Arch Chemicals, Inc.

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Arch Chemicals, Inc.

501 Merritt 7
Norwalk, Connecticut 06851
U.S.A.
Telephone: (203) 229-2900
Fax: (203) 229-3652
Web site: http://www.archchemicals.com

Public Company
Incorporated: 1998
Employees: 2,675
Sales: $1.12 billion (2004)
Stock Exchanges: New York
Ticker Symbol: ARJ
NAIC: 325998 All Other Miscellaneous Chemical Product and Preparation Manufacturing

Arch Chemicals, Inc., is a global specialty chemical company based in Norwalk, Connecticut, involved in two main business segments: treatment products and performance products. Treatment products include chemicals to sanitize drinking water and swimming pools; industrial biocides, used to inhibit the growth of microorganisms in metal working fluids, paint, and other coatings; industrial wood preservatives and fire retardants; stains and lacquers to coat wood; and active ingredients and preservatives used in shampoos, cosmetics, and other personal care products. Arch's performance products include polyols used to make adhesives, sealants, and coatings; glycols for making antifreeze, cleaning products, and consumer goods; and hydrazine hydrate, used to make drugs, treat water, and blowing agents that strengthen plastics and rubbers by expanding them. In 2004 Arch sold off most of its microelectronic materials business segment, which provided slurry used by semiconductor manufacturers to remove and polish surfaces. In addition to 16 U.S. locations, Arch maintains operations in 20 other countries around the world. A spinoff of the Olin Corporation in 1999, Arch is a public company listed on the New York Stock Exchange.

HERITAGE DATING TO THE 19TH CENTURY

Arch Chemicals' lineage is linked to two companies, both of which were founded in 1892: Olin Industries and Mathieson Chemical Corporation. Olin was founded by Franklin Walter Olin, a Cornell-trained engineer and part-time major league baseball player, as Equitable Powder Company in East Alton, Illinois, a company that made blasting powder for coal mining. After adding small arms ammunition to the product mix, it became known as Western Cartridge Company in 1898. The move into ammunition put the company in the brass business, which would become a mainstay. The company added to its holdings in 1931 by acquiring famous Winchester Repeating Arms Company, the Connecticut maker of one of the most popular rifles of all time, the lever-action, repeating rifle, model 1873 Winchester. In 1944 Olin retired, well into his 80s, and consolidated his different businesses under Olin Industries, Inc., keeping most of the stock but distributing the rest to his sons, Spencer and John, who by this time were in their 60s. Olin died in 1951 at the age of 91. His sons, along with executive Bill Hanes, who was of similar age, took over the running of the company in the mid-1940s. Over the next several years the company expanded beyond metals and ammunition and became involved in cellophane, lumber, paper production, and petrochemicals.

With Olin's management team aging and no successor available, company president John Olin turned to a 44-year-old friend named Tom Nichols, who had proven to be an extremely effective president of Mathieson Chemical Company. Mathieson had been founded in Saltville, Virginia, in 1892 by a group of investors who acquired the U.S. rights to an alkali process developed by English chemical manufacturer Neil Mathieson. At the outset the company sold soda ash to the glass, textile, and paper industries, but just a year later began selling the United States' first commercial bleaching powder, made from chlorine. Chlor-alkali products would become a core business for the company. Mathieson developed swimming pool and spa sanitizers, and during World War II served the war effort by producing chemicals to purify water and sanitize field medical equipment. In 1944 Nichols took over and Mathieson began to expand into industrial and agricultural chemicals, involved in products such as sulfuric acid, pesticides, and fertilizers. In 1952 it acquired pharmaceutical E.R Squibb & Sons, deemed a good fit because chlorine served as an important precursor chemical in about 85 percent of all pharmaceutical products.

In 1952 Nichols and John Olin talked about the possibility of merging their companies, which at the time were both generating sales in the neighborhood of $250 million. The two companies had already demonstrated they could work well together in a successful rocket fuel venture, but neither Nichols nor Olin wanted to be subordinate to the other and talk of a merger was dropped. It was during a hunting trip in 1953 that Olin convinced Nichols to allow Hanes to formulate an equitable power-sharing arrangement that would allow for the merger. Under Hanes's subsequent plan, Olin would serve as chairman, Nichols as president would run the company, and Hanes would head finances. Nichols agreed and in August 1954 the merger took place, resulting in the Olin Mathieson Chemical Corporation.

While both Olin and Mathieson had been involved in basic chemicals, Nichols was not content just to focus on its core chemicals, metals, and ammunition products. Through acquisitions the company became involved in industrial phosphates, paper bags and corrugated containers, and aluminum production, which led to the purchase of an African bauxite mine to provide a primary raw ingredient of aluminum. In the 1960s the company tried its hand at home construction, and leisure products, selling camping equipment under the Winchester name as well as skis. It ended the 1960s by shortening its name to Olin Corporation.

Olin's assets proved to be an unwieldy mix and in the 1970s the company took steps to concentrate its resources on core businesses. It sold off its aluminum assets and spun off its forest products subsidiary, and then in 1981 sold the arms portion of Winchester while holding onto the sporting ammunition plant in East Alton, Illinois. With some of the money it received through divestitures, Olin invested in key businesses. It became involved in the electronic chemicals industry through the 1984 acquisition of the Phillip A. Hunt Chemical Corporation, forming one of the components of Arch Chemicals.

The recession of the early 1990s forced Olin to once again pare down its diverse mix of businesses. By the end of 1995 Olin sold or simply closed 18 businesses and product lines in order to focus on three core businesses: chemicals, defense, and metals. But management was still not satisfied with the return it was receiving from its assets and further fine-tuning became the order of the day. The Ordnance and Aerospace divisions were combined to create Primex Technologies, Inc., which was then spun off to shareholders. In addition, Olin's isocyanates business was sold to Arco Chemical for $565 million. Olin was now left with two noncomplementary businesses: specialty chemicals and basic materials. Management decided that they would be better off operating independently, and by being split would enhance shareholder value. Hence, in mid-1998 it was announced that the specialty chemical businesses would be spun off as a separate publicly traded company. Olin would retain three divisions: brass, chlor-alkali, and Winchester ammunition.

COMPANY PERSPECTIVES

From good chemistry comes good innovations.

OLIN'S SPINOFF OF SPECIALTY CHEMICALS BEGINS IN 1999

The name Arch Chemicals, Inc. was selected and in August 1998 the new entity was incorporated in Virginia, although its headquarters would be established in Norwalk, Connecticut. To head the new company, Olin pulled from its executive ranks. To serve as chairman and chief executive officer, Olin executive vice-president Michael E. Campbell was selected. Leon B. Anziao, who previously served as president of Olin's specialty chemicals operation, was named president and chief operating officer. In addition, the general manager of Olin's Conductive Materials division, James LaCasse, was named vice-president and general manager of Arch's semiconductor division. They would head a company with three business segments: microelectronic chemicals, performance chemicals, and water chemicals, which combined for $863 million in sales in 1998. Performance chemicals contributed 40 percent of that amount, some $345 million, followed by water chemicals with 34 percent or $290 million, and microelectronic chemicals with 26 percent or $228 million. It also would inherit $75 million in debt from Olin, which arranged a $250 million credit line in Arch's name. The spinoff was completed in February 1999, with Olin shareholders receiving one share of Arch for every two shares of Olin they held. Wall Street, however, was not especially excited by the presence of Arch on the New York Stock Exchange, as its shares' opening price of $20 quickly slipped to $18.

Campbell and his team developed a three-prong growth strategy: adding to existing product lines, launching internally developed products, and making selective acquisitions. The company also hoped to improve on operational efficiencies and significantly trim overhead costs. In September 1999, Arch completed its first acquisition, adding the HQEE-hydroquinone di (beta-hydroxyethyl) Ether business of Eastman Chemical Company. Arch had manufactured HQEE for Eastman at its Brandenburg, Kentucky plant. The addition of Eastman's business gave Arch 80 percent of the HQEE market in the United States and a strong presence in Europe. When 1999 came to a close, Arch, in its first year of independence, increased sales 2 percent to $880 million, while earnings per share improved 17 percent to $1.82, due in some measure to the company reducing costs by $5 million.

Arch continued to reshape its business portfolio in 2000. It sold subsidiary Superior Pool Products, Inc., not deemed a strategic asset, receiving $21 million. The company also restructured its microelectronic materials unit, devoting resources to higher-margin formulated products rather than wet process chemicals, which were more akin to price-sensitive commodities and offered meager returns. Arch also completed a pair of acquisitions in 2000. In August it paid $140.4 million for United Kingdom-based Hickson International, a move that strengthened Arch's global position in high-growth biocides and performance urethanes. Subsequently, Arch began looking to cast off Hickson's organics division, which was not a good fit for the company. Arch also added to its roster of personal care intermediates with the November 2000, $38 million cash purchase of New Jersey-based Brooks Industries. Brooks mostly served global cosmetics and toiletries companies, offering specialty products like biopolymers, proteins, botanicals, and liposomes; and standard products, including lanolin, lanolin derivatives, emulsifiers, and protein products. In keeping with its growth strategy Arch also introduced several new products in 2000, such as Poly-G 30-400T, a polyol used primarily in elastomer, coating, and adhesive applications; and Zinc Omadine, a fungicide-algicide for masonry paint. For the year, Arch grew revenues to $941 million, to go with earnings per share of $1.66.

POOR BUSINESS CONDITIONS EARLY IN THE 21ST CENTURY

With the U.S. economy slipping in 2001 and the manufacturing sector struggling, especially the semiconductor industry, Arch experienced a drop in sales to $921 million and an earnings plunge to just 15 cents per share. Nevertheless, the company succeeded in integrating Hickson and Brooks into its operations. It also completed three minor acquisitions in 2001, adding Walker Brothers, a Canadian maker of anti-sapstain products used by sawmills. Later in the year Arch acquired United Kingdom-based Butler Mabbutt & Wrightto, producer of wood, leather, and plastic products finishes; and the International Division of Humbrol Limited, which manufactured varnishes, textured finishes, and other industrial coatings. Arch also supported its coating business in the Far East in 2001 by opening a sales support and technical support operation in Suzhou, China. In the pool chemical category, Arch introduced 17 new products in its retail pool chemical line.

KEY DATES

1892:: Olin Corporation is founded.
1954:: Olin and Mathieson Chemical Corporation merge.
1998:: Olin incorporates Arch Chemicals.
1999:: Olin spins off specialty chemical assets as Arch Chemicals.
2000:: Hickson International PLC is acquired.
2004:: Avecia biocides business is acquired.

The manufacturing sector did not pick up in 2002, forcing Arch to trim its workforce. The company was able to sell the Hickson DanChem unit, realizing $25 million that was used to pay down debt. In 2003 it was able to finally sell off Hickson's organics division for $18 million, as well as Peak Sulphur Inc., which brought in another $25 million. As a result, Arch was able to further trim its debt and put itself in a strong position to benefit from a rebound in the economy, as revenues topped the $1 billion mark in 2003.

The year 2004 was marked by a pair of major transactions. In March the company paid $210 million in cash and stock to acquire the biocides business of Avecia Group plc, enhancing Arch's U.S. position in pool chemicals by adding nonchlorine products to supplement Arch's chlorine-based sanitizers. Whereas Arch was aggressive in building on its expertise in treatment products, it shied away from microelectronic materials, which were cyclic in nature and also required a dedicated research and development effort. In December 2004, Arch sold virtually all of the operations to Fuji Photo Film Company Ltd. for approximately $160 million in cash. In 2005 Arch sold its 50 percent stake in another slurry operation, a joint venture called Planar Solutions, to Fuji for another $17 million. As a result treatment products now accounted for 85 percent of the company's revenues, which increased to $1.1 billion in 2004 and a projected $1.3 billion in 2005. Going forward, Arch planned to focus even more attention on its treatment business.

PRINCIPAL SUBSIDIARIES

Arch Chemicals Canada, Inc.; Arch Chemicals GmbH; Arch Chemicals Suzhoy Co., Ltd.; Arch Chemi-cals UK Holdings Limited; Arch Person Care Products, L.P.; Arch Treatment Technologies, Inc.; Arch Woods Protection, Inc.