | $ | (109.9 | ) | | $ | (1.4 | ) |
|
| | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS |
| Year Ended December 31, 2014 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Sales | $ | 1,373.2 |
| | — |
| | 1,285.5 |
| | $ | (417.5 | ) | | $ | 2,241.2 |
|
| Operating expenses: |
| |
| | — |
| |
| |
|
| Cost of goods sold | 1,148.1 |
| | — |
| | 1,122.6 |
| | (417.5 | ) | | 1,853.2 |
|
| Selling and administration | 90.7 |
| | — |
| | 75.4 |
| | — |
| | 166.1 |
|
| Restructuring charges | 4.8 |
| | — |
| | 10.9 |
| | — |
| | 15.7 |
|
| Acquisition-related costs | 4.2 |
| | — |
| | — |
| | — |
| | 4.2 |
|
| Other operating income | 0.9 |
| | — |
| | 0.6 |
| | — |
| | 1.5 |
|
| Operating income | 126.3 |
| | — |
| | 77.2 |
| | — |
| | 203.5 |
|
| Earnings of non-consolidated affiliates | 1.7 |
| | — |
| | — |
| | — |
| | 1.7 |
|
| Equity income (loss) in subsidiaries | 48.8 |
| | — |
| | — |
| | (48.8 | ) | | — |
|
| Interest expense | 47.0 |
| | — |
| | 1.3 |
| | (4.5 | ) | | 43.8 |
|
| Interest income | 2.5 |
| | — |
| | 3.3 |
| | (4.5 | ) | | 1.3 |
|
| Income (loss) from continuing operations before taxes | 132.3 |
| | — |
| | 79.2 |
| | (48.8 | ) | | 162.7 |
|
| Income tax provision | 27.3 |
| | — |
| | 30.4 |
| | — |
| | 57.7 |
|
| Income (loss) from continuing operations | 105.0 |
| | — |
| | 48.8 |
| | (48.8 | ) | | 105.0 |
|
| Income from discontinued operations, net | $ | 0.7 |
| | — |
| | $ | — |
| | $ | — |
| | $ | 0.7 |
|
| Net income (loss) | $ | 105.7 |
| | — |
| | $ | 48.8 |
| | $ | (48.8 | ) | | $ | 105.7 |
|
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| Year Ended December 31, 2016 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Net (loss) income | $ | (3.9 | ) | | $ | 42.7 |
| | $ | 112.5 |
| | $ | (155.2 | ) | | $ | (3.9 | ) |
| Other comprehensive income (loss), net of tax: |
| |
| |
| |
| |
|
| Foreign currency translation adjustments, net | — |
| | — |
| | (12.0 | ) | | — |
| | (12.0 | ) |
| Unrealized gains on derivative contracts, net | 19.7 |
| | — |
| | — |
| | — |
| | 19.7 |
|
| Pension and postretirement liability adjustments, net | (25.3 | ) | | — |
| | (12.2 | ) | | — |
| | (37.5 | ) |
| Amortization of prior service costs and actuarial losses, net | 10.9 |
| | — |
| | 1.4 |
| | — |
| | 12.3 |
|
| Total other comprehensive income (loss), net of tax | 5.3 |
| | — |
| | (22.8 | ) | | — |
| | (17.5 | ) |
| Comprehensive income (loss) | $ | 1.4 |
| | $ | 42.7 |
| | $ | 89.7 |
| | $ | (155.2 | ) | | $ | (21.4 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| Year Ended December 31, 2015 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Net (loss) income | $ | (1.4 | ) | | (4.6 | ) | | $ | 114.5 |
| | $ | (109.9 | ) | | $ | (1.4 | ) |
| Other comprehensive (loss) income, net of tax: |
| |
| |
| |
| |
|
| Foreign currency translation adjustments, net | — |
| | — |
| | (9.8 | ) | | — |
| | (9.8 | ) |
| Unrealized losses on derivative contracts, net | (2.7 | ) | | — |
| | — |
| | — |
| | (2.7 | ) |
| Pension and postretirement liability adjustments, net | (73.7 | ) | | — |
| | (5.1 | ) | | — |
| | (78.8 | ) |
| Amortization of prior service costs and actuarial losses, net | 39.6 |
| | — |
| | 2.3 |
| | — |
| | 41.9 |
|
| Total other comprehensive (loss) income, net of tax | (36.8 | ) | | — |
| | (12.6 | ) | | — |
| | (49.4 | ) |
| Comprehensive (loss) income | $ | (38.2 | ) | | $ | (4.6 | ) | | $ | 101.9 |
| | $ | (109.9 | ) | | $ | (50.8 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| Year Ended December 31, 2014 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Net income (loss) | 105.7 |
| | — |
| | 48.8 |
| | (48.8 | ) | | 105.7 |
|
| Other comprehensive (loss) income, net of tax: |
| |
| |
| |
| |
|
| Foreign currency translation adjustments, net | — |
| | — |
| | (1.8 | ) | | — |
| | (1.8 | ) |
| Unrealized losses on derivative contracts, net | (5.1 | ) | | — |
| | — |
| | — |
| | (5.1 | ) |
| Pension and postretirement liability adjustments, net | (83.4 | ) | | — |
| | (3.2 | ) | | — |
| | (86.6 | ) |
| Amortization of prior service costs and actuarial losses, net | 14.1 |
| | — |
| | 1.4 |
| | — |
| | 15.5 |
|
| Total other comprehensive (loss) income, net of tax | (74.4 | ) | | — |
| | (3.6 | ) | | — |
| | (78.0 | ) |
| Comprehensive income (loss) | $ | 31.3 |
| | $ | — |
| | $ | 45.2 |
| | $ | (48.8 | ) | | $ | 27.7 |
|
|
| | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
| Year Ended December 31, 2016 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Net operating activities | $ | 702.6 |
| | — |
| | $ | (99.4 | ) | | — |
| | $ | 603.2 |
|
| Investing Activities |
| |
| |
| |
| |
|
| Capital expenditures | (65.7 | ) | | — |
| | (212.3 | ) | | — |
| | (278.0 | ) |
| Business acquired and related transactions, net of cash acquired | (69.5 | ) | | — |
| | — |
| | — |
| | (69.5 | ) |
| Payments under long-term supply contract | — |
| | — |
| | (175.7 | ) | | — |
| | (175.7 | ) |
| Proceeds from sale/leaseback of equipment | — |
| | — |
| | 40.4 |
| | — |
| | 40.4 |
|
| Proceeds from disposition of property, plant and equipment | 0.2 |
| | — |
| | 0.3 |
| | — |
| | 0.5 |
|
| Proceeds from disposition of investments in non-consolidated equity affiliate | 8.8 |
| | — |
| | — |
| | — |
| | 8.8 |
|
| Net investing activities | (126.2 | ) | | — |
| | (347.3 | ) | | — |
| | (473.5 | ) |
| Financing Activities |
| |
| |
| |
| |
|
| Long-term debt: | | | | | | | | | |
| Borrowings | — |
| | — |
| | 230.0 |
| | — |
| | 230.0 |
|
| Repayments | (335.6 | ) | | (67.5 | ) | | (32.2 | ) | | — |
| | (435.3 | ) |
| Stock options exercised | 0.5 |
| | — |
| | — |
| | — |
| | 0.5 |
|
| Excess tax benefits from stock-based compensation | 0.4 |
| | — |
| | — |
| | — |
| | 0.4 |
|
| Dividends paid | (132.1 | ) | | — |
| | — |
| | — |
| | (132.1 | ) |
| Debt and equity issuance costs | — |
| | (1.0 | ) | | — |
| | — |
| | (1.0 | ) |
| Intercompany financing activities | (203.8 | ) | | 68.5 |
| | 135.3 |
| | — |
| | — |
|
| Net financing activities | (670.6 | ) | | — |
| | 333.1 |
| | — |
| | (337.5 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 0.3 |
| | — |
| | 0.3 |
|
| Net decrease in cash and cash equivalents | (94.2 | ) | | — |
| | (113.3 | ) | | — |
| | (207.5 | ) |
| Cash and cash equivalents, beginning of year | 119.4 |
| | — |
| | 272.6 |
| | — |
| | 392.0 |
|
| Cash and cash equivalents, end of year | $ | 25.2 |
| | — |
| | $ | 159.3 |
| | — |
| | $ | 184.5 |
|
|
| | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
| Year Ended December 31, 2015 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Net operating activities | $ | (70.6 | ) | | — |
| | $ | 287.7 |
| | — |
| | $ | 217.1 |
|
| Investing Activities |
| |
| |
| |
| |
|
| Capital expenditures | (74.0 | ) | | — |
| | (56.9 | ) | | — |
| | (130.9 | ) |
| Business acquired and related transactions, net of cash acquired | (408.1 | ) | | — |
| | — |
| | — |
| | (408.1 | ) |
| Proceeds from disposition of property, plant and equipment | 1.7 |
| | — |
| | 24.5 |
| | — |
| | 26.2 |
|
| Proceeds from disposition of investments in non-consolidated equity affiliate | 8.8 |
| | — |
| | — |
| | — |
| | 8.8 |
|
| Net investing activities | (471.6 | ) | | — |
| | (32.4 | ) | | — |
| | (504.0 | ) |
| Financing Activities |
| |
| |
| |
| |
|
| Long-term debt: |
| |
| |
| |
| |
|
| Borrowings | 1,275.0 |
| | — |
| | — |
| | — |
| | 1,275.0 |
|
| Repayments | (149.5 | ) | | — |
| | (581.2 | ) | | — |
| | (730.7 | ) |
| Stock options exercised | 2.2 |
| | — |
| | — |
| | — |
| | 2.2 |
|
| Excess tax benefits from stock-based compensation | 0.4 |
| | — |
| | — |
| | — |
| | 0.4 |
|
| Dividends paid | (79.5 | ) | | — |
| | — |
| | — |
| | (79.5 | ) |
| Debt and equity issuance costs | (35.2 | ) | | (10.0 | ) | | — |
| | — |
| | (45.2 | ) |
| Intercompany financing activities | (591.2 | ) | | 10.0 |
| | 581.2 |
| |
| | — |
|
| Net financing activities | 422.2 |
| | — |
| | — |
| | — |
| | 422.2 |
|
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
| Net (decrease) increase in cash and cash equivalents | (120.0 | ) | | — |
| | 255.2 |
| | — |
| | 135.2 |
|
| Cash and cash equivalents, beginning of year | 239.4 |
| | — |
| | 17.4 |
| | — |
| | 256.8 |
|
| Cash and cash equivalents, end of year | $ | 119.4 |
| | — |
| | $ | 272.6 |
| | — |
| | $ | 392.0 |
|
|
| | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
| Year Ended December 31, 2014 |
| (In millions) |
|
| |
| |
| |
| |
|
| Parent Guarantor | | Issuer | | Subsidiary
Non-Guarantor | | Eliminations | | Total |
| Net operating activities | $ | 134.7 |
| | — |
| | $ | 24.5 |
| | — |
| | $ | 159.2 |
|
| Investing Activities |
| |
| |
| |
| |
|
| Capital expenditures | (51.3 | ) | | — |
| | (20.5 | ) | | — |
| | (71.8 | ) |
| Proceeds from disposition of property, plant and equipment | 3.5 |
| | — |
| | 2.1 |
| | — |
| | 5.6 |
|
| Restricted cash activity, net | 4.2 |
| | — |
| | — |
| | — |
| | 4.2 |
|
| Other investing activities | — |
| | — |
| | 0.3 |
| | — |
| | 0.3 |
|
| Net investing activities | (43.6 | ) | | — |
| | (18.1 | ) | | — |
| | (61.7 | ) |
| Financing Activities |
| |
| |
| |
| |
|
| Long-term debt: |
| |
| |
| |
| |
|
| Borrowings | 150.0 |
| | — |
| | — |
| | — |
| | 150.0 |
|
| Repayments | (150.2 | ) | | — |
| | (12.2 | ) | | — |
| | (162.4 | ) |
| Earn out payment - SunBelt | — |
| | — |
| | (14.8 | ) | | — |
| | (14.8 | ) |
| Common stock repurchased and retired | (64.8 | ) | | — |
| | — |
| | — |
| | (64.8 | ) |
| Stock options exercised | 6.6 |
| | — |
| | — |
| | — |
| | 6.6 |
|
| Excess tax benefits from stock-based compensation | 1.1 |
| | — |
| | — |
| | — |
| | 1.1 |
|
| Dividends paid | (63.0 | ) | | — |
| | — |
| | — |
| | (63.0 | ) |
| Debt and equity issuance costs | (1.2 | ) | | — |
| | — |
| | — |
| | (1.2 | ) |
| Intercompany financing activities | (27.0 | ) | |
| | 27.0 |
| |
| | — |
|
| Net financing activities | (148.5 | ) | | — |
| | — |
| | — |
| | (148.5 | ) |
| Net (decrease) increase in cash and cash equivalents | (57.4 | ) | | — |
| | 6.4 |
| | — |
| | (51.0 | ) |
| Cash and cash equivalents, beginning of year | 296.8 |
| | — |
| | 11.0 |
| | — |
| | 307.8 |
|
| Cash and cash equivalents, end of year | $ | 239.4 |
| | — |
| | $ | 17.4 |
| | — |
| | $ | 256.8 |
|
OTHER FINANCIAL DATA
Quarterly Data (Unaudited)
($ in millions, except per share data)
| | | 2015 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Year | |
| 2016 | | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Year |
| Sales | | $ | 518.0 |
| | $ | 535.4 |
| | $ | 533.6 |
| | $ | 1,267.4 |
| | $ | 2,854.4 |
| | $ | 1,348.2 |
| | $ | 1,364.0 |
| | $ | 1,452.7 |
| | $ | 1,385.7 |
| | $ | 5,550.6 |
|
| Cost of goods sold | | 433.2 |
| | 445.5 |
| | 460.0 |
| | 1,148.1 |
| | 2,486.8 |
| | 1,175.4 |
| | 1,236.9 |
| | 1,284.4 |
| | 1,227.0 |
| | 4,923.7 |
|
| Net income (loss) | | 13.1 |
| | 42.3 |
| | 5.9 |
| | (62.7 | ) | | (1.4 | ) | |
| Net income (loss) per common share: | | | | | | | | | | | |
| Net (loss) income | | | (37.9 | ) | | (1.0 | ) | | 17.5 |
| | 17.5 |
| | (3.9 | ) |
| Net (loss) income per common share: | | | | | | | | | | | |
| Basic | | 0.17 |
| | 0.55 |
| | 0.08 |
| | (0.39 | ) | | (0.01 | ) | | (0.23 | ) | | (0.01 | ) | | 0.11 |
| | 0.11 |
| | (0.02 | ) |
| Diluted | | 0.17 |
| | 0.54 |
| | 0.08 |
| | (0.39 | ) | | (0.01 | ) | | (0.23 | ) | | (0.01 | ) | | 0.11 |
| | 0.10 |
| | (0.02 | ) |
| Common dividends per share | | 0.20 |
| | 0.20 |
| | 0.20 |
| | 0.20 |
| | 0.80 |
| | 0.20 |
| | 0.20 |
| | 0.20 |
| | 0.20 |
| | 0.80 |
|
Market price of common stock(1) | | | | | | | | | | | | | | | | | | | | |
| High | | 34.34 |
| | 32.56 |
| | 27.18 |
| | 22.13 |
| | 34.34 |
| | 17.75 |
| | 24.99 |
| | 26.46 |
| | 26.93 |
| | 26.93 |
|
| Low | | 22.00 |
| | 26.77 |
| | 15.73 |
| | 16.60 |
| | 15.73 |
| | 12.29 |
| | 16.55 |
| | 18.24 |
| | 19.62 |
| | 12.29 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| 2014 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Year |
| Sales | | $ | 577.4 |
| | $ | 570.4 |
| | $ | 593.6 |
| | $ | 499.8 |
| | $ | 2,241.2 |
|
| Cost of goods sold | | 475.4 |
| | 463.6 |
| | 492.3 |
| | 421.9 |
| | 1,853.2 |
|
| Income from continuing operations | | 29.5 |
| | 36.6 |
| | 26.1 |
| | 12.8 |
| | 105.0 |
|
| Income from discontinued operations, net | | — |
| | 0.7 |
| | — |
| | — |
| | 0.7 |
|
| Net income | | 29.5 |
| | 37.3 |
| | 26.1 |
| | 12.8 |
| | 105.7 |
|
| Basic income per common share: | | | | | | | | | | |
| Income from continuing operations | | 0.37 |
| | 0.46 |
| | 0.33 |
| | 0.16 |
| | 1.33 |
|
| Income from discontinued operations, net | | — |
| | 0.01 |
| | — |
| | — |
| | 0.01 |
|
| Net income | | 0.37 |
| | 0.47 |
| | 0.33 |
| | 0.16 |
| | 1.34 |
|
| Diluted income per common share: | | | | | | | | | | |
| Income from continuing operations | | 0.37 |
| | 0.46 |
| | 0.33 |
| | 0.16 |
| | 1.32 |
|
| Income from discontinued operations, net | | — |
| | 0.01 |
| | — |
| | — |
| | 0.01 |
|
| Net income | | 0.37 |
| | 0.47 |
| | 0.33 |
| | 0.16 |
| | 1.33 |
|
| Common dividends per share | | 0.20 |
| | 0.20 |
| | 0.20 |
| | 0.20 |
| | 0.80 |
|
Market price of common stock(1) | | | | | | | | | | |
| High | | 29.18 |
| | 29.28 |
| | 28.08 |
| | 25.97 |
| | 29.28 |
|
| Low | | 24.51 |
| | 26.42 |
| | 25.23 |
| | 20.43 |
| | 20.43 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| 2015 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Year |
| Sales | | $ | 518.0 |
| | $ | 535.4 |
| | $ | 533.6 |
| | $ | 1,267.4 |
| | $ | 2,854.4 |
|
| Cost of goods sold | | 433.2 |
| | 445.5 |
| | 460.0 |
| | 1,148.1 |
| | 2,486.8 |
|
| Net income (loss) | | 13.1 |
| | 42.3 |
| | 5.9 |
| | (62.7 | ) | | (1.4 | ) |
| Net income (loss) per common share: | | | | | | | | | | |
| Basic | | 0.17 |
| | 0.55 |
| | 0.08 |
| | (0.39 | ) | | (0.01 | ) |
| Diluted | | 0.17 |
| | 0.54 |
| | 0.08 |
| | (0.39 | ) | | (0.01 | ) |
| Common dividends per share | | 0.20 |
| | 0.20 |
| | 0.20 |
| | 0.20 |
| | 0.80 |
|
Market price of common stock(1) | | | | | | | | | | |
| High | | 34.34 |
| | 32.56 |
| | 27.18 |
| | 22.13 |
| | 34.34 |
|
| Low | | 22.00 |
| | 26.77 |
| | 15.73 |
| | 16.60 |
| | 15.73 |
|
| |
| (1) | NYSE composite transactions. |
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Our chief executive officer and our chief financial officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2015.2016. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information Olin is required to disclose in the reports that it files or submits with the SEC under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed in such reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Except as described below, thereThere have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20152016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On October 5, 2015, we acquired from TDCC the Acquired Business. We are in the process of integrating the Acquired Business into our overall internal control over financial reporting process. In accordance with the SEC's published guidance, management’s assessment of the effectiveness of internal control over financial reporting did not include consideration of the internal controls of the Acquired Business. The Acquired Business’s financial results are included in Olin’s consolidated financial statements and constituted total assets of $6,360.3 million as of December 31, 2015 and $802.6 million of sales for the year then ended.
Management’s report on internal control over financial reporting and the related report of Olin’s independent registered public accounting firm, KPMG LLP, are included in Item 8—“Consolidated Financial Statements and Supplementary Data.”
Item 9B. OTHER INFORMATION
Not applicable.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
We incorporate the biographical information relating to our Directors under the heading ITEM 1—“PROPOSAL FOR THE ELECTION OF DIRECTORS” in our Proxy Statement relating to our 20162017 Annual Meeting of Shareholders (the “Proxy Statement”) by reference in this Report. See alsoWe incorporate the list ofbiographical information regarding executive officers following Item 4under the heading “EXECUTIVE OFFICERS” in Part I ofour Proxy Statement by reference in this Report.report. We incorporate the information regarding compliance with Section 16 of the Securities Exchange Act of 1934, as amended, under the heading entitled “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in our Proxy Statement by reference in this Report.
The information with respect to our audit committee, including the audit committee financial expert, is incorporated by reference in this Report to the information contained in the paragraph entitled “CORPORATE GOVERNANCE MATTERS—What Are The Committees Of The Board?” in our Proxy Statement. We incorporate by reference in this Report information regarding procedures for shareholders to nominate a director for election, in the Proxy Statement under the headings “MISCELLANEOUS—How can I directly nominate a director for election to the board at the 20172018 annual meeting?” and “CORPORATE GOVERNANCE MATTERS—What Is Olin’s Director Nomination Process?”.
We have adopted a code of business conduct and ethics for directors, officers and employees, known as the Code of Conduct. The Code of Conduct is available in the About Olin, Ethics section of our website at www.olin.com. Olin intends to satisfy disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, any provision of the Code of Conduct with respect to its executive officers or directors by posting such amendment or waiver on its website.
Item 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement under the heading “CORPORATE GOVERNANCE MATTERS—Compensation Committee Interlocks and Insider Participation,” and the information under the heading “COMPENSATION DISCUSSION AND ANALYISIS” through the information under the heading “COMPENSATION COMMITTEE REPORT,” are incorporated by reference in this Report.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We incorporate the information concerning holdings of our common stock by certain beneficial owners contained under the heading “CERTAIN BENEFICIAL OWNERS” in our Proxy Statement, and the information concerning beneficial ownership of our common stock by our directors and officers under the heading “SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS” in our Proxy Statement by reference in this Report. We also incorporate the table entitled “Equity
Equity Compensation Plan Information” includedInformation
|
| | | | | | | | | | | | |
| | | (a) | | | (b) | | | (c) |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)(1) |
Equity compensation plans approved by security holders(2) | | 6,936,654 |
| (3) | | $ | 19.25 |
| (3) | | 7,248,213 |
|
| Equity compensation plans not approved by security holders | | N/A |
| | | N/A |
| | | N/A |
|
| Total | | 6,936,654 |
| | | $ | 19.25 |
| (3) | | 7,248,213 |
|
| |
| (1) | Number of shares is subject to adjustment for changes in capitalization for stock splits and stock dividends and similar events. |
| |
| (2) | Consists of the 2000 Long Term Incentive Plan, the 2003 Long Term Incentive Plan, the 2006 Long Term Incentive Plan, the 2009 Long Term Incentive Plan, the 2014 Long Term Incentive Plan, the 2016 Long Term Incentive Plan and the 1997 Stock Plan for Non-employee Directors. |
5,734,740 shares issuable upon exercise of options with a weighted average exercise price of $19.25, and a weighted average remaining term of 6.2 years,
177,000 shares issuable under restricted stock unit grants, with a weighted average remaining term of 1.7 years,
932,175 shares issuable in connection with outstanding performance share awards, with a weighted average term of 2.3 years remaining in the performance measurement period, and
92,739 shares under the heading ITEM 2—“PROPOSAL TO APPROVE THE OLIN CORPORATION 2016 LONG TERM INCENTIVE PLAN AND APPROVE THE PERFORMANCE MEASURES PURSUANT TO SECTION 162(m) OF THE INTERNAL REVENUE CODE” in our Proxy Statement by reference in this Report.1997 Stock Plan for Non-employee Directors which represent stock grants for retainers, other board and committee fees, and dividends on deferred stock under the plan.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
We incorporate the information under the headings “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “CORPORATE GOVERNANCE MATTERS—Which Board Members Are Independent?” in our Proxy Statement by reference in this Report.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
We incorporate the information concerning the accounting fees and services of our independent registered public accounting firm, KPMG LLP, under the heading ITEM 4—“PROPOSAL TO RATIFY APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” in our Proxy Statement by reference in this Report.
PART IV
Item 15. EXHIBITS; CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(a) 1. Consolidated Financial Statements
Consolidated financial statements of the registrant are included in Item 8 above.
2. Financial Statement Schedules
Schedules not included herein are omitted because they are inapplicable or not required or because the required information is given in the consolidated financial statements and notes thereto.
Separate consolidated financial statements of our 50% or less owned subsidiaries accounted for by the equity method are not summarized herein and have been omitted because, in the aggregate, they would not constitute a significant subsidiary.
3. Exhibits
See the Exhibit Index immediately prior to the exhibits which is hereby incorporated by reference. The following exhibits, listed on the Exhibit Index, are filed with this Annual Report on Form 10-K:
|
| |
| Exhibit No. | Description |
| | |
10(i)4(x) | Form of amendment to executive agreement betweenReceivables Financing Arrangement dated December 20, 2016 by and among Olin Finance Company, LLC, PNC Bank, National Association, Olin Corporation, PNC Capital Markets LLC and Messrs. Curley, Fischer, Greer, McIntosh, Pain and Rupp dated October 19, 2015 |
| |
10(j) | Form of executive retention agreement between Olin Corporation and Messrs. Dawson, Grannum, Sampson and Varilek dated July 1, 2015 |
| |
10(m) | Form of amendment to executive change in control agreement between Olin Corporation and Ms. Ennico and Messrs. Curley, Fischer, Greer, McIntosh, O’Keefe, Pain, Rupp and Slater dated October 19, 2015 |
| |
10(n) | Form of executive change in control agreement between Olin Corporation and Messrs. Dawson, Grannum, Sampson and Varilek dated February 15, 2016 |
| |
10(o) | Form of executive change in control agreement between Olin Corporation and Ms. Sumner dated February 15, 2016 |
| |
10(p) | Amended and Restated 1997 Stock Plan for Non-employee Directors codified to reflect amendments adopted through February 26, 2016the Lender parties thereto. |
| | |
| 11 | Computation of Per Share Earnings (included in the Note—“Earnings Per Share” to Notes to Consolidated Financial Statements in Item 8) |
| | |
| 12 | Computation of Ratio of Earnings to Fixed Charges (Unaudited) |
| | |
| 21 | List of Subsidiaries |
| | |
| 23 | Consent of KPMG LLP |
| | |
| 31.1 | Section 302 Certification Statement of Chief Executive Officer |
| | |
| 31.2 | Section 302 Certification Statement of Chief Financial Officer |
| | |
| 32 | Section 906 Certification Statement of Chief Executive Officer and Chief Financial Officer |
| | |
| 101.INS | XBRL Instance Document |
| | |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Any exhibit is available from Olin by writing to: Mr. George H. Pain, Senior Vice President, General Counsel andto the Secretary, Olin Corporation, 190 Carondelet Plaza, Suite 1530, Clayton, MO 63105 USA.
Shareholders may obtain information from Wells Fargo Shareowner Services, our registrar and transfer agent, who also manages our Dividend Reinvestment Plan by writing to: Wells Fargo Shareowner Services, PO Box 64874, St. Paul,1110 Centre Pointe Curve, Suite 101, MAC N9173-010, Mendota Heights, MN 55164-085455120 USA, by telephone from the United States at (800) 468-9716 or outside the United States at (651) 450-4064 or via the Internet at www.shareowneronline.com, click on “contact us”.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 29, 201627, 2017
|
| | | |
| | OLIN CORPORATION |
| | By: | /s/ Joseph D. RuppJohn E. Fischer |
| | | Joseph D. RuppJohn E. Fischer | |
| | | ChairmanPresident and Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ JOHN E. FISCHER John E. Fischer | | President and Chief Executive Officer and Director (Principal Executive Officer) | | February 27, 2017 |
| | | | |
/s/ JOSEPH D. RUPP Joseph D. Rupp | | Chairman and Chief Executive Officer and Director (Principal Executive Officer) | | February 29, 201627, 2017 |
| | | | | |
/s/ GRAY G. BENOIST Gray G. Benoist | | Director | | February 29, 201627, 2017 |
| | | | | |
/s/ DONALD W. BOGUS Donald W. Bogus | | Director | | February 29, 201627, 2017 |
| | | | | |
/s/ C. ROBERT BUNCH C. Robert Bunch | | Director | | February 29, 201627, 2017 |
| | | | | |
/s/ RANDALL W. LARRIMORE Randall W. Larrimore | | Director | | February 29, 201627, 2017 |
| | | | | |
/s/ JOHN M. B. O’CONNOR John M. B. O’Connor | | Director | | February 29, 201627, 2017 |
| | | | | |
/s/ RICHARD M. ROMPALA Richard M. Rompala | | Director | | February 29, 201627, 2017 |
| | | | | |
/s/ PHILIP J. SCHULZ Philip J. Schulz | | Director | | February 29, 201627, 2017 |
| | | | | |
/s/ VINCENT J. SMITH Vincent J. Smith | | Director | | February 29, 201627, 2017 |
|
| | | | |
| | | | | |
/s/ WILLIAM H. WEIDEMAN
William H. Weideman | | Director | | February 29, 201627, 2017 |
| | | | | |
/s/ CAROL A. WILLIAMS
Carol A. Williams | | Director | | February 29, 201627, 2017 |
| | | | | |
/s/ TODD A. SLATER Todd A. Slater | | Vice President and Chief Financial Officer (Principal Financial Officer) | | February 29, 201627, 2017 |
| | | | | |
/s/ RANDEE N. SUMNER Randee N. Sumner | | Vice President and Controller (Principal Accounting Officer) | | February 29, 201627, 2017 |
EXHIBIT INDEX
Management contracts and compensatory plans and arrangements are listed as Exhibits 10(a) through 10(dd)10(ee) below.
|
| | | |
| 2 |
| (a) | Merger Agreement dated as of March 26, 2015, among The Dow Chemical Company, Blue Cube Spinco Inc., Olin Corporation and Blue Cube Acquisition Corp.—Exhibit 2.1 to Olin’s Form 8-K dated March 27, 2015.* |
| 3 |
| (a) | Amended and Restated Articles of Incorporation of Olin Corporation as amended effective October 1, 2015—Exhibit 3.1 to Olin’s Form 10-Q for the quarter ended September 30, 2015.* |
| | (b) | Bylaws of Olin Corporation as amended effective February 26, 2016—Exhibit 3.1 to Olin’s Form 8-K dated February 29, 2016.* |
| | (c) | Articles of Amendment of the Amended and Restated Articles of Incorporation of Olin Corporation, effective on October 1, 2015—Exhibit 3.1 to Olin’s Form 8-K dated October 5, 2015.* |
| 4 |
| (a) | Indenture between Olin Corporation and JPMorgan Chase Bank, N.A. dated as of June 26, 2006—Exhibit 4.1 to Olin’s Form 8-K dated June 27, 2006.* |
| (b) | 6.75% Senior Note Due 2016—Exhibit 4.1 to Olin’s Form 8-K dated July 28, 2006.* |
| (c) | First Supplemental Indenture between Olin Corporation and JPMorgan Chase Bank, N.A. dated July 28, 2006—Exhibit 4.2 to Olin’s Form 8-K dated July 28, 2006.* |
| (d) | Registration Rights Agreement among Olin Corporation, Banc of America Securities LLC, Citigroup Global Markets Inc. and Wachovia Capital Markets, LLC dated July 28, 2006—Exhibit 4.3 to Olin’s Form 8-K dated July 28, 2006.* |
| (e) | Trust Indenture effective October 1, 2010 between The Industrial Development Authority of Washington County and U. S. Bank National Association, as trustee—Exhibit 4.1 to Olin’s Form 8-K dated October 20, 2010.* |
| | (f)(b) | Loan Agreement effective October 1, 2010 between The Industrial Development Authority of Washington County and Olin Corporation—Exhibit 4.2 to Olin’s Form 8-K dated October 20, 2010.* |
| | (g)(c) | Bond Purchase Agreement dated October 14, 2010 between The Industrial Development Authority of Washington County, Olin Corporation and PNC Bank National Association, as administrative agent—Exhibit 4.3 to Olin’s Form 8-K dated October 20, 2010.* |
| | (h)(d) | Trust Indenture effective December 1, 2010 between Mississippi Business Finance Corporation and U. S. Bank National Association—Exhibit 4.1 to Olin’s Form 8-K dated December 10, 2010.* |
| | (i)(e) | Loan Agreement effective December 1, 2010 between Mississippi Business Finance Corporation and Olin Corporation—Exhibit 4.2 to Olin’s Form 8-K dated December 10, 2010.* |
| | (j)(f) | Bond Purchase Agreement dated December 9, 2010 between Mississippi Business Finance Corporation, Olin Corporation and PNC Bank, National Association, as administrative agent—Exhibit 4.3 to Olin’s Form 8-K dated December 10, 2010.* |
| | (k)(g) | Amended and Restated Credit and Funding Agreement dated December 9, 2010 between Olin Corporation, as borrower; PNC Bank, National Association, as administrative agent; PNC Capital Markets LLC, as lead arranger; and the Lenders party thereto—Exhibit 4.4 to Olin’s Form 8-K dated December 10, 2010.* |
| | (l)(h) | First Amendment dated December 27, 2010 to the Amended and Restated Credit and Funding Agreement dated December 9, 2010 between Olin Corporation, as borrower; PNC Bank, National Association, as administrative agent; PNC Capital Markets LLC, as lead arranger; and the Lenders party thereto—Exhibit 4.4 to Olin’s Form 8-K dated December 30, 2010.* |
| | (m) | Trust Indenture effective December 27, 2010 between The Industrial Development Board of the County of Bradley and the City of Cleveland, Tennessee and U. S. Bank National Association, as trustee—Exhibit 4.1 to Olin’s Form 8-K dated December 30, 2010.* |
| (n) | Loan Agreement effective December 27, 2010 between The Industrial Development Board of the County of Bradley and the City of Cleveland, Tennessee and Olin Corporation—Exhibit 4.2 to Olin’s Form 8-K dated December 30, 2010.* |
| (o) | Bond Purchase Agreement dated December 27, 2010 between The Industrial Development Board of the County of Bradley and the City of Cleveland, Tennessee, Olin Corporation and PNC Bank, National Association, as administrative agent—Exhibit 4.3 to Olin’s Form 8-K dated December 30, 2010.* |
| (p)(i) | Forward Purchase Agreement dated April 27, 2012 by and among Olin Corporation, the Lenders (as defined therein), and PNC Bank, National Association, as administrative agent for the Lenders under the Funding Agreement—Exhibit 4.1 to Olin’s Form 8-K dated May 3, 2012.* |
| | (q)(j) | Second Amendment to Amended and Restated Credit and Funding Agreement dated April 27, 2012 among Olin Corporation, the Lenders, and PNC Bank, National Association, as administrative agent for the Lenders—Exhibit 4.2 to Olin’s Form 8-K dated May 3, 2012.* |
|
| | | |
| | (r)(k) | Second Supplemental Indenture dated as of August 9, 2012 between Olin Corporation, The Bank of New York Mellon Trust Company, N.A. and U. S. Bank National Association—Exhibit 4.1 to Olin’s Form 8-K dated August 9, 2012.* |
| | (s)(l) | Third Supplemental Indenture dated as of August 22, 2012 between Olin Corporation and U. S. Bank National Association—Exhibit 4.1 to Olin’s Form 8-K dated August 22, 2012.* |
| | (t)(m) | Form of 5.50% Senior Notes due 2022—Exhibit 4.2 to Olin’s Form 8-K dated August 22, 2012.* |
| | (u)(n) | Amended and Restated Forward Purchase Agreement dated June 23, 2014 by and among Olin Corporation, the Lenders (as defined therein), and PNC Bank, National Association, as administrative agent for the Lenders under the Funding Agreement—Exhibit 4.1 to Olin’s Form 8-K dated June 25, 2014.* |
| | (v)(o) | Third Amendment to Amended and Restated Credit and Funding Agreement dated June 23, 2014 among Olin Corporation, the Lenders, and PNC Bank, National Association, as administrative agent for the Lenders—Exhibit 4.2 to Olin’s Form 8-K dated June 25, 2014.* |
| | (w)(p) | Amendment No. 4 dated as of June 23, 2015 to the Amended and Restated Credit and Funding Agreement dated December 9, 2010 among Olin Corporation, the Lenders, and PNC Bank, National Association, as administrative agent—Exhibit 10.3 to Olin’s Form 8-K dated June 29, 2015.* |
|
| | | |
| | (x)(q) | Senior Notes Indenture dated October 5, 2015 between Blue Cube Spinco Inc., as issuer, and U. S. Bank National Association, as trustee, governing the 9.75% Senior Notes due 2023—Exhibit 4.1 to Olin’s Form 8-K dated October 5, 2015.* |
| | (y)(r) | Senior Notes Indenture dated October 5, 2015 between Blue Cube Spinco Inc., as issuer, and U. S. Bank National Association, as trustee, governing the 10.00% Senior Notes due 2025—Exhibit 4.2 to Olin’s Form 8-K dated October 5, 2015.* |
| | (z)(s) | First Supplemental Indenture dated October 5, 2015 between Blue Cube Spinco Inc., as issuer, and Olin Corporation, as guarantor, and U. S. Bank National Association, as trustee, governing the 9.75% Senior Notes due 2023—Exhibit 4.3 to Olin’s Form 8-K dated October 5, 2015.* |
| | (aa)(t) | First Supplemental Indenture dated October 5, 2015 between Blue Cube Spinco Inc., as issuer, and Olin Corporation, as guarantor, and U. S. Bank National Association, as trustee, governing the 10.00% Senior Notes due 2025—Exhibit 4.4 to Olin’s Form 8-K dated October 5, 2015.* |
| | (bb)(u) | Form of 9.75% Senior Notes due 2023—Exhibit 4.5 (included in Exhibit 4.1) to Olin’s Form 8-K dated October 5, 2015.* |
| | (cc)(v) | Form of 10.00% Senior Notes due 2025—Exhibit 4.6 (included in Exhibit 4.2) to Olin’s Form 8-K dated October 5, 2015.* |
| | (dd)(w) | Registration Rights Agreement dated October 5, 2015 relating to the 9.75% Senior Notes due 2023 and 10.00% Senior Notes due 2025 by and among Blue Cube Spinco Inc., Olin Corporation, J.P. Morgan Securities LLC and Wells Fargo Securities LLC for themselves and as representatives of other initial purchasers—Exhibit 4.7 to Olin’s Form 8-K dated October 5, 2015.* |
| (x) | Receivables Financing Arrangement dated December 20, 2016 by and among Olin Finance Company, LLC, PNC Bank, National Association, Olin Corporation, PNC Capital Markets LLC and the Lender parties thereto.
|
| | | |
| | | We are party to a number of other instruments defining the rights of holders of long-term debt. No such instrument authorizes an amount of securities in excess of 10% of the total assets of Olin and its subsidiaries on a consolidated basis. Olin agrees to furnish a copy of each instrument to the Commission upon request. |
| | | |
| 10 |
| (a) | Employee Deferral Plan as amended and restated effective as of January 30, 2003 and as amended effective January 1, 2005—Exhibit 10(b) to Olin’s Form 10-K for 2002 and Exhibit 10(b)(1) to Olin’s Form 10-K for 2005, respectively.* |
| | (b) | Senior Executive Pension Plan amended and restated effective October 24, 2008—Exhibit 10.1 to Olin’s Form 10-Q for the quarter ended September 30, 2008.* |
| | (c) | Supplemental Contributing Employee Ownership Plan as amended and restated effective September 29, 2015—Exhibit 99.1 to Olin’s Form 8-K dated October 2, 2015.* |
| | (d) | Olin Corporation Key Executive Life Insurance Program—Exhibit 10(e) to Olin’s Form 10-K for 2002.* |
| | (e) | Form of amendment to executive agreement between Olin Corporation and Messrs. Curley and Fischer dated November 9, 2007—Exhibit 10(g) to Olin’s Form 10-K for 2007.* |
| | (f) | Form of amendment to executive agreement between Olin Corporation and G. Bruce Greer, Jr. dated November 9, 2007—Exhibit 10(i) to Olin’s Form 10-K for 2007.* |
| (g) | Form of executive agreement between Olin Corporation and Messrs. Rupp, McIntosh and Pain dated November 1, 2007—Exhibit 10.1 to Olin’s Form 10-Q for the quarter ended September 30, 2007.* |
| | (h)(g) | Form of amendment to executive agreement between Olin Corporation and Messrs. Curley, Fischer, Greer, McIntosh, Pain and Rupp dated October 25, 2010—Exhibit 10.1 to Olin’s Form 10-K for 2010.* |
| | (i)(h) | Form of amendment to executive agreement between Olin Corporation and Messrs. Curley, Fischer, Greer, McIntosh, Pain and Rupp dated October 19, 2015—Exhibit 10(i) to Olin’s Form 10-K for 2015.* |
| | (j)(i) | Form of executive retention agreement between Olin Corporation and Messrs. Dawson, Grannum, Sampson and Varilek dated July 1, 2015—Exhibit 10(j) to Olin’s Form 10-K for 2015. |
|
| | | * |
| | (k)(j) | Form of executive change in control agreement between Olin Corporation and Ms. Ennico and Messrs. Chirumbole, Greer, O’Keefe and Slater dated January 29, 2014—Exhibit 10(l) to Olin’s Form 10-K for 2013.* |
| | (l)(k) | Form of executive change in control agreement between Olin Corporation and Messrs. Curley, Fischer, McIntosh, Pain and Rupp dated January 29, 2014—Exhibit 10.1 to Olin’s Form 8-K dated January 30, 2014.* |
| | (m)(l) | Form of amendment to executive change in control agreement between Olin Corporation and Ms. Ennico and Messrs. Curley, Fischer, Greer, McIntosh, O’Keefe, Pain, Rupp and Slater dated October 19, 2015—Exhibit 10(m) to Olin’s Form 10-K for 2015.* |
| | (n)(m) | Form of executive change in control agreement between Olin Corporation and Messrs. Dawson, Grannum, Sampson and Varilek dated February 15, 2016.2016—Exhibit 10(n) to Olin’s Form 10-K for 2015.* |
| | (o)(n) | Form of executive change in control agreement between Olin Corporation and Ms. Sumner dated February 15, 2016.2016—Exhibit 10(o) to Olin’s Form 10-K for 2015.* |
|
| | | |
| | (p)(o) | Amended and Restated 1997 Stock Plan for Non-employee Directors codified to reflect amendments adopted through February 26, 2016.2016—Exhibit 10(p) to Olin’s Form 10-K for 2015.* |
| | (q)(p) | Amended and Restated Senior Management Incentive Compensation Plan, as amended and restated effective April 23, 2015—Appendix A to Olin’s Proxy Statement dated March 11, 2015.* |
| | (r)(q) | Description of Restricted Stock Unit Awards granted under the 2000, 2003, 2006, 2009, 2014 or 20142016 Long Term Incentive Plans—Exhibit 10(p) to Olin’s Form 10-K for 2008.* |
| | (s)(r) | Supplementary and Deferral Benefit Pension Plan as amended and restated effective October 24, 2008—Exhibit 10.2 to Olin’s Form 10-Q for the quarter ended September 30, 2008.* |
| | (t)(s) | Amended and Restated Olin Corporation 2000 Long Term Incentive Plan codified as of January 24, 2014—Exhibit 10(r) to Olin’s Form 10-K for 2013.* |
| | (u)(t) | Amended and Restated Olin Corporation 2003 Long Term Incentive Plan codified as of January 24, 2014—Exhibit 10(s) to Olin’s Form 10-K for 2013.* |
| | (v)(u) | Amended and Restated Olin Corporation 2006 Long Term Incentive Plan codified as of January 24, 2014—Exhibit 10(t) to Olin’s Form 10-K for 2013.* |
| | (w)(v) | Amended and Restated Olin Corporation 2009 Long Term Incentive Plan codified as of January 24, 2014—Exhibit 10(u) to Olin’s Form 10-K for 2013.* |
| | (x)(w) | Olin Corporation 2014 Long Term Incentive Plan effective January 24, 2014—Exhibit 10.1 to Olin’s Form 8-K filed April 25, 2014.* |
| | (x) | Olin Corporation 2016 Long Term Incentive Plan effective April 28, 2016—Appendix A to Olin’s Proxy Statement dated March 11, 2016.* |
| (y) | Performance Share Program codified to reflect amendments through January 23, 2015—26, 2017—Exhibit 10(u)99.1 to Olin’s Form 10-K for 2014.8-K dated January 31, 2017.* |
| | (z) | Form of Non-Qualified Stock Option Award Certificate—Exhibit 10(bb) to Olin’s Form 10-K for 2007.* |
| | (aa) | Form of Restricted Stock Unit Award Certificate—Exhibit 10(cc) to Form 10-K for 2007.* |
| | (bb) | Form of Restricted Stock Unit Award Certificate—Exhibit 10.7 to Olin’s Form 10-Q for the quarter ended September 30, 2015.* |
| | (cc) | Form of Performance Award and Senior Performance Award Certificates—Exhibit 10(dd) to Olin’s Form 10-K for 2007.* |
| | (dd) | Summary of Stock Option Continuation Policy—Exhibit 10.2 to Olin’s Form 10-Q for the quarter ended March 31, 2009.* |
| | (ee) | Olin Corporation Contributing Employee Ownership Plan Amended and Restated effective as of October 24, 2008, and as amended effective September 29, 2015—Exhibit 99.1 to Olin’s Form S-8 filed February 16, 2016.* |
| | (ff) | Distribution Agreement between Olin Corporation and Arch Chemicals, Inc., dated as of February 1, 1999—Exhibit 2.1 to Olin’s Form 8-K filed February 23, 1999.* |
| | (gg) | Purchase Agreement dated as of February 28, 2011, by and among PolyOne Corporation, 1997 Chloralkali Venture, LLC, Olin Corporation and Olin SunBelt II, Inc.—Exhibit 2.1 to Olin’s Form 8-K dated March 3, 2011.* |
| | (hh) | Note Purchase Agreement dated December 22, 1997 between the SunBelt Chlor Alkali Partnership and the Purchasers named therein—Exhibit 99.5 to Olin’s Form 8-K dated December 3, 2001.* |
| | (ii) | Guarantee Agreement dated December 22, 1997 between Olin Corporation and the Purchasers named therein—Exhibit 99.6 to Olin’s Form 8-K dated December 3, 2001.* |
| | (jj) | Subordination Agreement dated December 22, 1997 between Olin Corporation and the Subordinated Parties named therein—Exhibit 99.7 to Olin’s Form 8-K dated December 3, 2001.* |
| | (kk) | Credit Agreement dated as of April 27, 2012 among Olin Corporation, Olin Canada ULC and the banks named therein—Exhibit 10.1 to Olin’s Form 8-K dated May 3, 2012.* |
|
| | | |
| | (ll) | Stock Purchase Agreement dated as of July 17, 2012, by and among K. A. Steel Chemicals Inc., the stockholders of K. A. Steel Chemicals Inc. and Robert F. Steel, as the sellers’ representative—Exhibit 2.1 to Olin’s Form 8-K dated July 18, 2012.* |
| | (mm) | Credit Agreement dated June 23, 2015 among Olin Corporation, Olin Canada ULC, the Lenders named therein and Wells Fargo Bank, National Association, as administrative agent—Exhibit 10.1 to Olin’s Form 8-K dated June 29, 2015.* |
| | (nn) | Credit Agreement dated June 23, 2015 among Blue Cube Spinco Inc., the Lenders named therein and Wells Fargo Bank, National Association, as administrative agent—Exhibit 10.2 to Olin’s Form 8-K dated June 29, 2015.* |
|
| | | |
| | (oo) | Amendment Agreement dated June 23, 2015 among Olin, Olin Canada ULC, Blue Cube Spinco Inc., the Lenders named therein and Wells Fargo Bank, National Association, as administrative agent—Exhibit 10.5 to Olin’s Form 8-K dated October 5, 2015.* |
| | (pp) | Separation Agreement dated March 26, 2015 between The Dow Chemical Company and Blue Cube Spinco Inc.—Exhibit 10.1 to Olin’s Form 8-K dated March 27, 2015.* |
| | (qq) | Credit Agreement dated August 25, 2015 among Olin Corporation, Olin subsidiaries, the Lenders (as defined therein) and Sumitomo Mitsui Banking Corporation, as administrative agent—Exhibit 10.1 to Olin’s Form 8-K dated August 26, 2015.* |
| | (rr) | Guaranty Agreement dated October 5, 2015 among Blue Cube Spinco Inc., Olin Corporation and Wells Fargo Bank, National Association, as administrative agent—Exhibit 10.2 to Olin’s Form 8-K dated October 5, 2015.* |
| | (ss) | Borrowing Subsidiary Agreement dated October 5, 2015 among Olin Corporation, Blue Cube Spinco Inc. and Wells Fargo Bank, National Association, as administrative agent—Exhibit 10.3 to Olin’s Form 8-K dated October 5, 2015.* |
| | (tt) | Guaranty Joinder dated October 5, 2015 among Olin subsidiaries, Blue Cube Spinco Inc. and Sumitomo Mitsui Banking Corporation, as administrative agent—Exhibit 10.4 to Olin’s Form 8-K dated October 5, 2015.* |
| | (uu) | Incremental Term Loan Agreement dated November 3, 2015 among Olin Corporation, Blue Cube Spinco Inc., the Lenders (as defined therein) and Sumitomo Mitsui Banking Corporation, as administrative agent—Exhibit 10.1 to Olin’s Form 8-K dated November 9, 2015.* |
| 11 |
| | Computation of Per Share Earnings (included in the Note—“Earnings Per Share” to Notes to Consolidated Financial Statements in Item 8). |
| 12 |
| | Computation of Ratio of Earnings to Fixed Charges (unaudited). |
14 |
| | Code of Conduct—Exhibit 14.1 to Olin’s Form 8-K dated December 19, 2012.* |
| 21 |
| | List of Subsidiaries. |
| 23 |
| | Consent of KPMG LLP. |
| 31.1 |
| | Section 302 Certification Statement of Chief Executive Officer. |
| 31.2 |
| | Section 302 Certification Statement of Chief Financial Officer. |
| 32 |
| | Section 906 Certification Statement of Chief Executive Officer and Chief Financial Officer. |
| 101.INS |
| | XBRL Instance Document |
| 101.SCH |
| | XBRL Taxonomy Extension Schema Document |
| 101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
| | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase Document |
*Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC file No. 1-1070 unless otherwise indicated.
