Item 1. Financial Statements
Item 1. Financial Statements.
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Balance Sheets
(In millions, except per share data)
(Unaudited)
June 30, 2023 December 31, 2022 June 30, 2022
Assets
Current assets:
Cash and cash equivalents $ 161.1 $ 194.0 $ 304.6
Receivables, net 869.8 924.6 1,299.2
Income taxes receivable 32.8 43.2 8.0
Inventories, net 1,081.2 941.9 945.7
Other current assets 53.3 52.7 109.0
Total current assets 2,198.2 2,156.4 2,666.5
Property, plant and equipment (less accumulated depreciation of $4,636.9, $4,413.1 and $4,217.9) 2,550.6 2,674.1 2,755.0
Operating lease assets, net 335.7 356.0 360.1
Deferred income taxes 82.6 60.5 86.5
Other assets 1,108.6 1,102.5 1,090.0
Intangible assets, net 255.9 273.8 296.2
Goodwill 1,420.9 1,420.9 1,420.9
Total assets $ 7,952.5 $ 8,044.2 $ 8,675.2
Liabilities and Shareholders’ Equity
Current liabilities:
Current installments of long-term debt $ 9.0 $ 9.7 $ 201.1
Accounts payable 750.0 837.7 983.7
Income taxes payable 139.6 133.4 112.9
Current operating lease liabilities 70.2 71.8 75.1
Accrued liabilities 426.9 508.8 483.8
Total current liabilities 1,395.7 1,561.4 1,856.6
Long-term debt 2,717.3 2,571.0 2,579.6
Operating lease liabilities 273.6 292.5 292.1
Accrued pension liability 225.4 234.5 322.6
Deferred income taxes 505.9 507.3 582.1
Other liabilities 363.0 333.9 346.1
Total liabilities 5,480.9 5,500.6 5,979.1
Commitments and contingencies
Shareholders’ equity:
Common stock, $1.00 par value per share: authorized, 240.0 shares; issued and outstanding, 125.8, 132.3 and 145.1 shares 125.8 132.3 145.1
Additional paid-in capital 313.7 682.7 1,318.5
Accumulated other comprehensive loss ( 483.4 ) ( 495.9 ) ( 535.5 )
Retained earnings 2,475.9 2,224.5 1,768.0
Olin Corporation’s shareholders’ equity 2,432.0 2,543.6 2,696.1
Noncontrolling interests 39.6 — —
Total equity 2,471.6 2,543.6 2,696.1
Total liabilities and equity $ 7,952.5 $ 8,044.2 $ 8,675.2
The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.
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OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Operations
(In millions, except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Sales $ 1,702.7 $ 2,616.1 $ 3,547.0 $ 5,077.5
Operating expenses:
Cost of goods sold 1,392.6 1,951.4 2,834.3 3,758.9
Selling and administration 101.2 99.0 213.0 203.3
Restructuring charges 19.2 3.6 80.1 6.7
Other operating income 27.0 3.3 27.5 3.3
Operating income 216.7 565.4 447.1 1,111.9
Interest expense 45.3 34.5 87.7 67.4
Interest income 1.1 0.3 2.2 0.7
Non-operating pension income 5.4 9.5 11.1 19.1
Income before taxes 177.9 540.7 372.7 1,064.3
Income tax provision 33.2 118.6 74.0 249.2
Net income $ 144.7 $ 422.1 $ 298.7 $ 815.1
Net loss attributable to noncontrolling interests ( 2.2 ) — ( 4.5 ) —
Net income attributable to Olin Corporation $ 146.9 $ 422.1 $ 303.2 $ 815.1
Net income attributable to Olin Corporation per common share:
Basic $ 1.15 $ 2.83 $ 2.35 $ 5.37
Diluted $ 1.13 $ 2.76 $ 2.29 $ 5.24
Average common shares outstanding:
Basic 127.4 149.2 129.2 151.9
Diluted 130.4 152.8 132.4 155.6
The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.
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OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Net income $ 144.7 $ 422.1 $ 298.7 $ 815.1
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments ( 8.5 ) ( 26.0 ) ( 3.0 ) ( 36.5 )
Unrealized losses (gains) on derivative contracts, net 7.4 ( 55.0 ) 14.8 ( 24.3 )
Amortization of prior service costs and actuarial losses, net 0.4 6.7 0.7 13.3
Total other comprehensive (loss) income, net of tax ( 0.7 ) ( 74.3 ) 12.5 ( 47.5 )
Comprehensive income 144.0 347.8 311.2 767.6
Comprehensive loss attributable to noncontrolling interests ( 2.2 ) — ( 4.5 ) —
Comprehensive income attributable to Olin Corporation $ 146.2 $ 347.8 $ 315.7 $ 767.6
The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.
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OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Shareholders’ Equity
(In millions, except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Common Stock
Balance at beginning of period $ 129.3 $ 151.8 $ 132.3 $ 156.8
Common stock repurchased and retired ( 3.5 ) ( 7.4 ) ( 7.1 ) ( 12.6 )
Common stock issued for:
Stock options exercised — 0.7 0.4 0.9
Other transactions — — 0.2 —
Balance at end of period $ 125.8 $ 145.1 $ 125.8 $ 145.1
Additional Paid-In Capital
Balance at beginning of period $ 491.6 $ 1,719.3 $ 682.7 $ 1,969.6
Common stock repurchased and retired ( 183.4 ) ( 419.1 ) ( 385.9 ) ( 677.1 )
Common stock issued for:
Stock options exercised 0.7 15.0 11.5 20.0
Other transactions 0.1 0.8 1.5 3.0
Stock-based compensation 4.7 2.5 3.9 3.0
Balance at end of period $ 313.7 $ 1,318.5 $ 313.7 $ 1,318.5
Accumulated Other Comprehensive Loss
Balance at beginning of period $ ( 482.7 ) $ ( 461.2 ) $ ( 495.9 ) $ ( 488.0 )
Other comprehensive (loss) income ( 0.7 ) ( 74.3 ) 12.5 ( 47.5 )
Balance at end of period $ ( 483.4 ) $ ( 535.5 ) $ ( 483.4 ) $ ( 535.5 )
Retained Earnings
Balance at beginning of period $ 2,354.6 $ 1,376.0 $ 2,224.5 $ 1,013.8
Net income 146.9 422.1 303.2 815.1
Common stock dividends paid ( 25.6 ) ( 30.1 ) ( 51.8 ) ( 60.9 )
Balance at end of period $ 2,475.9 $ 1,768.0 $ 2,475.9 $ 1,768.0
Olin Corporation’s Shareholders’ Equity $ 2,432.0 $ 2,696.1 $ 2,432.0 $ 2,696.1
Noncontrolling Interests
Balance at beginning of period $ 41.8 $ — $ — $ —
Net loss ( 2.2 ) — ( 4.5 ) —
Contributions from noncontrolling interests — — 44.1 —
Balance at end of period $ 39.6 $ — $ 39.6 $ —
Total Equity $ 2,471.6 $ 2,696.1 $ 2,471.6 $ 2,696.1
Dividends declared per share of common stock $ 0.20 $ 0.20 $ 0.40 $ 0.40
The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.
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OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Cash Flows
(In millions)
(Unaudited)
Six Months Ended June 30,
2023 2022
Operating Activities
Net income $ 298.7 $ 815.1
Adjustments to reconcile net income to net cash and cash equivalents provided by (used for) operating activities:
Gains on disposition of property, plant and equipment ( 27.0 ) —
Stock-based compensation 8.4 6.3
Depreciation and amortization 273.9 300.5
Deferred income taxes ( 27.7 ) 31.9
Write-off of equipment and facility included in restructuring charges 17.7 —
Qualified pension plan contributions ( 1.5 ) ( 0.8 )
Qualified pension plan income ( 9.9 ) ( 16.3 )
Change in:
Receivables 52.8 ( 228.5 )
Income taxes receivable/payable 14.3 12.8
Inventories ( 137.9 ) ( 90.4 )
Other current assets ( 1.8 ) ( 16.1 )
Accounts payable and accrued liabilities ( 141.1 ) 138.6
Other assets ( 13.4 ) 2.5
Other noncurrent liabilities 43.1 0.7
Other operating activities ( 5.6 ) 2.9
Net operating activities 343.0 959.2
Investing Activities
Capital expenditures ( 128.8 ) ( 103.9 )
Payments under other long-term supply contracts ( 29.6 ) —
Proceeds from disposition of property, plant and equipment 28.8 —
Other investing activities ( 1.0 ) —
Net investing activities ( 130.6 ) ( 103.9 )
Financing Activities
Long-term debt:
Borrowings 415.0 115.0
Repayments ( 271.3 ) ( 115.5 )
Common stock repurchased and retired ( 393.0 ) ( 689.7 )
Stock options exercised 11.9 20.9
Dividends paid ( 51.8 ) ( 60.9 )
Contributions received from noncontrolling interests 44.1 —
Net financing activities ( 245.1 ) ( 730.2 )
Effect of exchange rate changes on cash and cash equivalents ( 0.2 ) ( 1.0 )
Net (decrease) increase in cash and cash equivalents ( 32.9 ) 124.1
Cash and cash equivalents, beginning of year 194.0 180.5
Cash and cash equivalents, end of period $ 161.1 $ 304.6
Cash paid for interest and income taxes:
Interest, net $ 84.6 $ 63.5
Income taxes, net of refunds $ 70.9 $ 185.6
Non-cash investing activities:
Decrease in capital expenditures included in accounts payable and accrued liabilities $ 18.3 $ 15.3
The accompanying notes to condensed financial statements are an integral part of the condensed financial statements.
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OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS
Olin Corporation (Olin) is a Virginia corporation, incorporated in 1892, having its principal executive offices in Clayton, MO. 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. 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, hydrochloric acid, hydrogen, bleach products and potassium hydroxide. The Epoxy segment produces and sells a full range of epoxy materials and precursors, including aromatics (acetone and phenol), allyl chloride, epichlorohydrin, liquid epoxy resins, solid epoxy resins and systems and growth products such as converted epoxy resins and additives. The Winchester segment produces and sells sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges.
On January 10, 2023, Blue Water Alliance (BWA), our joint venture with Mitsui & Co., Ltd. (Mitsui), began operations after receiving all necessary regulatory approvals. BWA is an independent global trader of ECU-based derivatives, focused on globally traded caustic soda and ethylene dichloride. Olin holds 51% interest and exercises control in BWA and the joint venture is consolidated in our consolidated financial statements with Mitsui’s 49% interest in BWA classified as noncontrolling interest. All intercompany accounts and transactions are eliminated in consolidation.
We have prepared the condensed financial statements included herein, without audit, pursuant to the rules and regulations of the United States (U.S.) Securities and Exchange Commission (SEC). The preparation of the financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. In our opinion, these financial statements reflect all adjustments (consisting only of normal accruals), which are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are appropriate. We recommend that you read these condensed financial statements in conjunction with the financial statements, accounting policies and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
We do not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying condensed financial statements.
NOTE 3. RESTRUCTURING CHARGES
As a result of weak global resin demand and higher cost structures within the European region, we began a review of our global Epoxy asset footprint to optimize the most productive and cost effective assets to support our strategic operating model. As part of this review we announced operational cessations in the fourth quarter of 2022 and the first and second quarters of 2023 (collectively, Epoxy Optimization Plan). The foregoing actions will complete the rightsizing plan of our Epoxy business.
On June 20, 2023, we announced we had made the decision to cease all remaining operations at our Gumi, South Korea facility, reduce epoxy resin capacity at our Freeport, TX facility, and reduce our sales and support staffing across Asia. These actions are expected to be substantially completed by December 31, 2023. On March 21, 2023, we announced we had made the decision to cease operations at our cumene facility in Terneuzen, Netherlands and solid epoxy resin production at our facilities in Gumi, South Korea and Guaruja, Brazil. The closures were completed in the first quarter 2023. During the fourth quarter of 2022, we committed to and completed a plan to close down one of our bisphenol production lines at our Stade, Germany site. For the three and six months ended June 30, 2023, we recorded pretax restructuring charges of $ 13.3 million and $ 71.1 million, respectively, for the write-off of equipment and facility costs, employee severance and related benefit costs, contract
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termination costs and facility exit costs related to these actions. We expect to incur additional restructuring charges through 2026 of approximately $ 50 million related to these actions.
During 2021, we announced that we had made the decision to permanently close our diaphragm-grade chlor alkali capacity, representing 400,000 tons, at our McIntosh, AL facility (McIntosh Plan). The closure was completed during third quarter of 2022. For the three months ended June 30, 2023 and 2022, we recorded pretax restructuring charges of $ 2.5 million and $ 0.7 million, respectively, for lease and other contract termination costs and for facility exit costs related to this action. For the six months ended June 30, 2023 and 2022, we recorded pretax restructuring charges of $ 3.9 million and $ 1.6 million, respectively, for lease and other contract termination costs and for facility exit costs related to this action. We expect to incur additional restructuring charges through 2027 of approximately $ 30 million related to these actions.
On January 18, 2021, we announced we had made the decision to permanently close our trichloroethylene and anhydrous hydrogen chloride liquefaction facilities in Freeport, TX (collectively, Freeport 2021 Plan), which were completed in the fourth quarter of 2021. For the three months ended June 30, 2023 and 2022, we recorded pretax restructuring charges of $ 1.4 million and $ 1.2 million, respectively, for facility exit costs related to these actions. For the six months ended June 30, 2023 and 2022, we recorded pretax restructuring charges of $ 2.1 million and $ 1.5 million, respectively, for facility exit costs related to these actions. We expect to incur additional restructuring charges through 2025 of approximately $ 15 million related to these actions.
On December 11, 2019, we announced that we had made the decision to permanently close a chlor alkali plant with a capacity of 230,000 tons and our vinylidene chloride (VDC) production facility, both in Freeport, TX (collectively, Freeport 2019 Plan). The VDC facility and related chlor alkali plant were closed during the fourth quarter of 2020 and second quarter of 2021, respectively. For the three months ended June 30, 2023 and 2022, we recorded pretax restructuring charges of $ 2.0 million and $ 1.5 million, respectively, for facility exit costs related to these actions. For the six months ended June 30, 2023 and 2022, we recorded pretax restructuring charges of $ 3.0 million and $ 3.2 million, respectively, for facility exit costs related to these actions. We expect to incur additional restructuring charges through 2026 of approximately $ 30 million related to these actions.
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 (collectively, Chlor Alkali 2016 Plan). For the three and six months ended June 30, 2022, we recorded pretax restructuring charges of $ 0.2 million and $ 0.4 million, respectively, for facility exit costs and lease and other contract termination costs related to these actions. We do no t expect to incur additional restructuring charges related to these capacity reductions.
The following table summarizes the 2023 and 2022 activities by major component of these restructuring actions and the remaining balances of accrued restructuring costs as of June 30, 2023 and 2022:
Employee severance and related benefit costs Lease and other contract termination costs Facility exit costs Write-off of equipment and facility Total
($ in millions)
Balance at January 1, 2022 $ 6.9 $ 5.4 $ — $ — $ 12.3
Restructuring charges:
First quarter — 0.1 2.6 0.4 3.1
Second quarter — 0.2 3.1 0.3 3.6
Amounts utilized ( 3.7 ) ( 1.0 ) ( 5.7 ) ( 0.7 ) ( 11.1 )
Balance at June 30, 2022 $ 3.2 $ 4.7 $ — $ — $ 7.9
Balance at January 1, 2023 $ 9.4 $ 4.2 $ — $ — $ 13.6
Restructuring charges:
First quarter — 39.7 8.4 12.8 60.9
Second quarter 3.3 1.7 9.3 4.9 19.2
Amounts utilized ( 1.4 ) ( 7.2 ) ( 17.7 ) ( 17.7 ) ( 44.0 )
Balance at June 30, 2023 $ 11.3 $ 38.4 $ — $ — $ 49.7
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The following table summarizes the cumulative restructuring charges of these restructuring actions by major component through June 30, 2023:
Chlor Alkali Products and Vinyls Epoxy Corporate/other Total
McIntosh Plan Freeport 2021 Plan Freeport 2019 Plan Chlor Alkali 2016 Plan Epoxy Optimization Plan Productivity Plan
($ in millions)
Write-off of equipment and facility $ 2.7 $ — $ 58.9 $ 78.1 $ 18.3 $ — $ 158.0
Employee severance and related benefit costs — — 2.1 6.7 10.7 10.3 29.8
Facility exit costs 8.7 11.2 14.6 53.2 8.7 — 96.4
Employee relocation costs — — — 1.7 — — 1.7
Lease and other contract termination costs 6.4 — — 43.0 41.4 — 90.8
Total cumulative restructuring charges $ 17.8 $ 11.2 $ 75.6 $ 182.7 $ 79.1 $ 10.3 $ 376.7
As of June 30, 2023, we have incurred cash expenditures of $ 169.0 million and non-cash charges of $ 158.0 million related to these restructuring actions. The remaining balance of $ 49.7 million is expected to be paid out through 2028.
NOTE 4. EARNINGS PER SHARE
Basic and diluted net income attributable to Olin Corporation per share are computed by dividing net income attributable to Olin Corporation by the weighted-average number of common shares outstanding. Diluted net income attributable to Olin Corporation per share reflects the dilutive effect of stock-based compensation.
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Computation of Net Income per Share (In millions, except per share data)
Net income $ 144.7 $ 422.1 $ 298.7 $ 815.1
Net loss attributable to noncontrolling interests ( 2.2 ) — ( 4.5 ) —
Net income attributable to Olin Corporation $ 146.9 $ 422.1 $ 303.2 $ 815.1
Basic shares 127.4 149.2 129.2 151.9
Basic net income attributable to Olin Corporation per share $ 1.15 $ 2.83 $ 2.35 $ 5.37
Diluted shares:
Basic shares 127.4 149.2 129.2 151.9
Stock-based compensation 3.0 3.6 3.2 3.7
Diluted shares 130.4 152.8 132.4 155.6
Diluted net income attributable to Olin Corporation per share $ 1.13 $ 2.76 $ 2.29 $ 5.24
The computation of dilutive shares does not include 1.3 million shares for both the three and six months ended June 30, 2023 and 0.8 million shares for both the three and six months ended June 30, 2022, as their effect would have been anti-dilutive.
NOTE 5. ACCOUNTS RECEIVABLES
We maintain a $ 425.0 million Receivables Financing Agreement (Receivables Financing Agreement) that is scheduled to mature on October 14, 2025. Under the Receivables Financing Agreement, our eligible trade receivables are used for collateralized borrowings and continue to be serviced by us. In addition, the Receivables Financing Agreement incorporates the net leverage ratio covenant that is contained in the $ 1,550.0 million senior credit facility. As of June 30, 2023, December 31, 2022 and June 30, 2022, we had $ 234.8 million, $ 300.0 million and $ 300.0 million, respectively, drawn under the agreement.
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As of June 30, 2023, $ 478.6 million of our trade receivables were pledged as collateral and we had $ 120.0 million of additional borrowing capacity under the Receivables Financing Agreement, which was limited by our borrowing base.
Olin also has trade accounts receivable factoring arrangements (AR Facilities) and pursuant to the terms of the AR Facilities, certain of our domestic subsidiaries may sell their accounts receivable up to a maximum of $ 207.7 million and certain of our foreign subsidiaries may sell their accounts receivable up to a maximum of € 42.9 million. We will continue to service the outstanding accounts sold. These receivables qualify for sales treatment under ASC 860 “Transfers and Servicing” and, accordingly, the proceeds are included in net cash provided by operating activities in the condensed statements of cash flows. The following table summarizes the AR Facilities activity:
June 30,
2023 2022
($ in millions)
Balance at beginning of year $ 111.8 $ 83.3
Gross receivables sold 532.6 477.2
Payments received from customers on sold accounts ( 567.2 ) ( 450.6 )
Balance at end of period $ 77.2 $ 109.9
The factoring discount paid under the AR Facilities is recorded as interest expense on the condensed statements of operations. The factoring discount was $ 1.3 million and $ 0.4 million for the three months ended June 30, 2023 and 2022, respectively, and $ 2.5 million and $ 0.9 million for the six months ended June 30, 2023 and 2022, respectively. The agreements are without recourse and therefore no recourse liability had been recorded as of June 30, 2023, December 31, 2022 or June 30, 2022.
Our condensed balance sheets included an allowance for doubtful accounts receivables of $ 13.0 million, $ 12.6 million and $ 15.0 million and other receivables of $ 81.7 million, $ 71.6 million and $ 50.3 million at June 30, 2023, December 31, 2022 and June 30, 2022, respectively, which were included in receivables, net.
NOTE 6. INVENTORIES
Inventories consisted of the following:
June 30, 2023 December 31,
2022 June 30, 2022
($ in millions)
Supplies $ 145.1 $ 137.6 $ 136.8
Raw materials 181.6 201.2 202.0
Work in process 202.5 199.6 192.7
Finished goods 725.8 559.3 580.2
Inventories excluding LIFO reserve 1,255.0 1,097.7 1,111.7
LIFO reserve ( 173.8 ) ( 155.8 ) ( 166.0 )
Inventories, net $ 1,081.2 $ 941.9 $ 945.7
Inventories under the LIFO method are based on annual estimates of quantities and costs as of year-end; therefore, the condensed financial statements at June 30, 2023 reflect certain estimates relating to inventory quantities and costs at December 31, 2023. The replacement cost of our inventories would have been approximately $ 173.8 million, $ 155.8 million and $ 166.0 million higher than reported at June 30, 2023, December 31, 2022 and June 30, 2022, respectively.
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NOTE 7. OTHER ASSETS
Included in other assets were the following:
June 30, 2023 December 31, 2022 June 30, 2022
($ in millions)
Supply contracts $ 1,052.9 $ 1,048.0 $ 1,026.9
Other 55.7 54.5 63.1
Other assets $ 1,108.6 $ 1,102.5 $ 1,090.0
Amortization expense of $ 17.8 million and $ 17.6 million for the three months ended June 30, 2023 and 2022, respectively, and amortization expense of $ 35.6 million and $ 35.2 million for the six months ended June 30, 2023 and 2022, respectively, was recognized within cost of goods sold related to our long-term supply contracts and is reflected in depreciation and amortization on the condensed statements of cash flows.
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of goodwill were as follows:
Chlor Alkali Products and Vinyls Epoxy Total
($ in millions)
Balance at January 1, 2022 $ 1,275.6 $ 145.0 $ 1,420.6
Foreign currency translation adjustment 0.3 — 0.3
Balance at June 30, 2022 $ 1,275.9 $ 145.0 $ 1,420.9
Balance at January 1, 2023 $ 1,275.8 $ 145.1 $ 1,420.9
Foreign currency translation adjustment — — —
Balance at June 30, 2023 $ 1,275.8 $ 145.1 $ 1,420.9
Intangible assets consisted of the following:
June 30, 2023 December 31, 2022 June 30, 2022
Gross Amount Accumulated Amortization Net Gross Amount Accumulated Amortization Net Gross Amount Accumulated Amortization Net
($ in millions)
Customers, customer contracts and relationships $ 670.5 $ ( 419.5 ) $ 251.0 $ 669.1 $ ( 401.2 ) $ 267.9 $ 667.4 $ ( 382.2 ) $ 285.2
Acquired technology 93.2 ( 89.4 ) 3.8 93.1 ( 88.3 ) 4.8 92.7 ( 82.8 ) 9.9
Other 1.8 ( 0.7 ) 1.1 1.8 ( 0.7 ) 1.1 1.8 ( 0.7 ) 1.1
Total intangible assets $ 765.5 $ ( 509.6 ) $ 255.9 $ 764.0 $ ( 490.2 ) $ 273.8 $ 761.9 $ ( 465.7 ) $ 296.2
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NOTE 9. DEBT
Long-term Debt Borrowings (Repayments)
for the Six Months Ended
June 30, 2023 June 30, 2022
Debt Instruments ($ in millions)
Borrowings:
Senior Revolving Credit Facility 215.0 70.0
Receivables Financing Agreement 200.0 45.0
Total borrowings $ 415.0 $ 115.0
Repayments:
Senior Term Loan ( 4.4 ) —
Senior Revolving Credit Facility — ( 70.0 )
Receivables Financing Agreement ( 265.2 ) ( 45.0 )
Finance leases ( 1.7 ) ( 0.5 )
Total repayments $ ( 271.3 ) $ ( 115.5 )
Long-term debt borrowings (repayments), net $ 143.7 $ ( 0.5 )
Senior Credit Facility
On October 11, 2022, we entered into a new $ 1,550.0 million senior credit facility (Senior Credit Facility) that replaced our previous senior credit facility (2021 Senior Credit Facility), which included outstanding term loans of $ 350.0 million and a senior revolving credit facility with aggregate commitments in an amount equal to $ 800.0 million. The Senior Credit Facility includes a senior term loan facility with aggregate commitments of $ 350.0 million (Term Loan Facility) and a senior revolving credit facility with aggregate commitments of $ 1,200.0 million (Senior Revolving Credit Facility). The Term Loan Facility was fully drawn on the closing date with the proceeds of the Term Loan Facility used to refinance the loans and commitments outstanding under the 2021 Senior Credit Facility. The Term Loan Facility requires principal amortization amounts payable beginning March 31, 2023 at a rate of 0.625 % per quarter through the end of 2024, increasing to 1.250 % per quarter thereafter until maturity. The maturity date for the Senior Credit Facility is October 11, 2027.
The Senior Revolving Credit Facility includes a $ 100.0 million letter of credit subfacility. At June 30, 2023, we had $ 984.6 million available under our $ 1,200.0 million Senior Revolving Credit Facility because we had $ 215.0 million borrowed under the facility and issued $ 0.4 million of letters of credit.
We were in compliance with all covenants and restrictions under all our outstanding credit agreements as of June 30, 2023, 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 a result of our restrictive covenant related to the net leverage ratio, the maximum additional borrowings available to us could be limited in the future. The limitation, if an amendment or waiver from our lenders is not obtained, could restrict our ability to borrow the maximum amounts available under the Senior Revolving Credit Facility and the Receivables Financing Agreement. As of June 30, 2023, there were no covenants or other restrictions that limited our ability to borrow.
NOTE 10. PENSION PLANS AND RETIREMENT BENEFITS
We sponsor domestic and foreign defined benefit pension plans for eligible employees and retirees. Most of our domestic employees participate in defined contribution plans. However, a portion of our bargaining hourly employees continue to participate in our domestic qualified defined benefit pension plans under a flat-benefit formula. Our funding policy for the qualified defined benefit pension plans is consistent with the requirements of federal laws and regulations. Our foreign subsidiaries maintain pension and other benefit plans, which are consistent with local statutory practices.
Our domestic qualified defined benefit pension plan provides that if, within three years following a change of control of Olin, any corporate action is taken or filing made in contemplation of, among other things, a plan termination or merger or other transfer of assets or liabilities of the plan, and such termination, merger, or transfer thereafter takes place, plan benefits would
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automatically be increased for affected participants (and retired participants) to absorb any plan surplus (subject to applicable collective bargaining requirements).
We also provide certain postretirement healthcare (medical) and life insurance benefits for eligible active and retired domestic employees. The healthcare plans are contributory with participants’ contributions adjusted annually based on medical rates of inflation and plan experience.
Pension Benefits Other Postretirement Benefits
Three Months Ended June 30, Three Months Ended June 30,
2023 2022 2023 2022
Components of Net Periodic Benefit (Income) Cost ($ in millions)
Service cost $ 1.4 $ 2.2 $ 0.2 $ 0.3
Interest cost 26.4 15.5 0.4 0.3
Expected return on plans’ assets ( 32.7 ) ( 34.3 ) — —
Amortization of prior service cost ( 0.1 ) ( 0.2 ) 0.1 0.1
Recognized actuarial loss 0.3 8.6 0.2 0.5
Net periodic benefit (income) cost $ ( 4.7 ) $ ( 8.2 ) $ 0.9 $ 1.2
Pension Benefits Other Postretirement Benefits
Six Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Components of Net Periodic Benefit (Income) Cost ($ in millions)
Service cost $ 2.8 $ 4.5 $ 0.4 $ 0.6
Interest cost 52.7 30.9 0.9 0.6
Expected return on plans’ assets ( 65.6 ) ( 68.5 ) — —
Amortization of prior service cost ( 0.2 ) ( 0.4 ) 0.1 0.1
Recognized actuarial loss 0.6 17.2 0.4 1.0
Net periodic benefit (income) cost $ ( 9.7 ) $ ( 16.3 ) $ 1.8 $ 2.3
We made cash contributions to our international qualified defined benefit pension plans of $ 1.5 million and $ 0.8 million for the six months ended June 30, 2023 and 2022, respectively.
NOTE 11. INCOME TAXES
The effective tax rate for the three months ended June 30, 2023 included a benefit associated with stock-based compensation, a benefit associated with prior year tax positions, an expense from a net increase in the valuation allowance related to deferred tax assets in foreign jurisdictions, and an expense from a change in tax contingencies, resulting in a net $ 12.0 million tax benefit. After giving consideration to these items, the effective tax rate for the three months ended June 30, 2023 of 25.4 % was higher than the 21 % U.S. federal statutory rate primarily due to state income tax and an increase in the valuation allowance related to losses in foreign jurisdictions, partially offset by favorable permanent salt depletion deductions. The effective tax rate for the three months ended June 30, 2022 included a benefit associated with prior year tax positions and stock-based compensation, resulting in a net $ 8.5 million tax benefit. After giving consideration to these items, the effective tax rate for the three months ended June 30, 2022 of 23.5 % was higher than the 21 % U.S. federal statutory rate primarily due to state and foreign income taxes, partially offset by foreign income exclusions and favorable permanent salt depletion deductions.
The effective tax rate for the six months ended June 30, 2023 included a benefit associated with stock-based compensation, a benefit from remeasurement of deferred taxes due to a decrease in our state effective tax rates, a benefit associated with prior year tax positions, an expense from a net increase in the valuation allowance related to deferred tax assets in foreign jurisdictions, and an expense from a change in tax contingencies, resulting in a net $ 17.2 million tax benefit. After
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giving consideration to these items, the effective tax rate for the six months ended June 30, 2023 of 24.5 % was higher than the 21 % U.S. federal statutory rate primarily due to state income tax and an increase in the valuation allowance related to losses in foreign jurisdictions, partially offset by favorable permanent salt depletion deductions. The effective tax rate for the six months ended June 30, 2022 included a benefit associated with prior year tax positions and stock-based compensation, resulting in a net $ 10.8 million tax benefit. After giving consideration to these items, the effective tax rate for the six months ended June 30, 2022 of 24.4 % was higher than the 21 % U.S. federal statutory rate primarily due to state and foreign income taxes, partially offset by foreign income exclusions and favorable permanent salt depletion deductions.
As of June 30, 2023, we had $ 58.7 million of gross unrecognized tax benefits, which would have a net $ 56.8 million impact on the effective tax rate, if recognized. As of June 30, 2022, we had $ 46.0 million of gross unrecognized tax benefits, of which $ 45.4 million would have impacted the effective tax rate, if recognized. The amounts of unrecognized tax benefits were as follows:
June 30,
2023 2022
($ in millions)
Balance at beginning of year $ 51.6 $ 43.4
Increases for prior year tax positions 1.3 0.3
Decreases for prior year tax positions ( 0.3 ) ( 0.7 )
Increases for current year tax positions 5.4 5.3
Foreign currency translation adjustments 0.7 ( 2.3 )
Balance at end of period $ 58.7 $ 46.0
As of June 30, 2023, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $ 38.1 million over the next twelve months. The anticipated reduction primarily relates to settlements with taxing authorities and the expiration of federal, state and foreign statutes of limitation.
We operate globally and file income tax returns in numerous jurisdictions. Our tax returns are subject to examination by various federal, state and local tax authorities. Additionally, examinations are ongoing in various states and foreign jurisdictions. 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 2018 - 2022
U.S. state income tax 2012 - 2022
Canadian federal income tax 2016 - 2022
Brazil 2016 - 2022
Germany 2015 - 2022
China 2014 - 2022
The Netherlands 2016 - 2022
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NOTE 12. CONTRIBUTING EMPLOYEE OWNERSHIP PLAN
The Contributing Employee Ownership Plan (CEOP) is a defined contribution plan available to essentially all domestic employees. We provide a contribution to an individual retirement contribution account maintained with the CEOP equal to an amount of between 5.0 % and 7.5 % of the employee’s eligible compensation. The defined contribution plan expense for the three months ended June 30, 2023 and 2022 was $ 8.6 million and $ 8.8 million, respectively, and for the six months ended June 30, 2023 and 2022 was $ 20.3 million and $ 19.4 million, respectively.
Company matching contributions are invested in the same investment allocation as the employee’s contribution. Our matching contributions for eligible employees for the three months ended June 30, 2023 and 2022 was $ 3.7 million and $ 3.6 million, respectively, and for the six months ended June 30, 2023 and 2022 was $ 7.4 million and $ 6.7 million, respectively.
NOTE 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 (benefit) was as follows:
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
($ in millions)
Stock-based compensation $ 8.3 $ 9.6 $ 12.8 $ 14.2
Mark-to-market adjustments ( 1.6 ) ( 5.6 ) ( 0.1 ) ( 8.5 )
Total expense $ 6.7 $ 4.0 $ 12.7 $ 5.7
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 2023 2022
Dividend yield 1.32 % 1.60 %
Risk-free interest rate 4.07 % 1.93 %
Expected volatility of Olin common stock 47 % 48 %
Expected life (years) 7.0 7.0
Weighted-average grant fair value (per option) $ 28.74 $ 21.18
Weighted-average exercise price $ 60.55 $ 49.71
Options granted 562,124 737,100
Dividend yield was based on our current dividend yield as of the option grant date. 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.
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Performance share awards are denominated in shares of our stock and are paid half in cash and half in stock. Payouts for performance share awards are based on two criteria: (1) 50 % of the award is based on Olin’s total shareholder returns (TSR) over the applicable three -year performance cycle in relation to the TSR over the same period among a portfolio of public companies which are selected in concert with outside compensation consultants and (2) 50 % of the award is based on Olin’s net income over the applicable three -year performance cycle in relation to the net income goal for such period as set by the compensation committee of Olin’s board of directors. 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.
The fair value of each performance share award based on net income was estimated on the date of grant, using the current stock price. The fair value of each performance share award based on TSR was estimated on the date of grant, using a Monte Carlo simulation model with the following weighted average assumptions:
Grant date 2023 2022
Risk-free interest rate 4.46 % 1.74 %
Expected volatility of Olin common stock 52 % 59 %
Expected average volatility of peer companies 42 % 47 %
Average correlation coefficient of peer companies 0.51 0.51
Expected life (years) 3.0 3.0
Grant date fair value (TSR based award) $ 86.98 $ 64.13
Grant date fair value (net income based award) $ 60.55 $ 49.71
Awards granted 161,474 184,000
Risk-free interest rate was based on zero coupon U.S. Treasury securities rates for the expected life of the performance stock awards. Expected volatility of Olin common stock and peer companies was based on historical stock price movements, as we believe that historical experience is the best available indicator of the expected volatility. The average correlation coefficient of peer companies was determined based on historical trends of Olin’s common stock price compared to the peer companies. Expected life of the performance share award grant was based on historical exercise and cancellation patterns, as we believe that historical experience is the best estimate of future exercise patterns.
NOTE 14. SHAREHOLDERS’ EQUITY
On July 28, 2022, our Board of Directors authorized a share repurchase program for the purchase of shares of common stock at an aggregate price of up to $ 2.0 billion (the 2022 Repurchase Authorization). This program will terminate upon the purchase of $ 2.0 billion of common stock.
For the six months ended June 30, 2023 and 2022, 7.1 million and 12.6 million shares, respectively, of common stock were repurchased and retired at a total value of $ 393.0 million and $ 689.7 million, respectively. As of June 30, 2023, 13.0 million shares of common stock have been repurchased and retired at a total value of $ 687.8 million under the 2022 Repurchase Authorization program, and $ 1,312.2 million of common stock remained authorized to be repurchased under the program.
We issued 0.4 million and 0.9 million shares representing stock options exercised for the six months ended June 30, 2023 and 2022, respectively, with a total value of $ 11.9 million and $ 20.9 million, respectively.
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The following table represents the activity included in accumulated other comprehensive loss:
Foreign Currency Translation Adjustment Unrealized (Losses) Gains on Derivative Contracts (net of taxes) Pension and Other Postretirement Benefits (net of taxes) Accumulated Other Comprehensive Loss
($ in millions)
Balance at January 1, 2022 $ ( 10.9 ) $ 22.8 $ ( 499.9 ) $ ( 488.0 )
Unrealized (losses) gains:
First quarter ( 10.5 ) 52.8 — 42.3
Second quarter ( 26.0 ) ( 36.4 ) — ( 62.4 )
Reclassification adjustments of (gains) losses into income:
First quarter — ( 12.4 ) 8.9 ( 3.5 )
Second quarter — ( 36.1 ) 9.0 ( 27.1 )
Tax (provision) benefit:
First quarter — ( 9.7 ) ( 2.3 ) ( 12.0 )
Second quarter — 17.5 ( 2.3 ) 15.2
Net change ( 36.5 ) ( 24.3 ) 13.3 ( 47.5 )
Balance at June 30, 2022 $ ( 47.4 ) $ ( 1.5 ) $ ( 486.6 ) $ ( 535.5 )
Balance at January 1, 2023 $ ( 38.6 ) $ ( 32.5 ) $ ( 424.8 ) $ ( 495.9 )
Unrealized gains (losses):
First quarter 5.5 ( 20.8 ) — ( 15.3 )
Second quarter ( 8.5 ) ( 10.7 ) — ( 19.2 )
Reclassification adjustments of losses into income:
First quarter — 30.7 0.4 31.1
Second quarter — 20.5 0.5 21.0
Tax provision:
First quarter — ( 2.5 ) ( 0.1 ) ( 2.6 )
Second quarter — ( 2.4 ) ( 0.1 ) ( 2.5 )
Net change ( 3.0 ) 14.8 0.7 12.5
Balance at June 30, 2023 $ ( 41.6 ) $ ( 17.7 ) $ ( 424.1 ) $ ( 483.4 )
Net income and cost of goods sold included reclassification adjustments for realized gains and losses on derivative contracts from accumulated other comprehensive loss.
Net income and non-operating pension income included the amortization of prior service costs and actuarial losses from accumulated other comprehensive loss.
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NOTE 15. SEGMENT INFORMATION
We define segment results as income (loss) before interest expense, interest income, other operating income (expense), non-operating pension income, other income and income taxes. We have three operating segments: Chlor Alkali Products and Vinyls, Epoxy and Winchester. The three operating segments reflect the organization used by our management for purposes of allocating resources and assessing performance. Chlorine and caustic soda used in our Epoxy segment is transferred at cost from the Chlor Alkali Products and Vinyls segment. BWA is consolidated in our Chlor Alkali Products and Vinyls segment. Sales are attributed to geographic areas based on customer location.
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Sales: ($ in millions)
Chlor Alkali Products and Vinyls $ 1,002.3 $ 1,403.5 $ 2,119.4 $ 2,648.7
Epoxy 333.8 772.7 694.5 1,562.2
Winchester 366.6 439.9 733.1 866.6
Total sales $ 1,702.7 $ 2,616.1 $ 3,547.0 $ 5,077.5
Income (loss) before taxes:
Chlor Alkali Products and Vinyls $ 180.1 $ 346.5 $ 426.0 $ 675.1
Epoxy ( 0.5 ) 139.9 20.9 277.9
Winchester 64.7 119.3 125.7 238.2
Corporate/other:
Environmental expense ( 13.0 ) ( 5.0 ) ( 16.2 ) ( 10.6 )
Other corporate and unallocated costs ( 22.4 ) ( 35.0 ) ( 56.7 ) ( 65.3 )
Restructuring charges ( 19.2 ) ( 3.6 ) ( 80.1 ) ( 6.7 )
Other operating income 27.0 3.3 27.5 3.3
Interest expense ( 45.3 ) ( 34.5 ) ( 87.7 ) ( 67.4 )
Interest income 1.1 0.3 2.2 0.7
Non-operating pension income 5.4 9.5 11.1 19.1
Income before taxes $ 177.9 $ 540.7 $ 372.7 $ 1,064.3
Other operating income for both the three and six months ended June 30, 2023 included a gain of $ 27.0 million for the sale of our domestic private trucking fleet and operations.
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Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Sales by geography: ($ in millions)
Chlor Alkali Products and Vinyls
United States $ 652.3 $ 946.4 $ 1,418.8 $ 1,765.8
Europe 45.0 82.4 117.4 152.8
Other foreign 305.0 374.7 583.2 730.1
Total Chlor Alkali Products and Vinyls 1,002.3 1,403.5 2,119.4 2,648.7
Epoxy
United States 148.8 252.8 300.4 495.7
Europe 77.4 354.5 174.0 713.4
Other foreign 107.6 165.4 220.1 353.1
Total Epoxy 333.8 772.7 694.5 1,562.2
Winchester
United States 325.3 401.2 655.2 803.1
Europe 15.8 16.8 23.6 19.5
Other foreign 25.5 21.9 54.3 44.0
Total Winchester 366.6 439.9 733.1 866.6
Total
United States 1,126.4 1,600.4 2,374.4 3,064.6
Europe 138.2 453.7 315.0 885.7
Other foreign 438.1 562.0 857.6 1,127.2
Total sales $ 1,702.7 $ 2,616.1 $ 3,547.0 $ 5,077.5
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Sales by product line: ($ in millions)
Chlor Alkali Products and Vinyls
Caustic soda $ 454.9 $ 635.1 $ 1,001.7 $ 1,154.0
Chlorine, chlorine-derivatives and other products 547.4 768.4 1,117.7 1,494.7
Total Chlor Alkali Products and Vinyls 1,002.3 1,403.5 2,119.4 2,648.7
Epoxy
Aromatics and allylics 128.7 384.1 271.0 776.1
Epoxy resins 205.1 388.6 423.5 786.1
Total Epoxy 333.8 772.7 694.5 1,562.2
Winchester
Commercial 199.4 320.6 399.9 634.8
Military and law enforcement 167.2 119.3 333.2 231.8
Total Winchester 366.6 439.9 733.1 866.6
Total sales $ 1,702.7 $ 2,616.1 $ 3,547.0 $ 5,077.5
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NOTE 16. ENVIRONMENTAL
We are party to various government and private environmental actions associated with past manufacturing facilities and former waste disposal sites. The condensed balance sheets included reserves for future environmental expenditures to investigate and remediate known sites amounting to $ 151.8 million, $ 146.6 million and $ 148.9 million at June 30, 2023, December 31, 2022 and June 30, 2022, respectively, of which $ 126.8 million, $ 121.6 million and $ 123.9 million, respectively, were classified as other noncurrent liabilities.
Environmental provisions charged to income, which are included in costs of goods sold, were $ 13.0 million and $ 5.0 million for the three months ended June 30, 2023 and 2022, respectively, and $ 16.2 million and $ 10.6 million for the six months ended June 30, 2023 and 2022, respectively.
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.
NOTE 17. COMMITMENTS AND CONTINGENCIES
Olin, K.A. Steel Chemicals (a wholly owned subsidiary of Olin) and other caustic soda producers were named as defendants in six purported class action civil lawsuits filed March 22, 25 and 26, 2019 and April 12, 2019 in the U.S. District Court for the Western District of New York. Those cases were consolidated on May 22, 2019; the claims in the consolidated “Direct Purchaser” lawsuit, as modified, are on behalf of the respective named plaintiffs and a putative class comprised of all persons and entities who purchased certain types of caustic soda in the U.S. directly from one or more of the defendants, their parents, predecessors, subsidiaries or affiliates at any time on or after October 1, 2015 through December 31, 2018. Olin, K.A. Steel Chemicals and other caustic soda producers were also named as defendants in two purported class action civil lawsuits filed July 25 and 29, 2019 in the U.S. District Court for the Western District of New York on behalf of the respective named plaintiffs and a putative class comprised of all persons and entities who purchased caustic soda in the U.S. indirectly from distributors at any time on or after October 1, 2015. Those cases were consolidated and a consolidated, amended complaint in the “Indirect Purchaser” lawsuit was filed on August 23, 2021. The other current defendants in the Direct Purchaser and Indirect Purchaser lawsuits are Occidental Chemical Corporation d/b/a OxyChem, Westlake Chemical Corporation, Shin-Etsu Chemical Co., Ltd., and Formosa Plastics Corporation, U.S.A. The Direct Purchaser and Indirect Purchaser lawsuits allege the defendants conspired to fix, raise, maintain and stabilize the price of caustic soda, restrict domestic (U.S.) supply of caustic soda and allocate caustic soda customers. Plaintiffs seek damages and injunctive relief.
Olin, K.A. Steel Chemical, Olin Canada ULC, 3229897 Nova Scotia Co. (wholly owned subsidiaries of Olin) and other alleged caustic soda producers were named as defendants in a proposed class action civil lawsuit filed on October 7, 2020 in the Quebec Superior Court (Province of Quebec) on behalf of the respective named plaintiff and a putative class comprised of all Canadian persons and entities who, between October 1, 2015 and the date of the eventual class action certification, directly or indirectly purchased caustic soda or products containing caustic soda, produced by one or more of the defendants. Olin, K.A. Steel Chemical, Olin Canada ULC, 3229897 Nova Scotia Co. and other alleged caustic soda producers were also named as defendants in a proposed class action civil lawsuit filed November 13, 2020 in the Federal Court of Canada on behalf of the respective named plaintiff and a putative class comprised of all legal persons in Canada who, at any time on or after October 1, 2015 to the present, directly or indirectly purchased caustic soda. The other defendants named in the two Canadian lawsuits are Occidental Petroleum Corporation, Occidental Chemical Corporation, Oxy Canada Sales, Inc., Westlake Chemical Corporation, Axiall Canada, Inc., Shin-Etsu Chemical Co., Ltd., Shintech Incorporated, Formosa Plastics Corporation, and Formosa Plastics Corporation, U.S.A. The lawsuits allege the defendants conspired to fix, raise, maintain control, and stabilize the price of caustic soda, divide and allocate markets, sales, customers and territories, fix, maintain, control, prevent, restrict, lessen or eliminate production and supply of caustic soda, and agree to idle capacity of production and/or refrain from increasing their production capacity. Plaintiffs seek damages, including punitive damages.
We believe we have meritorious legal positions and will continue to represent our interests vigorously in the above matters. Any losses related to these matters are not currently estimable because of unresolved questions of fact and law, but if resolved unfavorably to Olin, could have a material adverse effect on our financial position, cash flows or results of operations.
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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. As of June 30, 2023, December 31, 2022 and June 30, 2022, our condensed balance sheets included accrued liabilities for these other legal actions of $ 15.9 million, $ 14.4 million and $ 14.5 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 other legal actions will materially adversely affect our financial position, cash flows or results of operations.
During the ordinary course of our business, contingencies arise resulting from an existing condition, situation or set of circumstances involving an uncertainty as to the realization of a possible gain contingency. In certain instances, such as environmental projects, we are responsible for managing the cleanup and remediation of an environmental site. There exists the possibility of recovering a portion of these costs from other parties. We account for gain contingencies in accordance with the provisions of ASC 450 “Contingencies” and, therefore, do not record gain contingencies and recognize income until it is earned and realizable.
NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk in the normal course of our business operations due to our purchases of certain commodities, our ongoing investing and financing activities and our operations that use foreign currencies. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies and procedures governing our management of market risks and the use of financial instruments to manage exposure to such risks. ASC 815 “Derivatives and Hedging” (ASC 815) requires an entity to recognize all derivatives as either assets or liabilities in the condensed balance sheets and measure those instruments at fair value. In accordance with ASC 815, we designate derivative contracts as cash flow hedges of forecasted purchases of commodities and forecasted interest payments related to variable-rate borrowings and designate certain interest rate swaps as fair value hedges of fixed-rate borrowings. We do not enter into any derivative instruments for trading or speculative purposes.
Energy costs, including electricity and natural gas, and certain raw materials used in our production processes are subject to price volatility. Depending on market conditions, we may enter into futures contracts, forward contracts, commodity swaps and put and call option contracts in order to reduce the impact of commodity price fluctuations. The majority of our commodity derivatives expire within one year.
We actively manage currency exposures that are associated with net monetary asset positions, currency purchases and sales commitments denominated in foreign currencies and foreign currency denominated assets and liabilities created in the normal course of business. We enter into forward sales and purchase contracts to manage currency risk to offset our net exposures, by currency, related to the foreign currency denominated monetary assets and liabilities of our operations. At June 30, 2023, we had outstanding forward contracts to buy foreign currency with a notional value of $ 10.9 million and to sell foreign currency with a notional value of $ 126.1 million. All of the currency derivatives expire within one year and are for U.S. dollar (USD) equivalents. The counterparties to the forward contracts are large financial institutions; however, the risk of loss to us in the event of nonperformance by a counterparty could be significant to our financial position or results of operations. At December 31, 2022, we had outstanding forward contracts to buy foreign currency with a notional value of $ 275.8 million and to sell foreign currency with a notional value of $ 110.7 million. At June 30, 2022, we had outstanding forward contracts to buy foreign currency with a notional value of $ 235.5 million and to sell foreign currency with a notional value of $ 81.0 million.
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Cash Flow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative is recognized as a component of other comprehensive income (loss) until the hedged item is recognized in earnings.
We had the following notional amounts of outstanding commodity contracts that were entered into to hedge forecasted purchases:
June 30, 2023 December 31, 2022 June 30, 2022
($ in millions)
Natural gas $ 79.3 $ 107.6 $ 98.0
Ethane 25.0 46.0 52.7
Metals 139.8 107.6 157.9
Total notional $ 244.1 $ 261.2 $ 308.6
As of June 30, 2023, the counterparties to these commodity contracts were Wells Fargo Bank, N.A., Citibank, N.A., JPMorgan Chase Bank, National Association and Bank of America Corporation, all of which are major financial institutions.
We use cash flow hedges for certain raw material and energy costs such as copper, zinc, lead, ethane, 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 June 30, 2023, we had open derivative contract positions through 2028. If all open futures contracts had been settled on June 30, 2023, we would have recognized a pretax loss of $ 23.8 million.
If commodity prices were to remain at June 30, 2023 levels, approximately $ 16.7 million of deferred losses, net of tax, 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
We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels. 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.
Financial Statement Impacts
We present our derivative assets and liabilities in our condensed balance sheets on a net basis whenever we have a legally enforceable master netting agreement with the counterparty to our derivative contracts. We use these agreements to manage and substantially reduce our potential counterparty credit risk.
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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:
June 30, 2023 December 31, 2022 June 30, 2022
($ in millions)
Asset derivatives:
Other current assets
Derivatives designated as hedging instruments:
Commodity contracts - gains $ 1.7 $ 2.4 $ 27.1
Commodity contracts - losses ( 1.5 ) ( 0.9 ) ( 1.3 )
Derivatives not designated as hedging instruments:
Foreign exchange contracts - gains 0.6 0.3 2.2
Foreign exchange contracts - losses ( 0.5 ) — ( 0.2 )
Total other current assets 0.3 1.8 27.8
Other assets
Derivatives designated as hedging instruments:
Commodity contracts - gains 3.2 4.0 5.4
Total other assets 3.2 4.0 5.4
Total asset derivatives (1)
$ 3.5 $ 5.8 $ 33.2
Liability derivatives:
Accrued liabilities
Derivatives designated as hedging instruments:
Commodity contracts - losses $ 23.7 $ 43.3 $ 38.7
Commodity contracts - gains ( 1.6 ) ( 1.7 ) ( 7.6 )
Derivatives not designated as hedging instruments:
Foreign exchange contracts - losses 0.7 1.7 —
Foreign exchange contracts - gains — ( 0.8 ) —
Total accrued liabilities 22.8 42.5 31.1
Other liabilities
Derivatives designated as hedging instruments:
Commodity contracts - losses 5.4 8.0 2.0
Commodity contracts - gains ( 0.3 ) ( 0.6 ) —
Total other liabilities 5.1 7.4 2.0
Total liability derivatives (1)
$ 27.9 $ 49.9 $ 33.1
(1) Does not include the impact of cash collateral received from or provided to counterparties.
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The following table summarizes the effects of derivative instruments on our condensed statements of operations:
Amount of Gain (Loss)
Three Months Ended June 30, Six Months Ended June 30,
Location of Gain (Loss) 2023 2022 2023 2022
Derivatives – Cash Flow Hedges ($ in millions)
Recognized in other comprehensive loss:
Commodity contracts ——— $ ( 10.7 ) $ ( 36.4 ) $ ( 31.5 ) $ 16.4
Reclassified from accumulated other comprehensive loss into income:
Commodity contracts Cost of goods sold $ ( 20.5 ) $ 36.1 $ ( 51.2 ) $ 48.5
Derivatives Not Designated as Hedging Instruments
Commodity contracts Cost of goods sold $ — $ — $ ( 0.6 ) $ 0.5
Foreign exchange contracts Selling and administration $ ( 11.8 ) $ ( 8.5 ) $ ( 13.2 ) $ ( 27.1 )
Credit Risk and Collateral
By using derivative instruments, we are exposed to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes us, thus creating a repayment risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, assume no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties. We monitor our positions and the credit ratings of our counterparties, and we do not anticipate non-performance by the counterparties.
Based on the agreements with our various counterparties, cash collateral is required to be provided when the net fair value of the derivatives, with the counterparty, exceeds a specific threshold. If the threshold is exceeded, cash is either provided by the counterparty to us if the value of the derivatives is our asset, or cash is provided by us to the counterparty if the value of the derivatives is our liability. As of June 30, 2023, December 31, 2022 and June 30, 2022, 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.
NOTE 19. 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:
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Level 1 — Inputs were unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 — Inputs (other than quoted prices included in Level 1) were either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 — Inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
We are required to separately disclose assets and liabilities measured at fair value on a recurring basis, from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis are intangible assets and goodwill, which are reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred.
Determining which hierarchical level an asset or liability falls within requires significant judgment. We evaluate our hierarchy disclosures each quarter. The following table summarizes the assets and liabilities measured at fair value in the condensed balance sheets:
Fair Value Measurements
Balance at June 30, 2023 Level 1 Level 2 Level 3 Total
Assets ($ in millions)
Commodity contracts $ — $ 3.4 $ — $ 3.4
Foreign exchange contracts — 0.1 — 0.1
Total Assets $ — $ 3.5 $ — $ 3.5
Liabilities
Commodity contracts $ — $ 27.2 $ — $ 27.2
Foreign exchange contracts — 0.7 — 0.7
Total Liabilities $ — $ 27.9 $ — $ 27.9
Balance at December 31, 2022
Assets
Commodity contracts $ — $ 5.5 $ — $ 5.5
Foreign exchange contracts — 0.3 — 0.3
Total Assets $ — $ 5.8 $ — $ 5.8
Liabilities
Commodity contracts $ — $ 49.0 $ — $ 49.0
Foreign exchange contracts — 0.9 — 0.9
Total Liabilities $ — $ 49.9 $ — $ 49.9
Balance at June 30, 2022
Assets
Commodity contracts $ — $ 31.2 $ — $ 31.2
Foreign exchange contracts — 2.0 — 2.0
Total Assets $ — $ 33.2 $ — $ 33.2
Liabilities
Commodity contracts $ — $ 33.1 $ — $ 33.1
Foreign exchange contracts — — — —
Total Liabilities $ — $ 33.1 $ — $ 33.1
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Commodity Contracts
Commodity contract financial instruments were valued primarily based on prices and other relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for commodities. We use commodity derivative contracts for certain raw materials and energy costs such as copper, zinc, lead, ethane, electricity and natural gas to provide a measure of stability in managing our exposure to price fluctuations.
Foreign Currency Contracts
Foreign currency contract financial instruments were valued primarily based on relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for currencies. We enter into forward sales and purchase contracts to manage currency risk resulting from purchase and sale commitments denominated in foreign currencies.
Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments. Since our long-term debt instruments may not be actively traded, the inputs used to measure the fair value of our long-term debt are based on current market rates for debt of similar risk and maturities and is classified as Level 2 in the fair value measurement hierarchy. As of June 30, 2023, December 31, 2022 and June 30, 2022, the fair value measurements of debt were $ 2,661.1 million, $ 2,517.7 million and $ 2,635.3 million, respectively.
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 or liabilities measured at fair value on a nonrecurring basis as of June 30, 2023, December 31, 2022 and June 30, 2022.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.