bodyform10q2ndqtr2008.htm
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
 
FORM 10-Q
 
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2008
 
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
 
Commission file number 1-1070

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

   
Virginia
13-1872319
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
   
190 Carondelet Plaza, Suite 1530, Clayton, MO
63105-3443
(Address of principal executive offices)
(Zip Code)
 
(314) 480-1400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨ (Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of June 30, 2008, 75,396,680 shares of the registrant’s common stock were outstanding.


 
 
1

 
 


Part I — Financial Information
 
Item 1. Financial Statements.
 
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Balance Sheets
(In millions, except per share data)
(Unaudited)
 
   
June 30,
2008
   
December 31,
2007
   
June 30,
2007
 
ASSETS
                 
Current Assets:
                 
Cash and Cash Equivalents
 
$
186.4
   
$
306.0
   
$
230.5
 
Short-Term Investments
   
20.5
     
26.6
     
26.6
 
Receivables, Net
   
251.0
     
202.0
     
172.9
 
Inventories
   
150.8
     
106.7
     
105.6
 
Current Deferred Income Taxes
   
13.5
     
15.0
     
5.8
 
Other Current Assets
   
18.6
     
14.7
     
25.7
 
Current Assets of Discontinued Operations
   
     
     
375.7
 
Total Current Assets
   
640.8
     
671.0
     
942.8
 
Property, Plant and Equipment (less Accumulated Depreciation of $938.9, $912.6 and $887.5)
   
541.4
     
503.6
     
239.7
 
Prepaid Pension Costs
   
154.1
     
139.7
     
 
Deferred Income Taxes
   
33.9
     
26.3
     
135.9
 
Other Assets
   
69.2
     
58.9
     
18.9
 
Goodwill
   
301.9
     
301.9
     
 
Assets of Discontinued Operations
   
     
     
322.5
 
Total Assets
 
$
1,741.3
   
$
1,701.4
   
$
1,659.8
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Current Liabilities:
                       
Current Installments of Long-Term Debt
 
$
   
$
9.8
   
$
8.3
 
Accounts Payable
   
159.3
     
150.6
     
88.0
 
Income Taxes Payable
   
2.0
     
3.1
     
37.0
 
Accrued Liabilities
   
219.0
     
244.7
     
154.6
 
Current Liabilities of Discontinued Operations
   
     
     
186.6
 
Total Current Liabilities
   
380.3
     
408.2
     
474.5
 
Long-Term Debt
   
248.7
     
249.2
     
242.5
 
Accrued Pension Liability
   
50.1
     
50.5
     
128.8
 
Other Liabilities
   
338.0
     
329.8
     
211.7
 
Liabilities of Discontinued Operations
   
     
     
2.7
 
Total Liabilities
   
1,017.1
     
1,037.7
     
1,060.2
 
Commitments and Contingencies
                       
Shareholders’ Equity:
                       
Common Stock, Par Value $1 Per Share:  Authorized, 120.0 Shares;
                       
Issued and Outstanding 75.4, 74.5 and 73.9 Shares
   
75.4
     
74.5
     
73.9
 
Additional Paid-In Capital
   
761.6
     
742.0
     
730.8
 
Accumulated Other Comprehensive Loss
   
(154.1
)
   
(151.2
)
   
(301.1
)
Retained Earnings (Accumulated Deficit)
   
41.3
     
(1.6
)
   
96.0
 
Total Shareholders’ Equity
   
724.2
     
663.7
     
599.6
 
Total Liabilities and Shareholders’ Equity
 
$
1,741.3
   
$
1,701.4
   
$
1,659.8
 
 
 The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements.




 
 
2

 
 




OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Income
(In millions, except per share data)
(Unaudited)
  
   
Three Months Ended
June 30,
     
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Sales
 
$
428.3
   
$
266.2
   
$
827.4
   
$
521.7
 
Operating Expenses:
                               
Cost of Goods Sold
   
347.3
     
211.9
     
661.3
     
418.3
 
Selling and Administration
   
35.6
     
32.8
     
68.9
     
64.0
 
Other Operating Income
   
0.5
     
0.2
     
1.1
     
0.2
 
Operating Income
   
45.9
     
21.7
     
98.3
     
39.6
 
Earnings of Non-consolidated Affiliates
   
11.0
     
12.2
     
19.1
     
20.3
 
Interest Expense
   
3.7
     
4.9
     
8.2
     
 9.9
 
Interest Income
   
1.4
     
3.1
     
4.2
     
6.5
 
Other Income
   
0.2
     
0.1
     
0.3
     
 0.2
 
Income from Continuing Operations before Taxes
   
54.8
     
32.2
     
113.7
     
56.7
 
Income Tax Provision
   
19.3
     
10.3
     
40.9
     
18.2
 
Income from Continuing Operations
   
35.5
     
21.9
     
72.8
     
38.5
 
Income from Discontinued Operations, Net
   
     
13.7
     
     
20.2
 
Net Income
 
$
35.5
   
$
35.6
   
$
72.8
   
$
58.7
 
Net Income per Common Share:
                               
Basic Income per Common Share:
                               
Income from Continuing Operations
 
$
0.47
   
$
0.29
   
$
0.97
   
$
0.52
 
Income from Discontinued Operations, Net
   
     
0.19
     
     
0.28
 
Net Income
 
$
0.47
   
$
0.48
   
$
0.97
   
$
0.80
 
Diluted Income per Common Share:
                               
Income from Continuing Operations
 
$
0.47
   
$
0.29
   
$
0.97
   
$
0.52
 
Income from Discontinued Operations, Net
   
     
0.19
     
     
0.27
 
Net Income
 
$
0.47
   
$
0.48
   
$
0.97
   
$
0.79
 
Dividends per Common Share
 
$
0.20
   
$
0.20
   
$
0.40
   
$
0.40
 
Average Common Shares Outstanding:
                               
Basic
   
75.0
     
73.8
     
74.8
     
73.7
 
Diluted
   
75.4
     
74.2
     
75.2
     
73.9
 
 
 The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements.




 
 
3

 
 






OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Shareholders’ Equity
(In millions, except per share data)
(Unaudited)
 
   
Common Stock
                         
   
Shares
Issued
   
Par
Value
   
Additional
Paid-In
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Retained
Earnings
(Accumulated
Deficit)
   
Total
Shareholders’
Equity
 
Balance at January 1, 2007
   
73.3
   
$
73.3
   
$
721.6
   
$
(318.5
)
 
$
66.9
   
$
543.3
 
Comprehensive Income:
                                               
Net Income
   
     
     
     
     
58.7
     
58.7
 
Translation Adjustment
   
     
     
     
0.3
     
     
0.3
 
Net Unrealized Gain
   
     
     
     
4.6
     
     
4.6
 
Amortization of Prior Service Costs and Actuarial Losses, Net
   
     
     
     
12.5
     
     
12.5
 
Comprehensive Income
                                           
76.1
 
Dividends Paid:
                                               
Common Stock ($0.40 per share)
   
     
     
     
     
(29.5
)
   
(29.5
)
Common Stock Issued for:
                                               
Stock Options Exercised
   
     
     
0.8
     
     
     
0.8
 
Employee Benefit Plans
   
0.6
     
0.6
     
9.2
     
     
     
9.8
 
Other Transactions
   
     
     
0.6
     
     
     
0.6
 
Stock-Based Compensation
   
     
     
(1.4
)
   
     
     
(1.4
)
Cumulative Effect of Accounting Change
   
     
     
     
     
(0.1
)
   
(0.1
)
Balance at June 30, 2007
   
73.9
   
$
73.9
   
$
730.8
   
$
(301.1
)
 
$
96.0
   
$
599.6
 
Balance at January 1, 2008
   
74.5
   
$
74.5
   
$
742.0
   
$
(151.2
)
 
$
(1.6
)
 
$
663.7
 
Comprehensive Income:
                                               
Net Income
   
     
     
     
     
72.8
     
72.8
 
Translation Adjustment
   
     
     
     
1.2
     
     
1.2
 
Net Unrealized Loss
   
     
     
     
(9.0
)
   
     
(9.0)
 
Amortization of Prior Service Costs and Actuarial Losses, Net
   
     
     
     
4.9
     
     
4.9
 
Comprehensive Income
                                           
69.9
 
Dividends Paid:
                                               
Common Stock ($0.40 per share)
   
     
     
     
     
(29.9
)
   
(29.9
)
Common Stock Issued for:
                                               
Stock Options Exercised
   
0.6
     
0.6
     
10.2
     
     
     
10.8
 
Employee Benefit Plans
   
0.3
     
0.3
     
6.2
     
     
     
6.5
 
Other Transactions
   
     
     
0.4
     
     
     
0.4
 
Stock-Based Compensation
   
     
     
2.8
     
     
     
2.8
 
Balance at June 30, 2008
   
75.4
   
$
75.4
   
$
761.6
   
$
(154.1
)
 
$
41.3
   
$
724.2
 

 
 The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements.




 
 
4

 
 


OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Cash Flows
(In millions)
(Unaudited)
 
   
Six Months Ended
June 30,
 
   
2008
   
2007
 
Operating Activities
           
Net Income
 
$
72.8
   
$
58.7
 
Income from Discontinued Operations, Net
   
     
(20.2
)
Adjustments to Reconcile Net Income to Net Cash and Cash Equivalents (Used for) Provided by Operating Activities:
               
Earnings of Non-consolidated Affiliates
   
(19.1
)
   
(20.3
)
Stock-Based Compensation
   
3.0
     
2.5
 
Depreciation and Amortization
   
34.9
     
19.1
 
Deferred Income Taxes
   
(9.2
)
   
(6.8
)
Qualified Pension Plan Contribution
   
     
(100.0
)
Qualified Pension Plan (Income) Expense
   
(7.1
)
   
8.1
 
Common Stock Issued under Employee Benefit Plans
   
2.2
     
1.7
 
Change in:
               
Receivables
   
(49.0
)
   
(37.5
)
Inventories
   
(44.1
)
   
(22.9
)
Other Current Assets
   
(3.9
)
   
(6.4
)
Accounts Payable and Accrued Liabilities
   
(17.5
)
   
(23.2
)
Income Taxes Payable
   
(2.6
)
   
35.0
 
Other Assets
   
1.5
     
0.9
 
Other Noncurrent Liabilities
   
9.9
     
9.1
 
Other Operating Activities
   
(3.3
)
   
4.1
 
Cash Used for Continuing Operations
   
(31.5
)
   
(98.1
)
Discontinued Operations:
               
Income from Discontinued Operations, Net
   
     
20.2
 
Operating Activities from Discontinued Operations
   
     
85.5
 
Cash Provided by Discontinued Operations
   
     
105.7
 
Net Operating Activities
   
(31.5
)
   
7.6
 
Investing Activities
               
Capital Expenditures
   
(71.5
)
   
(22.2
)
Proceeds from Disposition of Property, Plant and Equipment
   
0.4
     
0.2
 
Proceeds from Sale of Short-Term Investments
   
     
50.0
 
Proceeds from Sale/Leaseback of Equipment
   
     
14.8
 
Distributions from Affiliated Companies, Net
   
4.9
     
11.6
 
Other Investing Activities
   
1.2
     
0.8
 
Cash (Used for) Provided by Continuing Operations
   
(65.0
)
   
55.2
 
Investing Activities from Discontinued Operations
   
     
(10.6
)
Net Investing Activities
   
(65.0
)
   
44.6
 
Financing Activities
               
Long-Term Debt Repayments
   
(9.8
)
   
(1.1
)
Issuance of Common Stock
   
4.3
     
8.1
 
Stock Options Exercised
   
10.8
     
0.8
 
Excess Tax Benefits from Stock Options Exercised
   
1.5
     
0.2
 
Dividends Paid
   
(29.9
)
   
(29.5
)
Net Financing Activities
   
(23.1
)
   
(21.5
)
Net (Decrease) Increase in Cash and Cash Equivalents
   
(119.6
)
   
30.7
 
Cash and Cash Equivalents, Beginning of Period
   
306.0
     
199.8
 
Cash and Cash Equivalents, End of Period
 
$
186.4
   
$
230.5
 
Cash Paid for Interest and Income Taxes:
               
Interest
 
$
8.5
   
$
9.0
 
Income Taxes, Net of Refunds
 
$
33.9
   
$
6.1
 

 The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements.
 

 
 
5

 
 



 
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Notes to Condensed Financial Statements
(Tabular amounts in millions, except per share data)
(Unaudited)
 
1.  
Olin Corporation is a Virginia corporation, incorporated in 1892. We are a manufacturer concentrated in two business segments: Chlor Alkali Products and Winchester. Chlor Alkali Products, with nine U.S. manufacturing facilities and one Canadian manufacturing facility, produces chlorine and caustic soda, sodium hydrosulfite, hydrochloric acid, hydrogen, bleach products and potassium hydroxide. Winchester, with its principal manufacturing facility in East Alton, IL, produces and distributes sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges.

 
On October 15, 2007, we announced we entered into a definitive agreement to sell the Metals business to a subsidiary of Global Brass and Copper Holdings, Inc. (Global), an affiliate of KPS Capital Partners, LP, a New York-based private equity firm.  The transaction closed on November 19, 2007.  Accordingly, for all periods presented prior to the sale, Metals’ assets and liabilities are classified as “held for sale” and presented separately in the Condensed Balance Sheets, and the related operating results and cash flows are reported as discontinued operations in the Condensed Statements of Income and Condensed Statements of Cash Flows, respectively.

 
On August 31, 2007 we acquired Pioneer Companies, Inc. (Pioneer), whose earnings were included in the accompanying financial statements since the date of acquisition.

 
We have prepared the condensed financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of the consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. In our opinion, these financial statements reflect all adjustments (consisting only of normal accruals), which are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are appropriate. We recommend that you read these condensed financial statements in conjunction with the financial statements, accounting policies, and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2007. Certain reclassifications were made to prior year amounts to conform to the 2008 presentation, primarily related to reporting the Metals business as discontinued operations.

2.  
Allowance for doubtful accounts was $4.3 million at June 30, 2008, $3.0 million at December 31, 2007, and $2.5 million at June 30, 2007.  In conjunction with the acquisition of Pioneer, we obtained receivables and related allowance for doubtful accounts of $60.5 million and $1.5 million, respectively, as of August 31, 2007.   Provisions charged to operations were $1.4 million for the three months ended June 30, 2008 and provisions credited to operations were $0.2 million for the three months ended June 30, 2007.  Provisions charged to operations for the six months ended June 30, 2008 and 2007 were $1.2 million and $0.1 million, respectively.  Bad debt write-offs, net of recoveries, were $(0.1) million and $0.3 million for the six months ended June 30, 2008 and 2007, respectively.

3.  
Inventories consisted of the following:
 
   
June 30,
2008
   
December 31,
2007
   
June 30,
2007
 
Supplies
 
$
25.5
   
$
24.9
   
$
18.6
 
Raw materials
   
46.0
     
40.6
     
34.4
 
Work in process
   
30.2
     
21.4
     
25.5
 
Finished goods
   
116.3
     
73.2
     
89.1
 
     
218.0
     
160.1
     
167.6
 
LIFO reserve
   
(67.2
)
   
(53.4
)
   
(62.0
)
Inventories, net
 
$
150.8
   
$
106.7
   
$
105.6
 
 
In conjunction with the acquisition of Pioneer, we obtained inventories with a fair value of $25.4 million as of August 31, 2007.  Inventories are valued at the lower of cost or market, with cost being determined principally by the dollar value last-in, first-out (LIFO) method of inventory accounting.  Cost for other inventories has been determined principally by the average cost method, primarily operating supplies, spare parts, and maintenance parts. Elements of costs in inventories included raw materials, direct labor, and manufacturing overhead.  Inventories under the LIFO method are based on annual estimates of quantities and costs as of year-end; therefore, the condensed financial statements at June 30, 2008, reflect certain estimates relating to inventory quantities and costs at December 31, 2008. If the first-in, first-out (FIFO) method of inventory accounting had been used, inventories would have been approximately $67.2 million, $53.4 million and $62.0 million higher than reported at June 30, 2008, December 31, 2007, and June 30, 2007, respectively.
 
6


4.  
Basic and diluted income per share was computed by dividing net income by the weighted average number of common shares outstanding. Diluted income per share reflects the dilutive effect of stock-based compensation.
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Computation of Basic Income per Share
                       
Income from continuing operations
 
$
35.5
   
$
21.9
   
$
72.8
   
$
38.5
 
Income from discontinued operations, net
   
     
13.7
     
     
20.2
 
Net income
 
$
35.5
   
$
35.6
   
$
72.8
   
$
58.7
 
Basic shares
   
75.0
     
73.8
     
74.8
     
73.7
 
Basic income per share:
                               
Income from continuing operations
 
$
0.47
   
$
0.29
   
$
0.97
   
$
0.52
 
Income from discontinued operations, net
   
     
0.19
     
     
0.28
 
Net income
 
$
0.47
   
$
0.48
   
$
0.97
   
$
0.80
 
Computation of Diluted Income per Share
                               
Diluted shares:
                               
Basic shares
   
75.0
     
73.8
     
74.8
     
73.7
 
Stock-based compensation
   
0.4
     
0.4
     
0.4
     
0.2
 
Diluted shares
   
75.4
     
74.2
     
75.2
     
73.9
 
Diluted income per share:
                               
Income from continuing operations
 
$
0.47
   
$
0.29
   
$
0.97
   
$
0.52
 
Income from discontinued operations, net
   
     
0.19
     
     
0.27
 
Net income
 
$
0.47
   
$
0.48
   
$
0.97
   
$
0.79
 

5.  
We are party to various government and private environmental actions associated with past manufacturing operations and former waste disposal sites. Environmental provisions charged to income amounted to $9.7 million and $7.0 million for the three months ended June 30, 2008 and 2007, respectively, and $14.8 million and $13.1 million for the six months ended June 30, 2008 and 2007, respectively.  Charges to income for investigatory and remedial efforts were material to operating results in 2007 and are expected to be material to operating results in 2008. The condensed balance sheets included reserves for future environmental expenditures to investigate and remediate known sites amounting to $158.5 million at June 30, 2008, $155.6 million at December 31, 2007, and $93.0 million at June 30, 2007, of which $123.5 million, $120.6 million, and $58.0 million were classified as other noncurrent liabilities, respectively.  In conjunction with the acquisition of Pioneer, as of August 31, 2007 we assumed $55.4 million of environmental liabilities associated with their current and past manufacturing operations and former waste disposal sites.

 
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 have a material adverse affect on our financial position or results of operations.

6.  
Our board of directors, in April 1998, authorized a share repurchase program of up to 5 million shares of our common stock. We have repurchased 4,845,924 shares under the April 1998 program. There were no share repurchases during the six-month periods ended June 30, 2008 and 2007. At June 30, 2008, 154,076 shares remained authorized to be purchased.

7.  
We issued 0.6 million shares and less than 0.1 million shares with a total value of $10.8 million and $0.8 million, representing stock options exercised for the six months ended June 30, 2008 and 2007, respectively. In addition, we issued 0.3 million and 0.6 million shares with a total value of $6.5 million and $9.8 million for the six months ended June 30, 2008 and 2007, respectively, in connection with our Contributing Employee Ownership Plan (CEOP).

8.  
We define segment results as income (loss) from continuing operations before interest expense, interest income, other income, and income taxes, and include the operating results of non-consolidated affiliates.
 
 
7


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Sales:
                       
Chlor Alkali Products
 
$
312.2
   
$
166.4
   
$
600.5
   
$
321.7
 
Winchester
   
116.1
     
99.8
     
226.9
     
200.0
 
Total sales
 
$
428.3
   
$
266.2
   
$
827.4
   
$
521.7
 
Income from continuing operations before taxes:
                               
Chlor Alkali Products(1)
 
$
70.4
   
$
55.3
   
$
137.4
   
$
98.5
 
Winchester
   
9.5
     
5.6
     
19.5
     
13.7
 
Corporate/Other:
                               
Pension income (expense)(2)
   
3.6
     
(2.0
)
   
8.1
     
(3.5
)
Environmental provision
   
(9.7
)
   
(7.0
)
   
(14.8
)
   
(13.1
)
Other corporate and unallocated costs
   
(17.4
)
   
(18.2
)
   
(33.9
)
   
(35.9
)
Other operating income
   
0.5
     
0.2
     
1.1
     
0.2
 
Interest expense
   
(3.7
)
   
(4.9
)
   
(8.2
)
   
(9.9
)
Interest income
   
1.4
     
3.1
     
4.2
     
6.5
 
Other income
   
0.2
     
0.1
     
0.3
     
0.2
 
Income from continuing operations before taxes
 
$
54.8
   
$
32.2
   
$
113.7
   
$
56.7
 

 
(1)
Earnings of non-consolidated affiliates were included in the Chlor Alkali Products segment results consistent with management’s monitoring of the operating segments. The earnings from non-consolidated affiliates were $11.0 million and $12.2 million for the three months ended June 30, 2008 and 2007, respectively, and $19.1 million and $20.3 million for the six months ended June 30, 2008 and 2007, respectively.
 
 
 
(2)
The service cost and the amortization of prior service cost components of pension expense related to the employees of the operating segments are allocated to the operating segments based on their respective estimated census data. All other components of pension costs are included in Corporate/Other and include items such as the expected return on plan assets, interest cost, and recognized actuarial gains and losses.  Pension income for the three and six months ended June 30, 2008 included a curtailment charge of $0.8 million resulting from the conversion of our McIntosh, AL chlor alkali hourly workforce from a defined benefit pension plan to a defined contribution pension plan.

9.  
Stock-based compensation granted included stock options, performance stock awards, restricted stock awards, and deferred directors’ compensation.  Stock-based compensation expense totaled $4.3 million and $2.9 million for the three months ended June 30, 2008 and 2007, respectively, and $7.5 million and $4.1 million for the six months ended June 30, 2008 and 2007, respectively.

 
In 2008, we granted 523,350 stock options with an exercise price of $20.29.  The fair value of each stock option granted, which typically vests ratably over three years, was estimated on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions used:

Grant date
 
2008
   
2007
 
Dividend yield
   
4.34
%
   
4.37
%
Risk-free interest rate
   
3.21
%
   
4.81
%
Expected volatility
   
32
%
   
35
%
Expected life (years)
   
7.0
     
7.0
 
Grant fair value (per option)
 
$
4.52
   
$
4.46
 
 
Dividend yield for 2008 and 2007 was based on a historical average. Risk-free interest rate is based on zero coupon U.S. Treasury securities rates for the expected life of the options. Expected volatility is based on our historical stock price movements, and we believe that historical experience is the best available indicator of the expected volatility. Expected life of the option grant is based on historical exercise and cancellation patterns, and we believe that historical experience is the best estimate of future exercise patterns.

In 2007, a reclassification totaling $3.5 million from Additional Paid-In Capital to Other Liabilities was made for deferred directors’ compensation that could be settled in cash.  This reclassification conforms to the accounting treatment for stock-based compensation in Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “Share-Based Payment.”
 
8


10.  
We have a 50% ownership interest in SunBelt Chlor Alkali Partnership (SunBelt), which was accounted for using the equity method of accounting. The condensed financial positions and results of operations of SunBelt in its entirety were as follows:

100% Basis
 
June 30,
2008
   
December 31,
2007
   
June 30,
2007
 
Condensed Balance Sheet Data:
                 
Current assets
 
$
45.5
   
$
27.8
   
$
46.7
 
Noncurrent assets
   
113.1
     
109.6
     
108.2
 
Current liabilities
   
21.8
     
21.1
     
19.4
 
Noncurrent liabilities
   
109.7
     
109.7
     
121.9
 

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Condensed Income Statement Data:
                       
Sales
 
$
47.3
   
$
47.1
   
$
89.5
   
$
84.2
 
Gross profit
   
24.6
     
27.2
     
44.5
     
46.5
 
Net income
   
18.9
     
22.1
     
33.3
     
36.0
 

The amount of cumulative unremitted earnings of SunBelt was $27.1 million at June 30, 2008, $6.6 million at December 31, 2007, and $13.6 million at June 30, 2007. We received distributions from SunBelt totaling $6.4 million and $8.6 million in the six months ended June 30, 2008 and 2007, respectively.  We have not made any contributions in 2008 or 2007.  We received net settlements of advances of $4.9 million and $11.6 million in the six months ended June 30, 2008 and 2007, respectively.
 
In accounting for our ownership interest in SunBelt, we adjust the reported operating results for additional depreciation expense in order to conform SunBelt’s plant and equipment useful lives to ours.  Beginning January 1, 2007, the original machinery and equipment of SunBelt had been fully depreciated in accordance with our useful asset lives, thus resulting in lower depreciation expense.  The lower depreciation expense increased our share of SunBelt’s operating results by $1.3 million and $1.0 million for the three months ended June 30, 2008 and 2007, respectively, and $2.3 million and $1.9 million for the six months ended June 30, 2008 and 2007, respectively.  The operating results from SunBelt included interest expense of $1.1 million and $1.2 million for the three months ended June 30, 2008 and 2007, respectively, and $2.2 million and $2.4 million for the six months ended June 30, 2008 and 2007, respectively, on the SunBelt Notes.  Finally, we provide various administrative, management and logistical services to SunBelt for which we received fees totaling $2.2 million and $2.1 million in the three months ended June 30, 2008 and 2007, respectively, and $4.3 million and $4.0 million in the six months ended June 30, 2008 and 2007, respectively.
 
Pursuant to a note purchase agreement dated December 22, 1997, SunBelt sold $97.5 million of Guaranteed Senior Secured Notes due 2017, Series O, and $97.5 million of Guaranteed Senior Secured Notes due 2017, Series G. We refer to these notes as the SunBelt Notes. The SunBelt Notes bear interest at a rate of 7.23% per annum, payable semiannually in arrears on each June 22 and December 22.
 
We have guaranteed the Series O Notes, and PolyOne, our partner in this venture, has guaranteed the Series G Notes, in both cases pursuant to customary guaranty agreements. Our guarantee and PolyOne’s guarantee are several, rather than joint. Therefore, we are not required to make any payments to satisfy the Series G Notes guaranteed by PolyOne. An insolvency or bankruptcy of PolyOne will not automatically trigger acceleration of the SunBelt Notes or cause us to be required to make payments under our guarantee, even if PolyOne is required to make payments under its guarantee. However, if SunBelt does not make timely payments on the SunBelt Notes, whether as a result of a failure to pay on a guarantee or otherwise, the holders of the SunBelt Notes may proceed against the assets of SunBelt for repayment. If we were to make debt service payments under our guarantee, we would have a right to recover such payments from SunBelt.

Beginning on December 22, 2002 and each year through 2017, SunBelt is required to repay $12.2 million of the SunBelt Notes, of which $6.1 million is attributable to the Series O Notes.  Our guarantee of these SunBelt Notes was $60.9 million at June 30, 2008. In the event SunBelt cannot make any of these payments, we would be required to fund the payment on the Series O Notes. In certain other circumstances, we may also be required to repay the SunBelt Notes prior to their maturity. We and PolyOne have agreed that, if we or PolyOne intend to transfer our respective interests in SunBelt and the transferring party is unable to obtain consent from holders of 80% of the aggregate principal amount of the indebtedness related to the guarantee being transferred after good faith negotiations, then we and PolyOne will be required to repay our respective portions of the SunBelt Notes. In such event, any make whole or similar penalties or costs will be paid by the transferring party.
 
9


11.  
In October 2007, we announced that we were freezing our defined benefit pension plan for salaried and certain non-bargaining hourly employees.  Affected employees were eligible to accrue pension benefits through December 31, 2007, but are not accruing any additional benefits under the plan after that date.  Employee service after December 31, 2007 does count toward meeting the vesting requirements for such pension benefits and the eligibility requirements for commencing a pension benefit, but not toward the calculation of the pension benefit amount.  Compensation earned after 2007 similarly does not count toward the determination of the pension benefit amounts under the defined benefit pension plan.  In lieu of continuing pension benefit accruals for the affected employees under the pension plan, starting in 2008, we provide a contribution to an individual retirement contribution account maintained with the CEOP equal to 5% of the employee’s eligible compensation if such employee is less than age 45, and 7.5% of the employee’s eligible compensation if such employee is age 45 or older.  Most of our employees now participate in defined contribution pension plans.  Expenses of the defined contribution pension plans were $2.4 million and $0.8 million for the three months ended June 30, 2008 and 2007, respectively, and $5.6 million and $1.3 million for the six months ended June 30, 2008 and 2007, respectively.

 
A portion of our bargaining hourly employees continue to participate in our domestic defined benefit pension plans, which are non-contributory final-average-pay or flat-benefit plans. Our funding policy for the defined benefit pension plans is consistent with the requirements of federal laws and regulations. Our foreign subsidiaries maintain pension and other benefit plans, which are consistent with statutory practices. Our defined benefit pension plans provide 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 health care (medical) and life insurance benefits for eligible active and retired domestic employees. The health care plans are contributory with participants’ contributions adjusted annually based on medical rates of inflation and plan experience.

   
Pension Benefits
   
Other Postretirement Benefits
 
   
Three Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Components of Net Periodic Benefit (Income) Cost
                       
Service cost
 
$
1.6
   
$
4.7
   
$
0.4
   
$
0.6
 
Interest cost
   
25.3
     
24.5
     
1.1
     
1.1
 
Expected return on plans’ assets
   
(32.5
)
   
(31.2
)
   
     
 
Amortization of prior service cost
   
0.4
     
0.8
     
(0.1
)
   
(0.3
)
Recognized actuarial loss
   
2.5
     
9.0
     
0.8
     
1.0
 
Curtailment 
   
0.8
     
0.5
     
     
 
Net periodic benefit (income) cost
 
$
(1.9
)
 
$
8.3
   
$
2.2
   
$
2.4
 

   
Pension Benefits
   
Other Postretirement Benefits
 
   
Six Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Components of Net Periodic Benefit (Income) Cost
                       
Service cost
 
$
3.3
   
$
9.5
   
$
0.8
   
$
1.2
 
Interest cost
   
50.4
     
48.5
     
2.2
     
2.4
 
Expected return on plans’ assets
   
(65.2
)
   
(60.8
)
   
     
 
Amortization of prior service cost
   
0.8
     
1.8
     
(0.1
)
   
(0.4
)
Recognized actuarial loss
   
5.0
     
16.2
     
1.5
     
2.1
 
Curtailment 
   
0.8
     
0.5
     
     
 
Net periodic benefit (income) cost
 
$
(4.9
)
 
$
15.7
   
$
4.4
   
$
5.3
 

The service cost and the amortization of prior service cost components of pension expense related to the employees of the operating segments were allocated to the operating segments based on their respective estimated census data.  Therefore, the allocated portion of net periodic benefit costs for the Metals business of $2.3 million and $4.3 million for the three and six months ended June 30, 2007, respectively, were included in income from discontinued operations.  The allocated portion of other postretirement benefit costs for the Metals business of $1.4 million and $2.6 million for the three and six months ended June 30, 2007, respectively, were included in income from discontinued operations.
 
10

In June 2008, we recorded a curtailment charge of $0.8 million resulting from the conversion of our McIntosh, AL chlor alkali hourly workforce from a defined benefit pension plan to a defined contribution pension plan.  In June 2007, we recorded a curtailment charge of $0.5 million resulting from the conversion of a portion of the Metals hourly workforce from a defined benefit pension plan to a defined contribution pension plan.  The 2007 curtailment charge was included in income from discontinued operations.

We account for our defined benefit pension plans using actuarial models required by SFAS No. 87, “Employers’ Accounting for Pensions.”  This model uses an attribution approach that generally spreads the financial impact of changes to the plan and actuarial assumptions over a period of time.  Changes in liabilities/assets due to changes in actuarial assumptions such as discount rate, rate of compensation increases and mortality, as well as annual deviations between what was assumed and what was experienced by the plan are treated as gains or losses. The principle underlying the required attribution approach is that employees render service over their average remaining service lives on a relatively smooth basis and, therefore, the accounting for benefits earned under the pension or non-pension postretirement benefits plans should follow the same relatively smooth pattern.  With the freezing of our defined benefit pension plan for salaried and certain non-bargained hourly employees that became effective January 1, 2008 and the sale of the Metals business, substantially all defined benefit pension plan participants were inactive; therefore, actuarial gains and losses are now being amortized based upon the remaining life expectancy of the inactive plan participants rather than the future service period of the active participants, which was the amortization period used prior to 2008.  At December 31, 2007, the average remaining life expectancy of the inactive participants in the defined benefit pension plan was 19.0 years; compared to the average remaining service lives of the active employees in the defined benefit pension plan of 10.7 years.

In May 2007, we made a voluntary contribution to our defined benefit pension plan of $100 million.  In addition, during 2007 the asset allocation in the defined benefit pension plan was adjusted to insulate the plan from discount rate risk and reduce the plan’s exposure to equity investments.

12.  
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN No. 48).  This interpretation clarified the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.”  FIN No. 48 prescribed a recognition threshold and required a measurement of a tax position taken or expected to be taken in a tax return.  This interpretation also provided guidance on the treatment of derecognition, classification, interest and penalties, accounting in interim periods, and disclosure.

 
We adopted the provisions of FIN No. 48 on January 1, 2007.  As a result of the implementation, we recognized a $0.1 million increase in the liability for unrecognized tax benefits, which was accounted for as a decrease to Retained Earnings (Accumulated Deficit).  In addition, FIN No. 48 required a reclassification of unrecognized tax benefits and related interest and penalties from deferred income taxes to current and long-term liabilities.  At January 1, 2007, we reclassified $19.8 million from Deferred Income Taxes to Accrued Liabilities ($3.1 million) and Other Liabilities ($16.7 million).

 
As of January 1, 2007, we had $16.5 million of gross unrecognized tax benefits, of which $11.9 million would impact the effective tax rate, if recognized.  As of January 1, 2007, the remainder of $4.6 million would have been a reduction to goodwill, if recognized.  Upon completion of the Metals sale, the potential reduction to goodwill would instead be recognized as income from discontinued operations.

 
We acquired $37.2 million of gross unrecognized tax benefits as part of the Pioneer acquisition, all of which would be a reduction to goodwill, if recognized during 2008.  After adopting SFAS No. 141R, “Business Combinations” (SFAS No. 141R) in 2009, any remaining balance of unrecognized tax benefits would affect our effective tax rate instead of goodwill, if recognized.  The unrecognized tax benefit, net of federal income tax benefit, totaled $36.5 million.  If these tax benefits are not recognized, the result as of June 30, 2008 would have been cash tax payments of $16.3 million.

 
As of December 31, 2007, we had $51.8 million of gross unrecognized tax benefits (including Pioneer), of which $14.5 million would impact the effective tax rate, if recognized. At June 30, 2008, we had $52.1 million of gross unrecognized tax benefits (including Pioneer), of which $14.9 million would impact the effective tax rate, if recognized.  If these tax benefits are not recognized, the result would be cash tax payments. The change for the six months ended June 30, 2008 related to additional gross unrecognized tax benefits from ongoing income tax audits by various taxing jurisdictions, as well as the expiration of the statute of limitations in foreign jurisdictions.

 
On July 10, 2006, we finalized a settlement with the Internal Revenue Service (IRS), which included the periods 1996 to 2002 and related primarily to the tax treatment of capital losses generated in 1997.  We made payments of $46.7 million in 2006.  We made payments of $0.6 million in 2007 and expect to make payments of approximately $1.5 million in 2008 to various state and local jurisdictions in conjunction with the IRS settlement.  We have filed both federal and state amended income tax returns for years 2002 and prior to report changes to taxable income per IRS examinations.  Such tax years remain subject to examination to the extent of the changes reported.
 
 
11

 
 
In 2006, the IRS commenced an examination of our U.S. income tax return for 2004.  In June 2007, we reached an agreement in principle with the IRS for the 2004 tax examination.  The settlement resulted in a reduction of income tax expense of $0.6 million in 2007 related primarily to a favorable adjustment to our extraterritorial income exclusion.  In connection with the settlement, we paid $3.2 million to the IRS in June 2007.

 
Our federal income tax returns for 2004 to 2006 are open tax years under statute of limitations.  We file in numerous state and foreign jurisdictions with varying statutes of limitation open from 2003 through 2006 depending on each jurisdiction’s unique statute of limitation.  Pioneer filed income tax returns in the U.S., various states, Canada, and various Canadian provinces.  Pioneer tax returns for the years 2002 and forward are open for examination.  Pioneer is currently under examination by the Canada Revenue Agency for its 2002 through 2004 tax years.  We have been notified by the IRS that it will commence an audit of Pioneer’s 2004 tax year.

 
As of December 31, 2007, it was reasonably possible that our total amount of unrecognized tax benefits would decrease by approximately $9.0 million over the next twelve months, of which approximately $8.0 million would be a reduction of goodwill.  After adopting SFAS No. 141R in 2009, any remaining balance of unrecognized tax benefits will affect income tax expense instead of goodwill, if recognized.  The reduction primarily relates to settlements with tax authorities and the lapse of federal, state, and foreign statutes of limitation.  The amount remains materially unchanged at June 30, 2008.

13.  
On August 31, 2007, we acquired Pioneer, a manufacturer of chlorine, caustic soda, bleach, sodium chlorate, and hydrochloric acid.  Pioneer owned and operated four chlor-alkali facilities and several bleach manufacturing facilities in North America.  Under the merger agreement, each share of Pioneer common stock was converted into the right to receive $35.00 in cash, without interest.  The aggregate purchase price for all of Pioneer’s outstanding shares of common stock, together with the aggregate payment due to holders of options to purchase shares of common stock of Pioneer, was $426.1 million, which included direct fees and expenses.  

The following table summarizes the allocation of the purchase price to Pioneer’s assets and liabilities:

   
August 31, 2007
 
Total current assets
 
$
231.9
 
Property, plant and equipment
   
238.5
 
Other assets
   
29.4
 
Goodwill
   
301.9
 
Total assets acquired
   
801.7
 
Total current liabilities
   
(78.0
)
Long-term debt
   
(147.7
)
Deferred income taxes
   
(29.1
)
Other liabilities
   
(120.8
)
Total liabilities assumed
   
(375.6
)
Net assets acquired
 
$
426.1
 

Included in total current assets is cash and cash equivalents of $126.4 million.  Included in other liabilities are liabilities for future environmental expenditures to investigate and remediate known sites of $55.4 million, liabilities for unrecognized tax benefits of $38.4 million, accrued pension and postretirement liabilities of $13.5 million, asset retirement obligations of $12.2 million and other liabilities of $1.3 million.

On March 12, 2008, we announced that, in connection with our plans to streamline our Chlor Alkali Products manufacturing operations in Canada in order to serve our customer base in a more cost effective manner, we would close the acquired Dalhousie, New Brunswick, Canada chlorine, caustic soda, sodium chlorate, and sodium hypochlorite operations.  We substantially completed the closure of the Dalhousie facility by June 30, 2008.  We expect to incur cash expenditures of $3.0 million in 2008 associated with the shutdown, which were previously included in current liabilities on the August 31, 2007 balance sheet.

The following pro forma summary presents the condensed statement of operations as if the acquisition of Pioneer had occurred at the beginning of the period (unaudited):

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2007
   
June 30, 2007
 
Sales
 $
396.5
   
$
774.4
 
Income from continuing operations
 
25.8
     
48.6
 
Net income
 
39.5
     
68.8
 
Income from continuing operations per common share:
             
Basic
 $
0.35
   
$
0.66
 
Diluted
 
0.35
     
0.66
 
Net income per common share:
             
Basic
 $
0.54
   
$
0.93
 
Diluted
 
0.53
     
0.93
 
 
12

 
The pro forma statements of operations included an increase to interest expense of $1.6 million and $3.2 million for the three and six months ended June 30, 2007, respectively. This adjustment was calculated assuming that our borrowings of $110 million, at an interest rate of 5.76% at the time of the merger, were outstanding from January 1, 2007.  The pro forma statements of operations used estimates and assumptions based on information available at the time.  Management believes the estimates and assumptions to be reasonable; however, actual results may differ significantly from this pro forma financial information.  The pro forma information does not reflect any cost savings that might be achieved from combining the operations and is not intended to reflect the actual results that would have occurred had the companies actually been combined during the periods presented.  
 
14.  
On October 15, 2007, we announced we entered into a definitive agreement to sell the Metals business to Global for $400 million, payable in cash.  The price received was subject to a customary working capital adjustment.  The transaction closed on November 19, 2007.   The final loss recognized related to this transaction will be dependent upon the final determination of the value of working capital in the business.   Based on an estimated working capital adjustment, net cash proceeds from the transaction were $380.8 million.

 
The Metals business was a reportable segment comprised of principal manufacturing facilities in East Alton, IL and Montpelier, OH.  Metals produced and distributed copper and copper alloy sheet, strip, foil, rod, welded tube, fabricated parts, and stainless steel and aluminum strip.  Sales for the Metals business were $572.9 million and $1,083.1 million for the three and six months ended June 30, 2007, respectively.  Intersegment sales for the three and six months ended June 30, 2007 were $26.0 million and $48.8 million, respectively, representing the sale of ammunition cartridge case cups to Winchester from Metals, at prices that approximate market, and have been eliminated from Metals sales.  In conjunction with the sale of the Metals business, Winchester agreed to purchase the majority of its ammunition cartridge case cups and copper-based strip requirements from Global under a multi-year agreement with pricing, terms, and conditions which approximate market.   As the criteria to treat the related assets and liabilities as “held for sale” were met in the third quarter of 2007, for all periods presented prior to the sale, the related assets and liabilities were classified as “held for sale,” and the results of operations from the Metals business have been reclassified as discontinued operations.

 
The major classes of assets and liabilities of the Metals business included in assets “held for sale” in the Condensed Balance Sheet were as follows:

   
June 30, 2007
 
Receivables
 
$
229.9
 
Inventories
   
136.0
 
Other current assets
   
9.8
 
Current assets of discontinued operations
   
375.7
 
Property, plant, and equipment
   
226.0
 
Other assets
   
96.5
 
Assets of discontinued operations
   
698.2
 
Accounts payable
   
(144.8
)
Accrued liabilities
   
(41.8
)
Current liabilities of discontinued operations
   
(186.6
)
Liabilities of discontinued operations
   
(2.7
)
Net assets held for sale
 
$
508.9
 

In conjunction with the sale of the Metals business, we retained certain assets and liabilities including certain assets co-located with our Winchester business in East Alton, IL, assets and liabilities associated with former Metals manufacturing locations, pension assets and pension and postretirement healthcare and life insurance liabilities associated with Metals employees for service earned through the date of sale, and certain environmental obligations existing at the date of closing associated with current and past Metals manufacturing operations and waste disposal sites.

15.  
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (SFAS No. 159), which permitted an entity to measure certain financial assets and liabilities at fair value.  The statement’s objective was to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions.  This statement became effective for fiscal years beginning after November 15, 2007 and was to be applied prospectively.  We adopted the provisions of SFAS No. 159 on January 1, 2008.  As we did not elect to measure existing assets and liabilities at fair value, the adoption of this statement did not have an effect on our financial statements.
 
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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS No. 157).  This statement did not require any new fair value measurements, but rather, it provided enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. The changes to current practice resulting from the application of this statement related to the definition of fair value, the methods used to estimate fair value, and the requirement for expanded disclosures about estimates of fair value. This statement became effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The effective date for this statement for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, has been delayed by one year.  Nonfinancial assets and nonfinancial liabilities that could be impacted by this deferral include assets and liabilities initially measured at fair value in a business combination, and intangible assets and goodwill tested annually for impairment.  We adopted the provisions of SFAS No. 157 related to financial assets and financial liabilities on January 1, 2008.  The partial adoption of this statement did not have a material impact on our financial statements. It is expected that the remaining provisions of this statement will not have a material effect on our financial statements.

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 SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, 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.
 
Determining which hierarchical level an asset or liability falls within requires significant judgment.  We will evaluate our hierarchy disclosures each quarter.  The following table summarizes the financial instruments measured at fair value in the Condensed Balance Sheet as of June 30, 2008:

   
Fair Value Measurements
   
Level 1
   
Level 2
   
Level 3
   
Total
Assets
                   
Short-term investments
 
$
   
$
20.5
   
$
 
$
20.5
Interest rate swaps
   
     
6.0
     
   
6.0
Liabilities
                           
Interest rate swaps
 
$
   
$
6.0
   
$
 
$
6.0
Commodity forward contracts
   
5.7
     
     
   
5.7
   
Short-term investments

We classified our marketable securities as available-for-sale which were reported at fair market value with unrealized gains and losses included in Accumulated Other Comprehensive Loss, net of applicable taxes.  Fair values for marketable securities are based upon prices and other relevant information observable in market transactions involving identical or comparable assets or liabilities or prices obtained from independent third-party pricing services.  The third-party pricing services employ various models that take into consideration such market-based factors as recent sales, risk-free yield curves, prices of similarly rated bonds, and direct discussions with dealers familiar with these types of securities.
 
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As of June 30, 2008, we held corporate debt securities totaling $26.6 million of par value with a fair value of $20.5 million.  Although we continue to receive and earn interest on these investments at the contractual rates, we recorded an unrealized after-tax loss of $3.7 million ($6.1 million pretax) in Accumulated Other Comprehensive Loss.

We concluded no other than temporary impairment losses occurred as the decline in market value is due to general market conditions.  The AA-rated issuer of these debt securities has, to date, funded all redemptions at par and maintained short-term A1/P2 credit ratings.  Given our current liquidity and capital structure, we have the intent and ability to hold these debt securities until maturity on April 1, 2009.  We will continue to review all investments for other-than-temporary impairment at least quarterly and/or when circumstances or other events indicate that impairment may have occurred.  If the decline in fair value is determined to be other-than-temporary, we would be required to record an impairment charge.

Interest rate swaps

The fair value of the interest rate swaps was included in Other Assets and Long-Term Debt as of June 30, 2008.  These financial instruments were valued using the “income approach” valuation technique.  This method used valuation techniques to convert future amounts to a single present amount.  The measurement was based on the value indicated by current market expectations about those future amounts.  We use interest rate swaps as a means of managing interest rates on our outstanding fixed-rate debt obligations.

Commodity forward contracts

The fair value of the commodity forward contracts was classified in Accrued Liabilities as of June 30, 2008, with unrealized gains and losses included in Accumulated Other Comprehensive Loss, net of applicable taxes.  These financial instruments were valued primarily based on prices and other relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for commodities.  We use commodity forward contracts for certain raw materials and energy costs such as copper, zinc, lead, and natural gas to provide a measure of stability in managing our exposure to price fluctuations.

SFAS No. 157 requires separate disclosure of assets and liabilities measured at fair value on a recurring basis, as documented above, from those measured at fair value on a nonrecurring basis.  As of June 30, 2008, no assets or liabilities were measured at fair value on a nonrecurring basis.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Business Background
 
Our manufacturing operations are concentrated in two business segments: Chlor Alkali Products and Winchester. Both are capital intensive manufacturing businesses with operating rates closely tied to the general economy. Each segment has a commodity element to it, and therefore, our ability to influence pricing is quite limited on the portion of the segment’s business that is strictly commodity. Our Chlor Alkali Products segment is a commodity business where all supplier products are similar and price is the major supplier selection criterion. We have little or no ability to influence prices in this large, global commodity market. Cyclical price swings, driven by changes in supply/demand, can be abrupt and significant and, given the capacity in our Chlor Alkali Products business, can lead to very significant changes in our overall profitability. Winchester also has a commodity element to its business, but a majority of Winchester ammunition is sold as a branded consumer product where there are opportunities to differentiate certain offerings through innovative new product development and enhanced product performance. While competitive pricing versus other branded ammunition products is important, it is not the only factor in product selection.  The Metals business was classified as discontinued operations during 2007 and was excluded from the segment results.

Executive Summary

Chlor Alkali Products segment income improved 27% and 39% compared with the three and six months ended June 30, 2007, respectively, which reflects the contributions and synergies from the Pioneer acquisition and improved pricing.  Operating rates in Chlor Alkali Products for the three and six months ended June 30, 2008 were lower than the three and six months ended June 30, 2007 reflecting reduced levels of chlorine demand.  The reduced level of chlorine demand reflected the weakness in most customer groups.  The weakness in chlorine demand led to downward pressure on chlorine prices.

During the six months ended June 30, 2008, demand for caustic soda remained strong.  However, caustic soda supply was constrained because of reduced operating rates driven by weakness in chlorine demand, resulting in a significant supply and demand imbalance for caustic soda.  This imbalance, along with increased freight and energy costs, resulted in unprecedented caustic soda price increase announcements.

On March 12, 2008, we announced that, in connection with our plans to streamline Chlor Alkali manufacturing operations in Canada in order to serve our customer base in a more cost effective manner, we would close the acquired Dalhousie, New Brunswick, Canada chlorine, caustic soda, sodium chlorate, and sodium hypochlorite operations.  We substantially completed the closure of the Dalhousie facility by June 30, 2008.  We expect to incur cash expenditures of $3.0 million in 2008 associated with the shutdown, which were previously included in current liabilities on the August 31, 2007 balance sheet.  This action is expected to generate $8.0 million to $10.0 million of annual pretax savings.

Winchester’s segment income of $9.5 million and $19.5 million for the three and six months ended June 30, 2008, respectively, both represent record earnings for the Winchester business.  Winchester segment income improved 70% and 42% compared with the three and six months ended June 30, 2007, respectively.  Winchester’s results reflected the combination of improved volumes and pricing.

 
 
15

 
 


During the six months ended June 30, 2008, the defined benefit pension plan generated approximately breakeven returns.  This level of returns has preserved the over funded position that existed at December 31, 2007.  The 2008 performance reflects the actions taken in 2007 to reduce the defined benefit pension plan’s exposure to equity investments and increase exposure to fixed income investments.

Consolidated Results of Operations
 
 
($ in millions, except per share data)
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Sales
 
$
428.3
   
$
266.2
   
$
827.4
   
$
521.7
 
Cost of Goods Sold