UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2020
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) | |||
(314 ) 480-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class: | Trading symbol: | Name of each exchange on which registered: |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of March 31, 2020, 157,851,156 shares of the registrant’s common stock were outstanding.
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TABLE OF CONTENTS FOR FORM 10-Q | Page | |
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
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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, 2020 | December 31, 2019 | March 31, 2019 | |||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | $ | ||||||||
Receivables, net | |||||||||||
Income taxes receivable | |||||||||||
Inventories, net | |||||||||||
Other current assets | |||||||||||
Total current assets | |||||||||||
Property, plant and equipment (less accumulated depreciation of $3,373.8, $3,268.1 and $2,892.4) | |||||||||||
Operating lease assets, net | |||||||||||
Deferred income taxes | |||||||||||
Other assets | |||||||||||
Intangible assets, net | |||||||||||
Goodwill | |||||||||||
Total assets | $ | $ | $ | ||||||||
Liabilities and Shareholders’ Equity | |||||||||||
Current liabilities: | |||||||||||
Current installments of long-term debt | $ | $ | $ | ||||||||
Accounts payable | |||||||||||
Income taxes payable | |||||||||||
Current operating lease liabilities | |||||||||||
Accrued liabilities | |||||||||||
Total current liabilities | |||||||||||
Long-term debt | |||||||||||
Operating lease liabilities | |||||||||||
Accrued pension liability | |||||||||||
Deferred income taxes | |||||||||||
Other liabilities | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies | |||||||||||
Shareholders’ equity: | |||||||||||
Common stock, $1.00 par value per share: authorized, 240.0 shares; issued and outstanding, 157.8, 157.7 and 164.9 shares | |||||||||||
Additional paid-in capital | |||||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ( | ) | |||||
Retained earnings | |||||||||||
Total shareholders’ equity | |||||||||||
Total liabilities and shareholders’ equity | $ | $ | $ | ||||||||
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 March 31, | |||||||
2020 | 2019 | ||||||
Sales | $ | $ | |||||
Operating expenses: | |||||||
Cost of goods sold | |||||||
Selling and administration | |||||||
Restructuring charges | |||||||
Other operating income | |||||||
Operating (loss) income | ( | ) | |||||
Interest expense | |||||||
Interest income | |||||||
Non-operating pension income | |||||||
Other income | |||||||
Income (loss) before taxes | ( | ) | |||||
Income tax (benefit) provision | ( | ) | |||||
Net (loss) income | $ | ( | ) | $ | |||
Net (loss) income per common share: | |||||||
Basic | $ | ( | ) | $ | |||
Diluted | $ | ( | ) | $ | |||
Average common shares outstanding: | |||||||
Basic | |||||||
Diluted | |||||||
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 March 31, | |||||||
2020 | 2019 | ||||||
Net (loss) income | $ | ( | ) | $ | |||
Other comprehensive loss, net of tax: | |||||||
Foreign currency translation adjustments, net | ( | ) | ( | ) | |||
Unrealized losses on derivative contracts, net | ( | ) | ( | ) | |||
Amortization of prior service costs and actuarial losses, net | |||||||
Total other comprehensive loss, net of tax | ( | ) | ( | ) | |||
Comprehensive (loss) income | $ | ( | ) | $ | |||
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)
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total Shareholders’ Equity | ||||||||||||||||||
Shares Issued | Par Value | |||||||||||||||||||||
Balance at January 1, 2019 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||
Lease accounting adoption adjustment | ||||||||||||||||||||||
Net income | ||||||||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||
Dividends paid: | ||||||||||||||||||||||
Common stock ($0.20 per share) | ( | ) | ( | ) | ||||||||||||||||||
Common stock repurchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Common stock issued for: | ||||||||||||||||||||||
Stock options exercised | ||||||||||||||||||||||
Other transactions | ||||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||||
Balance at March 31, 2019 | ( | ) | ||||||||||||||||||||
Balance at January 1, 2020 | ( | ) | ||||||||||||||||||||
Net loss | ( | ) | ( | ) | ||||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||
Dividends paid: | ||||||||||||||||||||||
Common stock ($0.20 per share) | ( | ) | ( | ) | ||||||||||||||||||
Common stock issued for: | ||||||||||||||||||||||
Stock options exercised | ||||||||||||||||||||||
Other transactions | ||||||||||||||||||||||
Stock-based compensation | ( | ) | ( | ) | ||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||
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)
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Operating Activities | |||||||
Net (loss) income | $ | ( | ) | $ | |||
Adjustments to reconcile net (loss) income to net cash and cash equivalents provided by (used for) operating activities: | |||||||
Gain on disposition of non-consolidated affiliate | ( | ) | |||||
Stock-based compensation | |||||||
Depreciation and amortization | |||||||
Deferred income taxes | ( | ) | ( | ) | |||
Qualified pension plan contributions | ( | ) | ( | ) | |||
Qualified pension plan income | ( | ) | ( | ) | |||
Change in: | |||||||
Receivables | ( | ) | ( | ) | |||
Income taxes receivable/payable | ( | ) | ( | ) | |||
Inventories | ( | ) | |||||
Other current assets | ( | ) | ( | ) | |||
Accounts payable and accrued liabilities | ( | ) | ( | ) | |||
Other assets | |||||||
Other noncurrent liabilities | ( | ) | |||||
Other operating activities | ( | ) | |||||
Net operating activities | ( | ) | |||||
Investing Activities | |||||||
Capital expenditures | ( | ) | ( | ) | |||
Proceeds from disposition of non-consolidated affiliate | |||||||
Net investing activities | ( | ) | ( | ) | |||
Financing Activities | |||||||
Long-term debt: | |||||||
Borrowings | |||||||
Repayments | ( | ) | ( | ) | |||
Common stock repurchased and retired | ( | ) | |||||
Stock options exercised | |||||||
Dividends paid | ( | ) | ( | ) | |||
Debt issuance costs | ( | ) | |||||
Net financing activities | ( | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | |||
Net decrease in cash and cash equivalents | ( | ) | ( | ) | |||
Cash and cash equivalents, beginning of period | |||||||
Cash and cash equivalents, end of period | $ | $ | |||||
Cash paid for interest and income taxes: | |||||||
Interest, net | $ | $ | |||||
Income taxes, net of refunds | $ | $ | |||||
Non-cash investing activities: | |||||||
Decrease in capital expenditures included in accounts payable and accrued liabilities | $ | $ | |||||
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 manufacturer concentrated in three business segments: Chlor Alkali Products and Vinyls, Epoxy and Winchester. The Chlor Alkali Products and Vinyls segment manufactures and sells chlorine and caustic soda, ethylene dichloride (EDC) and vinyl chloride monomer, methyl chloride, methylene chloride, chloroform, carbon tetrachloride, perchloroethylene, trichloroethylene and vinylidene chloride, hydrochloric acid, hydrogen, bleach products and potassium hydroxide. The Epoxy segment produces and sells a full range of epoxy materials, including allyl chloride, epichlorohydrin, liquid epoxy resins, solid epoxy resins and downstream products such as differentiated epoxy resins and additives. The Winchester segment produces and sells sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges.
We have prepared the condensed financial statements included herein, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The preparation of the financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. In our opinion, these financial statements reflect all adjustments (consisting only of normal accruals), which are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are appropriate. We recommend that you read these condensed financial statements in conjunction with the financial statements, accounting policies and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019. Certain reclassifications were made to prior year amounts to conform to the 2020 presentation.
NOTE 2. RESTRUCTURING CHARGES
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. These closures are expected to be completed before the end of 2020. We expect to incur additional restructuring charges through 2024 of approximately $50 million related to these actions.
On December 10, 2018, we announced that we had made the decision to permanently close the ammunition assembly operations at our Winchester facility in Geelong, Australia. Subsequent to the facility’s closure, product for customers in the region will be sourced from Winchester manufacturing facilities located in the United States. For the three months ended March 31, 2019, we recorded pretax restructuring charges of $0.1 million for lease and other contract termination costs related to this action. For the three months ended March 31, 2019, we recorded additional pretax restructuring charges of $1.4 million for employee severance and related benefit costs related to our Winchester operations.
On March 21, 2016, we announced that we had made the decision to close a combined total of 433,000 tons of chlor alkali capacity across three separate locations. Associated with this action, we have permanently closed our Henderson, NV chlor alkali plant with 153,000 tons of capacity and have reconfigured the site to manufacture bleach and distribute caustic soda and hydrochloric acid. Also, the capacity of our Niagara Falls, NY chlor alkali plant has been reduced from 300,000 tons to 240,000 tons and the chlor alkali capacity at our Freeport, TX facility was reduced by 220,000 tons. This 220,000 ton reduction was entirely from diaphragm cell capacity. For the three months ended March 31, 2020 and 2019, we recorded pretax restructuring charges of $1.7 million and $2.5 million, respectively, for facility exit costs, employee severance and related benefit costs and lease and other contract termination costs related to these actions. We expect to incur additional restructuring charges through 2020 of approximately $5 million related to these capacity reductions.
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The following table summarizes the 2020 and 2019 activities by major component of these restructuring actions and the remaining balances of accrued restructuring costs as of March 31, 2020 and 2019:
Employee severance and related benefit costs | Lease and other contract termination costs | Facility exit costs | Total | ||||||||||||
($ in millions) | |||||||||||||||
Balance at January 1, 2019 | $ | $ | $ | $ | |||||||||||
Restructuring charges | |||||||||||||||
Amounts utilized | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Balance at March 31, 2019 | $ | $ | $ | $ | |||||||||||
Balance at January 1, 2020 | $ | $ | $ | $ | |||||||||||
Restructuring charges | |||||||||||||||
Amounts utilized | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Balance at March 31, 2020 | $ | $ | $ | $ | |||||||||||
The following table summarizes the cumulative restructuring charges of these restructuring actions by major component through March 31, 2020:
Chlor Alkali Products and Vinyls | Winchester | Total | |||||||||||||
Freeport | Capacity Reductions | ||||||||||||||
($ in millions) | |||||||||||||||
Write-off of equipment and facility | $ | $ | $ | $ | |||||||||||
Employee severance and related benefit costs | |||||||||||||||
Facility exit costs | |||||||||||||||
Employee relocation costs | |||||||||||||||
Lease and other contract termination costs | |||||||||||||||
Total cumulative restructuring charges | $ | $ | $ | $ | |||||||||||
As of March 31, 2020, we have incurred cash expenditures of $99.4 million and non-cash charges of $139.6 million related to these restructuring actions. The remaining balance of $3.0 million is expected to be paid out through 2021.
NOTE 3. ACCOUNTS RECEIVABLES
On July 16, 2019, our existing $250.0 million Receivables Financing Agreement was extended to July 15, 2022 and downsized to $10.0 million with the option to expand (Receivables Financing Agreement). During the three months ended March 31, 2020, we amended the Receivables Financing Agreement to expand the borrowing capacity and borrowed $150.0 million. During April 2020, we expanded the facility and borrowed an additional $100.0 million. The Receivables Financing Agreement includes a minimum borrowing requirement of 50 % of the available borrowing capacity or facility limit, whichever is greater, beginning on October 1, 2020. The administrative agent for our Receivables Financing Agreement is PNC Bank, National Association. 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 leverage covenant that is contained in the $2,000.0 million senior credit facility. As of March 31, 2020, $345.2 million of our trade receivables were pledged as collateral. As of March 31, 2020, we had $150.0 million drawn and no additional borrowing capacity under the Receivables Financing Agreement. As of December 31, 2019 and March 31, 2019, we had zero and $125.0 million, respectively, drawn under the Receivables Financing Agreement.
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Olin also has trade accounts receivable factoring arrangements (AR Facilities) and pursuant to the terms of the AR Facilities, certain of our subsidiaries may sell their accounts receivable up to a maximum of $315.0 million. We will continue to service the outstanding accounts sold. These receivables qualify for sales treatment under ASC 860 “Transfers and Servicing” and, accordingly, the proceeds are included in net cash provided by operating activities in the condensed statements of cash flows. The following table summarizes the AR Facilities activity:
March 31, | |||||||
2020 | 2019 | ||||||
($ in millions) | |||||||
Balance at beginning of year | $ | $ | |||||
Gross receivables sold | |||||||
Payments received from customers on sold accounts | ( | ) | ( | ) | |||
Balance at end of period | $ | $ | |||||
The factoring discount paid under the AR Facilities is recorded as interest expense on the condensed statements of operations. The factoring discount was $0.6 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively. The agreements are without recourse and therefore no recourse liability had been recorded as of March 31, 2020, December 31, 2019, or March 31, 2019.
NOTE 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLES
We evaluate the collectibility of financial instruments based on our current estimate of credit losses expected to be incurred over the life of the financial instrument. The only significant financial instrument which creates exposure to credit losses are customer accounts receivables. We measure credit losses on uncollected accounts receivable through an allowance for doubtful accounts receivable which is based on a combination of factors including both historical collection experience and reasonable estimates that affect the expected collectibility of the receivable. These factors include historical bad debt experience, industry conditions of the customer or group of customers, geographical region, credit ratings and general market conditions. We group receivables together for purposes of estimating credit losses when customers have similar risk characteristics; otherwise, the estimation is performed on the individual receivable.
This estimate is periodically adjusted when we become aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. While we have a large number of customers that operate in diverse businesses and are geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and, therefore, the need to revise estimates for the provision for doubtful accounts could occur.
Allowance for doubtful accounts receivables consisted of the following:
March 31, | |||||||
2020 | 2019 | ||||||
($ in millions) | |||||||
Balance at beginning of year | $ | $ | |||||
Provisions charged | |||||||
Write-offs, net of recoveries | ( | ) | |||||
Foreign currency translation adjustment | ( | ) | ( | ) | |||
Balance at end of period | $ | $ | |||||
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NOTE 5. INVENTORIES
Inventories consisted of the following:
March 31, 2020 | December 31, 2019 | March 31, 2019 | |||||||||
($ in millions) | |||||||||||
Supplies | $ | $ | $ | ||||||||
Raw materials | |||||||||||
Work in process | |||||||||||
Finished goods | |||||||||||
LIFO reserve | ( | ) | ( | ) | ( | ) | |||||
Inventories, net | $ | $ | $ | ||||||||
Inventories are valued at the lower of cost and net realizable value. For U.S. inventories, inventory costs are determined principally by the last-in, first-out (LIFO) method of inventory accounting while for international inventories, inventory costs are determined principally by the first-in, first-out (FIFO) method of inventory accounting. Cost for other inventories has been determined principally by the average-cost method (primarily operating supplies, spare parts and maintenance parts). Elements of costs in inventories included raw materials, direct labor and manufacturing overhead. Inventories under the LIFO method are based on annual estimates of quantities and costs as of year-end; therefore, the condensed financial statements at March 31, 2020 reflect certain estimates relating to inventory quantities and costs at December 31, 2020. The replacement cost of our inventories would have been approximately $42.6 million, $49.5 million and $70.6 million higher than reported at March 31, 2020, December 31, 2019 and March 31, 2019, respectively.
NOTE 6. OTHER ASSETS
Included in other assets were the following:
March 31, 2020 | December 31, 2019 | March 31, 2019 | |||||||||
($ in millions) | |||||||||||
Supply contracts | $ | $ | $ | ||||||||
Other | |||||||||||
Other assets | $ | $ | $ | ||||||||
On January 1, 2019, we sold our 9.1 % limited partnership interest in Bay Gas Storage Company, Ltd. (Bay Gas) for $20.0 million. The sale closed on February 7, 2019 which resulted in a gain of $11.2 million for the three months ended March 31, 2019 which was recorded to other income in the condensed statements of operations.
On October 5, 2015 (the Closing Date), we completed the acquisition (the Acquisition) from The Dow Chemical Company (Dow) of its U.S. Chlor Alkali and Vinyl, Global Chlorinated Organics and Global Epoxy businesses (collectively, the Acquired Business). In connection with the Acquisition, Olin and Dow entered into arrangements for the long-term supply of ethylene by Dow to Olin, pursuant to which, among other things, Olin made upfront payments in order to receive ethylene at producer economics and for certain reservation fees and for the option to obtain additional ethylene at producer economics. During 2016, we exercised one of the options to reserve additional ethylene at producer economics. During 2017, an additional payment of $209.4 million was made in connection with this option which increased the value of the long-term asset.
Amortization expense of $9.4 million for both the three months ended March 31, 2020 and 2019 was recognized within cost of goods sold related to these supply contracts and is reflected in depreciation and amortization on the condensed statements of cash flows. The long-term supply contracts are monitored for impairment each reporting period.
On February 27, 2017, we exercised the remaining option to reserve additional ethylene at producer economics from Dow. In connection with the exercise of this option, we also secured a long-term customer arrangement. As a result, an additional payment will be made to Dow that is not to exceed $493 million on or about the fourth quarter of 2020. Olin has recognized a long-term asset and other liability of $439.9 million, which represented the present value of the additional
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estimated payment. The discounted amount of $52.7 million will be recorded as interest expense through the fourth quarter of 2020. For both the three months ended March 31, 2020 and 2019, $4.0 million of interest expense was recorded for accretion on the 2020 payment discount. The liability balance as of March 31, 2020 of $480.8 million was reclassified to accrued liabilities from other liabilities on the condensed balance sheet.
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of goodwill were as follows:
Chlor Alkali Products and Vinyls | Epoxy | Total | |||||||||
($ in millions) | |||||||||||
Balance at January 1, 2019 | $ | $ | $ | ||||||||
Foreign currency translation adjustment | ( | ) | ( | ) | |||||||
Balance at March 31, 2019 | $ | $ | $ | ||||||||
Balance at January 1, 2020 | $ | $ | |||||||||
Foreign currency translation adjustment | ( | ) | ( | ) | |||||||
Balance at March 31, 2020 | $ | $ | $ | ||||||||
Goodwill is not amortized, but is reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred. Circumstances that are considered as part of the qualitative assessment and could trigger a quantitative impairment test include, but are not limited to: a significant adverse change in the business climate; a significant adverse legal judgment; adverse cash flow trends; an adverse action or assessment by a government agency; unanticipated competition; sustained decline in our stock price; and a significant restructuring charge within a reporting unit. During the three months ended March 31, 2020, we identified triggering events associated with an overall decrease in our stock price, an adverse change in the business climate and a significant reduction in near-term cash flow projections. As a result of these events, we performed a quantitative goodwill impairment test during the first quarter of 2020. We used a discounted cash flow approach to develop the estimated fair value of our reporting units. Based on the aforementioned analysis, the estimated fair value of our reporting units exceeded the carrying value of the reporting units and no impairment charges were recorded.
The discount rate, profitability assumptions and terminal growth rate of our reporting units and the cyclical nature of the chlor alkali industry were the material assumptions utilized in the discounted cash flow model used to estimate the fair value of each reporting unit. The discount rate reflects a weighted-average cost of capital, which is calculated based on observable market data. Some of this data (such as the risk free or treasury rate and the pretax cost of debt) are based on the market data at a point in time. Other data (such as the equity risk premium) are based upon market data over time for a peer group of companies in the chemical manufacturing or distribution industries with a market capitalization premium added, as applicable.
The discounted cash flow analysis requires estimates, assumptions and judgments about future events. Our analysis uses our internally generated long-range plan. Our discounted cash flow analysis uses the assumptions in our long-range plan about terminal growth rates, forecasted capital expenditures and changes in future working capital requirements to determine the implied fair value of each reporting unit. The long-range plan reflects management judgment, supplemented by independent chemical industry analyses which provide multi-year chlor alkali industry operating and pricing forecasts.
We believe the assumptions used in our goodwill impairment analysis are appropriate and result in reasonable estimates of the implied fair value of each reporting unit. However, given the economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions, made for purposes of our goodwill impairment testing, will prove to be an accurate prediction of the future. In order to evaluate the sensitivity of the fair value calculation on the goodwill impairment test, we applied three separate sensitivities: a hypothetical 10% decrease to the fair value of each reporting unit, a hypothetical decrease of 100-basis points in our terminal growth rate and an increase of 100-basis points in our weighted-average cost of capital to test the fair value calculation. The hypothetical 10% decrease to the fair value of our Chlor Alkali Products and Vinyls reporting unit exceeded the carrying value of the reporting unit, but was not significantly in excess of the carrying value. In all other cases, the estimated fair value of our Epoxy and Chlor Alkali Products and Vinyls reporting units derived in these sensitivity calculations did not exceed the carrying value of our reporting units. If our assumptions regarding future performance are not achieved, we may be required to record goodwill impairment charges in
12
future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
Intangible assets consisted of the following:
March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||||||||||||||||||||||||||||||
Gross Amount | Accumulated Amortization | Net | Gross Amount | Accumulated Amortization | Net | Gross Amount | Accumulated Amortization | Net | ||||||||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||||||||||||||
Customers, customer contracts and relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
Trade name | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Acquired technology | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Other | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
NOTE 8. EARNINGS PER SHARE
Basic and diluted net (loss) income per share are computed by dividing net (loss) income by the weighted-average number of common shares outstanding. Diluted net (loss) income per share reflects the dilutive effect of stock-based compensation.
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Computation of Net (Loss) Income per Share | (In millions, except per share data) | ||||||
Net (loss) income | $ | ( | ) | $ | |||
Basic shares | |||||||
Basic net (loss) income per share | $ | ( | ) | $ | |||
Diluted shares: | |||||||
Basic shares | |||||||
Stock-based compensation | |||||||
Diluted shares | |||||||
Diluted net (loss) income per share | $ | ( | ) | $ | |||
The computation of dilutive shares does not include 10.5 million and 5.6 million shares for the three months ended March 31, 2020 and 2019, respectively, as their effect would have been anti-dilutive.
NOTE 9. 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 $139.1 million, $139.0 million and $125.5 million at March 31, 2020, December 31, 2019 and March 31, 2019, respectively, of which $122.1 million, $122.0 million and $108.5 million, respectively, were classified as other noncurrent liabilities.
Environmental provisions charged to income, which are included in costs of goods sold, were $2.6 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively.
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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.
In connection with the October 5, 2015 acquisition of Dow’s U.S. Chlor Alkali and Vinyl, Global Chlorinated Organics and Global Epoxy businesses, the prior owner of the businesses retained liabilities relating to releases of hazardous materials and violations of environmental law to the extent arising prior to October 5, 2015.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Olin and Oxy Vinyls, L.P. (Oxy) have a long-term chlorine supply agreement, which is the subject of a pricing dispute. The dispute is pending in the United States District Court for the Southern District of Texas, and we currently anticipate trial will be scheduled for third quarter 2020. Any additional losses related to this contract dispute are not currently estimable because of unresolved questions of fact and law but, if resolved unfavorably to Olin, they could have a material adverse effect on our financial position, cash flows or results of operations.
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 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. directly from one or more of the defendants, their parents, predecessors, subsidiaries or affiliates at any time between October 1, 2015 and the present. 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 between October 1, 2015 and the present. The other defendants named in the lawsuits are Occidental Petroleum Corporation, Occidental Chemical Corporation d/b/a OxyChem, Westlake Chemical Corporation, 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 and stabilize the price of caustic soda, restrict domestic (U.S.) supply of caustic soda and allocate caustic soda customers. Plaintiffs seek an unspecified amount of damages and injunctive relief. We believe we have meritorious legal positions and will continue to represent our interests vigorously in this matter. Any losses related to this matter 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.
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 March 31, 2020, December 31, 2019 and March 31, 2019, our condensed balance sheets included accrued liabilities for these other legal actions of $12.0 million, $12.4 million and $15.8 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. In connection with the October 5, 2015 acquisition of Dow’s U.S. Chlor Alkali and Vinyl, Global Chlorinated Organics and Global Epoxy businesses, the prior owner of the businesses retained liabilities related to litigation to the extent arising prior to October 5, 2015.
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.
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NOTE 11. SHAREHOLDERS’ EQUITY
On April 26, 2018, our board of directors authorized a share repurchase program for the purchase of shares of common stock at an aggregate price of up to $500.0 million. This program will terminate upon the purchase of $500.0 million of our common stock.
There were no shares repurchased for the three months ended March 31, 2020. For the three months ended March 31, 2019, 0.6 million shares were repurchased and retired at a cost of $13.2 million. As of March 31, 2020, we had repurchased a total of $195.9 million of our common stock, representing 10.1 million shares, and $304.1 million of common stock remained authorized to be repurchased.
We issued less than 0.1 million and 0.1 million shares representing stock options exercised for the three months ended March 31, 2020 and 2019, respectively, with a total value of $0.7 million and $1.4 million, respectively.
The following table represents the activity included in accumulated other comprehensive loss:
Foreign Currency Translation Adjustment (net of taxes) | Unrealized Gains (Losses) on Derivative Contracts (net of taxes) | Pension and Other Postretirement Benefits (net of taxes) | Accumulated Other Comprehensive Loss | ||||||||||||
($ in millions) | |||||||||||||||
Balance at January 1, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | |||||||
Unrealized losses | ( | ) | ( | ) | ( | ) | |||||||||
Reclassification adjustments of losses into income | |||||||||||||||
Tax benefit (provision) | ( | ) | ( | ) | |||||||||||
Net change | ( | ) | ( | ) | ( | ) | |||||||||
Balance at March 31, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Balance at January 1, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Unrealized losses | ( | ) | ( | ) | ( | ) | |||||||||
Reclassification adjustments of losses into income | |||||||||||||||
Tax benefit (provision) | ( | ) | |||||||||||||
Net change | ( | ) | ( | ) | ( | ) | |||||||||
Balance at March 31, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Net (loss) income, interest expense and cost of goods sold included reclassification adjustments for realized gains and losses on derivative contracts from accumulated other comprehensive loss.
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NOTE 12. 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 used in our Epoxy segment is transferred at cost from the Chlor Alkali Products and Vinyls segment. Sales and profits are recognized in the Chlor Alkali Products and Vinyls segment for all caustic soda generated and sold by Olin. Sales are attributed to geographic areas based on customer location.
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Sales: | ($ in millions) | ||||||
Chlor Alkali Products and Vinyls | $ | $ | |||||
Epoxy | |||||||
Winchester | |||||||
Total sales | $ | $ | |||||
Income (loss) before taxes: | |||||||