XNYS:OLN Olin Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

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

For the quarterly period ended March 31, 2012
OR

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

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x No  ¨

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

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

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

Smaller reporting company ¨

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

As of March 31, 2012, 80,093,204 shares of the registrant’s common stock were outstanding.

 
 
 
1

 
 


 
Part I — Financial Information

Item 1.  Financial Statements.

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

   
March 31,
2012
   
December 31,
2011
   
March 31,
2011
 
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
 
$
220.6
   
$
304.8
   
$
280.4
 
Receivables, net
   
279.9
     
237.1
     
256.7
 
Income tax receivable
   
     
0.7
     
5.5
 
Inventories
   
186.0
     
176.6
     
179.7
 
Current deferred income taxes
   
51.3
     
50.9
     
46.3
 
Other current assets
   
14.1
     
10.2
     
28.8
 
Total current assets
   
751.9
     
780.3
     
797.4
 
Property, plant and equipment (less accumulated depreciation of $1,168.8, $1,144.0 and $1,089.8)
   
914.7
     
885.4
     
763.2
 
Prepaid pension costs
   
28.7
     
19.2
     
26.9
 
Restricted cash
   
34.1
     
51.7
     
99.1
 
Other assets
   
83.1
     
85.6
     
76.5
 
Goodwill
   
627.4
     
627.4
     
628.2
 
Total assets
 
$
2,439.9
   
$
2,449.6
   
$
2,391.3
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Current liabilities:
                       
Current installments of long-term debt
 
$
23.6
   
$
12.2
   
$
89.3
 
Accounts payable
   
125.9
     
149.7
     
118.5
 
Income taxes payable
   
0.5
     
     
 
Accrued liabilities
   
219.6
     
237.2
     
220.0
 
Total current liabilities
   
369.6
     
399.1
     
427.8
 
Long-term debt
   
512.0
     
524.2
     
491.9
 
Accrued pension liability
   
58.4
     
59.1
     
58.4
 
Deferred income taxes
   
117.2
     
99.6
     
107.7
 
Other liabilities
   
366.4
     
381.8
     
355.6
 
Total liabilities
   
1,423.6
     
1,463.8
     
1,441.4
 
Commitments and contingencies
                       
Shareholders’ equity:
                       
Common stock, par value $1 per share:  authorized, 120.0 shares;
   issued and outstanding 80.1, 80.1 and 79.7 shares
   
80.1
     
80.1
     
79.7
 
Additional paid-in capital
   
852.0
     
852.0
     
843.0
 
Accumulated other comprehensive loss
   
(286.4
)
   
(294.2
)
   
(260.8
)
Retained earnings
   
370.6
     
347.9
     
288.0
 
Total shareholders’ equity
   
1,016.3
     
985.8
     
949.9
 
Total liabilities and shareholders’ equity
 
$
2,439.9
   
$
2,449.6
   
$
2,391.3
 

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


 
 
 
2

 
 


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

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Sales
 
$
507.2
   
$
436.0
 
Operating expenses:
               
Cost of goods sold
   
392.9
     
359.2
 
Selling and administration
   
43.7
     
39.5
 
Restructuring charges
   
1.9
     
0.1
 
Other operating income
   
0.5
     
1.4
 
Operating income
   
69.2
     
38.6
 
Earnings of non-consolidated affiliates
   
0.2
     
7.0
 
Interest expense
   
6.5
     
7.2
 
Interest income
   
0.2
     
0.2
 
Other (expense) income
   
(2.6
)
   
181.2
 
Income before taxes
   
60.5
     
219.8
 
Income tax provision
   
21.8
     
86.1
 
Net income
 
$
38.7
   
$
133.7
 
Net income per common share:
               
Basic
 
$
0.48
   
$
1.68
 
Diluted
 
$
0.48
   
$
1.66
 
Dividends per common share
 
$
0.20
   
$
0.20
 
Average common shares outstanding:
               
Basic
   
80.1
     
79.6
 
Diluted
   
80.9
     
80.4
 

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


 
 
 
3

 
 


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

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Net income
 
$
38.7
   
$
133.7
 
Other comprehensive income, net of tax:
               
Foreign currency translation adjustments
   
0.3
     
1.3
 
Unrealized gains (losses) on derivative contracts
   
4.3
     
(3.1
)
Amortization of prior service costs and actuarial losses
   
3.2
     
2.8
 
Other comprehensive income
   
7.8
     
1.0
 
Comprehensive income
 
$
46.5
   
$
134.7
 

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

 
 
 
4

 
 


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

         
Additional
Paid-In
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Retained
Earnings
   
Total
Shareholders’
Equity
 
Common Stock
Shares
Issued
   
Par
Value
Balance at January 1, 2011
   
79.6
   
$
79.6
   
$
842.3
   
$
(261.8
)
 
$
170.2
   
$
830.3
 
Net income
   
     
     
     
     
133.7
     
133.7
 
Other comprehensive income
   
     
     
     
1.0
     
     
1.0
 
Dividends paid:
                                               
Common stock ($0.20 per share)
   
     
     
     
     
(15.9
)
   
(15.9
)
Common stock issued for:
                                               
Stock options exercised
   
     
     
0.3
     
     
     
0.3
 
Other transactions
   
0.1
     
0.1
     
1.4
     
     
     
1.5
 
Stock-based compensation
   
     
     
(1.0
)
   
     
     
(1.0
)
Balance at March 31, 2011
   
79.7
   
$
79.7
   
$
843.0
   
$
(260.8
)
 
$
288.0
   
$
949.9
 
Balance at January 1, 2012
   
80.1
   
$
80.1
   
$
852.0
   
$
(294.2
)
 
$
347.9
   
$
985.8
 
Net income
   
     
     
     
     
38.7
     
38.7
 
Other comprehensive income
   
     
     
     
7.8
     
     
7.8
 
Dividends paid:
                                               
Common stock ($0.20 per share)
   
     
     
     
     
(16.0
)
   
(16.0
)
Common stock repurchased and retired
   
(0.1
)
   
(0.1
)
   
(1.1
)
   
     
     
(1.2
)
Common stock issued for:
                                               
Stock options exercised
   
     
     
0.3
     
     
     
0.3
 
Other transactions
   
0.1
     
0.1
     
0.8
     
     
     
0.9
 
Balance at March 31, 2012
   
80.1
   
$
80.1
   
$
852.0
   
$
(286.4
)
 
$
370.6
   
$
1,016.3
 

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


 
 
 
5

 
 


 
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Cash Flows
(In millions)
(Unaudited)
   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Operating Activities
           
Net income
 
$
38.7
   
$
133.7
 
Adjustments to reconcile net income to net cash and cash equivalents provided by (used for) operating activities:
               
Gain on remeasurement of investment in SunBelt
   
     
(181.4
)
Earnings of non-consolidated affiliates
   
(0.2
)
   
(7.0
)
Other operating income – gains on disposition of property, plant and equipment
   
(0.1
)
   
(1.0
)
Stock-based compensation
   
1.4
     
1.4
 
Depreciation and amortization
   
25.5
     
23.2
 
Deferred income taxes
   
12.6
     
84.5
 
Qualified pension plan contributions
   
(0.2
)
   
(0.2
)
Qualified pension plan income
   
(5.9
)
   
(6.6
)
Change in:
               
Receivables
   
(42.8
)
   
(45.8
)
Inventories
   
(9.4
)
   
(20.1
)
Other current assets
   
(3.9
)
   
(2.1
)
Accounts payable and accrued liabilities
   
(16.2
)
   
3.4
 
Income taxes payable
   
1.2
     
0.2
 
Other assets
   
1.5
     
(0.6
)
Other noncurrent liabilities
   
2.5
     
0.5
 
Other operating activities
   
(0.3
)
   
(2.3
)
Net operating activities
   
4.4
     
(20.2
)
Investing Activities
               
Capital expenditures
   
(75.9
)
   
(25.6
)
Business acquired in purchase transaction, net of cash acquired
   
     
(123.4
)
Proceeds from sale/leaseback of equipment
   
1.0
     
 
Proceeds from disposition of property, plant and equipment
   
0.2
     
1.8
 
Distributions from affiliated companies, net
   
     
0.6
 
Restricted cash activity
   
17.6
     
2.9
 
Other investing activities
   
0.3
     
1.3
 
Net investing activities
   
(56.8
)
   
(142.4
)
Financing Activities
               
Earn out payment – SunBelt
   
(15.3
)
   
 
Common stock repurchased and retired
   
(1.2
)
   
 
Stock options exercised
   
0.3
     
0.3
 
Excess tax benefits from stock-based compensation
   
0.4
     
 
Dividends paid
   
(16.0
)
   
(15.9
)
Net financing activities
   
(31.8
)
   
(15.6
)
Net decrease in cash and cash equivalents
   
(84.2
)
   
(178.2
)
Cash and cash equivalents, beginning of period
   
304.8
     
458.6
 
Cash and cash equivalents, end of period
 
$
220.6
   
$
280.4
 
Cash paid for interest and income taxes:
               
Interest
 
$
7.5
   
$
7.5
 
Income taxes, net of refunds
 
$
7.1
   
$
1.3
 
Non-cash investing activities:
               
Capital expenditures included in accounts payable and accrued liabilities
 
$
20.7
   
$
1.6
 

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

 
 
 
6

 
 


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

DESCRIPTION OF BUSINESS

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

We have prepared the condensed financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  The preparation of the consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes.  In our opinion, these financial statements reflect all adjustments (consisting only of normal accruals), which are necessary to present fairly the results for interim periods.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are appropriate.  We recommend that you read these condensed financial statements in conjunction with the financial statements, accounting policies and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.  Certain reclassifications were made to prior year amounts to conform to the 2012 presentation.

On February 28, 2011, we acquired PolyOne Corporation’s (PolyOne) 50% interest in the SunBelt Chlor Alkali Partnership, which we refer to as SunBelt.  Previously, we had a 50% ownership interest in SunBelt, which was accounted for using the equity method of accounting.  Accordingly, prior to the acquisition, we included only our share of SunBelt results in earnings of non-consolidated affiliates.  Since the date of acquisition, SunBelt’s results are no longer included in earnings of non-consolidated affiliates but are consolidated in our accompanying financial statements.

ACQUISITION

On February 28, 2011, we acquired PolyOne’s 50% interest in SunBelt for $132.3 million in cash plus the assumption of a PolyOne guarantee related to the SunBelt Notes.  With this acquisition, we now own 100% of SunBelt.  The SunBelt chlor alkali plant, which is located within our McIntosh, AL facility, has approximately 350,000 tons of membrane technology capacity.  We also agreed to a three year earn out, which has no guaranteed minimum or maximum, based on the performance of SunBelt.  In addition, during the second quarter of 2011, we remitted to PolyOne $6.0 million, which represented 50% of distributable cash generated by SunBelt from January 1, 2011 through February 28, 2011.

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 conjunction with the acquisition, we consolidated the SunBelt Notes with a fair value of $87.3 million for the remaining principal balance of $85.3 million as of February 28, 2011.

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.

From January 1, 2011 to February 28, 2011, we recorded $6.3 million of equity earnings of non-consolidated affiliates for our 50% ownership in SunBelt.  The value of our investment in SunBelt was $(0.8) million.  We remeasured our equity interest in SunBelt to fair value upon the close of the transaction.  As a result, we recognized a pretax gain of $181.4 million, which was classified in other (expense) income in our condensed statement of income.  In conjunction with this remeasurement, a discrete deferred tax expense of $76.0 million was recorded.


 
 
 
7

 
 


 
The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.  We finalized our purchase price allocation during the second quarter of 2011.  The following table summarizes the final allocation of the purchase price to SunBelt’s assets and liabilities:

   
February 28, 2011
 
   
($ in millions)
 
Total current assets
 
$
37.6
 
Property, plant and equipment
   
87.4
 
Deferred income taxes
   
0.4
 
Other assets
   
5.8
 
Total assets acquired
   
131.2
 
Total current liabilities
   
42.7
 
Long-term debt
   
75.1
 
Other liabilities
   
27.6
 
Total liabilities assumed
   
145.4
 
Less:  Investment in SunBelt
   
(0.8
)
Net liabilities assumed
   
(13.4
)
Liabilities for uncertainties
   
48.3
 
Gain on remeasurement of investment in SunBelt
   
(181.4
)
Goodwill
   
327.1
 
Fair value of total consideration
 
$
180.6
 

Included in total current assets are cash and cash equivalents of $8.9 million.  Included in total current liabilities is $12.2 million of current installments of long-term debt.

Based on final valuations, we allocated $5.8 million of the purchase price to intangible assets relating to customers, customer contracts and relationships, which management estimates to have a useful life of fifteen years.  These identifiable intangible assets were included in other assets.  Based on final valuations, $327.1 million was assigned to goodwill.  For tax purposes, $163.7 million of the goodwill is deductible.  The goodwill represents the fair value of SunBelt that is in addition to the fair values of the other net assets acquired.  The primary reason for the acquisition and the principal factors that contributed to a SunBelt purchase price that resulted in the recognition of goodwill is the strategic fit with our Chlor Alkali operations and SunBelt’s low cost membrane capacity.

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.

For segment reporting purposes, SunBelt has been included in Chlor Alkali Products.  The SunBelt results of operations have been included in our consolidated results for the period subsequent to the effective date of the acquisition.  The following pro forma summary presents the condensed statement of income as if the acquisition of SunBelt had occurred on January 1, 2011.

   
Three Months Ended
 
   
March 31, 2011
 
   
($ in millions, except per share data)
 
Sales
 
$
462.3
 
Net income
   
32.4
 
Net income per common share:
       
Basic
 
$
0.41
 
Diluted
 
$
0.40
 

 
 
 
8

 
 


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

·  
Elimination of the pretax gain resulting from the remeasurement of our previously held 50% equity interest in SunBelt, which is considered non-recurring ($181.4 million for the three months ended March 31, 2011).
·  
Additional amortization expense related to the fair value of acquired identifiable intangible assets ($0.1 million for the three months ended March 31, 2011).
·  
Reduction of depreciation expense related to the fair value adjustment to property, plant and equipment ($1.0 million for the three months ended March 31, 2011).
·  
Reduction in interest expense as a result of increasing the carrying value of acquired debt obligations to its estimated fair value ($0.1 million for the three months ended March 31, 2011).
·  
Additional accretion expense for the earn out liability that was recorded as a result of the acquisition ($0.4 million for the three months ended March 31, 2011).
·  
Elimination of transaction costs incurred in 2011 that are directly related to the transaction, and do not have a continuing impact on our combined operating results ($0.8 million for the three months ended March 31, 2011).

In addition, the pro forma data reflect the tax effect of all of the above adjustments.  The pro forma tax provision for the three months ended March 31, 2011 reflects a reduction of $76.0 million related to the elimination of the gain resulting from the remeasurement of our previously held 50% equity interest in SunBelt.  The pro forma tax provision reflects an increase of $2.5 million for the three months ended March 31, 2011, associated with the incremental pretax income and the fair value adjustments for acquired intangible assets, property, plant and equipment and the SunBelt Notes, which reflects the marginal tax of the adjustments in the various jurisdictions where such adjustments occurred.

RESTRUCTURING CHARGES
 
    On December 9, 2010, our board of directors approved a plan to eliminate our use of mercury in the manufacture of chlor alkali products.  Under the plan, the 260,000 tons of mercury cell capacity at our Charleston, TN facility will be converted to 200,000 tons of membrane capacity capable of producing both potassium hydroxide and caustic soda.  The project has an estimated capital cost of approximately $160 million.  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.  This action will reduce our chlor alkali manufacturing capacity by 100,000 tons.  We based our decision to convert and reconfigure on several factors.  First, during 2009 and 2010 we had experienced a steady increase in the number of customers unwilling to accept our products manufactured using mercury cell technology.  Second, there was federal legislation passed in 2008 governing the treatment of mercury that significantly limits our recycling options after December 31, 2012.  We concluded that exiting mercury cell technology production after 2012 represented an unacceptable future cost risk.  Further, the conversion of the Charleston, TN plant to membrane technology will reduce the electricity usage per ECU produced by approximately 25% and the configuration of the new plant will result in an increase in our capacity to produce potassium hydroxide.  The decision to reconfigure the Augusta, GA facility to manufacture bleach and distribute caustic soda removes the highest cost production capacity from our system.  We currently expect to complete the conversion and reconfiguration by the end of 2012.  For the three months ended March 31, 2012 and 2011, we recorded pretax restructuring charges of $0.3 million and less than $0.1 million, respectively, for the accretion of employee severance and related benefit costs.  We expect to incur additional restructuring charges through 2013 of approximately $8 million related to the implementation of plans to exit the use of mercury cell technology in the chlor alkali manufacturing process.


 
 
 
9

 
 


 
    On November 3, 2010, we announced that we made the decision to relocate the Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.  This relocation, when completed, is forecast to reduce Winchester’s annual operating costs by approximately $30 million.  Consistent with this decision we have initiated an estimated $110 million five-year project, which includes approximately $80 million of capital spending.  The State of Mississippi and local governments have provided incentives which should offset approximately 40 percent of the capital spending.  We currently expect to complete this relocation by the end of 2015.  For the three months ended March 31, 2012 and 2011, we recorded pretax restructuring charges of $1.6 million and less than $0.1 million, respectively, for the accretion of employee severance and related benefits costs, employee relocation costs and facility exit costs.  We expect to incur additional restructuring charges through 2016 of approximately $15 million related to the transfer of these operations.

The following table summarizes the activity by major component of these restructuring actions and the remaining balances of accrued restructuring costs as of March 31, 2012:

   
Employee severance and job related benefits
   
Lease and other contract termination costs
   
Employee relocation costs
   
Facility exit costs
   
Total
 
   
($ in millions)
 
Balance at January 1, 2011
 
$
6.0
   
$
1.0
   
$
   
$
   
$
7.0
 
2011 restructuring charges
   
0.1
     
     
     
     
0.1
 
Balance at March 31, 2011
 
$
6.1
   
$
1.0
   
$
   
$
   
$
7.1
 
Balance at January 1, 2012
 
$
11.3
   
$
0.8
   
$
   
$
   
$
12.1
 
2012 restructuring charges
   
0.9
     
     
0.8
     
0.2
     
1.9
 
Amounts utilized
   
(0.7
)
   
     
(0.8
)
   
(0.2
)
   
(1.7
)
Balance at March 31, 2012
 
$
11.5
   
$
0.8
   
$
   
$
   
$
12.3
 

As of March 31, 2012, we have incurred cash expenditures of $6.2 million and non-cash charges of $28.3 million related to these restructuring actions.  The remaining balance of $12.3 million is expected to be paid out in 2012 through 2016.

The following table summarizes the cumulative restructuring charges by major component of these actions through March 31, 2012:

   
Chlor Alkali Products
   
Winchester
   
Total
 
   
($ in millions)
 
Write-off of equipment and facility
 
$
17.5
   
$
   
$
17.5
 
Employee severance and job related benefits
   
5.2
     
8.1
     
13.3
 
Facility exit costs
   
7.3
     
0.6
     
7.9
 
Pension and other postretirement benefits curtailment
   
     
4.1
     
4.1
 
Employee relocation costs
   
0.1
     
2.9
     
3.0
 
Lease and other contract termination costs
   
1.0
     
     
1.0
 
Total cumulative restructuring charges
 
$
31.1
   
$
15.7
   
$
46.8
 

ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLES

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


 
 
 
10

 
 


 
Allowance for doubtful accounts receivable consisted of the following:
   
March 31,
 
   
2012
   
2011
 
   
($ in millions)
 
Balance at beginning of year
 
$
3.2
   
$
4.8
 
Provisions charged
   
0.4
     
0.4
 
Recoveries, net
   
     
0.6
 
Balance at end of period
 
$
3.6
   
$
5.8
 

INVENTORIES

Inventories consisted of the following:
   
March 31,
2012
   
December 31,
2011
   
March 31,
2011
 
   
($ in millions)
 
Supplies
 
$
35.0
   
$
35.0
   
$
33.2
 
Raw materials
   
81.0
     
75.7
     
67.4
 
Work in process
   
33.4
     
31.9
     
33.9
 
Finished goods
   
111.8
     
111.7
     
119.3
 
     
261.2
     
254.3
     
253.8
 
LIFO reserve
   
(75.2
)
   
(77.7
)
   
(74.1
)
Inventories, net
 
$
186.0
   
$
176.6
   
$
179.7
 

In conjunction with the acquisition of SunBelt, we obtained inventories with a fair value of $4.0 million, as of February 28, 2011.  Inventories are valued at the lower of cost or market, with cost being determined principally by the dollar value last-in, first-out (LIFO) method of inventory accounting.  Cost for other inventories has been determined principally by the average cost method, primarily operating supplies, spare parts and maintenance parts.  Elements of costs in inventories included raw materials, direct labor and manufacturing overhead.  Inventories under the LIFO method are based on annual estimates of quantities and costs as of year-end; therefore, the condensed financial statements at March 31, 2012, reflect certain estimates relating to inventory quantities and costs at December 31, 2012.  If the first-in, first-out (FIFO) method of inventory accounting had been used, inventories would have been approximately $75.2 million, $77.7 million and $74.1 million higher than reported at March 31, 2012, December 31, 2011 and March 31, 2011, respectively.

EARNINGS PER SHARE

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

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Computation of Income per Share
 
($ and shares in millions, except per share data)
 
Net income
 
$
38.7
   
$
133.7
 
Basic shares
   
80.1
     
79.6
 
Basic net income per share
 
$
0.48
   
$
1.68
 
                 
Diluted shares:
               
Basic shares
   
80.1
     
79.6
 
Stock-based compensation
   
0.8
     
0.8
 
Diluted shares
   
80.9
     
80.4
 
Diluted net income per share
 
$
0.48
   
$
1.66
 

The computation of dilutive shares from stock-based compensation does not include 0.8 million shares and 1.3 million shares for the three months ended March 31, 2012 and 2011, respectively, as their effect would have been anti-dilutive.


 
 
 
11

 
 


 
ENVIRONMENTAL

We are party to various government and private environmental actions associated with past manufacturing facilities and former waste disposal sites.  Charges to income for investigatory and remedial efforts were material to operating results in 2011 and are expected to be material to operating results in 2012.  The condensed balance sheets included reserves for future environmental expenditures to investigate and remediate known sites amounting to $163.1 million, $163.3 million and $166.1 million at March 31, 2012, December 31, 2011 and March 31, 2011, respectively, of which $132.1 million, $132.3 million and $138.1 million, respectively, were classified as other noncurrent liabilities.

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

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
   
($ in millions)
 
Charges to income
 
$
2.9
   
$
2.0
 
Recoveries from third parties of costs incurred and expensed in prior periods
   
(0.1
)
   
(0.5
)
Total environmental expense
 
$
2.8
   
$
1.5
 

Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies, advances in technology, changes in environmental laws and regulations and their application, changes in regulatory authorities, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties (PRPs), our ability to obtain contributions from other parties, and the lengthy time periods over which site remediation occurs.  It is possible that some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably to us, which could materially adversely affect our financial position or results of operations.

COMMITMENTS AND CONTINGENCIES

We, and our subsidiaries, are defendants in various legal actions (including proceedings based on alleged exposures to asbestos) incidental to our past and current business activities.  As of March 31, 2012, December 31, 2011 and March 31, 2011, our condensed balance sheets included liabilities for these legal actions of $16.8 million, $16.4 million and $16.2 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 or results of operations in the near term.

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

SHAREHOLDERS’ EQUITY

On July 21, 2011, our board of directors authorized a share repurchase program of up to 5 million shares of common stock that will terminate in three years for any of the remaining shares not yet repurchased.  For the three months ended March 31, 2012, 0.1 million shares were purchased and retired under this program at a cost of $1.2 million.  As of March 31, 2012, we had purchased a total of 0.3 million shares under this program and 4.7 million shares remained authorized to be purchased.

We issued less than 0.1 million shares representing stock options exercised for the three months ended March 31, 2012 and 2011, with a total value of $0.3 million for both periods.


 
 
 
12

 
 


 
    The following table represents the activity included in accumulated other comprehensive loss:

   
Foreign
Currency
Translation
Adjustment
   
Unrealized
Gains (Losses)
on Derivative
Contracts
(net of taxes)
   
Pension and
Postretirement
Benefits
(net of taxes)
   
Accumulated
Other Comprehensive
Loss
 
   
($ in millions)
 
Balance at January 1, 2011
 
$
0.4
   
$
11.6
   
$
(273.8
)
 
$
(261.8
)
Unrealized gains
   
1.3
     
0.4
     
     
1.7
 
Reclassification adjustments into income
   
     
(3.5
)
   
2.8
     
(0.7
)
Balance at March 31, 2011
 
$
1.7
   
$
8.5
   
$
(271.0
)
 
$
(260.8
)
Balance at January 1, 2012
 
$
1.8
   
$
(5.3
)
 
$
(290.7
)
 
$
(294.2
)
Unrealized gains
   
0.3
     
2.6
     
     
2.9
 
Reclassification adjustments into income
   
     
1.7
     
3.2
     
4.9
 
Balance at March 31, 2012
 
$
2.1
   
$
(1.0
)
 
$
(287.5
)
 
$
(286.4
)

Pension and postretirement benefits (net of taxes) activity in other comprehensive loss included the amortization of prior service costs and actuarial losses.

Unrealized gains and losses on derivative contracts (net of taxes) activity in other comprehensive loss included a deferred tax provision (benefit) for the three months ended March 31, 2012 and 2011 of $2.6 million and $(2.0) million, respectively.  Pension and postretirement benefits (net of taxes) activity in other comprehensive loss included a deferred tax provision for the three months ended March 31, 2012 and 2011 of $2.0 million and $1.8 million, respectively.

SEGMENT INFORMATION

We define segment results as income before interest expense, interest income, other operating income, other (expense) income and income taxes, and include the operating results of non-consolidated affiliates.

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Sales:
 
($ in millions)
 
Chlor Alkali Products
 
$
359.7
   
$
299.4
 
Winchester
   
147.5
     
136.6
 
Total sales
 
$
507.2
   
$
436.0
 
Income before taxes:
               
Chlor Alkali Products
 
$
74.4
   
$
45.2
 
Winchester
   
10.8
     
12.5
 
Corporate/other:
               
Pension income
   
6.3
     
6.7
 
Environmental expense
   
(2.8
)
   
(1.5
)
Other corporate and unallocated costs
   
(17.9
)
   
(18.6
)
Restructuring charges
   
(1.9
)
   
(0.1
)
Other operating income
   
0.5
     
1.4
 
Interest expense
   
(6.5
)
   
(7.2
)
Interest income
   
0.2
     
0.2
 
Other (expense) income
   
(2.6
)
   
181.2
 
Income before taxes
 
$
60.5
   
$
219.8
 


 
 
 
13

 
 


 
STOCK-BASED COMPENSATION

Stock-based compensation granted includes stock options, performance stock awards, restricted stock awards and deferred directors’ compensation.  Stock-based compensation expense was as follows:

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
   
($ in millions)
 
Stock-based compensation
 
$
1.9
   
$
2.0
 
Mark-to-market adjustments
   
0.9
     
1.0
 
Total expense
 
$
2.8
   
$
3.0
 

The fair value of each stock option granted, which typically vests ratably over three years, but not less than one year, was estimated on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Grant date
 
2012
   
2011
 
Dividend yield
   
3.65
%
   
4.32
%
Risk-free interest rate
   
1.36
%
   
3.05
%
Expected volatility
   
43
%
   
42
%
Expected life (years)
   
7.0
     
7.0
 
Grant fair value (per option)
 
$
6.55
   
$
5.48
 
Exercise price
 
$
21.92
   
$
18.78
 
Shares granted
   
480,250
     
575,000
 

Dividend yield for 2012 and 2011 was based on a historical average.  Risk-free interest rate was based on zero coupon U.S. Treasury securities rates for the expected life of the options.  Expected volatility was based on our historical stock price movements, as we believe that historical experience is the best available indicator of the expected volatility.  Expected life of the option grant was based on historical exercise and cancellation patterns, as we believe that historical experience is the best estimate of future exercise patterns.

PENSION PLANS AND RETIREMENT BENEFITS

Most of our employees participate in defined contribution pension plans.  We provide a contribution to an individual retirement contribution account maintained with the Contributing Employee Ownership Plan (CEOP) primarily equal to 5% of the employee’s eligible compensation if such employee is less than age 45, and 7.5% of the employee’s eligible compensation if such employee is age 45 or older.  The defined contribution pension plans expense was $3.6 million for both the three months ended March 31, 2012 and 2011.

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


 
 
 
14

 
 


 
We also provide certain postretirement health care (medical) and life insurance benefits for eligible active and retired domestic employees.  The health care plans are contributory with participants’ contributions adjusted annually based on medical rates of inflation and plan experience.

   
Pension Benefits
   
Other Postretirement
Benefits
 
   
Three Months Ended
March 31,
   
Three Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Components of Net Periodic Benefit (Income) Cost
 
($ in millions)
 
Service cost
 
$
1.5
   
$
1.6
   
$
0.4
   
$
0.4
 
Interest cost
   
23.5
     
23.7
     
0.9
     
0.9
 
Expected return on plans’ assets
   
(34.2
)
   
(34.9
)
   
     
 
Amortization of prior service cost
   
     
0.1
     
     
(0.1
)
Recognized actuarial loss
   
4.3
     
3.9
     
0.9
     
0.7
 
Net periodic benefit (income) cost
 
$
(4.9
)
 
$
(5.6
)
 
$
2.2
   
$
1.9
 

    We made cash contributions to our Canadian qualified defined benefit pension plan of $0.2 million for both the three months ended March 31, 2012 and 2011.

INCOME TAXES

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

   
Three Months Ended
March 31,
 
Effective Tax Rate Reconciliation (Percent)
 
2012
   
2011
 
Statutory federal tax rate
   
35.0
%
   
35.0
%
Foreign rate differential
   
(0.1
)
   
 
Domestic manufacturing/export tax incentive
   
(1.0
)
   
(0.3
)
Dividends paid to CEOP
   
(0.4
)
   
(0.1
)
State income taxes, net
   
1.4
     
0.5
 
Remeasurement of deferred taxes
   
0.6
     
(1.5
)
Incremental tax effect of SunBelt remeasurement
   
     
5.7
 
Other, net
   
0.5
     
(0.1
)
Effective tax rate
   
36.0
%
   
39.2
%

The effective tax rate for the three months ended March 31, 2011 included a benefit of $3.4 million related to remeasurement of deferred taxes due to an increase in state tax effective rates and included a deferred tax expense of $76.0 million related to the tax effect of our gain on the remeasurement of our previously held 50% equity interest in SunBelt.

As of March 31, 2012, we had $38.0 million of gross unrecognized tax benefits, which would have a net $36.2 million impact on the effective tax rate, if recognized.  As of March 31, 2011, we had $41.5 million of gross unrecognized tax benefits, of which $39.4 million would have impacted the effective tax rate, if recognized.  The amount of unrecognized tax benefits was as follows:

   
March 31,
 
   
2012
   
2011
 
   
($ in millions)
 
Balance at beginning of year
 
$
37.9
   
$
41.5
 
Increases for current year tax positions
   
0.1
     
 
Balance at end of period
 
$
38.0
   
$
41.5
 

As of March 31, 2012, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $1.1 million over the next twelve months.  The anticipated reduction primarily relates to settlements with taxing authorities and the expiration of federal, state and foreign statutes of limitation.


 
 
 
15

 
 


 
We operate primarily in North America and file income tax returns in numerous jurisdictions.  Our tax returns are subject to examination by various federal, state and local tax authorities.  We believe we have adequately provided for all tax positions; however, amounts asserted by taxing authorities could be greater than our accrued position.  For our primary tax jurisdictions, the tax years that remain subject to examination are as follows:

 
Tax Years
U.S. federal income tax
2007 – 2010
U.S. state income tax
2004 – 2010
Canadian federal income tax
2007 – 2010
Canadian provincial income tax
2007 – 2010

DERIVATIVE FINANCIAL INSTRUMENTS

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

Energy costs, including electricity used in our Chlor Alkali Products segment, and certain raw materials and energy costs, namely copper, lead, zinc, electricity and natural gas used in our Winchester segment, are subject to price volatility.  Depending on market conditions, we may enter into futures contracts and put and call option contracts in order to reduce the impact of commodity price fluctuations.  The majority of our commodity derivatives expire within one year.  Those commodity contracts that extend beyond one year correspond with raw material purchases for long-term fixed-price sales contracts.
 
    We enter into forward sales and purchase contracts to manage currency risk resulting from purchase and sale commitments denominated in foreign currencies (principally Canadian dollar and Australian dollar).  All of the currency derivatives expire within one year and are for United States dollar equivalents.  Our foreign currency forward contracts do not meet the criteria to qualify for hedge accounting.  At March 31, 2012, December 31, 2011 and March 31, 2011, we had forward contracts to sell foreign currencies with a notional value of $8.1 million, zero and zero, respectively.  We had no forward contracts to buy foreign currencies at March 31, 2012, December 31, 2011 and March 31, 2011.

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 March 31, 2012, $10.0 million of this gain was included in long-term debt.  In October 2011, we de-designated our $125 million interest rate swaps that had previously been designated as fair value hedges.  The $125 million variable interest rate swaps and the $125 million fixed interest rate swaps do not meet the criteria for hedge accounting.  All changes in the fair value of these interest rate swaps are recorded currently in earnings.

In 2001 and 2002, we entered into interest rate swaps on $75 million of our underlying fixed-rate debt obligations, whereby we agreed to pay variable rates to a counterparty who, in turn, paid us fixed rates.  The counterparty to these agreements was Citibank.  In January 2009, we entered into a $75 million fixed interest rate swap with equal and opposite terms as the $75 million variable interest rate swaps on the 9.125% senior notes due 2011 (2011 Notes).  We agreed to pay a fixed rate to a counterparty who, in turn, paid us variable rates.  The counterparty to this agreement was Bank of America, N.A. (Bank of America), a major financial institution.  The result was a gain of $7.9 million on the $75 million variable interest rate swaps, which was recognized through 2011.  In January 2009, we de-designated our $75 million interest rate swaps that had previously been designated as fair value hedges.  The $75 million variable interest rate swaps and the $75 million fixed interest rate swap did not meet the criteria for hedge accounting.  All changes in the fair value of these interest rate swaps were recorded currently in earnings.

 
 
 
16

 
 


 
Cash flow hedges

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

We had the following notional amount of outstanding commodity forward contracts that were entered into to hedge forecasted purchases:

   
March 31,
2012
   
December 31,
2011
   
March 31,
2011
 
   
($ in millions)
 
Copper
 
$
42.6
   
$
52.1
   
$
43.3
 
Zinc
   
6.5
     
7.3
     
4.1
 
Lead
   
35.4
     
37.9
     
29.2
 
Natural gas
   
10.3
     
8.3
     
3.1
 

As of March 31, 2012, the counterparty to $83.5 million of these commodity forward contracts was Wells Fargo Bank, N.A. (Wells Fargo), a major financial institution.

We use cash flow hedges for certain raw material and energy costs such as copper, zinc, lead, electricity and natural gas to provide a measure of stability in managing our exposure to price fluctuations associated with forecasted purchases of raw materials and energy used in the company's manufacturing process.  At March 31, 2012, we had open positions in futures contracts through 2016.  If all open futures contracts had been settled on March 31, 2012, we would have recognized a pretax loss of $1.8 million.

If commodity prices were to remain at March 31, 2012 levels, approximately $1.0 million of deferred losses would be reclassified into earnings during the next twelve months.  The actual effect on earnings will be dependent on actual commodity prices when the forecasted transactions occur.

Fair value hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.  We include the gain or loss on the hedged items (fixed-rate borrowings) in the same line item, interest expense, as the offsetting loss or gain on the related interest rate swaps.  As of March 31, 2012, December 31, 2011 and March 31, 2011, the total notional amounts of our interest rate swaps designated as fair value hedges were $73.1 million, $80.8 million and $132.7 million, respectively.

The $73.1 million of interest rate swaps outstanding at March 31, 2012 were entered into in May 2011 on the SunBelt Notes.  In March 2012, Citibank terminated $7.7 million of interest rate swaps on our industrial development and environmental improvement tax-exempt bonds (industrial revenue bonds) due in 2017.  The result was a gain of $0.2 million, which will be recognized through 2017.

We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels.  These interest rate swaps are treated as fair value hedges.  The accounting for gains and losses associated with changes in fair value of the derivative and the effect on the condensed financial statements will depend on the hedge designation and whether the hedge is effective in offsetting changes in fair value of cash flows of the asset or liability being hedged.  We have entered into $73.1 million of such swaps, whereby we agreed to pay variable rates to a counterparty who, in turn, pays us fixed rates.  The counterparty to these agreements is Wells Fargo.  In all cases, the underlying index for the variable rates is six-month London InterBank Offered Rate (LIBOR).  Accordingly, payments are settled every six months and the terms of the swaps are the same as the underlying debt instruments.

Financial statement impacts

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


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

 
Asset Derivatives
 
Liability Derivatives
 
     
Fair Value
     
Fair Value
 
Derivatives Designated as Hedging
Instruments
Balance
Sheet
Location
 
March 31,
2012
   
December 31,
2011
   
March 31,
2011
 
Balance
Sheet
Location
 
March 31,
2012
   
December 31,
2011
   
March 31,
2011
 
     
($ in millions)
     
($ in millions)
 
Interest rate contracts
Other current assets
 
$
   
$
   
$
 
Current installments of long-term debt
 
$
   
$
   
$
2.1
 
Interest rate contracts
Other assets
   
1.8
     
2.2
     
4.0
 
Long-term debt
   
12.0
     
12.7
     
4.0
 
Commodity contracts – gains
Other current assets
   
     
     
14.3
 
Accrued liabilities
   
(3.6
)
   
(2.5
)
   
 
Commodity contracts – losses
Other current assets
   
     
     
(0.5
)
Accrued liabilities
   
5.4
     
11.2
     
 
     
$
1.8
   
$
2.2
   
$
17.8
     
$
13.8
   
$
21.4
   
$
6.1
 
                                         
Derivatives Not Designated as Hedging
Instruments
                                       
Interest rate contracts
Other current assets
 
$
   
$
   
$
2.8
 
Accrued liabilities
 
$
   
$
   
$
0.9
 
Interest rate contracts – gains
Other assets
   
11.0
     
11.6
     
 
Other liabilities
   
     
     
 
Interest rate contracts – losses
Other assets
   
(1.1
)
   
     
 
Other liabilities
   
     
1.0
     
 
Commodity contracts – losses
Other current assets
   
     
     
 
Accrued liabilities
   
2.4
     
1.5
     
 
     
$
9.9
   
$
11.6
   
$
2.8
     
$
2.4
   
$
2.5
   
$
0.9
 
                                                     
Total
derivatives(1)
   
$
11.7
   
$
13.8
   
$
20.6
     
$
16.2
   
$
23.9
   
$
7.0
 

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


 
 
 
18

 
 


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

     
Amount of Gain (Loss)
 
     
Three Months Ended
March 31,
 
 
Location of Gain (Loss)
 
2012
   
2011
 
Derivatives – Cash Flow Hedges
   
($ in millions)
 
Recognized in other comprehensive loss (effective portion)
———
 
$
4.2
   
$
0.7
 
                   
Reclassified from accumulated other comprehensive loss into income (effective portion)
Cost of goods sold
 
$
(2.7
)
 
$
5.8
 
Derivatives – Fair Value Hedges
                 
Interest rate contracts
Interest expense
 
$
0.9
   
$
1.6
 
                   
Derivatives Not Designated as Hedging Instruments
                 
Commodity contracts
Cost of goods sold
 
$
(2.9
)
   
(0.2
)

Credit risk and collateral

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

Based on the agreements with our various counterparties, cash collateral is required to be provided when the net fair value of the derivatives, with the counterparty, exceed a specific threshold.  If the threshold is exceeded, cash is either provided by the counterparty to us if the value of the derivatives is our asset, or cash is provided by us to the counterparty if the value of the derivatives is our liability.  As of March 31, 2012 and December 31, 2011, the amount recognized in accrued liabilities for cash collateral provided by us to counterparties was $0.3 million and $3.9 million, respectively.  As of March 31, 2011, the amount recognized in other current assets for cash collateral provided by counterparties to us was $1.1 million.  In all instances where we are party to a master netting agreement, we offset the receivable or payable recognized upon payment of cash collateral against the fair value amounts recognized for derivative instruments that have also been offset under such master netting agreements.

FAIR VALUE MEASUREMENTS

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

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

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

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.


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

Determining which hierarchical level an asset or liability falls within requires significant judgment.  We evaluate our hierarchy disclosures each quarter.  The following table summarizes the financial assets and liabilities measured at fair value in the condensed balance sheets:
 
Fair Value Measurements
 
Balance at March 31, 2012
Level 1
 
Level 2
 
Level 3
   
Total
 
Assets
($ in millions)
 
Interest rate swaps
 
$
   
$
11.7
   
$
   
$
11.7
 
Liabilities
                               
Interest rate swaps
 
$
   
$
12.0
   
$
   
$
12.0
 
Commodity forward contracts
   
0.2
     
4.0
     
     
4.2
 
Earn out
   
     
     
33.1
     
33.1
 
                   
Balance at December 31, 2011
                 
Assets
   
Interest rate swaps
 
$
   
$
13.8
   
$
   
$
13.8
 
Liabilities
                               
Interest rate swaps
 
$
   
$
13.7
   
$
   
$
13.7
 
Commodity forward contracts
   
2.5
     
7.7
     
     
10.2
 
Earn out
   
     
     
49.0
     
49.0
 
                   
Balance at March 31, 2011
                 
Assets
   
Interest rate swaps
 
$
   
$
6.8
   
$
   
$
6.8
 
Commodity forward contracts
   
5.9
     
7.9
     
     
13.8
 
Liabilities
                               
Interest rate swaps
 
$
   
$
7.0
   
$
   
$
7.0
 
Earn out
   
     
     
42.5
     
42.5
 

For the three months ended March 31, 2012, there were no transfers into or out of Level 1 and Level 2.

The following table summarizes the activity for our financial instruments measured at fair value using Level 3 inputs:

   
March 31,
 
   
2012
   
2011
 
   
($ in millions)
 
Balance at beginning of year
 
$
(49.0
)
 
$
 
Purchases, sales and settlements
   
18.5
     
(42.3
)
Unrealized losses included in other (expense) income
   
(2.6
)
   
(0.2
)
Balance at end of period
 
$
(33.1
)
 
$
(42.5
)

Interest Rate Swaps

The fair value of the interest rate swaps was included in other current assets, other assets, current installments of long-term debt, accrued liabilities, long-term debt and other liabilities as of March 31, 2012, December 31, 2011 and March 31, 2011.  These financial instruments were valued using the “income approach” valuation technique.  This method used valuation techniques to convert future amounts to a single present amount.  The measurement was based on the value indicated by current market expectations about those future amounts.  We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels.

Commodity Forward Contracts

The fair value of the commodity forward contracts was classified in other current assets and accrued liabilities as of March 31, 2012, December 31, 2011 and March 31, 2011, with unrealized gains and losses included in accumulated other comprehensive loss, net of applicable taxes.  These financial instruments were valued primarily based on prices and other relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for commodities.  We use commodity forward contracts for certain raw materials and energy costs such as copper, zinc, lead, electricity and natural gas to provide a measure of stability in managing our exposure to price fluctuations.

 
 
 
20

 
 




Foreign Currency Contracts

We had no fair value of foreign currency contracts as of March 31, 2012, December 31, 2011 and March 31, 2011.  The gains and losses of foreign currency contracts were included in selling and administration expense as these financial instruments do not meet the criteria to qualify for hedge accounting.  These financial instruments were valued primarily based on prices and other relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for foreign currencies.  We enter into forward sales and purch