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, 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, bisphenol, cumene and phenol), allyl chloride, epichlorohydrin, liquid epoxy resins, solid epoxy resins and downstream products such as converted epoxy resins and additives. The Winchester segment produces and sells sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges.
We have prepared the condensed financial statements included herein, without audit, pursuant to the rules and regulations of the 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, 2021. Certain reclassifications were made to prior year amounts to conform to the 2022 presentation.
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
Olin committed to a productivity initiative to align the organization with our new operating model and improve efficiencies (collectively, Productivity Plan). These actions and related activities were completed during the second quarter of 2021. We recorded pretax restructuring charges of $10.3 million for employee severance and related benefit costs related to these actions in the second quarter of 2021. We do not expect to incur additional restructuring charges related to these actions.
On March 15, 2021, we announced that we had made the decision to permanently close approximately 50% of our diaphragm-grade chlor alkali capacity, representing 200,000 tons, at our McIntosh, AL facility. The closure was completed in the first quarter of 2021. On October 21, 2021, we announced that we had made a decision to permanently cease operations of the remaining 50% of our diaphragm-grade chlor alkali capacity, representing an additional 200,000 tons, at our McIntosh, AL facility (collectively, McIntosh Plan). The closure is expected to be completed by the end of the third quarter of 2022. For the three months ended March 31, 2022 and 2021, we recorded pretax restructuring charges of $0.9 million and $4.4 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 2026 of approximately $35 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 March 31, 2022 and 2021, we recorded pretax restructuring charges of $0.3 million and $1.3 million for facility exit costs related to these actions. We expect to incur additional restructuring charges through 2024 of approximately $20 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 March 31, 2022 and 2021, we recorded pretax restructuring charges of $1.7 million and $0.8 million, respectively, for facility exit costs related to these actions. We expect to incur additional restructuring charges through 2025 of approximately $40 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). 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, 2022 and 2021, 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 expect to incur additional restructuring charges through 2022 of approximately $1 million related to these capacity reductions.
The following table summarizes the 2022 and 2021 activities by major component of these restructuring actions and the remaining balances of accrued restructuring costs as of March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Employee severance and related benefit costs | | Lease and other contract termination costs | | Facility exit costs | | Write-off of equipment and facility | | Total |
| | ($ in millions) |
| Balance at January 1, 2021 | $ | 1.8 | | | $ | 1.7 | | | $ | — | | | $ | — | | | $ | 3.5 | |
| | | | | | | | | |
| Restructuring charges | — | | | 4.6 | | | 2.3 | | | — | | | 6.9 | |
| | | | | | | | | |
| | | | | | | | | |
| Amounts utilized | (0.4) | | | (0.1) | | | (2.3) | | | — | | | (2.8) | |
| Balance at March 31, 2021 | $ | 1.4 | | | $ | 6.2 | | | $ | — | | | $ | — | | | $ | 7.6 | |
| Balance at January 1, 2022 | $ | 6.9 | | | $ | 5.4 | | | $ | — | | | $ | — | | | $ | 12.3 | |
| | | | | | | | | |
| Restructuring charges | — | | | 0.1 | | | 2.6 | | | 0.4 | | | 3.1 | |
| | | | | | | | | |
| | | | | | | | | |
| Amounts utilized | (2.0) | | | (0.2) | | | (2.6) | | | (0.4) | | | (5.2) | |
| Balance at March 31, 2022 | $ | 4.9 | | | $ | 5.3 | | | $ | — | | | $ | — | | | $ | 10.2 | |
The following table summarizes the cumulative restructuring charges of these restructuring actions by major component through March 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Chlor Alkali Products and Vinyls | | Corporate/other | | Total |
| | | McIntosh Plan | | Freeport 2021 Plan | | Freeport 2019 Plan | | Chlor Alkali 2016 Plan | | Productivity Plan | |
| | | ($ in millions) |
| Write-off of equipment and facility | | $ | — | | | $ | — | | | $ | 58.9 | | | $ | 78.1 | | | $ | — | | | $ | 137.0 | |
| Employee severance and related benefit costs | | — | | | — | | | 2.1 | | | 6.7 | | | 10.3 | | | 19.1 | |
| Facility exit costs | | 0.5 | | | 6.8 | | | 7.3 | | | 53.2 | | | — | | | 67.8 | |
| Employee relocation costs | | — | | | — | | | — | | | 1.7 | | | — | | | 1.7 | |
| Lease and other contract termination costs | | 6.0 | | | — | | | — | | | 42.8 | | | — | | | 48.8 | |
| Total cumulative restructuring charges | | $ | 6.5 | | | $ | 6.8 | | | $ | 68.3 | | | $ | 182.5 | | | $ | 10.3 | | | $ | 274.4 | |
As of March 31, 2022, we have incurred cash expenditures of $125.7 million and non-cash charges of $138.5 million related to these restructuring actions. The remaining balance of $10.2 million is expected to be paid out through 2028.
NOTE 4. ACCOUNTS RECEIVABLES
We maintain a $300.0 million Receivables Financing Agreement (Receivables Financing Agreement) that is scheduled to mature on September 28, 2024. The Receivables Financing Agreement includes a minimum borrowing requirement of 50% of the facility limit or available borrowing capacity, whichever is less. 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 $1,615.0 million senior credit facility. As of March 31, 2022, $642.4 million of our trade receivables were pledged as collateral and we had $300.0 million drawn with no additional borrowing capacity available under the Receivables Financing Agreement. As of December 31, 2021 and March 31, 2021, we had $300.0 million and $125.0 million, respectively, drawn under the Receivables Financing Agreement.
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 $250.0 million and certain of our foreign subsidiaries may sell their accounts receivable up to a maximum of €43.4 million. We will continue to service the outstanding accounts sold. These receivables qualify for sales treatment under ASC 860 “Transfers and Servicing” and, accordingly, the proceeds are included in net cash provided by operating activities in the condensed statements of cash flows. The following table summarizes the AR Facilities activity:
| | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
| ($ in millions) |
| Balance at beginning of year | $ | 83.3 | | | $ | 48.8 | |
| Gross receivables sold | 281.4 | | | 312.0 | |
| Payments received from customers on sold accounts | (266.8) | | | (218.3) | |
| Balance at end of period | $ | 97.9 | | | $ | 142.5 | |
The factoring discount paid under the AR Facilities is recorded as interest expense on the condensed statements of operations. The factoring discount was $0.5 million and $0.4 million for the three months ended March 31, 2022 and 2021, respectively. The agreements are without recourse and therefore no recourse liability had been recorded as of March 31, 2022, December 31, 2021 or March 31, 2021.
Our condensed balance sheets included an allowance for doubtful accounts receivables of $15.2 million, $12.3 million and $12.2 million and other receivables of $65.6 million, $65.3 million and $60.3 million at March 31, 2022, December 31, 2021 and March 31, 2021, respectively, which were included in receivables, net.
NOTE 5. INVENTORIES
Inventories consisted of the following: | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31,
2021 | | March 31, 2021 |
| | ($ in millions) |
| Supplies | $ | 131.4 | | | $ | 115.6 | | | $ | 113.9 | |
| Raw materials | 189.4 | | | 180.7 | | | 123.1 | |
| Work in process | 175.2 | | | 155.2 | | | 134.3 | |
| Finished goods | 557.3 | | | 523.3 | | | 366.2 | |
| Inventories excluding LIFO reserve | 1,053.3 | | | 974.8 | | | 737.5 | |
| LIFO reserve | (144.1) | | | (106.5) | | | (58.0) | |
| Inventories, net | $ | 909.2 | | | $ | 868.3 | | | $ | 679.5 | |
Inventories are valued at the lower of cost and net realizable value. For U.S. inventories, inventory costs are determined principally by the 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, 2022 reflect certain estimates relating to inventory quantities and costs at December 31, 2022. The replacement cost of our inventories would have been approximately $144.1 million, $106.5 million and $58.0 million higher than reported at March 31, 2022, December 31, 2021 and March 31, 2021, respectively.
NOTE 6. OTHER ASSETS
Included in other assets were the following:
| | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
| ($ in millions) |
| Supply contracts | $ | 1,044.6 | | | $ | 1,061.8 | | | $ | 1,106.2 | |
| Other | 71.7 | | | 70.0 | | | 64.8 | |
| Other assets | $ | 1,116.3 | | | $ | 1,131.8 | | | $ | 1,171.0 | |
Amortization expense of $17.6 million and $17.5 million for the three months ended March 31, 2022 and 2021, respectively, was recognized within cost of goods sold related to our long-term supply contracts and is reflected in depreciation and amortization on the condensed statements of cash flows. The long-term supply contracts are monitored for impairment each reporting period.
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of goodwill were as follows:
| | | | | | | | | | | | | | | | | |
| Chlor Alkali Products and Vinyls | | Epoxy | | Total |
| ($ in millions) |
| Balance at January 1, 2021 | $ | 1,275.3 | | | $ | 144.9 | | | $ | 1,420.2 | |
| Foreign currency translation adjustment | (0.1) | | | — | | | (0.1) | |
| Balance at March 31, 2021 | $ | 1,275.2 | | | $ | 144.9 | | | $ | 1,420.1 | |
| Balance at January 1, 2022 | $ | 1,275.6 | | | $ | 145.0 | | | $ | 1,420.6 | |
| Foreign currency translation adjustment | 0.1 | | | — | | | 0.1 | |
| Balance at March 31, 2022 | $ | 1,275.7 | | | $ | 145.0 | | | $ | 1,420.7 | |
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
| Gross Amount | | Accumulated Amortization | | Net | | Gross Amount | | Accumulated Amortization | | Net | | Gross Amount | | Accumulated Amortization | | Net |
| ($ in millions) |
Customers, customer contracts and relationships | $ | 672.0 | | | $ | (371.4) | | | $ | 300.6 | | | $ | 674.4 | | | $ | (359.8) | | | $ | 314.6 | | | $ | 677.2 | | | $ | (323.5) | | | $ | 353.7 | |
Acquired technology | 93.5 | | | (80.7) | | | 12.8 | | | 93.9 | | | (77.9) | | | 16.0 | | | 94.3 | | | (68.2) | | | 26.1 | |
| Other | 1.8 | | | (0.7) | | | 1.1 | | | 1.8 | | | (0.7) | | | 1.1 | | | 1.8 | | | (0.6) | | | 1.2 | |
Total intangible assets | $ | 767.3 | | | $ | (452.8) | | | $ | 314.5 | | | $ | 770.1 | | | $ | (438.4) | | | $ | 331.7 | | | $ | 773.3 | | | $ | (392.3) | | | $ | 381.0 | |
NOTE 8. EARNINGS PER SHARE
Basic and diluted net income per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per share reflects the dilutive effect of stock-based compensation.
| | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
| Computation of Net Income per Share | | | | | (In millions, except per share data) |
| Net income | | | | | $ | 393.0 | | | $ | 243.6 | |
| Basic shares | | | | | 154.7 | | | 158.6 | |
| Basic net income per share | | | | | $ | 2.54 | | | $ | 1.54 | |
| Diluted shares: | | | | | | | |
| Basic shares | | | | | 154.7 | | | 158.6 | |
| Stock-based compensation | | | | | 3.9 | | | 2.2 | |
| Diluted shares | | | | | 158.6 | | | 160.8 | |
| Diluted net income per share | | | | | $ | 2.48 | | | $ | 1.51 | |
The computation of dilutive shares does not include 0.8 million and 3.2 million shares for the three months ended March 31, 2022 and 2021, 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. Environmental provisions charged to income, which are included in costs of goods sold, were as follows:
| | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
| | | | | | ($ in millions) |
| Provisions charged to income | | | | | $ | 5.6 | | | $ | 2.5 | |
| Recoveries for costs incurred and expensed | | | | | — | | | (2.2) | |
| Environmental expense | | | | | $ | 5.6 | | | $ | 0.3 | |
Environmental expense for the three months ended March 31, 2021 includes $2.2 million of insurance recoveries for environmental costs incurred and expensed in prior periods. The condensed balance sheets included reserves for future environmental expenditures to investigate and remediate known sites amounting to $149.5 million, $147.3 million and $147.2 million at March 31, 2022, December 31, 2021 and March 31, 2021, respectively, of which $124.5 million, $122.3 million and $128.2 million, respectively, were classified as other noncurrent liabilities.
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 10. 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 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 on or after October 1, 2015. 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. The other current defendants in the 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 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.
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 an unspecified amount of damages, including punitive damages.
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, 2022, December 31, 2021 and March 31, 2021, our condensed balance sheets included accrued liabilities for these other legal actions of $13.5 million, $14.2 million and $13.8 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.
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 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 terminated upon the purchase of $500.0 million of our common stock during the first quarter of 2022. On November 1, 2021, our board of directors authorized an additional share repurchase program for the purchase of shares of common stock at an aggregate price of up to $1.0 billion. This program will terminate upon the purchase of $1.0 billion of our common stock.
For the three months ended March 31, 2022, 5.2 million shares of common stock were repurchased and retired at a total value of $263.2 million. There were zero shares repurchased for the three months ended March 31, 2021. As of March 31,
2022, a total of 15.7 million shares of common stock were repurchased and retired at a total value of $500.0 million under the 2018 Repurchase Authorization program, terminating the program. As of March 31, 2022, 4.3 million shares of common stock have been repurchased and retired at a total value of $211.0 million under the 2021 Repurchase Authorization program, and $789.0 million of common stock remained authorized to be repurchased under the program.
We issued 0.2 million and 1.2 million shares representing stock options exercised for the three months ended March 31, 2022 and 2021, respectively, with a total value of $5.2 million and $25.7 million, respectively.
The following table represents the activity included in accumulated other comprehensive loss:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustment (net of taxes) | | Unrealized (Losses) Gains on Derivative Contracts (net of taxes) | | Pension and Other Postretirement Benefits (net of taxes) | | Accumulated Other Comprehensive Loss |
| | ($ in millions) |
| Balance at January 1, 2021 | $ | 19.4 | | | $ | 21.4 | | | $ | (730.7) | | | $ | (689.9) | |
| | | | | | | |
| Unrealized (losses) gains | (11.4) | | | 122.0 | | | — | | | 110.6 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Reclassification adjustments of (gains) losses into income | — | | | (112.8) | | | 13.7 | | | (99.1) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Tax provision | — | | | (2.2) | | | (3.1) | | | (5.3) | |
| | | | | | | |
| | | | | | | |
| Net change | (11.4) | | | 7.0 | | | 10.6 | | | 6.2 | |
| Balance at March 31, 2021 | $ | 8.0 | | | $ | 28.4 | | | $ | (720.1) | | | $ | (683.7) | |
| Balance at January 1, 2022 | $ | (10.9) | | | $ | 22.8 | | | $ | (499.9) | | | $ | (488.0) | |
| | | | | | | |
| Unrealized (losses) gains | (10.5) | | | 52.8 | | | — | | | 42.3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Reclassification adjustments of (gains) losses into income | — | | | (12.4) | | | 8.9 | | | (3.5) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Tax provision | — | | | (9.7) | | | (2.3) | | | (12.0) | |
| | | | | | | |
| | | | | | | |
| Net change | (10.5) | | | 30.7 | | | 6.6 | | | 26.8 | |
| Balance at March 31, 2022 | $ | (21.4) | | | $ | 53.5 | | | $ | (493.3) | | | $ | (461.2) | |
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.
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 are attributed to geographic areas based on customer location.
| | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
| Sales: | | | | | ($ in millions) |
| Chlor Alkali Products and Vinyls | | | | | $ | 1,245.2 | | | $ | 867.0 | |
| Epoxy | | | | | 789.5 | | | 662.6 | |
| Winchester | | | | | 426.7 | | | 389.2 | |
| Total sales | | | | | $ | 2,461.4 | | | $ | 1,918.8 | |
| Income before taxes: | | | | | | | |
| Chlor Alkali Products and Vinyls | | | | | $ | 328.6 | | | $ | 271.1 | |
| Epoxy | | | | | 138.0 | | | 65.2 | |
| Winchester | | | | | 118.9 | | | 85.1 | |
| Corporate/other: | | | | | | | |
| Environmental expense | | | | | (5.6) | | | (0.3) | |
| Other corporate and unallocated costs | | | | | (30.3) | | | (33.0) | |
| Restructuring charges | | | | | (3.1) | | | (6.9) | |
| Interest expense | | | | | (32.9) | | | (84.5) | |
| Interest income | | | | | 0.4 | | | 0.1 | |
| Non-operating pension income | | | | | 9.6 | | | 9.3 | |
| Income before taxes | | | | | $ | 523.6 | | | $ | 306.1 | |
| | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
| Sales by geography: | | | | | ($ in millions) |
| Chlor Alkali Products and Vinyls | | | | | | | |
| United States | | | | | $ | 819.4 | | | $ | 577.0 | |
| Europe | | | | | 70.4 | | | 29.5 | |
| Other foreign | | | | | 355.4 | | | 260.5 | |
| Total Chlor Alkali Products and Vinyls | | | | | 1,245.2 | | | 867.0 | |
| Epoxy | | | | | | | |
| United States | | | | | 242.8 | | | 158.3 | |
| Europe | | | | | 359.0 | | | 320.0 | |
| Other foreign | | | | | 187.7 | | | 184.3 | |
| Total Epoxy | | | | | 789.5 | | | 662.6 | |
| Winchester | | | | | | | |
| United States | | | | | 401.9 | | | 365.0 | |
| Europe | | | | | 2.7 | | | 3.8 | |
| Other foreign | | | | | 22.1 | | | 20.4 | |
| Total Winchester | | | | | 426.7 | | | 389.2 | |
| Total | | | | | | | |
| United States | | | | | 1,464.1 | | | 1,100.3 | |
| Europe | | | | | 432.1 | | | 353.3 | |
| Other foreign | | | | | 565.2 | | | 465.2 | |
| Total sales | | | | | $ | 2,461.4 | | | $ | 1,918.8 | |
| | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
| Sales by product line: | | | | | ($ in millions) |
| Chlor Alkali Products and Vinyls | | | | | | | |
| Caustic soda | | | | | $ | 518.9 | | | $ | 347.0 | |
| Chlorine, chlorine-derivatives and other co-products | | | | | 726.3 | | | 520.0 | |
| Total Chlor Alkali Products and Vinyls | | | | | 1,245.2 | | | 867.0 | |
| Epoxy | | | | | | | |
| Aromatics and allylics | | | | | 392.0 | | | 312.0 | |
| Epoxy resins | | | | | 397.5 | | | 350.6 | |
| Total Epoxy | | | | | 789.5 | | | 662.6 | |
| Winchester | | | | | | | |
| Commercial | | | | | 314.2 | | | 261.0 | |
| Military and law enforcement | | | | | 112.5 | | | 128.2 | |
| Total Winchester | | | | | 426.7 | | | 389.2 | |
| Total sales | | | | | $ | 2,461.4 | | | $ | 1,918.8 | |
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 March 31, |
| | | | | | 2022 | | 2021 |
| | | | | | ($ in millions) |
| Stock-based compensation | | | | | $ | 4.7 | | | $ | 4.7 | |
| Mark-to-market adjustments | | | | | (2.9) | | | 8.1 | |
| Total expense | | | | | $ | 1.8 | | | $ | 12.8 | |
The fair value of each stock option granted, which typically vests ratably over three years, but not less than one year, was estimated on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| | | | | |
| Grant date | 2022 |
| Dividend yield | 1.60 | % |
| Risk-free interest rate | 1.93 | % |
| Expected volatility of Olin common stock | 48 | % |
| Expected life (years) | 7.0 |
| Weighted-average grant fair value (per option) | $ | 21.18 |
| Weighted-average exercise price | $ | 49.71 |
| Options granted | 729,600 |
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 of Olin common stock was based on our historical stock price movements, as we believe that historical experience is the best available indicator of the expected volatility. Expected life of the option grant was based on historical exercise and cancellation patterns, as we believe that historical experience is the best estimate of future exercise patterns.
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. The fair value of each performance stock award based on net income was estimated on the date of grant, using the current stock price. The fair value of each performance stock 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 | 2022 |
| Risk-free interest rate | 1.74 | % |
| Expected volatility of Olin common stock | 59 | % |
| Expected average volatility of peer companies | 47 | % |
| Average correlation coefficient of peer companies | 0.51 |
| Expected life (years) | 3.0 |
| Grant date fair value (TSR based award) | $ | 64.13 |
| Grant date fair value (net income based award) | $ | 49.71 |
| Awards granted | 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 stock 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. DEBT
Senior Credit Facility
On February 24, 2021, we entered into a $1,615.0 million senior secured credit facility (Senior Credit Facility) that amended our existing $1,300.0 million senior secured credit facility. On July 28, 2021, the liens on the collateral provided under the Senior Credit Facility were released based on the achievement of a net leverage ratio below 3.50 for the prior two consecutive fiscal quarters. The Senior Credit Facility includes a senior delayed-draw term loan facility with aggregate commitments of $315.0 million (Delayed Draw Term Loan), a senior term loan facility with aggregate commitments of $500.0 million (2020 Term Loan and together with the Delayed Draw Term Loan, the Senior Term Loans) and a senior revolving credit facility with aggregate commitments in an amount equal to $800.0 million (Senior Revolving Credit Facility). The maturity date for the Senior Credit Facility is July 16, 2024. The amendment modified the pricing grid for the Senior Credit Facility by reducing applicable interest rates on the borrowings under the facility.
On March 30, 2021, Olin drew the entire $315.0 million of the Delayed Draw Term Loan and used the proceeds to fund the redemption of the 10.00% senior notes due October 15, 2025 (2025 Notes). During 2021, we repaid $465.0 million of the Senior Term Loans. These repayments satisfied all future required quarterly installments of the Senior Term Loans. The Senior Revolving Credit Facility includes a $100.0 million letter of credit subfacility. At March 31, 2022, we had $799.6 million available under our $800.0 million Senior Revolving Credit Facility because we had issued $0.4 million of letters of credit.
Under the Senior Credit Facility, we may select various floating-rate borrowing options. The actual interest rate paid on borrowings under the Senior Credit Facility is based on a pricing grid which is dependent upon the net leverage ratio as calculated under the terms of the applicable facility for the prior fiscal quarter. The Senior Credit Facility includes various customary restrictive covenants, including restrictions related to the ratio of debt to earnings before interest expense, taxes, depreciation and amortization (net leverage ratio) and the ratio of earnings before interest expense, taxes, depreciation and amortization to interest expense (coverage ratio). The calculation of debt in our net leverage ratio excludes borrowings under the Receivables Financing Agreement, up to a maximum of $250.0 million, and is reduced by all unrestricted cash and cash equivalents. Compliance with these covenants is determined quarterly. We were in compliance with all covenants and restrictions under all our outstanding credit agreements as of March 31, 2022, 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 March 31, 2022, there were no covenants or other restrictions that limited our ability to borrow.
Other Financing
Interest expense for the three months ended March 31, 2021 included a loss on extinguishment of debt of $23.5 million, which included $18.7 million of bond redemption premiums and $4.8 million for write-off of deferred debt issuance costs and recognition of deferred fair value interest rate swap losses related to financing transactions during first quarter 2021. The cash payments related to the early redemption premiums for the debt extinguishments are classified as cash outflows from financing activities on the consolidated statements of cash flows for the three months ended March 31, 2021. The condensed statement of cash flows reflects a correction to the loss on debt extinguishment and early redemption premiums from the previously issued condensed statement of cash flows for the three months ended March 31, 2021, which increased cash flows from net operating activities and decreased cash flows from net financing activities by $18.7 million.
For the three months ended March 31, 2021, we paid debt issuance costs of $3.1 million primarily for the amendments to our Senior Credit Facility.
NOTE 15. 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 March 31, 2022 and 2021 was $10.6 million and $8.7 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 March 31, 2022 and 2021 were $3.1 million and $3.2 million, respectively.
NOTE 16. PENSION PLANS AND RETIREMENT BENEFITS
We sponsor domestic and foreign defined benefit pension plans for eligible employees and retirees. Most of our domestic employees participate in defined contribution plans. However, a portion of our bargaining hourly employees continue to participate in our domestic qualified defined benefit pension plans under a flat-benefit formula. Our funding policy for the qualified defined benefit pension plans is consistent with the requirements of federal laws and regulations. Our foreign subsidiaries maintain pension and other benefit plans, which are consistent with local statutory practices.
Our domestic qualified defined benefit pension plan provides that if, within three years following a change of control of Olin, any corporate action is taken or filing made in contemplation of, among other things, a plan termination or merger or other transfer of assets or liabilities of the plan, and such termination, merger, or transfer thereafter takes place, plan benefits would automatically be increased for affected participants (and retired participants) to absorb any plan surplus (subject to applicable collective bargaining requirements).
We also provide certain postretirement healthcare (medical) and life insurance benefits for eligible active and retired domestic employees. The healthcare plans are contributory with participants’ contributions adjusted annually based on medical rates of inflation and plan experience.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| | Three Months Ended March 31, | | Three Months Ended March 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Components of Net Periodic Benefit (Income) Cost | ($ in millions) |
| Service cost | $ | 2.3 | | | $ | 3.0 | | | $ | 0.3 | | | $ | 0.4 | |
| Interest cost | 15.4 | | | 12.8 | | | 0.3 | | | 0.3 | |
| Expected return on plans’ assets | (34.2) | | | (36.1) | | | — | | | — | |
| Amortization of prior service cost | (0.2) | | | (0.1) | | | — | | | — | |
| Recognized actuarial loss | 8.6 | | | 13.1 | | | 0.5 | | | 0.7 | |
| Net periodic benefit (income) cost | $ | (8.1) | | | $ | (7.3) | | | $ | 1.1 | | | $ | 1.4 | |
We made cash contributions to our international qualified defined benefit pension plans of $0.4 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively.
NOTE 17. INCOME TAXES
The effective tax rate for the three months ended March 31, 2022 included a benefit associated with prior year tax, stock-based compensation and a change in tax contingencies, resulting in a net $2.3 million tax benefit. After giving consideration to these items, the effective tax rate for the three months ended March 31, 2022 of 25.4% 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. The effective tax rate for the three months ended March 31, 2021 included a benefit associated with prior year tax positions, a benefit associated with stock-based compensation, an expense from remeasurement of deferred taxes due to an increase in our state effective tax rates and an expense from a change in tax contingencies. These factors resulted in a net $1.3 million tax benefit. After giving consideration to these items, the effective tax rate for the three months ended March 31, 2021 of 20.8% was lower than the 21% U.S. federal statutory rate primarily due to a net decrease in
the valuation allowance related to losses in foreign jurisdictions and favorable permanent salt depletion deductions, partially offset by state taxes, foreign income inclusions and foreign income taxes.
As of March 31, 2022, we had $45.1 million of gross unrecognized tax benefits, which would have a net $44.6 million impact on the effective tax rate, if recognized. As of March 31, 2021, we had $21.6 million of gross unrecognized tax benefits, of which $21.5 million would have impacted the effective tax rate, if recognized. The amount of unrecognized tax benefits was as follows:
| | | | | | | | | | | |
| | March 31, |
| | 2022 | | 2021 |
| | ($ in millions) |
| Balance at beginning of year | $ | 43.4 | | | $ | 21.3 | |
| Decreases for prior year tax positions | (0.7) | | | — | |
| Increases for current year tax positions | 3.1 | | | 0.3 | |
| Foreign currency translation adjustments | (0.7) | | | — | |
| Balance at end of period | $ | 45.1 | | | $ | 21.6 | |
As of March 31, 2022, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $12.9 million over the next twelve months. The anticipated reduction primarily relates to settlements with taxing authorities and the expiration of federal, state and foreign statutes of limitation.
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. 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 | 2017 - 2021 |
| U.S. state income tax | 2012 - 2021 |
| Canadian federal income tax | 2014 - 2021 |
| Brazil | 2015 - 2021 |
| Germany | 2015 - 2021 |
| China | 2014 - 2021 |
| The Netherlands | 2015 - 2021 |
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 March 31, 2022, we had outstanding forward contracts to buy foreign currency with a notional value of $259.2 million and to sell foreign currency with a notional value of $120.6 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, 2021, we had outstanding forward contracts to buy foreign currency with a notional value of $199.0 million and to sell foreign currency with a notional value of $124.4 million. At March 31, 2021, we had outstanding forward contracts to buy foreign currency with a notional value of $212.3 million and to sell foreign currency with a notional value of $110.8 million.
Cash Flow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative is recognized as a component of other comprehensive income (loss) until the hedged item is recognized in earnings.
We had the following notional amounts of outstanding commodity contracts that were entered into to hedge forecasted purchases:
| | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
| | ($ in millions) |
| Natural gas | $ | 51.0 | | | $ | 37.7 | | | $ | 56.8 | |
| Ethane | 41.2 | | | 60.3 | | | 47.0 | |
| Metals | 112.5 | | | 126.3 | | | 134.3 | |
| Total notional | $ | 204.7 | | | $ | 224.3 | | | $ | 238.1 | |
As of March 31, 2022, 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 March 31, 2022, we had open derivative contract positions through 2027. If all open futures contracts had been settled on March 31, 2022, we would have recognized a pretax gain of $70.7 million.
If commodity prices were to remain at March 31, 2022 levels, approximately $46.8 million of deferred gains, 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.
In 2021, we redeemed the 2025 Notes, which resulted in recognition of the outstanding deferred swap loss. For the three months ended March 31, 2021, $1.2 million of expense was recorded to interest expense on the accompanying condensed statements of operations related to these swap agreements.
Financial Statement Impacts
We present our derivative assets and liabilities in our condensed balance sheets on a net basis whenever we have a legally enforceable master netting agreement with the counterparty to our derivative contracts. We use these agreements to manage and substantially reduce our potential counterparty credit risk.
The following table summarizes the location and fair value of the derivative instruments on our condensed balance sheets. The table disaggregates our net derivative assets and liabilities into gross components on a contract-by-contract basis before giving effect to master netting arrangements:
| | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
| | ($ in millions) |
| Asset derivatives: | | | | | |
| Other current assets | | | | | |
| Derivatives designated as hedging instruments: | | | | | |
| Commodity contracts - gains | $ | 61.5 | | | $ | 31.8 | | | $ | 29.6 | |
| Commodity contracts - losses | — | | | (6.2) | | | (1.1) | |
| Derivatives not designated as hedging instruments: | | | | | |
| Foreign exchange contracts - gains | 0.3 | | | 2.0 | | | 0.6 | |
| Foreign exchange contracts - losses | — | | | (0.8) | | | (0.2) | |
| Total other current assets | 61.8 | | | 26.8 | | | 28.9 | |
| Other assets | | | | | |
| Derivatives designated as hedging instruments: | | | | | |
| Commodity contracts - gains | 9.9 | | | 7.9 | | | 9.7 | |
| Commodity contracts - losses | — | | | — | | | (0.1) | |
| Total other assets | 9.9 | | | 7.9 | | | 9.6 | |
Total asset derivatives(1) | $ | 71.7 | | | $ | 34.7 | | | $ | 38.5 | |
| Liability derivatives: | | | | | |
| Accrued liabilities | | | | | |
| Derivatives designated as hedging instruments: | | | | | |
| Commodity contracts - losses | $ | — | | | $ | 3.6 | | | $ | 0.3 | |
| Commodity contracts - gains | — | | | (0.7) | | | — | |
| Derivatives not designated as hedging instruments: | | | | | |
| Foreign exchange contracts - losses | 4.2 | | | 0.7 | | | 3.4 | |
| Foreign exchange contracts - gains | (1.1) | | | (0.1) | | | (0.7) | |
| Total accrued liabilities | 3.1 | | | 3.5 | | | 3.0 | |
| Other liabilities | | | | | |
| Derivatives designated as hedging instruments: | | | | | |
| Commodity contracts - losses | 0.9 | | | 0.3 | | | 0.3 | |
| Commodity contracts - gains | (0.2) | | | — | | | (0.1) | |
| Total other liabilities | 0.7 | | | 0.3 | | | 0.2 | |
Total liability derivatives(1) | $ | 3.8 | | | $ | 3.8 | | | $ | 3.2 | |
(1) Does not include the impact of cash collateral received from or provided to counterparties.
The following table summarizes the effects of derivative instruments on our condensed statements of operations:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Amount of Gain (Loss) |
| | | | | | Three Months Ended March 31, |
| | Location of Gain (Loss) | | | | | | 2022 | | 2021 |
| Derivatives – Cash Flow Hedges | | | | | ($ in millions) |
Recognized in other comprehensive loss: | | | | | | | | |
Commodity contracts | ——— | | | | | | $ | 52.8 | | | $ | 122.0 | |
Reclassified from accumulated other comprehensive loss into income: | | | | | | | | |
Commodity contracts | Cost of goods sold | | | | | | $ | 12.4 | | | $ | 112.8 | |
| Derivatives – Fair Value Hedges | | | | | | | | |
| Interest rate contracts | Interest expense | | | | | | $ | — | | | $ | (1.2) | |
| Derivatives Not Designated as Hedging Instruments | | | | | | | | |
| Commodity contracts | Cost of goods sold | | | | | | $ | 0.5 | | | $ | — | |
| Foreign exchange contracts | Selling and administration | | | | | | $ | — | | | $ | (2.0) | |
Credit Risk and Collateral
By using derivative instruments, we are exposed to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes us, thus creating a repayment risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, assume no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties. We monitor our positions and the credit ratings of our counterparties, and we do not anticipate non-performance by the counterparties.
Based on the agreements with our various counterparties, cash collateral is required to be provided when the net fair value of the derivatives, with the counterparty, exceeds a specific threshold. If the threshold is exceeded, cash is either provided by the counterparty to us if the value of the derivatives is our asset, or cash is provided by us to the counterparty if the value of the derivatives is our liability. As of March 31, 2022, December 31, 2021 and March 31, 2021, 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:
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 March 31, 2022 | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | ($ in millions) |
| Commodity contracts | $ | — | | | $ | 71.4 | | | $ | — | | | $ | 71.4 | |
| Foreign exchange contracts | — | | | 0.3 | | | — | | | 0.3 | |
| Total Assets | $ | — | | | $ | 71.7 | | | $ | — | | | $ | 71.7 | |
| Liabilities | | | | | | | |
| Commodity contracts | $ | — | | | $ | 0.7 | | | $ | — | | | $ | 0.7 | |
| Foreign exchange contracts | — | | | 3.1 | | | — | | | 3.1 | |
| Total Liabilities | $ | — | | | $ | 3.8 | | | $ | — | | | $ | 3.8 | |
| Balance at December 31, 2021 | | | | | | | |
| Assets | |
| Commodity contracts | $ | — | | | $ | 33.5 | | | $ | — | | | $ | 33.5 | |
| Foreign exchange contracts | — | | | 1.2 | | | — | | | 1.2 | |
| Total Assets | $ | — | | | $ | 34.7 | | | $ | — | | | $ | 34.7 | |
| Liabilities | | | | | | | |
| Commodity contracts | $ | — | | | $ | 3.2 | | | $ | — | | | $ | 3.2 | |
| Foreign exchange contracts | — | | | 0.6 | | | — | | | 0.6 | |
| Total Liabilities | $ | — | | | $ | 3.8 | | | $ | — | | | $ | 3.8 | |
| Balance at March 31, 2021 | | | | | | | |
| Assets | | | | | | | |
| Commodity contracts | $ | — | | | $ | 38.1 | | | $ | — | | | $ | 38.1 | |
| Foreign exchange contracts | — | | | 0.4 | | | — | | | 0.4 | |
| Total Assets | $ | — | | | $ | 38.5 | | | $ | — | | | $ | 38.5 | |
| Liabilities | | | | | | | |
| Commodity contracts | $ | — | | | $ | 0.5 | | | $ | — | | | $ | 0.5 | |
| Foreign exchange contracts | — | | | 2.7 | | | — | | | 2.7 | |
| Total Liabilities | $ | — | | | $ | 3.2 | | | $ | — | | | $ | 3.2 | |
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 March 31, 2022, December 31, 2021 and March 31, 2021, the fair value measurements of debt were $2,807.2 million, $2,921.0 million and $4,011.5 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 March 31, 2022, December 31, 2021 and March 31, 2021.